What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-24 · 423 added, 340 removed, 77 unchanged (91% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2020.

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

We are 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 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.

Our Business Strategy

Our mission is to be the best full-line, full-service supplier of premium engine management and temperature control products .

The key elements of our strategy are as follows:

Maintain Our Strong Competitive Position in our Engine Management and Temperature Control Businesses .

We are a leading independent manufacturer and distributor serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control.

We believe that our success is attributable to our emphasis on product quality, the breadth and depth of our product lines for both domestic and import vehicles, and our reputation for outstanding value-added services.

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 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;

focusing on our engineering development efforts including a focus on bringing more product manufacturing in-house.

Provide Superior Value-Added Services and Product Availability .

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.

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 .

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 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.

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 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:

the number of vehicles on the road;

the average age of vehicles on the road;

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.

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.

Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment.

It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business.

In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories.

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

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

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

During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

Inventory Management.

We face inventory management issues as a result of overstock returns.

We permit our customers to return new, undamaged products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories.

In addition, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns.

We accrue for overstock returns as a percentage of sales after giving consideration to recent returns history.

Discounts, Allowances, and Incentives.

We offer a variety of usual customer discounts, allowances and incentives.

First, we offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice.

Second, we offer pricing discounts based on volume purchased from us and participation in our cost reduction initiatives.

These discounts are principally in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale.

For those customers that choose to receive a payment on a quarterly basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly.

Finally, rebates and discounts are provided to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided.

Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances.

Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.

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

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.

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.

(In thousands, except per share data)

Gross profit %

Operating income

Operating income %

Earnings from continuing operations before income taxes

Provision for income taxes

Earnings from continuing operations

Loss from discontinued operations, net of income taxes

Net earnings attributable to

noncontrolling interest

Net earnings attributable to SMP

Per share data attributable to SMP – Diluted:

Earnings from continuing operations

Discontinued operations

Net earnings per common share

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.

Operating margin as a percentage of net sales in 2021 was 9.9% as compared to 9.6% in 2020 and 8.3% in 2019.

Our operating margins in 2021 were favorably impacted by higher net sales.

Included in our operating margin were selling, general

and administrative expenses (“SG&A”) of $247.5 million, or 19.1% of net sales in 2021, $224.7 million, or 19.9% of net sales in 2020, and $234.7 million, or 20.6% of net sales in 2019.

The higher SG&A expenses in 2021 resulted

principally from elevated distribution costs associated with higher sales volumes as well as the impact of increased freight costs, higher employee compensation costs, and incremental expenses from our soot sensor, Trombetta and Stabil

acquisitions.

We anticipate that our future operating margins will be in line with the operating margins achieved in 2021 and 2020.

Overall, our financial results in 2021 were extremely strong.

We posting record net sales and earnings from continuing operations and achieving substantial new business wins with existing customers.

Our core automotive aftermarket business

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.

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 market.

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,

Tijuana, Mexico, as well as a 70% ownership in a joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”).

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

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.

In September 2021, we acquired 100% of the capital stock of Stabil Operative Group GmbH, a German company (“Stabil”), for Euros 13.7 million, or $16.3 million, subject to certain post-closing adjustments.

Stabil is a manufacturer and

distributor of a variety of components, including electronic sensors, control units, and clamping devices to the European market, serving both commercial and light vehicle applications.

The acquired Stabil business is headquartered on the

outskirts of Stuttgart, Germany with facilities in Germany and Hungary.

The acquisition is an excellent fit for our strategy of expansion beyond our core aftermarket business into complementary areas, and gives us exposure to a diversified group

of blue chip European commercial and light vehicle customers.

For additional information on our recent acquisitions, see Note 2, “Business Acquisitions and Investments,” of 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 committee, comprised of

our executive officers, to oversee the Company’s risk identification, management and mitigation strategies regarding the impact of the pandemic on our business and operations.

The committee continues to meet on a regular basis, monitoring events

related to the pandemic and any appropriate actions to be taken.

