GENUINE PARTS CO 10-Q

Item 1. Financial Statements GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) June 30, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 987,389 $ 990,166 Trade accounts receivable, less allowance for doubtful accounts (2021 – $ 43,751 ; 2020 – $ 36,622 ) 1,899,978 1,556,966 Merchandise inventories, net 3,679,113 3,506,271 Prepaid expenses and other current assets 1,155,114 1,060,360 Total current assets 7,721,594 7,113,763 Goodwill 1,922,544 1,917,477 Other intangible assets, less accumulated amortization 1,461,886 1,498,257 Deferred tax assets 52,380 65,658 Property, plant and equipment, less accumulated depreciation (2021 – $ 1,336,175 ; 2020 – $ 1,268,170 ) 1,175,953 1,162,043 Operating lease assets 1,059,068 1,038,877 Other assets 692,557 644,140 Total assets $ 14,085,982 $ 13,440,215 Liabilities and equity Current liabilities: Trade accounts payable $ 4,729,240 $ 4,128,084 Current portion of debt 48,094 160,531 Dividends payable 117,536 114,043 Other current liabilities 1,626,325 1,491,426 Total current liabilities 6,521,195 5,894,084 Long-term debt 2,472,980 2,516,614 Operating lease liabilities 798,079 789,294 Pension and other post–retirement benefit liabilities 255,175 265,687 Deferred tax liabilities 230,463 212,910 Other long-term liabilities 562,945 543,623 Equity: Preferred stock, par value – $ 1 per share; authorized – 10,000,000 shares; none issued — — Common stock, par value – $ 1 per share; authorized – 450,000,000 shares; issued and outstanding – 2021 – 143,301,673 shares; 2020 – 144,354,335 shares 143,302 144,354 Additional paid-in capital 111,972 117,165 Retained earnings 3,982,159 3,979,779 Accumulated other comprehensive loss ( 1,003,554 ) ( 1,036,502 ) Total parent equity 3,233,879 3,204,796 Noncontrolling interests in subsidiaries 11,266 13,207 Total equity 3,245,145 3,218,003 Total liabilities and equity $ 14,085,982 $ 13,440,215 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2021 2020 2021 2020 Net sales $ 4,783,738 $ 3,823,227 $ 9,248,452 $ 7,915,753 Cost of goods sold 3,094,633 2,532,740 6,018,532 5,237,088 Gross profit 1,689,105 1,290,487 3,229,920 2,678,665 Operating expenses: Selling, administrative and other expenses 1,349,309 971,589 2,544,473 2,114,286 Depreciation and amortization 73,960 66,733 146,256 133,987 Provision for doubtful accounts 5,037 11,300 9,946 17,819 Restructuring costs — 25,059 — 28,041 Goodwill impairment charge — 506,721 — 506,721 Total operating expenses 1,428,306 1,581,402 2,700,675 2,800,854 Non-operating (income) expenses: Interest expense 16,107 25,465 35,169 46,430 Other ( 24,915 ) ( 11,944 ) ( 61,390 ) ( 24,776 ) Total non-operating (income) expenses ( 8,808 ) 13,521 ( 26,221 ) 21,654 Income (loss) before income taxes 269,607 ( 304,436 ) 555,466 ( 143,843 ) Income taxes 73,111 59,065 141,260 97,312 Net income (loss) from continuing operations 196,496 ( 363,501 ) 414,206 ( 241,155 ) Net loss from discontinued operations — ( 200,871 ) — ( 186,682 ) Net income (loss) $ 196,496 $ ( 564,372 ) $ 414,206 $ ( 427,837 ) Dividends declared per common share $ 0.8150 $ 0.7900 $ 1.6300 $ 1.5800 Basic earnings (loss) per share: Continuing operations $ 1.36 $ ( 2.52 ) $ 2.87 $ ( 1.67 ) Discontinued operations — ( 1.39 ) — ( 1.29 ) Basic earnings (loss) per share $ 1.36 $ ( 3.91 ) $ 2.87 $ ( 2.96 ) Diluted earnings (loss) per share: Continuing operations $ 1.36 $ ( 2.52 ) $ 2.85 $ ( 1.67 ) Discontinued operations — ( 1.39 ) — ( 1.29 ) Diluted earnings (loss) per share $ 1.36 $ ( 3.91 ) $ 2.85 $ ( 2.96 ) Weighted average common shares outstanding 144,211 144,262 144,312 144,657 Dilutive effect of stock options and non-vested restricted stock awards 772 — 846 — Weighted average common shares outstanding – assuming dilution 144,983 144,262 145,158 144,657 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2021 2020 2021 2020 Net income (loss) $ 196,496 $ ( 564,372 ) $ 414,206 $ ( 427,837 ) Other comprehensive income (loss), net of income taxes: Foreign currency translation adjustments, net of income taxes in 2021 — $ 7,019 and $ 14,166 ; 2020 — $ 12,114 and $ 3,445 , respectively 7,131 111,599 6,836 ( 71,014 ) Cash flow hedge adjustments, net of income taxes in 2021 — $ 1,383 and $ 2,767 ; 2020 — $ 560 and $ 6,044 , respectively 3,741 1,514 7,482 ( 16,342 ) Pension and postretirement benefit adjustments, net of income taxes in 2021 — $ 3,434 and $ 6,855 ; 2020 — $ 3,008 and $ 6,025 , respectively 9,334 7,844 18,630 16,292 Other comprehensive income (loss), net of income taxes 20,206 120,957 32,948 ( 71,064 ) Comprehensive income (loss) $ 216,702 $ ( 443,415 ) $ 447,154 $ ( 498,901 ) See accompanying notes to condensed consolidated financial statements. 