GENUINE PARTS CO 10-Q

Item 1. Financial Statements GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) June 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 519,131 $ 714,701 Trade accounts receivable, less allowance for doubtful accounts (2022 – $ 57,413 ; 2021 – $ 44,425 ) 2,235,453 1,797,955 Merchandise inventories, net 4,296,191 3,889,919 Prepaid expenses and other current assets 1,475,493 1,353,847 Total current assets 8,526,268 7,756,422 Goodwill 2,538,240 1,915,307 Other intangible assets, less accumulated amortization 1,853,222 1,406,401 Property, plant and equipment, less accumulated depreciation (2022 – $ 1,370,095 ; 2021 – $ 1,339,706 ) 1,236,859 1,234,399 Operating lease assets 1,067,614 1,053,689 Other assets 1,015,984 985,884 Total assets $ 16,238,187 $ 14,352,102 Liabilities and equity Current liabilities: Trade accounts payable $ 5,409,587 $ 4,804,939 Current portion of debt 14,118 — Dividends payable 126,716 115,876 Other current liabilities 1,743,439 1,660,768 Total current liabilities 7,293,860 6,581,583 Long-term debt 3,304,223 2,409,363 Operating lease liabilities 800,672 789,175 Pension and other post–retirement benefit liabilities 263,314 265,134 Deferred tax liabilities 407,763 280,778 Other long-term liabilities 514,792 522,779 Equity: Preferred stock, par value – $ 1 per share; authorized – 10,000,000 shares; none issued — — Common stock, par value – $ 1 per share; authorized – 450,000,000 shares; issued and outstanding – 2022 – 141,280,841 shares; 2021 – 142,180,683 shares 141,281 142,181 Additional paid-in capital 123,388 119,975 Accumulated other comprehensive loss ( 953,228 ) ( 857,739 ) Retained earnings 4,329,115 4,086,325 Total parent equity 3,640,556 3,490,742 Noncontrolling interests in subsidiaries 13,007 12,548 Total equity 3,653,563 3,503,290 Total liabilities and equity $ 16,238,187 $ 14,352,102 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2022 2021 2022 2021 Net sales $ 5,602,414 $ 4,783,738 $ 10,897,049 $ 9,248,452 Cost of goods sold 3,641,615 3,094,633 7,110,303 6,018,532 Gross profit 1,960,799 1,689,105 3,786,746 3,229,920 Operating expenses: Selling, administrative and other expenses 1,364,015 1,349,309 2,767,994 2,544,473 Depreciation and amortization 85,890 73,960 173,259 146,256 Provision for doubtful accounts 2,899 5,037 7,393 9,946 Total operating expenses 1,452,804 1,428,306 2,948,646 2,700,675 Non-operating expense (income): Interest expense, net 20,248 15,362 40,098 33,686 Other ( 3,820 ) ( 24,170 ) ( 19,281 ) ( 59,907 ) Total non-operating expense (income) 16,428 ( 8,808 ) 20,817 ( 26,221 ) Income before income taxes 491,567 269,607 817,283 555,466 Income taxes 119,038 73,111 198,916 141,260 Net income $ 372,529 $ 196,496 $ 618,367 $ 414,206 Dividends declared per common share $ 0.8950 $ 0.8150 $ 1.7900 $ 1.6300 Basic earnings per share $ 2.63 $ 1.36 $ 4.36 $ 2.87 Diluted earnings per share $ 2.62 $ 1.36 $ 4.34 $ 2.85 Weighted average common shares outstanding 141,581 144,211 141,747 144,312 Dilutive effect of stock options and non-vested restricted stock awards 723 772 835 846 Weighted average common shares outstanding – assuming dilution 142,304 144,983 142,582 145,158 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Net income $ 372,529 $ 196,496 $ 618,367 $ 414,206 Other comprehensive (loss) income, net of income taxes: Foreign currency translation adjustments, net of income taxes in 2022 — $ 31,638 and $ 40,049 ; 2021 — $ 7,019 and $ 14,166 , respectively ( 159,078 ) 7,131 ( 116,946 ) 6,836 Cash flow hedge adjustments, net of income taxes in 2022 — $ 1,383 and $ 2,767 ; 2021 — $ 1,383 and $ 2,767 , respectively 3,741 3,741 7,482 7,482 Pension and postretirement benefit adjustments, net of income taxes in 2022 — $ 2,580 and $ 5,160 ; 2021 — $ 3,434 and $ 6,855 , respectively 6,986 9,334 13,975 18,630 Other comprehensive (loss) income, net of income taxes ( 148,351 ) 20,206 ( 95,489 ) 32,948 Comprehensive income $ 224,178 $ 216,702 $ 522,878 $ 447,154 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) Three Months Ended June 30, 2022 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity April 1, 2022 141,627,749 $ 141,628 $ 126,064 $ ( 804,877 ) $ 4,132,925 $ 3,595,740 $ 12,136 $ 3,607,876 Net income — — — — 372,529 372,529 — 372,529 Other comprehensive