Among the issues that are actively being monitored by the committee are the general state of economic conditions, governmental measures in response to the pandemic, the spread of

the delta and omicron variants, and the enactment of policies and practices to ensure the health and safety of our employees, contractors and customers, as well as customer demand for our products and any potential disruptions in our supply

As related to the performance of our business, we were declared an essential business under national and regional shelter-in-place orders and, as such, our business operations continued throughout 2020.

After a downturn in net sales initially

in the second quarter of 2020, customer orders strengthened in the last half of the second quarter and continued throughout 2020, resulting in strong net sales for the year ended December 31, 2020.

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 impact of the pandemic, any uncertain future effect of the pandemic may have a material adverse effect on our business, financial condition and results of operations.

Impact of Global Supply Chain Disruption and Inflation

Disruptions in the global economy in 2020 and the lingering impacts into 2021 have impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost

increases in certain raw materials, labor and transportation.

In response to the global supply chain volatility and inflationary cost increases, we have taken, and continue to take, several actions to mitigate the impact by working closely with

our suppliers and customers to minimize any potential adverse impacts on our business, including implementing cost savings initiatives and the pass through of higher costs to our customers, which began in the fourth quarter of 2021.

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.

We expect these inflationary

trends to continue for some time, and while we believe that we will be able to somewhat offset the impact, there can be no assurances that unforeseen future events in the global supply chain affecting the availability of materials and components,

and/or increasing commodity pricing, will not have a material adverse effect on our business, financial condition and results of operations.

Impact of Changes in U.S.

Changes in U.S.

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

Although our operating results in 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.

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.

operating results in 2021 have been only slightly impacted by the tariff 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.

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.

Additionally, we realize the intricate role our employees play to the overall success of our business.

Their health and happiness is important, and we

continue to look for ways to address their needs and the needs of their families.

For example, in 2021 we conducted several surveys on employee engagement, employee satisfaction, and diversity, equity and inclusion to gain a deeper understanding of our employees’ well-being so as to ensure that the company’s culture remains strong.

Comparison of Results of Operations For Fiscal Years 2021 and 2020

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.

Consolidated net sales for 2021 were $1,298.8 million, an increase of $170.2 million, or 15.1%, compared to $1,128.6 million in the

same period of 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 in 2020 were adversely impacted in the first half of 2020 by the COVID-19 pandemic, and were followed by strong net sales in the second half of 2020, as our 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, 2021 and 2020 (in thousands):

7 unchanged sentences

Total Temperature Control

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.

Engine Management’s net sales increased $102.3 million, or 12.2%, to $937.9 million for the year ended December 31, 2021.

Net sales in ignition, emission control, fuel and safety related system products for the year ended December 31, 2021

were $786.5 million, an increase of $94.8 million, or 13.7%, compared to $691.7 million in the same period of 2020.

Net sales in the wire and cable product group for the year ended December 31, 2021 were $151.4 million, an increase of $7.5

million, or 5.2%, compared to $144 million in the same period of 2020.

Engine Management’s increase in net sales for the year ended December 31, 2021 compared to the same period in 2020, 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 soot sensor, Trombetta and Stabil acquisitions, along with the favorable year-over-year impact of having 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 lower net sales from the decision, in December 2020, of a large retail

customer to pursue a private brand strategy.

Incremental net sales from our soot sensor, Trombetta and Stabil acquisitions of $54.3 million were included in the net sales of the ignition, emission control, fuel and safety related system product group from the date of acquisition through

December 31, 2021.

Compared to the year ended December 31, 2020, excluding the incremental net sales from the acquisitions, net sales in the ignition, emission control, fuel and safety related product group increased $40.5 million, or 5.9%, and

Engine Management net sales increased $48 million, or 5.7%.

Temperature Control’s net sales increased $66.5 million, or 23.6%, to $348.4 million for the year ended December 31, 2021.

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, 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.

Net sales in the compressors product group for the year ended December 31, 2021 were $206.7 million, an increase of

$43.6 million, or 26.7%, compared to $163.1 million in the same period of 2020.

