STANDARD MOTOR PRODUCTS, INC. - Quarter Report: 2021 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐     No ☑

As of the close of business on May 3, 2021, there were 22,186,688 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION

PART I - FINANCIAL INFORMATION

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2021

(Unaudited)

Three Months Ended March 31, 2020

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Standard		Description		Date of adoption		Effects on the financial statements or other significant matters
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes		This standard is intended to simplify the accounting for income taxes by removing certain ASC Topic 740 exceptions in performing intra-period tax allocations among income statement components, in calculating certain deferred tax liabilities related to outside basis differences, and in calculating income taxes in interim periods with year-to-date losses. In addition, this standard is also intended to improve consistency and add simplification by clarifying and amending the reporting of franchise taxes and other taxes partially based on income, the recognition of deferred income taxes related to the step-up in tax basis goodwill, and the reporting in interim periods of the recognition of the enactment of tax laws or rate changes.		January 1, 2021		The adoption of the technical clarifications in the standard did not materially impact our accounting for income taxes, our consolidated financial statements and related disclosures.

Standard		Description		Date of adoption / Effective Date		Effects on the financial statements or other significant matters
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting		This standard is intended to provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The new standard is applicable to contracts that reference LIBOR, or another reference rate, expected to be discontinued due to reference rate reform.		Effective March 12, 2020 through December 31, 2022		The  new standard may be applied as of the beginning of an interim period that includes March 12, 2020 through December 31, 2022.  As certain of our contracts reference LIBOR, including our revolving credit facility and supply chain financing arrangements, we are currently reviewing the optional guidance in the standard to determine its impact upon the discontinuance of LIBOR. At this time, we do not believe that the new guidance, nor the discontinuance of LIBOR, will have a material impact on our consolidated financial statements and related disclosures.

Purchase Price						$	2,138
Assets acquired and liabilities assumed:
Inventory		$	1,032
Machinery and equipment, net			351
Intangible assets			755
Net assets acquired						$	2,138

		Workforce Reduction				Other Exit Costs				Total
Exit activity liability at December 31, 2020		$	179			$	—			$	179
Restructuring and integration costs:
Amounts provided for during 2021			—				—				—
Cash payments			(49	)			—				(49	)
Exit activity liability at March 31, 2021		$	130			$	—			$	130

		March 31, 2021				December 31, 2020
		(In thousands)
Finished goods		$	259,847			$	225,523
Work in process			11,639				10,711
Raw materials			119,410				109,268
Subtotal			390,896				345,502
Unreturned customer inventories			21,088				19,632
Total inventories		$	411,984			$	365,134

		March 31, 2021				December 31, 2020
		(In thousands)
Customer relationships		$	112,440			$	111,701
Trademarks and trade names			6,980				6,980
Non-compete agreements			3,270				3,272
Patents			723				723
Supply agreements			800				800
Leaseholds			160				160
Total acquired intangible assets			124,373				123,636
Less accumulated amortization (1)			(72,272	)			(70,221	)
Net acquired intangible assets		$	52,101			$	53,415

(1)

Applies to all intangible assets, except for trademarks and trade names totaling $2.6 million, which have indefinite useful lives and, as such, are not being amortized.

Balance Sheet Information		March 31, 2021				December 31, 2020
Assets
Operating lease right-of-use assets		$	31,453			$	29,958
Liabilities
Sundry payables and accrued expenses		$	8,822			$	8,719
Noncurrent operating lease liabilities			23,890				22,450
Total operating lease liabilities		$	32,712			$	31,169
Weighted Average Remaining Lease Term
Operating leases		5 Years				5 Years
Weighted Average Discount Rate
Operating leases			3.4	%			3.6	%

Expense and Cash Flow Information		Three Months Ended March 31,
		2021				2020
Lease Expense
Operating lease expense (a)		$	2,336			$	2,313
Supplemental Cash Flow Information
Cash paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	2,302			$	2,476
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases		$	3,603			$	251

(a)

Excludes expenses of approximately $0.7 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively, related to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less, which is not material.

