Standard Motor Products, Inc. — Q1 2019 Form 10-Q
Business context and reporting period: The company manufactures and distributes automotive replacement parts, primarily through its Engine Management and Temperature Control segments. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Dollar amounts below are in millions unless stated.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Net sales | $283.8 | $261.8 | Up 8.4% |
| Gross profit / margin | $78.0 / 27.5% | $72.6 / 27.7% | Profit increased; margin down 0.2 percentage points |
| Operating income | $18.0 | $12.3 | Up 45.9%; operating margin approximately 6.3% versus 4.7% |
| Continuing-operations earnings | $13.1 | $8.6 | Effective tax rate 25.2% versus 26.2% |
| Net earnings | $12.2 | $8.0 | Includes discontinued-operations losses of $0.9 and $0.6 |
| Diluted EPS | $0.53 | $0.35 | Continuing operations: $0.57 versus $0.37 |
| Cash from operating activities | $(26.7) | $(6.2) | Higher working-capital use |
Engine Management sales rose 6.9% to $213.2 million, led by ignition, emissions, fuel and safety products; wire and cable sales declined. Temperature Control sales rose 14.4% to $68.9 million, primarily from compressor sales and strong preseason orders. Aftermarket sales were $240.7 million, compared with $223.0 million.
At March 31, 2019, cash was $11.7 million, current assets $580.4 million and current liabilities $345.6 million. Total debt was $83.9 million, including $78.7 million drawn on the revolving facility; additional borrowing availability under the facility was $168.1 million. The facility provides up to $250 million, with a $50 million accordion feature, and matures in December 2023. The company was not subject to its fixed-charge coverage covenant at quarter-end. Total operating lease liabilities were $38.3 million.
Material changes versus the prior period
- Sales increased $22.0 million, supported by customer pipeline orders, tariff-related pricing, improved demand in certain Engine Management products, and Temperature Control preseason inventory orders. Management said customer Engine Management point-of-sale trends were in the low single digits.
- Operating income improved by $5.7 million. No restructuring and integration expense was recorded in Q1 2019, versus $2.8 million in Q1 2018, as prior rationalization programs were substantially completed.
- Gross margin edged down as product mix and tariff costs affected Engine Management; improved production variances lifted Temperature Control margin. SG&A rose $2.3 million, including higher distribution and receivables-factoring costs.
- Interest expense increased to $1.1 million from $0.6 million, reflecting higher average borrowings and interest rates. Revolver borrowings were $78.7 million at quarter-end versus $43.7 million at December 31, 2018.
- Operating cash use increased as accounts receivable rose $22.3 million and inventories rose $14.7 million; inventory growth included a seasonal build of air-conditioning products. Cash ended the quarter at $11.7 million, up from $11.1 million at year-end.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management expects cash from operations, available cash and revolver capacity to meet liquidity needs for at least 12 months, subject to assumptions including no material adverse developments.
- Results are seasonal: sales are typically highest in the second and third quarters, particularly for Temperature Control. Demand can vary with summer weather and customer inventory levels.
- Management did not expect increased tariffs to have a significant future operating impact, citing customer price increases, but cautioned that it may not recover all tariff costs. Tariffs passed through without markup affected margins.
- Receivables factoring remains an important funding and cash-management channel. The company sold $171.1 million of receivables in Q1 2019 and incurred $5.7 million in related charges. It warned that termination or disruption of these arrangements could adversely affect collections, financial condition and cash flows.
- In April 2019, the company acquired certain Pollak business assets and liabilities for approximately $40 million, funded with revolver borrowings. The business had approximately $45 million of 2018 revenue. Integration is expected within 12 months, and restructuring and integration expenses are anticipated over the next 12 months; purchase-price allocation was not yet complete.
- Asbestos-related matters remain a significant contingency. The balance-sheet asbestos liability was $43.8 million at March 31, 2019. A California verdict was amended to assign the company approximately $7.6 million of responsibility; the company plans to appeal, and interest accrues at 10% while the appeal is pending. Q1 discontinued-operations losses included related legal expenses and interest. The company reported approximately 1,490 outstanding cases and no insurance coverage for these indemnity and defense costs.
- The company adopted lease accounting effective January 1, 2019, recording operating lease right-of-use assets and liabilities; management said adoption did not materially affect earnings or cash flows. The quarterly dividend increased to $0.23 per share from $0.21.
- Other cited risks include customer and market demand, competitive pricing, production and material costs, acquisition integration, foreign exchange and variable interest rates. A hypothetical 100-basis-point adverse change in factoring margin rates could have an approximate $1.7 million negative impact on earnings or cash flows for the quarter.
Important facts for investors to verify
- Whether seasonal Temperature Control inventory converts to sales and collections, and whether operating cash flow improves from the Q1 working-capital outflow.
- Whether sales growth and margins persist, particularly given low-single-digit Engine Management point-of-sale trends, product mix, and tariff recovery.
- Continued availability and cost of receivables factoring, including its contribution to liquidity and SG&A.
- Pollak acquisition funding, integration costs, purchase-price allocation and realized contribution to earnings.
- Developments in the California asbestos appeal, future actuarial estimates, claims and related cash payments.
- Revolver borrowing levels and availability following the acquisition, and the company’s ability to maintain liquidity while funding dividends and repurchases.