Expand Our Product Lines. |
Improve Operating Efficiency and Cost Position. Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates. |
Cash Utilization. We intend to apply any excess cash flow from operations and the management of working capital primarily to reduce our outstanding indebtedness, pay dividends to our shareholders, expand our product lines by investing in new tooling and equipment, grow revenues through potential acquisitions, and repurchase shares of our common stock. |
| • | Environmental, Social & Governance. We support and seek continuous improvement in the pursuit of environmental, social and corporate governance (ESG) practices that embody our culture and what we believe it means to be a good corporate citizen. |
Our Products & Services
Engine Management Segment
Our Engine Management Segment manufactures and distributes a full line of critical components for most years, makes and models of vehicles on the ignition, electrical, emissions, fuel and safety-related systems of motor vehicles.road, including new technologies. Key product categories within our engine management portfolio include: (i) ignition, such as electronic ignition control modules, camshaft and crankshaft position sensors, ignition wires and coils; (ii) electrical, such as switches and relays; (iii) emissions, such as exhaust gas recirculation valves, pressure and temperature sensors and variable valve timing (VVT) components; (iv) fuel, such as mass airflow sensors, fuel pressure sensors, electronic throttle bodies and fuel injectors, including diesel injectors and pumps (new and remanufactured), ignition wires, coils, switches, relays, EGR valves, distributor caps; and rotors,(v) safety-related systems, such as various sensors primarily measuring temperature, pressure and position in numerous vehicle systems (such as camshaft and crankshaft position, fuel pressure, vehicle speed and mass airflow sensors), electronic throttle bodies, variable valve timing (VVT) components, safety-related components, such asincluding anti-lock brake (ABS) sensors,, vehicle speed, tire pressure monitoring (TPMS) sensors and park assist sensors, in addition to many other engine management components.sensors.
We continuously look to expand our product offering to provide our customers with full-line coverage. Weoffering. Recently, we have more recently expanded our offeringdone so by adding late-model coverage for existing product categories, and new product categories in response to new and evolving vehicle technologies, including diesel injectors,control modules, pumps and components, turbochargers, evaporation emission control system components, exhaust gas temperature sensors, active grill shutters, battery current sensors, and Advanced Driver Assistance Systems (ADAS) components, including blind spot detection sensors, cruise control distance sensors, lane departure sensor cameras and park assist backup cameras. For example, our offering includes more than seventy product categories for one of the first mass-produced hybrid electric vehicles (HEVs). As more HEVs enter the aftermarket, we intend to expand our product offering to service this important segment.
Ignition, Emission Control, Fuel & Safety Related System Products. Replacement parts for ignition, emission, fuel and safety related systems accounted for approximately$786.5 million, or 61%, of our consolidated net sales in 2021, $691.7 million, or 61%, of our consolidated net sales in 2020, and $706 million, or 62%, of our consolidated net sales in 2019, approximately $648.3 million, or 59%, of our consolidated net sales in 2018, and approximately $657.3 million, or 59%, of our consolidated net sales in 2017.
New sales opportunities within this category.have also arisen in the United States as a result of government regulations regarding safety and emissions. Legally, automobiles must now comply with emissions standards from the time they were manufactured and, in most states, until the last day they are in use. Emissions laws and fuel economy regulations have had a positive impact on sales of our ignition, emissions control and fuel delivery parts since vehicles failing these laws may require repairs utilizing parts sold by us. Similarly, as government-mandated safety devices, such as anti-lock braking systems and air bags mature, requiring servicing and repair, we anticipate increased sales opportunities for many of our products such as ABS sensors, TPMS sensors and traction control products.
Wire & Cable Products. Wire and cable parts accounted for $151.4 million, or 12%, of our consolidated net sales in 2021, $144 million, or 13%, of our consolidated net sales in 2020, and $143.2 million, or 13%, of our consolidated net sales in 2019. These products include spark plug wire sets, battery cables, pigtails, sockets and a wide range of electrical wire, terminals, connectors and tools for servicing an automobile’s electrical system.
Temperature Control Segment
Our Temperature Control Segment manufactures and distributes a full line of critical components for the temperature control (air conditioning and heating) systems, engine cooling systems, power window accessories and windshield washer systems of motor vehicles. Key product categories within our temperature control portfolio include: air conditioning compressors (new and remanufactured), air conditioning repair kits, clutch assemblies, blower and radiator fan motors (brushless and brushed), filter dryers, evaporators, accumulators, actuators, hose assemblies, thermal expansion devices, heater valves, heater cores, A/C service tools and chemicals, fan assemblies, fan clutches, oil coolers, window lift motors, window regulators and assemblies, and windshield washer pumps.
We continuously look to improve our cost position through strategic transactions with manufacturers in low cost regions. In 2014, we formed a joint venture with Gwo Yng EnterpriseFoshan GWOYNG SMP Vehicle Climate Control & Cooling Products Co., Ltd., a China-based manufacturer ofjoint venture that manufactures light vehicle and heavy duty air conditioning accumulators, filter driers, hose assemblies, and switches; in 2017, we formed a joint venture with Foshan GuangdongFGD SMP Automotive Air ConditioningCompressor Co., Ltd., a China-based manufacturer ofjoint venture that manufactures light vehicle and heavy duty belt driven air conditioning compressors for the automotive aftermarket and the Chinese OE market;compressors; and in 2019, we acquired an approximate 29%a minority interest ownership position in JiangsuFoshan Che Yijia New Energy Technology Co., Ltd., a China-based manufacturer of electric air conditioning compressors for electric vehicles.compressors. We believe that these transactions will enhance our position as a basic low-cost manufacturer and a leading supplier of temperature control parts to the aftermarket, as well as provide us withand allow an opportunity for growth in the China market.OE market, while providing key complementary manufacturing capabilities and synergy opportunities with our other manufacturing facilities. The synchronization and complimentary strategies between our operational and distribution facilities provides a more reliable supply of products, and supports our customers’ needs for consistent and reliable service levels.
Compressors. Compressors accounted for approximately$206.7 million, or 16%, of our consolidated net sales in 2021, $163.1 million, or 14%, of our consolidated net sales in 2020, and $160.5 million, or 14%, of our consolidated net sales in 2019, approximately $148.4 million, or 14%, of our2019. Included in consolidated net sales in 2018, and approximately $148.4 million, or 13%,for the compressor product line is the revenue generated from the sale of our consolidated net sales in 2017.kits.
Other Climate Control Parts. Other climate control parts accounted for approximately$141.7 million, or 11%, of our consolidated net sales in 2021, $118.9 million, or 11%, of our consolidated net sales in 2020, and $117.9 million, or 10%, of our consolidated net sales in 2019, approximately $130 million, or 12%, of our consolidated net sales in 2018, and approximately $130.8 million, or 12%, of our consolidated net sales in 2017.2019.
Financial Information about ourAbout Our Operating Segments
For additional information related to our operating segments, and the disaggregation of operating segment net sales by geographic area, major product group and major sales channel, see Note 2019 “Industry Segment and Geographic Data” and Note 2120 “Net Sales”, respectively, of the Notes to Consolidated Financial Statements in Item 8 of this Report.
Our Brands
We believe that our brands are an important component of our value proposition, and serve to distinguish our premium engine management and temperature control products from those of our competitors. We market and distribute our aftermarket products under our own brands, such as:
Engine Management Products |   | |
Temperature Control Products |   |
We also distribute our products to customers for resale under private labels and the following co-labels:
| Engine Management |  |  |   |
We have also developed our product offering and brand strategies to support our customers’ initiatives to market a tiered product assortment designed to satisfy end-user preferences for quality and value. We believe that this alignment makes us an invaluable business partner to our customers.
Our Customers
We sell our products primarily to:
Automotive aftermarket retailers, such as O’Reilly Automotive, Inc. (“O’Reilly”), |
Automotive aftermarket distributors, including warehouse distributors and program distribution groups, such as Genuine Parts Co. and National Automotive Parts Association (“NAPA”), Auto Value and All Pro/Bumper to Bumper (Aftermarket Auto Parts Alliance, Inc.), Automotive Distribution Network LLC, The National Pronto Association (“Pronto”), Federated Auto Parts Distributors, Inc. (“Federated”), Pronto and Federated’s affiliate, the Automotive Parts Services Group or The Group, and Icahn Automotive Group LLC (doing business as Pep Boys, Auto Plus, AAMCO and Precision Tune Auto Care). |
Original equipment manufacturers and original equipment service part operations, such as General Motors Co., |
Our fivethree largest individual customers accounted for approximately 69%57% of our consolidated net sales in 2019, and approximately 70% of our consolidated net sales in 2018 and 2017.2021. During 2019,2021, O’Reilly, Advance, NAPA and AutoZone accounted for 22%26%, 16%17%, 15% and 11%14% of our consolidated net sales, respectively. Net sales from each of these customers were reported in both our Engine Management and Temperature Control Segments.
Competition
We compete primarily on the basis of product quality, product availability, value-added services, product coverage, order turn-aroundturn‑around time, order fill rate, technical support and price. We believe we differentiate ourselves from our competitors primarily through:
a value‑added, knowledgeable sales force;
continuous product development, engineering & technical advancement;
extensive market leading product coverage in conjunction with market leading brands;
knowledgeable category management, including inventory stocking recommendations for our distributors to get the right parts on the shelf for their marketplace needs;
rigorous product qualification standards to ensure that our parts meet or exceed exacting performance specifications;
sophisticated parts cataloging systems, including catalogs available online through our website and our mobile application;
inventory levels and responsive logistical systems sufficient to meet the critical delivery requirements of customers;
breadth of manufacturing capabilities; and
award-winning marketing programs, sales support and technical training.
We are one of the leading independent manufacturers and distributors serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control. In the Engine Management Segment, we compete with: ACDelco, Delphi Technologies PLC,Aptiv Plc, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., Ltd., Dorman Products, Inc. and several privately-owned companies primarily importing products from Asia. In the Temperature Control Segment, we compete with: ACDelco, MAHLE GmbH, Behr Hella Service GmbH, Denso Corporation, Motorcraft, Sanden International (U.S.A.), Inc., Continental AG, Dorman Products, Inc., and several privately-owned companies.
Sales and Distribution
In the traditional 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 recent years, warehouse distributors have consolidated with other distributors, and an increasing number of distributors own their jobber stores or sell down channel to professional technicians. Retailers are also consolidating with other retailers and have begun to increase their efforts to sell to professional technicians adding additional competition in the “do-it-for-me,” or the professional technician segment of our industry. As automotive parts and systems become more complex, “do-it-yourselfers” are less likely to service their own vehicles and may become more reliant on professional technicians.
In the heavy duty and industrial markets,aftermarket, we sell our products to warehouserecognized distributors and retailers, who buy directly from us and sell directly to fleet operators and repair facilities for use in the repair and maintenance of medium to heavy duty fleet vehicles and owners and operators of heavy duty and industrial equipment.vehicles. We also sell our products to the service parts divisions of heavy duty OEMs for use in production and service of medium todistribution into the independent heavy duty aftermarket.
In the original equipment market we sell our products to manufacturers of automotive, heavy duty truck, construction, agriculture, alternative energy, lawn/garden and powersports/marine vehicles and equipment, as well as construction, agriculturaltheir tier suppliers and specialty vehiclessystem integrators. We also sell and equipment.support the service part divisions of each of our customers.
We sell our products primarily in the United States, with additional sales in Canada, Europe, Asia, Mexico and other Latin American countries. Our sales are substantially denominated in U.S. dollars. For information on revenues and long-lived assets by geographic area, see Note 2019 “Industry Segment and Geographic Data” of the Notes to Consolidated Financial Statements in Item 8 of this report.Report.
Our customers have come to depend on our sales personnel as a reliable source for technical information and to assist with sales to their customers (e.g., jobber stores and professional technicians). In this manner, we direct a significant portion of our sales efforts to our customers’ customers to generate demand for our products, and we believe that the structure of our sales force facilitates these efforts by enabling us to implement our sales and marketing programs uniformly throughout the distribution channel. One of the ways
Another way we generate this demand for our products is through our training program, which offers training seminars to professional automotive technicians. Our training program is accredited by the National Institute for Automotive Service Excellence (ASE) Training Managers Council. Our seminars are taught by ASE certified instructors in real time either in-person or by webinars online and feature in-person training seminars on more than 30 different topics andtopics. We also offer on-demand training webinars online on more than 150 different topics. Through our training program, we typically teach approximately 60,000 technicians annually how to diagnose and repair vehicles equipped with complex systems related to our products, and we have approximately 16,000 technicians who are registered to participate in such sessions through our online platform.
