What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-20 · 134 added, 110 removed, 283 unchanged (46% of the section changed)

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We are organized into two operating segments.

Each segment focuses on providing our customers with full-line coverage of its products, and a full suite of complimentary services that are tailored to our customers’ business needs and driving end-user demand for our products.

Each segment focuses on providing our customers with full-line coverage of its products, and a full suite of complementary services that are tailored to our customers’ business needs and driving end-user demand for our products.

We sell our products primarily to automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.

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To maintain our strong competitive position, we remain committed to the following:

providing our customers with full-line coverage of high quality engine management and temperature control products, supported by the highest level of value-added services;

continuing to maximize our production, supply chain and distribution efficiencies;

providing our customers with full-line coverage of high quality engine management and temperature control products and new technologies for all years, makes and models of vehicles on the road;

supporting our products with the highest level of value-added services;

supply chain excellence through supplier and customer focused initiatives, and continuing to maximize our production, supply chain and distribution efficiencies;

continuing to improve our cost position through increased global sourcing, increased manufacturing at our low-cost plants, and strategic transactions with manufacturers in low-cost regions;

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Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability and offering a product portfolio that provides comprehensive coverage for all vehicle applications.

In addition, our marketing support provides insightful customer category management, technical support and award-winning programs, and our technically skilled sales personnel provide our customers with product selection, assortment and application support, and technical training on diagnosing and repairing vehicles equipped with complex systems related to our products.

Our marketing support provides insightful customer category management, technical support and award-winning programs, and our technically skilled sales personnel provide our customers with product selection, assortment and application support related to our products.

In addition, we have a team dedicated to providing technical training on diagnosing and repairing vehicles equipped with complex systems.

Expand Our Product Lines .

We intend to increase our sales by continuing to develop internally, or through potential acquisitions, the range of engine management and temperature control products that we offer to our customers.

Vehicle manufacturers continue to introduce new technologies and systems creating opportunities for us to expand our product lines.

In addition, we intend to increase our sales by continuing to develop internally, or through potential acquisitions, the range of engine management and temperature control products that we offer to our customers.

We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture product lines that incorporate the latest technologies, including product lines relating to safety, advanced driver assistance and collision avoidance systems.

Broaden Our Customer Base .

Our goal is to increase our customer base by (a) leveraging our manufacturing capabilities to secure additional business globally with original equipment vehicle and equipment manufacturers and their service part operations, as well as our existing customer base of large retailers, program distribution groups, warehouse distributors, other manufacturers and export customers, and (b) supporting the service part operations of vehicle and equipment manufacturers with value-added services and product support for the life of the part.

Broaden Our Customer Base and Diversify our Business .

We seek to increase our customer base and diversify our business primarily by (a) leveraging our manufacturing and distribution capabilities to secure additional business globally with original equipment vehicle and equipment manufacturers and their service part operations, as well as our existing customer base of large retailers, program distribution groups, warehouse distributors, other manufacturers and export customers, (b) supporting the service part operations of vehicle and equipment manufacturers with value-added services and product support for the life of the part, (c) developing new product lines that compliment our existing product offering and have the potential for high growth within the automotive aftermarket and (d) expand our product offering in the heavy duty and commercial vehicle markets.

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.

We intend to continue to improve our operating efficiency and cost position by:

increasing cost-effective vertical integration in key product lines through internal development;

focusing on integrated supply chain management, customer collaboration and vendor managed inventory initiatives;

evaluating additional opportunities to relocate manufacturing to our low-cost plants;

maintaining and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain materials and products from low cost regions such as those in Asia without compromising product quality;

enhancing company-wide programs geared toward manufacturing and distribution efficiency;

focusing on company-wide overhead and operating expense cost reduction programs.

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.

Commencing in the second quarter of 2020, we implemented many programs to conserve cash and reduce costs in response to the impact of the COVID-19 pandemic on our business, including by borrowing an additional $75 million under our amended credit agreement, and temporarily suspending our quarterly cash dividend payments and stock repurchases.

In June 2020, we repaid the additional $75 million of borrowed funds.

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 payments.

The Automotive Aftermarket

The automotive aftermarket industry is comprised of a large number of diverse manufacturers varying in product specialization and size.

In addition to manufacturing, aftermarket companies must allocate resources towards an efficient distribution process in order to maintain the flexibility and responsiveness on which their customers depend.

