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Item 2. Management’s Discussion and Analysis

2021-04-22 compared with 2020-10-22 · 115 added, 181 removed, 84 unchanged (78% of the section changed)

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The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and with the audited consolidated financial statements, accompanying notes, related information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of results for the year ended December 31, 2021.

Forward-Looking Statements

Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (SEC) or otherwise release to the public and in materials that we make available on our website, constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

All statements in the future tense and all statements accompanied by words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “position,” “will,” “project,” “intend,” “plan,” “on track,” “anticipate,” “to come,” “may,” “possible,” “assume,” and variations of such words and similar expressions are intended to identify such forward-looking statements.

Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (“SEC”), release to the public, or make available on our website, constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

All statements in the future tense and all statements accompanied by words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “position,” “will,” “project,” “intend,” “plan,” “on track,” “anticipate,” “to come,” “may,” “possible,” “assume,” or similar expressions are intended to identify such forward-looking statements.

These forward-looking statements include our expected ability to operate and protect our workforce during the COVID-19 pandemic, our strategies for growing our automotive and industrial businesses, the execution and effect of our cost savings initiatives, our efforts and initiatives to help us emerge from the pandemic well-positioned to execute our strategy, our ongoing efforts to maintain compliance and flexibility under our debt covenants, our liquidity position and actions to maximize cash flow to continue to operate during these highly uncertain times and plans for future cost savings.

Senior officers may also make verbal statements to analysts, investors, the media and others that are forward-looking.

These forward-looking statements include, without limitation, our expected ability to operate and protect our workforce during the COVID-19 pandemic, our strategies for growing our automotive and industrial businesses, the execution and effect of our cost savings initiatives, our efforts and initiatives to help us emerge from the pandemic well-positioned, our ongoing efforts to maintain compliance and flexibility under our debt covenants, our liquidity position and actions to maximize cash flow to continue to operate during these highly uncertain times and plans for future cost savings.

The Company cautions that its forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements.

We caution you that all forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements.

Actual results or events may differ materially from those indicated as a result of various important factors.

Such factors may include, among other things, the extent and duration of the disruption to our business operations caused by the global health crisis associated with the COVID-19 outbreak, including the effects on the financial health of our business partners and customers, on supply chains and our suppliers, on vehicle miles driven as well as other metrics that affect our business, and on access to capital and liquidity provided by the financial and capital markets;

the Company’s ability to maintain compliance with its debt covenants;

the Company's ability to successfully integrate acquired businesses into the Company and to realize the anticipated synergies and benefits;

the Company's ability to successfully divest businesses;

the Company's ability to successfully implement its business initiatives in its two business segments;

slowing demand for the Company's products;

Such factors may include, among other things, the extent and duration of the disruption to our business operations caused by the global health crisis associated with the COVID-19 pandemic, including the effects on the financial health of our business partners and customers, on supply chains and our suppliers, on vehicle miles driven as well as other metrics that affect our business, and on access to capital and liquidity provided by the financial and capital markets;

our ability to maintain compliance with our debt covenants;

our ability to successfully integrate acquired businesses into our operations and to realize the anticipated synergies and benefits;

our ability to successfully implement our business initiatives in our two business segments;

slowing demand for our products;

the ability to maintain favorable supplier arrangements and relationships;

disruptions in our suppliers' operations, including the impact of COVID-19 on our suppliers as well as our supply chain;

changes in national and international legislation or government regulations or policies, including changes to import tariffs, short-term government subsidies, and the unpredictability of such changes and their impact to the Company and its suppliers and customers, data security policies and requirements as well as privacy legislation;

changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation and the United Kingdom's exit from the European Union, commonly known as Brexit, and the unpredictability of the impact following such exit from the European Union;

disruptions in global supply chains and in our suppliers' operations, including as a result of the impact of COVID-19 on our suppliers and our supply chain;

changes in national and international legislation or government regulations or policies, including changes to import tariffs, environmental and social policy, infrastructure programs and privacy legislation, and their impact to us and our suppliers and customers;

changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation and the United Kingdom's (“U.K.”) exit from the European Union and the unpredictability of the impact following such exit;

changes in tax policies;

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significant cost increases, such as rising fuel and freight expenses;

the Company's ability to successfully attract and retain employees in the current labor market;

our ability to successfully attract and retain employees in the current labor market;

uncertain credit markets and other macroeconomic conditions;

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the uncertainties and costs of litigation;

disruptions caused by a failure or breach of the Company's information systems, as well as other risks and uncertainties discussed in the Company's Annual Report on Form 10-K for 2019, the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and Item 1A, Risk Factors, in this report on Form 10-Q (all of which risks may be amplified by the COVID-19 outbreak) and from time to time in the Company's subsequent filings with the SEC.

Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward-looking statements except as required by law.

disruptions caused by a failure or breach of our information systems, as well as other risks and uncertainties discussed in our 2020 Annual Report on Form 10-K and Item 1A, Risk Factors, in this report on Form 10-Q (all of which risks may be amplified by the COVID-19 pandemic) and from time to time in our subsequent filings with the SEC.

Forward-looking statements speak only as of the date they are made, and we undertake no duty to update any forward-looking statements except as required by law.

You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the SEC.

Genuine Parts Company is a service organization engaged in the global distribution of automotive replacement parts and industrial parts.

Genuine Parts Company is a service organization engaged in the global distribution of automotive and industrial replacement parts.

