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Text: My name is Larry Sills.
I'm Chairman of the Board.
Today, our agenda will be Eric will go over some of the first quarter highlights, and Jim will discuss operations and finally, Nathan will go into more detail on the numbers.
Then we'll open it to Q&A.
They are based on information currently available to us and certain assumptions made by us, and we cannot assure you that they will prove correct.
The last year has been a roller coaster and while the challenges were undoubtedly significant, I believe we've navigated it quite well, and there is no doubt in my mind that we would not have managed it as successful if it were not for the dedication and skills of all of our people around the world.
I couldn't be more proud of how they guided us through.
The first quarter had many high notes.
Our sales were very strong, up almost 9% as we saw the ongoing market strength continue from the second half of last year.
Furthermore, we posted the highest earnings we've ever had in the first quarter, more than doubling last year's profitability due to a combination of sales leverage and cost control.
It's important to note that the first quarter of 2020 was only modestly impacted by COVID for us with a minor downturn in the last two weeks of March.
So while comparisons going forward will be muddy, the first quarter is a bit cleaner.
Sales in our Engine Management division were up more than 5%.
As previously discussed, we lost a large account and had a sizable reduction in sales to them in the quarter as they transitioned the business, but this loss was more than made up for by strong demand from our other customers.
Off in the first quarter is March with some large pipeline orders, but that was not the case this year.
Rather, we believe that our customer's strong purchases from us were the direct result of surging sell-through rather than inventory building.
Their POS was extremely strong with many accounts showing gains well into the double digits.
Obviously, March POS comparisons are not relevant due to last year's March COVID shutdowns, but our customers are also up double digits against their more normalized 2019 March POS.
And we are pleased to see that this trend is continuing into the second quarter with no apparent sign of abating.
Temperature Control also posted strong sales but as stated every year, the first quarter is largely related to preseason orders, which can vary in size year-to-year depending on various factors, and the full year will depend on demand in the summer months.
We are encouraged, however, by very strong POS in the quarter, which suggests that some of the purchases intended this pre-season are actually being sold through already and similar to Engine Management, these trends have continued into the second quarter.
Looking forward, we are quite bullish on the market in general.
Overall, industry trends are very favorable.
Cars are getting back on the road.
Miles driven are increasing and the repair base are getting busy again.
In all likelihood, this will continue as more Americans are vaccinated and more restrictions are lifted.
We believe that this will favor the ongoing recovery of the DIFM market, which is where our product categories excel.
Key economic indicators are also favorable.
Unemployment is dropping, and consumer spending is soaring and we expect SMP to enjoy those tailwinds.
As for our own initiatives, we are seeing very strong success in programs we have developed with our customers to pursue market share gains at the street level and while there are always some gains and losses, we are happy to report that we have been able to secure some new business, which annualized, will replace roughly a quarter to a third of the business that we lost.
This new business will begin to phase in over the next few quarters.
We're also very excited about our strategy to expand our original equipment business with a focus on heavy-duty commercial and off-road vehicles targeting sectors such as heavy truck, construction, agricultural, industrial, and power sports.
Over the past many years, we have been quietly building up this part of our business, both organically and through acquisition.
As previously announced, during the first quarter, we acquired the particulate matter sensor product line from Stoneridge.
This sophisticated technology, often referred to as SIP sensors is utilized in heavy-duty trucks to reduce tailpipe emissions.
We inherited $12 to $14 million business with blue chip customers but almost more importantly, we acquired the intellectual property and complex manufacturing capabilities to court more business in this fast-growing product category, and new opportunities are already presenting themselves.
Overall, the OE channel accounted for over $150 million in sales last year and is the fastest-growing part of our business.
We believe that we are now at a point of critical mass where we have the internal resources and competencies to support it as well as credibility with the customers to be an important supplier to them.
We also strongly believe that this focus is complementary to our aftermarket business for several reasons.
First off, it tends to be in similar product categories and technologies, which can be leveraged in the aftermarket.
Secondly, all this holds us to extremely high-quality standards, which get universally adopted throughout all of our operations and finally, we believe that in time, it will help us shift away from an over-reliance on conventional powertrains.
