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Text: My name is Larry Sills, Chairman of the Board.
Jim will talk a little more about operations.
Nathan will take a deeper dive into the numbers, and then we'll open it to questions.
Overall, we're very pleased with our performance in the quarter.
We set records for sales and profits.
We were able to consummate a major acquisition with terrific strategic value, and we were able to accomplish this while continuing to navigate the complexities of the ongoing pandemic, including the related supply chain challenges.
We would not have been able to have done this without the tireless efforts of our skilled and dedicated employees who we are just so proud of.
We achieved sales of over $340 million in the quarter, up 38% from the prior year with both divisions having all-time highs.
Comparisons to 2020 are not particularly relevant.
As you are well aware, that was the trough of the downturn for us.
However, when comparing to a more normalized 2019, we are favorable by 12%.
I believe that this has been somewhat aided by a shift back toward the DIFM business, a trend we expect will continue.
Coming out of the pandemic, DIY sorted as people had a certain amount of disposable money to spend and chose to upgrade their vehicles.
We felt that this was not necessarily a durable long-term trend, what was required was for vehicles to get back on the road.
We're now seeing that.
Vehicle miles traveled are nearing normal levels and deferred repairs are occurring.
And while this is good for the whole industry, we believe it is especially so for us as our product categories are more technical in nature and therefore, lend themselves to professional installation.
Let me now go into a review of our two product segments, beginning with Engine Management.
Our top line sales remained quite strong, up 35% versus last year, but also up 7% over 2019.
As discussed on previous calls, we entered 2021 with the loss of a major account.
Therefore, we are pleased to have been able to post positive numbers despite this.
As noted in the release, there were several contributors.
First, we implemented programs with all of our customers to pursue market share gains at the street level.
Early indications are that these were very successful.
Second, we have been aggressively pursuing new business wins with our existing customers, and we are very pleased with our results as our new business awards recover over 1/3 of the lost business on an annualized basis.
Some of this rolled in during the second quarter, while much of it is yet to begin.
Third, we've been busy on the M&A front, and I'll speak more on this in a minute.
And lastly, the general market conditions have been favorable.
Customer POS is well into the double digits over both 2020 and 2019 and was consistently strong month-over-month.
Turning to Temperature Control.
I think it is helpful to remind people that this is a highly seasonal and weather-dependent business.
The first quarter is always light, it's almost entirely preseason and can swing year-to-year depending on the timing of these orders.
The second quarter tends to have two parts.
April and May tend to be a continuation of preseason.
And then in June, the summer heat begins and the channel starts selling through and reordering.
This year, things shifted forward a bit.
We began seeing very strong POS early on in the year, which suggested that the purchases intended to load shelves were selling through, and this trend has continued.
We saw early heat in many parts of the country.
And when combined with the return of miles driven and the associated vehicle maintenance, we enjoyed a record-setting quarter for sales, up nearly 50% from last year and up over 25% compared to 2019.
Customer sell-through has remained very high with elevated summer heat in much of the country, we believe we are in for a good third quarter.
However, similar to Engine Management, here too, we are facing difficult third quarter comparisons to 2020, which was up 25% from '19 and was far and away the biggest third quarter we had ever had in Temperature Control.
Overall, gross margins dipped slightly from the first quarter.
Jim will go into more depth on the drivers when he discusses our operations, but at a high level, margins were aided by strong absorption in our plants due to elevated production levels as we sought to rebuild our inventory.
However, offsetting this, we are also experiencing inflationary headwinds across many of our cost inputs.
Our operating expenses were elevated due to a combination of distribution expenses related to higher sales as well as the cost increases in freight and labor.
However, we were able to achieve very good leverage on our costs due to our strong sales performance, and Nathan will dig a little deeper on this later on the call.
All of these elements combined for record profits as we posted earnings per share of $1.26, which is more than 140% greater than 2020 and nearly 40% greater than 2019.