4 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) Three Months Ended June 30, 2021 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity April 1, 2021 144,458,057 $ 144,458 $ 117,867 $ ( 1,023,760 ) $ 4,085,998 $ 3,324,563 $ 11,546 $ 3,336,109 Net income — — — — 196,496 196,496 — 196,496 Other comprehensive income, net of tax — — — 20,206 — 20,206 — 20,206 Cash dividend declared, $ 0.8150 per share — — — — ( 117,406 ) ( 117,406 ) — ( 117,406 ) Share-based awards exercised 279,441 280 ( 14,181 ) — — ( 13,901 ) — ( 13,901 ) Share-based compensation — — 8,286 — — 8,286 — 8,286 Purchase of stock ( 1,435,825 ) ( 1,436 ) — — ( 182,929 ) ( 184,365 ) — ( 184,365 ) Noncontrolling interest activities — — — — — — ( 280 ) ( 280 ) June 30, 2021 143,301,673 $ 143,302 $ 111,972 $ ( 1,003,554 ) $ 3,982,159 $ 3,233,879 $ 11,266 $ 3,245,145 Six Months Ended June 30, 2021 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity January 1, 2021 144,354,335 $ 144,354 $ 117,165 $ ( 1,036,502 ) $ 3,979,779 $ 3,204,796 $ 13,207 $ 3,218,003 Net income — — — — 414,206 414,206 — 414,206 Other comprehensive loss, net of tax — — — 32,948 — 32,948 — 32,948 Cash dividend declared, $ 1.6300 per share — — — — ( 235,120 ) ( 235,120 ) — ( 235,120 ) Share-based awards exercised 383,163 384 ( 19,714 ) — — ( 19,330 ) — ( 19,330 ) Share-based compensation — — 14,521 — — 14,521 — 14,521 Purchase of stock ( 1,435,825 ) ( 1,436 ) — — ( 182,929 ) ( 184,365 ) — ( 184,365 ) Cumulative effect from adoption of ASU 2019-12 (1) — — — — 6,223 6,223 — 6,223 Noncontrolling interest activities — — — — — — ( 1,941 ) ( 1,941 ) June 30, 2021 143,301,673 $ 143,302 $ 111,972 $ ( 1,003,554 ) $ 3,982,159 $ 3,233,879 $ 11,266 $ 3,245,145 5 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED) (UNAUDITED) Three Months Ended June 30, 2020 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity April 1, 2020 144,249,343 $ 144,249 $ 103,878 $ ( 1,333,329 ) $ 4,487,904 $ 3,402,702 $ 20,329 $ 3,423,031 Net loss — — — — ( 564,372 ) ( 564,372 ) — ( 564,372 ) Other comprehensive income, net of tax — — — 120,957 — 120,957 — 120,957 Cash dividend declared, $ 0.7900 per share — — — — ( 113,968 ) ( 113,968 ) — ( 113,968 ) Share-based awards exercised 14,846 15 ( 464 ) — — ( 449 ) — ( 449 ) Share-based compensation — — 4,405 — — 4,405 — 4,405 Noncontrolling interest activities — — — — — — 1,284 1,284 June 30, 2020 144,264,189 $ 144,264 $ 107,819 $ ( 1,212,372 ) $ 3,809,564 $ 2,849,275 $ 21,613 $ 2,870,888 Six Months Ended June 30, 2020 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity January 1, 2020 145,378,158 $ 145,378 $ 98,777 $ ( 1,141,308 ) $ 4,571,860 $ 3,674,707 $ 20,793 $ 3,695,500 Net loss — — — — ( 427,837 ) ( 427,837 ) — ( 427,837 ) Other comprehensive loss, net of tax — — — ( 71,064 ) — ( 71,064 ) — ( 71,064 ) Cash dividend declared, $ 1.5800 per share — — — — ( 228,444 ) ( 228,444 ) — ( 228,444 ) Share-based awards exercised 22,475 22 ( 812 ) — — ( 790 ) — ( 790 ) Share-based compensation — — 9,854 — — 9,854 — 9,854 Purchase of stock ( 1,136,444 ) ( 1,136 ) — — ( 94,583 ) ( 95,719 ) — ( 95,719 ) Cumulative effect from adoption of ASU 2016-13 (2) — — — — ( 11,432 ) ( 11,432 ) — ( 11,432 ) Noncontrolling interest activities — — — — — — 820 820 June 30, 2020 144,264,189 $ 144,264 $ 107,819 $ ( 1,212,372 ) $ 3,809,564 $ 2,849,275 $ 21,613 $ 2,870,888 (1) The Company adopted Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes , during the first quarter of 2021. (2) The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, during the first quarter of 2020. See accompanying notes to condensed consolidated financial statements. 6 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, (in thousands) 2021 2020 Operating activities: Net income (loss) $ 414,206 $ ( 427,837 ) Net loss from discontinued operations — ( 186,682 ) Net income (loss) from continuing operations 414,206 ( 241,155 ) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization 146,256 133,987 Share-based compensation 14,521 9,854 Excess tax (benefits) deficiencies from share-based compensation ( 6,627 ) 162 Realized currency losses — 11,356 Goodwill impairment charge — 506,721 Changes in operating assets and liabilities 136,074 499,795 Net cash provided by operating activities from continuing operations 704,430 920,720 Investing activities: Purchases of property, plant and equipment ( 89,993 ) ( 74,358 ) Proceeds from sale of property, plant and equipment 22,065 6,838 Proceeds from divestitures of businesses 13,705 382,737 Acquisitions of businesses and other investing activities ( 97,168 ) ( 15,393 ) Net cash (used in) provided by investing activities from continuing operations ( 151,391 ) 299,824 Financing activities: Proceeds from debt 31,599 1,885,109 Payments on debt ( 142,295 ) ( 2,082,271 ) Share-based awards exercised ( 19,330 ) ( 790 ) Dividends paid ( 231,627 ) ( 225,327 ) Purchases of stock ( 184,365 ) ( 95,719 ) Other financing activities ( 2,159 ) ( 8,357 ) Net cash used in financing activities from continuing operations ( 548,177 ) ( 527,355 ) Cash flows from discontinued operations: Net cash