Standard Motor Products, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Amounts are in millions of dollars, except per-share data. The company manufactures and distributes automotive replacement parts, principally through Engine Management and Temperature Control segments.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $270.1 | $268.9 | $500.8 | $480.6 |
| Gross profit / margin | $77.8 / 28.8% | $69.3 / 25.8% | $143.6 / 28.7% | $123.9 / 25.8% |
| Operating income | $27.2 | $22.7 | $43.3 | $32.4 |
| Continuing-operations earnings | $16.4 | $13.7 | $26.0 | $19.2 |
| Net earnings | $16.0 | $13.4 | $25.2 | $18.6 |
| Diluted EPS | $0.69 | $0.58 | $1.09 | $0.80 |
- Q2 sales increased 0.5%; six-month sales increased 4.2%. Gross margin improved in both segments, supported by sourcing and manufacturing efficiencies and CompressorWorks integration.
- Q2 operating income rose about 20%; six-month operating income rose about 34%. Higher SG&A partly offset gross-profit gains. Six-month SG&A increased to $100.2 million from $91.4 million, including acquisition, sales, distribution, and receivables-factoring costs.
- Six-month operating cash flow was negative $12.4 million, versus positive $21.2 million a year earlier. Receivables and inventory increases used $53.7 million and $31.9 million, respectively; management attributed the buildup to seasonality and CompressorWorks integration.
- Cash was $12.3 million at June 30, down from $13.1 million at year-end. Current assets were $505.5 million and current liabilities $296.6 million. Revolving borrowings were $68.3 million, up from $40.5 million at year-end; total debt was $68.5 million. Additional formula-based borrowing availability was $126.8 million.
- Investing cash outflow was $18.9 million, including the $6.3 million Orange Electronic minority investment, the $6.5 million SMP Europe OE business acquisition, and $5.6 million of capital expenditures. Financing cash inflow was $31.9 million.
Material changes and business drivers
- Engine Management Q2 sales rose 5.4% to $182.1 million; Temperature Control sales fell 6.9% to $86.7 million. Temperature Control included $4.9 million of CompressorWorks sales; excluding these, sales were down $11.3 million, which management attributed to cool, wet spring weather.
- For the first six months, Engine Management sales rose 6.5% to $357.6 million. Temperature Control sales rose 0.8% to $139.4 million, including $16.6 million from CompressorWorks; excluding the acquisition, they declined $15.5 million.
- In May, the company amended and extended its secured revolving facility to March 2018, increased the commitment from $200 million to $250 million, and reduced borrowing-rate margins and the unused fee. The weighted-average facility rate was 1.7% at June 30.
- The quarterly dividend increased from $0.09 to $0.11 per share. The company paid $5.0 million in dividends in the first half and had approximately $5.7 million remaining under a new $6 million repurchase authorization at June 30.
Outlook, risks and contingencies
- No specific full-year earnings or revenue guidance was provided. Management expected receivables and inventory to decline from their first-half increases by year-end and said existing funding sources, including additional borrowings, should meet financing needs over the next 12 months.
- Management noted seasonally high second- and third-quarter demand, especially for Temperature Control products, and working-capital needs that typically peak near the end of Q2. Weather and customer inventories can materially affect Temperature Control demand.
- Risks include customer and market conditions, pricing and input-cost pressures, acquisition integration and restructuring savings, substantial indebtedness, and dependence on receivables factoring. The company sold $334.3 million of receivables in the first half and incurred $7.1 million in related charges; disruption to those arrangements could adversely affect liquidity and collections.
- Asbestos matters remained a significant contingency: about 2,230 cases were outstanding, and insurance coverage had been exhausted. The latest actuarial study estimated undiscounted settlement payments of $27.1–$41.5 million through 2058, plus estimated legal costs of $32.3–$57 million. The balance sheet reported accrued asbestos liabilities of $24.2 million at June 30; the filing does not clearly reconcile that balance with the study’s stated low-end estimate.
- Accrued product warranty claims were $23.5 million, versus $18.8 million at June 30, 2012. Other ordinary-course litigation and product-liability matters were not expected by management to have a material adverse effect.
Key facts for investors to verify
- Whether the seasonal receivables and inventory buildup unwinds as management expects, and its effect on operating cash flow and revolver usage.
- Temperature Control demand, including the ongoing effects of weather and CompressorWorks integration, against the stronger Engine Management performance.
- The asbestos reserve balance, actuarial assumptions, legal-cost exposure, and timing of the next annual actuarial review.
- Continued access to receivables factoring, borrowing availability, and compliance with credit-facility conditions if availability falls below $25 million.