Standard Motor Products, Inc. — Q1 2015 Form 10-Q
Business and period: The company manufactures and distributes replacement motor-vehicle parts, principally through its Engine Management and Temperature Control segments, with a growing focus on original-equipment service, heavy-duty and industrial markets. This unaudited report covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Results are seasonal, with sales typically strongest in the second and third quarters.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $227.6 million | $232.8 million |
| Gross profit / margin | $63.9 million / 28.1% | $67.9 million / 29.2% |
| Operating income | $14.9 million | $20.4 million |
| Continuing-operations earnings | $9.3 million | $12.4 million |
| Net earnings, including discontinued operations | $8.9 million | $11.7 million |
| Diluted EPS | $0.39 | $0.50 |
| Cash from operating activities | $(14.2) million | $9.2 million |
| Capital expenditures | $4.0 million | $2.8 million |
SG&A increased to $49.2 million (21.6% of sales), from $47.6 million (20.4%). Interest expense was $0.4 million versus $0.3 million. The effective tax rate was 36.2%, compared with 37.0%. The company declared dividends of $0.15 per share, up from $0.13.
Balance sheet and liquidity at March 31, 2015
- Cash and cash equivalents were $8.1 million, down from $13.7 million at year-end 2014.
- Total debt was $71.8 million, including $71.6 million under revolving facilities; year-end total debt was $56.8 million. The revolver’s weighted-average rate was 2.0%.
- The secured revolving credit facility has a $250 million maximum commitment and expires in March 2018. Reported formula-based additional availability was $147.5 million. The company was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
- Current assets were $488.2 million and current liabilities $265.0 million. Inventory was $283.7 million, up from $278.1 million at year-end.
- Management said operating cash flow, available cash and revolver availability were expected to meet liquidity needs for at least the next 12 months, subject to no material adverse developments.
Changes and management commentary
- Sales declined 2.2%. Engine Management sales fell 1.2% to $177.1 million; Temperature Control sales fell 5.4% to $48.7 million. Temperature Control included $3 million of incremental sales from the April 2014 Annex asset acquisition; excluding those sales, the segment declined $5.8 million.
- Gross margin fell 1.1 percentage points. Management attributed Engine Management’s decline primarily to costs of improving diesel production processes and quality controls; Temperature Control’s decline primarily to under-absorbed overhead after reduced production in late 2014 and Q1 2015.
- Operating income fell by $5.5 million, reflecting lower sales and gross margins and higher SG&A, principally from employee benefit costs. Foreign exchange also weighed on reported sales: management estimated Q1 2015 sales would have been $2.1 million higher using prior-year Canadian dollar and Polish zloty rates.
- Operating cash flow swung to a use of cash, principally due to lower earnings and a $25.3 million increase in receivables, versus a $0.8 million increase in Q1 2014. Management said collections on late-quarter sales were anticipated early in Q2. Receivables factoring was $144 million in the quarter, down from $177.4 million; related expense was $2.9 million.
- The board authorized up to $10 million of share repurchases in February; none were made in Q1. The company also increased its quarterly dividend to $0.15 per share.
- Segment operating income was $21.7 million for Engine Management (down from $24.4 million) and a $1.4 million loss for Temperature Control (versus $0.6 million income). “All Other” reported a $5.4 million operating loss.
Outlook, risks and contingencies
- Management provided no specific earnings or revenue guidance. It noted that sales are generally highest in Q2 and Q3, and Temperature Control demand can vary with summer weather and customer inventories; working-capital needs typically peak around the end of Q2.
- Risks identified include major-customer relationships and program timing, factoring availability, competitive pricing, costs that cannot be recovered through pricing, market and product-mix changes, acquisition integration, cost-savings execution, and product-liability, environmental and asbestos matters.
- Asbestos-related matters: approximately 2,150 cases were outstanding. The August 2014 actuarial study estimated undiscounted settlement payments of $36.1 million–$55.4 million through 2058, excluding legal costs and potential insurance recoveries; estimated legal costs were $43 million–$76.4 million. The filing reports an asbestos liability of $33.4 million on the March 31 balance sheet and says the company recorded a $12.8 million pre-tax provision in 2014. Management said additional provisions could be required, though it did not then believe they were reasonably likely to materially harm liquidity or consolidated financial position.
- Other litigation includes commercial, product-liability, employment and environmental matters. Management did not expect the outcomes, individually or in aggregate, to have a material adverse effect, but noted that settlements or revised estimates could be material. Remaining restructuring liabilities were $1.4 million, principally severance/retiree-benefit enhancements payable through 2019 and environmental cleanup associated with a closed Long Island City facility.
- Nearly all debt was variable-rate (99.7%). The company reported no derivative instruments at quarter-end. It warned that loss or termination of receivables-factoring arrangements could adversely affect collections, results and cash flows.
- Disclosure controls and procedures were concluded to be effective at quarter-end; no material change in internal control over financial reporting was reported.
Investor verification points
- Track whether Q2 collections reduce receivables and improve operating cash flow after the unusually large Q1 receivables build.
- Assess whether Temperature Control margins recover as production and seasonal demand change, and whether diesel-process improvement costs abate.
- Reconcile the $33.4 million asbestos liability reported on the balance sheet with the actuarial settlement range and monitor the next annual actuarial update, legal costs and claims.
- Monitor revolver borrowings, formula-based availability, factoring volumes and costs, and the impact of the variable-rate debt exposure.
- Evaluate customer returns and warranty reserves, including the reported $35.8 million accrued customer returns and approximately $20.0 million warranty reserve.