# TO OUR SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NYSE_SMP_2017/NYSE_SMP_2017.mmd` · pages 3-9_

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TO OUR SHAREHOLDERS,

2017 was a successful year for our company. For the second year in a row, we set records for both sales and earnings.

Our consolidated net sales increased 5.4% for the year, helped by having the General Cable ignition wire acquisition for a full twelve months in 2017 vs. only seven months in 2016. Excluding the impact of General Cable, our Engine Management business was up about 3.3% for the year, which is in line with our forecast and general industry trends. However, our Temperature Control sales were negatively impacted by a cool summer and a weak air conditioning season, compared to a very warm summer in 2016, and as such were down about 1.6%.

Our profits were up slightly. Excluding non-operational gains and losses, and the impact of the Tax Cuts and Jobs Act, our Earnings per Share went from \(2.77 to \)2.83, an increase of about 2%. Our earnings were impacted by a drop in gross margin from 30.5% to 29.3%, with all of the shortfall coming in our Engine Management business, attributable to various plant moves.

As previously announced, in 2016 we embarked on an ambitious program to close three factories and relocate the operations to existing locations in Greenville, South Carolina; Independence, Kansas; and Reynosa, Mexico.

Our first priority was to deal with the people whose jobs were affected, and, as we have done in the past, we did so as fairly as we possibly could. As the locations were consolidated, we relocated some existing personnel, and then needed to hire and train several hundred new employees. The one-time costs of doing so were substantial and were the primary cause of the decline in Engine Management gross margin.

However, these are one-time costs, and will be coming to an end by the latter part of 2018. When the moves are complete and we return to historic efficiencies, we will be a far stronger company.

Let's now look ahead, to 2018 and beyond. The industry continues to experience steady growth, based on an increase in the total number of vehicles, an increase in the age of the fleet, and an increase in total miles driven. Analysts estimate ongoing growth in the low single digits.

Our position in the North American aftermarket has never been stronger. We are a key supplier to every publicly-traded distributor in the industry, and to the vast majority of the independent distributors. We are recognized for our fine performance—frequently winning awards from customers for quality, service, sales support, and training.

We are also looking to expand our horizons. We are making inroads in the Original Equipment and OE Service business. We continue to broaden our product offering, such as increasing parts coverage for diesel engines, adding sensors for driver assistance & safety applications, and developing fuel injectors for compressed natural gas applications. Geographically, we are looking to develop sales in Mexico, Europe, and Asia.

We have continued our strategy of judicious, bolt-on acquisitions. Near the end of 2017, we finalized a joint venture with FGD, a

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manufacturer of new air conditioning compressors, located in Foshan, China. This will be an excellent fit with Gwo Yng—our existing joint venture in Foshan, which manufactures many other products used in vehicle A/C systems. With the combination of Gwo Yng and FGD, we now have more A/C products to promote and sell in the fast-growing Chinese market.

Further, we stand to benefit from the new tax laws. We anticipate that our overall tax rate will decrease from approximately 37% to 26% in 2018. We plan to use the extra funds to continue to invest in future growth via acquisitions, and, as in the past several years, increase returns to shareholders in the form of increased dividends or share buybacks.

One final point—and perhaps it's the most important.

In April 2019, we will celebrate our 100 \( ^{th} \)  anniversary. We are extremely proud of this accomplishment. Very few companies reach this milestone. We thank all of our people—from the early founders in 1919 to the many thousands of employees since then. It is due to their hard work, dedication, and skill that we have been able to achieve this.

## LAWRENCE I. SILLS

Executive Chairman of the Board of Directors

## JAMES J. BURKE

Executive Vice President Finance and Chief Financial Officer

## ERIC P. SILLS

Director, Chief Executive Officer and President

## DALE BURKS

Executive Vice President and Chief Commercial Officer

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 \( ^{*} \) See the Reconciliation of GAAP and Non-GAAP Measures on the page facing the inside back cover of this Annual Report.