# TO OUR SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NYSE_SMP_2018/NYSE_SMP_2018.mmd` · pages 3-9_

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TO OUR SHAREHOLDERS,

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LAWRENCE I. SILLS
Executive Chairman of the
Board of Directors

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ERIC P. SILLS
Director, Chief Executive
Officer and President

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JAMES J. BURKE
Chief Operating Officer
and Chief Financial Officer

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DALE BURKS
Executive Vice President and
Chief Commercial Officer

2018 was a challenging year, as both sales and earnings, excluding non-operational gains and losses, were below 2017. However, the shortfall was primarily the result of one-time events, which are mostly behind us, and we are optimistic looking forward into 2019.

Engine Management sales, excluding wire and cable, ended the year slightly below 2017. However, this was entirely the result of a few large customer pipeline orders in 2017 that were not repeated in 2018. More significantly, our customers reported sales increases in our Engine Management line in the 3-4% range, and this is a positive indicator for 2019.

Wire and cable is a different story. It is an older technology and is in slow decline. However, as you may recall, in 2016 we acquired the North American automotive ignition wire business of General Cable, which effectively doubled our business. The integration of the two divisions is nearly complete, and so even though this is a declining business, it will be a very healthy one.

Our other major division, Temperature Control, has its own unique characteristics. The selling season is short and can vary significantly year-to-year, depending on how hot the summer is. 2016 was a very warm summer, sales were strong, and our customers ended the year with very low inventories. They ordered heavily in early 2017 to replenish their stocks in anticipation of another hot summer. Unfortunately, 2017 turned out to be cool, and customers ended the year with large inventories.

As a result, pre-season orders in 2018 were substantially below 2017. Even though 2018 turned out to be a hot summer, and our sales picked up in the second half of the year, we ended roughly flat with 2017. The positive news is that our customers reported sales increases in Temperature Control in the 6-7% range and ended the year with lower inventories. We are anticipating a healthy start in 2019.

In 2016, the Company embarked on an ambitious program to relocate several locations, with a goal of streamlining operations and reducing costs. Three major moves were planned—electronics from Orlando, Florida to Independence, Kansas; temperature control products from Grapevine, Texas to Reynosa, Mexico; and the largest move, relocating the production lines acquired from General Cable from Nogales, Mexico to our existing wire assembly plant in Reynosa.

The first two moves were completed on time and on budget, and the operations are running smoothly in their new locations. The wire assembly consolidation has taken longer and cost more than we first anticipated, the primary problem being the difficulties entailed in hiring, training and retaining 500 people in what has become a tight labor market in Reynosa. However, we began to see improvement in productivity towards the end of 2018, and are looking forward to significant gains in efficiency and cost in 2019.

As we take a broader look at our business, we have every reason to be optimistic. Industry demographics remain positive. The average age of vehicles and annual miles driven, the two biggest variables, continue to increase. We are growing and improving our manufacturing operations in Poland and China, and are beginning to penetrate the local markets there, primarily in the OE (Original Equipment) arena.

In the North American aftermarket, the heart of our business, our position has never been stronger. Our drive for continuous improvement in all areas, while seeking synergistic acquisitions, has proved successful. Our strategy of being a full-line and full-service provider of premium products continues to be very well received by our channel partners. As testimony of this, during the last 12 months alone we were awarded a host of Vendor of the Year awards by many of our customers, both large and small.

We are also pleased to be able to increase our quarterly dividend from 21 cents per share to 23 cents per share, which reflects our confidence in the long-term outlook of our Company. This represents our tenth consecutive year of dividend increases.

As previously announced, James Burke has been promoted to Chief Operating Officer, a position in which he will excel based on his wealth of industry experience and knowledge. We look forward to Jim's continued contributions to the Company's success.

In addition, our Director Frederick D. Sturdivant has announced his retirement from the Board of Directors at the conclusion of his term in May.

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On behalf of the entire Company, we would like to thank Fred for his wise counsel, insights and contributions to the Board and to the committees on which he served. We wish him well in his retirement.

And finally, as you can see from the cover of this report, we are celebrating the 100th anniversary of our company this year. We are extremely proud of this achievement. We have survived world wars, depressions, an energy crisis and a financial crisis. We have grown from a handful of people operating a small business in New York to a world-wide company of approximately 4,400 people. During the course of these 100 years, everything about our business has changed—the products, the customers, the distribution channels, and the competitors. We have successfully navigated all this thanks to the skill, hard work, and dedication of our people, both past and present.

We anticipate equally dramatic changes in the years ahead—electric vehicles, autonomous vehicles, ride sharing and others that are yet unknown. We will be faced with challenges. But again, thanks to our people, we are confident we will surmount them and continue to succeed and grow.

We look forward to the next 100 years.