It does this in two ways.
It gets us into products for alternative energy vehicles as with our successful compressed natural gas injection program or our joint venture in AC compressors for electric vehicles or moves us further into product categories that are not powertrain-related such as many of the product types that came with the Pollak acquisition.
So overall, we are very pleased with the state of the market and of our position within it.
Most trends are favorable and while the COVID crisis is not completely over, we are confident that the worst is behind us and that we have emerged from it stronger than we went in both operationally and from a financial standpoint.
Our core business is doing very well.
We have initiatives in place to take advantage of the momentum and we are very excited about our prospects in this adjacent commercial vehicle space.
And as such, we look forward to the future.
So, with that, I will hand it over to Jim to talk about our operations.
I'll provide some color around our operations.
To begin, as you have seen in our release, our first-quarter gross margins in both segments reflected some of our best results in the last 10 years.
At a very high level, this is primarily the benefit of increased production to meet our strong customer demand and the associated efficiency gains generated in our factories.
I'm very pleased with how our manufacturing and supply chain teams adapted to meet this higher demand.
Our supply chain team also addressed headwinds.
First material source of supply, we faced semiconductor chip and resin supply delays.
Our teams worked with our suppliers, increasing lead times and working around allocation limitations.
Fortunately, we were able to mitigate much of these supply issues with existing safety stocks and where necessary, alternate vendors.
On the material inflation front, we experienced price increases on semiconductor chips, resins, and other general commodities such as copper and aluminum, but no single commodity has a significant impact on our overall cost structure.
Lastly, Asia-sourced product face the same global inflation pressures, but also the compounded effect from higher container cost and vessel fees.
Fortunately, our global manufacturing footprint has been of benefit as compared to our peers sourcing 100% from Asia, recall our low-cost manufacturing facilities are in Mexico and Poland with other highly skilled and less labor-intensive operations in the US and Canada.
We believe our NAFTA footprint provides advantages for lower cost, improve supply chain logistics, and cost avoidance.
To offset these inflationary pressures, we looked internally at our margin enhancement efforts.
First, to expand in-house manufacturing versus buy initiatives.
In this effort, we are targeting the tool products earlier in the product life cycle to better control our costs, quality, and supply.
Next is our new vendor sourcing initiative.
This effort is driven by our overseas sourcing office working with our engineering teams to validate new vendors capturing significant cost reductions.
Another internal effort is referred to as value engineering where we evaluate existing processes for automation and other cost improvements.
Externally recognized and we are in a competitive marketplace, we look for pricing to offset inflationary costs incurred.
Overall, our intent is to alleviate any cost increases and strive for incremental margin improvements.
Looking forward, we will continue to enjoy increased production levels to meet our strong customer demand as we go into Q2.
Our goal is to be the number one full-line supplier for premium parts in our product categories.
On this point, many of our customers recognize the SMP with their 2020 Vendor of the Year Award.
Now turning to the numbers, I'll walk through the operating results for the first quarter and also cover some key balance sheet and cash flow metrics.
Looking first at the P&L, consolidated net sales in the first quarter were $276.6 million, up $22.3 million or 8.7% versus Q1 last year with increases coming from both of our segments.
Looking at it by segment,, Engine Management net sales in Q1, excluding wire and cable sales were $173.7 million, up $9.1 million versus the same quarter last year.
This 5.6% increase is partly reflective of the softness we experienced in Q1 last year but also reflects continued growth in sales with the ongoing customers that they are noted for.
Wire and cable net sales in Q1 were $38.4 million, up $1.8 million or 4.7%.
Sales continued to be positively impacted by strong DIY sales as consumers work on their own vehicles, but we're helped too by strong sales to OE customers as business ramped up in that channel as well.
While the sales in the wire and cable business continued to be steady, the product category remains in secular decline, and we believe sales will ultimately resume a trend line of declines in the range of 6% to 8% on an annual basis.
Temperature Control net sales in Q1 2021 were $62.5 million, up 21.4% versus the first quarter last year and increased primarily as a result of stronger pre-season ordering by our customers.
As we always point the first quarter is not indicative of how the year will turn out for the segment, as the year ultimately depends on summer weather.