However, looking forward, it is important to point out that the cadence of the last 18 months was very unusual, making the future difficult to predict.
From a top line perspective, although we entered the third quarter with indications of strong customer sell-through, it's hard to predict how long that can last.
The past 12 months have seen outsized market expansion, which likely includes a certain amount of pent-up demand, and at some point, it will not be a sustainable rate of growth.
From a gross margin standpoint, we anticipate certain pressures as the nonrecurring benefits of favorable absorption fade and elevated supply chain costs persist, though we do believe that the market is amenable to a pass-through of inflation.
Additionally, we will begin to see a slight mix shift to our OE business, which I'll discuss in a bit, and that segment has a different margin profile from the aftermarket.
Lower gross margins, but also lower operating expenses, so it ends up comparable at the bottom line.
When you put all these together and acknowledging the difficulties in forecasting these unusual times, we believe 2019 may provide a better benchmark for second half performance.
I would like to now spend a couple of minutes discussing our progress toward expanding our original equipment business.
For the last several years, we have been growing our penetration in the OE space.
And while we do have a certain amount of passenger car OE, our efforts have been more in niche areas, specifically heavy-duty and commercial vehicles, where product life cycles tend to be longer, technology tends to be more stable and price pressures tend to be less.
This year, we have made two acquisitions in this arena, both previously announced.
On our first quarter call, we discussed the acquisition of a high-tech emission sensor product line from Stoneridge Inc., which we are in the process of integrating into existing SMP locations.
Then at the end of May, we made a larger acquisition.
We acquired Trombetta, a worldwide leader in mechanical and electronic power switching and power management devices, generating about $60 million in annual sales.
Trombetta is headquartered in Milwaukee, Wisconsin, is run by a strong and seasoned management team and employs approximately 350 associates globally in four locations.
They sell to a broad group of blue chip OE customers across multiple commercial vehicle channels, including construction, agricultural, medium and heavy truck, lawn and garden and power sports.
From a product standpoint, they offer an expansive portfolio of both well-established electromechanical parts as well as a growing assortment of sophisticated electronics devices.
The majority of their offering is considered powertrain neutral, meaning that their parts either service other systems on the vehicle where are equally suited to conventional or electric powertrains.
And we believe this is extremely beneficial as they are well positioned to capitalize on the eventual shift to electric vehicles, and we believe we will be able to leverage this in our aftermarket business.
From an operations standpoint, Trombetta brings a highly complementary manufacturing footprint to SMP.
There are two plants in Wisconsin, including a high-tech electronics facility.
There is a low-cost plant in Tijuana, Mexico, and there is majority ownership in a joint venture in Wuxi, China, geared toward pursuing the fast-growing industrial market there.
While oftentimes, the synergies of an acquisition come from the cost savings of closing plants and eliminating duplicate costs, that is not the strategy here.
With Trombetta, the synergies come from the combination of their strengths and ours, cross-selling opportunities through combined product portfolios and customer lists and collaboration between our engineering groups and advanced technologies.
We're in the early stages, but we are delighted with the potential.
We believe that this acquisition takes us to the next level in this OE space.
When combined with previous activities, including organic business wins such as our compressed natural gas injection program and other acquisitions, such as the Pollak deal in 2019, we have grown this business to an annual run rate of around $250 million.
We now have the critical mass to be a significant supplier and are excited to see where we can take it.
And to reiterate, we believe that this channel is highly complementary to our core aftermarket business from the product and technology standpoint as well as from an engineering and production.
At this point, I'll hand it over to Jim to review our operations.
I would also like to reiterate what Eric stated that we are very pleased with our year-to-date performance, considering the challenges facing manufacturers.
Supply chain difficulties have been significant, and our supply chain and manufacturing teams continue to battle a host of challenges such as material source supply, including semiconductor chips, resins, which continue on allocation limitations, extended lead times, which add to challenges of forecasting demand and managing inventory levels and transportation of goods only adds to the difficulties once your vendors can provide the components.
