QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number: 001-04743
Standard Motor Products, Inc.
(Exact name of registrant as specified in its charter)
New York
11-1362020
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
37-18 Northern Blvd., Long Island City, New York
11101
(Address of principal executive offices)
(Zip Code)
(718) 392-0200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $2.00 per share
SMP
New York Stock Exchange LLC
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.
Large Accelerated Filer☑
Accelerated Filer ☐
Non-Accelerated Filer ☐
Smaller reporting company ☐
Emerging growth company ☐
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 August 2, 2021, there were 22,220,630 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
Standard Motor Products, Inc. and subsidiaries (referred to hereinafter in these notes to the consolidated financial statements as “we,” “us,” “our,” “SMP,” or the “Company”) is 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 service markets.
The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31,2020. The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership, except in instances where the minority shareholder maintains substantive participating rights, in which case we follow the equity method of accounting. In instances where we have more than a 50% equity ownership and the minority shareholder does not maintain substantive participating rights, our consolidated financial statements include the accounts of the company on a consolidated basis with its net income and equity reported at amounts attributable to both our equity position and that of the noncontrolling interest. Investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence. All significant inter-company items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.
Reclassification
Certain prior period amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 2021 presentation.
Note 2. Summary of Significant Accounting Policies
The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles requires management 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 have made a number of estimates and assumptions in the preparation of these consolidated financial statements. We can give no assurance 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. Some of the more significant estimates include allowances for doubtful accounts, cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability exposures, asbestos, environmental and litigation matters, valuation of deferred tax assets, share based compensation and sales returns and other allowances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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.
Recently Issued Accounting Pronouncements
Standards that were adopted
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.
Standards that are not yet adopted as of June 30,2021
The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted as of June 30, 2021, and that could have an impact on our financial statements:
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 3. Business Acquisitions and Investments
2021 Business Acquisitions
Acquisition of Capital Stock of Trumpet Holdings, Inc. (“Trombetta”)
In May 2021, we acquired 100% of the capital stock of Trumpet Holdings, Inc., a Delaware corporation, (more commonly known as “Trombetta”), for $111.7 million, subject to certain post-closing adjustments. Trombetta is a leading provider of power switching and power management products to Original Equipment (‘‘OE’’) customers in various markets. The acquired Trombetta business was paid for in cash funded by borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A., as agent, and has manufacturing facilities in Milwaukee, Wisconsin; Sheboygan Falls, Wisconsin; Tijuana, Mexico, as well as a 70% ownership in a joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”). The acquisition will be reported as part of our Engine Management Segment, is an excellent fit for our strategy of expansion into the OE heavy duty market.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The preliminary allocation of purchase price to assets acquired and liabilities assumed is based upon estimates of fair values utilizing customary valuation procedures and techniques, as well as other information compiled by management. While we believe these preliminary estimates provide a reasonable basis for estimating the fair value of the assets acquired and liabilities assumed, and do not anticipate that any adjustments to these values will be significant, we will continue to evaluate available information prior to finalization of the amounts, particularly the amounts related to intangible assets, deferred income taxes, noncontrolling interests and the final agreement of post-closing adjustments. The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed (in thousands):
Purchase price
$
111,741
Assets acquired and liabilities assumed:
Receivables
$
9,173
Inventory
12,460
Other current assets (1)
5,193
Property, plant and equipment, net
4,939
Operating lease right-of-use assets
3,847
Intangible assets
54,700
Goodwill
49,028
Current liabilities
(4,820
)
Noncurrent operating lease liabilities
(3,065
)
Deferred income taxes
(8,210
)
Subtotal
123,245
Fair value of acquired noncontrolling interest
(11,504
)
Net assets acquired
$
111,741
(1)
The other current assets balance includes $4.6 million of cash acquired.
Intangible assets acquired of $54.7 million consist of customer relationships of $39.4 million that will be amortized on a straight-line basis over the estimated useful life of 20 years; developed technology of $13.4 million that will be amortized on a straight-line basis over the estimated useful life of 15 years; and a trade name of $1.9 million that will be amortized on a straight-line basis over the estimated useful life of 10 years. Goodwill of $49 million was allocated to the Engine Management Segment. The goodwill reflects relationships, business specific knowledge and the replacement cost of an assembled workforce associated with personal reputations. The intangible assets and goodwill are not deductible for tax purposes.
Revenues from the acquired business included in our consolidated statement of operations from the acquisition date through June 30,2021 were $5.7 million.
Acquisition of Particulate Matter Sensor Business of Stoneridge, Inc.
In March 2021, we agreed to acquire the soot sensor product lines from Stoneridge, Inc. The product lines to be acquired manufacture sensors used in the exhaust and emission systems of diesel engines. The product lines are located in Stoneridge’s facilities in Lexington, Ohio and Tallinn, Estonia. We are not acquiring these facilities, nor any of Stoneridge’s employees, and will be relocating the production lines to our engine management plants in Independence, Kansas and Bialystok, Poland, respectively. The acquisition, to be reported as part of our Engine Management Segment, is an excellent fit for our strategy of expansion into the OE heavy duty market. Customer relationships to be acquired include Volvo, CNHi and Hino.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The product lines located in Stoneridge’s facility in Lexington, Ohio were acquired in March 2021 for $2.1 million, and were paid for in cash funded by borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A. The assets acquired include inventory, machinery & equipment and certain intangible assets. The product lines at Stoneridge’s Tallinn, Estonia facility will be acquired at a future date for approximately $800,000. Tallinn, Estonia assets to be acquired consist solely of machinery & equipment.
The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed through June 30, 2021, based on their fair values (in thousands):
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
Intangible assets acquired of approximately $0.8 million consist of customer relationships that will be amortized on a straight-line basis over the estimated useful life of 10 years.
Revenues from the acquired business included in our consolidated statement of operations from the acquisition date through June 30, 2021 were $3.8 million.
