GENUINE PARTS CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 and six months ended June 30, 2021 are not necessarily indicative of 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”), 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. 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 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 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; volatile exchange rates; volatility in oil prices; significant cost increases, such as rising fuel and freight expenses; our ability to successfully attract and retain employees in the current labor market; uncertain credit markets and other macroeconomic conditions; competitive product, service and pricing pressures; failure or weakness in our disclosure controls and procedures and internal controls over financial reporting, including as a result of the work from home environment; the uncertainties and costs of litigation; 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 (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. Overview 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. We conduct business in North America, Europe and Australasia from a network of more than 10,000 locations. 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 June 30, 2021, and accounted for 66% of total revenue for the six months ended June 30, 2021. Our Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, 17 Table of Contents Indonesia and Singapore. The Industrial Parts Group accounted for 34% of the Company's total revenue for the six months ended June 30, 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. Our strategic financial objectives are intended to align with our mission and drive value for all our stakeholders. Our strategic financial objectives include: (1) top line revenue growth; (2) improved operating margin; (3) a strong balance sheet and cash flows; and (4) effective capital allocation. COVID-19 Pandemic Our business and 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 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, primarily Europe and Australasia, 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 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, including the spread of variant strains; the duration of the outbreak; 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; the ability of the global population to access such vaccines; impacts on our supply chain, our ability to attract talent and keep operating locations open, and customer demand. As of June 30, 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. Based on the length and severity of COVID-19, we may experience continued volatility in customer demand and supply chain disruption. 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 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, “Unregistered Sales of Equity Securities and Use of Proceeds” 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 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 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 Overview As a result of COVID-19 vaccine distribution and its positive impact on consumer mobility and demand, we are encouraged by the increase in consumer activity during the first half of 2021 as our key markets continue to reopen. In addition, we continue to realize the benefits of our cost savings initiatives to more effectively leverage our cost structure in both our Automotive and Industrial Parts Groups. Both our segments reported improved sales and segment profit margin during the three and six months ended June 30, 2021 when compared to the same prior year periods. The Automotive Parts Group benefited from the broad 18 Table of Contents economic recovery, an increase in customer mobility and miles driven, as well as favorable weather trends. Additionally, the Industrial Parts Group experienced continued recovery in their operations and benefited from our operational initiatives, including the improved omni-channel capabilities and the expansion of our services and solutions business. Sales Sales for the three months ended June 30, 2021 were $4.8 billion, a 25.1% increase as compared to $3.8 billion in the same period of the prior year. The increase in sales is attributable to a 19.5% increase in comparable sales, a net favorable impact of foreign currency and other of 4.1% and a 1.5% benefit from acquisitions. Sales for the six months ended June 30, 2021 were $9.2 billion, a 16.8% increase as compared to $7.9 billion in the same period of the prior year. The increase in sales is due to a 11.8% comparable sales increase, a 3.9% net favorable impact of foreign currency and other and a 1.1% benefit from acquisitions. The increases in comparable sales is driven primarily by the increased consumer activity as our key markets continue to reopen when compared to the three and six months ended June 30, 2020. The impact of price inflation was minimal for the three and six months ended June 30, 2021. Sales for the Automotive Parts Group increased 28.1% for the three months ended June 30, 2021, as compared to the same period in the prior year. This group's revenue increase for the three months ended June 30, 2021 