Standard Motor Products, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods unless stated otherwise. The company manufactures and distributes replacement automotive parts, primarily through its Engine Management and Temperature Control segments. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $244.0 | $231.0 | $464.2 | $410.4 |
| Gross profit / margin | $63.2 / 25.9% | $58.4 / 25.3% | $116.3 / 25.1% | $102.2 / 24.9% |
| Operating income / margin | $23.3 / 9.5% | $15.4 / 6.7% | $35.7 / 7.7% | $22.2 / 5.4% |
| Continuing-operations earnings | $13.7 | $8.1 | $20.7 | $10.9 |
| Net earnings | $13.3 | $7.7 | $20.0 | $10.1 |
| Diluted EPS | $0.58 | $0.34 | $0.87 | $0.45 |
| Operating cash flow | Not presented by quarter | $21.0 | $(3.0) |
- Q2 sales rose 5.6%; first-half sales rose 13.1%. First-half Engine Management sales increased 11.8% and Temperature Control sales increased 17.4%.
- Q2 gross margin improved in both segments. For the first half, Engine Management margin improved, while Temperature Control margin fell 0.4 percentage points, which management attributed mainly to product mix.
- Q2 SG&A was $40.0 million, down from $41.8 million; first-half SG&A was $80.7 million, up from $78.5 million. The respective comparisons include a $3.6 million postretirement-plan curtailment gain.
- Interest expense declined to $1.0 million in Q2 and $2.4 million for the first half, from $2.0 million and $3.9 million, respectively, in 2010. First-half discontinued-operation losses were $0.7 million, principally asbestos-related legal costs.
Liquidity, debt and cash flow
- At June 30, cash was $13.1 million; current assets were $426.5 million and current liabilities $257.8 million. Working capital was approximately $168.6 million.
- Total debt was $68.2 million, versus $65.6 million at December 31, 2010. Revolver borrowings were $67.8 million; the company reported $115.9 million of additional borrowing availability and a 3.1% weighted-average revolver rate. The facility provides up to $200 million and matures in March 2014.
- The $12.3 million 15% convertible debentures were repaid at maturity in April using revolver borrowings. At June 30, the company was not subject to the facility’s financial covenants. Variable-rate debt represented 99.5% of total debt.
- First-half operating cash flow was $21.0 million, compared with cash use of $3.0 million in 2010. Investing used $29.8 million, including the $27.0 million Engine Controls acquisition; financing provided $9.1 million. Cash increased by $1.0 million to $13.1 million.
- Receivables sales totaled $291.1 million for the first half and incurred $4.1 million in SG&A fees. Management said factoring helped cash flow and expected current funding sources, including operations and additional borrowing, to meet financing needs over the next 12 months.
Material changes, outlook and risks
- Acquisition: In April, the company acquired BLD Products’ Engine Controls business for approximately $27.0 million in cash, funded by the revolver. The acquired business contributed about $2.1 million of Q2 sales after shipments began in May. Purchase accounting included $12.9 million of goodwill and $7.2 million of customer relationships.
- Postretirement benefits: The company announced termination of most U.S. and Canadian postretirement medical plans effective December 31, 2016. The plan changes reduced the accumulated obligation by $14.4 million and generated a $3.6 million curtailment gain in Q2 earnings.
- Management commentary: Sales benefited from strong traditional and retail demand, customers replenishing inventory, drivers keeping vehicles longer, and warm weather that supported Temperature Control demand. The company cited seasonality: sales and working-capital needs generally peak in Q2 and Q3.
- No specific earnings or revenue guidance is provided in the filing. Management noted continued focus on efficiency, cost position, customer service and integration of acquired operations.
- Contingencies: The balance sheet reports $25.5 million of accrued asbestos liabilities. The latest actuarial estimate cited a range of $25.7–$66.9 million for settlement payments through 2059, excluding legal costs; estimated legal costs were separately $20.3–$61.3 million. About 2,110 cases were outstanding. The company recorded the low end of the settlement range and said further provisions may be required.
- The company also faces antitrust litigation seeking injunctive relief and unspecified damages; it says it believes the claims are without merit and intends to defend them. Other product-liability and litigation matters were not expected by management to have a material adverse effect. Product warranty accruals were $15.5 million, up from $13.8 million a year earlier.
- Key stated risks include leverage, economic and market conditions, customer and product mix changes, pricing and input-cost pressures, acquisition integration, restructuring savings, and asbestos, environmental and product-liability exposures. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales growth and improved margins persist beyond the seasonally strong, unusually warm Q2, and how Temperature Control product mix develops.
- Acquisition integration costs, realized synergies and returns on the $27.0 million Engine Controls purchase.
- Working-capital and liquidity trends, including receivables factoring costs, revolver availability, and the effect of the high variable-rate debt mix.
- Future asbestos claim counts, actuarial reassessments, insurance recoveries and any resulting reserve changes; also the status and potential exposure from antitrust litigation.
- The durability of earnings excluding the one-time $3.6 million curtailment gain, and any effect of deferred-tax valuation-allowance changes; the filing reports a $29.4 million valuation allowance and says improved U.S. earnings could support a future reduction.