Aftermarket manufacturers must be efficient producers of small lot sizes, and must distribute, with rapid turnaround times, products for nearly all domestic and import vehicles on the road today.

The automotive aftermarket replacement parts business differs substantially from the OEM parts business.

The automotive aftermarket replacement parts business differs substantially from the original equipment manufacturers (“OEM”) parts business.

Unlike the OEM parts business that primarily follows trends in new car production, the automotive aftermarket replacement parts business primarily tends to follow different trends, such as:

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the total number of miles driven per year.

The automotive aftermarket industry is comprised of a large number of diverse manufacturers varying in product specialization and size.

Aftermarket manufacturers must be efficient producers of small lot sizes, and must distribute, with rapid turnaround times, products for nearly all domestic and import vehicles on the road today.

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.

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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, 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.

Ordinarily, a warm summer, as we experienced in 2020, would increase the demand for our temperature control products, while a somewhat mild summer, as we experienced in 2019, may lessen such demand.

In 2020, however, due to the impact of the COVID-19 pandemic, we initially experienced a significant reduction in customer demand for our products in the second quarter, with customer demand strengthening in the last half of the quarter and continuing throughout the second half of the year.

As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically peak near the end of the second quarter, as the inventory build‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.

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We account for these discounts and allowances as a reduction to revenues, and record them when sales are recorded.

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

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, and China.

In certain countries in which we operate, national, state and local governments implemented a variety of measures in response to the COVID-19 pandemic that had the effect of restricting or limiting, among other activities, the operations of certain businesses.

While many of these measures have eased, allowing for increased economic activity, there can be no assurances that restrictive measures will not be implemented again if the outbreak were to increase.

As we were declared an essential business under national and regional shelter-in-place orders, our business operations have continued throughout 2020.

Although we initially experienced a significant reduction in customer demand for our products in the second quarter of 2020, our business began to rebound in the last half of the quarter as we experienced an increase in incoming orders and increased demand for our products.

This trend continued into the second half of 2020 as our business improved to pre-COVID-19 levels with our customers’ POS sales exceeding their comparable figures for 2019, resulting in strong second half of 2020 results.

In response to the COVID-19 pandemic, we established a committee, comprised of our executive officers, to oversee the Company’s risk identification, management and mitigation strategies regarding the impact of the pandemic on our business and operations.

Among the issues that are actively being managed by the committee are those relating to the management of inventories and production volumes, cost reduction and cash preservation initiatives, and the enactment of policies and practices to ensure the health and safety of our employees, contractors and customers, as well as the impact of the continued duration and scope of the pandemic, of governmental measures in response to the pandemic, of potentially declining customer demand for our products, and of the potential future deterioration of general economic conditions and disruptions in our supply chain.

The committee continues to meet on a regular basis, closely monitoring events related to the pandemic and any appropriate actions that may be taken.

Commencing in the second quarter of 2020, we implemented many cost reduction measures in response to the impact of the COVID-19 pandemic on our business, including the reduction of discretionary spending, salary reductions of our executive officers and Board of Directors, and suspension of 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 November 2020, we reinstated the salaries of our executive officers and Board of Directors and retroactively restored their compensation.

Regarding the health and welfare of our employees, contractors and customers, we have implemented a number of policies and practices at all of our facilities.

We have provided personal protection equipment, including face masks and gloves, to all our employees and require their usage while at work, have installed Plexiglas partitions where appropriate, and require temperature checks for all employees and visitors upon entering our facilities.

We have established protocols for individuals who have tested positive, and for employees who have symptoms or have been exposed to the virus.

All of our facilities are thoroughly cleaned and sanitized daily, and all state mandated protocols are followed as employees return to work after the lifting of shelter-in-place orders.

The health and safety of our employees, vendors and visitors has always been and will continue to be our first priority.

The effects of the COVID-19 pandemic on our business, financial condition and results of operations in future periods may continue to be significant based upon the significant volatility, uncertainty and potential economic disruption caused by the pandemic.

See “Comparison of Results of Operations for Fiscal Years 2020 and 2019” of this Report for a further discussion of the impact of the COVID-19 pandemic on our business, results of operations and financial condition.

Impact of CARES Act and International Wage Subsidies

In March 2020, the U.S.

enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

The CARES Act was passed to protect Americans from the public health and economic impacts of COVID-19.

The CARES Act provides for fast and direct assistance for American workers, families and small businesses, and preserves jobs for American industries.