Container and vessel management has become a critical path to managing the manufacturing process.
Fortunately, we believe our global footprint and being a basic manufacturer has helped us with these challenges.
Our low-cost operation in Mexico and domestic manufacturing facilities in North America ease the challenges of sourcing strictly from Asia.
Our low-cost operation in Poland is also easier to schedule containers and vessels as compared to China.
And in addition, this reduces any negative tariff impacts out of China.
Availability of labor has also been a struggle at times but not to the same magnitude of material supply.
With the significant increases in customer demand, the primary challenge has been to secure distribution personnel to get the product out.
We have managed this labor shortage with the help of our dedicated distribution teams working six or seven days per week and daily over time.
We also have adjusted wages for existing and new hires as we compete for a limited labor pool.
Despite these challenges, our internal teams are focused on meeting our customer demand for availability and timely deliveries.
We have received many accolades from our customers for higher fill rates than other vendors in the industry.
On the inflation front, the low supply and demand tends to set pricing.
We are not immune to these pressures and are incurring increases in materials for chips, resins and commodities across the board.
Transportation for international impact on containers and vessels as well as domestic transportation cost increases and labor supply for wage adjustments and over time.
We do our best to offset some of these increases with make-first-buy efforts and low-cost vendor sourcing.
However, we are also passing on price increases to our customers.
Availability of product and better fill rates than other vendors help support the need and acceptance for these price increases.
Now turning to the numbers.
I'll walk through the numbers for the second quarter and first six months, also cover some key balance sheet and cash flow metrics.
Looking first at the P&L.
Consolidated net sales in Q2 '21 were $342.1 million, up 94.8% versus last year, and our consolidated net sales for the first six months of 2021 were $618.6 million, up $116.4 million or 23.2%.
Looking at it by segment.
Engine Management net sales in Q2 were $233.2 million, up $60.1 million versus the same quarter last year.
And for the first six months, were up $71 million to $445.2 million.
These large increases of 34.7% and 19% for the quarter and first six months, respectively, largely reflect the softness we experienced in Q2 last year in the midst of the pandemic.
Given the volatile results in 2020, it's better to compare our results through 2019, where Engine is up 7% for the quarter and up 3.2% for the first six months despite the loss of a large customer.
These increases are a result of the successful customer initiatives, new business wins and generally robust demand highlighted before.
Additionally, the acquired Trombetta and soot sensor businesses provided approximately $9 million of revenue in the second quarter of 2021.
Temperature Control net sales in Q2 '21 were $106.5 million, up 47.1% versus the second quarter last year and were up 36.4% to $168.9 million for the first six months.
And like we said for the Engine segment, it's better to compare our 2021 results to 2019.
And on that basis, Temp Control sales were up 10.2% for the first six months, with the increases mainly reflecting an earlier-than-usual start to the summer selling season, as Eric alluded to before.
Our consolidated gross margin in Q2 '21 was 29% versus 26% last year, up three points.
And for the first six months, it was 29.6% versus 26.8% last year, up 2.8 points with increases for both the quarter and year-to-date periods coming from both of our segments.
Looking at the segments.
Second quarter gross margin for Engine Management was 28.9%, up 2.2 points from Q2 last year.
And for Temperature Control, was 26.9%, an increase of 4.1 points from 22.8% last year.
The higher margins in both segments were mainly the result of the higher sales volumes we experienced and favorable plant absorption from building our inventory back to sufficient levels.
And were partly offset by higher costs and labor raw materials and exportation as was expected, given the inflation occurring across the spending categories.
For the first six months, Engine Management gross margin was up 2.3 points to 29.8%, while Temp Control was up 3.3 points to 26.4%.
The increases in our first half margins were also due to higher sales and higher fixed cost absorption given elevated production levels and were again partly offset by inflationary cost pressures.
Moving now to SG&A expenses.
