Standard Motor Products, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company manufactures and distributes replacement motor-vehicle parts, primarily through Engine Management and Temperature Control segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $276.0 | $236.2 | $756.6 | $700.5 |
| Gross profit / margin | $77.8 / 28.2% | $64.5 / 27.3% | $201.7 / 26.7% | $180.8 / 25.8% |
| Operating income | $26.7 | $22.8 | $59.1 | $58.5 |
| Continuing-operations earnings | $17.4 | $14.1 | $36.7 | $34.8 |
| Net earnings | $16.8 | $13.0 | $35.4 | $33.1 |
| Diluted EPS | $0.74 | $0.57 | $1.54 | $1.43 |
Q3 sales increased 16.8%; nine-month sales increased 8.0%. Growth included acquired-business sales: CompressorWorks contributed $24.8 million in Q3 and $38.4 million year to date; Forecast Trading contributed $9.6 million in Q3. Excluding acquisitions, Q3 segment sales were slightly higher in Engine Management and up $2.3 million in Temperature Control. For the nine months, excluding acquisitions, Engine Management sales fell $8.9 million and Temperature Control sales fell $6.8 million.
Q3 gross margin improved, led by Engine Management, whose margin rose to 29.2% from 26.5%; Temperature Control declined to 24.3% from 25.4%. For the nine months, Engine Management margin rose to 27.5% from 25.3%, while Temperature Control fell to 22.1% from 23.4%. Management cited sourcing and manufacturing efficiencies in Engine Management; Temperature Control faced product-mix, cost-absorption and acquired-inventory fair-value effects. SG&A rose to $50.9 million in Q3 and $142.3 million year to date, including acquisition costs, higher receivables-sale charges, and postretirement-plan costs.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $62.9 million, versus $57.3 million; investing cash use was $46.6 million, including the $38.6 million CompressorWorks acquisition; financing cash use was $17.6 million. Cash ended at $10.9 million.
- At September 30, current assets were $457.4 million and current liabilities $267.1 million; working capital was approximately $190.3 million. Receivables were $161.3 million, versus $104.1 million at year-end; inventory was $246.3 million, versus $248.1 million.
- Total debt was $60.5 million, down from $73.3 million at December 31, 2011; substantially all was revolving credit borrowings. The $200 million facility matures in March 2015, with $118.7 million of formula-based availability at quarter-end. Weighted-average facility interest was 2.01%; the company was not subject to financial covenants at September 30.
- The company expects existing funds and additional borrowing capacity to meet financing needs over the next 12 months. It paid $6.2 million in dividends year to date and repurchased $5.0 million of stock; credit restrictions prohibited further repurchases in 2012.
Material changes, outlook and risks
- CompressorWorks was acquired in April for $38.6 million, funded through the revolving facility. It generated approximately $60 million of 2011 revenue; the acquisition added $9.7 million of goodwill and $8.9 million of identifiable intangibles.
- Warm summer weather supported Q3 Temperature Control demand, partially offsetting lost sales after a major customer began buying certain air-conditioning parts directly from China. Management also cited a return to more historical Engine Management ordering patterns after unusually strong first-quarter 2011 pipeline orders.
- Receivables factoring increased: $508.6 million of receivables sold in the first nine months versus $449.7 million in 2011. Related charges rose to $10.5 million from $6.4 million. The company warns that loss or interruption of these arrangements could materially affect cash flows and collections.
- Asbestos exposure remains a significant contingency. About 2,155 cases were outstanding. The recorded reserve was approximately $27.1 million, the low end of an estimated $27.1–$41.5 million range for settlement payments through 2058; estimated legal costs were an additional $32.3–$57.0 million. Insurance coverage remaining was nominal. Management said further provisions cannot be ruled out, but did not expect them to materially affect liquidity or financial position.
- Other risks identified include customer and program changes, competitive pricing, input-cost inflation, market and credit conditions, acquisition integration, restructuring savings, product liability, environmental matters and substantial indebtedness. Results are seasonal, generally strongest in Q2 and Q3, and Temperature Control demand varies with summer weather. No specific full-year earnings or revenue guidance was provided.
- The antitrust case was settled in April 2012 for a nominal amount. Management reported disclosure controls were effective and no material internal-control changes occurred during the quarter.
Important facts for investors to verify
- How much reported growth and profitability is attributable to acquisitions versus underlying demand, particularly given year-to-date organic sales declines in both segments?
- Whether Temperature Control margins recover as CompressorWorks integration and purchase-accounting inventory effects pass, and whether lost customer sales continue.
- Whether receivables factoring remains available at an acceptable cost, and how rising factoring charges and receivables balances affect cash generation.
- Future asbestos claims, legal costs, actuarial estimates and reserve adequacy, including the limited remaining insurance recovery.
- Revolving-credit availability, borrowing-base changes, covenant triggers and the company’s capacity to fund seasonal working capital, acquisitions, dividends and other commitments.