Standard Motor Products, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The company manufactures and distributes replacement motor-vehicle parts, principally through Engine Management and Temperature Control segments. Results are seasonal, with typically stronger sales in the second and third quarters.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $236.2 million | $227.5 million | $700.5 million | $637.9 million |
| Gross profit | $64.5 million | $60.0 million | $180.8 million | $162.2 million |
| Gross margin | 27.3% | 26.4% | 25.8% | 25.4% |
| Operating income | $22.8 million | $18.1 million | $58.5 million | $40.3 million |
| Net earnings | $13.0 million | $9.7 million | $33.1 million | $19.7 million |
| Diluted EPS | $0.57 | $0.42 | $1.43 | $0.87 |
Nine-month diluted EPS from continuing operations was $1.51, versus $0.97 in 2010; discontinued operations reduced diluted EPS by $0.08, versus $0.10. Q3 continuing-operations diluted EPS was $0.61, versus $0.48.
- Segment trends: Q3 Engine Management sales rose 7.6% to $165.2 million, while Temperature Control sales fell 5.0% to $68.1 million, reflecting customer purchase timing. For the nine months, sales increased 10.3% in Engine Management and 8.7% in Temperature Control.
- Margins and expenses: Management attributed improved margins to higher production and volume, including better fixed-cost absorption, and a greater mix of compressor production in Reynosa, Mexico. Nine-month SG&A rose $1.9 million to $122.3 million but declined as a share of sales to 17.5% from 18.9%. Restructuring and integration expense declined to $0.7 million from $3.4 million.
- Cash flow: Nine-month operating cash flow was $57.3 million, versus $4.9 million. Investing used $31.0 million, including the BLD acquisition; financing used $22.2 million. Cash increased $2.8 million to $14.9 million.
- Debt and liquidity: Total debt was $42.1 million at September 30, versus $65.6 million at year-end 2010. Revolver borrowings were $41.8 million; stated additional borrowing availability was $121 million. The amended secured revolving facility provides up to $200 million and matures in March 2015. Its weighted average rate was 2.1%; substantially all company assets and certain subsidiary assets secure the facility. The company was not subject to the facility’s conditional financial covenants at quarter-end.
- Other balance-sheet items: Total assets were $523.7 million and stockholders’ equity was $243.0 million. Inventory was $234.0 million, down from $241.2 million at December 2010. Declared dividends were $0.07 per share in Q3 and $0.21 for the nine months.
Material changes and unusual items
- In April, the company acquired BLD Products’ Engine Controls business for approximately $27 million in cash, funded through the revolver. The acquisition contributed approximately $2.2 million of Q3 sales and $4.3 million of nine-month sales; $12.9 million of goodwill was recorded.
- On October 25, after quarter-end, the company acquired Forecast Trading Corporation for approximately $44 million in cash funded by the revolver. Forecast reported 2010 revenue of approximately $28 million.
- Lower interest expense reflected reduced average borrowings and repayment at maturity in April of $12.3 million of 15% convertible subordinated debentures.
- A $3.6 million postretirement-plan curtailment gain benefited nine-month SG&A. The company announced that postretirement medical plans for substantially all eligible U.S. and Canadian employees will terminate on December 31, 2016; 64 former union employees are not affected.
- The nine-month tax provision was $21.2 million, at a 37.9% effective rate. A $29.4 million deferred-tax valuation allowance remained; management said a significant portion of U.S. deferred tax assets might be realized in the near term, potentially as early as Q4 2011, if earnings and tax-position trends continue. Any resulting benefit would be noncash.
- The company sold $449.7 million of receivables during the first nine months, recording $6.4 million of related charges in SG&A, versus $4.8 million in 2010.
Outlook, risks and contingencies
Management stated that operating funds and additional borrowing capacity are expected to meet financing needs over the next 12 months; no specific revenue or earnings guidance was provided. Management cited consumer vehicle-retention trends as supporting demand. Key risks identified include economic and automotive-market conditions, customer and channel changes, pricing and input-cost pressures, acquisition integration, restructuring savings, indebtedness, and product, environmental and litigation liabilities.
- Asbestos: The company recorded a $27.5 million reserve for future settlements through 2059, the low end of an actuarial range of $27.5 million to $66.5 million, excluding legal costs and potential insurance recoveries. Estimated legal costs were separately projected at $26.2 million to $63 million. There were 2,095 outstanding cases; management cautioned that additional provisions may be required.
- Antitrust case: The court dismissed the complaint with prejudice on September 29, 2011; the plaintiff appealed on October 27. The company said it would continue to contest the case.
- Capital allocation: The company authorized a $5 million share-repurchase program and had repurchased $3.3 million through September. Further purchases in October left approximately $0.9 million available.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether acquired businesses, particularly the October Forecast acquisition, contribute expected sales and earnings without materially increasing debt or integration costs.
- Assess the sustainability of operating cash flow, especially the effects of receivables factoring, seasonal working-capital needs and its associated fees.
- Monitor revolver availability, borrowing-base capacity, covenant triggers and debt levels after the Forecast acquisition.
- Evaluate the assumptions underlying asbestos reserves and potential legal costs, and follow the antitrust appeal and other litigation developments.
- Verify whether deferred-tax valuation allowances are reduced and whether reported earnings benefit from any tax-accounting changes.