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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-19 · 161 added, 245 removed, 243 unchanged (63% of the section changed)

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Risk Factors” of this Form 10-K.

This section of this Form 10-K generally discusses 2021 and 2020 results and year-to-year comparisons between 2021 and 2020 results.

Discussions of 2019 results and year-to-year comparisons between 2020 and 2019 results are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

BUSINESS PRODUCTS GROUP

Effective June 30, 2020, the Company completed the divestiture of its Business Products Group by selling Supply Source Enterprises, Inc.

("SSE") and S.P.

Richards Company ("SPR") in separate transactions.

The Business Products Group was previously a reportable segment of the Company.

The results of operations, financial position and cash flows for the Business Products Group are reported as discontinued operations for all periods presented.

Further, as a result of the reclassification of the Business Products Group business to discontinued operations, the Company now has two segments:

the Automotive Group and the Industrial Parts Group.

On June 30, 2020, the Company completed the divestiture of its Business Products Group which had previously been reported as a segment.

The Business Products Group is reported as discontinued operations in our consolidated financial statements for all periods presented.

Refer to the acquisitions, divestitures and discontinued operations footnote in the accompanying consolidated financial statements for more information.

COVID-19 PANDEMIC

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

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

Overall, our business segments continue to face many uncertainties.

The Company's operations are vulnerable to the reduced economic activity caused by the COVID-19 outbreak.

Many governments put in place temporary social distancing and shelter-in-place mandates in late March and early April of 2020 and, as a result, our business segments experienced slowing sales trends as we entered the second quarter.

Beginning in the second half of 2020, sales generally improved as markets reopened and governments eased restrictions.

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

the occurrence of additional waves or spikes in infection rates;

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 shutdowns, travel restrictions, and stay-at-home orders among other actions;

the effectiveness and distribution of COVID-19 vaccines;

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

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

During the first quarter of 2020 we created a dedicated COVID-19 taskforce and added enhanced protocols in response to COVID-19, including implementing many of the recommendations and requirements issued by the Centers for Disease Control and Prevention, WHO, and local, state and national health authorities, to protect our employees, customers, suppliers and communities.

As of December 31, 2020, substantially all operations are open for business.

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

The COVID-19 pandemic continues to impact various aspects of our business, and the long-term impact to our business remains unknown.

During the year ended December 31, 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, 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.

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 December 31, 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.

KEY BUSINESS METRICS

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

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

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

Comparable Sales

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

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

Comparable sales is a key metric that refer to period-over-period comparisons of our net sales excluding the impact of acquisitions, divestitures, 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 metric 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.

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

In 2020, the Company conducted business in North America, Europe and Australasia from approximately 10,000 locations.

The Company's Automotive Parts Group operated in the U.S., Canada, France, the UK, Germany, Poland, the Netherlands, Belgium, Australia and New Zealand in 2020, and accounted for 66% of total revenues for the year.

The Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for 34% of the Company's total revenues in 2020.

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.

In 2021, the Company conducted business in North America, Europe and Australasia from more than 10,300 locations.

The Company's Automotive Parts Group operated in the U.S., Canada, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Australia and New Zealand in 2021, and accounted for 66% of total revenues for the year.

The Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for 34% of the Company's total revenues for the year.

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

Additionally, we strive to be a respected business community member and a good corporate citizen.

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) strong balance sheet and cash flow and (4) effective capital allocation.

(1) top line revenue growth in excess of market growth;

(2) improved operating margin;

(3) strong balance sheet and cash flows;

and (4) effective capital allocation.

Top Line Revenue

The Company's strategy for top-line revenue growth includes a combination of organic and acquisitive initiatives designed to outpace the industry, improve the market share in each of our business segments and position the Company for sustained long-term growth.

In 2020, in response to the COVID-19 pandemic, our business segments faced tremendous challenges and uncertainties.

Governments put in place temporary social distancing and shelter-in-place mandates in late March and early April of 2020 causing reduced economic activity globally.

Additionally, we limited merger and acquisition activity to select “bolt-on” acquisitions to preserve financial flexibility.

As markets reopened and governments eased restrictions sales results began to improve in the third and fourth quarter of 2020.

Although, we still face many uncertainties, we are encouraged by the current economic outlook and believe our Company is well-positioned to drive positive sales growth in 2021.

In 2021, each business segment experienced a year of strong recovery as pandemic related restrictions eased around the globe and markets reopened.

The economic recovery along with strong consumer demand and execution of our sales initiatives led to double-digit top-line growth for the year despite continued uncertainties with COVID-19.

Additionally, after limited merger and acquisition activity in 2020, we were active in 2021 with strategic bolt-on acquisitions that support the Company's ongoing growth initiatives, including our Industrial segment's $1.3 billion acquisition of Kaman Distribution Group in early 2022.

While we continue to face uncertainties in the business due to supply chain disruption, cost inflation and labor market constraints, we are encouraged by the current economic outlook and strong consumer demand trends.

We believe these factors and the positive impact of our ongoing strategic initiatives position us for continued sales growth in the upcoming year.

Operating Margins

The Company targets continuous operating margin improvement each year.

In October of 2019, the Company approved and began to implement certain restructuring actions across its subsidiaries primarily targeted at simplifying organizational structures and distribution networks (the "2019 Cost Savings Plan").

In accordance with our 2019 Cost Savings Plan, we recognized permanent expense reductions of $150 million driven by transformative reductions in payroll and facility costs for the year ended December 31, 2020.

Additionally, we experienced lower costs in areas such as freight and delivery and legal and professional for the year.

We also executed on a number of additional savings initiatives in response to the impact of COVID-19, which contributed approximately $300 million in incremental, temporary savings in 2020 related to furloughs, reduced travel and other initiatives.

These efforts produced improved segment margins in 2020 and we believe created a path for a more efficient and productive cost structure in the years ahead.

In 2020, we took certain restructuring actions across its subsidiaries to simplify our cost structure and distribution networks (the "2019 Cost Savings Plan").

We recognized permanent expense reductions of $150 million driven by transformative reductions in payroll and facility costs.