Our consolidated SG&A expenses in Q2 increased by $14 million to $62.3 million, ending at 18.2% of sales versus 19.5% in Q2 last year.
For the first six months, SG&A spending was $116.8 million, up $12.6 million, but ending lower at 18.9% of net sales versus 20.7% last year.
Expenses increased for both the quarter and first half, mainly due to higher selling and distribution costs due to both higher sales levels and inflation and costs.
The improvement as a percentage of sales mainly reflects improved expense leverage due to our higher sales volumes and continued focus on cost control around discretionary spending.
Our consolidated operating income before restructuring, integration and acquisition expenses and other income net in Q2 was $37.7 million or 11% of net sales, up 4.5 points from Q2 last year.
And for the first six months was 10.8% of net sales, up 4.7 points from the first six months last year.
As we note on our GAAP to non-GAAP reconciliation of operating income, our performance resulted in second quarter 2021 diluted earnings per share of $1.26 versus $0.52 last year.
And for the first six months, diluted earnings per share of $2.23 versus $0.95 last year.
The increase in our operating profit for both the quarter and first half was mainly due to higher sales volumes, higher gross margin percent and improved SG&A expense leverage.
Turning now to the balance sheet.
Accounts receivable at the end of the quarter were $211.8 million, up $48.8 million from June 2020 and up $13.7 million from December 2020.
The increase over June last year was due to the increase in sales during the quarter, while the smaller increase from December reflects both higher sales and management of our supply chain factoring arrangements.
Inventory levels finished the quarter at $404.9 million, up $51.6 million from June last year and up $59.4 million from December 2020.
The increased inventory levels reflect higher sales levels and the need to carry higher balances to support our customers.
And as a reminder, our inventories were depleted during 2020 due to strong sales in the last half of the year, and we expected to build our inventories back this year.
Looking now at cash flows.
Our cash flow statement reflects cash generated from operations in the first six months of 2021, $23.2 million as compared to cash used of $0.9 million last year.
The $24.1 million improvement was mainly driven by an increase in our operating income.
And while we saw some large swings in working capital balances, the changes were largely offsetting.
The changes in working capital in the first six months were mainly driven by sales performance during the period.
Inventory balances finished higher as we replenished ourselves and made sure we had sufficient inventory to serve our customers, but cash used for inventory was partly offset by an increase in accounts payable.
Additionally, we use significantly less cash and funding accounts receivable versus last year due to both timing of collections and management of our factoring programs, but this was partly offset by cash used to pay customer rebates that were earned and accrued last year.
We used $11.7 million of cash for capital expenditures during the first six months, up from $9 million last year.
We also used $109.3 million to fund our acquisitions of the aforementioned Trombetta and soot sensor businesses.
Financing activities included $11.1 million of dividends paid and another $11.1 million paid for repurchases of our common stock.
Financing activities also included $127.3 million of borrowings on our revolving credit facilities, which were used mainly to fund our acquisitions, but also for investments in capital and returns to shareholders through dividends and share buybacks.
And while after making significant acquisitions in the first six months, we still finished the quarter with total debt of less than 1 times EBITDA given our strong operating performance and ended Q2 with total outstanding borrowings of $137 million and had more than sufficient remaining available capacity under our revolving credit facility of $112 million.
In summary, we are very pleased with our operating results for the first half of the year.
These results led to strong cash flow generation, which supported two great acquisitions in the Trombetta and soot sensor businesses as well as continued returns to shareholders and helped us finish the second quarter with low levels of debt and a substantial amount of liquidity.
Our financial performance has been strong both in sales and profits.
We've been active in M&A, closing two very strategic deals and have done so while navigating the complexities of the ongoing pandemic, keeping our people safe, managing through supply chain challenges.
And I absolutely feel we are a stronger organization for it.
We're pleased with the overall state of the industry and of our standing within it, and we are very excited about the future.

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q2 sales $342.1 million versus $247.9 million.

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