We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia.

The Company conducts business in North America, Europe and Australasia from approximately 3,600 Company locations.

We conduct business in North America, Europe and Australasia from a network of more than 10,000 locations.

Our Automotive Parts Group operated in the U.S., Canada, Mexico, France, the U.K., Germany, Poland, the Netherlands, Belgium, Australia and New Zealand as of March 31, 2021, and accounted for 66% of total revenues for the three months ended March 31, 2021.

Our Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and

The Industrial Parts Group accounted for 34% of the Company's total revenues for the three months ended March 31, 2021.

At Genuine Parts Company, our mission is to be a world-class service organization and the employer of choice, supplier of choice, valued customer, good corporate citizen and investment of choice.

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and (4) effective capital allocation.

The Company's Automotive Parts Group operated in the U.S., Canada, Mexico, France, the U.K., Germany, Poland, the Netherlands, Belgium, Australia and New Zealand as of September 30, 2020, and accounted for 65% of total revenues for the nine months ended September 30, 2020.

Our Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore.

The Industrial Parts Group accounted for 35% of the Company's total revenues for the nine months ended September 30, 2020.

As of June 30, 2020, the Company completed the divestiture of its Business Products Group and has accounted for this segment as discontinued operations for the periods presented.

COVID-19 Pandemic

The COVID-19 outbreak, which was declared a pandemic by the World Health Organization (“WHO”) on March 11, 2020, continues to evolve rapidly.

Our deepest and sincere thoughts go out to all affected by COVID-19, as well as the dedicated healthcare workers and first responders who are on the front lines for all our citizens.

Overall, our business segments continue to face many uncertainties.

The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of results for the entire year.

The Company's operations are vulnerable to the reduced economic activity caused by the COVID-19 outbreak, which led many governments to put in place temporary social distancing and shelter-in-place mandates in late March and early April.

As a result, our business segments experienced slowing sales trends as we entered the second quarter.

Sales results sequentially improved throughout the second and third quarter of 2020 as markets reopened and governments eased restrictions.

The extent to which the COVID-19 pandemic impacts the Company will depend on numerous factors and future developments that we cannot predict, including the severity of the virus;

the occurrence of a “second wave” or additional spikes;

Our business and results of operations improved in the first quarter of 2021 relative to the first quarter of 2020 as a result of several positive trends caused by the global response to the COVID-19 outbreak, which was declared a pandemic in March 2020.

In particular, as widespread vaccine distribution continued, we have seen economic recovery in many of the markets where we operate and a significant uptick in consumer mobility.

However, some areas continue to experience renewed outbreaks and surges in infection rates.

As a result, our business segments continue to face many uncertainties and our operations remain vulnerable to reversal of these trends or other continuing negative effects caused by the pandemic.

The extent to which the COVID-19 pandemic impacts us will depend on numerous factors and future developments that we cannot predict, including the severity of the virus;

the occurrence of additional waves or spikes in infection rates;

the duration of the outbreak;

governmental, business or other actions taken in response to the pandemic;

and impacts on our supply chain, our ability to keep operating locations open, and on customer demand.

While the negative impact on our business operations cannot be reasonably estimated at this time, our teams are preparing for multiple scenarios to ensure we continue to protect our employees while also keeping our operations up and running to serve our customers.

During the first quarter we created a dedicated COVID-19 Taskforce and added enhanced protocols in response to COVID-19, including implementing many of the recommendations and requirements issued by the Centers for Disease Control and Prevention, WHO, and local, state and national health authorities, to protect our employees, customers, suppliers and communities.

As of September 30, 2020, substantially all operations are open for business.

Our supply chain partners have been very supportive, despite strain on the supply chain with respect to labor shortages and certain inventory shortages, delays in order fulfillment and increased backlogs, and they continue to do their part to help our service levels to our customers remain strong.

governmental, business or other actions taken in response to the pandemic and the impact of these actions, including partial or complete shutdowns, travel restrictions, and shelter-in-place orders among other actions;

the effectiveness and distribution of COVID-19 vaccines;

and impacts on our supply chain, our ability to keep operating locations open, and customer demand.

As of March 31, 2021, substantially all our operations are open for business.

Our supply chain partners have been very supportive, despite strain on the supply chain with respect to labor shortages and certain inventory shortages, delays in order fulfillment and increased backlogs our partners continue to do their part to help our service levels to our customers remain strong.

We remain in constant communication with our employees regarding changing conditions and protocol.

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We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources.

For further information regarding the impact of COVID-19 on the Company, please see “Results of Operations,” “Financial Condition,” “Liquidity and Capital Resources,” “Changes in Internal Control over Financial Reporting,” item 1A, “Risk Factors,” and item 2, “Issuer Repurchase of Equity Securities” in this report, which is incorporated herein by reference.

For further information regarding the impact of COVID-19 on our business, please see “Results of Operations,” “Financial Condition,” “Liquidity and Capital Resources,” “Changes in Internal Control over Financial Reporting,” Item 1A, “Risk Factors,” and Item 2, “Issuer Repurchase of Equity Securities” in this report, which are incorporated herein by reference.

Key Business Metrics

We consider comparable sales to be a key business metric because management has evaluated its results of operations using this metric and we believe that this key indicator provides additional perspective and insights when analyzing the operating performance of the Company from period to period and trends in its historical operating results.