2021		$	6,853
2022			7,940
2023			6,468
2024			4,416
2025			3,364
Thereafter			6,084
Total lease payments		$	35,125
Less: Interest			(2,413	)
Present value of lease liabilities		$	32,712

		March 31, 2021				December 31, 2020
		(In thousands)
Revolving credit facilities		$	40,967			$	10,000
Other (1)			1,607				232
Total debt		$	42,574			$	10,232
Current maturities of debt		$	42,490			$	10,135
Long-term debt			84				97
Total debt		$	42,574			$	10,232

(1)

Other includes borrowings under our Polish overdraft facility of Zloty 5.9 million (approximately $1.5 million) and Zloty 0.4 million (approximately $0.1 million) as of March 31, 2021 and December 31, 2020, respectively.

		Shares				Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2020			839,686			$	34.77
Granted			—				—
Vested			(16,863	)			33.47
Forfeited			(3,825	)			40.27
Balance at March 31, 2021			818,998			$	34.77

		Three Months Ended March 31,
Basic Net Earnings Per Common Share:		2021				2020
Earnings from continuing operations		$	22,164			$	9,621
Loss from discontinued operations			(1,164	)			(994	)
Net earnings available to common stockholders		$	21,000			$	8,627
Weighted average common shares outstanding			22,318				22,438
Earnings from continuing operations per common share		$	0.99			$	0.43
Loss from discontinued operations per common share			(0.05	)			(0.05	)
Basic net earnings per common share		$	0.94			$	0.38
Diluted Net Earnings Per Common Share:
Earnings from continuing operations		$	22,164			$	9,621
Loss from discontinued operations			(1,164	)			(994	)
Net earnings available to common stockholders		$	21,000			$	8,627
Weighted average common shares outstanding			22,318				22,438
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock and performance stock			448				431
Weighted average common shares outstanding – Diluted			22,766				22,869
Earnings from continuing operations per common share		$	0.97			$	0.42
Loss from discontinued operations per common share			(0.05	)			(0.04	)
Diluted net earnings per common share		$	0.92			$	0.38

		Three Months Ended March 31,
		2021				2020
Restricted and performance shares			272				253

		Three Months Ended March 31,
		2021				2020
Net Sales (a)
Engine Management		$	212,018			$	201,118
Temperature Control			62,473				51,442
All Other			2,062				1,742
Consolidated		$	276,553			$	254,302
Intersegment Revenue (a)
Engine Management		$	5,359			$	4,014
Temperature Control			1,847				1,391
All Other			(7,206	)			(5,405	)
Consolidated		$	—			$	—
Operating Income (Loss)
Engine Management		$	31,114			$	21,433
Temperature Control			3,592				(348	)
All Other			(5,382	)			(6,762	)
Consolidated		$	29,324			$	14,323

(a)

Segment net sales include intersegment sales in our Engine Management and Temperature Control segments.

Three months ended March 31, 2021 (a)		Engine Management				Temperature Control				Other (b)				Total
Geographic Area:
United States		$	181,101			$	58,736			$	—			$	239,837
Canada			8,574				3,326				2,062				13,962
Asia			9,635				76				—				9,711
Mexico			6,147				65				—				6,212
Europe			5,149				56				—				5,205
Other foreign			1,412				214				—				1,626
Total		$	212,018			$	62,473			$	2,062			$	276,553
Major Product Group:
Ignition, emission control, fuel and safety related system products		$	173,666			$	—			$	1,669			$	175,335
Wire and cable			38,352				—				7				38,359
Compressors			—				33,374				18				33,392
Other climate control parts			—				29,099				368				29,467
Total		$	212,018			$	62,473			$	2,062			$	276,553
Major Sales Channel:
Aftermarket		$	166,843			$	55,685			$	2,062			$	224,590
OE/OES			38,835				6,380				—				45,215
Export			6,340				408				—				6,748
Total		$	212,018			$	62,473			$	2,062			$	276,553

