Standard Motor Products, Inc. — FY 2012 Form 10-K
Business and period: The company manufactures and distributes automotive aftermarket and original-equipment service replacement parts through Engine Management and Temperature Control segments. This annual report covers the year ended December 31, 2012; quarterly figures below compare the fourth quarter of 2012 with the fourth quarter of 2011. Amounts are in U.S. dollars.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $948.9 million | $874.6 million | +8.5% |
| Gross profit / margin | $259.7 million / 27.4% | $229.1 million / 26.2% | Margin +1.2 percentage points |
| Operating income | $71.4 million | $64.9 million | +10.1% |
| Continuing-operations earnings | $43.0 million | $64.3 million | −33.2% |
| Net earnings | $41.4 million | $62.4 million | −33.7% |
| Diluted EPS | $1.79 | $2.70 | −33.7% |
| Operating cash flow | $93.6 million | $75.3 million | +$18.3 million |
| Capital expenditures | $11.8 million | $11.0 million | +$0.8 million |
Fourth quarter: Sales were $192.4 million versus $174.2 million a year earlier. Gross profit was $58.0 million versus $48.3 million; earnings from continuing operations were $6.3 million versus $29.5 million, and net earnings were $5.9 million versus $29.3 million. The 2011 comparison includes a $21.5 million non-cash tax benefit from reducing the deferred-tax valuation allowance, making year-over-year earnings comparisons unusually difficult.
Segment results: Engine Management sales rose 5.8% to $665.1 million and segment operating income increased to $69.6 million from $56.3 million. Its gross margin improved to 28.2% from 25.6%, attributed mainly to global sourcing and manufacturing efficiencies. Temperature Control sales grew 15.0% to $268.8 million, including $44.3 million from CompressorWorks; excluding that acquisition, sales declined $9.2 million, partly due to a major customer sourcing certain air-conditioning parts directly from China. Segment operating income decreased to $15.0 million from $17.7 million, and gross margin fell to 21.8% from 23.5%.
Balance sheet, liquidity and capital
- At December 31, 2012, cash was $13.1 million, working capital was $196.4 million, total assets were $576.6 million and shareholders’ equity was $307.6 million.
- Total debt was $40.6 million, down from $73.3 million a year earlier. Revolver borrowings were $40.4 million, with approximately $111.9 million available under the $200 million secured revolving facility, which matures in March 2015. The company was not subject to the facility’s conditional financial covenants at year-end.
- The weighted-average rate on revolving borrowings was 2.7%; nearly all debt was variable-rate. Management estimated that an adverse 100-basis-point rate change could reduce earnings or cash flow by approximately $0.5 million.
- Cash provided by operations rose to $93.6 million, which management attributed primarily to improved working-capital management, including lower receivables and higher payables and accrued expenses. Investing used $49.9 million, including $38.6 million for CompressorWorks. Financing used $42.8 million, including debt repayment, $5.0 million of share repurchases and $8.2 million of dividends.
- Receivables factoring increased: the company sold $663.7 million of receivables in 2012 versus $566.2 million in 2011. Related expense rose to $13.7 million from $8.4 million.
- Dividends declared were $0.36 per share for 2012. In January 2013, the board raised the quarterly dividend to $0.11 per share.
Changes, outlook and key risks
- The April 2012 CompressorWorks acquisition expanded Temperature Control. The company reported $44.3 million of acquired-business sales after acquisition; its $38.6 million cash purchase was funded through the revolver. Goodwill increased to $35.8 million, and the year-end impairment test found no impairment.
- Management said existing operating cash flow, cash and available revolver borrowings should meet liquidity needs for at least the next 12 months, subject to no material adverse developments. The filing provides no specific revenue or earnings guidance.
- Management continued restructuring and cost-reduction efforts, including moving some U.S. production to Mexico and increasing production in Poland. It cautioned that expected savings may not be achieved or may be delayed. Year-end restructuring liabilities were $3.8 million.
- Customer concentration is substantial: the five largest customers represented about 64% of 2012 sales. O’Reilly, NAPA and Advance Auto Parts accounted for 19%, 18% and 15%, respectively. The company generally lacks long-term customer agreements.
- Asbestos exposure from a former brake business remained a material contingency. About 2,140 cases were outstanding; the recorded settlement liability was approximately $27.1 million. The actuarial range for settlement payments through 2058 was $27.1 million to $41.5 million, excluding estimated legal costs of $32.3 million to $57 million. Prior insurance coverage had been exhausted.
- Other risks include competitive pricing and offshore sourcing, seasonal and weather-sensitive Temperature Control demand, warranty and inventory returns, supplier and factoring availability, variable-rate debt, foreign operations, environmental remediation and changing vehicle technology. A facility was under environmental testing; the recorded cleanup reserve was $1.6 million.
- Subsequent events included a January 2013 $6.3 million investment for an approximately 25% interest in Orange Electronic, and a February 2013 acquisition of a U.K. original-equipment business for approximately $6.4 million.
Important facts for investors to verify
- How much future sales growth is organic, particularly in Temperature Control, given the acquired sales contribution and the lost customer business?
- Whether Engine Management margin gains persist and Temperature Control margins recover after acquisition-related costs, product mix and weaker manufacturing cost absorption.
- Whether receivables factoring remains available and cost-effective, and how its use affects reported cash flow and working capital.
- Whether operating cash flow can support seasonal borrowing needs, debt repayment, dividends and planned investment as the revolver approaches its March 2015 maturity.
- Whether asbestos claims, legal costs and environmental remediation ultimately exceed recorded reserves; these estimates depend on significant assumptions.
- How the 2011 one-time tax benefit affects comparisons of reported earnings, especially fourth-quarter results.