Note 4. Restructuring and Integration Expenses
The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of December 31, 2020 and June 30, 2021 and for the six months ended June 30, 2021, consisted of the following (in thousands):
Workforce
Reduction
Other Exit
Costs
Total
Exit activity liability at December 31, 2020
$
179
$
—
$
179
Cash payments
(72
)
—
(72
)
Exit activity liability at June 30, 2021
$
107
$
—
$
107
Restructuring Costs
Plant Rationalization Programs
The 2016 Plant Rationalization Program, which included the shutdown and sale of our Grapevine, Texas facility, and the 2017 Orlando Plant Rationalization Program, which included the shutdown our Orlando Florida facility, have been substantially completed. Cash payments made of $72,000 during the six months ended June 30, 2021, and the remaining aggregate liability of $107,000 consists of severance payments to former employees terminated in connection with these programs.
Note 5. Sale of Receivables
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Pursuant to these agreements, we sold $203.1 million and $394.4 million of receivables during the three months and six months ended June 30,2021, respectively, and $147.7 million and $297.9 million for the comparable periods in 2020. Receivables presented at financial institutions and not yet sold as of June 30,2021 and December 31,2020 were approximately $5 million and $50 million, respectively, and remained in our accounts receivable balance for those periods. All receivables sold were reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale. A charge in the amount of $3 million and $5.7 million related to the sale of receivables was included in selling, general and administrative expense in our consolidated statements of operations for the three months and six months ended June 30,2021, respectively, and $3.1 million and $5.9 million for the comparable periods in 2020.
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.
Note 6. Inventories
Inventories, which are stated at the lower of cost (determined by means of the first-in, first-out method) and net realizable value, consist of the following:
June 30,
2021
December 31,
2020
(In thousands)
Finished goods
$
261,627
$
225,523
Work in process
12,219
10,711
Raw materials
131,030
109,268
Subtotal
404,876
345,502
Unreturned customer inventories
22,070
19,632
Total inventories
$
426,946
$
365,134
Note 7. Acquired Intangible Assets
Acquired identifiable intangible assets consist of the following:
June 30,
2021
December 31,
2020
(In thousands)
Customer relationships
$
151,876
$
111,701
Patents, developed technology and intellectual property
14,123
723
Trademarks and trade names
8,880
6,980
Non-compete agreements
3,277
3,272
Supply agreements
800
800
Leaseholds
160
160
Total acquired intangible assets
179,116
123,636
Less accumulated amortization (1)
(74,336
)
(70,221
)
Net acquired intangible assets
$
104,780
$
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
In May 2021, we acquired 100% of the capital stock of Trumpet Holdings, Inc. (more commonly known as “Trombetta”). Intangible assets acquired of $54.7 million consist of customer relationships of $39.4 million that will be amortized on a straight-line basis over the estimated useful life of 20 years; developed technology of $13.4 million that will be amortized on a straight-line basis over the estimated useful life of 15 years; and a trade name of $1.9 million that will be amortized on a straight-line basis over the estimated useful life of 10 years.
In March 2021, we acquired certain assets and liabilities of the particulate matter sensor product lines from Stoneridge, Inc. Intangible assets acquired of approximately $0.8 million consist of customer relationships that will be amortized on a straight-line basis over the estimated useful life of 10 years.
Total amortization expense for acquired intangible assets was $2.1 million and $4.1 million for the three months and six months ended June 30, 2021, respectively, and $2 million and $4.1 million for the comparable periods in 2020. Based on the current estimated useful lives assigned to our intangible assets, amortization expense is estimated to be $4.6 million for the remainder of 2021, $8.4 million in 2022, $8.1 million in 2023, $8 million in 2024 and $73.1 million in the aggregate for the years 2025 through 2041.
Note 8. Leases
We have operating and finance leases for our manufacturing facilities, warehouses, office space, automobiles, and certain equipment. Our leases have remaining lease terms of up to ten years, some of which may include one or more five-year renewal options. We have included the five-year renewal option for one of our leases in our operating lease payments as we concluded that it is reasonably certain that we will exercise the option. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease expense is recognized on a straight-line basis over the lease term. Finance leases are not material.
The following tables provides quantitative disclosures related to our operating leases and includes all operating leases acquired in the Trombetta acquisition from the date of acquisition (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Three Months Ended
June 30,
Expense and Cash Flow Information
2021
2020
Lease Expense
Operating lease expense (a)
$
2,441
$
2,303
Six Months Ended
June 30,
2021
2020
Lease Expense
Operating lease expense (a)
$
4,777
$
4,616
Supplemental Cash Flow Information
Cash paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
4,733
$
4,544
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases
$
14,077
$
380
(a)
Excludes expenses of approximately $0.3 million and $0.9 million for the three and six months ended June 30, 2021, respectively, and approximately $0.5 million and $0.9 million for the comparable periods in 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.
Minimum Lease Payments
At June 30, 2021, we are obligated to make minimum lease payments through 2028, under operating leases, which are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 9. Credit Facilities and Long-Term Debt
Total debt outstanding is summarized as follows:
June 30,
2021
December 31,
2020
(In thousands)
Revolving credit facilities
$
135,000
$
10,000
Other (1)
2,477
232
Total debt
$
137,477
$
10,232
Current maturities of debt
$
137,397
$
10,135
Long-term debt
80
97
Total debt
$
137,477
$
10,232
(1)
Other includes borrowings under our Polish overdraft facility of Zloty 9 million (approximately $2.4 million) and Zloty 0.4 million (approximately $0.1 million) as of June 30, 2021 and December 31, 2020, respectively.
Revolving Credit Facility
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 credit 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 $112.3 million available for us to borrow pursuant to the formula at June 30, 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 credit agreement, which are classified as current liabilities, were $135 million and $10 million at June 30, 2021 and December 31, 2020, respectively; while letters of credit outstanding under the credit agreement were $2.6 million and $2.8 million at June 30, 2021 and December 31, 2020, respectively. Borrowings under the credit agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.
At June 30, 2021, the weighted average interest rate on our amended credit agreement was 1.3%, which consisted of $135 million in direct borrowings. 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 six months ended June 30, 2021, our average daily alternative base rate loan balance was $1 million, compared to a balance of $1.7 million for the six months ended June 30, 2020 and a balance of $1.5 million for the year ended December 31, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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 June 30, 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.
Polish Overdraft Facility
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 $7.9 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 June 30, 2021 and December 31, 2020, borrowings under the overdraft facility were Zloty 9 million (approximately $2.4 million) and Zloty 0.4 million (approximately $0.1 million), respectively.