We consider comparable sales to be a key business metric because management has evaluated its results of operations using this metric and we believe that this key indicator provides additional perspective and insights when analyzing the operating performance of our business from period to period and trends in its historical operating results.

This metric should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in this report.

Comparable Sales

Comparable sales (also called organic sales or core sales) refer to period-over-period comparisons of our net sales excluding the impact of acquisitions, divestitures and foreign currency.

The Company considers this metric useful to investors because it provides greater transparency into management’s view and assessment of the Company’s core ongoing operations.

Comparable sales refer to period-over-period comparisons of our net sales excluding the impact of acquisitions, foreign currency and other.

We consider this metric useful to investors because it provides greater transparency into management’s view and assessment of our core ongoing operations.

This is a metric that is widely used by analysts, investors and competitors in our industry, although our calculation of the metric may not be comparable to similar measures disclosed by other companies, because not all companies and analysts calculate this metric in the same manner.

Results of Operations

The Company has remained substantially open during the COVID-19 pandemic, which slowed mobility and overall economic activity.

Despite the challenges of these unprecedented business conditions, our Automotive Parts Group operated well and reported improved profit margins across all regions during the three months ended September 30, 2020 when compared to the same period in the prior year.

Our Industrial Parts Group also improved profit margin this quarter when compared to the same prior year period.

The Company improved its total gross margin in the quarter and executed on a number of cost savings initiatives to more effectively leverage our cost structure.

As a result of COVID-19 and its negative impact on demand, the Company has experienced and may continue to experience a decrease in volume-based buying incentives.

These trends and uncertainties may persist and impact future results.

Sales for the three months ended September 30, 2020 were $4.4 billion, a 3.4% decrease compared to $4.5 billion in the same period of the prior year period.

The decrease in sales is attributable to a 1.8% decline in comparable sales driven primarily by COVID-19 and a 4.2% impact from divestitures.

These items were partially offset by a 1.3% benefit from acquisitions and the net impact of favorable foreign currency and other of 1.3%.

Sales for the quarter improved sequentially from the second quarter of 2020.

Sales for the nine months ended September 30, 2020 were $12.3 billion, a 7.2% decrease compared to $13.2 billion in the same period of the prior year.

The decline in sales is due to a 6.5% comparable sales decrease due primarily to decreased demand caused by COVID-19 and a 4.4% impact from divestitures.

These items were partially offset by a 3.7% positive impact from acquisitions.

The impact of foreign currency and other for the nine months ended September 30, 2020 was flat compared to the prior year period.

Sales for the Automotive Parts Group increased 6.0% for the three months ended September 30, 2020, compared to the same period in the prior year.

This group's revenue increase for the three months ended September 30, 2020 consisted of an approximate 2.2% increase in comparable sales driven by strong demand in Australasia and Europe, a 1.6% benefit from acquisitions and the net impact of favorable foreign currency and other of 2.2%.

Sales for the quarter improved sequentially from the second quarter of 2020.

This group's 1.9% revenue decrease for the nine months ended September 30, 2020 consisted of an approximate 5.1% decrease in comparable sales and a 0.2% impact from the sale of Grupo Auto Todo in March of 2019.

These items were partially offset by a 3.3% benefit from acquisitions.

Sales for the Industrial Parts Group decreased 18.6% for the three months ended September 30, 2020, compared to the same period in 2019.

The decrease in this group's revenues reflects an approximate 9.2% decrease in comparable sales driven primarily by COVID-19 and related government actions and a 9.9% impact from the sale of EIS, which was sold in the third quarter of 2019.

Foreign currency was flat compared to the same period in 2019.

These declines were slightly offset by a 0.4% benefit from acquisitions.

Sales for the quarter improved sequentially from the second quarter of 2020.

This group's 15.9% sales decrease for the nine months ended September 30, 2020 reflects a 9.6% decrease in comparable sales, an 11.0% impact from the sale of EIS and a slight impact from foreign currency.

This decrease was partially offset by a 4.9% benefit from acquisitions.

As a result of COVID-19 vaccine distribution and its positive impact on consumer mobility and demand, we are encouraged by the increased economic activity globally during the first quarter of 2021.

Our Automotive Parts Group reported improved sales and segment profit margin across all regions during the three months ended March 31, 2021 when compared to the same prior year period and also when compared to the same period in 2019.

Our Industrial Parts Group experienced continued recovery in their operations with improved sales trends and segment profit margin this quarter when compared to the same period in both 2020 and 2019.

We improved our total segment profit margin in the quarter and are generating gross margin gains and realizing the continued benefits of our cost savings initiatives to more effectively leverage our cost structure.

We believe our Automotive

Parts Group also benefited from improving product availability and colder weather in North America and Europe as compared to the same period in the prior year.

In addition, we believe the pandemic-related government stimulus benefited many of our U.S.

customers to further drive demand.

Our Industrial Parts Group benefited from the strengthening industrial economy, which is evident in indicators such as the Purchasing Managers Index and Industrial Production Index.

Sales for the three months ended March 31, 2021 were $4.5 billion, a 9.1% increase compared to $4.1 billion for the same period of the prior year.

The increase in sales is attributable to a 4.6% increase in comparable sales, a net favorable impact of foreign currency and other of 3.7%, and a 0.8% benefit from acquisitions.

Foreign currency was positively impacted by the strengthening of the Australian dollar, Euro and Canadian dollar as compared to the U.S.

