What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-27 compared with 2022-04-21 · 79 added, 62 removed, 118 unchanged (54% 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, 2021.

The results of operations for the three months ended March 31, 2022 are not necessarily indicative of results for the year ended December 31, 2022.

The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of results for the year ended December 31, 2022.

Forward-Looking Statements

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

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

Such factors may include, among other things, changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation and geopolitical conflicts, such as the conflict between Russia and Ukraine;

volatility in oil prices;

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

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

our ability to maintain compliance with our debt covenants;

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

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

changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation and geopolitical conflicts, such as the conflict between Russia and Ukraine;

changes in tax policies;

volatile exchange rates;

volatility in oil prices;

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

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

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the uncertainties and costs of litigation;

disruptions caused by a failure or breach of our information systems, as well as other risks and uncertainties discussed in our 2021 Annual Report on Form 10-K and Item 1A, Risk Factors, in this report on Form 10-Q (all of which may be amplified by the COVID-19 pandemic and geopolitical conflicts, such as the current conflict between Russia and Ukraine) and from time to time in our subsequent filings with the SEC.

disruptions caused by a failure or breach of our information systems, as well as other risks and uncertainties discussed in our 2021 Annual Report on Form 10-K and Item 1A, Risk Factors, in our report on Form 10-Q for the quarter ended March 31, 2022 (all of which may be amplified by the COVID-19 pandemic and geopolitical conflicts, such as the current conflict between Russia and Ukraine) and from time to time in our subsequent filings with the SEC.

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

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We conduct business in North America, Europe and Australasia from a network of more than 10,300 locations.

Our 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 March 31, 2022, and accounted for 62% of total revenues for the three months ended March 31, 2022.

Our Industrial Parts Group operated in the U.S., Canada, Mexico,

Australia, New Zealand, Indonesia and Singapore.

The Industrial Parts Group accounted for 38% of the our total revenues for the three months ended March 31, 2022.

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 - we keep the world moving!

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and (4) effective capital allocation.

Key Business Metrics

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

Our Automotive Parts Group operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand as of June 30, 2022, and accounted for 62% of total revenues for the three and six months ended June 30, 2022.

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

The Industrial Parts Group accounted for 38% of our total revenues for the three and six months ended June 30, 2022.

Key Business Metrics - Comparable Sales

We consider comparable sales, which refers to period-over-period comparisons of our net sales excluding the impact of acquisitions, foreign currency and other, to be a key business metric.

Management uses comparable sales to evaluate the results of operations 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.

While this metric is widely used by industry stakeholders, 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.

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

Comparable Sales

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

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

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

Results of Operations

Our Automotive Parts Group and Industrial Parts Group both experienced continued recovery and expansion in their operations, reporting strong sales and segment profit margin growth during the three months ended March 31, 2022 when compared to the same prior year period.

Our Industrial Parts Group benefited from the January 2022 acquisition of Kaman Distribution Group.

Our Automotive Parts Group and Industrial Parts Group both reported strong sales and segment profit margin growth during the three and six months ended June 30, 2022 when compared to the same prior year period.

Our Industrial Parts Group also benefited from the January 2022 acquisition of KDG.

We expect this strategic and highly synergistic combination to significantly enhance our scale and to strengthen our market leading position, creating a premier leader in industrial solutions.

Additionally both businesses were resilient in managing through ongoing supply chain challenges and inflationary pressures.

Sales for the three months ended March 31, 2022 were $5.3 billion, an 18.6% increase compared to $4.5 billion for the same period of the prior year.

The increase in sales is attributable to a 12.3% increase in comparable sales and an 8.1% benefit from acquisitions, slightly offset by a net unfavorable impact of foreign currency and other of 1.8%.

The 12.3% increase in comparable sales was primarily driven by the continued increase in consumer activity and pricing increases to offset product cost and other inflationary pressures.

Sales for the Automotive Parts Group increased 10.9% for the three months ended March 31, 2022 compared to the same period in the prior year.

This group's revenue increase for the three months ended March 31, 2022 consisted of an approximate 10.3% increase in comparable sales driven by strong demand in all geographical regions and pricing increases to offset product costs and other inflationary pressures.

Additionally both businesses were resilient in managing through ongoing supply chain challenges and inflationary pressures, and rising fuel costs, all of which we expect to continue throughout the remainder of the year.

Sales for the three months ended June 30, 2022 were $5.6 billion, a 17.1% increase compared to $4.8 billion for the same period of the prior year.

The increase in sales is attributable to an 11.5% increase in comparable sales and an 8.8% benefit from acquisitions, slightly offset by a net unfavorable impact of foreign currency and other of 3.2%.

Sales for the six months ended June 30, 2022 were $10.9 billion, a 17.8% increase compared to $9.2 billion for the same period of the prior year.

The increase in sales is due to a 11.8% increase in comparable sales, a 8.6% benefit from acquisitions, and a 2.6% net unfavorable impact of foreign currency and other.

The increases in comparable sales were primarily driven by the continued increase in consumer activity and the ongoing execution of the strategic pricing and other sales initiatives to offset product and other inflationary cost pressures when compared to the three and six months ended June 30, 2021.

Sales for the Automotive Parts Group increased 8.5% and 9.7% for the three and six months ended June 30, 2022 compared to the same periods in the prior year.

This group's revenue increase for the three months ended June 30, 2022 consisted of an approximate 8.4% increase in comparable sales driven by strong demand in all geographical regions and pricing increases to offset product costs and other inflationary pressures.

The overall sales increase also included a 4.5% benefit from acquisitions and was slightly offset by a 4.4% net unfavorable impact of foreign currency and other.

Sales for the Industrial Parts Group increased 33.6% for the three months ended March 31, 2022 compared to the same period in 2021.

The increase reflects a 17.9% benefit from the acquisition of Kaman Distribution Group and a 16.1% increase in comparable sales, slightly offset by a 0.4% unfavorable impact of foreign currency as compared to the same period in 2021.

Our Industrial Parts Group continues to benefit from continued expansion in the industrial economy, which is evident in indicators such as the Purchasing Managers Index and Industrial Production Index.

This group's revenue increase for the six months ended June 30, 2022 consisted of an approximate 9.3% increase in comparable sales and 3.9% benefit from acquisitions, partially offset by a 3.5% net unfavorable impact from foreign currency and other compared to the same period in 2021.

Sales for the Industrial Parts Group increased 34.5% and 34% for the three and six months ended June 30, 2022 compared to the same periods in 2021.

The increases reflect benefits of 17.6% and 17.7% primarily from the acquisition of KDG and increases of 17.8% and 17% in comparable sales.

Our Industrial Parts Group continues to benefit from the ongoing execution of our strategic initiatives and the continued expansion in the industrial economy, which is evident in indicators such as the Purchasing Managers Index and Industrial Production Index.

Cost of Goods Sold and Operating Expenses

Cost of goods sold for the three months ended March 31, 2022 was $3.5 billion, an 18.6% increase from $2.9 billion for the same period in 2021.

As a percentage of net sales, cost of goods sold was 65.5% for the three months

ended March 31, 2022 and 2021.

Cost of goods sold for the three months ended June 30, 2022 was $3.6 billion, an 17.7% increase from $3.1 billion for the same period in 2021.

As a percentage of net sales, cost of goods sold was 65.0% for the three months ended June 30, 2022 compared to 64.7% for the same period in 2021.

For the six months ended June 30, 2022, cost of goods sold was $7.1 billion, an 18.1% increase from $6 billion for the same six month period in 2021.

As a percentage of net sales, cost of goods sold was 65.2% for the six months ended June 30, 2022 compared to 65.1% for the same period in 2021.

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

The increase in costs of goods sold for the three months ended March 31, 2022 was primarily driven by inflation and increased demand.

Total operating expenses increased 17.6% to $1.5 billion for the three months ended March 31, 2022 compared to $1.3 billion for the same three month period in 2021.

As a percentage of net sales, operating expenses decreased to 28.3% compared to 28.5% in the three months ended March 31, 2022 and 2021, respectively.

The increases in costs of goods sold for the three and six months ended June 30, 2022 were primarily driven by increased demand, unfavorable foreign exchange impacts, inflation and moderation in supplier incentives, which were partially offset by the ongoing favorable impact of strategic category management initiatives.

Total operating expenses increased 1.7% to $1.5 billion for the three months ended June 30, 2022 compared to $1.4 billion for the same three month period in 2021.

As a percentage of net sales, operating expenses decreased to 25.9% compared to 29.9% for same three month period in the previous year.

For the six months ended June 30, 2022, these expenses totaled $2.9 billion, compared to $2.7 billion for the same period in 2021, and as a percentage of net sales, operating expenses decreased to 27.1% compared to 29.2% for the same six month period in 2021.

For the three and six months ended June 30, 2022 operating expenses included $25 million and $47 million, respectively, of transaction and other costs associated with the KDG acquisition, inclusive of a non-cash impairment charge of $17 million from the retirement of certain legacy trade names that will no longer be used as result of the on-going KDG integration.

The increase in total operating expenses for both periods was partially offset by a one-time benefit of $103 million from a gain on the sale of real estate that had been leased to S.P.

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

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Segment Profit

The Automotive Parts Group's segment profit increased 12.3% in the three months ended March 31, 2022 compared to the same period of 2021, and its segment profit margin increased to 8.1% compared to 8.0% for the same period of the previous year.

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

The Industrial Parts Group's segment profit increased 50.3% in the three months ended March 31, 2022 compared to the same three month period of 2021 primarily driven by the acquisition of Kaman Distribution Group.

This groups segment profit margin increased to 9.3% compared to 8.3% for the same period of the previous year.

The improved segment profit margin is primarily due to the benefit of strong sales growth and strategic initiatives in areas such as category management and pricing.

Our effective income tax rate was 24.5% and 23.8% for the three months ended March 31, 2022 and 2021, respectively.

The increase in the rate is primarily related to prior year gains on the sale of real estate and geographic income mix shifts.

For the three months ended March 31, 2022, net income was $245.8 million, an increase of 12.9% compared to net income of $217.7 million for the same three month period of the prior year.

The Automotive Parts Group's segment profit increased 10.9% in the three months ended June 30, 2022 compared to the same period of 2021, and its segment profit margin increased to 9.3% compared to 9.1% for the same period of the previous year.

For the six months ended June 30, 2022, this group's segment profit increased 11.5% compared to the same period of the prior year, and its segment profit margin increased to 8.7% compared to 8.6% for the same period in 2021.

These improvements in segment profit margin, despite inflationary headwinds, reflect the strong operating results in all geographical regions, driven primarily by strong sales demand and the execution of our strategic growth and operating initiatives.

The Industrial Parts Group's segment profit increased 49.9% and 50.1% in the three and six months ended June 30, 2022 compared to the same periods in 2021, primarily driven by the acquisition of KDG.

For the three months and six months ended June 30, 2022, this group's segment profit margin increased to 10.6% and 10.0% compared to 9.5% and 8.9%, respectively, for the same periods of the previous year.

These improved segment profit margins are primarily due to the benefit of strong sales growth and strategic initiatives in areas such as category management and pricing.

Our effective income tax rate was 24.2% and 24.3% for the three and six month periods ended June 30, 2022, as compared to 27.1% and 25.4%, respectively, for the same periods in 2021.

The rate decrease is primarily due to future tax benefit adjustments and a prior year United Kingdom rate change that required deferred tax asset and liability remeasurement increasing the prior period 2021 comparative rate.

The decrease was partially offset by geographic income mix shifts.

For the three months ended June 30, 2022, net income was $373 million, an increase of 89.6% compared to net income of $196 million for the same three month period of the prior year.

On a per share diluted basis, net income was $2.62, an increase of 92.6% compared to $1.36 for the same three month period of 2021.

For the three months ended March 31, 2022, net income on an adjusted basis was $265.7 million, an increase of 22.0% compared to adjusted net income of $217.7 million for the same three month period of the prior year.

On a per share basis, net income on an adjusted basis was $1.86 for the three months ended March 31, 2022, an increase of 24.0% compared to $1.50 for the same three month period of 2021.

For 2021, adjusted net income and adjusted diluted net income per common share are both non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

For the six months ended June 30, 2022, net income was $618 million, an increase of 49.3% compared to net income of $414 million for the same six month period in 2021.

On a per share diluted basis, net income was $4.34, an increase of 52.3% compared to $2.85 for the same six month period of the prior year.

For the three months ended June 30, 2022, net income on an adjusted basis was $313 million, an increase of 23.9% compared to adjusted net income of $253 million for the same three month period of the prior year.

On a per share basis, net income on an adjusted diluted basis was $2.20 for the three months ended June 30, 2022, an increase of 26.4% compared to $1.74 for the same three month period of 2021.

For the six months ended June 30, 2022, net income on an adjusted basis was $579 million, an increase of 23.1% compared to adjusted net income of $470 million for the same six month period of the prior year.

On a per share basis, net income on an adjusted diluted basis was $4.06 for the six months ended June 30, 2022, an increase of 25.3% compared to $3.24 for the same six month period of 2021.

For 2021, adjusted net income and adjusted diluted earnings per share are both non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

The growth in net income and adjusted net income in all periods presented reflects strong operating results in both of our segments, driven primarily by strong sales demand, the benefits of key acquisitions (including KDG), and the execution of our strategic growth initiatives, despite inflationary and other macroeconomic headwinds.

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

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

Three Months Ended March 31,

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

(in thousands) 2022 2021 2022 2021

GAAP net income $ 372,529 $ 196,496 $ 618,367 $ 414,206

Gain on sale of real estate (1) (102,803) — (102,803) —

Gain on insurance proceeds (2) (873) — (1,507) —

Product liability damages award (3) — 77,421 — 77,421

Transaction and other costs (4) 26,944 — 53,493 —

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The table below represent amounts per common share assuming dilution:

Three Months Ended March 31,

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

(in thousands, except per share data) 2022 2021 2022 2021

GAAP net income $ 2.62 $ 1.36 $ 4.34 $ 2.85

Gain on sale of real estate (1) (0.72) — (0.72) —

Gain on insurance proceeds (2) (0.01) — (0.02) —

Product liability damages award (3) — 0.53 — 0.53

Transaction and other costs (4) 0.19 — 0.38 —

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

Three Months Ended March 31,

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

(in thousands) 2022 2021 2022 2021

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Total adjustments $ (76,732) $ 77,421 $ (50,817) $ 77,421

(1) Adjustment reflects a gain on the sale of real estate that had been leased to S.P.

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

(2) Adjustment primarily reflects costs associated with the January 3, 2022 acquisition of Kaman Distribution Group.

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

(4) Adjustment primarily reflects legal and professional, restructuring, lease termination and other costs associated with the January 3, 2022 acquisition and subsequent integration of KDG.

These costs also include a $17 million impairment charge driven by a decision to retire certain legacy trade names, classified as other intangible assets, prior to the end of their estimated useful lives as part of executing our KDG integration and rebranding strategy.

Refer to the acquisition footnote for more information regarding the acquisition.

Financial Condition

Our cash balance of $610.8 million at March 31, 2022 decreased $103.9 million, or 14.5%, from December 31, 2021.

For the three months ended March 31, 2022, we had net cash provided by operating activities of $398.8 million, net cash used in investing activities of $1.4 billion and net cash provided by financing activities of $914.0 million.

The cash provided by operating activities was driven by higher net income for the three months ended March 31, 2022 and the effective management of our working capital.

In addition, cash from operations included a $200 million benefit related to our A/R Sales Agreement during the quarter.

We used $1.4 billion cash for investing activities primarily in connection with the acquisition of Kaman Distribution Group, in addition to $78.0 million for capital

expenditures.

Our cash balance of $519 million at June 30, 2022 decreased $196 million, from December 31, 2021.

For the six months ended June 30, 2022, we had net cash provided by operating activities of $791 million, net cash used in investing activities of $1.5 billion and net cash provided by financing activities of $585 million.

The cash provided by operating activities was driven by higher net income for the six months ended June 30, 2022 and the effective management of our working capital, including a $200 million benefit related to our A/R Sales Agreement.

We used $1.5 billion cash for investing activities primarily in connection with the acquisition of KDG, in addition to $153 million for capital expenditures.

The financing activities consisted primarily of $1 billion of net proceeds from debt primarily from the Senior Notes offering (as discussed below).

This was partially offset by $243 million for dividends paid to our shareholders and $123 million of stock repurchases.

Each of our working capital line items were impacted by the acquisition of Kaman Distribution Group (refer to our acquisitions footnote in the notes to condensed consolidated financial statements for further information).

Each of our working capital line items were impacted by the acquisition of KDG (refer to our acquisitions footnote in the notes to condensed consolidated financial statements for further information).

Accounts receivable increased $437 million, or 24.3%, from December 31, 2021.

Inventory increased $406 million, or 10.4%.

Accounts receivable and inventory were both impacted by first quarter increase in revenues and related product demand.

Accounts receivable and inventory were both impacted by increases in revenues and related product demand.

Accounts payable increased $605 million, or 12.6% from December 31, 2021, in line with the increase in inventory.

Total debt of $3.5 billion at March 31, 2022 increased $1.1 billion, or 45.6%, from December 31, 2021 driven primarily by the Senior Notes offering (as discussed below).

Total debt of $3.3 billion at June 30, 2022 increased $909 million, or 37.7%, from December 31, 2021 driven primarily by the Senior Notes offering (as discussed below).

We continue to negotiate extended payment dates with our suppliers.

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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 March 31, 2022 and December 31, 2021, the outstanding payment obligations to the financial institutions are $2.7 billion and $2.7 billion, respectively.

The amount settled through the SCF program was $855 million and $577 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

As of June 30, 2022 and December 31, 2021, the outstanding payment obligations to the financial institutions are $2.8 billion and $2.7 billion, respectively.

The amount settled through the SCF program was $1.8 billion and $1.2 billion for the six months ended June 30, 2022 and June 30, 2021, respectively.

Liquidity and Capital Resources

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

At March 31, 2022, our total average cost of debt was 2.31%, and we remain in compliance with all covenants connected with our borrowings.

At June 30, 2022, our total average cost of debt was 2.34%, and we remain in compliance with all covenants connected with our borrowings.

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.

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 February 14, 2022, we announced a 10% increase in the regular quarterly cash dividend for 2022.

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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-Q

Item 2. Management’s Discussion and Analysis