As related to the preservation of jobs for American industries, the CARES Act includes the enactment of an employee retention feature, a payroll tax deferral opportunity and, in certain instances, payroll support and business loans.

The payroll tax deferral opportunity in the CARES Act enables businesses to enhance their cash flow by permitting the cash deferral of the payment of the employer’s share of the Social Security tax they otherwise would be responsible for paying to the federal government with respect to their employees.

The amount of the cash deferral will be paid over the next two years, with 50% of the amount to be paid by December 31, 2021 and the remaining 50% by December 31, 2022.

In April 2020, we elected to defer our share of the employers’ Social Security tax relating to wages paid to our employees.

The total cash deferral as of December 31, 2020 is $5.5 million, which we plan to pay equally by December 31, 2021 and 2022.

The employee retention feature of the CARES Act enables employers to obtain a tax credit for wages paid to employees unable to provide services to the company as a result of COVID-19.

The tax credit is limited to 50% of up to $10,000 of wages per employee paid, or incurred, from March 13, 2020 through December 31, 2020.

Although our manufacturing facilities were deemed to be an essential business and continued to operate, our headquarters in Long Island City, New York were forced to close under the New York State shelter-in-place mandate by the governor, which resulted in a $0.9 million tax credit as of December 31, 2020.

Additionally, we filed for wage subsidies in Canada and Poland under laws in those countries.

After qualifying, in August 2020, we received a wage subsidy of CND $1.7 million (approximately US $1.3 million) from the Canadian government, and a wage subsidy of Zloty 2.8 million (approximately US $0.7 million) from the Polish government.

Impact of Changes in U.S.

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trade policy, particularly as it relates to China, as with much of our industry, have resulted in the assessment of increased tariffs on goods that we import into the United States.

Although our operating results in 2019 have been slightly impacted by the timing of Chinese sourced products, we have taken, and continue to take, several actions to mitigate the impact of the increased tariffs, including but not limited to, price increases to our customers.

Although our operating results in 2020 have been only slightly impacted by the tariff costs associated with Chinese sourced products, we have taken, and continue to take, several actions to mitigate the impact of the increased tariffs, including but not limited to, price increases to our customers.

We do not anticipate that the increased tariffs will have a significant impact on our future operating results.

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Comparison of Results of Operations For Fiscal Years 2020 and 2019

Consolidated net sales for 2019 were $1,137.9 million, an increase of $45.8 million, or 4.2%, compared to $1,092.1 million in the same period of 2018, with the majority of our net sales to customers located in the United States.

Consolidated net sales increased in our Engine Management Segment and were essentially flat year-over-year in our Temperature Control Segment.

Consolidated net sales for 2020 were $1,128.6 million, a decrease of $9.3 million, or 0.8%, compared to $1,137.9 million in the same period of 2019, with the majority of our net sales to customers located in the United States.

Consolidated net sales decreased in our Engine Management Segment and increased in our Temperature Control Segment.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the years ended December 31, 2020 and 2019 (in thousands):

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Total Temperature Control

Engine Management’s net sales increased $45.7 million, or 5.7%, to $849.2 million for the year ended December 31, 2019.

Net sales in ignition, emission control, fuel and safety related system products for the year ended December 31, 2019 were $706 million, an increase of $57.7 million, or 8.9%, compared to $648.3 million in the same period of 2018.

Net sales in the wire and cable product group for the year ended December 31, 2019 were $143.2 million, a decrease of $12 million, or 7.7%, compared to $155.2 million in the same period of 2018.

Engine Management’s increase in net sales for the year ended December 31, 2019 compared to the same period in 2018 primarily reflects the impact of incremental sales from our April 2019 acquisition of certain assets and liabilities 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 in net sales was offset, in part, by the general decline in our wire and cable business due to its product lifecycle.

Incremental sales from our acquisition of the Pollak business of $28.2 million were included in the net sales of the ignition, emission control, fuel and safety related system products market from the date of acquisition through December 31, 2019.

Compared to the year ended December 31, 2018, excluding the incremental net sales from the acquisition, net sales in the ignition, emission control, fuel and safety related system products market increased $29.5 million, or 4.6%, and Engine Management net sales increased $17.5 million, or 2.2%.

Temperature Control’s net sales of $278.4 million for the year ended December 31, 2019 were essentially flat when compared to the same period in 2018.

Engine Management’s net sales decreased $13.5 million, or 1.6%, to $835.7 million for the year ended December 31, 2020.