Deferred Financing Costs
We have deferred financing costs of approximately $0.5 million and $0.7 million as of June 30, 2021 and December 31, 2020, respectively. Deferred financing costs are related to our revolving credit facility. Deferred financing costs as of June 30, 2021 are being amortized in the amounts of $0.1 million for the remainder of 2021, $0.2 million in 2022, and $0.2 million in 2023.
Note 10.Stock-Based Compensation Plans
We account for our stock-based compensation plans in accordance with the provisions of FASB ASC 718, Stock Compensation, which requires that a company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized in the consolidated statement of operations over the period during which an employee is required to provide service in exchange for the award.
Restricted and Performance Stock Grants
In May 2021, our Board of Directors and Shareholders approved an amendment and restatement to the 2016 Omnibus Incentive Plan (the “Plan”). The Plan, as amended and restated (1) increased the number of shares available for issuance under the Plan by 950,000 shares (from 1,100,000 shares to 2,050,000 shares); (2) increased the number of shares available for issuance to nonemployee directors by 100,000 (from 250,000 shares to 350,000 shares); and (3) revised the Plan in response to certain changes made in applicable federal tax laws. The restated and amended 2016 Omnibus Incentive Plan terminates in May 2026.
Under the revised and amended 2016 Omnibus Incentive Plan, we are authorized to issue, among other things, shares of restricted and performance-based stock to eligible employees and restricted stock to directors of up to 2,050,000 shares. Shares issued under the Plan that are cancelled, forfeited or expire by their terms are eligible to be granted again under the Plan.
As part of the Plan, we currently grant shares of restricted stock to eligible employees and our independent directors and performance-based shares to eligible employees. We grant eligible employees two types of restricted stock (standard restricted shares and long-term retention restricted shares). Standard restricted shares granted to employees become fully vested no earlier than three years after the date of grant. Long-term retention restricted shares granted to selected executives vest at a 25% rate on or within approximately two months of an executive reaching the ages 60 and 63, and become fully vested on or within approximately two months of an executive reaching the age 65. Restricted shares granted to directors become fully vested upon the first anniversary of the date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Performance-based shares issued to eligible employees are subject to a three-year measuring period and the achievement of performance targets and, depending upon the achievement of such performance targets, they may become vested no earlier than three years after the date of grant. Each period we evaluate the probability of achieving the applicable targets, and we adjust our accrual accordingly. Restricted shares (other than long-term retention restricted shares) and performance shares issued to certain key executives and directors are subject to a one or two year holding period upon the lapse of the vesting period. Forfeitures on stock grants are estimated at 5% for employees and 0% for executives and directors based on our evaluation of historical and expected future turnover.
Our restricted and performance-based share activity was as follows for the six months ended June 30, 2021:
Shares
Weighted Average
Grant Date Fair
Value Per Share
Balance at December 31, 2020
839,686
$
34.77
Granted
7,000
39.03
Vested
(56,845
)
31.90
Forfeited
(10,625
)
38.76
Balance at June 30, 2021
779,216
$
34.96
We recorded compensation expense related to restricted shares and performance-based shares of $4 million ($3 million, net of tax) and $3 million ($2.2 million, net of tax) for the six months ended June 30, 2021 and 2020, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $13.1 million at June 30, 2021, and is expected to be recognized as they vest over a weighted average period of 4 years and 0.8 years for employees and directors, respectively.
Note 11.Employee Benefits
We provide certain medical and dental care benefits to 16 former U.S. union employees. The postretirement medical and dental benefit obligation to the former union employees as of June 30, 2021, and the related net periodic benefit cost for the plan for the three and six months ended June 30, 2021 and 2020 were not material.
We maintain a defined contribution Supplemental Executive Retirement Plan for key employees. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, we may at our discretion make contributions to the plan on behalf of the employees. In March 2021, we made company contributions to the plan of $0.5 million related to calendar year 2020.
We also have an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. In connection therewith, we maintain an employee benefits trust to which we contribute shares of treasury stock. We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under the plan. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with their fiduciary duties. During the six months ended June 30, 2021, we contributed to the trust an additional 61,800 shares from our treasury and released 61,800 shares from the trust leaving 200 shares remaining in the trust as of June 30, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 12.Earnings Per Share
The following are reconciliations of the net earnings attributable to SMP and the shares used in calculating basic and dilutive net earnings per common share attributable to SMP (in thousands, except per share data):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021
2020
2021
2020
Net Earnings Attributable to SMP
Earnings from continuing operations
$
27,995
$
11,842
$
50,159
$
21,463
Loss from discontinued operations
(853
)
(875
)
(2,017
)
(1,869
)
Net earnings attributable to SMP
$
27,142
$
10,967
$
48,142
$
19,594
Basic Net Earnings Per Common Share Attributable to SMP
Earnings from continuing operations per common share
$
1.26
$
0.53
$
2.25
$
0.96
Loss from discontinued operations per common share
(0.04
)
(0.04
)
(0.09
)
(0.08
)
Net earnings per common share attributable to SMP
$
1.22
$
0.49
$
2.16
$
0.88
Weighted average common shares outstanding
22,199
22,330
22,258
22,384
Diluted Net Earnings Per Common Share Attributable to SMP
Earnings from continuing operations per common share
$
1.23
$
0.52
$
2.21
$
0.94
Loss from discontinued operations per common share
(0.03
)
(0.04
)
(0.09
)
(0.08
)
Net earnings per common share attributable to SMP
$
1.20
$
0.48
$
2.12
$
0.86
Weighted average common shares outstanding
22,199
22,330
22,258
22,384
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock and performance-based stock
487
389
483
410
Weighted average common shares outstanding – Diluted
22,686
22,719
22,741
22,794
The shares listed below were not included in the computation of diluted net earnings per common share attributable to SMP because to do so would have been anti-dilutive for the periods presented or because they were excluded under the treasury method (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021
2020
2021
2020
Restricted and performance-based shares
239
261
258
257
Note 13.Fair Value Measurements
The carrying value of our financial instruments consisting of cash and cash equivalents, deferred compensation, and short term borrowings approximate their fair value. In each instance, fair value is determined after considering Level 1 inputs under the three-level fair value hierarchy. For fair value purposes, the carrying value of cash and cash equivalents approximates fair value due to the short maturity of those investments. The fair value of the assets held by the deferred compensation plan are based on the quoted market prices of the underlying funds which are held in registered investment companies. The carrying value of our revolving credit facilities, classified as short term borrowings, equals fair market value because the interest rate reflects current market rates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 14.Industry Segments
We have twomajor reportable operating segments, each of which focuses on a specific line of automotive parts in the automotive aftermarket with a complementary focus on the heavy duty, industrial equipment and original equipment service markets. Our Engine Management Segment manufactures and remanufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicle systems. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories and windshield washer system parts.