provided by operating activities from discontinued operations — 31,668 Net cash used in investing activities from discontinued operations — ( 11,131 ) Net cash provided by financing activities from discontinued operations — — Net cash provided by discontinued operations — 20,537 Effect of exchange rate changes on cash and cash equivalents ( 7,639 ) ( 6,959 ) Net increase in cash and cash equivalents ( 2,777 ) 706,767 Cash and cash equivalents at beginning of period 990,166 276,992 Cash and cash equivalents at end of period $ 987,389 $ 983,759 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. On June 30, 2020, the Company completed the divestiture of its Business Products Group. Refer to the acquisitions, divestitures and discontinued operations footnote for more information. The Company's results of operations for the Business Products Group are reported as discontinued operations and all information related to the discontinued operations has been excluded from the notes to the condensed consolidated financial statements for all periods presented. Net income from discontinued operations for each period includes all costs that are directly attributable to these businesses and excludes certain corporate overhead costs that were previously allocated. Additionally, revenue from freight services provided by the Automotive Parts Group are grossed up and recast in continuing operations in each period because those sales are continuing with the discontinued operations after the divestiture. Except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Genuine Parts Company (the “Company,” “we,” “our,” “us,” or “its”) for the year ended December 31, 2020. Accordingly, the unaudited condensed consolidated financial statements and related disclosures herein should be read in conjunction with the Company’s 2020 Annual Report on Form 10-K. The preparation of interim financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements. Specifically, the Company makes estimates and assumptions in its unaudited condensed consolidated financial statements for inventory adjustments, the accrual of bad debts, credit losses on guaranteed loans, customer sales returns, and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out (“LIFO”) method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation. Reserves for bad debts, credit losses on guaranteed loans and customer sales returns are estimated and accrued on an interim basis based on a consideration of historical experience, current conditions, and reasonable and supportable forecasts. Volume incentives are estimated based upon cumulative and projected purchasing levels. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the interim periods have been made. These adjustments are of a normal recurring nature. The Company has reclassified certain prior period amounts to conform to the current period presentation. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of results for the year ended December 31, 2021. The Company's results of operations improved in the first half of 2021 relative to the first half of 2020 as a result of several positive trends caused by the global response to the coronavirus (“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, the Company's operations remain vulnerable to continuing negative effects caused by COVID-19. The extent to which the pandemic impacts the Company will depend on numerous factors and future developments that the Company cannot predict, including the severity of the virus; the occurrence of additional waves or spikes in infection rates, including the spread of variant strains; the duration of the outbreak; governmental, business or other actions taken in response to the pandemic and the efficacy of these actions, including partial or complete shut downs, travel restrictions, and shelter-in-place orders among other actions; the effectiveness and distribution of COVID-19 vaccines; the ability of the global population to access such vaccines; impacts on the Company's supply chain, its ability to attract talent and keep operating locations open, and on customer demand. The Company has evaluated subsequent events through the date the unaudited condensed consolidated financial statements covered by this quarterly report were issued. 