Standard Motor Products, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Figures are unaudited; financial amounts are in millions except per-share data. The company manufactures and distributes replacement automotive parts through its Engine Management and Temperature Control segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $296.6 | $281.1 | $845.1 | $876.2 |
| Gross profit / margin | $87.3 / 29.4% | $82.5 / 29.4% | $241.2 / 28.5% | $257.3 / 29.4% |
| Operating income | $27.2 | $26.8 | $62.8 | $81.6 |
| Continuing-operations earnings | $19.3 | $17.1 | $44.7 | $51.7 |
| Net earnings, including discontinued operations | $15.7 | $13.1 | $39.7 | $46.6 |
| Diluted EPS | $0.69 | $0.57 | $1.73 | $2.00 |
- Quarterly trend: Sales rose 5.5% year over year, led by Temperature Control; operating income increased modestly. Gross margin was unchanged at 29.4%. Diluted EPS improved, partly reflecting a lower effective tax rate.
- Nine-month trend: Sales fell 3.5%, operating income fell 23.0%, and diluted EPS declined. Gross margin contracted 0.9 percentage points; higher SG&A and lower sales and gross margins weighed on operating results.
- Segments: Q3 Engine Management sales were $197.6 million, up 0.4%; Temperature Control sales were $96.1 million, up 18.4%. For the first nine months, Engine Management sales declined 4.9% to $600.5 million and Temperature Control declined 0.9% to $236.7 million.
- Margins and expenses: Q3 Engine Management margin fell to 28.9% from 29.4%, while Temperature Control rose to 27.6% from 26.8%. Year-to-date segment margins declined to 28.6% and 25.8%, respectively. SG&A was $60.1 million in Q3 and $175.6 million year to date; receivables-sale charges included in SG&A were $7.3 million and $19.0 million, respectively.
- Taxes and unusual items: Effective tax rates were 26.6% for Q3 and 26.1% year to date, compared with 35.8% and 37.1% in 2017, primarily reflecting U.S. tax reform. Discontinued operations recorded losses of $3.5 million for Q3 and $5.0 million year to date, including a $3.5 million pre-tax asbestos provision in 2018.
Cash flow, balance sheet and capital
- Year-to-date operating cash flow was $67.6 million versus $36.8 million in 2017. Investing used $25.4 million, including $15.6 million of capital expenditures and $9.9 million of joint-venture investments. Financing used $32.6 million, including $14.1 million of dividends, $9.3 million of treasury-stock purchases and $12.0 million of net revolving-credit repayments.
- Cash was $27.3 million at September 30, 2018, versus $17.3 million at year-end 2017. Current assets were $542.0 million and current liabilities $309.0 million. Inventories were $318.4 million, plus $21.3 million of unreturned customer inventories recorded under the new revenue standard.
- Total debt was $51.0 million, down from $61.8 million at year-end; revolving borrowings were $45.0 million. The company reported $201.8 million of additional borrowing availability under its $250 million secured revolving facility. Its weighted-average facility rate was 3.4%, up from 2.7% at year-end. It was not subject to the facility’s fixed-charge covenant at quarter-end.
- The company sold $566 million of receivables in the first nine months, paying $19.0 million in related charges. Management cautions that termination of these arrangements or financial difficulty at a purchaser could adversely affect collections, results and cash flows.
- The quarterly dividend increased to $0.21 per share from $0.19. A new $20 million repurchase authorization had $16.1 million remaining at September 30; subsequent repurchases through October 26 reduced remaining authorization to $10.7 million.
Outlook, commentary and risks
- Management stated that operating cash flow, available cash and borrowing capacity should meet liquidity needs for at least the next 12 months, subject to no material adverse developments.
- Management said Temperature Control demand in Q4 would depend on weather and customer inventory levels. Warm weather from mid-May supported a strong Q3 after a slow start to the 2018 season. Management expected a distribution-center automation project to be complete and optimized by year-end, with substantial improvements next year.
- Management attributed nine-month Engine Management sales weakness partly to large customer pipeline orders in the prior-year first half and the continuing decline of older wire-and-cable products. It noted that production moves caused inefficiencies and redundant costs; restructuring and relocation programs were substantially complete by September 30.
- Asbestos exposure remains a significant contingency: approximately 1,450 cases were outstanding. The actuarial study estimated settlement payments, excluding legal costs, of $37.1 million to $56.9 million through 2061, and legal costs of $44.9 million to $80.6 million. The filing reports a $37.1 million liability in the asbestos discussion but $35.3 million of accrued asbestos liabilities on the balance sheet; the filing text does not clearly reconcile these values. Management warned that further provisions may be required.
- Other disclosed risks include customer and market demand, pricing and input-cost pressures, product returns and warranty estimates, foreign exchange and variable interest rates, factoring availability, integration and cost-savings execution, and other litigation and environmental matters. Management did not quantify formal earnings or sales guidance.
- Revenue standard adoption in 2018 changed presentation of core returns and overstock returns and established unreturned customer inventory and related liabilities. Management said the ongoing net-income impact was not expected to be material; the filing shows a $1.189 million opening retained-earnings adjustment.
Key facts for investors to verify
- Whether Q3 Temperature Control strength persists given weather sensitivity and customer inventory levels, and whether the automation project delivers the anticipated cost and distribution benefits.
- Whether Engine Management sales and margins stabilize amid declining wire-and-cable products and production-transition costs.
- The sustainability of cash conversion, working-capital changes, receivables factoring and the associated fees and liquidity exposure.
- The asbestos reserve and legal-cost outlook, including the difference between the $37.1 million reserve discussed in the note and the $35.3 million balance-sheet amount.
- Whether lower effective tax rates, ongoing dividends and share repurchases remain consistent with operating performance, debt capacity and covenant terms.