Standard Motor Products, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The company manufactures and distributes replacement motor-vehicle parts, primarily through Engine Management and Temperature Control segments, with a growing focus on original equipment service markets. Results are unaudited; first-quarter results are seasonal and are not necessarily indicative of full-year performance. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $211.7 | $220.2 | Down 3.9% |
| Gross profit / margin | $54.6 / 25.8% | $53.2 / 24.1% | Margin up 1.7 percentage points |
| Operating income | $9.7 | $12.4 | Down $2.7 |
| Continuing-operations earnings | $5.5 | $7.0 | Down 21.6% |
| Net earnings | $5.2 | $6.7 | Down 22.5% |
| Diluted EPS | $0.22 | $0.29 | Down $0.07 |
| Operating cash flow | $(9.0) | $(11.9) | Cash use narrowed |
SG&A rose to $44.8 million (21.1% of sales) from $40.6 million (18.5%). Restructuring and integration expense was $0.1 million versus $0.3 million. Interest expense fell to $0.7 million from $1.4 million, partly reflecting the April 2011 maturity of $12.3 million of 15% convertible debentures. The effective tax rate was 38.6%, versus 38.2%. Discontinued operations generated a $0.3 million loss in each period.
Segments and material changes
- Engine Management: Sales were $163.0 million, down 0.7%; operating profit was $13.7 million versus $14.8 million. Acquisitions contributed $11.3 million in incremental sales, offset by lower pipeline orders versus unusually high Q1 2011 levels. Gross margin improved to 26.4% from 24.4%, supported by sourcing, manufacturing efficiencies and product mix.
- Temperature Control: Sales were $45.3 million, down 16.3%; operating profit was $0.05 million versus $1.3 million. Lower pipeline orders and a major customer’s move to sourcing certain A/C parts directly from China weighed on sales.
- Consolidated gross margin improved despite lower sales, but higher SG&A—partly from acquisitions, intangible amortization, customer-cost classification and receivables-sale fees—contributed to lower operating income.
Cash, liquidity and debt
- At March 31, cash was $9.3 million; current assets were $432.1 million and current liabilities $249.6 million. Working capital was approximately $182.6 million.
- Total debt was $79.3 million, including $79.0 million under the revolving facility; debt was largely variable-rate. The facility had a $200 million limit, matures in March 2015, and had $98.5 million of additional borrowing availability under its borrowing formula. Weighted-average borrowing rate was 1.99%. The company was not subject to the facility’s conditional financial covenants at quarter-end.
- Operating cash use was $9.0 million; investing cash use was $2.4 million, primarily capital expenditures. Financing provided $9.1 million, including $6.0 million of net line-of-credit borrowings. Cash declined $1.6 million during the quarter.
- Inventory increased to $259.9 million from $248.1 million at year-end; accounts receivable increased to $122.2 million from $104.1 million. Management attributed the improved year-over-year operating cash flow mainly to a smaller receivables increase and higher accounts payable, partly offset by greater inventory growth.
- The company sold $132.1 million of receivables in Q1 versus $126.4 million a year earlier; related SG&A charges were $2.4 million versus $1.8 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said existing funding sources, including operating funds and additional borrowings, were expected to meet financing needs over the next 12 months, while noting it was evaluating other liquidity sources.
- Management identified seasonality: sales, particularly Temperature Control, typically peak in Q2 and Q3; weather and customer inventory levels can materially affect demand and working-capital needs.
- On April 30, 2012, after quarter-end, the company acquired substantially all assets of CompressorWorks for approximately $37.4 million in cash funded by its revolver. CompressorWorks had approximately $60 million in 2011 revenue; the purchase price remained subject to customary working-capital adjustments.
- Asbestos claims remained a significant contingency: approximately 2,110 cases were outstanding at March 31. The latest actuarial study estimated undiscounted settlement payments of $27.5 million to $66.5 million through 2059, excluding legal costs and possible insurance recoveries; the company recorded the low end of the settlement range. The balance sheet lists accrued asbestos liabilities of $26.0 million, so investors should reconcile this balance with the disclosed reserve estimate. Estimated legal costs through 2059 were $26.2 million to $63.0 million; additional provisions cannot be ruled out.
- The antitrust lawsuit was settled in April 2012 for a nominal amount. Other ordinary-course litigation and product-liability matters were not expected by management to have a material adverse effect.
- Key disclosed risks include indebtedness and borrowing access, customer and market demand, customer concentration and program changes, pricing and input-cost pressure, acquisition integration, restructuring savings, product returns and warranties, and asbestos and environmental liabilities. Foreign-exchange exposure was described as immaterial for monetary balances; 99.6% of debt was variable-rate. No derivatives were outstanding.
Most important facts for investors to verify
- Whether the Temperature Control sales decline and major-customer sourcing change persist, and whether Engine Management margins and acquisition contributions offset that weakness.
- Inventory, receivables, seasonal borrowing needs, and the cost and continued use of receivables factoring.
- Post-acquisition borrowing, integration progress and final CompressorWorks purchase-price adjustment.
- Asbestos reserve reconciliation, claim trends, future legal costs, and any changes in actuarial assumptions or insurance recoveries.
- Availability and terms under the revolving facility, variable-rate exposure, and the company’s ability to sustain dividends while managing debt and liquidity.