What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-20 compared with 2022-07-27 · 75 added, 68 removed, 129 unchanged (53% 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 and six months ended June 30, 2022 are not necessarily indicative of results for the year ended December 31, 2022.

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

Forward-Looking Statements

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the ability to maintain favorable supplier arrangements and relationships;

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

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

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and (4) effective capital allocation.

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 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 September 30, 2022, and accounted for 62% of total revenues for the three and nine months ended September 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.

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

Key Business Metrics - Comparable Sales

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Results of Operations

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 Automotive Parts Group and Industrial Parts Group both reported strong sales and segment profit growth during the three and nine months ended September 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, 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.

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.

We expect this strategic and highly synergistic acquisition to significantly enhance our scale and to strengthen our market leading position in industrial solutions.

Additionally both businesses continued to be highly effective in managing the impacts of inflationary pressures, a dynamic geopolitical landscape and ongoing supply chain challenges, all of which we expect to continue throughout the remainder of the year.

Sales for the three months ended September 30, 2022 were $5.7 billion, a 17.8% increase compared to $4.8 billion for the same period of the prior year.

The increase in sales is attributable to a 12.7% increase in comparable sales and a 9.1% benefit from acquisitions, slightly offset by a net unfavorable impact of foreign currency and other of 4.0%.

Sales for the nine months ended September 30, 2022 were $16.6 billion, a 17.8% increase compared to $14.1 billion for the same period of the prior year.

The increase in sales is due to a 12.1% increase in comparable sales, a 8.7% benefit from acquisitions, slightly offset by a 3.0% net unfavorable impact of foreign currency and other.

The increase in comparable sales reflects the benefits of price increases to offset higher product costs and other inflationary pressures and, to a lesser extent, continued increase in consumer activity when compared to the three and nine months ended September 30, 2021.

We continue to execute our strategic pricing and other sales initiatives to mitigate product and other inflationary cost pressures.

Sales for the Automotive Parts Group increased 8.9% and 9.4% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

This group's revenue increase for the three months ended September 30, 2022 consisted of an approximate 9.2% increase in comparable sales driven by price increases to offset higher product costs and other inflationary pressures and strong demand.

The overall sales increase also included a 5.3% benefit from acquisitions, partially offset by a 5.6% net unfavorable impact of foreign currency and other.

This group's revenue increase for the nine months ended September 30, 2022

consisted of an approximate 9.3% increase in comparable sales and 4.4% benefit from acquisitions, partially offset by a 4.3% net unfavorable impact from foreign currency and other compared to the same period in 2021.

Sales for the Industrial Parts Group increased 35.3% and 34.5% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The increases for both periods reflect benefits of approximately 17% and primarily from the acquisition of KDG and increases of 19.6% and 17.9% in comparable sales for the three and nine months ended September 30, 2022, respectively.

Our Industrial Parts Group continues to benefit from the ongoing execution of our pricing, supply chain and other strategic initiatives and the continued resilience and 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 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 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.

Cost of goods sold for the three months ended September 30, 2022 was $3.7 billion, an 18.9% increase from $3.1 billion for the same period in 2021.

As a percentage of net sales, cost of goods sold was 65.1% for the three months ended September 30, 2022 compared to 64.5% for the same period in 2021.

As a result, gross margin declined to 34.9% from 35.5% for the same period in 2021.

For the nine months ended September 30, 2022, cost of goods sold was $10.8 billion, an 18.4% increase from $9.1 billion for the same nine month period in 2021.

As a percentage of net sales, cost of goods sold was 65.2% for the nine months ended September 30, 2022 compared to 64.9% for the same period in 2021.

As a result, gross margin declined to 34.8% from 35.1% in the same period in 2021.

The decreases in gross margin for the three and nine months ended September 30, 2022 was driven primarily by the impact of supplier incentives as compared to the same period in 2021, unfavorable foreign exchange, and a business mix shift due to the increased sales from our Industrial Parts Group.

This decline was partially offset by the ongoing favorable impact of strategic category management and pricing initiatives in our business.

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

Other major expense categories include facility occupancy costs for headquarters, distribution centers and retail store/branch operations, transportation and delivery costs, technology and digital costs, accounting, legal and professional services, insurance costs, and travel and advertising.

Total operating expenses increased 9.6% to $1.6 billion for the three months ended September 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 27.3% compared to 29.4% for same three month period in the prior year.

For the nine months ended September 30, 2022, these expenses totaled $4.5 billion, compared to $4.1 billion for the same period in 2021, and as a percentage of net sales, operating expenses decreased to 27.2% compared to 29.3% for the same nine month period in 2021.

For the nine months ended September 30, 2022 operating expenses included $57 million 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 the nine month period 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 overall 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.

Segment Profit

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.

The Automotive Parts Group's segment profit increased 10.0% in the three months ended September 30, 2022 compared to the same period of 2021, and its segment profit margin improved to 8.9% compared to 8.8% for the same period of the previous year.