income, net of tax — — — ( 148,351 ) — ( 148,351 ) — ( 148,351 ) Cash dividend declared, $ 0.895 per share — — — — ( 126,716 ) ( 126,716 ) — ( 126,716 ) Share-based awards exercised, including tax benefit of $ 2,423 30,588 30 ( 13,387 ) — — ( 13,357 ) — ( 13,357 ) Share-based compensation — — 10,711 — — 10,711 — 10,711 Purchase of stock ( 377,496 ) ( 377 ) — — ( 49,623 ) ( 50,000 ) — ( 50,000 ) Noncontrolling interest activities — — — — — — 871 871 June 30, 2022 141,280,841 $ 141,281 $ 123,388 $ ( 953,228 ) $ 4,329,115 $ 3,640,556 $ 13,007 $ 3,653,563 Six Months Ended June 30, 2022 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity January 1, 2022 142,180,683 $ 142,181 $ 119,975 $ ( 857,739 ) $ 4,086,325 $ 3,490,742 $ 12,548 $ 3,503,290 Net income — — — — 618,367 618,367 — 618,367 Other comprehensive income, net of tax — — — ( 95,489 ) — ( 95,489 ) — ( 95,489 ) Cash dividend declared, $ 1.79 per share — — — — ( 253,607 ) ( 253,607 ) — ( 253,607 ) Share-based awards exercised, including tax benefit of $ 3,137 49,258 49 ( 14,469 ) — — ( 14,420 ) — ( 14,420 ) Share-based compensation — — 17,882 — — 17,882 — 17,882 Purchase of stock ( 949,100 ) ( 949 ) — — ( 121,970 ) ( 122,919 ) — ( 122,919 ) Noncontrolling interest activities — — — — — — 459 459 June 30, 2022 141,280,841 $ 141,281 $ 123,388 $ ( 953,228 ) $ 4,329,115 $ 3,640,556 $ 13,007 $ 3,653,563 5 Table of Contents Three Months Ended June 30, 2021 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity April 1, 2021 144,458,057 $ 144,458 $ 117,867 $ ( 1,023,760 ) $ 4,085,998 $ 3,324,563 $ 11,546 $ 3,336,109 Net income — — — — 196,496 196,496 — 196,496 Other comprehensive income, net of tax — — — 20,206 — 20,206 — 20,206 Cash dividend declared, $ 0.815 per share — — — — ( 117,406 ) ( 117,406 ) — ( 117,406 ) Share-based awards exercised, including tax benefit of $ 4,863 279,441 280 ( 14,181 ) — — ( 13,901 ) — ( 13,901 ) Share-based compensation — — 8,286 — — 8,286 — 8,286 Purchase of stock ( 1,435,825 ) ( 1,436 ) — — ( 182,929 ) ( 184,365 ) — ( 184,365 ) Noncontrolling interest activities — — — — — — ( 280 ) ( 280 ) June 30, 2021 143,301,673 $ 143,302 $ 111,972 $ ( 1,003,554 ) $ 3,982,159 $ 3,233,879 $ 11,266 $ 3,245,145 Six Months Ended June 30, 2021 (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Parent Equity Non-controlling Interests in Subsidiaries Total Equity January 1, 2021 144,354,335 $ 144,354 $ 117,165 $ ( 1,036,502 ) $ 3,979,779 $ 3,204,796 $ 13,207 $ 3,218,003 Net income — — — — 414,206 414,206 — 414,206 Other comprehensive income, net of tax — — — 32,948 — 32,948 — 32,948 Cash dividend declared, $ 1.63 per share — — — — ( 235,120 ) ( 235,120 ) — ( 235,120 ) Share-based awards exercised, including tax benefit of $ 6,627 383,163 384 ( 19,714 ) — — ( 19,330 ) — ( 19,330 ) Share-based compensation — — 14,521 — — 14,521 — 14,521 Purchase of stock ( 1,435,825 ) ( 1,436 ) — — ( 182,929 ) ( 184,365 ) — ( 184,365 ) Cumulative effect from adoption of ASU 2019-12 (1) — — — — 6,223 6,223 — 6,223 Noncontrolling interest activities — — — — — — ( 1,941 ) ( 1,941 ) June 30, 2021 143,301,673 $ 143,302 $ 111,972 $ ( 1,003,554 ) $ 3,982,159 $ 3,233,879 $ 11,266 $ 3,245,145 (1) We adopted Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes , during the first quarter of 2021. See accompanying notes to condensed consolidated financial statements. 6 Table of Contents GENUINE PARTS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, (in thousands) 2022 2021 Operating activities: Net income $ 618,367 $ 414,206 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 173,259 146,256 Share-based compensation 17,882 14,521 Gain on sale of real estate ( 102,803 ) — Intangible asset impairment 17,061 — Excess tax benefits from share-based compensation ( 3,137 ) ( 6,627 ) Changes in operating assets and liabilities 70,356 136,074 Net cash provided by operating activities 790,985 704,430 Investing activities: Purchases of property, plant and equipment ( 152,976 ) ( 89,993 ) Proceeds from sale of property, plant and equipment 140,841 22,065 Proceeds from divestitures of businesses 26,102 13,705 Acquisitions of businesses and other investing activities ( 1,557,420 ) ( 97,168 ) Net cash used in investing activities ( 1,543,453 ) ( 151,391 ) Financing activities: Proceeds from debt 3,850,642 