Standard Motor Products, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. The company manufactures and distributes replacement automotive parts through Engine Management and Temperature Control segments. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $261.8 million | $282.4 million |
| Gross profit / margin | $72.6 million / 27.7% | $84.1 million / 29.8% |
| Operating income | $12.3 million | $25.5 million |
| Continuing-operations earnings | $8.6 million | $16.4 million |
| Net earnings | $8.0 million | $15.7 million |
| Diluted earnings per share | $0.35 | $0.67 |
| Cash used in operating activities | $6.2 million | $26.9 million |
Net sales fell 7.3%. Engine Management sales declined 5.6% to $199.5 million; Temperature Control sales declined 14.3% to $60.2 million. Segment operating income was $17.4 million for Engine Management (versus $27.3 million) and $0.8 million for Temperature Control (versus $4.0 million).
At March 31, 2018, cash was $26.2 million, total debt was $95.9 million, and total current liabilities were $338.5 million. Revolver borrowings were $90.0 million, with $120.8 million of additional borrowing availability under the borrowing formula. The revolving facility’s weighted average interest rate was 3.0%. The company reported $13.4 million of cash used in investing activities, including capital spending and joint-venture investments, and $28.0 million of cash provided by financing activities.
Material changes and unusual items
- Gross margin decreased to 27.7% from 29.8%. Management attributed the decline to lower production volumes and production-move inefficiencies and redundant costs.
- Operating income more than halved, reflecting lower sales and margins, higher restructuring and integration costs ($2.8 million versus $1.5 million), and slightly higher SG&A.
- The effective tax rate was 26.2%, versus 36.7%, reflecting the U.S. Tax Cuts and Jobs Act. The lower tax rate partly offset weaker operating performance.
- The company adopted the new revenue standard using the modified retrospective method. Q1 2018 reported net sales were $2.3 million higher and net earnings $0.4 million higher than they would have been without adoption; 2017 comparative figures were not restated. Management expected no material ongoing effect on net income.
- A $0.6 million after-tax loss from discontinued operations in Q1 2018 primarily reflected asbestos-related legal expenses.
- The company acquired an additional 15% interest in a China joint venture, increasing ownership to 65%, but continues equity-method accounting because the minority owner retains substantive participating rights.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management said Temperature Control sales for the rest of 2018 depend on summer weather. The business is seasonal, typically with higher sales in the second and third quarters and peak working-capital needs near the end of the second quarter.
Management expected the wire-and-cable relocation and Orlando plant rationalization programs to be completed by the end of the second half of 2018; the earlier plant rationalization program was substantially complete. Management believed cash, operating cash flow and available revolver borrowings would meet liquidity needs for at least 12 months, subject to no material adverse developments. Restructuring costs, integration inefficiencies, customer demand and inventory returns remain relevant considerations.
Risks include customer concentration and program changes, competitive pricing, unrecovered production or material cost increases, weather-related demand, execution of cost savings and acquisitions, and changes to receivables factoring arrangements. The company sold $157.5 million of receivables in Q1 and incurred $5.4 million in factoring charges; termination or disruption of these arrangements could adversely affect collections and liquidity. Most debt is variable-rate.
Asbestos-related matters remain a significant contingency: approximately 1,545 cases were outstanding. The latest actuarial study estimated undiscounted settlement payments of $35.2 million to $54 million through 2060, excluding legal costs and potential insurance recoveries; estimated future legal costs were $44.3 million to $79.6 million. The balance sheet reported accrued asbestos liabilities of $32.8 million. The company also faces other litigation and environmental matters; outcomes and potential payments are uncertain.
Important facts for investors to verify
- Whether the sales decline and lower margins persist, particularly in Temperature Control and the wire-and-cable product line.
- Whether summer demand supports Temperature Control sales and whether customer inventory levels normalize.
- Execution, remaining costs and expected benefits of relocation and restructuring programs scheduled for completion in the second half of 2018.
- Availability and cost of receivables factoring, revolver capacity, and the effects of higher interest rates on financing and factoring costs.
- Future asbestos actuarial estimates, claim payments and legal costs, as well as developments in other contingencies.
- The effects of revenue-standard estimates for returns and core liabilities, and any further tax adjustments related to the Tax Cuts and Jobs Act.