Additionally, we had approximately $300 million in temporary savings in response to the impact of COVID-19.

These actions led to improved segment margins in 2020 and permanently lowered our cost structure.

As business normalized in 2021, the temporary savings ended and we experienced cost increases in areas such as wages, freight and health insurance.

Despite these challenges, we improved segment margins 60 basis points by leveraging strong top-line growth, improving gross margins through pricing and sourcing actions and managing costs through ongoing strategic initiatives.

We believe continued execution of our strategic priorities in 2022 will further improve our margins.

Balance Sheet and Cash Flow

The Company is focused on maintaining a strong balance sheet and generating strong cash flows to support our growth initiatives.

Our working capital was a source of operating cash flow.

We also focused on having ample liquidity and we improved our debt position by entering into a new revolving credit facility and issuing $500 million of the Company's unsecured senior notes.

Additionally, we entered into an accounts receivable sales agreement (the "A/R Sales Agreement").

We believe these measures further strengthen our liquidity position moving into 2021.

The Company generated $2.0 billion in cash from operations and also benefited from cash proceeds associated with the sale of certain non-core businesses in 2020.

The Company is focused on maintaining a strong balance sheet and generating strong cash flow to support our growth initiatives.

Our working capital was a source of operating cash flow, and we improved our debt position and took advantage of favorable financing arrangements throughout the year.

In 2021, we generated $1.3 billion in cash from operations.

Capital Allocation

The Company's priorities for disciplined and effective capital allocation remain consistent with prior years.

In 2020, we used cash for key investments in the form of essential capital expenditures and small, bolt-on acquisitions, as well as the return of capital to our shareholders via cash dividends and opportunistic share repurchases.

In 2021, we used cash for investments in the form of capital expenditures and bolt-on acquisitions, while also returning capital to our shareholders through cash dividends and share repurchases.

We plan to continue to support the dividend, which we have increased for 65 consecutive years through 2021.

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Net sales $ 18,870,510 $ 16,537,433

Gross margin $ 5,654,841 $ 5,859,683 $ 5,519,755

Gross profit $ 6,634,136 $ 5,654,841

Net income from continuing operations $ 898,790 $ 163,395

Diluted net income from continuing operations per common share $ 6.23 $ 1.13

Consolidated net sales for the year ended December 31, 2020 totaled $16.5 billion, down 5.6% from 2019.

The decline in net sales is due to a 5.6% comparable sales decrease attributable primarily to decreased demand caused by COVID-19 and a 3.3% negative impact from divestitures.

These items were partially offset by a 3.0% positive impact from acquisitions.

Additionally, the favorable impact of foreign currency and other partially offset the decline in total sales by 0.3%.

Consolidated net sales for the year ended December 31, 2021 totaled $18.9 billion, up 14.1% from 2020.

Net sales for 2019 included an approximate 5.1% contribution from acquisitions, net of store closures and an approximate 2.1% increase in core sales.

The Company's sale of certain non-core businesses determined to be slower-growth and lower-margin operations partially offset total sales by 1.6%.

Additionally, the unfavorable impact of foreign currency partially offset 2019 total sales by 1.5%.

The Company's comparable sales included both an increase in sales volume and product inflation.

The impact of product inflation varied by business segment in 2020, with prices flat in the Automotive segment and up 0.7% in our Industrial segment.

Due to the Company's global initiatives to grow revenues, we believe it is well positioned for sustainable long-term growth.

The increase in net sales is due to a 10.5% comparable sales increase, the favorable impact of foreign currency and other of 2.1% and a 1.5% positive impact from acquisitions.

The Company's comparable sales growth reflects both an increase in sales volume and product inflation as compared to the year ended December 31, 2020.

Higher sales volume was driven primarily by the increase in consumer activity associated with the reopening of our key markets and the execution of our strategic growth initiatives throughout the year.

Additionally, sales were positively impacted by price inflation of approximately 3% for the year ended December 31, 2021.

With our global growth initiatives and strong industry fundamentals, we believe we are well positioned for both near-term and sustainable long-term sales growth.

Automotive Group

Net sales for the Automotive Group (“Automotive”) were $10.9 billion in 2020, a 1.2% decrease from 2019.

The decrease in sales consists of an approximate 4.4% decrease in comparable sales and a slight decrease related to divestitures.

This decrease was partially offset by a 2.7% contribution from acquisitions, and a 0.6% favorable impact of currency translation and other.

Foreign currency translation was positively impacted by our automotive businesses in Europe.

In 2020, total Automotive revenues were down approximately 1.6% in the first quarter, down 10.1% in the second quarter, up 6.0% in the third quarter and up 0.7% in the fourth quarter.

The positive growth in the second half of the year reflects a recovery from the decreased demand caused by COVID-19 in the first half of the year.

We remain optimistic that our Automotive sales trends will continue to show positive growth, but we are still operating in an environment of significant uncertainty due to the COVID-19 pandemic.

In our view, the underlying fundamentals in the automotive aftermarket, including trends related to the overall number and age of the vehicle population, as well as the continued increase in miles driven, remain supportive of sustained demand for automotive aftermarket maintenance and supply items across the markets we serve.

Net sales for the Automotive Group (“Automotive”) were $12.5 billion in 2021, a 15.5% increase from 2020.

The increase in sales consists of an approximate 11.0% increase in comparable sales, a 2.5% favorable impact of currency translation and other and a 2.0% contribution from acquisitions.

Foreign currency translation was positively impacted by our automotive businesses across all regions.

In 2021, total Automotive revenues were up approximately 14.3% in the first quarter, up 28.1% in the second quarter, up 8.2% in the third quarter and up 13.1% in the fourth quarter.

All periods reflect a strong recovery from the decline in demand caused by COVID-19 in 2020.

We remain optimistic that our Automotive sales trends will continue to show positive growth as the global markets fully recover.

Positive trends related to the overall number and age of the vehicle population and the continued improvement in miles driven remain supportive of sustained demand for automotive aftermarket maintenance and supply items across the markets we serve.

We expect these fundamentals and our ongoing sales initiatives to drive sales growth for the Automotive Group in 2022.