Net sales in ignition, emission control, fuel and safety related system products for the year ended December 31, 2020 were $691.7 million, a decrease of $14.3 million, or 2%, compared to $706 million in the same period of 2019.

Net sales in the wire and cable product group for the year ended December 31, 2020 were $144 million, an increase of $0.8 million, or 0.6%, compared to $143.2 million in the same period of 2019.

Engine Management’s decrease in net sales for the year ended December 31, 2020 compared to the same period in 2019 results primarily from lower year-over-year net sales in the second quarter of 2020 reflective of the impact of the COVID-19 pandemic and the resulting national and regional shelter-in-place orders related thereto.

After a downturn in net sales initially in the second quarter of 2020 due to impact of the COVID-19 pandemic, customer orders strengthened in the last half of the second quarter and continued throughout the second half of 2020, resulting in strong Engine Management net sales in the second half of 2020, which have largely offset the steep declines experienced earlier in the year.

Temperature Control’s net sales increased $3.6 million, or 1.3%, to $282 million for the year ended December 31, 2020.

Net sales in the compressors product group for the year ended December 31, 2020 were $163.1 million, an increase of $2.6 million, or 1.6%, compared to $160.5 million in the same period of 2019.

Net sales in the other climate control parts group for the year ended December 31, 2019 were $117.9 million, a decrease of $12.1 million, or 9.3%, compared to $130 million for the year ended December 31, 2018.

Temperature Control’s net sales for the year ending December 31, 2019 when compared to the same period in 2018, reflect the impact of (1) increased year-over-year net sales during the first six months of 2019 due to strong pre-season orders as customers rebuilt their inventory levels after a very strong 2018 selling season;

(2) 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 from the impact of the introduction of air conditioner repair kits, which are sold as a complete repair kit inclusive of 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.

Net sales in the other climate control parts group for the year ended December 31, 2020 were $118.9 million, an increase of $1 million, or 0.9%, compared to $117.9 million for the year ended December 31, 2019.

Temperature Control’s increase in net sales for the year ended December 31, 2020, when compared to the same period in 2019, reflects the impact of a strong second half of the year after a significant year-over-year decrease in net sales in the first and second quarters of 2020.

The lower year-over-year net sales in the first half of 2020 reflects the impact of strong pre-season orders in the first quarter of 2019 that did not recur in the first quarter of 2020;

and the impact in the second quarter of 2020 of the COVID-19 pandemic and resulting national and regional shelter-in-place orders related thereto.

After a downturn in net sales in the first quarter of 2020, and initially in the second quarter of 2020 due to impact of the COVID-19 pandemic, Temperature Control’s net sales strengthened in the last half of the second quarter and continued throughout the second half of 2020, aided by the impact of very warm summer weather conditions, which more than offset the declines earlier in the year.

Demand for our Temperature Control products may vary significantly with summer weather conditions and customer inventory levels.

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

Compared to 2018, gross margins at Engine Management increased 1 percentage point from 28.6% to 29.6%, while gross margins at Temperature Control decreased 0.1 percentage point from 25.3% to 25.2%.

The gross margin percentage increase in Engine Management compared to the prior year reflects our return to historical productivity in our Reynosa, Mexico wire plant after the lengthy integration of the General Cable wire business, a continued emphasis on cost reductions, as well as certain pricing actions, which more than offset the negative impact of tariff costs passed on to customers without any markup.

The gross margin percentage decrease in Temperature Control compared to the prior year resulted primarily from the negative impact of tariffs passed on to customers without any markup.

Compared to 2019, gross margins at Engine Management increased 0.5 percentage points from 29.6% to 30.1%, while gross margins at Temperature Control increased 1.5 percentage points from 25.2% to 26.7%.

The gross margin percentage increases at both Engine Management and Temperature Control reflect the impact of improved year-over-year absorption in the third and fourth quarters of 2020, as production volumes increased due to higher year-over-year customer demand, which more than offset the decline in gross margins in the second quarter of 2020 caused by lower absorption and production volumes.

The lower production volume at both Engine Management and Temperature Control in the second quarter of 2020 was reflective of the general slowdown in the worldwide economy caused by the COVID-19 pandemic, as we temporarily reduced production levels in several of our facilities in line with lower customer demand.

As customer demand began to increase, the production levels at all of our facilities were adjusted to meet the increase in customer demand, resulting in higher year-over-year production volumes in the second half of 2020.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses (“SG&A”) increased to $234.7 million, or 20.6% of consolidated net sales in 2019, as compared to $231.3 million, or 21.2% of consolidated net sales in 2018.

The $3.4 million increase in SG&A expenses as compared to 2018 reflects the impact of (1) incremental expenses of $4.3 million from our acquisition of certain assets and liabilities of the Pollak business of Stoneridge, Inc., including amortization of intangible assets acquired;

and (2) higher selling and marketing expenses, and other general and administrative costs, which 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 Control 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.

Selling, general and administrative expenses (“SG&A”) decreased to $224.7 million, or 19.9% of consolidated net sales in 2020, as compared to $234.7 million, or 20.6% of consolidated net sales in 2019.

The $10 million decrease in SG&A expenses as compared to 2019 is principally due to lower selling and marketing expenses, lower costs incurred related to our accounts receivable supply chain financing arrangements resulting primarily from lower discount rates , annual savings initiatives, and to a lesser extent by certain non-recurring benefits from cost reduction initiatives .

These decreases more than offset the impact of slightly higher distribution expenses, COVID-19 related costs, and $1.1 million of incremental expenses from our April 2019 acquisition of certain assets and liabilities of the Pollak business of Stoneridge Inc., including amortization of intangible assets acquired.

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, we anticipate that products sold under the BWD trademark will be significantly reduced and uncertain beyond the first quarter of 2021.

In connection with the decision, we recorded an impairment charge of $2.6 million in 2020.

Restructuring and Integration Expenses.

Restructuring and integration expenses were $0.5 million in 2020 compared to restructuring and integration expenses of $2.6 million in 2019.

Restructuring and integration expenses incurred in 2020 relate to (1) $0.3 million 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) $0.2 million in costs related to the residual relocation activities in our Engine Management segment in connection with our integration of the Pollak business of Stoneridge, Inc., acquired in April 2019.

Restructuring and integration expenses incurred in 2019 of $2.6 million consisted of (1) $2.2 million of expenses related to relocation of certain inventory, machinery and equipment acquired in our April 2019 acquisition of the Pollak business of Stoneridge, Inc.

to our existing facilities and the $0.4 million increase 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.

Other Income (Expense), Net.

Other expense, net was $5,000 in 2019 compared to other income, net of $4.3 million in 2018.

During the year ended December 31, 2018, we recognized a $3.9 million gain on the sale of our property located in Grapevine, Texas, and a $0.2 million deferred gain related to the sale-leaseback of our Long Island City, New York facility.

The recognition of the deferred gain related to the sale-leaseback of our Long Island City, New York facility ended in the first quarter of 2018 upon the termination of the initial 10-year lease term for the facility.

to our existing facilities, and (2) $0.4 million in environmental cleanup costs for the ongoing monitoring and remediation at our Long Island City, New York former manufacturing facility.

Operating Income.

Operating income was $108.9 million in 2020, compared to $94.5 million in 2019.

The year-over-year increase in operating income of $13.2 million is the result of the impact of higher consolidated net sales, higher 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 other income (expense), net.

The year-over-year increase in operating income of $14.4 million is the result of the impact of higher gross margins as a percentage of consolidated net sales, lower SG&A expenses and lower restructuring and integration expenses, which more than offset the impact of lower consolidated net sales and the impairment charge related to the BWD trademark.

Other Non-Operating Income (Expense), Net.

Other non-operating income, net was $2.6 million in 2019, compared to other non-operating expense, net of $0.4 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, the year-over-year increase in other non-operating income (expense), net of $1.3 million resulted primarily from the increase in year-over-year equity income from our joint ventures offset, in part, by the unfavorable impact of changes in foreign currency exchange rates.

Other non-operating income, net was $0.8 million in 2020, compared to $2.6 million in 2019.

The year-over-year decrease in other non-operating income, net results primarily from the decrease in year-over-year equity income from our joint ventures, which more than offset the year-over-year reduction in foreign exchange losses.

The lower year-over-year equity income from our joint ventures is reflective of the general slowdown in the worldwide economy caused by the COVID-19 pandemic.

Interest Expense.

Interest expense was $5.3 million in 2019 compared to $4 million in 2018.

The year-over-year increase in interest expense reflects the impact of both higher average outstanding borrowings during 2019 when compared to 2018, and the higher year-over-year average interest rates on our revolving credit facility.

The higher year-over-year average outstanding borrowings during 2019 resulted primarily from the timing of the acquisition of the Pollak business of Stoneridge, Inc.

Interest expense decreased to $2.3 million in 2020, compared to $5.3 million in 2019.

The year-over-year decrease in interest expense reflects the impact of lower year-over-year average interest rates on our revolving credit facility, and lower average outstanding borrowings in 2020 when compared to 2019.

Income Tax Provision .

The income tax provision for 2020 was $27 million at an effective tax rate of 25.1%, compared to $22.7 million at an effective tax rate of 24.8% in 2019.

The lower effective tax rate in 2019 compared to 2018 results primarily from a change in the mix of U.S.

The higher effective tax rate in 2020 compared to 2019 results primarily from an increase in state and local taxes, and a change in the mix of U.S.

and foreign income.

Loss From Discontinued Operations.

Loss from discontinued operations, net of income tax, reflects information contained in the actuarial studies performed as of August 31, 2019, and as of August 31, 2018 (which was revised to reflect the events occurring through November 30, 2018), other information available and considered by us, and legal expenses and other costs associated with our asbestos-related liability.

Loss from discontinued operations, net of income tax, reflects information contained in the actuarial studies performed as of August 31, 2020 and updated in December 2020 to reflect events that occurred in the fourth quarter of 2020, and as of August 31, 2019, 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, 2020 and 2019, we recorded a net loss of $23 million and $11.1 million from discontinued operations, respectively.

The loss from discontinued operations for the year ended December 31, 2020 and 2019 includes a $25.7 million and $9.7 million pre-tax provision, respectively, to increase our indemnity liability in line with the 2020 and 2019 actuarial studies;

and legal expenses, before taxes, of $4.7 million and $5.1 million during 2019 and 2018, respectively.

and legal expenses and other miscellaneous expenses, before taxes, of $5.4 million during both 2020 and 2019.

As discussed more fully in Note 21 “Commitments and Contingencies” in the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

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Restructuring and Integration Programs

The Plant Rationalization Program that commenced in February 2016, the Wire and Cable Relocation Program announced in October 2016, and the Orlando Plant Rationalization Program that commenced in January 2017, were all substantially completed as of December 31, 2018.

As a result of our April 2019 acquisition of the Pollak business of Stoneridge, Inc., we incurred $2.2 million of integration expenses related to the relocation of certain inventory, machinery, and equipment from Pollak’s distribution and manufacturing facilities to our existing facilities.

The Pollak relocation was substantially completed as of December 31, 2019.

All of our restructuring and integration programs have been substantially completed.

For a detailed discussion on the restructuring and integration costs, see Note 3, “Restructuring and Integration Expense,” of the notes to our consolidated financial statements.

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During 2020, cash provided by operating activities was $97.9 million compared to $76.9 million in 2019.

The year-over-year increase in operating cash flow is primarily the result of the increase in net earnings, the year-over-year decrease in accounts receivable compared to the year-over-year increase in accounts receivable in 2018, and the smaller year-over-year increase in inventories, offset, in part, by the year-over-year increase in prepaid expenses and other current assets compared to 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.

The year-over-year increase in operating cash flow is primarily the result of the decrease in inventories compared to the year-over-year increase in inventories in 2019, the smaller year-over-year increase in prepaid expenses and other current assets, the increase in accounts payable compared to the year-over-year decrease in accounts payable in 2019, and the increase in sundry payables and accrued expenses compared to the year-over-year decrease in sundry payables and accrued expenses in 2019, partially offset by the increase in accounts receivable compared to the year-over-year decrease in accounts receivable in 2019.

Net earnings during 2020, were $57.4 million compared to $57.9 million in 2019.

During 2019, (1) the decrease in accounts receivable was $17.9 million compared to the year-over-year increase in accounts receivable of $13.7 million in 2018;

(2) the increase in inventories was $17.9 million compared to the year-over-year increase in inventories of $30.2 million in 2018;

(3) the increase in prepaid expenses and other current assets was $8.3 million compared to the year-over-year decrease in prepaid expenses and other current assets of $4.9 million in 2018;

(4) the decrease in accounts payable was $2 million compared to the year-over-year increase in accounts payable of $16.9 million in 2018;

and (5) the decrease in sundry payables and accrued expenses was $18.1 million compared to the year-over-year increase in sundry payables and accrued expenses of $8.4 million in 2018.

The cash impact of the changes in sundry payables and accrued expenses relates primarily to the timing of defective and overstock customer returns, and customer core returns used in our future remanufacturing activities.

During 2020, (1) the increase in accounts receivable was $71.9 million compared to the year-over-year decrease in accounts receivable of $2.8 million in 2019;

(2) the decrease in inventories was $18 million compared to the year-over-year increase in inventories of $17.9 million in 2019;

(3) the increase in accounts payable was $7.4 million compared to the year-over-year decrease in accounts payable of $2 million in 2019;

(4) the increase in prepaid expenses and other current assets was $0.4 million compared to the year-over-year increase in prepaid expenses and other current assets of $8.3 million in 2019;

and (5) the increase in sundry payables and accrued expenses was $40.7 million compared to the year-over-year decrease in sundry payables and accrued expenses of $3 million in 2019.

The increase in receivables and decrease in inventories during 2020 is reflective of the significant increase in net sales in the second half of 2020 and the timing of cash receipts from customers;

while the cash impact of the increase in sundry payables and accrued expenses relates primarily to the timing of the payment of customer rebates.

We continue to actively manage our working capital to maximize our operating cash flow.

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Cash used in investing activities was $17.8 million in 2020 compared to $54.8 million in 2019.

Investing activities in 2020 consisted of capital expenditures of $17.8 million.

Investing activities in 2019 consisted of (1) net cash proceeds of $4.8 million received in January 2019 from the December 2018 sale of our property in Grapevine, Texas;

(2) the payment of $38.4 million for our acquisition of certain assets and liabilities of the Pollak business of 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 million.

Investing activities in 2018 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;

(3) the payment of $5.1 million for our acquisition of an approximate 29% minority interest in Foshan Che Yijia New Energy Technology Co., Ltd.;

and (4) capital expenditures of $16.2 million.

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Cash used in financing activities was $71.5 million in 2020 compared to $23.4 million in 2019.

During 2019, (1) we increased borrowings under our revolving credit facility by $8.8 million;

During 2020, (1) we reduced our borrowings under our revolving credit facility by $42.5 million;

(2) we reduced our borrowings under lease obligations and our Polish overdraft facility by $4.2 million;

(3) we made cash payments for the repurchase of shares of our common stock of $13.5 million;

and (4) we paid dividends of $11.2 million.

Borrowings under our revolving credit 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 finance activities was $46.1 million in 2018.

During 2018, (1) we increased 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 $13.3 million;

(3) we made cash payments of $14.9 million for the repurchase of our common stock;

Cash provided by operating activities was used to pay down our revolving credit facility, our lease obligations and Polish overdraft facility, and to fund our investing activities, purchase shares of our common stock and pay dividends.

Cash used in financing activities was $23.4 million in 2019.

During 2019, (1) we increased borrowings under our revolving credit facility by $8.8 million;

(2) we made cash payments for the repurchase of shares of our common stock of $10.7 million;

and (3) we paid dividends of $20.6 million.

Cash provided by operating activities, along with borrowings under our Polish overdraft facility, net of payments under our capital lease obligations, were used to fund our investing activities, pay down borrowings under our revolving credit facility, purchase shares of our common stock and pay dividends.

Borrowings under our revolving credit facility, along with cash provided by operating activities, were used to fund our investing activities, purchase shares of our common stock and pay dividends.

Dividends of $11.2 million and $20.6 million were paid in 2020 and 2019, 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, which was paid on December 1, 2020 to shareholders of record on November 16, 2020.

Comparison of Liquidity and Capital Resources For Fiscal Years 2019 and 2018

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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.

After taking into account outstanding borrowings under the amended credit agreement, there was an additional $237.1 million available for us to borrow pursuant to the formula at December 31, 2020.

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 $10 million and $52.5 million at December 31, 2020 and 2019, respectively;

while letters of credit outstanding under the credit agreement were $3.1 million at both December 31, 2019 and 2018.

while letters of credit outstanding under the credit agreement were $2.8 million and $3.1 million at December 31, 2020 and 2019, 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, the weighted average interest rate on our amended credit agreement was 3.5%, which consisted of $40 million in direct borrowings at 2.3% and an alternative base rate loan of $12.5 million at 5%.

At December 31, 2020, the weighted average interest rate on our amended credit agreement was 1.4%, which consisted of $10 million in direct borrowings.

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Borrowings under the overdraft facility will bear interest at a rate equal to WIBOR + 1.5% and are guaranteed by Standard Motor Products, Inc., the ultimate parent company.

At December 31, 2019 and 2018, borrowings under the overdraft facility were Zloty 16.7 million (approximately $4.4 million) and Zloty 19.9 million (approximately $5.3 million), respectively.

At December 31, 2020 and 2019, borrowings under the overdraft facility were Zloty 0.4 million (approximately US $0.1 million) and Zloty 16.7 million (approximately US $4.4 million), respectively.

In order to reduce our accounts receivable balances and improve our cash flow, we are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions.

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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.

During 2017, our Board of Directors authorized the purchase of up to $30 million of our common stock under stock repurchase programs.

Under these programs, during the years ended December 31, 2017 and 2018, we repurchased 539,760 and 112,307 shares of our common stock, respectively, in the open market at a total cost of $24.8 million and $5.2 million, respectively, thereby completing the 2017 Board of Directors’ authorizations.

In May 2018, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a new stock repurchase program.

In May 2018, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a stock repurchase program.

Under this program, during the year ended December 31, 2018 and 2019, we repurchased 201,484 and 221,748 shares of our common stock, respectively, at a total cost of $9.3 million and $10.7 million, respectively, thereby completing the 2018 Board of Directors authorization.

In March 2020, our Board of Directors authorized the purchase of up to $20 million of our common stock under a stock repurchase program.

Under this program, during the year ended December 31, 2020, we repurchased 323,867 shares of our common stock, at a total cost of $13.5 million.

As of December 31, 2020, there was approximately $6.5 million available for future stock purchases under the program.

In February 2021, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a new stock repurchase program, thereby increasing the amount available for future stock purchases to approximately $26.5 million.

Stock will be purchased under the programs from time to time, in the open market or through private transactions, as market conditions warrant.

We anticipate that our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months.

Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements.

Significant assumptions underlie this belief, including, among other things, that we will be able to mitigate the future impact, if any, of the COVID-19 pandemic and the decision of a large retail customer to pursue a private brand strategy for its engine management product line on our business and operating cash flow by managing our inventories and production levels to align with customer demand for our products, and effectively managing our costs and expenses, and that there will be no material adverse developments in our business, liquidity or capital requirements.

If material adverse developments were to occur in any of these areas, there can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs.

In addition, if we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected.

For further information regarding the risks in our business, refer to Item 1A, “Risk Factors,” of this report.

The following table summarizes our contractual commitments as of December 31, 2020 and expiration dates of commitments through 2028 (a) (b):

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As of December 31, 2020, amounts outstanding under our revolving credit facility was $10 million.

As of January 1, 2019 we adopted ASU 2016-02, Leases, which resulted in the recording of the lease obligations on our consolidated balance sheet.

For information related to our adoption of ASU 2016-02, see Note 1 “Summary of Significant Accounting Policies” and Note 2 “Leases” of the notes to our consolidated financial statements.

Critical Accounting Policies

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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, 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.

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 assurance that actual results will not differ from those estimates.

Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimate or in the assumptions that we use in calculating the estimate, unforeseen changes in the industry, or business could materially impact the estimate and may have a material adverse effect on our business, financial condition and results of operations.

Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of the COVID-19 pandemic, and other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.

Revenue Recognition.

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At December 31, 2020 and 2019, the allowance for sales returns was $41 million and $35.2 million, respectively.

Similarly, we must make estimates of the uncollectability of our accounts receivable.

We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

Similarly, we must make estimates of the collectability of our accounts receivable.

We specifically analyze accounts receivable and analyze historical and current economic trends, as well as reasonable and supportable forecasts, customer concentrations, customer credit‑worthiness, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

At December 31, 2020 , the allowance for doubtful accounts and for discounts was $5.8 million.

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New customer acquisition costs refer to arrangements pursuant to which we incur change-over costs to induce a new customer to switch from a competitor’s brand.

In addition, change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory commonly referred to as a stocklift.

In addition, change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory commonly referred to as a stock lift.

New customer acquisition costs are recorded as a reduction to revenue when incurred.

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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-step impairment test is not required.

If we are unable to reach this conclusion, then we would perform the two-step impairment test.

Initially, 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 a charge for impairment to the extent the carrying value exceeds the implied fair value.

The implied fair value of goodwill is determined 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 a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

ASU 2017-04 will be applied prospectively.

If we are unable to reach this conclusion, then we would perform a goodwill quantitative impairment test.

In performing the quantitative test, the fair value of the reporting unit is compared to its carrying amount.

A charge for impairment is recognized by the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the total amount of 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis