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Item 2. Management’s Discussion and Analysis

2021-10-21 compared with 2021-07-22 · 101 added, 95 removed, 142 unchanged (58% 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 and six months ended June 30, 2021 are not necessarily indicative of the year ended December 31, 2021.

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the year ended December 31, 2021.

Forward-Looking Statements

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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,

Indonesia and Singapore.

The Industrial Parts Group accounted for 34% of the Company's total revenue for the six months ended June 30, 2021.

The Company's Automotive Parts Group operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Australia and New Zealand as of September 30, 2021, and accounted for 66% of total revenue for the nine months ended September 30, 2021.

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

The Industrial Parts Group accounted for 34% of the Company's total revenue for the nine months ended September 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.

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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.

During the nine months ended September 30, 2021, our business and results of operations continued to improve relative to the same period of 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.

However, all regions in which we operate continue to experience periodic 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.

However, we are encouraged to see the impact of the pandemic subsiding as evidenced by the improving industrial economy, increase in miles driven and overall consumer activity.

As of September 30, 2021, all our operations are open for business.

Our supply chain partners have been very supportive and accommodating, despite strains on the supply chain caused by labor shortages, inventory shortages, delays in order fulfillment and increased backlogs.

This has allowed us to continue to provide quality customer service.

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.

Based on the length and severity of the pandemic, 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.

For further information regarding the impact of COVID-19 on our business, please see “Results of Operations,” and Item 1A, “Risk Factors,” in this report, which are incorporated herein by reference.

Key Business Metrics

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Results of Operations

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.

As a result of the COVID-19 vaccine distribution and its positive impact on consumer mobility and demand, we are encouraged by the increase in consumer activity during the three and nine months ended September 30, 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

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 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.

Both our segments reported improved sales during the three and nine months ended September 30, 2021 when compared to the same prior year periods.

The Automotive Parts Group benefited from the broad economic recovery, an increase in customer mobility and miles driven, as well as favorable weather trends.

The Industrial Parts Group benefited from the strengthening industrial economy, as evidenced by economic indicators such as the Manufacturing Industrial Production and the Purchasing Managers Index, among others.

Additionally, the Industrial Parts Group executed on key operational initiatives, including improved omni-channel capabilities and the expansion of our services and solutions business.

Sales for the three months ended September 30, 2021 were $4.8 billion, a 10.3% increase as compared to $4.4 billion in the same period of the prior year.

The increase in sales is attributable to a 7.6% increase in comparable sales, a 1.8% benefit from acquisitions and a net favorable impact of foreign currency and other of 0.9%.

Sales for the nine months ended September 30, 2021 were $14.1 billion, a 14.5% increase as compared to $12.3 billion in the same period of the prior year.

The increase in sales is due to a 10.0% comparable sales increase, a 3.2% net favorable impact of foreign currency and other and a 1.3% 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 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 nine months ended September 30, 2020.

Sales were positively impacted by price inflation of approximately 3% and 2% for the three and nine months ended September 30, 2021, respectively.

Sales for the Automotive Parts Group increased 8.2% for the three months ended September 30, 2021, as compared to the same period in the prior year.

This group's revenue increase for the three months ended September 30, 2021 consisted of an approximate 4.8% increase in comparable sales, a 2.4% benefit from acquisitions and a 1.0% net favorable impact of foreign currency and other.

This group's 16.4% revenue increase for the nine months ended September 30, 2021 consisted of an approximate 10.7% increase in comparable sales, a 3.9% net favorable impact from foreign currency and other and a 1.8% benefit from acquisitions.

Sales for the Industrial Parts Group increased 14.5% for the three months ended September 30, 2021, as compared to the same period in 2020.

The increase in this group's revenue reflects an approximate 13.4% increase in comparable sales, a 0.8% favorable foreign currency impact and a 0.3% 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.

This group's 11.0% sales increase for the nine months ended September 30, 2021 reflects an 8.9% increase in comparable sales, a 1.5% favorable impact from foreign currency and a 0.6% 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%.

Cost of goods sold for the three months ended September 30, 2021 was $3.1 billion, a 9.4% increase from $2.8 billion for the same period in 2020.

As a percentage of net sales, cost of goods sold was 64.5% for the three months ended September 30, 2021, as compared to 65.0% in the same three month period of 2020.

Cost of goods sold for the nine months ended September 30, 2021 was $9.1 billion, a 13.0% increase from $8.1 billion for the same period in 2020.

As a percentage of net sales, cost of goods sold was 64.9% for the nine months ended September 30, 2021, as compared to 65.8% in the same period of 2020.

The increase in cost of goods sold for the three and nine months ended September 30, 2021 primarily relates to the overall increase in sales volume due to the increased consumer activity as compared to the same three and nine month periods of the prior year.

Gross profit as a percentage of net sales may fluctuate based on, among other things, (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, (vi) changes in inflation or deflation, and (vii) the impact of tariffs.

Gross margin improved to 35.5% for the three months ended September 30, 2021 compared to 35.0% in the same period of 2020.

Gross margin for the nine months ended September 30, 2021 improved to 35.1% from 34.2% for the same nine month period of 2020.

The gross margin improvements primarily reflect the impact of higher levels of supplier incentives on stronger sales and strategic category management initiatives including pricing and global sourcing strategies.

We have reported improved year over year gross margin for 16 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.

Total operating expenses increased to $1.4 billion for the three months ended September 30, 2021 as compared to $1.2 billion for the same three month period in 2020.

As a percentage of net sales, operating expenses increased to 29.4% as compared to 28.1% in the respective periods.

This increase as a percentage of net sales is primarily due to the benefit of temporary COVID-19 related savings initiatives in 2020 and a $61.1 million loss on a software disposal in 2021.

For the nine months ended September 30, 2021, operating expenses totaled $4.1 billion as

compared to $4.0 billion for the same nine month period in 2020.

As a percentage of net sales, operating expenses improved to 29.3% as compared to 32.8% for the respective periods primarily driven by the non-cash goodwill impairment charge that occurred in 2020.

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

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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 Automotive Parts Group’s segment profit increased 5.6% in the three months ended September 30, 2021 as compared to the same period of 2020, and its segment profit margin was 8.8% as compared to 9.0% in the same period of the previous year.

Segment profit margin declined primarily due to the benefit of temporary COVID-related savings initiatives in 2020.

These items were partially offset by improved leverage from stronger sales, gross margin expansion and incremental cost control initiatives in 2021.

For the nine months ended September 30, 2021, the Automotive Parts Group's segment profit increased approximately 28.7% and the segment profit margin improved to 8.6% as compared to 7.8% in the same nine month period of 2020.

This improvement in segment profit margin is primarily due to sales gains as a result of the increased consumer activity as our key markets continue to reopen, gross margin improvements, and the leveraging of expenses on higher sales and ongoing cost control initiatives.

The Industrial Parts Group's segment profit increased 31.9% in the three months ended September 30, 2021 as compared to the same three month period of 2020, and the segment profit margin for this group improved to 10.3% compared to 8.9% for the same period of the previous year.

Segment profit for the Industrial Parts Group improved 26.7% in the nine months ended September 30, 2021 as compared to the same nine month period of 2020, and the segment profit margin for this group improved to 9.4% compared to 8.2% 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.

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.

The Company's effective income tax rate was 23.5% for the three months ended September 30, 2021, compared to 21.8% for the same three month period in 2020.

The effective income tax rate was 24.8% for the nine months ended September 30, 2021, compared to 105.4% for the same period in 2020.

For the three months ended September 30, 2021, the rate increase is primarily due to income mix shifts and statute related adjustments.

For the nine months ended September 30, 2021, the rate decrease 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.

Accordingly, the Company remeasured its deferred tax assets and liabilities as of June 30, 2021.

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.

For the three months ended September 30, 2021, the Company recorded net income from continuing operations of $228.6 million, a decrease of 1.9% as compared to net income from continuing operations of $232.9 million in the same three month period of the prior year.

On a per share diluted basis, net income was $1.59, a decrease of 1.2% as compared to net income per diluted share of $1.61 for the same three month period of 2020.

This decrease is primarily related to a loss on a software disposal of $61.1 million during the three months ended September 30, 2021.

For the nine months ended September 30, 2021, the Company recorded net income from continuing operations of $642.8 million as compared to net loss from continuing operations of $8.2 million in the same nine month period of the prior year.

On a per share diluted basis, net income from continuing operations was $4.44 as compared to net loss per diluted share of $0.06 in the same nine month period of 2020.

The increase in income for the nine month period was primarily driven by the goodwill impairment charge of $506.7 million that occurred during the second quarter of 2020.

Additionally, we saw higher sales volume as a result of increased consumer activity as our key markets continue to reopen during the nine months ended September 30, 2021 .

Further impacting net income from continuing operations during the three and nine months ended September 30, 2021, the Company incurred $61.1 million and $138.5 million of adjustments, respectively.

These adjustments include the aforementioned loss related to a software disposal of $61.1 million and $77.4 million 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 property, plant and equipment and commitments and contingencies footnotes to the condensed consolidated financial statements for more information regarding these adjustments.

The Company believes these represent costs that do not arise in the ordinary course of the Company's business and therefore impact comparability with prior periods.

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

These adjustments include a 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

continuing operations per common share are non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

For the three months ended September 30, 2021, the Company's adjusted net income from continuing operations was $270.5 million, an increase of 14.2% as compared to adjusted net income from continuing operations of $236.8 million in the same three month period of the prior year.

On a per share basis, adjusted net income from continuing operations was $1.88 for the three months ended September 30, 2021, an increase of 15.3% as compared to $1.63 for the same period of 2020.

For the nine months ended September 30, 2021, adjusted net income from continuing operations was $740.8 million, an increase of 36.2% as compared to $544.1 million for the same period of 2020.

On a per share diluted basis, adjusted net income from continuing operations was $5.12 for the nine months ended September 30, 2021, an increase of 36.2% as compared to $3.76 for the same period of the prior year.

The increased adjusted net income from continuing operations for the three and nine months ended September 30, 2021 reflects the benefits of improved sales volume related to increased consumer activity as our key markets continue to reopen, gross margin improvements, improved expense leverage on sales growth and our ongoing cost control initiatives.

Both adjusted net income from continuing operations and adjusted diluted net income from 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.

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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,

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

(in thousands) 2021 2020 2021 2020

GAAP net income (loss) from continuing operations $ 228,585 $ 232,918 $ 642,791 $ (8,237)

Loss on software disposal (1) 61,063 — 61,063 —

Product liability damages award (2) — — 77,421 —

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Adjusted net income from continuing operations $ 270,481 $ 236,751 $ 740,786 $ 544,060

The table below represent amounts per common share assuming dilution:

Three Months Ended June 30, Six Months Ended June 30,

The table below represents amounts per common share assuming dilution:

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

(in thousands, except per share data) 2021 2020 2021 2020

GAAP net income (loss) from continuing operations $ 1.59 $ 1.61 $ 4.44 $ (0.06)

Loss on software disposal (1) 0.42 — 0.42 —

Product liability damages award (2) — — 0.54 —

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Weighted average common shares outstanding – assuming dilution 143,589 145,035 144,622 144,528

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,

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

(in thousands) 2021 2020 2021 2020

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Total adjustments $ 61,063 $ 11,256 $ 138,484 $ 565,030

(1) Adjustment reflects a loss on an internally developed software project that was disposed of due to a change in management strategy related to advances in alternative technologies.

Refer to the property, plant and equipment footnote to the condensed consolidated financial statements for more information.

(2) Adjustment reflects damages reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim.

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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.

(7) Adjustment reflects $8.5 million of incremental costs associated with COVID-19 for the nine months ended September 30, 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.

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 Company’s cash balance of $919.1 million at September 30, 2021 decreased $71.1 million, or 7.2%, from December 31, 2020.

For the nine months ended September 30, 2021, the Company had net cash provided by operating activities of $1,008.2 million, net cash used in investing activities of $239.9 million and net cash used in financing activities of $818.7 million.

The cash provided by operating activities of $1,008.2 million reflects strong earnings and effective working capital management.

This amount decreased $419.0 million from $1,427.2 million for the nine months ended September 30, 2020 primarily driven by the $500 million benefit to operating cash flow in 2020 as a result of the Company entering into the A/R Sales Agreement to sell receivables.

The investing activities consisted primarily of $142.6 million in acquisitions and other investing activities and $138.2 million in capital expenditures, slightly offset by $40.9 million in proceeds from divestitures and the sale of property, plant and equipment.

The financing activities consisted primarily of $349.3 million for dividends paid to the Company’s shareholders, $283.9 million paid for share repurchases and $160.8 million net payments on debt.

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Inventory increased $242.1 million, or 6.9%, 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.

Accounts payable increased $691.0 million, or 16.7%, from December 31, 2020 due to increased purchasing related to sales volume and extended payment terms with certain suppliers.

Total debt of $2.4 billion at September 30, 2021 decreased $0.2 billion, or 9.1%, from December 31, 2020.

We continue to negotiate extended payment terms 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 SCF program is primarily available to suppliers of goods and services included in cost of goods sold in our condensed consolidated statements of 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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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.

As of September 30, 2021 and December 31, 2020, the outstanding payment obligations to the financial institutions are $2.6 billion and $1.8 billion, respectively.

The amount settled through the SCF program was $2.3 billion and $1.9 billion for the nine months ended September 30, 2021 and September 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).

We ended the quarter with $2.4 billion of total liquidity (comprising $1.5 billion availability on the Unsecured Revolving Credit Facility, defined below, and $0.9 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.

On September 30, 2021, we entered into the first amendment to the Syndicated Facility Agreement (the "Unsecured Revolving Credit Facility"), dated as of October 30, 2020.

The interest rates were amended to reduce the applicable rate by 12.5 basis points (resulting in a rate of LIBOR + 112.5 basis points) and the LIBOR floor from 0.5% to 0.0%.

The amendment also extended the maturity by one year to September 30, 2026.

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

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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,

At September 30, 2021, the Company's total average cost of debt was 2.34%, 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.

5 unchanged sentences

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