We offer a variety of strategic customer discounts, allowances and incentives to increase customer purchases of our products. For example, we offer cash discounts for paying invoices in accordance with the specified discounted terms of the invoice. We also offer rebates and discounts to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided. We believe these discounts, allowances and incentives are a common practice throughout the automotive aftermarket industry, and we intend to continue to offer them in response to competitive pressures and to strategically support the growth of all our products.
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 controlTemperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories. For example,Ordinarily, a warm summer, as we experienced in 2018, may2021, would increase the demand for our temperature controlTemperature Control products, while a somewhat mild summer, as we experienced in 2017,2019, may lessen such demand. While the COVID-19 pandemic caused large shifts in sales demand between quarters in 2020, our business returned to a more normalized pattern of seasonality and variability in demand of our Temperature Control products in 2021. As such, our working capital typically peaks near the end of the second quarter, as the inventory build-up of air conditioning products was converted to sales, and payments on the receivables associated with such sales were yet to be received. During this period, our working capital requirements were funded by borrowing from our revolving credit facility.
Working Capital and Inventory Management
Automotive aftermarket companies have been under increasing pressure to provide broad SKU (stock keeping unit) coverage due to parts and brand proliferation. In response to this, we have made, and continue to make, changes to our inventory management system designed to reduce inventory requirements. We have a pack-to-orderpack‑to‑order distribution system, which permits us to retain slow moving items in a bulk storage state until an order for a specific branded part is received. This system reduces the volume of a given part in inventory. We also expanded our inventory management system to improve inventory deployment, enhance our collaboration with customers on forecasts and inventory assortments, and further integrate our supply chain both to customers and suppliers.
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.
Our profitability and working capital requirements are seasonal due to our sales mix of temperature controlTemperature Control products. Our working capital requirements typically peak near the end of the second quarter, as the inventory build-upbuild‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. These increased working capital requirements are funded by borrowings from our revolving credit facility.
Production and Engineering
An important component of our business strategy is to invest the resources necessary to expand our technical capabilities and bring more product manufacturing in-house. We engineer, tool and manufacture many of the products that we offer for sale and the components used in the assembly of those products, and we continue to evaluate opportunities to bring new product categories in-house. For example, we perform our own plastic molding operations, stamping and machining operations, wire extrusion, automated electronics assembly and a wide variety of other processes. In the case of remanufactured components, we conduct our own teardown, diagnostics and rebuilding for air conditioning compressors, diesel injectors, and diesel pumps. We have found this level of vertical integration, in combination with our manufacturing footprint in low cost regions, provides advantages in terms of cost, quality and availability.
Suppliers
We source materials through a global network of suppliers to ensure a consistent, high quality and low cost supply of materials and key components for our product lines. As a result of the breadth of our product offering, we are not dependent on any single raw material.
The principal raw materials purchased by us consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), steel magnets, laminations, tubes and shafts, stamped steel parts, copper wire, stainless steel coils and rods, aluminum coils, fittings, rods, cast aluminum parts, lead, steel roller bearings, rubber molding compound, thermo-setthermo‑set and thermo plastic molding powders, and chemicals. Additionally, we use components and cores (used parts) in our remanufacturing processes for air conditioning compressors, diesel injectors, and diesel pumps, and turbo chargers.pumps.
In the case of cores for air conditioning compressors, diesel injectors, and diesel pumps, and turbo chargers, we obtain them either from exchanges with customers who return cores subsequent to purchasing remanufactured parts or through direct purchases from a network of core brokers. In addition, we acquire certain materials by purchasing products that are resold into the market, particularly by OEM sources and other domestic and foreign suppliers.
We believe there is an adequate supply of primary raw materials and cores; however, there can be no assurance overdisruptions in the long term thatglobal economy in 2020 and the availability oflingering impacts into 2021 have impeded global supply chains, resulting in longer lead times and delays in procuring component parts and raw materials, and components orinflationary cost increases in commodity prices will not materially affectcertain 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, which began in the fourth quarter of 2021. We believe that we have also benefited from our geographically diversified manufacturing footprint and our strategy to bring more product manufacturing in-house, especially with respect to product availability and fill rates.
Environmental, Social and Governance (ESG) and Human Capital
Our Culture
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. These values also serve as the foundation for our increased focus on many important environmental, social and governance issues, such as environmental stewardship and our efforts to identify and implement practices that reduce our environmental impact while achieving our business goals; our attention to diversity, equity and inclusion, employee development, retention, and health and safety; and our community engagement initiatives, to name a few. We have made significant strides building awareness of the environmental impact of our operations, and challenging ourselves to reduce our impact by reducing our consumption of energy and generation of waste, as well as enhancing our recycling efforts.
Environmental Stewardship
We have made significant strides building awareness of the environmental impact of our operations, and challenging ourselves to reduce our impact by reducing our consumption of energy, including electricity, natural gas and propane; reducing our generation of waste and increasing the percentage of waste recycled; reducing our use of water and reducing our Scope 1 and Scope 2 greenhouse gas emissions.
We are also focused on several initiatives that are intended to promote a more environmentally-friendly car parc. Through our remanufacturing processes, we divert certain types of used automotive products from traditional waste streams and reprocess them for their original purpose. We remanufacture key product categories within our product portfolio, such as air conditioning compressors, diesel injectors and diesel pumps, resulting in the production of premium automotive products within these categories through processes that we believe save energy and reduce waste. We also bring to market emission control system products, which are designed to reduce emissions and improve fuel economy during vehicle operation, and alternative energy products, which utilize cleaner burning fuels or resultsare designed for electric or hybrid electric vehicles.
Human Capital
We believe that our commitment to our employees is critical to our continued success, and has led to high employee satisfaction and low employee turnover. To facilitate talent attraction and retention, we strive to have a diverse, inclusive and safe workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits and health and wellness programs, and by programs that build connections between our employees and their communities. Our employees share our corporate values of operations.integrity, common decency and respect of others, values which have been established since our company was founded.
As of December 31, 2019,2021, we employed approximately 4,2005,000 people, with 1,8002,000 people in the United States and 2,4003,000 people in Mexico, Canada, Poland, the U.K., Germany, Hungary, China, Hong Kong and Taiwan. Of the 4,2005,000 people employed, approximately 2,2002,700 people are production employees. We operate primarily in non-unionnon‑union facilities and have binding labor agreements with employees at other unionized facilities. We have approximately 7680 production employees in Edwardsville, Kansas who are covered by a contract with The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) that expires in August 2022. We also have approximately 1,2001,500 employees in Mexico who are covered under union agreements negotiated at various intervals. For clarification, the employee numbers described above exclude the employees of our joint venture operations.
Diversity, Equity and Inclusion. We believe that a diverse workforce is critical to our success, and we continue to focus on the hiring, retention and advancement of women and underrepresented populations. Our recent efforts have been focused in three areas: inspiring innovation through an inclusive and diverse culture; expanding our efforts to recruit and hire world-class diverse talent; and identifying strategic partners to accelerate our inclusion and diversity programs. Over the last 5 years, approximately 50% of our hires and promotions have been women or racially diverse individuals. To further our commitment to diversity, in 2021, we established a Diversity, Equity and Inclusion steering committee to develop key structures within our organization to promote equality, inclusion and awareness among our employees.
Health, Safety and Wellness.The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees shareand their families with access to a variety of innovative, flexible and convenient health and wellness programs, including benefits that provide protection and security so they can have peace of mind concerning events that may require time away from work, or that impact their financial well-being; that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and encourage engagement in healthy behaviors; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees and which comply with government regulations. These include providing employees with flexible working arrangements, including where appropriate the ability to work from home, and implementing a number of safety policies and practices at all of our facilities.
Compensation and Benefits. We provide competitive compensation and benefits programs that meet the needs of our employees. In addition to wages and salaries, these programs include annual cash bonuses, stock awards, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, and employee assistance programs.
Talent Development. We invest significant resources to develop the talent of our high potential employees. We deliver numerous training opportunities, provide rotational assignment opportunities, have expanded our focus on continuous learning and development, and implemented methodologies to manage performance, provide feedback and develop talent.
Our talent development programs are designed to provide employees with the resources they need to help achieve their career goals, build management skills and lead their organizations. We provide a series of employee workshops that support professional growth and development. Our annual review process encourages manager and employee conversations throughout the year to enhance growth and development.
Social Engagement and Community Service
We believe that building connections between our employees, their families and our communities creates a more meaningful, fulfilling and enjoyable workplace. Through our SMP Cares® initiative, we sponsor corporate giving and volunteering programs to encourage our employees to connect with our local communities and engage in the local causes that they are passionate about.
Our volunteering efforts include organizing blood drives with the American Red Cross, and fundraising for the March of Dimes, United Way, the Salvation Army, and many others. In 2021, we collaborated with our employees to donate over $50,000 to local community organizations, hospitals, schools, shelters, and universities. We are a lifetime trustee of the University of the Aftermarket Foundation (“UAF”), and we donate $10,000 annually to fund scholarships to support the next generation of technicians and automotive professionals, which we believe is an important way to sustain and give back to our industry. We are also proud to sponsor annual scholarship contests for future automotive technicians, including our Women in Auto Care scholarship that aims to empower women entering the automotive industry. Since our first scholarship contest in 2015, we have awarded $265,000 in scholarships. We have continued to expand our scholarship program, and in 2021, we awarded ten students each with a $5,000 scholarship. We continue to encourage participation in these initiatives as we believe they are essential in the support of our core values.
Governance
Our commitment to ESG is spearheaded by our Board of Directors. Specifically, our Nominating and Corporate Governance Committee established an ESG steering committee among our executive officers including our Chief Executive Officer & President, Chief Legal Officer & Secretary, Chief Human Resources Officer, and Senior Vice President of North American Operations. This ESG steering committee is tasked with developing specific strategies to ensure that our operations adhere to our corporate governance values and advance our ESG objectives. The multidisciplinary approach of ethics, integrity, common decencyour steering committee allows it to leverage our expertise in operations, engineering, supply chain, human capital management, finance, legal and respect of others, values which have been established sinceother fields to push our company was founded.ESG initiatives ahead from all angles.
Available Information
We are a New York corporation founded in 1919. Our principal executive offices are located at 37-1837‑18 Northern Boulevard, Long Island City, New York 11101, and our main telephone number at that location is (718) 392-0200.392‑0200. Our Internet address is www.smpcorp.com. We provide a link to reports that we have filed with the SEC. However, for those persons that make a request in writing or by e-mail (financial@smpcorp.com), we will provide free of charge our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports and other information are also available, free of charge, at www.sec.gov.
You should carefully consider the risks described below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business and results of operations. If any of the stated risks actually occur, they could materially and adversely affect our business, financial condition or operating results.
Risks Related to Our Operations
We depend on a limited number of key customers, and the loss of any such customer, or a significant reduction in purchases by such customer, could have a material adverse effect on our business, financial condition and results of operations.
Our fivethree largest individual customers accounted for approximately 69%57% of our consolidated net sales in 2019, and approximately 70% of our consolidated net sales in 2018 and 2017.2021. During 2019,2021, O’Reilly, Advance, NAPA and AutoZone accounted for 22%26%, 16%, 15%17% and 11%14% of our consolidated net sales, respectively. The loss of one or more of these customers or, a significant reduction in purchases of our products from any one of them, such as the decision, announced in December 2020, of a large retail customer to pursue a private brand strategy for its engine management product line, could have a materially adverse impact on our business, financial condition and results of operations. In addition, any consolidation among our key customers may further increase our customer concentration risk.
Also, we do not typically enter into long-term agreements with any of our customers. Instead, we enter into a number of purchase order commitments with our customers, based on their current or projected needs. We have in the past, and may in the future, lose customers or lose a particular product line of a customer due to the highly competitive conditions in the automotive aftermarket industry, including pricing pressures, consolidation of customers, customer initiatives to buy direct from foreign suppliers and/or to pursue a private brand strategy, or other business considerations. A decision by any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to materially decrease the amount of products purchased from us, to change their manner of doing business with us, or to stop doing business with us, including a decision to source products directly from a low cost region such as Asia, could have a material adverse effect on our business, financial condition and results of operations.
Because our sales are concentrated, and the market in which we operate is very competitive, we are under ongoing pressure from our customers to offer lower prices, extend payment terms, increase marketing allowances and other terms more favorable to these customers. These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers, and significantly increased our working capital needs.
Our industry is highly competitive, and our success depends on our ability to compete with suppliers of automotive aftermarket products, some of which may have substantially greater financial, marketing and other resources than we do.
The automotive aftermarket industry is highly competitive, and our success depends on our ability to compete with domestic and international suppliers of automotive aftermarket products. In the Engine Management Segment, we compete with: ACDelco, Delphi Technologies PLC,Aptiv Plc, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., LTD., Dorman Products, Inc. and several privately-owned companies primarily importing products from Asia. In the Temperature Control Segment, we compete with: ACDelco, MAHLE GmbH, Behr Hella Service GmbH, Denso Corporation, Motorcraft, Sanden International (U.S.A.), Inc., Continental AG, Dorman Products, Inc., and several privately-owned companies. In addition, automobile manufacturers supply many of the replacement parts we sell.
Some of our competitors may have larger customer bases and significantly greater financial, technical and marketing resources than we do. These factors may allow our competitors to:
respond more quickly than we can to new or emerging technologies and changes in customer requirements by devoting greater resources than we can to the development, promotion and sale of automotive products and services;
engage in more extensive research and development;
sell products at a lower price than we do;
undertake more extensive marketing campaigns; and
make more attractive offers to existing and potential customers and strategic partners.
We cannot assure you that our competitors will not develop products or services that are equal or superior to our products or that achieve greater market acceptance than our products or that in the future other companies involved in the automotive aftermarket industry will not expand their operations into product lines produced and sold by us. We also cannot assure you that additional entrants will not enter the automotive aftermarket industry or that companies in the aftermarket industry will not consolidate. Any such competitive pressures could cause us to lose market share or could result in significant price decreases and could have a material adverse effect upon our business, financial condition and results of operations.
There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure.
There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure. This is the result of a number of industry trends, including the impact of offshore suppliers in the marketplace (particularly in China) which do not have the same infrastructure costs as we do, the consolidated purchasing power of large customers, and actions taken by some of our competitors in an effort to ‘‘win over’’ new business. We have in the past reduced prices to remain competitive and may have to do so again in the future. Price reductions have impacted our sales and profit margins and are expected tomay do so in the future. Our future profitability will depend in part upon our ability to respond to changes in product and distribution channel mix, to continue to improve our manufacturing efficiencies, to generate cost reductions, including reductions in the cost of components purchased from outside suppliers, and to maintain a cost structure that will enable us to offer competitive prices.prices, and to pass through higher distribution, raw materials and labor costs to our customers. Our inability to maintain a competitive cost structure could have a material adverse effect on our business, financial condition and results of operations.
Our business is seasonal and is subject to substantial quarterly fluctuations, which impact our quarterly performance and working capital requirements.
Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and with 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. For example,Ordinarily, a warm summer, as we experienced in 2018, may2020, would increase the demand for our temperature controlTemperature Control products, while a somewhat mild summer, as we experienced in 2017,2019, may lessen such demand. AsWhile the COVID-19 pandemic caused large shifts in sales demand between quarters in 2020, our business has returned to a resultmore normalized pattern of this seasonality and variability in demand of our Temperature Control products in 2021. As such, our working capital requirements peakpeaked near the end of the second quarter, as the inventory build-upbuild‑up of air conditioning products iswas converted to sales and payments on the receivables associated with such sales havewere yet to be received. During this period, our working capital requirements are typicallywere funded by borrowing from our revolving credit facility.
Climate-related physical risks, such as changes to weather patterns and conditions may also impact the pattern of seasonality and variability in demand for our Temperature Control products discussed above, which may impact our quarterly performance and working capital requirements.
We may incur material losses and significant costs as a result of warranty-related returns by our customers in excess of anticipated amounts.
Our products are required to meet rigorous standards imposed by our customers and our industry. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship, failure to meet industry published specifications and/or the result of installation error. In the event that there are material deficiencies or defects in the design and manufacture of our products and/or installation error, the affected products may be subject to warranty returns and/or product recalls. Although we maintain a comprehensive quality control program, we cannot give any assurance that our products will not suffer from defects or other deficiencies or that we will not experience material warranty returns or product recalls in the future.
We accrue for warranty returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for warranty returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. We have in the past incurred, and may in the future incur, material losses and significant costs as a result of our customers returning products to us for warranty-related issues in excess of anticipated amounts. Deficiencies or defects in our products in the future may result in warranty returns and product recalls in excess of anticipated amounts and may have a material adverse effect on our business, financial condition and results of operations.
Our profitability may be materially adversely affected as a result of overstock inventory-relatedinventory related returns by our customers in excess of anticipated amounts.
We permit overstock returns of inventory that may be either new or non-defective or non-obsolete but that we believe we can re-sell. Customers are generally limited to returning overstocked inventory according to a specified percentage of their annual purchases from us. In addition, a customer’s annual allowance cannot be carried forward to the upcoming year.
We accrue for overstock returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for overstock returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. To the extent that overstocked returns are materially in excess of our projections, our business, financial condition and results of operations may be materially adversely affected.
We may be materially adversely affected by asbestos claims arising from products sold by our former brake business, as well as by other product liability claims.
In 1986, we acquired a brake business, which we subsequently sold in March 1998. 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 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. We do not have insurance coverage for the indemnity and defense costs associated with the claims we face.
At December 31, 2019, approximately 1,5502021, 1,554 cases were outstanding for which we may be responsible for any related liabilities. Since inception in September 2001 through December 31, 2019,2021, the amounts paid for settled claims areand awards of asbestos-related damages, including interest, were approximately $30.9$53.8 million. During 2018, we were a defendant in an asbestos liability case in California, in which we were found liable for $7.6 million in compensatory damages. We are pursuing all rights of appeal of this case. A substantial increase in the number of new claims, or increased settlement payments, or awards of asbestos-related damages, as well as additional findings in the California case, could have a material adverse effect on our business, financial condition and results of operations.
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, 2019.2021. Based upon the results of the August 31, 20192021 actuarial study, and all other available information to us, we increased our asbestos liability to $52 million, the low end of the range, and recorded an incremental pre-tax provision of $9.7$5.3 million in earnings (loss) from discontinued operations in the accompanying statement of operations. The results of the August 31, 20192021 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 $52$60.9 million to $90.6$100.2 million for the period through 2064.2065. Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the August 31, 2021 study, to range from $50.6$49.4 million to $85.2 million.$99.3 million for the period through 2065.
Given the uncertainties associated with projecting asbestos-related matters into the future and other factors outside our control, we cannot give any assurance that significant increases in the number of claims filed against us will not occur, that awards of asbestos-related damages or settlement awards will not exceed the amount we have in reserve, or that additional provisions will not be required. Management will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional reserves and provisions may be necessary. We plan on performing an annual actuarial analysis 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.
In addition to asbestos-related claims, our product sales entail the risk of involvement in other product liability actions. We maintain product liability insurance coverage, but we cannot give any assurance that current or future policy limits will be sufficient to cover all possible liabilities. Further, we can give no assurance that adequate product liability insurance will continue to be available to us in the future or that such insurance may be maintained at a reasonable cost to us. In the event of a successful product liability claim against us, a lack or insufficiency of insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to achieve the benefits that we expect from our cost savings initiatives.
We expect to realize the continued benefit of discretionary cost reduction measures implemented in 2020, in response to the COVID-19 pandemic, and carried over into 2021, along with the continued cost savings as a result of variousanticipated from several ongoing and/or recently completed initiatives, including the closing of our Grapevine, Texas facility; the closing of our recently acquired wire set assembly operation in Nogales, Mexico; the closing of our Orlando, Florida facility;restructuring and the moving of production to our domestic and international facilities in Mexico and Poland.integration initiatives. Due to factors outside our control, such as the adoption or modification of domestic and foreign laws, regulations or policies, we may not be able to achieve the level of benefits that we expect to realize in these initiatives, or we may not be able to realize these benefits within the time frames we currently expect. Our ability to achieve any anticipated cost savings could be affected by a number of factors such as changes in the amount, timing and character of charges related to such initiatives, or a substantial delay in the completion of such initiatives. Failure to achieve the benefits of our cost saving initiatives could have a material adverse effect on us. Our cost savings is also predicated upon maintaining our sales levels.
Severe weather, natural disasters and other disruptions could adversely impact our operations at our manufacturing and distribution facilities.
Severe weather conditions and natural disasters, such as hurricanes, floodstornados, earthquakes and tornados,floods, could damage our properties and effect our operations, particularly our major manufacturing and distribution operations at foreign facilities in Canada, Mexico, Poland, Germany and Poland,Hungary and at our domestic facilities in Florida, Indiana, Kansas, South Carolina, Texas, Virginia, and Virginia. Wisconsin. In February 2021, our operations in Texas were disrupted due to a severe winter storm that resulted in power grid failure, blackouts and the tragic loss of life across the State of Texas. Moreover, global climate change may cause these natural disasters to occur more frequently and/or with more intense effects, which could prevent us from, or cause delays in our ability to, manufacture and deliver products to our customers, and/or cause us to incur additional costs.
In addition, our business and operations could be materially adversely affected in the event of other serious disruptions at these facilities due to fire, electrical blackouts, power losses, telecommunications failures, terrorist attack or similar events. Any of these occurrences could impair our ability to adequately manufacture or supply our customers due to all or a significant portion of our equipment or inventory being damaged. We may not be able to effectively shift the manufacture or delivery of products to our customers if one or more of our manufacturing or distribution facilities are significantly disrupted.
Disruptions in the supply of raw materials, manufactured components, or equipment fromcould materially and adversely affect our suppliers.operations and cause us to incur significant cost increases.
Additionally, supplier non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. Our suppliers’ ability to supply products to us is also subject to a number of risks, including the availability and cost of raw materials, the destruction of their facilities, or work stoppages, cyber attacks on their information technology systems or other limitations on their business operations, which could be caused by any number of factors, such as labor disruptions, financial distress, severe weather conditions and natural disasters, social unrest, economic and political instability, and public health crises, including the occurrence of a contagious disease or illness, such as the novel coronavirus,COVID-19 pandemic, war, terrorism or other catastrophic events. In addition, our failure to promptly pay, or order sufficient quantities of inventory from our suppliers may increase the cost of products we purchase or may lead to suppliers refusing to sell products to us at all. Our efforts to protect against and to minimize these risks may not always be effective.
Our operations could be adversely affected by interruptions or breaches in the security of our computer and information technology systems.
We rely on information technology systems throughout our organization to conduct day-to-day business operations, including the management of our supply chain and our purchasing, receiving and distribution functions. We also routinely use our information technology systems to send, receive, store, access and use sensitive data relating to our Company and its employees, customers, suppliers, and business partners, including intellectual property, proprietary business information, and other sensitive materials. Additionally, we rely on our information technology systems to enable many of our employees to work remotely as a result of new policies and practices enacted by us in response to the COVID-19 pandemic.
Our information technology systems have been subject to cyber threats, including attempts to hack into our network and computer viruses. Such hacking attempts and computer viruses have not significantly impacted or interrupted our business operations. While we implement security measures designed to prevent and mitigate the risk of cyber attacks, our information technology systems, and the systems of our customers, suppliers and business partners, may continue to be vulnerable to computer viruses, attacks by hackers, or unauthorized access caused by employee error or malfeasance. The exploitation of any such vulnerability could unexpectedly compromise our information security, or the security of our customers, suppliers and other business partners. Furthermore, because the techniques used to carry out cyber attacks change frequently and in many instances are not recognized until after they are used against a target, we may be unable to anticipate these changes or implement adequate preventative measures. If our information technology systems, or the systems of our customers, suppliers or business partners, are subject to cyber attacks, such as those involving significant or extensive system interruptions, sabotage, computer viruses or unauthorized access, we could experience disruptions to our business operations and incur substantial remediation costs, which could have a material adverse effect on our business, financial condition or results of operations.
The transition risks associated with global climate change may cause us to incur significant costs.
In addition to the physical risks described above, global climate change has brought about certain risks associated with the anticipated transition to a lower-carbon economy, such as regulatory changes affecting vehicle emissions and fuel efficiency requirements, technological changes in vehicle architectures, changes in consumer demand, carbon taxes, greenhouse gas emissions tracking, and regulation of greenhouse gas emissions from certain sources. Any regulatory changes aimed to reduce or eliminate greenhouse gas emissions may require us to incur increased operating costs, such as to purchase and operate emissions control systems or other such technologies to comply with applicable regulations or reporting requirements. These regulations, as well as shifts in consumer demand due to public awareness and concern of climate change, could affect the timing and scope of their proliferation and may also adversely impact our sales of products designed for the internal combustion engines. As we monitor the rapid developments in this area, we may be required to adjust our business strategy to address the various transition risks posed by climate change.
Failure to maintain the value of our brands could have an adverse effect on our reputation, cause us to incur significant costs and negatively impact our business.
Our brands are an important component of our value proposition, and serve to distinguish our premium engine management and temperature control products from those of our competitors. We believe that our success depends, in part, on maintaining and enhancing the value of our brands and executing our brand strategies, which are designed to drive end-user demand for our products and make us a valued business partner to our customers through the support of their marketing initiatives. A decline in the reputation of our brands as a result of events, such as deficiencies or defects in the design or manufacture of our products, or from legal proceedings, product recalls or warranty claims resulting from such deficiencies or defects, may harm our reputation as a manufacturer and distributor of premium automotive parts, reduce demand for our products and adversely affect our business.
Risks Related to Liquidity
We are exposed to risks related to our receivables supply chain financing arrangements.
We are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable without recourse to such customers’ financial institutions. 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 a reference rate for the LIBOR rate, as it is a componentpurpose of determining the discount rate applicable to each arrangement.on the sale of the underlying trade accounts receivable. If the LIBORreference 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.
Increasing our indebtedness could negatively affect our financial health.
We have an existinga senior secured revolving bank credit facility of $250 million (with an additional $50 million accordion feature) with JPMorgan Chase Bank, N.A., as agent, and a syndicate of lenders, which we refer to throughout this Report as our revolving credit facility. As of December 31, 2019,2021, our total outstanding indebtedness was $57$128.4 million, of which amount $52.5$125.3 million of outstanding indebtedness and approximately $194.3$122.1 million of availability was attributable to this revolving credit facility. AnyThe significant increase in our indebtedness could could:
increase our vulnerabilityborrowing costs;
limit our ability to obtain additional financing or borrow additional funds;
require that a substantial portion of our cash flow from operations be used to pay principal and interest in our indebtedness, instead of funding working capital, capital expenditures, acquisitions, dividends, stock repurchases, or other general adverse economic and industry conditions and corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.operate; and
increase our vulnerability to general adverse economic and industry conditions.
Availability under our revolving credit facility is based on a formula of eligible accounts receivable, eligible drafts presented to financial institutions under our supply chain financing arrangements and eligible inventory. 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.
In addition, we have granted the lenders under our revolving credit facility a first priority security interest in substantially all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries. We have also pledged shares of stock in our subsidiaries to those lenders. If we default on any of our indebtedness, or if we are unable to obtain necessary liquidity, our business could be adversely affected.
We may not be able to generate the significant amount of cash needed to servicesatisfy our indebtedness and fund our future operations.obligations or maintain sufficient liquidity through borrowing capacities.
Our ability either to make payments on or to refinance our indebtedness, or to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future. Our ability to generate cash is in part subject to:
general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control;
the ability of any ofour customers to pay timely the amounts we have billed; and
our ability to sell receivables under supply chain financing arrangements.
The foregoing factors could result in reduced cash flow, which could have a material adverse effect on us. When cash generated by earnings is not sufficient for the Company’s liquidity needs, the Company seeks external financing. Our access to funding sources in amounts adequate to finance our activities on terms that are beneficial to us could be impaired by factors that affect us specifically or the economy generally. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing costs could increase. A significant downgrade in the company’s credit ratings could increase its borrowing costs and limit access to capital.
Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility, inclusive of the utilization of the $50 million accordion feature in the 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, disruptions in the supply chain that may lead to a further increase in inventories to support our customers, and significant inflationary cost increases in raw materials, labor and transportation, and that there will be no material adverse developments in our business, liquidity or capital requirements. Because borrowings under the revolving credit facility are secured by substantially all of our assets, including accounts receivable, 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. If we are unable to servicefund our indebtedness,operations through earnings or external financing, we will be forced to adopt an alternative strategy that may include actions such as:
deferring, reducing or eliminating future cash dividends;
reducing or delaying capital expenditures or restructuring activities;
reducing or delaying research and development efforts;
selling assets;
deferring or refraining from pursuing certain strategic initiatives and acquisitions;
refinancing our indebtedness; and
seeking additional funding.
We cannot assure you that, if material adverse developments in our business, liquidity or capital requirements should occur, 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.
The proposed phase-out of the London Interbank Offered Rate (LIBOR) could materially impact our borrowing costs under our secured revolving credit facility or the utility of our supply chain financing arrangements.
Our secured revolving credit facility and certain of our supply chain financing arrangements utilize LIBOR for the purpose of determining the interest rate on certain borrowings or the discount rate on the sale of trade accounts receivable, respectively. In July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that, after the end of 2021, it would no longer compel contributing banks to make rate submissions to the ICE Benchmark Administration (the “IBA”) for the purposes of setting LIBOR. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended by the IBA through June 2023; however, in early 2021, the United States Federal Reserve Board and other regulatory bodies issued guidance encouraging banks and other financial market participants to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate as soon as practicable and in any event no later than December 31, 2021. As a result, it is possible that commencing in 2022, LIBOR maywill likely cease to be available or may cease to be deemed an appropriate reference rate, and we maywill likely need to amend our credit agreement and supply chain financing arrangements to utilize an alternative reference rate based on the then prevailing market convention at the time. Although we do not believe that the proposed phase-out of LIBOR will materially impact our business, financial condition or results of operations, we can provide no assurances that any such alternative reference rate will be similar to LIBOR, or produce the same value or economic equivalence of LIBOR, or have the same volume or liquidity as LIBOR prior to its discontinuance.
Risks Related to External Factors
Our business, results of operations and financial condition could be materially adversely affected by the effects of widespread public health crises, including the novel coronavirus (COVID-19) pandemic, that are beyond our control.
The global outbreak of the novel coronavirus (COVID-19) pandemic has created significant volatility, uncertainty and economic disruption in many countries in which we operate, including the United States, Mexico, Canada, Poland, Germany, Hungary and China, and could, in the future, have a material adverse effect on our business, results of operations and financial condition. Ultimately, the duration and severity of the pandemic may vary depending on the characteristics of the virus and the public health response; therefore, the nature and extent of its impact on our business and operations may be uncertain and beyond our control. Customer demand for our products and customer preferences regarding product mix and distribution channels could be impacted as a result of the COVID-19 pandemic, and significant uncertainty exists with respect to the potential future impact of the pandemic as well as a deterioration of general economic conditions, including rising inflation, disruptions in the supply chain and a possible national or global recession.
If customer demand were to decrease in future periods, or if customer preferences regarding product mix and distribution channels were to change, we may be required to adjust and reduce production volumes and implement cost reduction and cash preservation initiatives, including potential reductions in capital expenditures and employee furloughs, which could have a material adverse impact on our business, results of operations and financial condition.
In certain countries in which we operate, national, state and local governments implemented a variety of measures in 2020 in response to the COVID-19 pandemic, including by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), restricting or limiting the operations of businesses deemed to be non-essential, and imposing travel restrictions on individuals, including restrictions requiring individuals to stay at their place of residence except to perform certain activities deemed to be essential. Many of these restrictions have been eased, however, there can be no guarantee that they will not be implemented in the future. As we were deemed to be an essential business, throughout the pandemic we have been able to continue to perform, with certain modifications, all of the material operations at all of our principal facilities, however, we can provide no assurances that we will be able to continue to perform such operations in the future without disruption, such as temporary closures, as a result of new or modifications to existing governmental measures in response to the pandemic. Any restrictions or limitations on our ability to perform such operations in the future without disruption, such as temporary closures, as a result of governmental measures in response to the pandemic could have a material adverse effect on our business, results of operations and financial condition.
Furthermore, the COVID-19 pandemic could have a material adverse effect on the business, operations and financial condition of our customers, suppliers and other supply chain partners as a result of the governmental measures described above, disruptions to their business and operations for reasons similar to those described above, and their ability to manage and mitigate the adverse effects of these and other risks unique to their business and operations that may arise as a result of the pandemic.
We conduct our manufacturing and distribution operations on a worldwide basis and are subject to risks associated with doing business outside the United States.
We have manufacturing and distribution facilities in many countries, including Canada, Mexico, Poland, MexicoGermany and China, and increasingHungary, as well as a joint-venture in China. Increasing our manufacturing footprint in low cost regions is an important element of our strategy. There are a number of risks associated with doing business internationally, including: (a) exposure to local economic and political conditions; (b) social unrest such as risks of terrorism or other hostilities; (c) currency exchange rate fluctuations and currency controls; (d) the effect of potential changes in U.S. trade policy and international trade agreements; and (e) the potential for shortages of trained labor.
In particular, historically there has been social unrest in Hong Kong and Mexico and any recurrence, or increased violence in or around our facilities in such countries could be disruptive to our business operations at such facilities, or present risks to our employees who may be directly affected by the violence and may result in a decision by them to relocate from the area, or make it difficult for us to recruit or retain talented employees at such facilities.
Furthermore, changes in U.S. trade policy, particularly as it relates to China, have resulted in the assessment of increased tariffs on goods that we import into the United States, and have caused uncertainty about the future of free trade generally. We benefit from free trade agreements, such as the North American Free Trade Agreement (NAFTA) and its successor agreement, the U.S.-Mexico-Canada Agreement (USMCA). The repeal or modification of NAFTA or the USMCA or further increases to tariffs on goods imported into the United States could increase our costs to source materials, component parts and finished goods from other countries. The likelihood of such occurrences and their potential effect on us is unpredictable and may vary from country to country. Any such occurrences could be harmful to our business and our financial results.
We may incur liabilities under government regulations and environmental laws, which may have a material adverse effect on our business, financial condition and results of operations.
Domestic and foreign political developments and government regulationslaws and policiesregulations directly affect automotive consumer products in the United States and abroad. Regulations and policies relating to over-the-highway vehicles include standards established byIn the United States, Department of Transportation for motorthese laws and regulations include standards relating to vehicle safety, fuel economy and emissions.emissions, among others. Furthermore, increased public awareness and concern regarding climate change may result in new laws and regulations designed to reduce or mitigate the effects of greenhouse gas emissions or otherwise effect the transition to a lower-carbon economy. The modification of existing laws, regulations or policies, or the adoption of new laws, regulations or policies could have a material adverse effect on our business, financial condition and results of operations.
Our operations and properties are subject to a wide variety of increasingly complex and stringent federal, state, local and international laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of materials, substances and wastes, the remediation of contaminated soil and groundwater and the health and safety of employees. Such environmental laws, including but not limited to those under the Comprehensive Environmental Response Compensation & Liability Act, may impose joint and several liability and may apply to conditions at properties presently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors have been sent or otherwise come to be located.
The nature of our operations exposes us to the risk of claims with respect to such matters, and we can give no assurance that violations of such laws have not occurred or will not occur or that material costs or liabilities will not be incurred in connection with such claims. We are currently monitoring our environmental remediation efforts at one of our facilities and our reserve balance related to the environmental clean-up at this facility is $1.7$1.5 million at December 31, 2019.2021. The environmental testing and any remediation costs at such facility may be covered by several insurance policies, although we can give no assurance that our insurance will cover any environmental remediation claims. We also maintain insurance to cover our existing U.S. and Canadian facilities. We can give no assurance that the future cost of compliance with existing environmental laws and the liability for known environmental claims pursuant to such environmental laws will not give rise to additional significant expenditures or liabilities that would be material to us. In addition, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, state or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations.
Our future performance may be materially adversely affected by changes in technologies and improvements in the quality of new vehicle parts.
If we do not respond appropriately to changes in automotive technologies, such as the adoption of new technologies and systems to make traditional, ICE vehicles powered by fuel cellsmore efficient, or electricity,the adoption of electric or hybrid electric vehicle architectures, we could negatively affect sales to our aftermarket customers. These factors could result inexperience less demand for our products thereby causing a decline in our results of operations or deterioration in our business and financial condition, and we may have a material adverse effect on our long-term performance.
In addition, the size of the automobile replacement parts market depends, in part, upon the growth in number of vehicles on the road, increase in average vehicle age, change in total miles driven per year, new or modified environmental and vehicle safety regulations, including fuel-efficiencyfuel economy and emissions reduction standards, increase in pricing of new cars and new car quality and related warranties. The automobile replacement parts market has been negatively impacted by the fact that the quality of more recent automotive vehicles and their component parts (and related warranties) has improved, thereby lengthening the repair cycle. Generally, if parts last longer, there will be less demand for our products and the average useful life of automobile parts has been steadily increasing in recent years due to innovations in products and technology. In addition, the introduction by original equipment manufacturers of increased warranty and maintenance initiatives has the potential to decrease the demand for our products. When proper maintenance and repair procedures are followed, newer air conditioning (A/C) systems in particular are less prone to leak resulting in fewer A/C system repairs. These factors could have a material adverse effect on our business, financial condition and results of operations.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
We maintain our executive offices in Long Island City, New York. The table below describes our principal facilities as of December 31, 2019.2021.
| Location | State or Country | Principal Business Activity | Approx. Square Feet | Owned or Expiration Date of Lease | State or Country | Principal Business Activity | Approx. Square Feet | Owned or Expiration Date of Lease | ||||||||
| Engine Management | Engine Management | |||||||||||||||
| Ft. Lauderdale | FL | Distribution | 23,300 | Owned | FL | Distribution | 23,300 | Owned | ||||||||
| Ft. Lauderdale | FL | Distribution | 30,000 | Owned | FL | Distribution | 30,000 | Owned | ||||||||
| Mishawaka | IN | Manufacturing | 153,100 | Owned | IN | Manufacturing | 153,100 | Owned | ||||||||
| Edwardsville | KS | Distribution | 363,500 | Owned | KS | Distribution | 363,500 | Owned | ||||||||
| Independence | KS | Manufacturing | 337,400 | Owned | KS | Manufacturing | 337,400 | Owned | ||||||||
| Long Island City | NY | Administration | 75,800 | 2023 | NY | Administration | 75,800 | 2023 | ||||||||
| Greenville | SC | Manufacturing | 184,500 | Owned | SC | Manufacturing | 184,500 | Owned | ||||||||
| Disputanta | VA | Distribution | 411,000 | Owned | VA | Distribution | 411,000 | Owned | ||||||||
| Reynosa | Mexico | Manufacturing | 175,000 | 2025 | Mexico | Manufacturing | 175,000 | 2025 | ||||||||
| Reynosa | Mexico | Manufacturing | 153,000 | 2023 | Mexico | Manufacturing | 153,000 | 2023 | ||||||||
| Bialystok | Poland | Manufacturing | 108,300 | 2022 | Poland | Manufacturing | 142,400 | 2027 | ||||||||
Sheboygan Falls | WI | Manufacturing | 22,000 | 2025 | ||||||||||||
Milwaukee | WI | Manufacturing | 84,000 | 2028 | ||||||||||||
Tijuana | Mexico | Manufacturing | 37,500 | 2023 | ||||||||||||
Kirchheim-Teck | Germany | Distribution | 27,500 | 2031 | ||||||||||||
Pécel | Hungary | Manufacturing | 52,400 | 2031 | ||||||||||||
Wuxi | China | Manufacturing | 27,600 | 2023 | ||||||||||||
| Temperature Control | Temperature Control | |||||||||||||||
| Lewisville | TX | Administration and Distribution | 415,000 | 2024 | TX | Administration and Distribution | 415,000 | 2024 | ||||||||
| St. Thomas | Canada | Manufacturing | 40,000 | Owned | Canada | Manufacturing | 40,000 | Owned | ||||||||
| Reynosa | Mexico | Manufacturing | 82,000 | 2024 | Mexico | Manufacturing | 82,000 | 2026 | ||||||||
| Reynosa | Mexico | Manufacturing | 118,000 | 2021 | Mexico | Manufacturing | 117,500 | 2026 | ||||||||
Reynosa | Mexico | Manufacturing | 111,800 | 2024 | ||||||||||||
| Other | Other | |||||||||||||||
| Mississauga | Canada | Administration and Distribution | 82,400 | 2023 | Canada | Administration and Distribution | 82,400 | 2023 | ||||||||
| Irving | TX | Training Center | 13,400 | 2021 | TX | Training Center | 13,400 | 2027 | ||||||||
The information required by this Item is incorporated herein by reference to the information set forth in Item 8, “Financial Statements and Supplementary Data” of this Report under the captions “Asbestos” and “Other Litigation” appearing in Note 22,21, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.Statements in Item 8 of this Report.
Not applicable.
PART II
Our common stock trades publicly on the New York Stock Exchange (“NYSE”) under the trading symbol “SMP.” The last reported sale price of our common stock on the NYSE on February 18, 202017, 2022 was $50.59$47.63 per share. As of February 18, 2020,17, 2022, there were 445507 holders of record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our Board of Directors (the “Board”) and depend on our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our Board. Our revolving credit facility permits dividends and distributions by us provided specific conditions are met. For information related to our revolving credit facility, see Note 12,11, “Credit Facilities and Long-Term Debt,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
There have been no unregistered offerings of our common stock during the fourth quarter of 2019.2021.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
For information related to our stock repurchases, see Note 12, “Stockholders’ Equity,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
The following table provides information relating to the Company’s purchases of its common stock for the fourth quarter of 2021:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs (2) | ||||||||||||
| October 1-31, 2021 | — | $ | — | — | $ | — | ||||||||||
| November 1-30, 2021 | 6,000 | 49.04 | 6,000 | 29,705,754 | ||||||||||||
| December 1-31, 2021 | 1,000 | 47.69 | 1,000 | 29,656,062 | ||||||||||||
| Total | 7,000 | $ | 49.13 | 7,000 | $ | 29,656,062 | ||||||||||
| (1) | All shares were purchased through the publicly announced stock repurchase programs in open-market transactions. |
| (2) | In October 2021, our Board of Directors authorized the purchase of up to $30 million of our common stock under a 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 fourth quarter of 2021, we repurchased 7,000 shares of our common stock at a total cost of $0.3 million. During the year ended December 31, 2021, additional stock repurchases of 615,265 shares were made at a total cost of $26.5 million under prior Board of Directors authorizations, which are now fully completed. |
As of December 31, 2021, there was approximately $29.7 million available for future stock purchases under the October 2021 program. During the period from January 1, 2022 through February 17, 2022, we have repurchased an additional 64,482 shares of our common stock at a total cost of $3.1 million, thereby reducing the availability under the program to $26.6 million.
Stock Performance Graph
The following graph compares the five year cumulative total return on the Company’s Common Stock to the total returns on the Standard & Poor’s 500 Stock Index and the S&P 1500 Auto Parts & Equipment Index, which is a combination of automotive parts and equipment companies within the S&P 400, the S&P 500 and the S&P 600. The graph shows the change in value of a $100 investment in the Company’s Common Stock and each of the above indices on December 31, 20142016 and the reinvestment of all dividends. The comparisons in this table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company’s Common Stock or the referenced indices.
| SMP | S&P 500 | S&P 1500 Auto Parts & Equipment Index | SMP | S&P 500 | S&P 1500 Auto Parts & Equipment Index | ||||||||||||
| 2014 | 100 | 100 | 100 | ||||||||||||||
| 2015 | 101 | 101 | 93 | ||||||||||||||
| 2016 | 144 | 114 | 99 | 100 | 100 | 100 | |||||||||||
| 2017 | 124 | 138 | 130 | 86 | 122 | 132 | |||||||||||
| 2018 | 136 | 132 | 89 | 94 | 116 | 90 | |||||||||||
| 2019 | 152 | 174 | 119 | 105 | 153 | 121 | |||||||||||
| 2020 | 81 | 181 | 148 | ||||||||||||||
| 2021 | 107 | 233 | 182 | ||||||||||||||
* Source: S&P Capital IQ
Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
| Net sales | $ | 1,137,913 | $ | 1,092,051 | $ | 1,116,143 | $ | 1,058,482 | $ | 971,975 | ||||||||||
| Gross profit | 331,800 | 312,787 | 326,656 | 322,487 | 280,988 | |||||||||||||||
| Operating income (1) | 94,495 | 81,268 | 97,521 | 98,789 | 79,764 | |||||||||||||||
| Earnings from continuing operations (2) | 69,051 | 56,854 | 43,630 | 62,412 | 48,120 | |||||||||||||||
| Loss from discontinued operations, net of income tax benefit (3) | (11,134 | ) | (13,851 | ) | (5,654 | ) | (1,982 | ) | (2,102 | ) | ||||||||||
| Net earnings (2) (3) | 57,917 | 43,003 | 37,976 | 60,430 | 46,018 | |||||||||||||||
| Per Share Data: | ||||||||||||||||||||
| Earnings from continuing operations (2): | ||||||||||||||||||||
| Basic | $ | 3.09 | $ | 2.53 | $ | 1.92 | $ | 2.75 | $ | 2.11 | ||||||||||
| Diluted | 3.03 | 2.48 | 1.88 | 2.70 | 2.08 | |||||||||||||||
| Earnings per common share (2) (3): | ||||||||||||||||||||
| Basic | 2.59 | 1.91 | 1.67 | 2.66 | 2.02 | |||||||||||||||
| Diluted | 2.54 | 1.88 | 1.64 | 2.62 | 1.99 | |||||||||||||||
| Cash dividends per common share | 0.92 | 0.84 | 0.76 | 0.68 | 0.60 | |||||||||||||||
| Other Data: | ||||||||||||||||||||
| Depreciation and amortization | $ | 25,809 | $ | 24,104 | $ | 23,916 | $ | 20,457 | $ | 17,637 | ||||||||||
| Capital expenditures | 16,185 | 20,141 | 24,442 | 20,921 | 18,047 | |||||||||||||||
| Dividends | 20,593 | 18,854 | 17,287 | 15,447 | 13,697 | |||||||||||||||
| Cash Flows Provided By (Used In): | ||||||||||||||||||||
| Operating activities | $ | 76,928 | $ | 70,258 | $ | 64,617 | $ | 97,805 | $ | 65,171 | ||||||||||
| Investing activities | (54,812 | ) | (29,886 | ) | (31,228 | ) | (88,018 | ) | (18,011 | ) | ||||||||||
| Financing activities | (23,378 | ) | (46,121 | ) | (35,944 | ) | (7,756 | ) | (41,155 | ) | ||||||||||
| Balance Sheet Data (at period end): | ||||||||||||||||||||
| Cash and cash equivalents | $ | 10,372 | $ | 11,138 | $ | 17,323 | $ | 19,796 | $ | 18,800 | ||||||||||
| Working capital | 239,969 | 233,638 | 210,194 | 190,380 | 195,198 | |||||||||||||||
| Total assets (4) | 912,730 | 843,132 | 787,567 | 768,697 | 681,064 | |||||||||||||||
| Total debt | 57,045 | 49,219 | 61,778 | 54,975 | 47,505 | |||||||||||||||
| Long-term debt (excluding current portion) | 129 | 153 | 79 | 120 | 62 | |||||||||||||||
| Stockholders’ equity | 504,228 | 467,201 | 453,654 | 441,028 | 391,979 | |||||||||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We are a leading manufacturer and distributor of premium replacement parts utilized in the maintenance, repair and service of vehicles in the automotive aftermarket industry. In addition, we continue to increase our supplier capabilities with a complementary focus on specialized original equipment parts for manufacturers across multiple industries such as agriculture, heavy duty, and construction equipment. We believe that our extensive design and engineering capabilities have afforded us opportunities to expand our product coverage in our aftermarket business and enter newer specialized markets that require application-specific knowledge, such as those mentioned above.
We are organized into two operating segments. Each segment is focused on different product categories and with providing our customers with full-line coverage of its products, a full suite of complementary services that are tailored to our customers’ business needs, and with 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.
Overview of Financial Performance
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended December 31, 2021.
| December 31, | ||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | 2019 | |||||||||
| Net sales | $ | 1,298,816 | $ | 1,128,588 | $ | 1,137,913 | ||||||
| Gross profit | 376,931 | 336,655 | 331,800 | |||||||||
| Gross profit % | 29 | % | 29.8 | % | 29.2 | % | ||||||
| Operating income | 128,999 | 108,895 | 94,495 | |||||||||
| Operating income % | 9.9 | % | 9.6 | % | 8.3 | % | ||||||
| Earnings from continuing operations before income taxes | 130,465 | 107,379 | 91,796 | |||||||||
| Provision for income taxes | 31,044 | 26,962 | 22,745 | |||||||||
| Earnings from continuing operations | 99,421 | 80,417 | 69,051 | |||||||||
| Loss from discontinued operations, net of income taxes | (8,467 | ) | (23,024 | ) | (11,134 | ) | ||||||
| Net earnings | 90,954 | 57,393 | 57,917 | |||||||||
Net earnings attributable to noncontrolling interest | 68 | — | — | |||||||||
| Net earnings attributable to SMP | 90,886 | 57,393 | 57,917 | |||||||||
| Per share data attributable to SMP – Diluted: | ||||||||||||
| Earnings from continuing operations | $ | 4.39 | $ | 3.52 | $ | 3.03 | ||||||
| Discontinued operations | (0.37 | ) | (1.01 | ) | (0.49 | ) | ||||||
| Net earnings per common share | $ | 4.02 | $ | 2.51 | $ | 2.54 | ||||||
The post COVID-19 sales momentum we experienced in the second half of 2020 carried over into 2021 resulting in record net sales and earnings from continuing operations. We experienced strong demand across all our product categories as well as a more normalized seasonal trend consistent with years prior to 2020.