31,599 Payments on debt ( 2,872,124 ) ( 142,295 ) Share-based awards exercised ( 14,420 ) ( 19,330 ) Dividends paid ( 242,767 ) ( 231,627 ) Purchases of stock ( 122,919 ) ( 184,365 ) Other financing activities ( 13,901 ) ( 2,159 ) Net cash provided by (used in) financing activities 584,511 ( 548,177 ) Effect of exchange rate changes on cash and cash equivalents ( 27,613 ) ( 7,639 ) Net decrease in cash and cash equivalents ( 195,570 ) ( 2,777 ) Cash and cash equivalents at beginning of period 714,701 990,166 Cash and cash equivalents at end of period $ 519,131 $ 987,389 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. General Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. Except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Genuine Parts Company (the “Company,” “we,” “our,” “us,” or “its”) for the year ended December 31, 2021. Accordingly, the unaudited condensed consolidated financial statements and related disclosures herein should be read in conjunction with our 2021 Annual Report on Form 10-K. Significant accounting policies and other disclosures normally provided have been omitted since they are disclosed in our Annual Report and have not changed. The preparation of interim financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements. Specifically, we make estimates and assumptions in our unaudited condensed consolidated financial statements for inventory adjustments, the accrual of bad debts, credit losses on guaranteed loans, customer sales returns, and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out (“LIFO”) method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation. Reserves for bad debts, credit losses on guaranteed loans and customer sales returns are estimated and accrued on an interim basis based on a consideration of historical experience, current conditions, and reasonable and supportable forecasts. Volume incentives are estimated based upon cumulative and projected purchasing levels. In the opinion of management, all adjustments necessary for a fair presentation of our financial results for the interim periods have been made. These adjustments are of a normal recurring nature. We have reclassified certain prior period amounts to conform to the current period presentation. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of results for the year ended December 31, 2022. We have evaluated subsequent events through the date the unaudited condensed consolidated financial statements covered by this quarterly report were issued. Recent Accounting Pronouncements Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”) to the FASB Accounting Standards Codification (“ASC”). We consider the applicability and impact of all ASUs and have determined that any recently adopted accounting pronouncements did not have a material impact on our condensed consolidated financial statements and all recent accounting pronouncements not yet adopted are not applicable or are expected to have an immaterial impact on our condensed consolidated financial statements. Debt 1.750 % and 2.750 % Senior Notes Offering On January 6, 2022, we issued $ 500 million of unsecured 1.750 % Senior Notes due 2025. Simultaneously, we issued $ 500 million of unsecured 2.750 % Senior Notes due 2032. For both offerings, interest is payable semi-annually on February 1 and August 1 of each year, beginning August 1, 2022. We utilized the proceeds from these offerings to repay borrowings under our Revolving Credit Facility, which were incurred to finance a significant portion of the Kaman Distribution Group ("KDG") acquisition. 8 Table of Contents Derivatives and Hedging The following table summarizes the classification and carrying amounts of derivative instruments and the foreign currency denominated debt, a non-derivative financial instrument, that are designated and qualify as part of hedging relationships (in thousands): June 30, 2022 December 31, 2021 Instrument Balance Sheet Classification Notional Balance Notional Balance Net investment hedges: Forward contracts Prepaid expenses and other current assets $ 1,406,950 $ 172,393 $ 925,810 $ 73,819 Forward contract Other current liabilities $ — $ — $ 235,180 $ 2,935 Foreign currency debt Long-term debt € 700,000 $ 730,870 € 700,000 $ 792,820 The tables below present gains and losses