Sales for the Automotive Parts Group increased 14.3% for the three months ended March 31, 2021 compared to the same period in the prior year.

This group's revenue increase for the three months ended March 31, 2021 consisted of an approximate 8.3% increase in comparable sales driven by strong demand in all geographical regions, the net impact of favorable foreign currency and other of 5.1%, and a 0.9% benefit from acquisitions.

Sales for the Industrial Parts Group increased 0.1% for the three months ended March 31, 2021 compared to the same period in 2020.

The increase in this group's revenues reflects the favorable impact of foreign currency of 1.3% and a 0.6% benefit from acquisitions, mostly offset by an approximate 1.8% decrease in comparable sales as compared to the same period in 2020.

Cost of Goods Sold and Operating Expenses

Cost of goods sold for the three months ended September 30, 2020 was $2.8 billion, a 5.9% decrease from $3.0 billion for the same period in 2019.

As a percentage of net sales, cost of goods sold was 65.0% for the three months ended September 30, 2020, compared to 66.7% in the same three month period of 2019.

Cost of goods sold for the nine months ended September 30, 2020 was $8.1 billion, an 8.8% decrease from $8.9 billion for the same period in 2019.

As a percentage of net sales, cost of goods sold was 65.8% for the nine months ended September 30, 2020, compared to 66.9% in the same nine month period of 2019.

The Company’s cost of goods sold includes the total cost of merchandise sold, including freight expenses associated with moving merchandise from our suppliers to our distribution centers, retail stores and branches, as well as supplier volume incentives and inventory adjustments.

Cost of goods sold for the three months ended March 31, 2021 was $2.9 billion, an 8.1% increase from $2.7 billion for the same period in 2020.

As a percentage of net sales, cost of goods sold was 65.5% for the three months ended March 31, 2021, compared to 66.1% for the same three month period of 2020.

Cost of goods sold includes the total cost of merchandise sold, including freight expenses associated with moving merchandise from our suppliers to our distribution centers, retail stores and branches, as well as supplier volume incentives and inventory adjustments.

Gross profit as a percentage of net sales may fluctuate based on (i) changes in merchandise costs and related supplier volume incentives or pricing, (ii) variations in product and customer mix, (iii) price changes in response to competitive pressures, (iv) physical inventory and LIFO adjustments, (v) changes in foreign currency exchange rates, and (vi) the impact of tariffs.

The decreases in costs of goods sold for the three and nine month periods ended September 30, 2020 are primarily driven by the sales decreases as discussed above as well as improvements in gross margin.

The gross margin improvements primarily reflect the favorable impact of sales mix shifts to higher gross margin operations, positive product mix (especially in the Industrial Parts Group), strategic category management initiatives including pricing and global sourcing actions and the favorable impact of divestitures.

These items were partially offset by a decrease in supplier incentives due to lower purchasing volumes.

We have reported improved gross margin for 12 quarter over quarter periods.

Total operating expenses decreased to $1.23 billion for the three months ended September 30, 2020 compared to $1.24 billion for the same three month period in 2019 due to the positive impact of the cost actions implemented during 2020.

For the nine months ended September 30, 2020, operating expenses totaled $4.0 billion compared to $3.6 billion for the same nine month period in 2019 due primarily to the $506.7 million goodwill impairment charge r ecognized in the second quarter related to our European reporting unit.

As a percentage of net sales, operating expenses increased to 28.1% compared to 27.5% and 32.8% compared to 27.3% in the three and nine month periods ended September 30, 2020, as compared to the same prior year periods, respectively.

The increases as a percentage of net sales in the periods are primarily due to loss of leverage caused by declining sales volume as discussed above.

The Company’s operating expenses are substantially comprised of compensation and benefit-related costs for personnel.

Other major expense categories include facility occupancy costs for headquarters, distribution centers and retail store/branch operations, insurance costs, accounting, legal and professional services, technology and digital costs, transportation and delivery costs, and travel and advertising.

In accordance with our $100 million cost savings plan announced in late 2019, we recognized more than $40 million in savings in the third quarter of 2020 driven by transformative reductions in payroll and facility costs.

Our permanent expense reductions associated with this plan now total over $110 million for the nine months ended September 30, 2020.

We have continued to execute on a number of additional savings initiatives in response to the impact of COVID-19, which have contributed approximately $60 million in incremental, temporary savings in the third quarter related to furloughs, reduced travel and other initiatives.

The increase in costs of goods sold for the three months ended March 31, 2021 are primarily driven by the sales increase as discussed above.

Gross margin increased to 34.5% compared to 33.9% for the same three month period of 2020.

The gross margin improvements primarily reflect the favorable impact of channel mix shifts, positive product mix, and strategic category management initiatives including pricing and global sourcing actions.

In addition, there was minimal impact of price inflation for the three months ended March 31, 2021.

We have reported improved year over year gross margin for 14 consecutive quarters.

Total operating expenses increased 4.3% to $1.3 billion for the three months ended March 31, 2021 compared to $1.2 billion for the same three month period in 2020.

As a percentage of net sales, operating expenses decreased to 28.5% compared to 29.8% in the three month periods ended March 31, 2021 and 2020, respectively.

The decrease in operating expenses as a percentage of net sales for the period is primarily related to improved leverage on stronger sales and cost control initiatives.

Our operating expenses are substantially comprised of compensation and benefit-related costs for personnel.