The following tables show our net sales, intersegment revenue and operating income for each reportable segment (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021
2020
2021
2020
Net Sales (a)
Engine Management
$
233,216
$
173,153
$
445,234
$
374,271
Temperature Control
106,471
72,392
168,944
123,834
All Other
2,389
2,394
4,451
4,136
Consolidated
$
342,076
$
247,939
$
618,629
$
502,241
Intersegment Revenue (a)
Engine Management
$
5,185
$
2,666
$
10,544
$
6,680
Temperature Control
3,125
1,387
4,972
2,778
All Other
(8,310
)
(4,053
)
(15,516
)
(9,458
)
Consolidated
$
—
$
—
$
—
$
—
Operating Income
Engine Management
$
30,384
$
16,722
$
61,498
$
38,155
Temperature Control
13,229
3,967
16,821
3,619
All Other
(6,688
)
(4,668
)
(12,070
)
(11,430
)
Consolidated
$
36,925
$
16,021
$
66,249
$
30,344
(a)
Segment net sales include intersegment sales in our Engine Management and Temperature Control segments.
For the disaggregation of our net sales from contracts with customers by geographic area, major product group and major sales channels for each of our segments, see Note 15, “Net Sales.”
Note 15. Net Sales
Disaggregation of Net Sales
We disaggregate our net sales from contracts with customers by geographic area, major product group, and major sales channels for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our net sales are affected by economic factors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Six months ended June 30, 2021 (a)
Engine
Management
Temperature
Control
Other (b)
Total
Geographic Area:
United States
$
383,375
$
159,977
$
—
$
543,352
Canada
16,007
7,958
4,451
28,416
Asia
19,082
144
—
19,226
Mexico
12,607
180
—
12,787
Europe
10,401
217
—
10,618
Other foreign
3,762
468
—
4,230
Total
$
445,234
$
168,944
$
4,451
$
618,629
Major Product Group:
Ignition, emission control, fuel and safety related system products
$
366,152
$
—
$
3,501
$
369,653
Wire and cable
79,082
—
(135
)
78,947
Compressors
—
102,951
404
103,355
Other climate control parts
—
65,993
681
66,674
Total
$
445,234
$
168,944
$
4,451
$
618,629
Major Sales Channel:
Aftermarket
$
342,002
$
153,448
$
4,451
$
499,901
OE/OES
90,128
14,484
—
104,612
Export
13,104
1,012
—
14,116
Total
$
445,234
$
168,944
$
4,451
$
618,629
Six months ended June 30, 2020 (a)
Engine
Management
Temperature
Control
Other (b)
Total
Geographic Area:
United States
$
328,270
$
117,646
$
—
$
445,916
Canada
11,114
5,398
4,136
20,648
Asia
17,675
139
—
17,814
Mexico
9,523
100
—
9,623
Europe
5,874
198
—
6,072
Other foreign
1,815
353
—
2,168
Total
$
374,271
$
123,834
$
4,136
$
502,241
Major Product Group:
Ignition, emission control, fuel and safety related system products
$
307,313
$
—
$
3,325
$
310,638
Wire and cable
66,958
—
(8
)
66,950
Compressors
—
70,226
351
70,577
Other climate control parts
—
53,608
468
54,076
Total
$
374,271
$
123,834
$
4,136
$
502,241
Major Sales Channel:
Aftermarket
$
302,059
$
110,831
$
4,136
$
417,026
OE/OES
63,471
12,475
—
75,946
Export
8,741
528
—
9,269
Total
$
374,271
$
123,834
$
4,136
$
502,241
(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 sales for the three months ended June 30, 2021, and for the six months ended June 30, 2021 and June 30, 2020 exceeded third party sales from our Canadian business unit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Geographic Area
We sell our line of products primarily in the United States, with additional sales in Canada, Mexico, Europe, Asia and Latin America. Sales are attributed to countries based upon the location of the customer. Our sales are substantially denominated in U.S. dollars.
Major Product Group
The Engine Management segment of the Company principally generates revenue from the sale of automotive engine parts in the automotive aftermarket including ignition, emission control, fuel and safety related system products, and wire and cable parts. The Temperature Control segment of the Company principally generates revenue from the sale of automotive temperature control systems parts in the automotive aftermarket including air conditioning compressors and other climate control parts.
Major Sales Channel
In the aftermarket channel, we sell our products to warehouse distributors and retailers. Our customers buy directly from us and sell directly to jobber stores, professional technicians and to “do-it-yourselfers” who perform automotive repairs on their personal vehicles. In the “OE” and Original Equipment Service (“OES”) channel, we sell our products to original equipment manufacturers who redistribute our products within their distribution network, ind ependent dealerships and service dealer technicians. Lastly, in the Export channel, our domestic entities sell to customers outside the United States.
Note 16.Commitments and Contingencies
Asbestos
In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying statement of operations. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed on or after September 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 2001, and the amounts paid for settlements, awards of asbestos-related damages, and defense of such claims. At June 30, 2021, approximately 1,610 cases were outstanding for which we may be responsible for any related liabilities. Since inception in September 2001 through June 30, 2021, the amounts paid for settled claims and awards of asbestos-related damages, including interest, were approximately $53.1 million. We do not have insurance coverage for the indemnity and defense costs associated with the claims we face.