For the nine months ended September 30, 2022, segment profit increased 11.0% compared to the same period of the prior year, and segment profit margin increased to 8.8% compared to 8.6% for the same period in 2021.

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

The Industrial Parts Group's segment profit increased 46.3% and 48.7% in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily driven by the acquisition of KDG.

For the three months and nine months ended September 30, 2022, this group's segment profit margin increased to 11.1% and 10.4%, respectively, compared to 10.3% and 9.4%, 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 supply chain, category management and pricing.

Our effective income tax rate for the three months ended September 30, 2022 was 25.3% compared to 23.5% for the same three month period in 2021.

The rate increase is primarily due to geographic income mix shifts with a higher percentage in international.

The effective income tax rate for the nine months ended September 30, 2022 was 24.7% compared to 24.8%, for the same period in 2021.

The rate decrease is primarily due to a prior year United Kingdom rate change that required deferred tax asset and liability remeasurement increasing the 2021 comparative rate, which was partially offset by geographic income mix shifts.

For the three months ended September 30, 2022, net income was $312 million, an increase of 36.6% compared to net income of $229 million for the same three month period of the prior year.

On a per share diluted basis, net income was $2.20, an increase of 38.4% compared to $1.59 for the same three month period of 2021.

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).

For the nine months ended September 30, 2022, net income was $931 million, an increase of 44.8% compared to net income of $643 million for the same nine month period in 2021.

On a per share diluted basis, net income was $6.53, an increase of 47.1% compared to $4.44 for the same nine month period of the prior year.

For the three months ended September 30, 2022, net income on an adjusted basis was $317 million, an increase of 17.3% compared to adjusted net income of $270 million for the same three month period of the prior year.

On a per share basis, net income on an adjusted diluted basis was $2.23 for the three months ended September 30, 2022, an increase of 18.6% compared to $1.88 for the same three month period of 2021.

For the nine months ended September 30, 2022, net income on an adjusted basis was $896 million, an increase of 21.0% compared to adjusted net income of $741 million for the same nine month period of the prior year.

On a per share basis, net income on an adjusted diluted basis was $6.29 for the nine months ended September 30, 2022, an increase of 22.9% compared to $5.12 for the same nine month period of 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.

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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 June 30, Six Months Ended June 30,

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

(in thousands) 2022 2021 2022 2021

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

Loss on software disposal (4) — 61,063 — 61,063

Transaction and other costs (5) 3,462 — 56,955 —

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The table below represent amounts per common share assuming dilution:

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

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

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

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Product liability damages award (3) — — — 0.54

Loss on software disposal (4) — 0.42 — 0.42

Transaction and other costs (5) 0.02 — 0.40 —

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

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

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

(in thousands) 2022 2021 2022 2021

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(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.

(4) 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.

(5) Adjustment primarily reflects costs associated with the January 3, 2022 acquisition and 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.

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Financial Condition

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.

Our cash balance of $629 million at September 30, 2022 decreased $86 million, from December 31, 2021.

For the nine months ended September 30, 2022, we had net cash provided by operating activities of $1.2 billion, net cash used in investing activities of $1.7 billion and net cash provided by financing activities of $386 million.

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

We used $1.7 billion cash for investing activities primarily in connection with the acquisition of KDG, in addition to $244 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.

This was partially offset by $369 million for dividends paid to our shareholders and $173 million of share repurchases.

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 $417 million, or 23.2%, from December 31, 2021.

Inventory increased $406 million, or 10.4%.

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 $3.3 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).

Inventory increased $411 million, or 10.6%, from December 31, 2021.

In addition to the KDG acquisition, accounts receivable and inventory were both impacted by increases in revenues and related product demand.

Accounts payable increased $726 million, or 15.1% from December 31, 2021.

Apart from KDG, this was due largely to increased purchases to meet demand, inflationary pressures, and extended payment terms with certain suppliers.

Total debt of $3.2 billion at September 30, 2022 increased $824 million, or 34.2%, 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 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.

As of September 30, 2022 and December 31, 2021, the outstanding payment obligations to the financial institutions are $3.1 billion and $2.7 billion, respectively.

The amount settled through the SCF program was $2.7 billion and $2.3 billion for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Liquidity and Capital Resources

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

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

Our key priorities include the reinvestment in our businesses through capital expenditures, mergers and acquisitions, the dividend and share repurchases.

We have plans for additional investments in our businesses to drive growth, improve efficiencies and productivity, and drive shareholder value.

We have a healthy cash position and the financial strength to pursue future growth opportunities through disciplined, strategic capital deployment.

Our key priorities include reinvesting in our businesses through capital expenditures, mergers and acquisitions, the dividend and share repurchases.

These investments are designed to drive growth, improve efficiencies and productivity, and enhance shareholder value.

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 billion.

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We utilized the proceeds from these offerings to repay the borrowings under the Revolving Credit Facility which were incurred to finance a significant portion of the KDG Acquisition.

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

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.

At September 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