Other major expense categories include facility occupancy costs for headquarters, distribution centers and retail store/branch operations, transportation and delivery costs, technology and digital costs, accounting, legal and professional services, insurance costs, and travel and advertising.

Segment Profit

Segment profit increased to $391.7 million for the three months ended September 30, 2020, compared to $360.1 million for the same three month period of the prior year, an increase of 8.8%.

Segment profit margin was 9.0% compared to 8.0% in the same three month period of 2019.

The increase in segment profit margin for the three months ended September 30, 2020 reflects the improvement in gross margin and significant cost savings relative to the prior year.

For the nine months ended September 30, 2020, segment profit decreased to $976.1 million compared to $1.0 billion for th e same nine month period of the prior year, a decrease of 4.8%.

However, segment profit margin increased to 7.9% compared to 7.7% in the same nine month period of 2019, driven by the Company's implementation of its gross margin and cost saving initiatives which have allowed the Company to better leverage expenses.

As more fully discussed in our 2019 Form 10-K, in the fourth quarter of 2019 the Company began to implement certain restructuring actions across its subsidiaries under the 2019 Cost Savings Plan, primarily targeted at simplifying organizational structures and distribution networks.

We believe that these actions, coupled with our ongoing focus on driving top line sales growth, gross margin improvement and accelerated cost initiatives in response to COVID-19, will continue to create value for our stakeholders.

The Automotive Parts Group’s segment profit increased 19.6% in the three months ended September 30, 2020 compared to the same period of 2019, and its segment profit margin was 9.0% compared to 8.0% in the same period of the previous year.

This improvement in segment profit margin reflects the strong operating results in all regions, driven by improving sales trends and the positive impact of cost actions.

For the nine months ended September 30, 2020, the Automotive Parts Group's segment

profit decreased approximately 0.5%.

However, segment profit margin increased to 7.8% compared to 7.7% in the same nine month period of 2019, reflecting the cost actions, better leveraging of expenses despite lower automotive sales volumes and benefit of government subsidies received primarily in the second quarter.

The Industrial Parts Group's segment profit decreased 8.7% in the three months ended September 30, 2020 compared to the same three month period of 2019, although the segment profit margin for this group increased to 8.9% compared to 7.9% for the same period of the previous year.

Segment profit for the Industrial Parts Group decreased 11.8% in the nine months ended September 30, 2020 compared to the same nine month period of 2019, however the segment profit margin for this group improved to 8.2% compared to 7.8% for the same period of the previous year.

The improved segment profit margins for both periods primarily reflects the growing efficiencies and gross margin improvements in the Industrial Parts Group's operating structure and the accretive benefit of the sale of EIS.

Goodwill Impairment

Due to several factors that coalesced in the second quarter of 2020 we performed an interim impairment test as of May 31, 2020 for our European reporting unit and recorded a goodwill impairment charge of $506.7 million.

These factors primarily resulted from the ongoing market volatility and uncertainty caused by the COVID-19 pandemic, which extended into the second quarter and impacted several critical impairment testing assumptions including weighted average cost of capital and market multiples, and near-term revenue and operating margin projections for the reporting unit.

Refer to the goodwill and other intangible assets footnote within the notes to the condensed consolidated financial statements for additional information.

If there are sustained declines in macroeconomic or business conditions in future periods, including as a result of the continued COVID-19 pandemic, affecting the projected earnings and cash flows at our reporting units, among other things, there can be no assurance that goodwill at one or more reporting units may not be impaired.

As of September 30, 2020, we determined that there were no indicators that goodwill was impaired at any of our reporting units.

The Company's effective income tax rate was 21.8 % for the three months ended September 30, 2020, compared to 25.2 % for the same three month period in 2019.

The effective income tax rate was 105.4 % for the nine months ended September 30, 2020, compared to 25.1 % for the same period in 2019.

The rate decrease during the third quarter is due primarily to the benefit of statute-related adjustments and income mix shifts.

The rate increase for the nine months ended September 30, 2020 is primarily due to a non-deductible goodwill impairment charge and certain transaction and other costs incurred during the period.

Net (Loss) Income from Continuing Operations

For the three months ended September 30, 2020, the Company recorded consolidated net income from continuing operations of $232.9 million, an increase of 9.7% compared to consolidated net income from continuing operations of $212.3 million in the same three month period of the prior year.

The Automotive Parts Group's segment profit increased 65.3% in the three months ended March 31, 2021 compared to the same period of 2020, and its segment profit margin increased to 8.0% compared to 5.5% for the same period of the previous year.

This improvement in segment profit margin reflects the strong operating results in all geographical regions, driven by primarily strong sales trends and the execution of our growth and operating initiatives.

The Industrial Parts Group's segment profit increased 10.0% in the three months ended March 31, 2021 compared to the same three month period of 2020, and its segment profit margin increased to 8.3% compared to 7.5% for the same period of the previous year.

The improved segment profit margin reflects gross margin expansion and reduced expenses related to our cost control initiatives.

Our effective income tax rate was 23.8% for both the three months ended March 31, 2021 and March 31, 2020.

Net Income from Continuing Operations

For the three months ended March 31, 2021, net income from continuing operations was $217.7 million, an increase of 77.9% compared to net income from continuing operations of $122.3 million for the same three month period of the prior year.