In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study of the asbestos related liabilities performed by an independent actuarial firm, our settlement amounts and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of such claims. As is our accounting policy, we consider the advice of actuarial consultants with experience in assessing asbestos-related liabilities to estimate our potential claim liability;and perform an actuarial evaluation in the third quarter of each year and whenever events or changes in circumstances indicate that additional provisions may be necessary. The methodology used to project asbestos-related liabilities and costs in our actuarial study considered: (1) historical data available from publicly available studies; (2) an analysis of our recent claims history to estimate likely filing rates into the future; (3) an analysis of our currently pending claims; and (4) an analysis of our settlements and awards of asbestos-related damages to date; and (5) an analysis of closed with pay ratios and lag patterns in order to develop average future settlement values. Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments and awards of asbestos-related damages was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
In accordance with our policy to perform an annual actuarial evaluation in the third quarter of each year, and whenever events or changes in circumstances indicate that additional provisions may be necessary, an actuarial study was performed as of August 31, 2020. The results of the August 31, 2020 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers, ranging from $58.1 million to $99.3 million for the period through 2065. Based upon the results of the August 31, 2020 actuarial study, in September 2020 we increased our asbestos liability to $58.1 million, the low end of the range, and recorded an incremental pre-tax provision of $8.7 million in earnings (loss) from discontinued operations.
As related to our potential asbestos-related liability as of August 31, 2020, we were found liable for $7.6 million in compensatory damages as a defendant in a 2018 asbestos liability case in California. We actively pursued our right of appeal, and during the fourth quarter of 2020, received notice that the appeal was unsuccessful. The judgment against us was for the $7.6 million in compensatory damages plus interest at a rate of ten percent (10%) per annum. During the fourth quarter of 2020, we paid the compensatory damages and accrued interest.
Based upon the reduction to our asbestos-related liability resulting from the payment made in the California asbestos case and fourth quarter 2020 cash settlements, in December 2020 our actuarial firm performed an updated actuarial study. The results of the updated study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers, ranging from $63 million to $99.1 million for the period through 2065. Based upon the results of the updated actuarial study and in accordance with our practice, we increased our asbestos liability as of November 2020 to $63 million, the low end of the range, and recorded an additional incremental pre-tax provision of $17 million in earnings (loss) from discontinued operations. Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations, are estimated, according to the updated study, to range from $48.7 million to $95.4 million for the period through 2065. Total operating cash outflows related to discontinued operations, which include settlements, awards of asbestos-related damages and legal costs, net of taxes, were $5.5 million and $3.4 million for the six months ended June 30, 2021 and 2020, respectively.
We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future and whenever events or changes in circumstances indicate that additional provisions may be necessary. Given the uncertainties associated with projecting such matters into the future and other factors outside our control, we can give no assurance that additional provisions will not be required. We will continue to monitor events and changes in circumstances surrounding these potential liabilities in determining whether to perform additional actuarial evaluations and whether additional provisions may be necessary. At the present time, however, we do not believe that any additional provisions would be reasonably likely to have a material adverse effect on our liquidity or consolidated financial position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Other Litigation
We are currently involved in various other legal claims and legal proceedings (some of which may involve substantial amounts), including claims related to commercial disputes, product liability, employment, and environmental. Although these legal claims and legal proceedings are subject to inherent uncertainties, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the ultimate outcome of these matters will not, either individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. We may at any time determine that settling any of these matters is in our best interests, which settlement may include substantial payments. Although we cannot currently predict the specific amount of any liability that may ultimately arise with respect to any of these matters, we will record provisions when the liability is considered probable and reasonably estimable. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. As additional information becomes available, we reassess our potential liability related to these matters. Such revisions of the potential liabilities could have a material adverse effect on our business, financial condition or results of operations.
Warranties
We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time of the product depending on the nature of the product. As of June 30, 2021 and 2020, we have accrued $18.2 million and $17.8 million, respectively, for estimated product warranty claims included in accrued customer returns. The accrued product warranty costs are based primarily on historical experience of actual warranty claims.
The following table provides the changes in our product warranties (in thousands):
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 crises, 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.
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 SMPCaresTM initiative to put our philanthropic plans into practice. Additionally, in 2021, we established a committee to drive diversity, equity and inclusion initiatives throughout our company.
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.
On an ongoing basis, we continue to monitor the impact, if any, of 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, the spread of the Delta variant, 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 half of 2021 continued back to a more normalized level, as we experienced strong demand for our products, and a seasonal trend 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 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. We actively monitor vaccination rates at all of our facilities and closely follow government mandates in establishing work policies and practices. 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 Global Supply Chain Disruption and Inflation
Disruptions in the global economy in 2020 and the lingering impacts into 2021 have impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. In response to the global supply chain volatility and inflationary cost increases, we have taken, and continue to take, several actions to mitigate the impact by working closely with our suppliers and customers to minimize any potential adverse impacts on our business, including initiating cost savings initiatives and the pass through of higher costs to our customers. We expect these inflationary trends to continue for some time, and while we believe that we will be able to somewhat offset the impact, there can be no assurances that unforeseen future events in the global supply chain, and inflationary pressures, will not 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.
Comparison of the Three Months Ended June 30, 2021 to the Three Months Ended June 30, 2020
Sales. Consolidated net sales for the three months ended June 30, 2021 were $342.1 million, an increase of $94.2 million, or 38%, compared to $247.9 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 June 30, 2021 and 2020 (in thousands):
Three Months Ended June 30,
2021
2020
Engine Management:
Ignition, Emission Control, Fuel and Safety Related System Products
$
192,486
$
142,787
Wire and Cable
40,730
30,366
Total Engine Management
233,216
173,153
Temperature Control:
Compressors
69,577
44,878
Other Climate Control Parts
36,894
27,514
Total Temperature Control
106,471
72,392
All Other
2,389
2,394
Total
$
342,076
$
247,939
Engine Management’s net sales increased $60.1 million, or 34.7%, to $233.2 million for the three months ended June 30, 2021. Net sales in ignition, emission control, fuel and safety related system products for the three months ended June 30, 2021 were $192.5 million, an increase of $49.7 million, or 34.8%, compared to $142.8 million in the same period of 2020. Net sales in the wire and cable product group for the three months ended June 30, 2021 were $40.7 million, an increase of $10.3 million, or 34%, compared to $30.4 million in the three months ended June 30, 2020. Engine Management’s increase in net sales for the second quarter of 2021 compared to the same period in 2020 reflects the impact of successful customer initiatives in the marketplace, new business wins, and continued robust customer demand, along with incremental net sales from our soot sensor and Trombetta acquisitions, and the favorable year-over-year impact of having lower net sales in the second quarter of 2020 due to the general weakness in the economy caused by the COVID-19 pandemic. 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. Net sales to this customer were minimal in the second quarter of 2021, and any additional net sales to this customer for the remainder of 2021 are not anticipated to be significant.
