Business context and reporting period
Standard Motor Products, Inc. manufactures and distributes replacement automotive parts, with a growing focus on original equipment service. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the same 2013 periods. Its principal segments are Engine Management and Temperature Control.
Financial performance and position
Amounts below are in millions, except per-share data.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $272.5 | $270.1 | $505.3 | $500.8 |
| Gross profit | $77.4 | $77.8 | $145.3 | $143.6 |
| Gross margin | 28.4% | 28.8% | 28.8% | 28.7% |
| Operating income | $17.6 | $27.2 | $38.0 | $43.3 |
| Continuing-operations earnings | $11.2 | $16.4 | $23.6 | $26.0 |
| Net earnings | $10.6 | $16.0 | $22.4 | $25.2 |
| Diluted EPS | $0.46 | $0.69 | $0.96 | $1.09 |
- Q2 sales rose 0.9%; first-half sales rose 0.9%. Engine Management sales increased, while Temperature Control sales declined.
- Q2 operating income fell 35%, and net earnings fell 34%, mainly reflecting a $10.6 million litigation charge. First-half operating income declined 12%; net earnings declined 11%.
- Q2 Engine Management gross margin improved to 30.4% from 29.9%; Temperature Control margin declined to 21.4% from 23.5%. Management attributed the latter decline primarily to lower production while aligning inventories with expected demand.
- SG&A was $48.8 million in Q2, down from $50.6 million, and $96.4 million for the half, down from $100.2 million. The company cited lower employee benefit costs and CompressorWorks integration savings.
- Six-month operating cash flow was $17.6 million, versus cash used of $12.4 million in 2013. Investing used $44.1 million; financing provided $27.8 million. Cash ended the period at $6.2 million, versus $12.3 million at June 30, 2013.
- At June 30, total debt was $59.1 million, compared with $21.5 million at December 31, 2013; cash was $6.2 million. The company reported $164 million of additional borrowing availability under its revolving facility, with a $250 million total line expiring in March 2018. Borrowings were predominantly variable-rate.
- Current assets were $496.3 million and current liabilities $293.9 million. Inventories were $292.5 million, up from $269.4 million at year-end, reflecting seasonal working-capital needs.
Material changes, outlook, risks and unusual items
- During the first half, the company acquired Pensacola Fuel Injection for $12.2 million and Annex Manufacturing for approximately $11.5 million, and invested $14 million for a 50% interest in a China-based joint venture. Annex contributed $2.6 million of sales through June 30. Management expects the Pensacola acquisition to be accretive excluding one-time integration costs.
- A $10.6 million tentative litigation settlement was recorded in Q2. It remained subject to court approval; payment was expected in Q3, funded with cash and revolving-credit availability. The company reported no insurance coverage for this matter.
- The company reported approximately 2,180 outstanding asbestos cases. Its latest actuarial estimate put undiscounted settlement payments through 2058 at $24.4–$37.4 million, excluding legal costs; estimated legal costs were $27.4–$48.1 million. Existing insurance coverage was exhausted. Management said it did not believe additional provisions were then reasonably likely to materially affect liquidity or consolidated financial position, but noted uncertainty and the possibility of future provisions.
- The company sells receivables to financial institutions: $366.2 million in the first half of 2014, with $6.9 million of related charges. It warned that termination of these arrangements or financial difficulties at counterparties could adversely affect collections, cash flow and financial condition.
- Management said cash from operations, available cash and credit should meet liquidity needs for at least the next 12 months, assuming no material adverse developments. It identified risks including customer and market demand, summer weather and customer inventories, pricing and input-cost pressures, acquisitions and integration, indebtedness, factoring arrangements, litigation, product liability and environmental matters.
- No specific earnings or revenue guidance was provided. The company noted that sales are typically strongest in the second and third quarters, particularly for Temperature Control, and that demand varies with summer weather. It increased the quarterly dividend to $0.13 per share in 2014 from $0.11 and repurchased 166,890 shares for $5.9 million during the first half.
- Management concluded disclosure controls were effective as of June 30, 2014 and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Court approval and payment timing of the $10.6 million settlement, and any subsequent litigation developments.
- Progress in acquired-business integration and the joint venture, including contribution to sales, margins and cash generation.
- Temperature Control demand, seasonal inventory levels and segment margins as the summer selling season progresses.
- Revolving-credit borrowings, borrowing availability, variable-rate exposure and continued access to receivables factoring.
- Updated asbestos actuarial estimates, claims experience and any change in reserves or legal-cost expectations.