Net sales for 2021 were $1,298.8 million, an increase of $170.2 million, or 15.1% compared to net sales of $1,128.6 million in 2020, and an increase of $160.9 million, or 14.1%, compared to net sales of $1,137.9 million in 2019.
The increase in net sales in 2021 reflects the favorable impact of multiple factors including:
successful customer initiatives in the marketplace,
the phase-in of new business wins,
beneficial summer weather,
continued strong customer demand as evidenced by robust customer POS and fueled by the replenishment of customer inventory levels,
the partial impact of price increases in the fourth quarter of the year, which were implemented to pass through inflationary increases in raw materials, freight and labor costs, and
incremental net sales from our soot sensor, Trombetta and Stabil acquisitions.
The combination of the above factors more than offset the impact of lost revenue related to the decision of a large retail customer to pursue a private brand strategy in December 2020.
Gross margin as a percentage of net sales in 2021 was 29% as compared to 29.8% in 2020 and 29.2% in 2019. Gross margins in the first half of 2021 were favorably impacted by greater fixed cost absorption due to higher production volumes as we increased inventories to meet the strong customer demand. The strong gross margins achieved in the first half of 2021 were offset by some compression in the second half of 2021 caused by several factors including lower fixed cost absorption due to lower production levels than those achieved in the second half of 2020, inflationary cost increases in certain raw materials, labor and elevated transportation expense, and the higher mix of heavy duty parts sales from our recent acquisitions, which have a different margin profile than our aftermarket business with lower gross margins but comparable operating margin. While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost initiatives coupled with our ability to pass through higher prices to our customers should help to offset much of this impact to our margins.
Overall, our financial results in 2021 were extremely strong. We are a leading independent manufacturerposting record net sales and distributor of premium replacement parts for the engine managementearnings from continuing operations and temperature control systems of motor vehicles in theachieving substantial new business wins with existing customers. Our core automotive aftermarket industrybusiness remains strong and we have made major strides into new complementary markets with upside potential.
Recent Strategic Acquisitions
As part of our strategic plan for diversification and growth beyond our core automotive aftermarket business, and to further expand internationally with a focus on the European market, we completed three acquisitions in 2021. The acquisitions continue to increase our supplier capabilities with a complementary focus on specialized original equipment parts to manufacturers across multiple industries such as medium and heavy duty vehicles, construction and agricultural equipment, power sports, and other sub-segments. In addition to expanding beyond our core automotive aftermarket business, it also provided geographic expansion as we now have meaningful footprints to grow sales in Europe and Asia.
As we integrate these businesses, we will be able to take advantage of shared customer lists, product portfolios, manufacturing and engineering capabilities, and geographic reach. Many of the products in the acquired businesses are either power-train neutral, or are geared toward electric and alternative energy vehicles and, as such, not limited to applications on internal combustion engine (“ICE”), providing potential synergies and future sales growth opportunities in non-internal combustion engine applications. After these acquisitions, we estimate that approximately half of our product offering is power-train neutral, or suitable for electric, hybrid electric and/or alternative energy vehicles. Following is a brief summary of the acquired businesses.
In March 2021, we acquired certain Soot Sensor product lines from Stoneridge, Inc. for $2.9 million. The product line assets acquired manufacture sensors used in the exhaust and emission systems of diesel engines. The acquisition is an excellent fit for our strategy of expansion into the heavy duty industrial equipmentmarket.
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. Trombetta 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 original equipmentWuxi, China (“Trombetta Asia, Ltd.”). Trombetta is a worldwide leader in power switching and power management products and has a long history of supplying high-quality products to a broad group of blue-chip customers across multiple commercial vehicle and off-highway channels, including heavy truck, construction, agricultural, electric vehicle and power sports markets. Few of Trombetta’s products are powertrain-related and thus unaffected by the shift from internal combustion engines. We believe that the combination of Trombetta, along with our existing businesses will create a critical mass that can be a powerful force for growth.
For additional information on providing our customers with full-line coveragerecent acquisitions, see Note 2, “Business Acquisitions and Investments,” of its products,the Notes to Consolidated Financial Statements in Item 8 of this Report.
Impact of the Coronavirus (“COVID-19”)
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 full suitecommittee, comprised of complimentary servicesour 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 tailoredactively being monitored by the committee are the general state of economic conditions, governmental measures in response to our customers’ business needsthe pandemic, the spread of the delta and driving end-user demand for our products. We sell our products primarilyomicron variants, and the enactment of policies and practices to automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturersensure the health and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.
As related to the highest, specificallyperformance 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 Temperature Control Segmentsecond quarter of our business. In addition to this seasonality,2020, customer orders strengthened in 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. For example, a warm summer, as we experienced in 2018, may increase the demand for our temperature control products, while a mild summer, as we experienced in 2017, may lessen such demand. As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically peak near the endlast half of the second quarter and continued throughout 2020, resulting in strong net sales for the year ended December 31, 2020. The net sales momentum continued into 2021, as we experienced strong demand for our products, and a seasonal trend that was more in line with years prior to 2020.
Although our business remains strong and we continue to monitor the inventory build-upimpact of air conditioning products is convertedthe 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 salesthe global supply chain volatility and paymentsinflationary 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 implementing cost savings initiatives and the receivables associated with such salespass through of higher costs to our customers, which began in the fourth quarter of 2021. We believe that we have yet to be received. During this period, our working capital requirements are typically funded by borrowingalso benefited from our revolving credit facility.
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, as with much of our industry, import into the United States. Although our operating results in 20192021 have been only slightly impacted by the timing oftariff costs associated with Chinese sourced products (due to our diversified manufacturing and distribution footprint), 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.
Environmental, Social, & Governance (“ESG”)
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. These values also serve as the foundation for our increased focus on many important environmental, social and governance issues, such as environmental stewardship and our efforts to identify and implement practices that reduce our environmental impact while achieving our business goals; our attention to diversity, equity and inclusion, employee development, retention, and health and safety; and our community engagement initiatives, to name a few. We have made significant strides building awareness of the environmental impact of our operations, and challenging ourselves to reduce our impact by reducing our consumption of energy and generation of waste, as well as enhancing our recycling efforts.
Comparison of Results of Operations For Fiscal Years 20192021 and 20182020
Sales. Consolidated net sales for 20192021 were $1,137.9$1,298.8 million, an increase of $45.8$170.2 million, or 4.2%15.1%, compared to $1,092.1$1,128.6 million in the same period of 2018,2020. Consolidated net sales increased in both our Engine Management and Temperature Control Segments, with the majority of our net sales to customers located in the United States.
Consolidated net sales increased in our Engine Management Segment2020 were adversely impacted in the first half of 2020 by the COVID-19 pandemic, and were essentially flat year-over-yearfollowed by strong net sales in the second half of 2020, as our Temperature Control Segment.business improved to pre-COVID-19 levels with our customers’ POS sales exceeding their comparable levels in prior periods.
The following table summarizes consolidated net sales by segment and by major product group within each segment for the years ended December 31, 20192021 and 20182020 (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||
| Engine Management: | ||||||||||||||||
| Ignition, Emission Control, Fuel & Safety Related System Products | $ | 705,994 | $ | 648,270 | $ | 786,514 | $ | 691,722 | ||||||||
| Wire and Cable | 143,167 | 155,217 | 151,422 | 143,963 | ||||||||||||
| Total Engine Management | 849,161 | 803,487 | 937,936 | 835,685 | ||||||||||||
| Temperature Control: | ||||||||||||||||
| Compressors | 160,485 | 148,416 | 206,697 | 163,071 | ||||||||||||
| Other Climate Control Parts | 117,870 | 130,040 | 141,726 | 118,883 | ||||||||||||
| Total Temperature Control | 278,355 | 278,456 | 348,423 | 281,954 | ||||||||||||
| All Other | 10,397 | 10,108 | 12,457 | 10,949 | ||||||||||||
| Total | $ | 1,137,913 | $ | 1,092,051 | $ | 1,298,816 | $ | 1,128,588 | ||||||||
Engine Management’s net sales increased $45.7$102.3 million, or 5.7%12.2%, to $849.2$937.9 million for the year ended December 31, 2019.2021. Net sales in ignition, emission control, fuel and safety related system products for the year ended December 31, 20192021 were $706$786.5 million, an increase of $57.7$94.8 million, or 8.9%13.7%, compared to $648.3$691.7 million in the same period of 2018.2020. Net sales in the wire and cable product group for the year ended December 31, 20192021 were $143.2$151.4 million, a decreasean increase of $12$7.5 million, or 7.7%5.2%, compared to $155.2$144 million in the same period of 2018.2020. Engine Management’s increase in net sales for the year ended December 31, 20192021 compared to the same period in 2018 primarily2020, reflects the impact of successful customer initiatives in the marketplace, the phase-in of new business wins, continued strong customer demand as evidenced by robust customer POS, the partial impact of price increases in the fourth quarter of the year, which were implemented to pass through inflationary increases in raw materials, freight and labor costs, and incremental net sales from our April 2019 acquisitionsoot sensor, Trombetta and Stabil acquisitions, along with the favorable year-over-year impact of certain assets and liabilitieshaving lower net sales in the first part of 2020 due to the general weakness in the economy caused by the COVID-19 pandemic. The favorable net sales results achieved by Engine Management in 2021 more than offset the impact of the Pollak business of Stoneridge, Inc., as well as pipeline orders from several customers, general price increases, tariff costs passed on to customers, and low single digit organic growth. Engine Management’s year-over-year increase inlower net sales was offset,from the decision, in part, by the general decline in our wire and cable business dueDecember 2020, of a large retail customer to its product lifecycle. pursue a private brand strategy.
Incremental net sales from our acquisitionsoot sensor, Trombetta and Stabil acquisitions of the Pollak business of $28.2$54.3 million were included in the net sales of the ignition, emission control, fuel and safety related system products marketproduct group from the date of acquisition through December 31, 2019.2021. Compared to the year ended December 31, 2018,2020, excluding the incremental net sales from the acquisition,acquisitions, net sales in the ignition, emission control, fuel and safety related system products marketproduct group increased $29.5$40.5 million, or 4.6%5.9%, and Engine Management net sales increased $17.5$48 million, or 2.2%5.7%.
Temperature Control’s net sales of $278.4increased $66.5 million, or 23.6%, to $348.4 million for the year ended December 31, 2019 were essentially flat when compared to the same period in 2018.2021. Net sales in the compressors product group for the year ended December 31, 20192021 were $160.5$206.7 million, an increase of $12.1$43.6 million, or 8.1%26.7%, compared to $148.4$163.1 million in the same period of 2018.2020. Net sales in the other climate control parts group for the year ended December 31, 20192021 were $117.9$141.7 million, a decreasean increase of $12.1$22.8 million, or 9.3%19.2%, compared to $130$118.9 million for the year ended December 31, 2018.2020. Temperature Control’s increase in net sales for the year endingended December 31, 20192021, when compared to the same period in 2018, reflect2020, reflects the impact of (1) increased year-over-year net sales duringcontinued strong customer demand stemming from the first six monthsimpact of 2019 due to strong pre-season orders as customers rebuilt theirvery warm summer weather conditions and the replenishment of customer inventory levels, after a very strong 2018 selling season; (2)along with the favorable year-over-year impact of having lower year-over-year net sales during the second half of 2019 as customer ordering patterns normalized in 2019 as compared to the same period in 2018, when customer orders strengthened in June and continued throughout the second half of 2018 after a slow start to the 2018 season; and (3) to a lesser extent incremental pricing for tariff costs passed on to customers. In addition, the decline in net sales in the other climate control parts product group results fromfirst part of 2020 due to the impact ofgeneral weakness in the introduction of air conditioner repair kits, which are sold as a complete repair kit inclusive ofeconomy caused by the compressor and other climate control parts. These air conditioner repair kits are classified as sales under the compressor product group, resulting in a shift in reported sales from the other climate control parts product group into the compressor product group.COVID-19 pandemic. Demand for our Temperature Control products may vary significantly with summer weather conditions and customer inventory levels.