Incremental net sales from our soot sensor and Trombetta acquisitions of $8.7 million were included in the net sales of the ignition, emission control, fuel and safety related system products market from the date of acquisition through June 30, 2021. Compared to the second quarter of 2020, excluding the incremental net sales from the acquisitions, net sales in the ignition, emission control, fuel and safety related products market increased $41 million, or 28.7%, and Engine Management net sales increased $51.4 million, or 29.7%.
Temperature Control’s net sales increased $34.1 million, or 47.1%, to $106.5 million for the three months ended June 30, 2021. Net sales in the compressors product group for the three months ended June 30, 2021 were $69.6 million, an increase of $24.7 million, or 55%, compared to $44.9 million in the same period of 2020. Net sales in the other climate control parts product group for the three months ended June 30, 2021 were $36.9 million, an increase of $9.4 million, or 34.1%, compared to $27.5 million in the three months ended June 30, 2020. Temperature Control’s increase in net sales for the second quarter of 2021 compared to the same period in 2020 reflects the impact of strong pre-season orders in the second quarter of 2021 that did not occur in the second quarter of 2020, a summer selling season that began earlier than usual for our customers, and the favorable year-over-year impact of having lower net sales in the second quarter 2020 due to the general weakness in the economy caused by the COVID-19 pandemic. Full year Temperature Control 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 29% in the second quarter of 2021, compared to 26% in the second quarter of 2020. The following table summarizes gross margins by segment for the three months ended June 30, 2021 and 2020, respectively (in thousands):
Three Months Ended
June 30,
Engine
Management
Temperature
Control
Other
Total
2021
Net sales
$
233,216
$
106,471
$
2,389
$
342,076
Gross margins
67,447
28,658
3,167
99,272
Gross margin percentage
28.9
%
26.9
%
—
29
%
2020
Net sales
$
173,153
$
72,392
$
2,394
$
247,939
Gross margins
46,230
16,520
1,608
64,358
Gross margin percentage
26.7
%
22.8
%
—
26
%
Compared to the second quarter of 2020, gross margins at Engine Management increased 2.2 percentage points from 26.7% to 28.9%, while gross margins at Temperature Control increased 4.1 percentage points from 22.8% to 26.9%. The gross margin percentage increase in Engine Management compared to the prior year primarily reflects the favorable impact of higher year-over-year absorption due to higher sales levels and production volumes. The gross margin percentage increase in Temperature Control compared to the prior year reflects primarily the favorable impact of higher year-over-year absorption due to higher sales levels and production volumes. The higher production volumes at both Engine Management and Temperature Control are reflective of our effort to rebuild inventory in response to the continued strong customer demand and the timing of customer purchases, all fueled by the overall recovery in the worldwide economy from the COVID-19 pandemic. While we anticipate margin pressures from more normalized production levels and inflationary cost increases in certain raw materials, labor and transportation, we believe that our annual cost savings initiatives, and our ability to pass through higher prices to our customers, will help to offset the impact of the anticipated inflationary increases on our margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) were $62.3 million, or 18.2% of consolidated net sales, in the second quarter of 2021, as compared to $48.3 million, or 19.5% of consolidated net sales, in the second quarter of 2020. The $14 million increase in SG&A expenses as compared to the second quarter of 2020 is principally due to (1) higher distribution costs associated with higher sales volumes and the impact of an increase in freight costs, (2) higher selling, marketing and employee compensation costs, and (3) the impact of incremental expenses of $1.1 million from our soot sensor and Trombetta acquisitions, including amortization of intangible assets acquired. The lower year-over-year SG&A expense percentage of consolidated net sales reflects the impact of discretionary cost reduction measures implemented in 2020 and carried over into 2021, and higher year-over-year sales volumes.
Operating Income. Operating income increased to $36.9 million in the second quarter of 2021, compared to $16 million in the second quarter of 2020. The year-over-year increase in operating income of $20.9 million is the result of the impact of higher consolidated net sales, and higher gross margins as a percentage of consolidated net sales, which more than offset the impact of higher SG&A expenses.
Other Non-Operating Income, Net. Other non-operating income, net was $0.8 million in the second quarter of 2021, compared to $0.6 million in the second quarter of 2020. The year-over-year increase in other non-operating income, net results primarily from the increase in year-over-year equity income from our joint ventures, partially offset by the unfavorable impact of changes in foreign currency exchange rates.
Interest Expense. Interest expense decreased to $0.5 million in the second quarter of 2021, compared to $0.8 million in the second quarter of 2020. The year-over-year decrease in interest expense reflects primarily the impact of lower year-over-year average interest rates on our revolving credit facility.
Income Tax Provision. The income tax provision in the second quarter of 2021 was $9.2 million at an effective tax rate of 24.8% compared to $4 million at an effective tax rate of 25.3% for the same period in 2020. The effective tax rate was essentially flat year-over-year.
Loss from Discontinued Operations. During both the second quarter of 2021 and 2020, the loss from discontinued operations, net of tax was $0.9 million. 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.
Net Earnings Attributable to Noncontrolling Interest. In May 2021, we acquired the Trombetta business for $111.7 million, subject to certain post-closing adjustments. As part of the acquisition, we acquired a 70% ownership in a joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”). Net earnings attributable to the noncontrolling interest of $19,000 during the three months ended June 30, 2021 represents 30% of the net earnings of Trombetta Asia, Ltd. from the date of acquisition through June 30, 2021.