Net sales for the Automotive Group were $11.0 billion in 2019, a 4.4% increase from 2018.

The increase in sales consists of an approximate 5.0% contribution from acquisitions, a 2.3% comparable sales increase and a 2.3% negative impact of currency translation associated with our automotive businesses in Canada, Australasia, Europe and Mexico.

In addition, the sale of Auto Todo in 2019, the Company's legacy automotive business in Mexico, slightly offset total sales for the Automotive Group.

Automotive sales were positively impacted by product inflation of 2.4% in the U.S.

Industrial Parts Group

Net sales for the Industrial Parts Group (“Industrial”) were $5.7 billion in 2020, down 13.0% from 2019.

The decrease in sales reflects an 8.4% decrease in comparable sales and an approximate 8.5% decrease in net sales related to the sale of EIS, a non-core component of the industrial business due to its slower-growth and lower-margin profile.

This decrease was slightly offset by an approximate 3.8% contribution from acquisitions.

Total Industrial sales were positively impacted by product inflation of 0.7%, as a portion of this increase was passed through to customers and is included in the comparable sales impact.

Industrial revenues were down approximately 7.7% in the first quarter of 2020, down 21.1% in the second quarter, down 18.6% in the third quarter and down 3.3% in the fourth quarter.

These quarterly results reflect the impact of several factors, including reduced demand as a result of the COVID-19 pandemic.

Beginning in the second half of 2020, however, the addition of three bolt-on acquisitions, among other initiatives, and strengthening industrial indicators such as the Purchasing Managers Index and Manufacturing Industrial Production led to improving conditions and sequentially stronger sales.

We are confident in our growth plans for 2021, both in North America and Australasia, and expect to experience a continued, gradual recovery in the industrial economy amid the current COVID-19 environment.

Net sales for the Industrial Parts Group were $6.5 billion in 2019, up 3.6% from 2018.

The increase in sales reflects an approximate 5.2% contribution from acquisitions and a 1.7% increase in comparable sales, offset by an approximate 3.1% decrease in net sales related to the sale of EIS.

Total Industrial sales were positively impacted by product inflation of 2.4%, as a portion of this increase was passed through to customers and is included in the comparable sales increase.

Industrial revenues were up approximately 5.7% in the first quarter of 2019, up 4.9% in the second quarter, up 9.9% in the third quarter and down 5.9% in the fourth quarter.

These quarterly results reflect the impact of several factors, including the slowing trend in the industrial economy throughout the course of the year, as evidenced by weakening economic indicators such as Manufacturing Industrial Production and the Purchasing Managers Index, among others.

In addition, the July 1, 2019 acquisition of Inenco (now referred to as Motion Asia Pacific), one of Australasia's leading industrial distributors, and the sale of EIS on September 30, 2019, impacted the quarterly sales comparisons for the Industrial Group in 2019.

Net sales for the Industrial Parts Group (“Industrial”) were $6.3 billion in 2021, up 11.4% from 2020.

The increase in sales reflects a 9.7% increase in comparable sales, a 1.3% favorable impact of currency translation and an approximate 0.4% contribution from acquisitions.

In 2021, total Industrial revenues were up approximately 0.1% in the first quarter of 2021, up 19.6% in the second quarter, up 14.5% in the third quarter and up 12.8% in the fourth quarter.

These quarterly results reflect the positive impact of key sales initiatives, the ongoing industrial recovery and broad increase in customer productivity, which correlate to the improvement in industrial indicators such as the Purchasing Managers Index and Industrial Production.

We are confident in our growth plans for 2022, both in North America and Australasia, and expect to see continued improvement in our sales trends.

Cost of Goods Sold

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Other items in cost of goods sold include warranty costs and in-bound freight from the suppliers, net of any vendor allowances and incentives.

Cost of goods sold was $10.9 billion in 2020, a 6.7% decrease from $11.7 billion in 2019.

As a percentage of net sales, cost of goods sold was 65.8% in 2020, decreasing from 66.6% of net sales in 2019.

The decrease in cost of goods sold in 2020 reflects the favorable impact of business unit sales and product mix shifts, strategic category management initiatives in areas such as pricing and global sourcing, and the benefit of acquisitions and divestitures.

These items were slightly offset by reduced supplier incentives in 2020 compared to 2019.

During the quarter ended December 31, 2020, the Company recorded a $40 million increase to cost of goods sold due to the correction of an immaterial error related to the accounting in prior years for consideration received from vendors.

Refer to the quarterly financial data footnote within the notes to the consolidated financial statements for additional information.

Cost of goods sold was $12.2 billion in 2021, a 12.4% increase from $10.9 billion in 2020.

The increase in cost of goods sold in 2019 compares to a 4.1% total sales increase and is a positive reflection of our global supply chain initiatives, the lower cost of goods sold models at certain acquired companies such as PartsPoint and Motion Asia Pacific, and the sale of the lower margin EIS business.

These items were slightly offset by relatively unchanged levels of supplier incentives in 2019 compared to 2018.

Cost of goods sold represented 67.2% of net sales in 2018.

As a percentage of net sales, cost of goods sold was 64.8% in 2021, decreasing from 65.8% of net sales in 2020.

The decrease in cost of goods sold as a percentage of net sales in 2021 reflects the favorable impact of increased supplier incentives, business unit channel and product mix shifts and strategic category management initiatives in areas such as pricing and global sourcing in 2021 compared to 2020.

Operating Expenses

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Additional costs in SG&A include our facilities, delivery, marketing, advertising, technology, digital, legal and professional costs.

SG&A of $4.4 billion in 2020 decreased by $0.2 billion or approximately 4.2% from 2019.

This represents 26.5% of net sales in 2020 compared to 26.1% of net sales in 2019.

The increase in SG&A expenses as a percent of net sales from the prior year reflects loss of leverage due to lower sales volume as a result of the COVID-19 pandemic, as well as the sale of EIS, which had a lower level of SG&A expenses relative to total sales.

This increase was partially offset by our continued efforts to execute on our growth initiatives to better leverage our expenses.