Gross Margins. Gross margins, as a percentage of consolidated net sales, increaseddecreased to 29.2%29% for 2019,2021, compared to 28.6%29.8% for 2018.2020. The following table summarizes gross margins by segment for the years ended December 31, 20192021 and 2018,2020, respectively (in thousands):
Year Ended December 31, | Engine Management | Temperature Control | Other | Total | Engine Management | Temperature Control | Other | Total | ||||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||
| Net sales (a) | $ | 849,161 | $ | 278,355 | $ | 10,397 | $ | 1,137,913 | $ | 937,936 | $ | 348,423 | $ | 12,457 | $ | 1,298,816 | ||||||||||||||||
| Gross margins | 251,560 | 70,064 | 10,176 | 331,800 | 266,961 | 95,138 | 14,832 | 376,931 | ||||||||||||||||||||||||
| Gross margin percentage | 29.6 | % | 25.2 | % | — | % | 29.2 | % | 28.5 | % | 27.3 | % | — | % | 29 | % | ||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||
| Net sales (a) | $ | 803,487 | $ | 278,456 | $ | 10,108 | $ | 1,092,051 | $ | 835,685 | $ | 281,954 | $ | 10,949 | $ | 1,128,588 | ||||||||||||||||
| Gross margins | 229,949 | 70,561 | 12,277 | 312,787 | 251,747 | 75,161 | 9,747 | 336,655 | ||||||||||||||||||||||||
| Gross margin percentage | 28.6 | % | 25.3 | % | — | % | 28.6 | % | 30.1 | % | 26.7 | % | — | % | 29.8 | % | ||||||||||||||||
| (a) | Segment net sales include intersegment sales in our Engine Management and Temperature Control segments. |
Compared to 2018,2020, gross margins at Engine Management increased 1decreased 1.6 percentage pointpoints from 28.6%30.1% to 29.6%28.5%, while gross margins at Temperature Control decreased 0.1increased 0.6 percentage pointpoints from 25.3%26.7% to 25.2%27.3%. The gross margin percentage increasedecrease in Engine Management compared to the prior year reflects our return to historical productivity in our Reynosa, Mexico wire plant after the lengthy integrationimpact of the General Cable wirelower gross margins achieved in the second half of 2021 compared to the second half of 2020, resulting from lower fixed cost absorption due to lower production levels than those achieved in the second half of 2020, inflationary cost increases in raw materials, labor and transportation, which began in the second quarter of 2021, and a higher mix of heavy duty OE sales from recent acquisitions, which has a different margin profile than our aftermarket business a continued emphasis on cost reductions, as well as certain pricing actions, which more than offsetwith lower gross margins but comparable operating margins. Engine Management gross margins in the negativefirst half of 2021 were favorably impacted by higher year-over-year absorption due to higher production volumes to build inventory levels, and the impact of tariff costs passed on to customers without any markup. year-over-year production variances carried over from the prior year.
The gross margin percentage decreaseincrease in Temperature Control compared to the prior year resulted primarily fromreflects the negativefavorable impact of tariffs passedhigher year-over-year absorption due to higher production volumes, as well as overall higher sales volume, which more than offset the unfavorable impact in the second half of 2021 of inflationary cost increases in certain raw materials, labor and transportation. While we anticipate continued margin pressures at both Engine Management and Temperature Control resulting from inflationary cost increases, 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 to customers without any markup.our margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) increased to $234.7$247.5 million, or 20.6%19.1% of consolidated net sales in 2019,2021, as compared to $231.3$224.7 million, or 21.2%19.9% of consolidated net sales in 2018.2020. The $3.4$22.8 million increase in SG&A expenses as compared to 2018 reflects2020 is principally due to (1) higher distribution costs associated with higher sales volumes and the impact of (1)an increase in freight costs, (2) higher employee compensation costs, and (3) the impact of incremental expenses of $4.3$7.8 million from our acquisition of certain assetssoot sensor, Trombetta and liabilities of the Pollak business of Stoneridge, Inc.,Stabil acquisitions, including amortization of intangible assets acquired;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 (2)carried over into 2021, and higher selling and marketing expenses, and other general and administrative costs, whichyear-over-year sales volumes.
Intangible Asset Impairment. In December 2020, a large retail customer informed us of its decision to pursue a private brand strategy for its engine management product line. As a result of this development, products sold under the BWD trademark were offset by lower distribution expenses primarily at Temperature Control and lower costs incurred related to our accounts receivable supply chain financing arrangements. Higher than usual distribution expenses at Temperature Controlsignificantly reduced. In connection with the decision, we recorded an impairment charge of $2.6 million in 2018 were due to a combination of significant additional labor costs to meet the surge in sales in the third and fourth quarters of 2018, as well as start-up costs related to the installation of a new automation project in our distribution center. The automation project has yielded significant savings in 2019 compared to 2018.2020.
Restructuring and Integration Expenses. Restructuring and integration expenses were $2.6$0.4 million in 20192021 compared to restructuring and integration expenses of $4.5$0.5 million in 2018.2020. Restructuring and integration expenses incurred in 2019 of $2.6 million consisted of $2.2 million of expenses related2021 relate to the relocation in our Engine Management Segment of certain inventory, machinery, and equipment acquired in our April 2019 acquisitionMarch 2021 soot sensor acquisition; while restructuring and integration expenses incurred in 2020 relate to (1) the increase in environmental cleanup costs for ongoing monitoring and remediation in connection with the prior closure of our manufacturing operations at our Long Island City, New York location, and (2) costs related to the residual relocation activities in our Engine Management segment in connection with our integration of the Pollak business of Stoneridge, Inc. to our existing facilities and the $0.4 million increase, acquired in environmental cleanup costs for the ongoing monitoring and remediation at our Long Island City, New York former manufacturing facility; while restructuring and integration expenses incurred in 2018 of $4.5 million consisted of $3.2 million of expenses related to the Plant Rationalization Program that commenced in February 2016, the Orlando Plant Rationalization Program that commenced in January 2017, and the wire and cable relocation program announced in October 2016, all of which were substantially completed as of December 31, 2018, and the $1.3 million increase in environmental cleanup costs for the ongoing monitoring and remediation in connection at our Long Island City, New York former manufacturing facility.
Operating Income. Operating income was $94.5$129 million, or 9.9%, of consolidated net sales in 2019,2021, compared to $81.3$108.9 million, or 9.6%, of consolidated net sales in 2018.2020. The year-over-year increase in operating income of $13.2$20.1 million is the result of the impact of higher consolidated net sales higherand the impact of the impairment charge in 2020 related to the BWD trademark, which more than offset the impact of lower gross margins as a percentage of consolidated net sales and lower restructuring and integration expenses offset, in part, by higher SG&A expenses and lower otherexpenses. Operating income (expense), net.of 9.9% of consolidated net sales achieved in 2021 is in line historical operating margin percentages achieved.
Other Non-Operating Income (Expense), Net. Other non-operating income, net was $2.6$3.5 million in 2019,2021, compared to other non-operating expense, net of $0.4$0.8 million in 2018. Included in other non-operating expense, net in 2018 is a noncash impairment charge of approximately $1.7 million related to our minority interest investment in Orange Electronics Co., Ltd. Excluding the year-over-year impact of the noncash impairment charge, the2020. The year-over-year increase in other non-operating income, (expense), net of $1.3 million resultedresults primarily from the increase in year-over-year equity income from our joint ventures offset, in part, byand the unfavorablefavorable 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 was $5.3decreased to $2 million in 20192021, compared to $4$2.3 million in 2018.2020. The year-over-year increasedecrease in interest expense reflects the impact of both higher average outstanding borrowings during 2019 when compared to 2018, and the higherlower year-over-year average interest rates on our revolving credit facility. Thefacility, which more than offset the impact of slightly higher year-over-year average outstanding borrowings during 2019 resulted primarily from the timing of the acquisition of the Pollak business of Stoneridge, Inc.in 2021 when compared to 2020.
Income Tax Provision. The income tax provision for 20192021 was $22.7$31 million at an effective tax rate of 24.8%23.8%, compared to $20$27 million at an effective tax rate of 26%25.1% in 2018.2020. The lower effective tax rate in 20192021 compared to 20182020 results primarily from a changethe increased year-over-year income tax benefit from the exercise of restricted stock, and changes in the mix of U.S. and foreign income.
Loss fromFrom Discontinued Operations. Loss from discontinued operations, net of income tax, reflects information contained in the actuarial studies performed as of August 31, 2019,2021 and as of August 31, 2018 (which was revised2020, and in December 2020 to reflect events that occurred in the events occurring through November 30, 2018),fourth quarter of 2020, as well as other information available and considered by us, and legal expenses and other costs associated with our asbestos-related liability. During the years ended December 31, 20192021 and 2018,2020, we recorded a net loss of $11.1$8.5 million and $13.9$23 million from discontinued operations, respectively. The loss from discontinued operations for the year ended December 31, 20192021 and 20182020 includes a $9.7$5.3 million and $13.6$25.7 million pre-tax provision, respectively, to increase our indemnity liability in line with the 20192021 and 20182020 actuarial studies; and legal expenses and other miscellaneous expenses, before taxes, of $4.7$6.1 million and $5.1$5.4 million during 2019for 2021 and 2018,2020, respectively. As discussed more fully in Note 22 “Commitments21 “Commitments and Contingencies”Contingencies” in the notes to our consolidated financial statements, 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. 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 $68,000 during the year ended December 31, 2021 represents 30% of the net earnings of Trombetta Asia, Ltd. from the date of acquisition through December 31, 2021.
Comparison of Results of Operations For Fiscal Years 20182020 and 20172019
For a detailed discussion on the comparison of fiscal year 20182020 to fiscal year 2017,2019, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
2020.Restructuring and Integration Programs
For a detailed discussion on the restructuring and integration costs, see Note 5,3, “Restructuring and Integration Expense,” of the notes to our consolidated financial statements.
Notes Consolidated Financial Statements in Item 8 of this Report.Liquidity and Capital Resources
Operating Activities. During 2019,2021, cash provided by operating activities was $76.9$85.6 million compared to $70.3$97.9 million in 2018.2020. The decrease in cash provided by operating activities resulted primarily from the increase in inventories compared to the decrease in inventories in the prior year, the smaller year-over-year increase in operating cash flow is primarilysundry payables and accrued expenses, and the result oflarger year-over-year increase in prepaid expenses and other current assets, partially offset by the increase in net earnings, the year-over-year decrease in accounts receivable compared to the increase in accounts receivable in the prior year, and the larger year-over-year increase in accounts payable.
Net earnings during 2021 were $91 million compared to $57.4 million in 2020. During 2021 (1) the decrease in accounts receivable was $28.5 million compared to the year-over-year increase in accounts receivable of $71.9 million in 2018, and2020; (2) the smallerincrease in inventories was $107.6 million compared to the year-over-year decrease in inventories of $18 million in 2020; (3) the increase in accounts payable was $33 million compared to the year-over-year increase in inventories, offset,accounts payable of $7.4 million in part, by2020; (4) the increase in prepaid expenses and other current assets was $0.8 million compared to the year-over-year increase in prepaid expenses and other current assets compared toof $0.4 million in 2020; and (5) the year-over-year decrease in prepaid expenses and other current assets in 2018, the year-over-year decrease in accounts payable compared to the year-over-year increase in accounts payable in 2018, and the year-over-year decrease in sundry payables and accrued expenses compared to the year-over-year increase in sundry payables and accrued expenses in 2018.
Investing Activities. Cash used in investing activities was $54.8$151.2 million in 20192021 compared to $29.9$17.8 million in 2018.2020. Investing activities in 2019during 2021 consisted of (1) the payment of $15.4 million, net of $0.9 million of cash proceedsacquired, for our acquisition of $4.8 million received in January 2019 from100% of the December 2018 salecapital stock of our property in Grapevine, Texas;Stabil Operative Group GmbH, a German company, (“Stabil”); (2) the payment of $38.4$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”); (3) the payment of $2.9 million for our acquisition of certain assets and liabilities of the Pollak business ofsoot sensor product lines from Stoneridge, Inc.; (3) the payment of $5.1 million for our acquisition of an approximate 29% minority interest in Jiangsu Che Yijia New Energy Technology Co., Ltd.; and (4) capital expenditures of $16.2$25.9 million.