Comparison of the Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020
Sales. Consolidated net sales for the six months ended June 30, 2021 were $618.6 million, an increase of $116.4 million, or 23.2%, compared to $502.2 million in the same period of 2020, with the majority of our net sales to customers 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 six months ended June 30, 2021 and 2020 (in thousands):
Six Months Ended June 30,
2021
2020
Engine Management:
Ignition, Emission Control, Fuel and Safety Related System Products
Engine Management’s net sales increased $70.9 million, or 19%, to $445.2 million for the first six months of 2021. Net sales in ignition, emission control, fuel and safety related system products for the six months ended June 30, 2021 were $366.2 million, an increase of $58.9 million, or 19.1%, compared to $307.3 million in the same period of 2020. Net sales in the wire and cable product group for the six months ended June 30, 2021 were $79.1 million, an increase of $12.1 million, or 18.1%, compared to $67 million in the six months ended June 30, 2020. Engine Management’s increase in net sales for the first six months of 2021 compared to the same period in 2020 reflects the impact of successful customer initiatives in the marketplace, new business wins, and continued robust customer demand, along with incremental net sales from our soot sensor and Trombetta acquisitions and the favorable year-over-year impact of having lower net sales in the first six months of 2020 due to the general weakness in the economy caused by the COVID-19 pandemic. 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, net sales were minimal in the second quarter of 2021, and any additional net sales to this customer for the remainder of 2021 are not anticipated to be significant.
Incremental net sales from our soot sensor and Trombetta acquisitions of $9.5 million were included in the net sales of the ignition, emission control, fuel and safety related system products market from the date of acquisition through June 30, 2021. Compared to the first six months of 2020, excluding the incremental net sales from the acquisitions, net sales in the ignition, emission control, fuel and safety related products market increased $49.4 million, or 16.1%, and Engine Management net sales increased $61.4 million, or 16.4%.
Temperature Control’s net sales increased $45.1 million, or 36.4%, to $168.9 million for the first six months of 2021. Net sales in the compressors product group for the six months ended June 30, 2021 were $102.9 million, an increase of $32.7 million, or 46.6%, compared to $70.2 million in the same period of 2020. Net sales in the other climate control parts product group for the six months ended June 30, 2021 were $66 million, an increase of $12.4 million, or 23.1%, compared to $53.6 million in the six months ended June 30, 2020. Temperature Control’s increase in net sales for the first six months of 2021 compared to the same period in 2020 reflects the impact of strong pre-season orders in the first half of 2021 that did not occur in the first half of 2020, a summer selling season that began earlier than usual for our customers, and the year-over-year impact of having lower net sales in the first half of 2020 due to the general weakness in the economy caused by the COVID-19 pandemic. Full year Temperature Control 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 29.6% in the first six months of 2021, compared to 26.8% during the same period in 2020. The following table summarizes gross margins by segment for the six months ended June 30, 2021 and 2020, respectively (in thousands):
Six Months Ended
June 30,
Engine
Management
Temperature
Control
Other
Total
2021
Net sales
$
445,234
$
168,944
$
4,451
$
618,629
Gross margins
132,517
44,653
5,886
183,056
Gross margin percentage
29.8
%
26.4
%
—
29.6
%
2020
Net sales
$
374,271
$
123,834
$
4,136
$
502,241
Gross margins
102,935
28,616
3,202
134,753
Gross margin percentage
27.5
%
23.1
%
—
26.8
%
Compared to the first six months of 2020, gross margins at Engine Management increased 2.3 percentage points from 27.5% to 29.8%, while gross margins at Temperature Control increased 3.3 percentage points from 23.1% to 26.4%. The gross margin percentage increase in Engine Management compared to the prior year primarily reflects the favorable impact of higher year-over-year absorption due to higher sales levels and 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 primarily the favorable impact of higher year-over-year absorption due to higher sales levels and 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 are reflective of our effort to rebuild inventory in response to the continued strong customer demand and the timing of customer purchases, all fueled by the overall recovery in the worldwide economy from the COVID-19 pandemic. While we anticipate margin pressures from more normalized production levels and inflationary cost increases in certain raw materials, labor and transportation, we believe that our annual cost initiatives, and our ability to pass through higher prices to our customers, will help to offset the impact of the inflationary increases on our margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) were $116.8 million, or 18.9% of consolidated net sales, in the first six months of 2021, as compared to $104.2 million, or 20.7% of consolidated net sales in the first six months of 2020. The $12.6 million increase in SG&A expenses as compared to the first six months of 2020 is principally due to (1) higher distribution costs associated with higher sales volumes and the impact of an increase in freight costs, (2) higher selling, marketing and employee compensation costs, and (3) the impact of incremental expenses of $1.2 million from our soot sensor and Trombetta acquisitions, including amortization of intangible assets acquired. The lower year-over-year SG&A expense percentage of consolidated net sales reflects the impact of discretionary cost reduction measures implemented in 2020 and carried over into 2021, and higher year-over-year sales volumes.
Operating Income. Operating income was $66.2 million in the first six months of 2021, compared to $30.3 million for the same period in 2020. The year-over-year increase in operating income of $35.9 million is the result of the impact of higher consolidated net sales, and higher gross margins as a percentage of consolidated net sales, which more than offset the impact of higher SG&A expenses.
Other Non-Operating Income, Net. Other non-operating income, net was $1.5 million in the first six months of 2021, compared to $0.1 million in the first six months of 2020. The year-over-year increase in other non-operating income, net results primarily 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 $0.7 million in the first six months of 2021, compared to $1.6 million for the same period in 2020. The year-over-year decrease in interest expense reflects the impact of lower average outstanding borrowings in the first six months of 2021 when compared to first six months of 2020, and lower year-over-year average interest rates on our revolving credit facility.
Income Tax Provision. The income tax provision for the six months ended June 30, 2021 was $16.8 million at an effective tax rate of 25.1%, compared to $7.3 million at an effective tax rate of 25.4% for the same period in 2020. The effective tax rate was essentially flat year-over-year.
Loss from Discontinued Operations. During the first six months of 2021 and 2020, the loss from discontinued operations, net of tax was $2 million and $1.9 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.
Net Earnings Attributable to Noncontrolling Interest. In May 2021, we acquired the Trombetta business for $111.7 million, subject to certain post-closing adjustments. As part of the acquisition, we acquired a 70% ownership in a joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”). Net earnings attributable to the noncontrolling interest of $19,000 during the six months ended June 30, 2021 represents 30% of the net earnings of Trombetta Asia, Ltd. from the date of acquisition through June 30, 2021.