In addition, we are working towards a lower cost and highly effective infrastructure via steps to accelerate the integration of our acquisitions, investments to enhance our productivity and innovative strategies to unlock greater savings and efficiencies across our operations.

In accordance with our $100 million cost savings plan announced in late 2019, we achieved permanent expense reductions of approximately $150 million for the year ended December 31, 2020 driven by transformative reductions in payroll and facility costs.

Additionally, we have executed on a number of savings initiatives in response to the impact of COVID-19, which have contributed approximately $300 million in incremental, temporary savings related to furloughs, reduced travel and other initiatives for the year ended December 31, 2020.

SG&A of $5.2 billion in 2021 increased by $0.8 billion, or approximately 17.7% from 2020.

This represents 27.4% of net sales in 2021 compared to 26.5% of net sales in 2020.

The increase in SG&A expenses from the prior year reflects a combination of factors, including the impact of increased sales for the year.

In addition, our expenses reflect the impact of higher cost and higher gross margin models at certain acquired businesses, including PartsPoint and Motion Asia Pacific, as well as the sale of EIS, which had a lower level of SG&A expenses relative to total sales.

We also experienced rising costs in areas such as labor, freight and delivery, insurance, legal and professional and technology for the year, although our labor and freight costs trended more favorably in the fourth quarter.

Further, we incurred incremental costs associated with our acquisitions during the year.

The increase in SG&A expenses as a percentage of net sales in 2019 relative to the prior year reflects the cost increases described above as well as the loss of leverage associated with the 2.1% comparable sales growth for the Company.

Depreciation and amortization expense was $272.8 million in 2020, an increase of approximately $15.6 million, or 6.1%, from 2019, due primarily to an increase in fixed assets acquired at the end of 2019 that began fully depreciating in 2020.

The provision for doubtful accounts was $23.6 million in 2020, a $9.7 million increase from 2019, due primarily to higher collectability risks associated with the COVID-19 pandemic.

The increase in SG&A as a percent of net sales primarily reflects a $77.4 million charge related to damages in connection with a 2017 automotive product liability claim and a $61.1 million loss on a software disposal.

In addition, we had the headwind of more than $300 million in temporary COVID-19 related cost savings in 2020.

The increase in SG&A was partially offset by the leveraging of expenses on strong sales and our initiatives to improve operational efficiencies and optimize the productivity of our distribution network.

Depreciation and amortization expense was $291.0 million in 2021, an increase of approximately $18.1 million, or 6.6%, from 2020, due to an increase in capital investments to improve our distribution facilities, streamline our supply chain and invest in technology solutions.

The provision for doubtful accounts was $17.7 million in 2021, a $5.8 million decrease from 2020, reflecting the improved financial health of our customers as our key markets recover from the COVID-19 pandemic.

We believe the Company is adequately reserved for bad debts and credit losses at December 31, 2021.

Depreciation and amortization expense was $257.3 million in 2019, an increase of approximately $29.7 million, or 13.0%, from 2018, due primarily to the impact of acquisitions and the increase in capital expenditures relative to the prior year.

The provision for doubtful accounts was $13.9 million in 2019, a $2.1 million decrease from 2018.

Goodwill Impairment

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

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

Refer to the goodwill and

other intangible assets footnote within the notes to the consolidated financial statements for additional information.

These factors primarily resulted from the ongoing market volatility and uncertainty caused by the COVID-19 pandemic, which extended into the second quarter of 2020 and impacted several critical impairment testing assumptions including weighted average cost of capital and market multiples, and near-term revenue and operating margin projections for the reporting unit.

Refer to the goodwill and other intangible assets footnote within the Notes to the Consolidated Financial Statements for additional information.

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

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Non-Operating Expenses and Income

Non-operating expenses included interest expense of $93.7 million in 2020, $95.6 million in 2019 and $101.8 million in 2018.

The decreases in interest expense of $1.9 million in 2020 and $6.2 million in 2019 reflect the combination of the repayment of debt and lower interest rates on certain variable interest debt instruments.

In 2019, the Company recorded $42.8 million in special termination costs related to benefits provided through the Company's defined benefit plans to employees that accepted the voluntary retirement program ("VRP") package as part of the Company's 2019 Cost Savings Plan.

Refer to the restructuring footnote in the Notes to Consolidated Financial Statements for additional information.

In “Other”, the net benefit of interest income, equity method investment income, investment dividends, noncontrolling interests and pension income in 2020 was $58.1 million, an approximate $28.6 million decrease from the prior year primarily driven by an immaterial loss on investment and changes in retirement plan valuation.

In 2019, the $25.3 million increase in income from 2018 was primarily driven by changes in retirement plan valuation.

Non-operating expenses included net interest expense of $62.2 million in 2021 and $91.0 million in 2020.

The decrease in net interest expense of $28.9 million in 2021 primarily reflects the combination of the repayment of debt and lowered interest rates on our remaining outstanding debt.

“Other” includes equity method investment income, investment dividends, noncontrolling interests and pension income.

Other income in 2021 was $99.6 million, an approximate $44.1 million increase from the prior year due to a variety of factors, including favorable changes in gains on equity investments and retirement plan valuations.

Segment Profit

Segment profit is calculated as net sales less operating expenses excluding general corporate expenses, interest expense, equity in income from investees, intangible asset amortization, income attributable to noncontrolling interests and other unallocated amounts that are driven by corporate initiatives and adjusted in Non-GAAP Measures (as described further below).

Segment profit is calculated as net sales less operating expenses excluding general corporate expenses, net interest expense, equity in income from investees, intangible asset amortization, income attributable to noncontrolling interests and other unallocated amounts that are primarily driven by corporate initiatives and adjusted in Non-GAAP Measures (as described further below).

Refer to the segment data footnote in the Notes to Consolidated Financial Statements for additional information.

Automotive Group

Automotive's segment profit increased 4.3% in 2020 from 2019 and segment profit margin was 8.0% in 2020 as compared to 7.6% in 2019.

The increase in segment profit margin reflects the strong operating results in North America and Australasia, driven by the positive impact of cost actions, which offset the 4.4% decrease in comparable sales for Automotive.

The Company's European automotive operations were the most challenged in 2020, although this business made significant progress during the year, with improved margins in both the third and fourth quarters.

To further improve Automotive's segment margin, this group will continue to execute on its growth plans and cost initiatives in 2021 and the years ahead.

Automotive's segment profit decreased 2.8% in 2019 from 2018 and segment margin was 7.6% in 2019 as compared to 8.1% in 2018.

The decrease in segment margin reflects the loss of expense leverage due to the 2.3% growth in comparable sales for Automotive.

In addition, rising costs in several areas as described above negatively impacted Automotive's segment margin.

Automotive's segment profit increased 23.7% in 2021 from 2020 and segment profit margin was 8.6% in 2021 compared to 8.0% in 2020.

The improvement reflects strong operating results across our geographies resulting from double-digit organic sales growth, gross margin expansion and ongoing cost control actions.

To further improve Automotive's segment margin, this group will continue to execute on its growth plans and cost initiatives going forward.

Industrial Group

Industrial’s segment profit decreased 7.7% in 2020 from 2019 and segment profit margin was 8.5%, an increase from 8.0% in 2019.

The improvement in segment profit margin for this group primarily reflects the benefits of an improved gross margin, despite the reduced demand from the COVID-19 pandemic, and lower costs.

The Company believes that strengthening economic indicators such as Manufacturing Industrial Production and the Purchasing Managers Index combined with effective growth initiatives and cost actions position the Industrial Group for further growth in 2021.

Industrial’s segment profit increased 7.1% in 2019 from 2018 and segment margin was 8.0%, an increase from 7.7% in 2018.

The improvement in segment margin for this group primarily reflects the benefit of improved gross margins, despite the slowing sales trend during the year and 1.7% comparable sales growth.

2019 was a transformative year for Industrial, given the addition of Motion Asia Pacific in Australasia and sale of EIS.

The effective income tax rate of 56.9% in 2020 increased from 24.8% in 2019.

The increase in rate is primarily due to a non-deductible goodwill impairment charge and other one-time costs incurred during the year.

The effective income tax rate of 24.8% in 2019 increased from 24.6% in 2018.

The increase in rate is primarily due to geographic income tax rate mix shifts and the impact of one-time transaction and other costs, as well as changes in the realizability of future tax benefit adjustments recorded in the comparable periods.

Industrial’s segment profit increased 23.5% in 2021 from 2020 and segment profit margin improved to 9.4%, an increase from 8.5% in 2020.

The improvement primarily reflects the benefits of double-digit organic sales growth and improved gross margin and operational efficiencies.

We believe the strength of economic indicators such as Industrial Production and the Purchasing Managers Index combined with effective growth initiatives and cost actions position the Industrial Group for further growth in 2022.

The Company's effective income tax rate was 25.1% as of December 31, 2021, compared to 56.9% in 2020.

For the year ended December 31, 2021, the rate decrease is primarily due to the non-deductible goodwill impairment charge that occurred in 2020.

Net Income from Continuing Operations

Net income from continuing operations was $163.4 million in 2020, a decrease of 74.7% from $646.5 million in 2019.

On a per share diluted basis, net income from continuing operations was $1.13 in 2020, down 74.4% compared to $4.42 in

Net income from continuing operations was 1.0% of net sales in 2020 compared to 3.7% of net sales in 2019.

Net income from continuing operations was $646.5 million in 2019, a decrease of 13.7% from $749.5 million in 2018.

On a per share diluted basis, net income from continuing operations was $4.42 in 2019, down 13.2% compared to $5.09 in 2018.

Net income from continuing operations was $898.8 million in 2021, a significant increase compared to $163.4 million in 2020.

On a per share diluted basis, net income from continuing operations was $6.23 in 2021, up 451.3% compared to $1.13 in 2020.

Net income from continuing operations was 4.8% of net sales in 2021 compared to 1.0% of net sales in 2020.

During the years ended December 31, 2020, 2019 and 2018, the Company incurred $634.5 million, $170.1 million and $34.9 million, respectively, of adjustments.

In 2020, these adjustments include a goodwill impairment charge related to our European reporting unit, restructuring costs, an inventory adjustment, realized currency losses, and transaction and other costs and income.

Transaction and other costs in 2020 primarily include incremental costs associated with certain divestitures and COVID-19, slightly offset by income from the SPR Fire insurance proceeds.

In 2019 and 2018, these transaction and other costs primarily reflect costs related to acquisitions and divestitures.

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

Adjusted net income from continuing operations was $765.0 million in 2020, down 1.5% from adjusted net income from continuing operations in 2019.

On a per share diluted basis, adjusted net income from continuing operations was $5.27, a 0.8% decrease compared to adjusted net income per diluted share from continuing operations of $5.31 in 2019.

Adjusted net income from continuing operations was $776.8 million in 2019, up 0.3% from adjusted net income from continuing operations in 2018.

On a per share diluted basis, adjusted net income from continuing operations was $5.31 in 2019, a 1.0% increase compared to adjusted net income per diluted share from continuing operations of $5.26 in 2018.

Adjusted net income from continuing operations and adjusted net income per diluted share from continuing operations, both Non-GAAP measures, in 2020, 2019 and 2018 exclude those items noted above (see table below for reconciliations to the most directly comparable GAAP measures).

The increase in net income from continuing operations for the year ended December 31,

2021 primarily reflects the goodwill impairment charge of $506.7 million that occurred during the second quarter of 2020.

Adjusted net income from continuing operations was $997.0 million in 2021, an increase of 30.3% from $765.0 million in 2020.

On a per share diluted basis, adjusted net income from continuing operations was $6.91, a 31.1% increase compared to adjusted net income per diluted share from continuing operations of $5.27 in 2020.

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).

Certain Information Regarding Non-GAAP Financial Measures

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GAAP net income from continuing operations $ 898,790 $ 163,395

Loss on software disposal (1) 61,063 —

Product liability damages award (2) 77,421 —

Goodwill impairment charge (3) — 506,721

Restructuring (2) 50,019 142,780 —

Realized currency losses (3) 11,356 34,701 —

Restructuring costs (4) — 50,019

Realized currency and other divestiture losses (5) — 11,356

Gain on insurance proceeds related to SPR fire (6) (3,862) (13,448)

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

Gain on equity investments (7) (10,229) —

Inventory adjustment (8) — 40,000

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(in thousands, except per share data) 2021 2020

GAAP net income from continuing operations $ 1.13 $ 4.42 $ 5.09

GAAP net income from continuing operations per common share $ 6.23 $ 1.13

Loss on software disposal (1) 0.42 —

Product liability damages award (2) 0.54 —

Goodwill impairment charge (3) — 3.49

Restructuring (2) 0.34 0.98 —

Realized currency losses (3) 0.08 0.24 —

Restructuring costs (4) — 0.34

Realized currency and other divestiture losses (5) — 0.08

Gain on insurance proceeds related to SPR fire (6) (0.03) (0.09)

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

Gain on equity investments (7) (0.07) —

Inventory adjustment (8) — 0.28

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Cost of goods sold $ — $ 53,495

$ 53,495 $ 9,608 $ 5,779

Selling, administrative and other expenses 142,139 10,094

Restructuring costs — 50,019

50,019 100,023 —

Goodwill impairment charge — 506,721

Non-operating expenses (income):

Special termination costs — 42,757 —

Non-operating expenses (income):

14,136 (6,084) —

Non-operating (income) expenses:

Other (14,091) 14,136

Total adjustments $ 128,048 $ 634,465

$ 634,465 $ 170,072 $ 34,930

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

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

(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 in the Notes to 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.

Refer to the commitments and contingencies footnote in the Notes to Consolidated Financial Statements for more information.

(3) Adjustment reflects a goodwill impairment charge related to our European reporting unit.

(4) Adjustment reflects restructuring costs related to 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.

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Richards Headquarters and Distribution Center.

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

(6) Adjustment reflects a $40 million increase to cost of goods sold recorded during the quarter ended December 31, 2020 due to the correction of an immaterial error related to the accounting in prior years for consideration received from vendors.

(7) Adjustment includes a $17 million loss on investment, $10 million of incremental costs associated with COVID-19, and costs associated with certain divestitures.

(7) Adjustment relates to gains recognized upon remeasurement of certain equity investments to fair value upon acquiring the remaining equity of those entities.

(8) Adjustment reflects a $40 million increase to cost of goods sold due to the correction of an immaterial error related to the accounting in prior years for consideration received from vendors.

(9) Adjustment for 2021 include transaction and other costs related to acquisitions.

For 2020, adjustment includes a $17 million loss on investment, $10 million of incremental costs associated with COVID-19 and costs associated with certain divestitures.

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

For the twelve months ended December 31, 2019 and December 31, 2018, adjustments reflect transaction and other costs related to acquisitions and divestitures.

FINANCIAL CONDITION

The Company’s cash balance of $990.2 million at December 31, 2020 compares to cash of $277.0 million at December 31, 2019, as discussed further below.

For the year ended December 31, 2020, the Company used $895.0 million to pay down debt (net of proceeds).

This was primarily used to pay down the term loan A facility.

Additionally the Company used

$453.3 million for dividends paid to the Company’s shareholders, $153.5 million for investments in the Company via capital expenditures and $69.2 million for acquisitions and other investing activities.

The Company’s cash balance at December 31, 2021 was $714.7 million compared to cash of $990.2 million at December 31, 2020.

For the year ended December 31, 2021, the Company used $160.7 million to pay down debt (net of proceeds), $465.6 million for dividends paid to the Company’s shareholders, $333.6 million for the repurchase of the Company's common stock, $266.1 million for investments in the Company via capital expenditures and $284.3 million for acquisitions and other investing activities.

These items were offset by the Company’s earnings and net cash provided by operating activities.

Accounts receivable decreased $883.3 million, or 36.2%, from December 31, 2019 primarily due to entering into the A/R Sales Agreement.

Inventory increased $62.4 million, or 1.8% from December 31, 2019, but was down 1.3% excluding the impact of foreign currency.

Accounts payable increased $180.1 million, or 4.6% from December 31, 2019 partly due to extended payment terms with certain suppliers.

Total debt of $2.7 billion at December 31, 2020 decreased $0.7 billion, or 21.9%, from December 31, 2019 primarily due to the extinguishment of the term loan A facility.

Accounts receivable increased $241.0 million, or 15.5%, from December 31, 2020 primarily due to higher sales volume.

Inventory increased $383.6 million, or 10.9% from December 31, 2020 in association with higher product demand and increase in sales.

Accounts payable increased $676.9 million, or 16.4% from December 31, 2020 due to the increase in purchases related to sales volume and extended payment terms with certain suppliers.

Total debt of $2.4 billion at December 31, 2021 decreased $267.8 million, or 10.0%, from December 31, 2020 primarily due to the pay down of our short-term debt and foreign currency impact during the year.

We continue to negotiate extended payment dates with our suppliers.

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

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

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

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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The ratio of current assets to current liabilities was 1.18 to 1 at December 31, 2021 and 1.21 to 1 at 2020, and our liquidity position remains strong.

The Company’s total debt outstanding at December 31, 2020 decreased by $749.0 million or 21.9% from December 31, 2019, primarily due to the extinguishment of our term loan A facility.

The Company’s total debt outstanding at December 31, 2021 decreased by $267.8 million or 10.0% from December 31, 2020, primarily due to the pay down of our short-term debt and foreign currency impact during the year.

Sources and Uses of Cash

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Financing activities $ (989,532) $ (1,513,765) $ 524,233 (34.6) %

Year Ended December 31,

(In thousands) 2019 2018 $ Change % Change

Operating Activities

Investing activities $ (543,595) $ (469,938) $ (73,657) 15.7 %

Financing activities $ (385,962) $ (608,830) $ 222,868 (36.6) %

Operating Activities

The Company continues to generate cash, and in 2020 net cash provided by operating activities totaled $2.0 billion, a $1.2 billion, or 142.0%, increase from 2019.

The increase in cash provided by operating activities was primarily driven by the effective management of working capital, including the entry into an A/R Sales Agreement to sell receivables that provided an $800 million benefit to operating cash flows.

In 2019 net cash provided by operating activities totaled $0.8 billion, a $0.2 billion, or 21.2%, decrease from 2018.

The decrease in cash provided by operating activities was primarily due to the change in working capital in 2019 as compared to 2018, as the Company's increase in accounts payable was less than in the prior year.

The Company continues to generate positive cash flow, and in 2021 net cash provided by operating activities totaled $1.3 billion, a $0.8 billion, or 37.5%, decrease from 2020.

The decrease in cash provided by operating activities was primarily driven by the $800 million benefit to operating cash flow in 2020 for the A/R Sales Agreement to sell receivables.

Investing Activities

Net cash provided by investing activities was $182.8 million in 2020 compared to net cash used of $543.6 million in 2019, a $726.4 million, or 133.6%, decrease.

In 2020, net cash provided by investing activities included $387.4 million in proceeds from the divestiture of the Business Products Group and $18.1 million in proceeds from the sale of property, plant and equipment.

These proceeds were partially offset by capital expenditures of $153.5 million, a decrease of $124.4 million, or 44.8%, from the prior year, and $69.2 million used for acquisitions of businesses and other investing activities, a decrease of $655.5 million, or 90.5%, from 2019.

As part of our actions to preserve liquidity as a result of the COVID-19 pandemic, we significantly reduced our planned capital expenditures during 2020 from our original estimate of $300 million for the year.

We estimate that cash used for capital expenditures in 2021 will be in the range of $275 million to $325 million.

Net cash used in investing activities was $543.6 million in 2019 compared to $469.9 million in 2018, a $73.7 million, or 15.7%, increase.

In 2019, net cash used in investing activities included $724.7 million used for acquisitions of businesses and other investing activities, an increase of $466.9 million, or 181.1%, from 2018, and capital expenditures of $277.9 million, an increase of $51.4 million, or 22.7%, from the prior year.

This increase was mostly offset by $434.6 million in proceeds for the divestiture of businesses during the year and $24.4 million in proceeds from the sale of property, plant and equipment.

Net cash used in investing activities was $506.2 million in 2021 compared to net cash provided by investing activities of $182.8 million in 2020, a $688.9 million, or 376.9%, decrease.

In 2021, net cash used in investing activities included capital expenditures of $266.1 million, an increase of $112.6 million, or 73.4%, from the prior year, and $284.3 million used for acquisitions of businesses and other investing activities, an increase of $215.1 million, or 311.0%, from 2020.

These items were partially offset by $17.7 million in proceeds from the divestitures, down $369.6 million or 95.4%, primarily due to the sale of the Business Products Group in 2020.

Financing Activities

Net cash used in financing activities in 2020 totaled $1.5 billion, an increase of $1.1 billion, or 292.2%, from the $386.0 million in cash used in financing activities in 2019.

The increase is primarily driven by the extinguishment of the term loan A facility in 2020.

For the years presented, the Company's financing activities also included the use of cash for dividends paid to shareholders and repurchases of the Company’s common stock.

The Company paid dividends to shareholders of $453.3 million during 2020.

During 2020, the Company repurchased $96.2 million, of the Company’s common stock.

Net cash used in financing activities in 2021 totaled $1.0 billion, a decrease of $0.5 billion, or 34.6%, from the $1.5 billion in cash used in financing activities in 2020.

The decrease is primarily due to the $160.7 million pay down of debt (net of proceeds) in 2021 relative to the $895.0 million pay down of debt (net of proceeds) in 2020, which was partially offset by an additional $237.4 million in repurchases of our common stock as compared to 2020.

For 2021, the Company's financing activities included dividends paid to shareholders of $465.6 million and repurchases of the Company's common stock of $333.6 million.

The Company expects this trend of increasing dividends to continue in the foreseeable future.

We also expect to remain active in our share repurchase program, but the amount and value of shares repurchased will vary and is at the discretion of the Company's board of directors.

Net cash used in financing activities in 2019 totaled $386.0 million, a decrease of $222.9 million, or 36.6%, from the $608.8 million in cash used in financing activities in 2018.

Primarily, the decrease reflects the net proceeds from debt issued in 2019 as compared to the net payments on debt in 2018.

For the years presented, the Company's financing activities also included the use of cash for dividends paid to shareholders and repurchases of the Company’s common stock.

The Company paid dividends to shareholders of $438.9 million and $416.0 million during 2019 and 2018, respectively.

During 2019 and 2018, the Company repurchased $74.2 million and $92.0 million, respectively, of the Company’s common stock.

Notes and Other Borrowings

We have taken actions and will continue to take actions, as necessary, intended to preserve financial flexibility in light of current uncertainty in the global markets resulting from COVID-19.

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

Additionally, we took precautionary measures in 2020 to conserve liquidity including, but not limited to, reducing our inventory levels and managing replenishment volumes to adjust to the changing levels of market demand.

To the extent available, we are also delaying tax payments as allowed by governmental authorities.

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

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

We ended the year with $2.9 billion of total liquidity (comprising $1.9 billion availability on the revolving credit facility and $1.0 billion of cash and cash equivalents).

The Company ended the year with $2.2 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $0.7 billion of cash and cash equivalents).

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

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

On May 1, 2020, the Company entered into an amendment to each of the Amended and Restated Syndicated Credit Facility Agreement (the "October 30, 2017 Syndicated Facility") and the Notes Purchase Agreement, each dated as of October

30, 2017, to provide additional covenant flexibility on account of the COVID-19 pandemic.

In consideration of the increased covenant flexibility, the Company agreed to certain interest rate increases under these facilities which expire on March 31, 2021.

On May 29, 2020, we entered into the A/R Sales Agreement to sell approximately $500 million of short-term receivables from certain customer trade accounts to an unaffiliated financial institution.

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

On October 29, 2020, the Company transferred ownership and control of an additional $300 million in receivables under the A/R Sales Agreement bringing the total to $800 million.

The terms of the A/R Sales Agreement limit the balance of receivables sold to approximately $800 million at any point in time.

On October 27, 2020, the Company issued $500,000 aggregate principal amount of unsecured 1.875% Senior Notes due 2030 at a price to the public of 99.069% of their face value with U.S.

Bank National Association as trustee.

Interest on the 1.875% Senior Notes due 2030 is payable semi-annually on May 1 and November 1 of each year, which begins on May 1, 2021, and is computed on the basis of a 360-day year.

On October 30, 2020, the term loan A was extinguished in connection with the issuance of these senior notes.

On October 30, 2020, the Company entered into a new $1.5 billion Syndicated Facility Agreement (the "October 30, 2020 Syndicated Facility").

Borrowings under the October 30, 2020 Syndicated Facility bear interest at a rate of London Inter-bank Offered Rate ("LIBOR") (or a similar index for foreign currency borrowings) plus a margin, which is based on the Company’s debt rating, with a LIBOR floor of 0.50%.

The Company also has the option to increase the borrowing capacity up to an additional $750 million, as well as an option to decrease the borrowing capacity or terminate the facility with appropriate notice.

The October 30, 2020 Syndicated Facility matures in October 2025.

Simultaneously with the entry into the October 30, 2020 Syndicated Facility, the Company terminated and paid in full all outstanding indebtedness under the October 30, 2017 Syndicated Facility and repaid the existing term loan A facility.

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.

At December 31, 2021, approximately $1.5 billion was available under this line of credit.

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Our unused letters of credit expire within one year, but have automatic renewal clauses.

At December 31, 2020, the Company had unsecured Senior Notes outstanding of $2.1 billion.

These borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings.

At December 31, 2021, the Company had $2.4 billion of unsecured Senior Notes outstanding.

Approximately $1.9 billion of these borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings.

The weighted average interest rate on the Company’s total outstanding borrowings was approximately 2.35% at December 31, 2021 and 2.65% at December 31, 2020.

Total interest expense, net of interest income, for all borrowings was $91.0 million, $91.4 million and $93.3 million in 2020, 2019 and 2018, respectively.

Refer to the credit facilities footnote the Consolidated Financial Statements for more information.

At December 31, 2020, the Company was in compliance with the covenants under its October 30, 2020 Syndicated Facility and its outstanding unsecured Senior Notes.

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.

Total interest expense, net of interest income, for all borrowings was $62.2 million and $91.0 million in 2021 and 2020, respectively.

Refer to the debt footnote in the Notes to Consolidated Financial Statements for more information.

At December 31, 2021, the Company was in compliance with the covenants under our Unsecured Revolving Credit Facility and our outstanding unsecured Senior Notes.

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.

On January 3, 2022, we amended our A/R Sales Agreement to increase the facility limit by an additional $200 million bringing the total to $1.0 billion.

The terms of the A/R Sales Agreement limit the balance of receivables sold to approximately $1.0 billion at any point in time.

Refer to the A/R Sales Agreement footnote in the Notes to Consolidated Financial Statements for more information.

On January 6, 2022, we issued $500,000 aggregate principal amount of unsecured 1.750% Senior Notes due 2025 at a price to the public of 99.721% of their face value with U.S.

Bank National Association as trustee.

Interest on the 1.750% Senior Notes due 2025 is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2022, and is computed on the basis of a 360-day year.

Simultaneously, on January 6, 2022, the Company issued $500,000 aggregate principal amount of unsecured 2.750% Senior Notes due 2032 at a price to the public of 98.810% of their face value with U.S.

Bank National Association as trustee.

Interest on the 2.750% Senior Notes due 2032 is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2022, and is computed on the basis of a 360-day year.

Contractual and Other Obligations

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The long-term primary objectives for the pension plan funds are to provide for a reasonable amount of long-term growth of capital without undue exposure to risk, protect the assets from erosion of purchasing power and provide investment results that meet or exceed the pension plans’ actuarially assumed long-term rates of return.

The Company’s investment strategy with respect to pension plan assets is to generate a return in excess of the passive portfolio benchmark (47% S&P 500 Index, 5% Russell Mid Cap Index, 7% Russell 2000 Index, 5% MSCI EAFE Index, 5% DJ Global Moderate Index, 3% MSCI Emerging Market Net, and 28% Barclays U.S.

Long Govt/Credit).

The Company’s investment strategy with respect to pension plan assets is to generate a return in excess of the passive portfolio benchmark (38% U.S.

Large-cap stocks, 9% U.S.

Mid-cap stocks, 10% International stocks, 3% Emerging Market stocks and 40% Barclays U.S.

Gov/Credit Index).

We make several critical assumptions in determining our pension plan assets and liabilities and related pension income.

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Based upon this cash flow matching analysis, we selected a weighted average discount rate for the plans of 3.04% at December 31, 2021.

Effective December 31, 2013, our defined benefit pension plans was amended to freeze benefit plan accruals for participants and provide for immediate vesting of accrued benefits.

Our pension income for 2021 is determined at the December 31, 2020 measurement date.

A 25 basis point increase in discount rate would result in an approximate $73 million decrease on our projected benefit obligation.

A 25 basis point decrease in discount rate would result in approximate $77 million increase on our projected benefit obligation.

A 25 basis point change in discount rate would have an approximate $1.2 million impact on our pension income.

A 25 basis point change in expected return on asset would have an approximate $5.7 million impact on our pension income.

These sensitivities reflect the effect of changing one assumption at a time and assume no changes to the design of the pension plans.

Effective December 31, 2013, our defined benefit pension plans were amended to freeze benefit plan accruals for participants and provide for immediate vesting of accrued benefits.

Net periodic benefit income for our defined benefit pension plans was $19.3 million, $18.0 million, and $16.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could record impairment charges.

In addition, the Company has estimated the economic lives of certain acquired tangible and intangible assets and these lives are used to

calculate depreciation and amortization expense.

In addition, the Company has estimated the

economic lives of certain acquired tangible and intangible assets and these lives are used to calculate depreciation and amortization expense.

If the Company's estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.

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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-K

Item 7. Management’s Discussion and Analysis