Net sales in the other climate control parts group for the year ended December 31, 2021 were $141.7 million, an increase of $22.8 million, or 19.2%, compared to

$118.9 million for the year ended December 31, 2020.

Temperature Control’s increase in net sales for the year ended December 31, 2021, when compared to the same period in 2020, reflects the impact of continued strong customer demand stemming

from the impact of very warm summer weather conditions and the replenishment of customer inventory levels, along with the favorable year-over-year impact of having lower net sales in the first part of 2020 due to the general weakness in the

economy caused by the COVID-19 pandemic.

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

Gross margins, as a percentage of consolidated net sales, increased to 29.8% for 2020, compared to 29.2% for 2019.

The following table summarizes gross margins by segment for the years ended December 31, 2020 and 2019, respectively (in thousands):

Gross Margins.

Gross margins, as a percentage of consolidated net sales, decreased to 29% for 2021, compared to 29.8% for 2020.

The following table summarizes gross margins by

segment for the years ended December 31, 2021 and 2020, respectively (in thousands):

Net sales (a)

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

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.

Compared to 2020, gross margins at Engine Management decreased 1.6 percentage points from 30.1% to 28.5%, while gross margins at Temperature Control increased 0.6 percentage points from 26.7% to 27.3%.

The gross margin percentage decrease in

Engine Management compared to the prior year reflects the impact of the lower 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 with lower gross margins but comparable operating margins.

Engine Management gross margins in the first 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 year-over-year production variances carried over from the prior year.

The gross margin percentage increase in Temperature Control compared to the prior year reflects the favorable impact of higher 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 our margins.

Selling, General and Administrative Expenses.

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.

Selling, general and administrative expenses (“SG&A”) increased to $247.5 million, or 19.1% of consolidated net sales in 2021, as

compared to $224.7 million, or 19.9% of consolidated net sales in 2020.

The $22.8 million increase in SG&A expenses as compared to 2020 is principally due to (1) higher distribution costs associated with higher sales volumes and the impact

of an increase in freight costs, (2) higher employee compensation costs, and (3) the impact of incremental expenses of $7.8 million from our soot sensor, Trombetta and Stabil acquisitions, including amortization of intangible assets acquired.

The lower year-over-year SG&A expense percentage of consolidated net sales reflects the impact of discretionary cost reduction measures implemented in 2020 and carried over into 2021, and higher year-over-year sales volumes.

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.

result of this development, products sold under the BWD trademark were significantly reduced.

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

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Restructuring and integration expenses were $0.4 million in 2021 compared to restructuring and integration expenses of $0.5 million in 2020.

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

Restructuring and integration expenses incurred in 2021 relate to the relocation in our Engine Management Segment of certain inventory, machinery, and equipment acquired in our March 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., acquired in April 2019.

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 $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.

Operating income was $129 million, or 9.9%, of consolidated net sales in 2021, compared to $108.9 million, or 9.6%, of consolidated net sales in 2020.

year-over-year increase in operating income of $20.1 million is the result of the impact of higher consolidated net sales and 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 higher SG&A expenses.

Operating income 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 $3.5 million in 2021, compared to $0.8 million in 2020.

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.

The year-over-year increase in other

non-operating income, net results primarily from the increase in year-over-year equity income from our joint ventures and the favorable impact of changes in foreign currency exchange rates.

During the first quarter of 2020, our joint ventures in

China experienced temporary shutdowns due to the impact of the COVID-19 pandemic, resulting in significantly lower equity income.

In March 2020, the joint ventures reopened and resumed manufacturing and distribution.

Interest Expense.

Interest expense decreased to $2 million in 2021, compared to $2.3 million in 2020.

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.

The year-over-year decrease in interest expense reflects the impact of lower

year-over-year average interest rates on our revolving credit facility, which more than offset the impact of slightly higher average outstanding borrowings in 2021 when compared to 2020.

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 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.

The income tax provision for 2021 was $31 million at an effective tax rate of 23.8%, compared to $27 million at an

effective tax rate of 25.1% in 2020.

The lower effective tax rate in 2021 compared to 2020 results primarily from the increased year-over-year income tax benefit from the exercise of restricted stock, and changes in the mix of U.S.

Loss From Discontinued Operations.

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 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.

Loss from discontinued operations, net of income tax, reflects information contained in the actuarial studies performed as of August 31, 2021 and

2020, and in December 2020 to reflect events that occurred in the 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.

years ended December 31, 2021 and 2020, we recorded a net loss of $8.5 million and $23 million from discontinued operations, respectively.

The loss from discontinued operations for the year ended December 31, 2021 and 2020 includes a $5.3

million and $25.7 million pre-tax provision, respectively, to increase our indemnity liability in line with the 2021 and 2020 actuarial studies;

and legal expenses and other miscellaneous expenses, before taxes, of $6.1 million and $5.4 million

for 2021 and 2020, respectively.

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 2020 and 2019

For a detailed discussion on the comparison of fiscal year 2019 to fiscal year 2018, 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, 2019.

For a detailed discussion on the comparison of fiscal year 2020 to fiscal year 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, 2020.

Restructuring and Integration Programs

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

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

For a detailed discussion on the restructuring and integration costs, see Note 3, “Restructuring and Integration Expense,” of the Notes Consolidated Financial Statements in Item 8 of this Report.

Liquidity and Capital Resources

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During 2021, cash provided by operating activities was $85.6 million compared to $97.9 million in 2020.

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.

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 sundry payables and accrued expenses, and the larger year-over-year increase in prepaid expenses

and other current assets, partially offset by the increase in net earnings, the 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 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;

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 2020;

the increase 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 accounts payable of $7.4

million in 2020;

(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 of $0.4 million in 2020;

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.

and (5) the increase in sundry payables

and accrued expenses was $13.4 million compared to the year-over-year increase in sundry payables and accrued expenses of $40.7 million in 2020.

The decrease in accounts receivable during 2021 reflects the impact of $50 million of receivables

presented to financial institutions at December 31, 2020, pursuant to our supply chain financing arrangements, that were collected in 2021;

while the increase in inventories during 2021 reflects actions taken to meet continued strong customer

demand, to replenish stock levels, which were depleted after record sales in the last half of 2020, and to serve as a hedge against the global disruptions in the supply chain.

We continue to actively manage our working capital to maximize our

operating cash flow.

Investing Activities .

Cash used in investing activities was $151.2 million in 2021 compared to $17.8 million in 2020.

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 Foshan Che Yijia New Energy Technology Co., Ltd.;

Investing activities

during 2021 consisted of (1) the payment of $15.4 million, net of $0.9 million of cash acquired, for our acquisition of 100% of the capital stock of Stabil Operative Group GmbH, a German company, (“Stabil”);

(2) the payment of $107.1 million, net

of $4.6 million of cash acquired, for our acquisition of 100% of the capital stock of Trumpet Holdings, Inc., a Delaware corporation, (“Trombetta”);

(3) the payment of $2.9 million for our acquisition of certain assets of the soot sensor product

lines from Stoneridge, Inc.;

and (4) capital expenditures of $25.9 million.

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

Financing Activities .

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

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.

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 provided by financing activities was $69 million in 2021 compared to cash used in financing activities of $71.5

million in 2020.

During 2021, we (1) increased our borrowings under our revolving credit facility by $115.3 million;

(2) increased 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 $26.8 million;

and (4) paid dividends of $22.2 million.

Cash provided by operating activities, along with borrowings under our revolving credit agreement, lease obligations and Polish overdraft

facility were used to fund our investing activities, purchase shares of our common stock and pay dividends.

Cash used in financing activities was $71.5 million in 2020.

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.

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.

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

(2) reduced our borrowings under lease obligations and our Polish overdraft facility

by $4.2 million;

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

and (4) paid dividends of $11.2 million.

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.

Dividends of $22.2 million and $11.2 million were paid in 2021 and 2020, respectively.

In January 2020, our Board of Directors voted to increase our quarterly dividend from $0.23 per share in 2019 to $0.25 per share in 2020.

In April 2020, in response to the impact of the COVID-19 pandemic on our business, our Board of Directors approved to temporarily suspend our quarterly cash dividend payments 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.

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 2020 and 2019

For a detailed discussion of our Liquidity and Capital Resources comparison of fiscal year 2019 to fiscal year 2018, 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, 2019.

For a detailed discussion of our Liquidity and Capital Resources comparison of fiscal year 2020 to fiscal year 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, 2020.

Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions.

Our primary sources of funds are ongoing net cash flows from operating activities and availability under our secured revolving credit facility (as detailed below).

In December 2018, we amended our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and a syndicate of lenders.

The amended credit agreement provides for a senior secured revolving credit facility with a line of credit of up to $250 million (with an additional $50 million accordion feature) and extends the maturity date to December 2023.

The line of credit under the amended agreement also allows for a $10 million line of credit to Canada as part of the $250 million available for borrowing.

Direct borrowings under the amended credit agreement bear interest at LIBOR plus a margin ranging from 1.25% to 1.75% based on our borrowing availability, or floating at the alternate base rate plus a margin ranging from 0.25% to 0.75% based on our borrowing availability, at our option.

Our primary sources of funds are ongoing net cash

flows from operating activities and availability under our secured revolving credit facility (as detailed below).

We have entered into an amended credit agreement with JPMorgan Chase Bank, N.A., as agent, and a syndicate of lenders.

The amended credit agreement provides for a senior secured revolving credit facility with a line of credit of up to $250

million (with an additional $50 million accordion feature) and extends the maturity date to December 2023.

The line of credit under the amended agreement also allows for a $10 million line of credit to Canada as part of the $250 million

available for borrowing.

0.25% to 0.75% based on our borrowing availability, at our option.

The amended credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.

Borrowings under the amended credit agreement are secured by substantially all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries.

Availability under the amended credit agreement is based on a formula of eligible accounts receivable, eligible drafts presented to the banks under our supply chain financing arrangements and eligible inventory.

After taking into account outstanding borrowings under the amended credit agreement, there was an additional $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.

Availability under the amended credit

agreement is based on a formula of eligible accounts receivable, eligible drafts presented to the banks under our supply chain financing arrangements and eligible inventory.

After taking into account outstanding borrowings under the amended

credit agreement, there was an additional $122.1 million available for us to borrow pursuant to the formula at December 31, 2021.

The loss of business of one or more of our key customers or, a significant reduction in purchases of our products

from any one of them, could adversely impact availability under our revolving credit facility.

Outstanding borrowings under the credit agreement, which are classified as current liabilities, were $125.3 million and $10 million at December 31, 2021 and 2020, respectively;

while letters of credit outstanding under the credit agreement were $2.8 million and $3.1 million at December 31, 2020 and 2019, respectively.

while letters of credit outstanding under the credit agreement

were $2.6 million and $2.8 million at December 31, 2021 and 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, 2020, the weighted average interest rate on our amended credit agreement was 1.4%, which consisted of $10 million in direct borrowings.

At December 31, 2021, the weighted average interest rate on our amended credit agreement was 1.4%, which consisted of $125 million in direct borrowings at 1.4% and an alternative base rate loan of $0.3 million at 3.5%.

Our average daily alternative base rate loan balance was $1.5 million and $1.7 million during 2020 and 2019, 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).

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.

Our average daily alternative base rate loan balance was $1.1 million and $1.5 million during 2021 and 2020,

respectively.

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, 2021, we were not subject to these covenants.

The amended credit agreement permits us to pay cash dividends of $20 million and make stock repurchases of $20 million in any fiscal year subject to a minimum availability of $25 million.

Provided specific conditions are met, the amended credit agreement also permits acquisitions, permissible debt financing, capital expenditures, and cash dividend payments and stock repurchases of greater than $20 million.

Our Polish subsidiary, SMP Poland sp.

z.o.o., has entered into an overdraft facility with HSBC France (Spolka Akcyjna) Oddzial w Polsce, formerly HSBC Bank Polska S.A., for Zloty 30 million (approximately $8 million).

The facility, as amended, expires in December 2021.

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

At 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.

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 February 2022, our Polish subsidiary, SMP Poland sp.

z.o.o., amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce, formerly HSBC France (Spolka Akcyjna) Oddzial w Polsce.

The amended overdraft

facility provides for borrowings of up to Zloty 30 million (approximately $8 million).

Availability under the amended facility commences in March 2022 and ends in June 2022, with automatic three-month renewals until June 2027, subject to

cancellation by either party, at its sole discretion, at least 30 days prior to the commencement of the three-month renewal period.

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, 2021 and 2020, borrowings under the overdraft facility were Zloty 12.3 million (approximately $3 million) and Zloty 0.4 million (approximately $0.1 million),

respectively.

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.

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 $695.1 million and $719 million of receivables for the years ended December 31, 2020 and 2019, respectively, which was reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale.

A charge in the amount of $12.2 million, $22 million and $24.4 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, 2020, 2019 and 2018, respectively.

Pursuant to these agreements, we sold $818.8 million and $695.1 million of receivables for the years ended December 31, 2021 and 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 $11.5 million, $12.2 million and $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, 2021, 2020 and 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, 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.

If the LIBOR rate increases significantly, we may be negatively impacted as we may

not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

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

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 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.

Stock repurchases under this program, during the years ended December 31, 2021 and 2020, were 150,273 and

323,867 shares of our common stock, respectively, at a total cost of $6.5 million and $13.5 million, respectively, thereby completing the 2020 Board of Directors authorization.

In February 2021, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a stock repurchase program.

Stock repurchases under this program, during the year ended December 31, 2021, were

464,992 shares of our common stock at a total cost of $20 million, thereby completing the 2021 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.

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):

(In thousands)

Operating lease obligations

Postretirement benefits

Severance payments related to restructuring and integration

Total commitments

Indebtedness under our revolving credit facilities is not included in the table above as it is reported as a current liability in our consolidated balance sheets.

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

Critical Accounting Policies

We have identified the policies 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 on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results.

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 assurance that actual results will not differ from those estimates.

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

Revenue Recognition.

We derive our revenue primarily from sales of replacement parts for motor vehicles from both our Engine Management and Temperature Control Segments.

We recognize revenues when our performance obligation has been satisfied and the control of products has been transferred to a customer which typically occurs upon shipment.

Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of goods or providing services.

The amount of consideration we receive and revenue we recognize depends on the marketing incentives, product warranty and overstock returns we offer to our customers.

For certain of our sales of remanufactured products, we also charge our customers a deposit for the return of a used core component which we can use in our future remanufacturing activities.

Such deposit is not recognized as revenue at the time of the sale but rather carried as a core liability.

At the same time, we estimate the core expected to be returned from the customer and record the estimated return as unreturned customer inventory.

The liability is extinguished when a core is actually returned to us, or at period end when we estimate and recognize revenue for the core deposits not expected to be returned.

We estimate and record provisions for cash discounts, quantity rebates, sales returns and warranties in the period the sale is recorded, based upon our prior experience and current trends.

Significant management judgments and estimates must be made and used in estimating sales returns and allowances relating to revenue recognized in any accounting period.

Sales Returns and Other Allowances and Allowance for Doubtful Accounts.

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 and failure to meet industry published specifications and/or the result of installation error.

In addition to warranty returns, we also 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.

At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return.

At the same time, we record an estimate of anticipated customer returns as unreturned customer inventory.

Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.

Revision to these estimates is made when necessary, based upon changes in these factors.

We regularly study trends of such claims.

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 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.

New Customer Acquisition Costs .

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 stock lift.

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

Inventory Valuation.

Inventories are valued at the lower of cost and net realizable value.

Cost is determined on the first-in, first-out basis.

Where appropriate, standard cost systems are utilized for purposes of determining cost;

the standards are adjusted as necessary to ensure they approximate actual costs.

Estimates of lower of cost and net realizable value of inventory are determined by comparing the actual cost of the product to the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation of the inventory.

We also evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand.

For inventory deemed to be obsolete, we provide a reserve on the full value of the inventory.

Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates our estimate of future demand.

Future projected demand requires management judgment and is based upon (a) our review of historical trends and (b) our estimate of projected customer specific buying patterns and trends in the industry and markets in which we do business.

Using rolling twelve month historical information, we estimate future demand on a continuous basis.

As such, the historical volatility of such estimates has been minimal.

We utilize cores (used parts) in our remanufacturing processes for air conditioning compressors, diesel injectors, and diesel pumps.

The production of air conditioning compressors, diesel injectors, and diesel pumps involves the rebuilding of used cores, which we acquire either in outright purchases from used parts brokers or from returns pursuant to an exchange program with customers.

Under such exchange programs, at the time of sale of air conditioning compressors, diesel injectors, and diesel pumps, we estimate the core expected to be returned from the customer and record the estimated return as unreturned customer inventory.

In addition, many of our customers can return inventory to us based upon customer warranty and overstock arrangements within customer specific limits.

At the time products are sold, we accrue a liability for product warranties and overstock returns and record as unreturned customer inventory our estimate of anticipated customer returns.

Estimates are based upon historical information on the nature, frequency and probability of the customer return.

Unreturned core, warranty and overstock customer inventory is recorded at standard cost.

Revision to these estimates is made when necessary, based upon changes in these factors.

We regularly study trends of such claims.

Accounting for Income Taxes.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.

This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.

These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.

We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that it is more likely than not that the deferred tax assets will not be recovered, we must establish a valuation allowance.

To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include an expense or recovery, respectively, within the tax provision in the statement of operations.

We maintain valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies.

We consider all positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the deferred tax asset.

We consider cumulative losses in recent years as well as the impact of one-time events in assessing our pre-tax earnings.

Assumptions regarding future taxable income require significant judgment.

Our assumptions are consistent with estimates and plans used to manage our business, which includes restructuring and integration initiatives that are expected to generate significant savings in future periods.

The valuation allowance of $1.6 million as of December 31, 2020 is intended to provide for the uncertainty regarding the ultimate realization of our U.S.

foreign tax credit carryovers and foreign net operating loss carryovers.

The assessment of the adequacy of our valuation allowance is based on our estimates of taxable income in these jurisdictions and the period over which our deferred tax assets will be recoverable.

Based on these considerations, we believe it is more likely than not that we will realize the benefit of the net deferred tax asset of $44.8 million as of December 31, 2020, which is net of the remaining valuation allowance.

In the event that actual results differ from these estimates, or we adjust these estimates in future periods for current trends or expected changes in our estimating assumptions, we may need to modify the level of the valuation allowance which could materially impact our business, financial condition and results of operations.

In accordance with generally accepted accounting practices, we recognize in our financial statements only those tax positions that meet the more-likely-than-not recognition threshold.

We establish tax reserves for uncertain tax positions that do not meet this threshold.

During the years ended December 31, 2020, 2019 and 2018, we did not establish a liability for uncertain tax positions.

Penalties associated with income tax matters are included in the provision for income taxes in our consolidated statement of operations.

We determine if an arrangement is a lease at inception.

For operating leases, we include and report operating lease right-of-use (“ROU”) assets, sundry payables and accrued expenses, and noncurrent operating lease liabilities on our consolidated balance sheet for leases with a term longer than twelve months.

Finance leases are reported on our consolidated balance sheets in property, plant and equipment, current portion of other debt, and long-term debt.

Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the total lease payments over the lease term.

Our ROU assets represent the right to use an underlying leased asset over the existing lease term, and the corresponding lease liabilities represent our obligation to make lease payments arising from the lease agreement.

As most of our leases do not provide for an implicit rate, we use our secured incremental borrowing rate based on the information available when determining the present value of our lease payments.

Our lease terms may include options to terminate, or extend, our lease when it is reasonably certain that we will execute the option.

Lease agreements may contain lease and non-lease components, which are generally accounted for separately.

Operating lease expense is recognized on a straight-line basis over the lease term.

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.

liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.

We can give no assurances that actual results will not differ from those estimates.

Although we do

not believe that there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of the COVID-19 pandemic, and

other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.

Valuation of Long‑Lived and Intangible Assets and 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 and non-compete agreements.

The fair values of these intangible assets are estimated based on our assessment.

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

Intangible 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 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.

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

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‑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:

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;

(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, then a quantitative impairment test would not required.

not be required.

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.

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.

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‑lived asset impairment including projecting revenues, interest rates, tax rates and the cost of capital.

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.

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.

Share-Based Compensation.

The provisions of FASB ASC 718, Stock Compensation , require the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the grant date.

The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our condensed consolidated statement of operations.

Forfeitures are estimated at the time of grant based on historical trends in order to estimate the amount of share-based awards that will ultimately vest.

We monitor actual forfeitures for any subsequent adjustment to forfeiture rates.

Environmental Reserves.

We are subject to various U.S.

Federal, state and local environmental laws and regulations and are involved in certain environmental remediation efforts.

We estimate and accrue our liabilities resulting from such matters based upon a variety of factors including the assessments of environmental engineers and consultants who provide estimates of potential liabilities and remediation costs.

Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

Potential recoveries from insurers or other third parties of environmental remediation liabilities are recognized independently from the recorded liability, and any asset related to the recovery will be recognized only when the realization of the claim for recovery is deemed probable.

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.

Asbestos Litigation

In evaluating our potential asbestos-related liability, we use an actuarial study that is prepared by a leading actuarial firm with expertise in assessing asbestos-related liabilities.

We evaluate the estimate of the range of undiscounted liability to determine which amount to accrue.

Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.

Legal costs are expensed as incurred.

We will continue to perform 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.

Based on the actuarial studies and all other available information, we will continue to reassess the recorded liability and, if deemed necessary, record an adjustment to the reserve, which will be reflected as a loss or gain from discontinued operations.

See Note 21, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.

Other Loss Reserves.

We have other loss exposures, for such matters as legal claims and legal proceedings.

Establishing loss reserves for these matters requires estimates, judgment of risk exposure, and ultimate liability.

We record provisions when the liability is considered probable and reasonably estimable.

Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated.

As additional information becomes available, we reassess our potential liability related to these matters.

Such revisions of the potential liabilities could have a material adverse effect on our business, financial condition or results of operations.

In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study of the asbestos related liabilities performed by an independent actuarial firm, our settlement amounts

and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of such claims.

As is our accounting policy, we consider the advice of actuarial consultants with experience in assessing

asbestos-related liabilities to estimate our potential claim liability;

and perform an actuarial evaluation in the third quarter of each year and whenever events or changes in circumstances indicate that additional provisions may be necessary.

The methodology used to project asbestos-related liabilities and costs in our actuarial study considered:

(1) historical data available from publicly available studies;

(2) an analysis of our recent claims history to estimate likely filing rates

into the future;

(3) an analysis of our currently pending claims;

(4) an analysis of our settlements and awards of asbestos-related damages to date;

and (5) an analysis of closed claims with pay ratios and lag patterns in order to develop average

future settlement values.

Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments and awards of asbestos-related

damages was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.

Future legal costs are expensed as incurred and

reported in earnings (loss) from discontinued operations in the accompanying statement of operations.

We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future and whenever events or changes in circumstances indicate that additional provisions may be necessary.

Given the uncertainties

associated with projecting such matters into the future and other factors outside our control, we can give no assurance that additional provisions will not be required.

We will continue to monitor events and changes in circumstances surrounding

these potential liabilities in determining whether to perform additional actuarial evaluations and whether additional provisions may be necessary, which will reported 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 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.

Item 8 of this Report.

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