related to designated net investment hedges: Gain (Loss) Recognized in AOCL before Reclassifications Gain Recognized in Interest Expense for Excluded Components (in thousands) 2022 2021 2022 2021 Three Months Ended June 30, Forward contracts $ 66,986 $ ( 13,329 ) $ 7,565 $ 6,574 Foreign currency debt 50,190 ( 12,670 ) — — Total $ 117,176 $ ( 25,999 ) $ 7,565 $ 6,574 Gain Recognized in AOCL before Reclassifications Gain Recognized in Interest Expense for Excluded Components (in thousands) 2022 2021 2022 2021 Six Months Ended June 30, Forward contracts $ 86,380 $ 24,186 $ 15,130 $ 13,148 Foreign currency debt 61,950 28,280 — — Total $ 148,330 $ 52,466 $ 15,130 $ 13,148 Fair Value of Financial Instruments As of June 30, 2022 the fair value of our senior unsecured notes was approximately $ 3 billion, which are designated as Level 2 in the fair value hierarchy. Guarantees We guarantee the borrowings of certain independently controlled automotive parts stores and businesses (“independents”) and certain other affiliates in which we have a noncontrolling equity ownership interest (“affiliates”). While such borrowings of the independents and affiliates are outstanding, we are required to maintain compliance with certain covenants. At June 30, 2022, we were in compliance with all such covenants. As of June 30, 2022, the total borrowings of the independents and affiliates subject to guarantee by us were approximately $ 902 million. These loans generally mature over periods from one to six years . We regularly monitor the performance of these loans and the ongoing operating results, financial condition and ratings from credit rating agencies of the independents and affiliates that participate in the guarantee programs. In the event that we are required to make payments in connection with these guarantees, we would obtain and liquidate certain collateral pledged by the independents or affiliates (e.g., accounts receivable and inventory) to recover all or a substantial portion of the amounts paid under the guarantees. We recognize a liability equal to current expected credit losses over the lives of the loans in the guaranteed loan portfolio, based on a consideration of historical experience, current conditions, the nature and expected value of any collateral, and reasonable and supportable forecasts. To date, we have not had significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the current expected credit loss reserve is not material. As of June 30, 2022, there are no material guaranteed loans for 9 Table of Contents which the borrower is experiencing financial difficulty and recovery is expected to be provided substantially through the operation or sale of the collateral. As of June 30, 2022, we have recognized certain assets and liabilities amounting to $ 71 million each for the guarantees related to the independents’ and affiliates’ borrowings. These assets and liabilities are included in other assets and other long-term liabilities in the condensed consolidated balance sheets. The liabilities relate to our noncontingent obligation to stand ready to perform under the guarantee programs and they are distinct from our current expected credit loss reserve. Earnings Per Share We maintain various long-term incentive plans, which provide for the granting of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalents and other share-based awards. Certain outstanding options are not included in the diluted earnings per share calculation because their inclusion would have been anti-dilutive. The following table summarizes anti-dilutive shares outstanding: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Anti-dilutive shares outstanding 456 186 748 99 2. Segment Information The following table presents a summary of our reportable segment financial information: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Net sales: Automotive $ 3,467,494 $ 3,196,299 $ 6,743,115 $ 6,149,464 Industrial 2,134,920 1,587,439 4,153,934 3,098,988 Total net sales $ 5,602,414 $ 4,783,738 $ 10,897,049 $ 9,248,452 Segment profit: Automotive $ 322,553 $ 290,758 $ 587,126 $ 526,436 Industrial 225,472 150,413 413,825 275,705 Total segment profit 548,025 441,171 1,000,951 802,141 Interest expense, net ( 20,248 ) ( 15,362 ) ( 40,098 ) ( 33,686 ) Intangible asset amortization ( 39,630 ) ( 27,384 ) ( 79,324 ) ( 52,928 ) Corporate expense ( 73,312 ) ( 51,397 ) ( 115,063 ) ( 82,640 ) Other unallocated income (expenses) (1) 76,732 ( 77,421 ) 50,817 ( 77,421 ) Income before income taxes $ 491,567 $ 269,607 $ 817,283 $ 555,466 (1) The following table presents a summary of the other unallocated income and expenses: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Other unallocated costs: Gain on sale of real estate (2) $ 102,803 $ — $ 102,803 $ — Gain on insurance proceeds (3) $ 873 $ — $ 1,507 $ — Product liability damages award (4) — ( 77,421 ) — ( 77,421 ) Transaction and other costs (5) ( 26,944 ) — ( 53,493 ) — Total other unallocated costs $ 76,732 $ ( 77,421 ) $ 50,817 $ ( 77,421 ) 10 Table of Contents (2) Adjustment reflects a gain on the sale of real estate that had been leased to S.P. Richards. (3) Adjustment reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs. (4) Adjustment reflects damages reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim. (5) 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. Net sales are disaggregated by geographical region for each of our reportable segments, as we deem this presentation best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table presents disaggregated geographical net sales from contracts with customers by reportable segment: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 North America: Automotive $ 2,302,008 $ 2,076,562 $ 4,432,881 $ 3,939,367 Industrial 2,021,297 1,469,775 3,931,730 2,869,174 Total North America $ 4,323,305 $ 3,546,337 $ 8,364,611 $ 6,808,541 Australasia: Automotive $ 398,940 $ 388,708 $ 777,849 $ 756,577 Industrial 113,623 117,664 222,204 229,814 Total Australasia $ 512,563 $ 506,372 $ 1,000,053 $ 986,391 Europe – Automotive $ 766,546 $ 731,029 $ 1,532,385 $ 1,453,520 Total net sales $ 5,602,414 $ 4,783,738 $ 10,897,049 $ 9,248,452 3. Accounts Receivable Sales Agreement Under our accounts receivable sales agreement (the "A/R Sales Agreement"), we continuously sell designated pools of receivables as they are originated by us and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The A/R Sales Agreement has a three year term, which we intend to renew. We continue to be involved with the receivables transferred by the SPE to the unaffiliated financial institution by providing collection services. As cash is collected on sold receivables, the SPE continuously transfers ownership and control of new qualifying receivables to the unaffiliated financial institution so that the total principal amount outstanding of receivables sold is approximately $ 1 billion at any point in time (which is the maximum amount allowed under the agreement as amended on January 3, 2022). Total principal amount outstanding of receivables sold is approximately $ 1 billion and $ 800 million as of June 30, 2022 and December 31, 2021, respectively. The amount of receivables pledged as collateral as of June 30, 2022 and December 31, 2021 is approximately $ 1.1 billion and $ 973 million, respectively. The following table summarizes the activity and amounts outstanding under the A/R Sales Agreement as of: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Receivables sold to the financial institution and derecognized $ 2,242,273 $ 1,888,942 $ 4,478,718 $ 3,816,873 Cash collected on sold receivables $ 2,242,274 $ 1,888,940 $ 4,278,729 $ 3,816,868 11 Table of Contents Continuous cash activity related to the A/R Sales Agreement is reflected in net cash provided by operating activities in the condensed consolidated statements of cash flows. The SPE incurs fees due to the unaffiliated financial institution related to the accounts receivable sales transactions. Those fees, which are immaterial, are recorded within other non-operating expense (income) in the condensed consolidated statements of income. The SPE has a recourse obligation to repurchase from the unaffiliated financial institution any previously sold receivables that are not collected due to the occurrence of certain events, including credit quality deterioration and customer sales returns. The reserve recognized for this recourse obligation as of June 30, 2022 and December 31, 2021 is not material. The servicing liability related to our collection services also is not material, given the high quality of the customers underlying the receivables and the anticipated short collection period. 4. Employee Benefit Plans Net periodic benefit income from our pension plans included the following components for our pension benefits: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Service cost $ 2,586 $ 3,101 $ 5,202 $ 6,142 Interest cost 18,849 17,962 37,716 35,868 Expected return on plan assets ( 37,646 ) ( 38,858 ) ( 75,318 ) ( 77,590 ) Amortization of prior service cost 172 172 344 344 Amortization of actuarial loss 9,275 12,509 18,554 24,965 Net periodic benefit income $ ( 6,764 ) $ ( 5,114 ) $ ( 13,502 ) $ ( 10,271 ) Service cost is recorded in selling, administrative and other expenses in the condensed consolidated statements of income while all other components are recorded within other non-operating expense (income). Pension benefits also include amounts related to supplemental retirement plans. 5. Acquisitions We acquired several businesses, including KDG, for approximately $ 1.6 billion, net of cash acquired, during the six months ended June 30, 2022. For the six months ended June 30, 2021, acquisitions totaled $ 98 million, net of cash acquired. During the six months ended June 30, 2022, we recognized approximately $ 238 million and $ 550 million of revenue, net of store closures, related to our Automotive and Industrial acquisitions, respectively. The results of operations for acquired businesses are included in our condensed consolidated statements of income beginning on their respective acquisition dates. For each acquisition, we allocate the purchase price to the assets acquired and the liabilities assumed based on their fair values as of their respective acquisition dates. Excluding KDG, for the six months ended June 30, 2022 and June 30, 2021, we recorded approximately $ 185 million and $ 70 million of goodwill and other intangible assets associated with acquisitions. Other intangible assets acquired consisted primarily of customer relationships with a weighted average amortization lives of 20 years. KDG Acquisition On January 3, 2022, we, through our wholly-owned subsidiary, Motion Industries, Inc., acquired all of the equity interests in KDG for a purchase price of approximately $ 1.3 billion in cash. KDG, which is headquartered in Bloomfield, Connecticut, is a power transmission, automation and fluid power industrial distributor and solutions provider with operations throughout the United States, providing electro-mechanical products, bearings, power transmission, motion control and electrical and fluid power components to MRO and OEM customers. KDG has approximately 1,700 employees with approximately 220 locations across the United States and Puerto Rico. As of January 3, 2022, KDG had estimated annual revenues of approximately $ 1 billion. The net cash consideration transferred of approximately $ 1.3 billion is net of the estimated cash acquired of approximately $ 30 million. The KDG acquisition was financed using a combination of borrowings under the existing unsecured revolving credit facility, proceeds of $ 200 million from the selling of additional receivables under our amended A/R Sales Agreement and $ 109 million of cash. The following table summarizes the preliminary, estimated fair values of the assets acquired and liabilities assumed at the acquisition date as well as adjustments made to the acquisition accounting during the six months ended June 12 Table of Contents 30, 2022 (referred to as the "measurement period adjustments"). The measurement period adjustments primarily resulted from revisions to the valuation of certain tangible and intangible assets. The fair value of the acquired identifiable intangible assets is provisional pending completion of the final valuations for these assets. We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed as of the acquisition date, including, among other things, obtaining valuations of certain tangible and intangible assets, as well as the fair value of certain contracts and the determination of certain tax balances. Additional adjustments may be made to the acquisition accounting during the measurement period primarily related to intangible asset revaluations, tax accounting and leases. As of January 3, 2022 (in thousands) Initial Balance Measurement Period Adjustments As Adjusted Trade accounts receivable $ 156,000 $ — $ 156,000 Merchandise inventories 166,000 ( 1,000 ) 165,000 Prepaid expenses and other current assets 39,000 ( 2,000 ) 37,000 Property, plant and equipment 26,000 ( 2,000 ) 24,000 Operating lease assets 49,000 ( 5,000 ) 44,000 Other assets 1,000 — 1,000 Other intangible assets 592,000 4,000 596,000 Goodwill 574,000 ( 6,000 ) 568,000 Total assets acquired 1,603,000 ( 12,000 ) 1,591,000 Trade accounts payable 85,000 — 85,000 Other current liabilities 32,000 — 32,000 Operating lease liabilities 17,000 ( 1,000 ) 16,000 Deferred tax liabilities 121,000 ( 10,000 ) 111,000 Other long-term liabilities 39,000 ( 4,000 ) 35,000 Total liabilities assumed 294,000 ( 15,000 ) 279,000 Net assets acquired $ 1,309,000 $ 3,000 $ 1,312,000 The other intangible assets acquired included $ 527 million of customer relationship intangibles and a $ 41 million favorable trade name licensing agreement, with amortization lives of 17 and 1.5 years, respectively. The other intangible assets have a total weighted amortization life of 16 years. The goodwill was assigned to the Industrial segment and is attributable primarily to expected synergies and the assembled workforce. Approximately $ 261 million of the estimated goodwill recognized as part of the KDG acquisition is expected to be tax deductible. For the six months ended June 30, 2022, approximately $ 5 million of inventory amortization step-up cost related to this acquisition was included in cost of goods sold. Further, $ 47 million of transaction and other one-time costs, inclusive of the impairment charge described below, were included in selling, administrative, and other expenses in the condensed consolidated statements of income. In June 2022, we incurred a $ 17 million non-cash impairment charge related to our decision to retire certain legacy Industrial trade names, classified as other intangible assets, prior to the end of their estimated useful lives as part of the KDG integration and rebranding strategy. We evaluate other intangible assets for potential impairment indicators annually or more frequently if circumstances change. 13 Table of Contents 6. Accumulated Other Comprehensive Loss The following tables present the changes in AOCL by component for the six months ended June 30: Changes in Accumulated Other Comprehensive Loss by Component (in thousands) Pension and Other Post-Retirement Benefits Cash Flow Hedges Foreign Currency Translation Total Beginning balance, January 1, 2022 $ ( 463,227 ) $ ( 15,042 ) $ ( 379,470 ) $ ( 857,739 ) Other comprehensive loss before reclassifications — — ( 116,946 ) ( 116,946 ) Amounts reclassified from accumulated other comprehensive loss 13,975 7,482 — 21,457 Other comprehensive income (loss), net of income taxes 13,975 7,482 ( 116,946 ) ( 95,489 ) Ending balance, June 30, 2022 $ ( 449,252 ) $ ( 7,560 ) $ ( 496,416 ) $ ( 953,228 ) Changes in Accumulated Other Comprehensive Loss by Component (in thousands) Pension and Other Post-Retirement Benefits Cash Flow Hedges Foreign Currency Translation Total Beginning balance, January 1, 2021 $ ( 692,868 ) $ ( 30,007 ) $ ( 313,627 ) $ ( 1,036,502 ) Other comprehensive income before reclassifications — — 6,836 6,836 Amounts reclassified from accumulated other comprehensive loss 18,630 7,482 — 26,112 Other comprehensive income, net of income taxes 18,630 7,482 6,836 32,948 Ending balance, June 30, 2021 $ ( 674,238 ) $ ( 22,525 ) $ ( 306,791 ) $ ( 1,003,554 ) The AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote. Generally, tax effects in AOCL are established at the currently enacted tax rate and reclassified to net income in the same period that the related pre-tax AOCL reclassifications are recognized. 7. Commitments and Contingencies Legal Matters From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity and capital resources. There have been no significant developments to the information presented in our 2021 Annual Report on Form 10-K with respect to litigation or commitments and contingencies. Environmental Liabilities Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe will exceed an applied threshold not to exceed $1 million. Applying this threshold, there are no environmental matters to disclose for this period. 14 Table of Contents