Three months ended March 31, 2020 (a)		Engine Management				Temperature Control				Other (b)				Total
Geographic Area:
United States		$	174,379			$	47,876			$	—			$	222,255
Canada			6,589				3,141				1,742				11,472
Asia			9,459				95				—				9,554
Mexico			6,114				59				—				6,173
Europe			3,348				123				—				3,471
Other foreign			1,229				148				—				1,377
Total		$	201,118			$	51,442			$	1,742			$	254,302
Major Product Group:
Ignition, emission control, fuel and safety related system products		$	164,526			$	—			$	1,484			$	166,010
Wire and cable			36,592				—				(22	)			36,570
Compressors			—				25,348				(142	)			25,206
Other climate control parts			—				26,094				422				26,516
Total		$	201,118			$	51,442			$	1,742			$	254,302
Major Sales Channel:
Aftermarket		$	160,583			$	44,394			$	1,742			$	206,719
OE/OES			35,120				6,779				—				41,899
Export			5,415				269				—				5,684
Total		$	201,118			$	51,442			$	1,742			$	254,302

(a)

Segment net sales include intersegment sales in our Engine Management and Temperature Control segments.

(b)

Other consists of the elimination of intersegment sales from our Engine Management and Temperature Control segments as well as sales from our Canadian business unit that does not meet the criteria of a reportable operating segment.  Intersegment wire and cable and compressor sales for the three months ended March 31, 2020 exceeded third party sales from our Canadian business unit.

		Three Months Ended March 31,
		2021				2020
Balance, beginning of period		$	17,663			$	17,175
Liabilities accrued for current year sales			20,177				22,067
Settlements of warranty claims			(20,892	)			(22,010	)
Balance, end of period		$	16,948			$	17,232

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties.  Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, changes or loss in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our supply chain financing arrangements, such as changes in terms, termination of contracts and/or the impact of rising interest rates; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs, including procurement costs resulting from higher tariffs, that cannot be recouped in product pricing; the performance of the aftermarket, heavy duty, industrial equipment and original equipment markets; changes in the product mix and distribution channel mix; economic and market conditions; successful integration of acquired businesses; our ability to achieve benefits from our cost savings initiatives; product liability and environmental matters (including, without limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties); the effects of widespread public health crisis, including the novel coronavirus (COVID-19) pandemic; as well as other risks and uncertainties, such as those described under Risk Factors, Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC. Forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, historical information should not be considered as an indicator of future performance.  The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report.

Overview

We are a leading automotive parts manufacturer and distributor for engine management and temperature control systems of motor vehicles in the automotive aftermarket industry with a complementary focus on the heavy duty, industrial equipment and original equipment markets.

We are organized into two operating segments.  Each segment focuses on providing our customers with full-line coverage of its products, and a full suite of complementary services that are tailored to our customers’ business needs and driving end-user demand for our products.  We sell our products primarily to automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.

Seasonality

Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business.  In addition to this seasonality, the demand for our temperature control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories.  Ordinarily, a warm summer, as we experienced in 2020, would increase the demand for our temperature control products, while a somewhat mild summer, as we experienced in 2019, may lessen such demand.  In 2020, however, due to the impact of the COVID-19 pandemic, we initially experienced a significant reduction in customer demand for our products in the second quarter, with customer demand strengthening in the last half of the quarter and continuing throughout the second half of the year. As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically peak near the end of the second quarter, as the inventory build‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.  During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

Inventory Management

We face inventory management issues as a result of overstock returns.  We permit our customers to return new, undamaged products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories.  In addition, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns.  We accrue for overstock returns as a percentage of sales after giving consideration to recent returns history.

Discounts, Allowances, and Incentives

We offer a variety of usual customer discounts, allowances and incentives.  First, we offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice.  Second, we offer pricing discounts based on volume purchased from us and participation in our cost reduction initiatives.  These discounts are principally in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale. For those customers that choose to receive a payment on a quarterly basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly.  Finally, rebates and discounts are provided to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided.  Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.  We account for these discounts and allowances as a reduction to revenues, and record them when sales are recorded.

Environmental, Social and Governance (ESG) and Human Capital

Our Company was founded in 1919 on the values of integrity, common decency and respect for others.  These values continue to this day and are embodied in our Code of Ethics, which has been adopted by the Board of Directors of the Company to serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business.  We believe that our commitment to our Company, our employees and the communities within which we operate has led to high employee satisfaction and low employee turnover, and our commitment to our customers, suppliers and business partners has resulted in high customer satisfaction, as evidenced by the customer awards that we routinely win, and decades-long customer relationships.

We also take environmental and social issues seriously.  We believe that our commitment to identifying and implementing positive environmental and social related business practices strengthens our Company, improves our relationship with our shareholders and better serves our customers, our communities and the broader environment within which we conduct our business. To further our commitment to these values, in 2020, we formed a multi-disciplinary leadership team comprised of our Chief Executive Officer and other executive officers to lead our efforts in this area, and we launched the SMPCares^TM initiative to put our philanthropic plans into practice.

For further information regarding our Environmental, Social and Governance (ESG) and Human Capital policies and practices, refer to Item 1 “Business” under the heading “Environmental, Social and Governance (ESG) and Human Capital” of our Annual Report on Form 10-K for the year ended December 31, 2020.

Impact of the Novel Coronavirus (“COVID-19”)

On an ongoing basis, we continue to monitor the impact, if any, of the novel coronavirus (“COVID-19”) on the global economy, our industry, business, and the markets that we serve.  In response to the COVID-19 pandemic, in 2020, we established a committee, comprised of our executive officers, to oversee the Company’s risk identification, management and mitigation strategies regarding the impact of the pandemic on our business and operations.  The committee continues to meet on a regular basis, monitoring events related to the pandemic, and any appropriate actions to be taken.  Among the issues that are actively being monitored by the committee are the general state of economic conditions, governmental measures in response to the pandemic, and the enactment of policies and practices to ensure the health and safety of our employees, contractors and customers, as well as customer demand for our products and any potential disruptions in our supply chain.

As related to the performance of our business, we were declared an essential business under national and regional shelter-in-place orders and, as such, our business operations continued throughout 2020.  After a downturn in net sales initially in the second quarter of 2020, customer orders strengthened in the last half of the second quarter and continued throughout 2020, resulting in strong net sales for the year ended December 31, 2020.  Net sales in the first quarter of 2021 continued a trend back to normal, as we experienced demand for our products that was more in line with years prior to 2020.

Regarding the health and welfare of our employees, contractors and customers, we have implemented a number of policies and practices at all of our facilities.  We have provided personal protection equipment, including face masks and gloves, to all our employees and require their usage while at work, have installed Plexiglas partitions where appropriate, and require temperature checks for all employees and visitors upon entering our facilities.  We have established protocols for individuals who have tested positive, and for employees who have symptoms or have been exposed to the virus.  All of our facilities are thoroughly cleaned and sanitized daily, and all state mandated protocols are followed as employees return to work. The health and safety of our employees, vendors and visitors has always been and will continue to be our first priority.

Although our business remains strong and we continue to monitor the impact of the pandemic, any uncertain future effect of the pandemic may have a material adverse effect on our business, financial condition and results of operations.

Impact of Changes in U.S. Trade Policy

Changes in U.S. trade policy, particularly as it relates to China, as with much of our industry, have resulted in the assessment of increased tariffs on goods that we import into the United States.  Although our operating results in 2021 have been only slightly impacted by the tariff costs associated with Chinese sourced products, we have taken, and continue to take, several actions to mitigate the impact of the increased tariffs, including but not limited to, price increases to our customers.  We do not anticipate that the increased tariffs will have a significant impact on our future operating results.  Although we are confident that we will be able to pass along the impact of the increased tariffs to our customers, there can be no assurances that we will be able to pass on the entire increased costs imposed by the tariffs.

Interim Results of Operations

Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

Sales.  Consolidated net sales for the three months ended March 31, 2021 were $276.6 million, an increase of $22.3 million, or 8.7%, compared to $254.3 million in the same period of 2020, with the majority of our net sales to customers located in the United States.  Consolidated net sales increased in both our Engine Management and Temperature Control Segments.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the three months ended March 31, 2021 and 2020 (in thousands):

Engine Management’s net sales increased $10.9 million, or 5.4%, to $212 million for the three months ended March 31, 2021.  Net sales in ignition, emission control, fuel and safety related system products for the three months ended March 31, 2021 were $173.6 million, an increase of $9.1 million, or 5.6%, compared to $164.5 million in the same period of 2020.  Net sales in the wire and cable product group for the three months ended March 31, 2021 were $38.4 million, an increase of $1.8 million, or 4.8%, compared to $36.6 million in the three months ended March 31, 2020.  Engine Management’s increase in net sales for the first quarter of 2021 compared to the same period in 2020 reflects the impact of continued strong customer POS sales, including increases in the double digit range for many of our customers, and the favorable year-over-year impact of having lower net sales in the second half of March 2020 due to the general weakness in the economy caused by the COVID-19 pandemic. Both of these impacts more than offset the impact of the lower net sales from the decision, in December 31, 2020, of a large retail customer to pursue a private brand strategy.  Although net sales to this customer continued in the first quarter of 2021, any additional net sales to this customer for the remainder of 2021 are not anticipated to be significant.

Temperature Control’s net sales increased $11 million, or 21.4%, to $62.5 million for the three months ended March 31, 2021.  Net sales in the compressors product group for the three months ended March 31, 2021 were $33.4 million, an increase of $8 million, or 31.7%, compared to $25.4 million in the same period of 2020.  Net sales in the other climate control parts product group for the three months ended March 31, 2021 were $29.1 million, an increase of $3 million, or 11.5%, compared to $26.1 million in the three months ended March 31, 2020.  Temperature Control’s increase in net sales for the first quarter of 2021 compared to the same period in 2020 reflects the impact of strong pre-season orders in the first quarter of 2021 that did not occur in the first quarter of 2020, and the favorable year-over-year impact of having lower net sales in the second half of March 2020 due to the general weakness in the economy caused by the COVID-19 pandemic.  Our pre-season orders continue to be strong in the second quarter of 2021 as our customers replenish their shelves from a warm 2020 summer, however, full year results will be dependent upon upcoming summer weather conditions and customer inventory levels.

Gross Margins.  Gross margins, as a percentage of consolidated net sales, increased to 30.3% in the first quarter of 2021, compared to 27.7% in the first quarter of 2020.  The following table summarizes gross margins by segment for the three months ended March 31, 2021 and 2020, respectively (in thousands):

Compared to the first three months of 2020, gross margins at Engine Management increased 2.5 percentage points from 28.2% to 30.7%, while gross margins at Temperature Control increased 2.1 percentage points from 23.5% to 25.6%.  The gross margin percentage increase in Engine Management compared to the prior year mainly reflects higher year-over-year absorption due to higher production volumes and the favorable impact of year-over-year production variances carried over from the prior year. Additionally, the increase reflects to a lesser extent the impact of net sales made without the usual customer discounts, rebates, and allowances for overstock returns to the large retail customer that decided to pursue a private brand strategy in December 2020.  The gross margin percentage increase in Temperature Control compared to the prior year reflects higher year-over-year absorption due to higher production volumes, and the favorable impact of year-over-year production variances carried over from the prior year.  The higher production volumes at both Engine Management and Temperature Control is reflective of our effort to rebuild inventory in response to the continued strong customer POS sales and the timing of customer purchases. While we anticipate the ongoing benefit of high production levels, we expect some offsetting inflationary cost increases in labor, certain raw materials and transportation.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses (“SG&A”) decreased to $54.5 million, or 19.7% of consolidated net sales, in the first quarter of 2021, as compared to $55.9 million, or 22% of consolidated net sales in the first quarter of 2020.  The $1.4 million decrease in SG&A expenses in the first quarter of 2021 as compared to the first quarter of 2020 is principally due to lower selling and marketing expenses, which more than offset the higher distribution costs associated with higher sales volumes and the impact of an increase in freight costs.  The lower year-over-year selling and marketing expenses reflects the ongoing impact of discretionary cost reduction measures implemented in 2020 and carried over into 2021.

Operating Income.  Operating income increased to $29.3 million in the first quarter of 2021, compared to $14.3 million in the first quarter of 2020.  The increase of $15 million is the result of the impact of higher consolidated net sales, higher gross margins as a percentage of consolidated net sales, and lower SG&A expenses.

Other Non-Operating Income (Expense), Net.  Other non-operating income, net was $0.6 million in the first quarter of 2021, compared to other non-operating expense, net of $0.5 million in the first quarter of 2020.  The year-over-year increase in other non-operating income (expense), net results from the increase in year-over-year equity income from our joint ventures and the favorable impact of changes in foreign currency exchange rates.  During the first quarter of 2020, our joint ventures in China experienced temporary shutdowns due to the impact of the COVID-19 pandemic, resulting in significantly lower equity income.  In March 2020, the joint ventures reopened and resumed manufacturing and distribution.

Interest Expense.  Interest expense decreased to $0.2 million in the first quarter of 2021 compared to $0.9 million in the same period of 2020.  The year-over-year decrease in interest expense reflects the impact of lower average outstanding borrowings in the first quarter of 2021 when compared to the first quarter of 2020, and lower year-over-year average interest rates on our revolving credit facility.

Income Tax Provision.  The income tax provision in the first quarter of 2021 was $7.6 million at an effective tax rate of 25.5% compared to $3.3 million at an effective tax rate of 25.6% for the same period in 2020.  The effective tax rate was essentially flat year-over-year.

Loss from Discontinued Operations.  During the first quarter of 2021 and 2020, the loss from discontinued operations, net of tax was $1.2 million and $1 million, respectively.  The loss from discontinued operations, net of tax, reflects legal expenses associated with our asbestos-related liability.  As discussed more fully in Note 16, “Commitments and Contingencies” in the notes to our consolidated financial statements (unaudited), we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

Restructuring and Integration Programs

All of our restructuring and integration programs have been substantially completed.  For a detailed discussion on the restructuring and integration costs, see Note 4, “Restructuring and Integration Expenses,” of the notes to our consolidated financial statements (unaudited).

Liquidity and Capital Resources

Operating Activities. During the first three months of 2021, cash used in operating activities was $11.4 million compared to $32.8 million in the same period of 2020.  The decrease in cash used in operating activities resulted primarily from the increase in net earnings, the decrease in accounts receivable compared to an increase in accounts receivable in the prior year, the increase in accounts payable compared to a decrease in accounts payable in the prior year, and the larger year-over-year decrease in prepaid expenses and other current assets, partially offset by the larger year-over-year increase in inventories, and the larger year-over-year decrease in sundry payables and accrued expenses.

Net earnings during the first quarter of 2021 were $21 million compared to $8.6 million in the first quarter of 2020.  During the first three months of 2021, (1) the decrease in accounts receivable was $23.5 million compared to the year-over-year increase in accounts receivable of $28.1 million in 2020; (2) the increase in inventories was $46.3 million compared to the year-over-year increase in inventories of $5.3 million in 2020; (3) the increase in accounts payable was $8.4 million compared to the year-over-year decrease in accounts payable of $11.9 million in 2020; (4) the decrease in prepaid expenses and other current assets was $3.8 million compared to the year-over-year decrease in prepaid expenses and other current assets of $1.3 million in 2020; and (5) the decrease in sundry payables and accrued expenses was $29.5 million compared to the year-over-year decrease in sundry payables of $7.3 million in 2020.  The increase in inventories during the first quarter of 2021 reflects the actions we took to replenish stock levels which were depleted after record sales in the last half of 2020, and the timing of inventory purchases at our Temperature Control segment in anticipation of the summer selling season.  We continue to actively manage our working capital to maximize our operating cash flow.

Investing Activities.  Cash used in investing activities was $7 million in the first three months of 2021, compared to $4.4 million in the same period of 2020.  Investing activities during the first three months of 2021 consisted of the payment of $2.1 million for our acquisition of certain assets of the soot sensor product lines from Stoneridge, Inc., and capital expenditures of $4.9 million; while investing activities during the first three months of 2020 consisted of capital expenditures of $4.4 million.

Financing Activities.  Cash provided by financing activities was $16.1 million in the first three months of 2021 as compared to $40 million in the same period of 2020.  During the first three months of 2021, (1) we increased borrowings under our revolving credit facility by $31 million as compared to the increase in borrowings under our revolving credit facility of $52.5 million in 2020; (2) we made cash payments in the first three months of 2021 for the repurchase of shares of our common stock of $11.1 million as compared to $8.7 million in 2020; and (3) we paid dividends of $5.6 million in each of the first three months of 2021 and 2020.

Liquidity.

Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions.  Our primary sources of funds are ongoing net cash flows from operating activities and availability under our secured revolving credit facility (as detailed below).

In December 2018, we amended our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and a syndicate of lenders.  The amended credit agreement provides for a senior secured revolving credit facility with a line of credit of up to $250 million (with an additional $50 million accordion feature) and extends the maturity date to December 2023.  The line of credit under the amended agreement also allows for a $10 million line of credit to Canada as part of the $250 million available for borrowing.  Direct borrowings under the amended credit agreement bear interest at LIBOR plus a margin ranging from 1.25% to 1.75% based on our borrowing availability, or floating at the alternate base rate plus a margin ranging from 0.25% to 0.75% based on our borrowing availability, at our option.  The amended credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.

Borrowings under the amended credit agreement are secured by substantially all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries.  Availability under the amended credit agreement is based on a formula of eligible accounts receivable, eligible drafts presented to the banks under our supply chain financing arrangements and eligible inventory.  After taking into account outstanding borrowings under the amended credit agreement, there was an additional $206.3 million available for us to borrow pursuant to the formula at March 31, 2021.  The loss of business of one or more of our key customers or, a significant reduction in purchases of our products from any one of them, could adversely impact availability under our revolving credit facility.

Outstanding borrowings under the amended credit agreement, which are classified as current liabilities, were $41 million and $10 million at March 31, 2021 and December 31, 2020, respectively; while letters of credit outstanding under the credit agreement were $2.6 million and $2.8 million at March 31, 2021 and December 31, 2020, respectively.  Borrowings under the amended credit agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.

At March 31, 2021, the weighted average interest rate on our amended credit agreement was 1.8%, which consisted of $33 million in direct borrowings at 1.4% and an alternative base rate loan of $8 million at 3.5%.  At December 31, 2020, the weighted average interest rate on our amended credit agreement was 1.4%, which consisted of $10 million in direct borrowings.  During the three months ended March 31, 2021, our average daily alternative base rate loan balance was $1.2 million compared to a balance of $2.5 million for the three months ended March 31, 2020 and a balance of $1.5 million for the year ended December 31, 2020.

At any time that our borrowing availability is less than the greater of either (a) $25 million, or 10% of the commitments if fixed assets are not included in the borrowing base, or (b) $31.25 million, or 12.5% of the commitments if fixed assets are included in the borrowing base, the terms of the amended credit agreement provide for, among other provisions, a financial covenant requiring us, on a consolidated basis, to maintain a fixed  charge coverage ratio of 1:1 at the end of each fiscal quarter (rolling four quarters).  As of March 31, 2021, we were not subject to these covenants.  The amended credit agreement permits us to pay cash dividends of $20 million and make stock repurchases of $20 million in any fiscal year subject to a minimum availability of $25 million.  Provided specific conditions are met, the amended credit agreement also permits acquisitions, permissible debt financing, capital expenditures, and cash dividend payments and stock repurchases of greater than $20 million.

Our Polish subsidiary, SMP Poland sp. z.o.o., has entered into an overdraft facility with HSBC France (Spolka Akcyjna) Oddzial w Polsce, formerly HSBC Bank Polska S.A., for Zloty 30 million (approximately $7.6 million).  The facility, as amended, expires in December 2021.  Borrowings under the overdraft facility will bear interest at a rate equal to WIBOR + 1.5% and are guaranteed by Standard Motor Products, Inc., the ultimate parent company.  At March 31, 2021 and December 31, 2020, borrowings under the overdraft facility were Zloty 5.9 million (approximately $1.5 million) and Zloty 0.4 million (approximately $0.1 million), respectively.

In order to reduce our accounts receivable balances and improve our cash flow, we are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions.  We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements is less than the cost of servicing our receivables with existing debt.  Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale.  As such, these transactions are being accounted for as a sale.

Pursuant to these agreements, we sold $191.4 million and $150.2 million of receivables during the three months ended March 31, 2021 and 2020, respectively, which was reflected as a reduction of accounts receivable in the consolidated balance at the time of sale.  A charge in the amount of $2.7 million and $2.8 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months ended March 31, 2021 and 2020, respectively.

To the extent that these arrangements are terminated, our financial condition, results of operations, cash flows and liquidity could be adversely affected by extended payment terms, delays or failures in collecting trade accounts receivables.  The utility of the supply chain financing arrangements also depends upon the LIBOR rate, as it is a component of the discount rate applicable to each arrangement.  If the LIBOR rate increases significantly, we may be negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

In March 2020, our Board of Directors authorized the purchase of up to $20 million of our common stock under a stock repurchase program.  As of December 31, 2020, there was approximately $6.5 million available for future stock purchases under the program.  During the three months ended March 31, 2021, we repurchased 150,273 shares of our common stock at a total cost of $6.5 million, thereby completing the 2020 Board of Directors authorization.

In February 2021, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a new stock repurchase program.  Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant.  Under this program, during the three months ended March 31, 2021, we repurchased 105,353 shares of our common stock at a total cost of $4.6 million.  As of March 31, 2021, there was approximately $15.4 million available for future stock purchases under the program.  There have been no additional common stock repurchases under the program.

We anticipate that our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months.  Significant assumptions underlie this belief, including, among other things, that we will be able to mitigate the future impact, if any, of the COVID-19 pandemic and the decision of a large retail customer to pursue a private brand strategy for its engine management product line on our business and operating cash flow by managing our inventories and production levels to align with customer demand for our products, and effectively managing our costs and expenses, and that there will be no material adverse developments in our business, liquidity or capital requirements.  If material adverse developments were to occur in any of these areas, there can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs.  In addition, if we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected.

For further information regarding the risks of our business, refer to Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020.

The following table summarizes our contractual commitments as of March 31, 2021 and expiration dates of commitments through 2028 (a):

Critical Accounting Policies

We have identified several accounting policies as critical to our business operations and the understanding of our results of operations.  The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.

You should be aware that preparation of our consolidated quarterly financial statements in this Report requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. We can give no assurances that actual results will not differ from those estimates.  Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of the COVID-19 pandemic, and other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.

Recently Issued Accounting Pronouncements

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to market risk, primarily related to foreign currency exchange and interest rates.  These exposures are actively monitored by management.  Our exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than one of our subsidiary’s functional currency. Similarly, we are exposed to market risk as the result of changes in interest rates, which may affect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures.  We do not hold or issue derivative financial instruments for trading or speculative purposes.  As of March 31, 2021, we do not have any derivative financial instruments.

Exchange Rate Risk

We have exchange rate exposure, primarily, with respect to the Canadian Dollar, the Euro, the British Pound, the Polish Zloty, the Mexican Peso, the Taiwan Dollar, the Chinese Yuan Renminbi and the Hong Kong Dollar.  As of March 31, 2021 and December 31, 2020, our monetary assets and liabilities which are subject to this exposure are immaterial, therefore, the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows.  This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the incremental effect of such a change on our foreign currency denominated revenues.

Interest Rate Risk

We manage our exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in our debt portfolio. To manage a portion of our exposure to interest rate changes, we have in the past entered into interest rate swap agreements.  We invest our excess cash in highly liquid short-term investments.  Substantially all of our debt is variable rate debt as of March 31, 2021 and December 31, 2020.

In addition, we are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions.  We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements is less than the cost of servicing our receivables with existing debt.  During the three months ended March 31, 2021, we sold $191.4 million of receivables.  Depending upon the level of sales of receivables pursuant these agreements, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the margin rate may have an approximate $1.9 million negative impact on our earnings or cash flows during the three months ended March 31, 2021.  The charge related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations.

Other than the aforementioned, there have been no significant changes to the information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K for the year ended December 31, 2020.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

During the quarter ended March 31, 2021, we have not made any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

We review, document and test our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control – Integrated Framework.  We may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts may lead to various changes in our internal control over financial reporting.

The information required by this Item is incorporated herein by reference to the information set forth in Item 1, “Consolidated Financial Statements” of this Report under the captions “Asbestos” and “Other Litigation” appearing in Note 16, “Commitments and Contingencies,” of the notes to our consolidated financial statements (unaudited).

The following table provides information relating to the Company’s purchases of its common stock for the first quarter of 2021: