Standard Motor Products, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. The company manufactures and distributes replacement automotive parts, principally through Engine Management and Temperature Control. Amounts below are in millions except per-share data.
Financial results
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $286.6 | $312.7 | $548.5 | $595.1 |
| Gross profit / margin | $81.3 / 28.4% | $90.7 / 29.0% | $153.9 / 28.1% | $174.8 / 29.4% |
| Operating income | $23.4 | $29.4 | $35.7 | $54.9 |
| Continuing-operations earnings | $16.8 | $18.3 | $25.4 | $34.6 |
| Net earnings | $15.9 | $17.8 | $23.9 | $33.5 |
| Diluted EPS | $0.69 | $0.76 | $1.04 | $1.44 |
- Cash flow: H1 operating cash flow was $4.2 million, versus cash used of $6.8 million in 2017. Investing used $19.9 million, including $11.3 million of capital expenditures and payments for joint-venture investments. Financing provided $17.2 million. Cash ended at $18.6 million.
- Liquidity and debt: At June 30, current assets were $558.6 million and current liabilities $341.8 million. Total debt was $93.7 million, including $88.5 million under revolving facilities; revolving-credit availability was $158.3 million. The credit-facility weighted average rate was 3.5%. Debt is predominantly variable-rate.
- Other metrics: Q2/H1 interest expense was $1.3 million/$1.9 million. The effective tax rate was 25.5%/25.7%, versus 38.5%/37.7% in 2017. Dividends declared were $0.21 per share in Q2 and $0.42 per share for H1.
Material changes and management commentary
- Sales fell 8.3% in Q2 and 7.8% in H1. Both operating segments declined. Engine Management sales were affected by unusually strong 2017 customer pipeline orders and continuing declines in older wire-and-cable products; management said underlying Engine Management sales, excluding these factors, increased at a low-single-digit rate.
- Temperature Control sales fell 8.0% in Q2 and 10.8% in H1. Management attributed this to excess customer inventory following the mild 2017 summer and a cool early spring. Warm weather brought a June order increase, some of which shipped in July; management reported robust incoming business and anticipated healthy third-quarter Temperature Control sales. No quantified company-wide earnings or revenue guidance was provided.
- Lower sales and production volumes, including production-move inefficiencies, reduced gross margins. SG&A decreased in dollars but increased as a share of sales. Operating income fell 20.6% in Q2 and 35.0% in H1.
- The Tax Cuts and Jobs Act lowered the company’s effective tax rate. A second-quarter update to the estimated gross repatriation tax resulted in a $2.5 million gross amount, paid in full and reflected in the Q2 tax provision.
- The company adopted the revenue-recognition standard using the modified retrospective method; prior-year figures were not restated. Management said ongoing net-income impact was expected to be immaterial. Adoption increased reported Q2 sales by $0.1 million and H1 sales by $2.5 million versus balances without adoption; reported net earnings were higher by $0.4 million and $0.8 million, respectively.
- Restructuring and integration programs were substantially completed by June 30. H1 charges were $3.1 million, and approximately $1.2 million of future severance payments remained.
- The company increased its ownership in a China joint venture from 50% to 65%, but continues equity-method accounting because the minority owner retains substantive participating rights.
Risks, contingencies, and unusual items
- Asbestos: The company recorded $32.3 million of asbestos liabilities at June 30 and reported approximately 1,550 outstanding cases. The latest actuarial estimate, dated August 2017, placed undiscounted settlement payments through 2060 at $35.2 million to $54.0 million, excluding legal costs and potential insurance recoveries; future legal costs were estimated at $44.3 million to $79.6 million. Management said additional provisions could be required.
- Receivables factoring: The company sold $341.6 million of receivables in H1 and recorded $11.7 million of related charges in SG&A. It warned that termination of these arrangements or financial-institution difficulties could materially affect cash flows and results.
- Other exposures: Risks include customer and market demand, competition and pricing, unrecovered input-cost increases, acquisition integration, restructuring benefits, product liability, environmental matters, foreign exchange and interest rates. Other litigation outcomes are uncertain, though management did not expect the matters, individually or collectively, to materially adversely affect the company.
- Management stated that cash, operating cash flow, and available revolver borrowings should meet liquidity needs for at least 12 months, subject to no material adverse developments. The company was not subject to the revolving-credit fixed-charge coverage covenant at quarter-end.
Key facts for investors to verify
- Whether the reported June order rebound translated into third-quarter Temperature Control sales and whether customer inventories normalized.
- Whether Engine Management’s underlying low-single-digit growth offsets the ongoing wire-and-cable decline and prior-year comparison effects.
- Whether margins recover as production moves conclude and volumes improve.
- Cash conversion, working-capital needs, revolving borrowings and continued access to receivables factoring.
- Future asbestos actuarial estimates, claims, legal costs and any reserve adjustments.
- The effects of revenue-standard adoption when comparing 2018 reported sales and earnings with unadjusted 2017 results.