consisted of an approximate 21.1% increase in comparable sales, a 5.1% net favorable impact of foreign currency and other and a 1.9% benefit from acquisitions. This group's 21.1% revenue increase for the six months ended June 30, 2021 consisted of an approximate 14.8% increase in comparable sales, a 4.9% net favorable impact from foreign currency and other and a 1.4% benefit from acquisitions. Sales for the Industrial Parts Group increased 19.6% for the three months ended June 30, 2021, as compared to the same period in 2020. The increase in this group's revenue reflects an approximate 16.4% increase in comparable sales, a 2.4% favorable foreign currency impact and a 0.8% benefit from acquisitions. This group's 9.2% sales increase for the six months ended June 30, 2021 reflects a 6.5% increase in comparable sales, a 2.0% favorable impact from foreign currency and a 0.7% benefit from acquisitions. Cost of Goods Sold and Operating Expenses Cost of goods sold for the three months ended June 30, 2021 was $3.1 billion, a 22.2% increase from $2.5 billion for the same period in 2020. As a percentage of net sales, cost of goods sold was 64.7% for the three months ended June 30, 2021, as compared to 66.2% in the same three month period of 2020. Cost of goods sold for the six months ended June 30, 2021 was $6.0 billion, a 14.9% increase from $5.2 billion for the same period in 2020. As a percentage of net sales, cost of goods sold was 65.1% for the six months ended June 30, 2021, as compared to 66.2% in the same six month period of 2020. The increase in cost of goods sold for the three and six months ended June 30, 2021 primarily relates to the overall increase in sales volume due to the increased consumer activity as compared to the same three and six month periods of the prior year. 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. Gross margin increased to 35.3% and 34.9% for the three and six months ended June 30, 2021, respectively, compared to 33.8% for the same three and six month periods of 2020. The gross margin improvements primarily reflect the impact of higher levels of supplier incentives on stronger sales and the favorable impact of channel and geographical mix shifts, positive product mix, and strategic category management initiatives including pricing and global sourcing actions. In addition, there was an approximate 1.5% positive impact of price inflation for the three months ended June 30, 2021. The impact of price inflation for the six month period ended June 30, 20201 was less than 1%. We have reported improved year over year gross margin for 15 consecutive quarters. Total operating expenses decreased to $1.4 billion for the three months ended June 30, 2021 as compared to $1.6 billion for the same three month period in 2020. As a percentage of net sales, operating expenses improved to 29.9% as compared to 41.4% in the same three month period of the previous year. For the six months ended June 30, 2021, these expenses totaled $2.7 billion as compared to $2.8 billion for the same six month period in 2020. As a percentage of net sales, operating expenses improved to 29.2% as compared to 35.4% in the same six month period of the previous year. The decrease in operating expenses as a percentage of net sales for the three and six months ended June 30, 2021 is primarily related to the impact of a non-cash goodwill impairment charge included in operating expenses for these periods in 2020. Additionally, these metrics are improved due to the 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 transportation and delivery costs driven by higher sales, facility occupancy costs, technology and digital costs, insurance costs, legal and professional services, and travel and advertising. 19 Table of Contents Segment Profit The Automotive Parts Group’s segment profit increased 32.8% in the three months ended June 30, 2021 as compared to the same period of 2020, and its segment profit margin improved to 9.1% as compared to 8.8% in the same period of the previous year. This improvement in segment profit margin reflects the positive impact of gross margin gains and the leveraging of expenses due to strong automotive sales volumes. For the six months ended June 30, 2021, the Automotive Parts Group's segment profit increased approximately 45.6% and the segment profit margin improved to 8.6% as compared to 7.1% in the same six month period of 2020. The improvement in segment profit margin for the six months is primarily due to our strong operating results, as a result of the increased consumer activity as our key markets continue to reopen, gross margin gains and the leveraging of expenses on higher sales. The Industrial Parts Group's segment profit increased 38.1% in the three months ended June 30, 2021 as compared to the same three month period of 2020, and the segment profit margin for this group improved to 9.5% compared to 8.2% for the same period of the previous year. Segment profit for the Industrial Parts Group improved 23.7% in the six months ended June 30, 2021 as compared to the same six month period of 2020, and the segment profit margin for this group improved to 8.9% compared to 7.9% for the same period of the previous year. The improved segment profit margins for both periods reflect the positive impact of higher sales volumes, gross margin gains and efficiencies in the operating structure of the Industrial Parts Group. Additionally, the Industrial Parts Group benefited from the strengthening industrial economy, which is evident in indicators such as the Purchasing Managers Index and Industrial Production Index. 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, as described below. 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 related to its intangible assets. The rate increase was partially offset by stock compensation excess tax benefits. Net Income (Loss) from Continuing Operations For the three months ended June 30, 2021, the Company recorded net income from continuing operations of $196.5 million, an increase of 154.1% as compared to net loss from continuing operations of $363.5 million in the same three month period of the prior year. On a per share diluted basis, net income was $1.36, an increase of 154.0% as compared to net loss per diluted share of $2.52 for the same three month period of 2020. For the six months ended June 30, 2021, the Company recorded net income from continuing operations of $414.2 million, an increase of 271.8% as compared to net loss from continuing operations of $241.2 million in the same six month period of the prior year. On a per share diluted basis, net income from continuing operations was $2.85, an increase of 270.7% as compared to net loss per diluted share of $1.67 in the same six month period of 2020. The increase in income for these periods was primarily driven by higher sales volume as a result of increased consumer activity as our key markets continue to reopen. Further impacting net income from continuing operations during the three and six months ended June 30, 2021, the Company incurred $77.4 million of adjustments related to 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. The Company believes these damages represent costs that do not arise in the ordinary course of the Company's business. During the three and six months ended June 30, 2020, the Company incurred $555.5 million and $553.8 million of adjustments, respectively. These adjustments include goodwill impairment charge of $506.7 million related to our European reporting unit and also represents restructuring costs, realized currency losses, insurance proceeds related to the SPR Fire and transaction and other costs and income. Transaction and other costs primarily include incremental costs associated with certain divestitures and COVID-19. For the three months ended June 30, 2021, the Company's adjusted net income from continuing operations was $252.6 million, an increase of 32.6% as compared to adjusted net income from continuing operations of $190.5 million in the same three month period of the prior year. On a per share basis, adjusted net income from continuing operations was $1.74 for the three months ended June 30, 2021, an increase of 31.8% as compared to $1.32 for the same three month period of 2020. For the six months ended June 30, 2021, adjusted net income from continuing operations was $470.3 million, an increase of 53.0% as compared to $307.3 million for the same six month period of 2020. On a per share diluted basis, adjusted net income from continuing operations was $3.24 for the six months ended June 30, 2021, an increase of 52.8% as compared to $2.12 for the same six month period of the prior year. Both adjusted net income from continuing operations and adjusted diluted net income from 20 Table of Contents continuing operations per common share are 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 (loss) from continuing operations and diluted net income (loss) 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. The Company believes that the presentation of adjusted net income from continuing operations and adjusted diluted net 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 June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 GAAP net income (loss) from continuing operations $ 196,496 $ (363,501) $ 414,206 $ (241,155) Adjustments: Product liability damages award (1) 77,421 — 77,421 — Goodwill impairment charge (2) — 506,721 — 506,721 Restructuring costs (3) — 25,059 — 28,041 Realized currency loss (4) — 11,356 — 11,356 Gain on insurance proceeds related to SPR Fire (5) — (1,166) — (13,448) Transaction and other costs (6) — 13,555 — 21,104 Total adjustments 77,421 555,525 77,421 553,774 Tax impact of adjustments (21,322) (1,500) (21,322) (5,310) Adjusted net income from continuing operations $ 252,595 $ 190,524 $ 470,305 $ 307,309 21 Table of Contents The table below represent amounts per common share assuming dilution: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2021 2020 2021 2020 GAAP net income (loss) from continuing operations $ 1.36 $ (2.52) $ 2.85 $ (1.67) Adjustments: Product liability damages award (1) 0.53 — 0.53 — Goodwill impairment charge (2) — 3.51 — 3.50 Restructuring costs (3) — 0.17 — 0.19 Realized currency loss (4) — 0.08 — 0.08 Gain on insurance proceeds related to SPR Fire (5) — (0.01) — (0.09) Transaction and other costs (6) — 0.10 — 0.15 Total adjustments 0.53 3.85 0.53 3.83 Tax impact of adjustments (0.15) (0.01) (0.14) (0.04) Adjusted diluted net income from continuing operations per common share $ 1.74 $ 1.32 $ 3.24 $ 2.12 Weighted average common shares outstanding – assuming dilution 144,983 144,262 145,158 144,657 The table below clarifies where the items that have been adjusted above to improve comparability of the financial information from period to period are presented in the condensed consolidated statements of income. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Line item: Cost of goods sold $ — $ 12,891 $ — $ 12,891 Selling, administrative and other expenses 77,421 663 77,421 8,213 Goodwill impairment charge — 506,721 — 506,721 Restructuring costs — 25,059 — 28,041 Non-operating (income) expenses: Other — 10,191 — (2,092) Total adjustments $ 77,421 $ 555,525 $ 77,421 $ 553,774 (1) 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. (2) Adjustment reflects the 2020 goodwill impairment charge related to the Company's European reporting unit. (3) 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. (4) Adjustment reflects realized currency losses related to divestitures. (5) 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. (6) 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 incremental costs incurred relating to fees to cancel marketing events and increased cleaning and sanitization materials, among other things. 22 Table of Contents Financial Condition The Company’s cash balance of $987.4 million at June 30, 2021 decreased $2.8 million, or 0.3%, from December 31, 2020. For the six months ended June 30, 2021, the Company had net cash provided by operating activities of $704.4 million, net cash used in investing activities of $151.4 million and net cash used in financing activities of $548.2 million. The cash provided by operating activities included net income of $414.2 million, adjustments to net income of $154.2 million primarily associated with depreciation and amortization expense, and changes in assets and liabilities of $136.1 million primarily associated with increased purchasing related to sales volume. The investing activities consisted primarily of $90.0 million in capital expenditures and $97.2 million in acquisitions and other investing activities, slightly offset by $35.8 million in proceeds from divestitures and the sale of property, plant and equipment. The financing activities consisted primarily of $231.6 million for dividends paid to the Company’s shareholders, $184.4 million paid for share repurchases and $110.7 million net payments on debt. Accounts receivable increased $343.0 million, or 22.0%, from December 31, 2020 primarily due to higher sales volumes. Inventory increased $172.8 million, or 4.9%, due to increased economic activity and related product demand. Accounts payable increased $601.2 million, or 14.6% from December 31, 2020 due to increased purchasing related to sales volume and, to a lesser extent, extended payment terms with certain suppliers. Total debt of $2.5 billion at June 30, 2021 decreased $0.2 billion, or 5.8%, 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, 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. The suppliers sell goods or services, as applicable, to the Company and they issue the associated invoices to the Company based on the agreed-upon contractual terms. Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, they want to sell to the financial institutions. In turn, we direct payment to the financial institutions, rather than the suppliers, for the invoices sold to the financial institutions. No guarantees are provided by the Company or any of our subsidiaries on third-party performance under the SCF program; however, the Company guarantees the payment by our subsidiaries to the financial institutions participating in the SCF program for the applicable invoices. We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program. 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 statements of cash flows. As of June 30, 2021 and December 31, 2020, the outstanding payment obligations to the financial institutions are $2.1 billion and $1.8 billion, respectively. The amount settled through the SCF program was $1.2 billion and $1.3 billion for the six months ended June 30, 2021 and June 30, 2020, respectively. Liquidity and Capital Resources We ended the quarter with $2.5 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $1 billion of cash and cash equivalents). 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. We expect to be able to continue to borrow funds at reasonable rates over the long term. At June 30, 2021, the Company's total average cost of debt was 2.35%, and the Company remained in compliance with all covenants connected with its borrowings, 23 Table of Contents 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. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could create cross defaults under other debt arrangements and have a material adverse effect on our business, financial condition, results of operations and cash flows. Item 3. 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 2020 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2020.