On a per share diluted basis, net income from continuing operations was $1.50, an increase of 78.6% compared to $0.84 for the same three month period of 2020.

For the nine months ended September 30, 2020, the Company recorded consolidated net loss from continuing operations of $8.2 million, a decrease of 101.5% compared to consolidated net income from continuing operations of $567.5 million in the same nine month period of the prior year.

On a per share diluted basis, net loss from continuing operations was $0.06, a decrease of 101.6% compared to net income from continuing operations of $3.87 in the same nine month period of 2019.

The decrease in net income from continuing operations for the nine months ended September 30, 2020 was primarily driven by the second quarter goodwill impairment charge of $506.7 million, as well as reduced sales volumes due to COVID-19.

During the three and nine months ended September 30, 2020, the Company incurred $11.3 million and $565.0 million, respectively, of adjustments.

These adjustments include a second quarter goodwill impairment charge of $506.7 million related to our European reporting unit and also represents restructuring costs, realized currency losses and transaction and other costs and income.

Transaction and other costs primarily include incremental costs associated with certain divestitures and COVID-19, slightly offset by income from the SPR Fire insurance proceeds.

Refer to the acquisitions, divestitures and discontinued operations footnote and commitments and contingencies footnote in the notes to the condensed consolidated financial statements for more information.

For the three months ended September 30, 2020, before the impact of restructuring and transaction and other costs, the Company's adjusted net income from continuing operations was $236.8 million, an increase of 16.1% compared to adjusted net income from continuing operations of $203.8 million in the same three month period of the prior year.

On a per share basis, adjusted net income from continuing operations was $1.63 for the three months ended September 30, 2020, an increase of 17.3% compared to $1.39 for the same three month period of 2019.

For the nine months ended September 30, 2020, before the impact of adjustments related to goodwill impairment, realized currency losses, restructuring, transaction and other costs and insurance proceeds related to the SPR fire, adjusted net income from continuing operations was $544.1 million, a decrease of 8.0% compared to the same nine month period of 2019.

On a per share diluted basis, adjusted net income from continuing

operations was $3.76 for the nine months ended September 30, 2020, a decrease of 6.7% compared to $4.03 for the same nine month period of the prior year.

Each of adjusted net (loss) income from continuing operations and adjusted diluted net (loss) income from continuing operations per common share is a non-GAAP measure (see table below for reconciliations to the most directly comparable GAAP measures).

The following table sets forth a reconciliation of net (loss) income from continuing operations and diluted net (loss) income from continuing operations per common share to adjusted net (loss) income from continuing operations and adjusted diluted net (loss) income from continuing operations per common share to account for the impact of these adjustments.

The Company believes that the presentation of adjusted net (loss) income from continuing operations and adjusted diluted net (loss) income from continuing operations per common share, which are not calculated in accordance with GAAP, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of the Company's core operations.

The Company considers these metrics useful to investors because they provide greater transparency into management’s view and assessment of the Company’s ongoing operating performance by removing items management believes are not representative of our continuing operations and may distort our longer-term operating trends.

We believe these measures are useful and enhance the comparability of our results from period to period and with our competitors, as well as show ongoing results from operations distinct from items that are infrequent or not associated with the Company’s core operations.

The Company does not, nor does it suggest investors should, consider such non-GAAP financial measures, as superior to, in isolation from, or as a substitute for, GAAP financial information.

Three Months Ended September 30, Nine Months Ended September 30,

During the three months ended March 31, 2020, we incurred $1.8 million of adjustments.

These adjustments represent restructuring costs, insurance proceeds related to the SPR Fire, and transaction and other costs.

Transaction and other costs primarily include incremental costs associated with certain divestitures and COVID-19.

For the three months ended March 31, 2021, net income from continuing operations on an adjusted basis was also $217.7 million, an increase of 86.4% compared to adjusted net income from continuing operations of $116.8 million for the same three month period of the prior year.

On a per share basis, net income from continuing operations on an adjusted basis was $1.50 for the three months ended March 31, 2021, an increase of 87.5% compared to $0.80 for the same three month period of 2020.

For 2020, adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share are both non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

The following table sets forth a reconciliation of net income from continuing operations and diluted net income from continuing operations per common share to adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share to account for the impact of these adjustments.

We believe that the presentation of adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of the Company's core operations.

We consider these metrics useful to investors because they provide greater transparency into management’s view and assessment of our ongoing operating performance by removing items management believes are not representative of our continuing operations and may distort our longer-term operating trends.

We do not, nor do we suggest that investors should, consider such non-GAAP financial measures, as superior to, in isolation from, or as a substitute for, GAAP financial information.

Three Months Ended March 31,

(in thousands) 2021 2020

GAAP net income (loss) from continuing operations $ 232,918 $ 212,256 $ (8,237) $ 567,459

Goodwill impairment charge (1) — — 506,721 —

GAAP net income from continuing operations $ 217,710 $ 122,346

Restructuring costs (1) — 2,982

Realized currency loss (3) — 7,664 11,356 34,701

Gain on insurance proceeds related to SPR Fire (2) — (12,282)

Gain in equity investment (5) — (38,663) — (38,663)

Transaction and other costs (3) — 7,549

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The table below represent amounts per common share assuming dilution:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands, except per share data) 2021 2020

GAAP net income (loss) from continuing operations $ 1.61 $ 1.45 $ (0.06) $ 3.87

Goodwill impairment charge (1) — — 3.51 —

GAAP net income from continuing operations $ 1.50 $ 0.84

Restructuring costs (1) — 0.02

Realized currency loss (3) — 0.05 0.08 0.24

Gain on insurance proceeds related to SPR Fire (2) — (0.08)

Gain in equity investment (5) — (0.26) — (0.26)

Transaction and other costs (3) — 0.05

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The table below clarifies where the adjusted items are presented in the condensed consolidated statements of income.

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2021 2020

Cost of goods sold $ 604 $ 4,521 $ 13,495 $ 7,481

Selling, administrative and other expenses $ — $ 7,549

Goodwill impairment charge — — 506,721 —

Restructuring costs — 2,982

Non-operating (income):

Non-operating (income) expense:

Other — (12,282)

Total adjustments $ — $ (1,751)

(1) Adjustment reflects the second quarter goodwill impairment charge related to our European reporting unit.

(2) Adjustment reflects restructuring costs related to the ongoing execution of the 2019 Cost Savings Plan announced in the fourth quarter of 2019.

( 1 ) Adjustment reflects restructuring costs related to the execution of the 2019 Cost Savings Plan.

The costs are primarily associated with severance and other employee costs, including a voluntary retirement program, and facility and closure costs related to the consolidation of operations.

(3) Adjustment reflects realized currency losses related to divestitures.

(2) Adjustment reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs related to the S.P.

Richards Headquarters and Distribution Center.

(5) Adjustment relates to the gain recognized upon remeasuring the Company's preexisting 35% equity investment to fair value upon acquiring the remaining equity of Inenco on July 1, 2019.

(6) Adjustment includes $8.5 million of incremental costs associated with COVID-19 for the nine months ended September 30, 2020 and costs associated with certain divestitures.

(3) Adjustment includes $6.0 million of incremental costs associated with COVID-19 for the three months ended March 31, 2020 and costs associated with certain divestitures.

COVID-19 related costs include incremental costs incurred relating to fees to cancel marketing events and increased cleaning and sanitization materials, among other things.

For the three and nine months ended September 30, 2019, adjustments also include transaction and other costs related to acquisitions and divestitures.

Financial Condition

The Company’s cash balance of $900.1 million at September 30, 2020 increased $623.1 million, or 225.0%, from December 31, 2019.

For the nine months ended September 30, 2020, the Company had net cash provided by operating activities of $1.4 billion, net cash provided by investing activities of $0.2 billion and net cash used in financing activities of $1.0 billion.

cash provided by operating activities was primarily driven by entry into the A/R Sales Agreement to sell receivables, which provided a $500 million benefit to operating cash flows, and the effective management of our working capital.

Refer to the accounts receivable sales agreement footnote in the notes to the condensed consolidated financial statements for more information.

The investing activities consisted primarily of $394.4 million proceeds from the divestiture of the Business Products Group and the sale of property, plant and equipment, slightly offset by $105.4 million for capital expenditures and $59.1 million for acquisitions and other investing activities.

The financing activities consisted primarily of $577.4 million net payments on debt, $339.3 million for dividends paid to the Company’s shareholders and $95.7 million paid for share repurchases.

Accounts receivable decreased $488.0 million, or 20.0%, from December 31, 2019 primarily due to entering into the A/R Sales Agreement.

Inventory decreased $24.5 million, or 0.7%, due to ongoing inventory management initiatives and accounts payable increased $82.3 million, or 2.1% from December 31, 2019 partly due to extended payment terms with certain suppliers.

Total debt of $2.9 billion at September 30, 2020 decreased $0.5 billion, or 15.2%, from December 31, 2019 primarily due to a reduction in the amounts outstanding on our revolving credit facility.

Our cash balance of $1.1 billion at March 31, 2021 increased $127.8 million, or 12.9%, from December 31, 2020.

For the three months ended March 31, 2021, we had net cash provided by operating activities of $300.9 million, net cash used in investing activities of $40.7 million and net cash used in financing activities of $116.0 million.

The cash provided by operating activities was up significantly from the prior year, primarily driven by higher net income for the three months ended March 31, 2021 and the effective management of our working capital.

The investing activities consisted primarily of $48.4 million for capital expenditures and $19.5 million for acquisitions and other investing activities, partially offset by $27.2 million in proceeds from the sale of property, plant and equipment and divestitures.

The financing activities consisted primarily of $114.0 million for dividends paid to the Company’s shareholders.

Accounts receivable increased $252.7 million, or 16.2%, from December 31, 2020 primarily due to higher sales volume in March of 2021.

Inventory increased $94.4 million, or 2.7%, due to increased economic activity globally and related product demand.

Accounts payable increased $351.3 million, or 8.5% from December 31, 2020 partly due to extended payment terms with certain suppliers.

Total debt of $2.6 billion at March 31, 2021 decreased $0.1 billion, or 2.2%, from December 31, 2020.

We continue to negotiate extended payment dates with our suppliers.

Our current payment terms with the majority of our suppliers range from 30 to 360 days.

Several global financial institutions offer voluntary supply chain finance ("SCF") programs which enable our suppliers (generally those that grant extended terms), at their sole discretion, to sell their receivables from the Company to these financial institutions on a non-recourse basis at a rate that takes advantage of our credit rating and may be beneficial to them.

The SCF program is primarily available to suppliers of goods and services included in cost of goods sold in our condensed consolidated statements of comprehensive income.