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 six months of 2021, cash provided by operating activities was $23.2 million compared to cash used in operating activities of $0.9 million in the same period of 2020. The increase in cash provided by operating activities resulted primarily from the increase in net earnings, the smaller year-over-year increase in accounts receivable, and the increase in accounts payable compared to a decrease in accounts payable in the prior year, partially offset by the increase in inventories compared to the decrease in inventories in the prior year, the decrease in sundry payables and accrued expenses compared to the increase in sundry payables and accrued expenses in the prior year, and the smaller year-over-year decrease in prepaid expenses and other current assets.
Net earnings during the first six months of 2021 were $48.2 million compared to $19.6 million in the first six months of 2020. During the first six months of 2021, (1) the increase in accounts receivable was $4.7 million compared to the year-over-year increase in accounts receivable of $38.6 million in 2020; (2) the increase in inventories was $46.7 million compared to the year-over-year decrease in inventories of $12.7 million in 2020; (3) the increase in accounts payable was $16.1 million compared to the year-over-year decrease in accounts payable of $21.8 million in 2020; (4) the decrease in prepaid expenses and other current assets was $3.2 million compared to the year-over-year decrease in prepaid expenses and other current assets of $5.7 million in 2020; and (5) the decrease in sundry payables and accrued expenses was $6.5 million compared to the year-over-year increase in sundry payables of $2.1 million in 2020. The increase in inventories during the first six months 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 $121 million in the first six months of 2021, compared to $9 million in the same period of 2020. Investing activities during the first six months of 2021 consisted of (1) the payment of $107.1 million, net of $4.6 million of cash acquired, for our acquisition of 100% of the capital stock of Trumpet Holdings, Inc., a Delaware corporation, (“Trombetta”), (2) the payment of $2.1 million for our acquisition of certain assets of the soot sensor product lines from Stoneridge, Inc., and (3) capital expenditures of $11.7 million; while investing activities during the first six months of 2020 consisted of capital expenditures of $9 million.
Financing Activities. Cash provided by financing activities was $105.7 million in the first six months of 2021 as compared to $21.8 million in the same period of 2020. During the first six months of 2021, we (1) increased our borrowings under our revolving credit facility by $125 million; (2) increased our borrowings under lease obligations and our Polish overdraft facility by $2.3 million; (3) made cash payments for the repurchase of shares of our common stock of $11.1 million; and (4) paid dividends of $11.1 million. Cash provided by operating activities, along with borrowings under our revolving credit agreement, lease obligations and Polish overdraft facility were used to fund our investing activities, purchase shares of our common stock and pay dividends.
During the first six months of 2020, we (1) increased our borrowings under our revolving credit facility by $32.5 million; (2) increased our borrowings under lease obligations and our Polish overdraft facility by $1.8 million; (3) made cash payments for the repurchase of shares of our common stock of $8.7 million; and (4) paid dividends of $5.6 million. Cash provided by borrowings under our revolving credit agreement, lease obligations and Polish overdraft facility were used to fund the cash used in operating activities, fund our investing activities, purchase shares of our common stock and pay dividends.
Dividends of $11.1 million and $5.6 million were paid in 2021 and 2020, respectively. In January 2020, our Board of Directors voted to increase our quarterly dividend from $0.23 per share in 2019 to $0.25 per share in 2020. In April 2020, in response to the impact of the COVID-19 pandemic on our business, our Board of Directors approved to temporarily suspend our quarterly cash dividend payments. In October 2020, our Board of Directors approved the reinstatement of our quarterly cash dividend of $0.25 per share, and in February 2021, our Board of Directors voted to maintain our quarterly dividend at $0.25 per share in 2021.
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 credit 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 $112.3 million available for us to borrow pursuant to the formula at June 30, 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 $135 million and $10 million at June 30, 2021 and December 31, 2020, respectively; while letters of credit outstanding under the amended credit agreement were $2.6 million and $2.8 million at June 30, 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 June 30, 2021, the weighted average interest rate on our amended credit agreement was 1.3%, which consisted of $135 million in direct borrowings. 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 six months ended June 30, 2021, our average daily alternative base rate loan balance was $1 million, compared to a balance of $1.7 million for the six months ended June 30, 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 June 30, 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 $7.9 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 June 30, 2021 and December 31, 2020, borrowings under the overdraft facility were Zloty 9 million (approximately $2.4 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 $203.1 million and $394.4 million of receivables during the three months and six months ended June 30, 2021, respectively, and $147.7 million and $297.9 million for the comparable periods in 2020. Receivables presented at financial institutions and not yet sold as of June 30, 2021 and December 31, 2020 were approximately $5 million and $50 million, respectively, and remained in our accounts receivable balance for those periods. All receivables sold were reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale. A charge in the amount of $3 million and $5.7 million related to the sale of receivables was included in selling, general and administrative expense in our consolidated statements of operations for the three months and six months ended June 30, 2021, respectively, and $3.1 million and $5.9 million for the comparable periods in 2020.
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 six months ended June 30, 2021, we repurchased 105,353 shares of our common stock at a total cost of $4.6 million. As of June 30, 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 ending December 31, 2020.
The following table summarizes our contractual commitments as of June 30, 2021 and expiration dates of commitments through 2028 (a)
(In thousands)
2021
2022
2023
2024
2025
2026-2028
Total
Operating lease obligations
$
5,110
$
9,681
$
8,700
$
6,370
$
5,248
$
8,835
$
43,944
Postretirement benefits
16
29
25
25
25
25
145
Severance payments related to restructuring and integration
66
40
1
—
—
—
107
Total commitments
$
5,192
$
9,750
$
8,726
$
6,395
$
5,273
$
8,860
$
44,196
(a)
Indebtedness under our revolving credit facility is not included in the table above as it is reported as a current liability in our consolidated balance sheets. As of June 30, 2021, amounts outstanding under our revolving credit facilities were $135 million.
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
For a detailed discussion on recently issued accounting pronouncements and their impact on our consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements (unaudited).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 June 30, 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 June 30, 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 June 30, 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 and six months ended June 30, 2021, we sold $203.1 million and $394.4 million of receivables, respectively. 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 $2 million and $3.9 million negative impact on our earnings or cash flows during the three months and six months ended June 30, 2021, respectively. 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.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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.
(b)
Changes in Internal Control Over Financial Reporting.
During the quarter ended June 30, 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.
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
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).
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
**
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to the Original Filing shall be deemed to be “furnished” and not “filed.”
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