Turning to gross margins, our consolidated gross margin in the first quarter was 30.3% versus 27.7% last year, up 2.6 points with both of our segments reporting increases for the quarter.
Looking at the segments, first-quarter gross margins for Engine Management was 30.7%, up 2.5 points from Q1 last year and for Temperature Control was 25.6%, an increase of 2.1 points from 23.5% last year.
The higher margins in both segments remain with the result of three things.
First, the higher sales volumes we experienced versus last year.
Second, favorable plant absorption from inventory production in the quarter and third, the carryover impact of favorable manufacturing variances from the record sales and production levels last year.
Looking ahead, the gross margin expectations for the year in Engine Management, we are seeing strong customer POS sales and new business wins, which should help offset the loss of the customer from a sales perspective.
However, we're also facing headwinds from inflationary cost and labor, raw materials, and transportation as Jim touched on earlier.
While we expect the impact of higher sales and higher costs will have somewhat offsetting effects, gross margins will vary across quarters, and we continue to forecast full-year 2021 gross margin of 29% plus for this segment.
For our Temp Control segment, we continue to target a gross margin of 26% plus for the full year in 2021.
Moving now to SG&A expenses, our consolidated SG&A expenses in Q1 declined by $1.4 million to $54.5 million ending at 19.7% of sales versus 22% last year.
Expenses declined despite some higher distribution costs, mainly due to continued cost control around discretionary spending.
And the improvement as a percentage of sales mainly reflects the improved expense leverage due to higher sales volumes.
Looking at our SG&A cost for the full year in 2021, we expect expenses to be about $54 million to $58 million each quarter, a slightly higher range that noted on our last call as we'll see some higher expenses as a result of higher sales.
Consolidated operating income before restructuring and integration expenses and other income net in Q1 2021 was $29.3 million or 10.6% of net sales up 4.9 points from Q1 2020.
As we note on our GAAP to non-GAAP reconciliation of operating income, our performance resulted in first-quarter 2021 diluted earnings per share of $0.97 versus $0.43 last year.
The increase in our operating profit for the quarter was mainly due to higher sales volumes, higher gross margin percent, and slightly lower SG&A expenses.
Turning now to the balance sheet, accounts receivable at the end of the quarter were $174.1 million, up $21.9 million from March 2020, but down $23.9 million from December 2020.
The increase over March last year was due to the increase in sales during the quarter, while the decrease from December mainly reflects the timing of collections and management of our supply chain factoring arrangements.
Our inventory levels finished the quarter at $390.9 million, up $20 million from March 2020 reflecting the need to carry higher balances to support higher sales levels.
As compared to December 2020, our inventory was up $45.4 million, mainly due to our effort to restock our shelves to normal levels.
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 back our inventories in the quarter.
Looking at cash flows, our cash flow statement reflects cash used in operations in the first quarter of $11.4 million as compared to cash used of $32.8 million last year.
The $21.4 million improvement was driven by an increase in our operating income as noted earlier and by changes in working capital.
The changes in working capital in the first quarter of 2021 were mainly again a result of timing and were to be expected if sales returned to normal levels.
Inventory balances finished higher as we replenished our shelves, the cash used for inventory was partly offset by an increase in accounts payable.
Additionally, we generated cash from accounts receivable, again due to the timing of collections and management of our factoring programs while we used cash for customer rebates that were earned and accrued last year.
Turning to investments, we used $5 million of cash for capital expenditures during the quarter, which was slightly more than the $4.4 million we used last year.
We also used $2.1 million to purchase the SIP Sensor business from Stoneridge that was discussed earlier.
Financing activities included $5.6 million of dividends paid and $11.1 million paid for repurchases of our common stock.
Financing activities also included $31 million of borrowings on our revolving credit facilities, which were used to fund operations, investments in capital, and returns to shareholders through dividends and share buybacks.
We finished the quarter with total outstanding borrowings of $42.5 million and available capacity under our revolving credit facility $206 million.

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compname announces q1 earnings per share of $0.97.
q1 earnings per share $0.97 from continuing operations.
q1 sales $276.6 million versus $254.3 million.

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