Several global financial institutions offer voluntary supply chain finance (“SCF”) programs which enable our suppliers, at their sole discretion, to sell their receivables from the Company to these financial

institutions on a non-recourse basis at a rate that takes advantage of our credit rating and may be beneficial to them.

The SCF program is primarily available to suppliers of goods and services included in cost of goods sold in our condensed consolidated statements of comprehensive income (loss).

The Company and our suppliers agree on commercial terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program.

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Accordingly, amounts due to our suppliers that elected to participate in the SCF program are included in the line item accounts payable in our condensed consolidated balance sheets.

All activity related to amounts due to suppliers that elected to participate in the SCF program is reflected in cash flows from operating activities in our condensed consolidated statement of cash flows.

We have been informed by the financial institutions that as of September 30, 2020 and December 31, 2019, suppliers elected to sell $1.8 billion and $1.8 billion, respectively, of our outstanding payment obligations to the financial institutions.

The amount settled through the SCF program was $1.9 billion for the nine months ended September 30, 2020.

As of March 31, 2021 and December 31, 2020, the outstanding payment obligations to the financial institutions are $1.9 billion and $1.8 billion, respectively.

The amount settled through the SCF program was $577 million and $629 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

Liquidity and Capital Resources

We have taken actions and will continue to take actions intended to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from COVID-19.

These actions include the previously negotiated covenant amendments to our credit arrangements due to macro uncertainty and evaluating alternative forms of liquidity to enhance credit capacity, reducing our planned capital expenditures for 2020 (specifically deferring our growth related capital spending), temporarily suspending our share repurchase program, and limiting merger and acquisition activity to select “bolt-on” acquisitions.

Additionally, we are taking precautionary measures to conserve liquidity including, but not limited to, reducing our inventory levels and managing replenishment volumes to adjust to the new level of market demand and to the extent available, we are delaying tax payments as allowed by governmental authorities.

We have a low level of capital expenditures related to maintenance items, which provides the flexibility to decrease spending as needed to further preserve funds.

We believe that we have sufficient liquidity to manage through the current market disruption caused by COVID-19.

We ended the quarter with $2.6 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $1.1 billion of cash and cash equivalents).

From time to time, the Company may enter into other credit facilities or financing arrangements to provide additional liquidity and to manage against foreign currency risk.

The Company currently believes that the existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future.

On February 18, 2020, the Company announced a 4% increase in the regular quarterly cash dividend for 2020.

From time to time, we may enter into other credit facilities or financing arrangements to provide additional liquidity and to manage against foreign currency risk.

We currently believe that the existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future.

We have a strong cash position and solid financial strength to pursue strategic growth opportunities through disciplined, strategic capital deployment.

Our key priorities include the reinvestment in our businesses through capital expenditures, mergers and acquisitions, the dividend and share repurchases.

We have plans for additional investments in our businesses to drive growth, improve efficiencies and productivity, and drive shareholder value.

On February 16, 2021, we announced a 3% increase in the regular quarterly cash dividend for 2021.

The Board of Directors increased the cash dividend payable to an annual rate of $3.26 per share compared with the previous dividend of $3.16 per share.

GPC has paid a cash dividend every year since going public in 1948, and 2021 marks the 65th consecutive year of increased dividends paid to shareholders.

At this time, we expect to continue to pay dividends in the ordinary course.

On May 1, 2020, the Company entered into an amendment to each of the Amended and Restated Syndicated Credit Facility Agreement and the Notes Purchase Agreement, each dated as of October 30, 2017, to provide additional covenant flexibility on account of the COVID-19 pandemic.

In consideration of the increased covenant flexibility, the Company agreed to certain interest rate increases under these facilities.

On May 29, 2020, we entered into an agreement (the "A/R Sales Agreement") to sell short-term receivables from certain customer trade accounts to an unaffiliated financial institution.

The A/R Sales Agreement has a one year term, which the Company intends to renew each year.

The terms of the A/R Sales Agreement limit the balance of receivables sold to approximately $500 million at any point in time.

In addition, we qualify and are taking advantage of certain employer payroll tax credits and the deferral of certain tax payments that are allowed under the U.S.

Coronavirus Aid, Relief, and Economic Security Act.

Although we expect our borrowing costs to increase in the near term as a result of credit market disruptions caused by the COVID-19 pandemic, we expect to be able to continue to borrow funds at reasonable rates over the long term.

At September 30, 2020, the Company's total average cost of debt was 2.95%, and the Company remained in compliance with all covenants connected with its borrowings, such covenants include, among others, a financial covenant to maintain a certain leverage ratio of consolidated debt to consolidated Adjusted EBITDA under our credit facility.

We expect to be able to continue to borrow funds at reasonable rates over the long term.

At March 31, 2021, the Company's total average cost of debt was 2.65%, and the Company remained in compliance with all covenants connected with its borrowings, such covenants include, among others, a financial covenant to maintain a certain leverage ratio of consolidated debt to consolidated adjusted EBITDA under our credit facility.

Any failure to comply with our debt covenants or restrictions could result in a default under our financing arrangements or could require us to obtain waivers from our lenders for failure to comply with these restrictions.

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Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019.

For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our 2020 Annual Report on Form 10-K.

Our exposure to market risk has not changed materially since December 31, 2020.

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-Q

Item 2. Management’s Discussion and Analysis