8 Table of Contents 2. Segment Information The following table presents a summary of the Company's reportable segment financial information from continuing operations: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net sales: Automotive $ 3,196,299 $ 2,495,799 $ 6,149,464 $ 5,078,484 Industrial 1,587,439 1,327,428 3,098,988 2,837,269 Total net sales $ 4,783,738 $ 3,823,227 $ 9,248,452 $ 7,915,753 Segment profit: Automotive $ 290,758 $ 218,906 $ 526,436 $ 361,484 Industrial 150,413 108,928 275,705 222,861 Total segment profit 441,171 327,834 802,141 584,345 Interest expense, net ( 15,362 ) ( 24,876 ) ( 33,686 ) ( 44,744 ) Intangible asset amortization ( 27,384 ) ( 23,256 ) ( 52,928 ) ( 45,996 ) Corporate expense ( 51,397 ) ( 28,613 ) ( 82,640 ) ( 83,674 ) Other unallocated costs (1) ( 77,421 ) ( 555,525 ) ( 77,421 ) ( 553,774 ) Income (loss) before income taxes from continuing operations $ 269,607 $ ( 304,436 ) $ 555,466 $ ( 143,843 ) (1) The following table presents a summary of the other unallocated costs: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Other unallocated costs: Product liability damages award (2) $ ( 77,421 ) $ — $ ( 77,421 ) $ — Goodwill impairment charge (3) — ( 506,721 ) — ( 506,721 ) Restructuring costs (4) — ( 25,059 ) — ( 28,041 ) Realized currency loss (5) — ( 11,356 ) — ( 11,356 ) Gain on insurance proceeds related to SPR Fire (6) — 1,166 — 13,448 Transaction and other costs (7) — ( 13,555 ) — ( 21,104 ) Total other unallocated costs $ ( 77,421 ) $ ( 555,525 ) $ ( 77,421 ) $ ( 553,774 ) (2) Adjustment reflects damages reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim. Refer to the commitments and contingencies footnote to the condensed consolidated financial statements for more information. (3) Adjustment reflects the 2020 goodwill impairment charge related to the Company's European reporting unit. (4) Adjustment reflects restructuring costs related to the execution of certain restructuring actions across the Company's subsidiaries primarily targeted at simplifying the organizational structures and distribution networks implemented by the Company in October 2019 (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. (5) Adjustment reflects realized currency losses related to divestitures. (6) 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. (7) Adjustment reflects (i) $ 2,481 and $ 8,490 of incremental costs associated with COVID-19 for the three and six months ended June 30, 2020, respectively, and (ii) costs associated with certain divestitures. COVID-19 related costs include 9 Table of Contents incremental costs incurred relating to fees to cancel marketing events and increased cleaning and sanitization materials, among other things. Net sales are disaggregated by geographical region for each of the Company’s reportable segments, as the Company deems this presentation best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table presents disaggregated geographical net sales from contracts with customers by reportable segment: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 North America: Automotive $ 2,076,562 $ 1,715,567 $ 3,939,367 $ 3,447,063 Industrial 1,469,775 1,231,208 2,869,174 2,641,923 Total North America $ 3,546,337 $ 2,946,775 $ 6,808,541 $ 6,088,986 Australasia: Automotive $ 388,708 $ 282,797 $ 756,577 $ 555,721 Industrial 117,664 96,220 229,814 195,346 Total Australasia $ 506,372 $ 379,017 $ 986,391 $ 751,067 Europe – Automotive $ 731,029 $ 497,435 $ 1,453,520 $ 1,075,700 Total net sales $ 4,783,738 $ 3,823,227 $ 9,248,452 $ 7,915,753 3. Accumulated Other Comprehensive Loss The following tables present the changes in accumulated other comprehensive loss (“AOCL”) by component for the six months ended June 30: Changes in Accumulated Other Comprehensive Loss by Component Pension and Other Post-Retirement Benefits Cash Flow Hedges Foreign Currency Translation Total Beginning balance, January 1, 2021 $ ( 692,868 ) $ ( 30,007 ) $ ( 313,627 ) $ ( 1,036,502 ) Other comprehensive income before reclassifications — — 6,836 6,836 Amounts reclassified from accumulated other comprehensive loss 18,630 7,482 — 26,112 Other comprehensive income, net of income taxes 18,630 7,482 6,836 32,948 Ending balance, June 30, 2021 $ ( 674,238 ) $ ( 22,525 ) $ ( 306,791 ) $ ( 1,003,554 ) Changes in Accumulated Other Comprehensive Loss by Component Pension and Other Post-Retirement Benefits Cash Flow Hedges Foreign Currency Translation Total Beginning balance, January 1, 2020 $ ( 704,415 ) $ ( 20,671 ) $ ( 416,222 ) $ ( 1,141,308 ) Other comprehensive loss before reclassifications — ( 21,046 ) ( 82,370 ) ( 103,416 ) Amounts reclassified from accumulated other comprehensive loss 16,292 4,704 11,356 32,352 Other comprehensive income (loss), net of income taxes 16,292 ( 16,342 ) ( 71,014 ) ( 71,064 ) Ending balance, June 30, 2020 $ ( 688,123 ) $ ( 37,013 ) $ ( 487,236 ) $ ( 1,212,372 ) The AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote. The nature of the cash flow hedges are discussed in the derivatives and hedging footnote. 10 Table of Contents Generally, tax effects in AOCL are established at the currently enacted tax rate and reclassified to net income (loss) in the same period that the related pre-tax AOCL reclassifications are recognized. 4. Recent Accounting Pronouncements Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs and has determined that any recently adopted accounting pronouncements did not have a material impact on the Company's condensed consolidated financial statements and all recent accounting pronouncements not yet adopted are not applicable or are expected to have an immaterial impact on the Company's condensed consolidated financial statements. 5. Employee Benefit Plans Net periodic benefit income from the Company's pension plans included the following components: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Service cost $ 3,101 $ 2,925 $ 6,142 $ 5,907 Interest cost 17,962 20,865 35,868 41,790 Expected return on plan assets ( 38,858 ) ( 38,410 ) ( 77,590 ) ( 76,933 ) Amortization of prior service credit 172 173 344 346 Amortization of actuarial loss 12,509 11,088 24,965 22,210 Net periodic benefit income $ ( 5,114 ) $ ( 3,359 ) $ ( 10,271 ) $ ( 6,680 ) Service cost is recorded in selling, administrative and other expenses in the condensed consolidated statements of income while all other components are recorded within other non-operating (income) expenses. Pension benefits also include amounts related to supplemental retirement plans. 6. Guarantees The Company guarantees the borrowings of certain independently controlled automotive parts stores and businesses (“independents”) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (“affiliates”). Presently, the independents are generally consolidated by unaffiliated enterprises that have controlling financial interests through ownership of a majority voting interest in the independents. The Company has no voting interest or equity conversion rights in any of the independents. The Company does not control the independents or the affiliates but receives a fee for the guarantees. The Company has concluded that the independents are variable interest entities, but that the Company is not the primary beneficiary. Specifically, the equity holders of the independents have the power to direct the activities that most significantly impact the entities’ economic performance including, but not limited to, decisions about hiring and terminating personnel, local marketing and promotional initiatives, pricing and selling activities, credit decisions, monitoring and maintaining appropriate inventories, and store hours. Separately, the Company concluded that the affiliates are not variable interest entities. The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is generally equal to the total borrowings subject to the Company’s guarantees. While such borrowings of the independents and affiliates are outstanding, the Company is required to maintain compliance with certain covenants. At June 30, 2021, the Company was in compliance with all such covenants. As of June 30, 2021, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $ 896,080 . These loans generally mature over periods from one to six years . The Company regularly monitors the performance of these loans and the ongoing operating results, financial condition and ratings from credit rating agencies of the independents and affiliates that participate in the guarantee programs. In the event that the Company is required to make payments in connection with these guarantees, the Company would obtain and liquidate certain collateral pledged by the independents or affiliates (e.g., accounts receivable and inventory) to recover all or a substantial portion of the amounts paid under the guarantees. The Company recognizes a liability equal to current expected credit losses over the lives of the loans in the guaranteed loan portfolio, based on a consideration of historical experience, current conditions, the nature and expected value of any collateral, and reasonable and supportable forecasts. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the current expected credit loss reserve is not material. As of June 30, 2021, there are no material guaranteed loans for which the borrower is experiencing financial difficulty and recovery is expected to be provided substantially through the operation or sale of the collateral. 11 Table of Contents As of June 30, 2021, the Company has recognized certain assets and liabilities amounting to $ 78,000 each for the guarantees related to the independents’ and affiliates’ borrowings. These assets and liabilities are included in other assets and other long-term liabilities in the condensed consolidated balance sheets. The liabilities relate to the Company's noncontingent obligation to stand ready to perform under the guarantee programs and they are distinct from the Company's current expected credit loss reserve. 7. Accounts Receivable Sales Agreement The Company has an accounts receivable sales agreement (the “A/R Sales Agreement”) to sell short-term receivables from certain customer trade accounts to an unaffiliated financial institution on a revolving basis. The A/R Sales Agreement has a 3 year term, which the Company intends to renew. As part of the A/R Sales Agreement, the Company continuously sells designated pools of receivables as they are originated by it and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The assets of the SPE would be first available to satisfy the creditor claims of the unaffiliated financial institution. The Company controls and therefore consolidates the SPE in its condensed consolidated financial statements. The SPE transferred ownership and control of certain receivables that met certain qualifying conditions to the unaffiliated financial institution in exchange for cash. The Company accounts for transactions with the unaffiliated financial institution as sales of financial assets, with the associated receivables derecognized from the Company's condensed consolidated balance sheet. The remaining receivables held by the SPE were pledged to secure the collectability of the sold receivables. The amount of receivables pledged as collateral as of June 30, 2021 and December 31, 2020 is approximately $ 959,000 and $ 771,000 , respectively. The Company continues to be involved with the receivables transferred by the SPE to the unaffiliated financial institution by providing collection services. As cash is collected on sold receivables, the SPE continuously transfers ownership and control of new qualifying receivables to the unaffiliated financial institution so that the total principal amount outstanding of receivables sold is approximately $ 800,000 at any point in time (which is the maximum amount allowed under the agreement). The future amount of receivables outstanding as sold could decrease, based on the level of activity and other factors. Total principal amount outstanding of receivables sold is approximately $ 800,000 as of June 30, 2021 and December 31, 2020, respectively. The following table summarizes the activity under the A/R Sales Agreement for the following periods: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Receivables sold to the financial institution and derecognized $ 1,888,942 $ 902,326 $ 3,816,873 $ 902,326 Cash collected on sold receivables $ 1,888,940 $ 402,302 $ 3,816,868 $ 402,302 Upon entry into the A/R Sales Agreement, the Company received an initial benefit from cash from operations of approximately $ 800,000 in the year ended December 31, 2020. Continuous cash activity related to the A/R Sales Agreement is reflected in cash from operating activities in the condensed consolidated statement of cash flows. The SPE incurs fees due to the unaffiliated financial institution related to the accounts receivable sales transactions. Those fees, which are immaterial, are recorded within other non-operating (income) expense in the condensed consolidated statements of income. The SPE has a recourse obligation to repurchase from the unaffiliated financial institution any previously sold receivables that are not collected due to the occurrence of certain events, including credit quality deterioration and customer sales returns. The reserve recognized for this recourse obligation as of June 30, 2021 and December 31, 2020 is not material. The servicing liability related to the Company's collection services also is not material, given the high quality of the customers underlying the receivables and the anticipated short collection period. 8. Fair Value of Financial Instruments Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. Additionally, ASC 820, Fair Value Measurements , defines levels within a hierarchy based upon observable and non-observable inputs. • Level 1. Observable inputs such as quoted prices in active markets; • Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and 12 Table of Contents • Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions As of June 30, 2021 the fair value of the Company's senior unsecured notes was approximately $ 2,617,081 , which are designated as Level 2 in the fair value hierarchy. Our valuation technique is based primarily on prices and other relevant information generated by observable transactions involving identical or comparable assets or liabilities. Derivative instruments are recognized in the consolidated balance sheets at fair value and are designated as Level 2 in the fair value hierarchy. They are valued using inputs other than quoted prices, such as foreign exchange rates and yield curves. Refer to the derivatives and hedging footnote for further information. Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analyses of goodwill, other intangible assets, and long-lived assets. These involve fair value measurements on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable, trade accounts payable, and borrowings under the line of credit approximate their respective fair values based on the short-term nature of these instruments. 9. Derivatives and Hedging The Company is exposed to various risks arising from business operations and market conditions, including fluctuations in interest rates and certain foreign currencies. When deemed appropriate, the Company uses derivative and non-derivative instruments as risk management tools to mitigate the potential impact of interest rate and foreign exchange rate risks. The objective of using these tools is to reduce fluctuations in the Company’s earnings and cash flows associated with changes in these rates. Derivative financial instruments are not used for trading or other speculative purposes. The Company has not historically incurred, and does not expect to incur in the future, any losses as a result of counterparty default related to derivative instruments. The Company formally documents relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative and non-derivative instruments that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When a designated instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively. Cash Flow Hedges In 2020, the Company terminated its interest rate swaps and settled the outstanding balances through cash payments totaling $ 41,000 . The remaining amount in AOCL is being amortized to interest expense on a straight-line basis over the remaining life of the previously hedged instrument. Net Investment Hedges The Company has designated certain derivative instruments and a portion of its foreign currency denominated debt, a non-derivative financial instrument, as hedges of the foreign currency exchange rate exposure of the Company's Euro-denominated net investment in a European subsidiary. The Company applies the spot method to assess the hedge effectiveness of the derivative instruments and this assessment for each instrument excludes the initial value related to the difference at contract inception between the foreign exchange spot rate and the forward rate (i.e., the forward points). The initial value of this excluded component is recognized as a reduction to interest expense in a systematic and rational manner over the term of the derivative instrument. All other changes in value for the net investment hedges are included in AOCL within foreign currency translation and would only be reclassified to earnings if the European subsidiary were liquidated, or otherwise disposed. The following table summarizes the location and carrying amounts of the derivative instruments and the foreign currency denominated debt, a non-derivative financial instrument, that are designated and qualify as part of hedging relationships: June 30, 2021 December 31, 2020 Instrument Balance Sheet Location Notional Balance Notional Balance Net investment hedges: Forward contracts Prepaid expenses and other current assets $ 925,810 $ 37,783 $ 800,000 $ 7,668 Forward contracts Other current liabilities $ 235,180 $ 12,223 $ 360,990 $ 19,442 Foreign currency debt Long-term debt € 700,000 $ 832,790 € 700,000 $ 861,070 13 Table of Contents The tables below presents gains and losses related to designated cash flow hedges and net investment hedges: Gain (Loss) Recognized in AOCL Before Reclassifications Gain Recognized in Interest Expense For Excluded Components 2021 2020 2021 2020 Three Months Ended June 30, Cash flow hedges: Interest rate contracts $ — $ ( 4,370 ) $ — $ — Net investment hedges: Forward contracts ( 13,329 ) ( 31,147 ) 6,574 7,476 Foreign currency debt ( 12,670 ) ( 13,720 ) — — Total $ ( 25,999 ) $ ( 49,237 ) $ 6,574 $ 7,476 Gain (Loss) Recognized in AOCL Before Reclassifications Gain Recognized in Interest Expense For Excluded Components 2021 2020 2021 2020 Six Months Ended June 30, Cash flow hedges: Interest rate contracts $ — $ ( 28,830 ) $ — $ — Net investment hedges: Forward contracts 24,186 15,701 13,148 13,998 Foreign currency debt 28,280 ( 2,940 ) — — Total $ 52,466 $ ( 16,069 ) $ 13,148 $ 13,998 10. Commitments and Contingencies Legal Matters As more fully discussed in the Company's notes to the consolidated financial statements in its 2020 Annual Report on Form 10-K, a jury awarded damages in 2017 against the Company in a litigated automotive product liability dispute. On February 19, 2020, the Washington Court of Appeals issued an order entirely reversing the jury’s finding on damages and ordering a new trial on damages. The plaintiffs subsequently appealed this order to the Washington Supreme Court. On July 7, 2020, the Washington Supreme Court indicated that it would consider a further appeal on this matter, and oral arguments occurred on November 10, 2020. On July 8, 2021, the Washington Supreme Court overturned the order of the Washington Court of Appeals and reinstated the trial court's damage award of $ 77,100 against the Company. The Company recorded an adjustment to increase Selling, general and other expenses by approximately $ 77,421 , inclusive of statutory interest and insurance coverage, in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2021. Environmental Liabilities Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed an applied threshold not to exceed $1 million. Applying this threshold, there are no environmental matters to disclose for this period. 11. Acquisitions, Divestitures and Discontinued Operations Acquisitions The Company acquired several businesses for approximately $ 98,018 and $ 33,047 , net of cash acquired, during the six months ended June 30, 2021 and June 30, 2020, respectively. The measurement period is still open for certain businesses acquired in prior periods, but there have been no significant measurement period adjustments during the three and six months ended June 30, 2021. Divestitures 14 Table of Contents The Company received cash proceeds from divestitures of businesses totaling $ 13,705 and $ 382,737 for the six months ended June 30, 2021 and June 30, 2020, respectively. Discontinued Operations Business Products Group During 2020, the Company completed the divestiture of its Business Products Group as part of its long-term strategic initiative to streamline its operations and optimize its portfolio so that it can drive shareholder value by focusing on its global Automotive and Industrial Parts Groups. This divestiture represented a single plan to exit the Business Products Group segment and was considered a strategic shift that had a major effect on the Company’s operations and financial results. Therefore, the results of operations, financial position and cash flows for the Business Products Group are reported as discontinued operations for all prior periods presented. The Company retains an investment in S.P. Richard's (“SPR”), a business that previously belonged to the Business Products Group, with a carrying value of $ 70,576 , which is included within other assets on the condensed consolidated balance sheets, as of June 30, 2021. The Company maintains an allowance equal to the current expected credit loss based on a consideration of historical experience, current market conditions and reasonable and supportable forecasts related to this investment and other related assets of $ 17,000 . The Company also remains involved with SPR for a limited period of time through various lease, sublease, freight distribution and transition service agreements. The Company has concluded that SPR is a variable interest entity, but the Company is not the primary beneficiary and therefore the entity is not consolidated. Among other things, the Company does not have any voting rights and does not have the power to direct the activities that most significantly affect SPR's economic performance. For a limited period of time as SPR completes its transition away from the Company’s shared services platform, the Company continues to pay certain payables on SPR’s behalf and at SPR’s direction with full reimbursement from SPR under the terms of a transition services agreement. The Company’s results of operations for discontinued operations were: Three Months Ended June 30, 2020 Six Months Ended June 30, 2020 Net sales $ 379,938 $ 846,944 Cost of goods sold 277,614 632,007 Gross profit 102,324 214,937 Operating expenses 89,385 179,461 Loss on disposal 216,133 220,318 Loss before income taxes ( 203,194 ) ( 184,842 ) Income tax (benefit) expense ( 2,323 ) 1,840 Net loss from discontinued operations $ ( 200,871 ) $ ( 186,682 ) 12. Income Taxes The Company's effective income tax rate was 27.1 % for the three months ended June 30, 2021, compared to negative 19.4 % for the same three month period in 2020. The effective income tax rate was 25.4 % for the six months ended June 30, 2021, compared to negative 67.7 % for the same period in 2020. The rate increase is primarily due to the non-deductible goodwill impairment charge that occurred in 2020. In addition, during the second quarter of 2021 the United Kingdom enacted legislation raising its corporate tax rate from 19% to 25% effective April 2023. The Company remeasured its deferred tax assets and liabilities as of June 30, 2021, primarily related to its intangible assets. The rate increase was partially offset by stock compensation excess tax benefits. 13. Earnings Per Share As more fully discussed in the share-based compensation footnote of the Company’s notes to the consolidated financial statements in its 2020 Annual Report on Form 10-K, the Company maintains various long-term incentive plans, which provide for the granting of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalents and other share-based awards. Certain outstanding options to purchase shares of common stock are not included in the diluted earnings per share calculation because their inclusion would have been anti-dilutive. Options to purchase approximately 186 and 99 shares of common stock were outstanding but excluded from the computations of diluted earnings per share for the three and six month periods ended June 30, 2021, respectively, as compared 15 Table of Contents to approximately 2,537 and 2,418 for the three and six month periods ended June 30, 2020, respectively. These options were excluded because their inclusion would have been anti-dilutive. 16 Table of Contents