Investing activities in 20182020 consisted of (1) the payment of the third and final contribution of $5.7 million for our November 2017 acquisition of a 50% interest in Foshan FGD SMP Automotive Compressor Co., Ltd., a China-based joint venture that manufactures air conditioning compressors for the automotive aftermarket and the Chinese OE market; (2) the payment of $4.2 million for our 15% increase in equity ownership in Foshan GWO YNG SMP Vehicle Climate Control & Cooling Products Co. Ltd., a China-based joint venture that manufactures air conditioner accumulators, filter driers, hose assemblies and switches for the automotive aftermarket and OEM/OES markets; and (3) capital expenditures of $20.1$17.8 million.
Financing Activities. Cash provided by financing activities was $69 million in 2021 compared to cash used in financing activities was $23.4of $71.5 million in 2019 compared to $46.1 million in 2018.2020. During 2019,2021, we (1) we increased our borrowings under our revolving credit facility by $8.8$115.3 million; (2) weincreased our borrowings under lease obligations and our Polish overdraft facility by $3 million; (3) made cash payments for the repurchase of shares of our common stock of $10.7$26.8 million; and (3) we(4) paid dividends of $20.6$22.2 million. BorrowingsCash provided by operating activities, along with borrowings under our revolving credit agreement, lease obligations and Polish overdraft facility in 2019, along with cash provided by operating activities, were used to fund our investing activities, purchase shares of our common stock and pay dividends.
Cash used by financein financing activities was $46.1$71.5 million in 2018.2020. During 2018,2020, we (1) we increasedreduced our borrowings under the Polish overdraft facility, net of payments under our capital lease obligations of $1.1 million; (2) we paid down borrowings under our revolving credit facility of $13.3by $42.5 million; (2) reduced our borrowings under lease obligations and our Polish overdraft facility by $4.2 million; (3) we made cash payments of $14.9 million for the repurchase of shares of our common stock;stock of $13.5 million; and (4) we paid dividends of $18.9$11.2 million. Cash provided by operating activities along with borrowings underwas used to pay down our revolving credit facility, our lease obligations and Polish overdraft facility, net of payments under our capital lease obligations, were usedand to fund our investing activities, pay down borrowings under our revolving credit facility, purchase shares of our common stock and pay dividends.
Dividends of $20.6$22.2 million and $18.9$11.2 million were paid in 20192021 and 2018,2020, respectively. Quarterly dividends were paid at a rate of $0.23 per share in 2019 and $0.21 per share in 2018. 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 and stock repurchases. In September 2020, our Board of Directors approved to reinstate our stock repurchase program; and in October 2020, our Board of Directors approved the reinstatement of our quarterly cash dividend of $0.25 per share. In February 2021, our Board of Directors voted to maintain our quarterly dividend at $0.25 per share in 2021; and in February 2022, our Board of Directors voted to increase our quarterly dividend from $0.25 per share in 2021 to $0.27 per share in 2022.
Comparison of Liquidity and Capital Resources For Fiscal Years 20182020 and 2017
For a detailed discussion of our Liquidity and Capital Resources comparison of fiscal year 20182020 to fiscal year 2017,2019, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2020.
Liquidity
Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions. Our primary sources of funds are ongoing net cash flows from operating activities and availability under our secured revolving credit facility (as detailed below).
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 eligible inventory, eligible equipment and eligible fixed assets.inventory. After taking into account outstanding borrowings under the amended credit agreement, there was an additional $194.3$122.1 million available for us to borrow pursuant to the formula at December 31, 2019. 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 $52.5$125.3 million and $43.7$10 million at December 31, 20192021 and 2018,2020, respectively; while letters of credit outstanding under the credit agreement were $3.1$2.6 million and $2.8 million at both December 31, 20192021 and 2018.2020, respectively. Borrowings under the credit agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.
At December 31, 2019,2021, the weighted average interest rate on our amended credit agreement was 3.5%1.4%, which consisted of $40$125 million in direct borrowings at 2.3%1.4% and an alternative base rate loan of $12.5$0.3 million at 5%3.5%. At December 31, 2018,2020, the weighted average interest rate on our amended credit agreement was 3.9%1.4%, which consisted of $40$10 million in direct borrowings at 3.4% and an alternative base rate loan of $3.7 million at 5.8%.borrowings. Our average daily alternative base rate loan balance was $1.7$1.1 million and $1.8$1.5 million during 20192021 and 2018,2020, respectively.
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 December 31, 2019,2021, 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.
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 $719$818.8 million and $720$695.1 million of receivables for the years ended December 31, 20192021 and 2018,2020, respectively, which was reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale. Receivables presented at financial institutions and not yet collected as of December 31, 2021 and December 31, 2020 were approximately $1.3 million and $50 million, respectively, and remained in our accounts receivable balance for those periods. A charge in the amount of $22$11.5 million, $24.4$12.2 million and $22.6$22 million related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively.
To the extent that these arrangements are terminated, our financial condition, results of operations, cash flows and liquidity could be adversely affected by extended payment terms, delays or failures in collecting trade accounts receivables. The utility of the supply chain financing arrangements also depends upon the LIBOR rate, as it is a component of the discount rate applicable to each arrangement. If the LIBOR rate increases significantly, we may be negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.
In May 2018,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. UnderStock repurchases under this program, during the year ended December 31, 2018 and 2019, we repurchased 201,484 and 221,7482021, were 464,992 shares of our common stock respectively, at a total cost of $9.3$20 million, and $10.7 million, respectively, thereby completing the 20182021 Board of Directors authorization.
In October 2021, our Board of Directors authorized the purchase of up to an additional $30 million of our common stock under a stock repurchase program. Stock will be purchased under the programs from time to time, in the open market or through private transactions, as market conditions warrant. Stock repurchases under this program, during the year ended December 31, 2021, were 7,000 shares of our common stock, at a total cost of $0.3 million. As of December 31, 2021, there was approximately $29.7 million available for future stock purchases under the program. During the period from January 1, 2022 through February 17, 2022, we have repurchased an additional 64,482 shares of our common stock at a total cost of $3.1 million, thereby reducing the availability under the program to $26.6 million.
Material Cash Commitments
Material cash commitments as of December 31, 2021 consist of required cash payments to service our outstanding borrowings of $125.3 million under our amended revolving credit agreement with JPMorgan Chase Bank, N.A., as agent, and the future minimum cash requirements of $44.9 million through 2031 under operating leases. All of our other cash commitments as of December 31, 2021 are not material. For additional information related to our material cash commitments, see Note 7, “Leases,” and Note 11, “Credit Facilities and Long-Term Debt,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
We anticipate that our cash flow from operations, available cash and available borrowings under our revolving credit facility, inclusive of the utilization of the $50 million accordion feature in the 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, disruptions in the supply chain that may lead to a further increase in inventories to support our customers, and significant inflationary cost increases in raw materials, labor and transportation, 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.
| (In thousands) | 2020 | 2021 | 2022 | 2023 | 2024 | 2025–2028 | Total | |||||||||||||||||||||
| Operating lease obligations | $ | 8,994 | $ | 8,245 | $ | 6,882 | $ | 5,682 | $ | 3,881 | $ | 7,844 | $ | 41,528 | ||||||||||||||
| Postretirement benefits | 36 | 32 | 29 | 25 | 25 | 50 | 197 | |||||||||||||||||||||
| Severance payments related to restructuring and integration | 205 | 106 | 25 | — | — | — | 336 | |||||||||||||||||||||
| Total commitments | $ | 9,235 | $ | 8,383 | $ | 6,936 | $ | 5,707 | $ | 3,906 | $ | 7,894 | $ | 42,061 | ||||||||||||||
Critical Accounting Policies and Estimates
We have identified the two accounting policies and estimates below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies and estimates on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies and estimates affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the notes to our consolidated financial statements.
You should be aware that preparation of our consolidated annual and quarterly financial statements 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 assuranceassurances 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 estimateestimates, or in the assumptions that we use in calculating the estimate,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 estimateestimates, and may have a material adverse effect on our business, financial condition and results of operations.
Valuation of Long-LivedLong‑Lived and Intangible Assets and Goodwill.Goodwill
At acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consist of customer relationships, trademarks and trade names, patents, developed technology and intellectual property, and non-compete agreements. The fair values of theseIntangible assets acquired through business combinations are subject to potential adjustments within the measurement period, which is up to one year from the acquisition date. Valuing intangible assets requires the use of significant estimates and assumptions. As related to valuing customer relationships, significant estimates and assumptions used include but are estimated based on our assessment.not limited to: (1) forecasted revenues attributable to existing customers; (2) forecasted earnings before interest and taxes (“EBIT”) margins; (3) customer attrition rates; and (4) the discount rate. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. We believe that the fair value of acquired identifiable net assets, including intangible assets, are based upon reasonable estimates and assumptions.
We assess the impairment of long-livedlong‑lived assets, identifiable intangibles assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. With respect to goodwill and identifiable intangible assets having indefinite lives, we test for impairment on an annual basis or in interim periods if an event occurs or circumstances change that may indicate the fair value is below its carrying amount. Factors we consider important, which could trigger an impairment review, include the following: (a) significant underperformance relative to expected historical or projected future operating results; (b) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (c) significant negative industry or economic trends. We review the fair values using the discounted cash flows method and market multiples.
When performing our evaluation of goodwill for impairment, if we conclude qualitatively that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, than the two-stepthen a quantitative impairment test iswould not be required. If we are unable to reach this conclusion, then we would perform the two-stepa goodwill quantitative impairment test. Initially,In performing the quantitative test, the fair value of the reporting unit is compared to its carrying amount. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit; we are required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired. In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill and recognize aA charge for impairment to the extent the carrying value exceeds the implied fair value. The implied fair value of goodwill is determinedrecognized by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. On January 1, 2020, we will adopt Accounting Standards Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the second step of the impairment test, which requires a hypothetical purchase price allocation to determine the implied fair value of the reporting unit goodwill. Instead, under ASU 2017-04, goodwill impairment is the amount by which athe reporting unit’s carrying valueamount exceeds its fair value, not to exceed the carryingtotal amount of goodwill. ASU 2017-04 will be applied prospectively.goodwill allocated to the reporting unit.
Identifiable intangible assets having indefinite lives are reviewed for impairment on an annual basis using a methodology similar with that used to evaluate goodwill. Intangible assets having definite lives and other long-lived assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets fair value and their carrying value.
There are inherent assumptions and estimates used in developing future cash flows requiring our judgment in applying these assumptions and estimates to the analysis of identifiable intangibles and long-livedlong‑lived asset impairment including projecting revenues, interest rates, tax rates and the cost of capital. Many of the factors used in assessing fair value are outside our control and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments. In the event our planning assumptions were modified resulting in impairment to our assets, we would be required to include an expense in our statement of operations, which could materially impact our business, financial condition and results of operations.
We will continueplan to perform an annual actuarial analysisevaluation 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. Based onGiven the actuarial studiesuncertainties associated with projecting such matters into the future and all other available information,factors outside our control, we can give no assurance that additional provisions will not be required. We will continue to reassess the recorded liabilitymonitor events and if deemedchanges in circumstances surrounding these potential liabilities in determining whether to perform additional actuarial evaluations and whether additional provisions may be necessary, record an adjustment to the reserve, which will be reflected as a loss or gainreported in earnings (loss) from discontinued operations in the accompanying statement of operations. 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. See Note 22,21, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.
Recently Issued Accounting Pronouncements
For a detailed discussion on recently issued accounting pronouncements and their impact on our consolidated financial statements, see Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
Quantitative and Qualitative Disclosures 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 December 31, 2019,2021, we did 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 Hungarian Forint, the Mexican Peso, the Taiwan Dollar, the Chinese Yuan Renminbi and the Hong Kong Dollar. As of December 31, 2019,2021, 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 December 31, 20192021 and 2018. Depending2020. Based upon theour current level of borrowings under our revolving credit facility and our Polish overdraft facility, and our excess cash, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate maywould have an approximate $0.7 million negativeimmaterial impact on our earnings or cash flows.
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 year ended December 31, 2019,2021, we sold $719$818.8 million of receivables. Depending upon the level of sales of receivables pursuant these agreements, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the margin rate may have an approximate $7.2$8.2 million negative impact on our earnings or cash flows. The charge related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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