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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-17 · 261 added, 285 removed, 119 unchanged (82% of the section changed)

3 unchanged sentences

Risk Factors” of this Form 10-K.

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

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

BUSINESS PRODUCTS GROUP

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

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

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

COVID-19 PANDEMIC

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

During the year ended December 31, 2021, our business and results of operations continued to improve relative to the same period of 2020.

In particular, as widespread vaccine distribution continued, we have seen economic recovery in many of the markets where we operate and a significant uptick in consumer mobility.

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

As a result, our business segments continue to face many uncertainties and our operations remain vulnerable to continuing negative effects caused by the pandemic.

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

As of December 31, 2021, all our operations are open for business.

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

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

We remain in constant communication with our employees regarding changing conditions and protocol.

Based on the length and severity of the pandemic, we may experience continued volatility in customer demand and supply chain disruption.

We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources.

KEY BUSINESS METRICS

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

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

Comparable Sales

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

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

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

Genuine Parts Company is a service organization engaged in the global distribution of automotive and industrial replacement parts.

Genuine Parts Company is a global service organization engaged in the distribution of automotive and industrial replacement parts.

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

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

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

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

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

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

In 2022, we conducted business in North America, Europe and Australasia from more than 10,600 locations.

Our Automotive business operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand in 2022 and accounted for 62% of total revenues for the year.

Our Industrial business operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore and accounted for 38% of total revenues.

Our mission is to be an employer of choice, supplier of choice, valued customer, good corporate citizen and investment of choice for all our shareholders.

Additionally, we strive to be a respected community member that gives back to the communities in which we operate.

Our strategic financial objectives are intended to align with our mission and drive value for all our stakeholders.

Our strategic financial objectives include:

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

(2) improved operating margin;

(1) revenue growth in excess of market growth;

(2) improved operating margins;

(3) strong balance sheet and cash flows;

and (4) effective capital allocation.

Top Line Revenue

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

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

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

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

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

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

Operating Margins

The Company targets continuous operating margin improvement each year.

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

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

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

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

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

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

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

Balance Sheet and Cash Flow

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

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

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

Capital Allocation

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

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

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

RESULTS OF OPERATIONS

KEY PERFORMANCE INDICATORS

We consider a variety of performance and financial measures in assessing our business, and the key performance indicators used to measure our results are summarized below.

Comparable Sales

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

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

Gross Profit and Gross Margin

Gross profit represents net sales less cost of goods sold.

Gross profit as a percentage of net sales is referred to as gross margin.

Cost of goods sold primarily represents the cost of merchandise sold, including the cost of inbound freight from suppliers.

It also includes the effects of supplier volume incentives and inventory adjustments.

Our gross profit is variable in nature and generally follows changes in net sales.

We believe that gross profit and gross margin are useful measures because they allow management, analysts, investors and others to evaluate the profit we generate from our sales, before operating and other expenses and income.

Selling, Administrative and Other Expenses ("SG&A")

SG&A includes all personnel and personnel-related costs at our segment headquarters, distribution centers, stores and branches, which accounts for more than 60% of total SG&A.

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

Freight and delivery costs are the shipping and handling costs incurred related to delivering merchandise to our customers.

Segment Profit and Segment Margin

Segment profit is calculated as net sales less costs of goods sold, operating expenses, and certain non-operating expenses attributable to the segment (e.g., foreign currency), excluding general corporate expenses, net interest expense, intangible asset amortization, and other unallocated amounts that are primarily driven by corporate initiatives.

Operating expenses include SG&A at our segments.

Segment profit as a percentage of segment net sales is referred to as segment margin.

We believe that segment profit and segment margin are useful measures because they allow management, analysts, investors, and other interested parties to evaluate the profitability of our segments, after the effects of

operating and other expenses and income associated with those businesses.

Refer to the Segment Data Footnote in the Notes to Consolidated Financial Statements for additional information.

Net Income and EBITDA

We believe that net income and EBITDA, along with their adjusted measures, are useful measures of operating performance.

EBITDA helps us assess the underlying profitability of our company’s business operations before the effects of certain net expenses that directly arise from our capital investment decisions (depreciation, amortization), financing decisions (interest), and tax strategies (income taxes).

Net Income represents our profitability after the effects of all operating and other expenses and income.

The adjusted measures of EBITDA and net income eliminate certain non-recurring charges and other items that we do not believe are reflective of our ongoing business performance.

These adjusted measures help us evaluate our operating performance on a comparable basis from period-to-period so that we can better understand the ongoing factors and trends affecting our business operations.

We also use adjusted EBITDA, together with net income and segment profit, to forecast our performance, evaluate our actual results against our forecasts and compare our results to others in the industries that we serve.

Adjusted EBITDA is also a measure of performance included in our executive incentive compensation plans.

See “Non-GAAP Financial Measures” below for a discussion of how we define adjusted net income and adjusted EBITDA and a reconciliation of adjusted net income, EBITDA and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

CONSOLIDATED RESULTS OF OPERATIONS

Our discussion of our results focuses on 2022 and 2021 and year-to-year comparisons between those periods.

Discussions of 2020 results and year-to-year comparisons between 2021 and 2020 results are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

In 2022, we experienced strong and consistent customer demand and a favorable pricing environment for our services.

These factors, combined with our Industrial segment's $1.3 billion acquisition of Kaman Distribution Group ("KDG"), contributed to 17.1% revenue growth over 2021.

Our strong revenue growth, expense leverage and strategic initiatives drove a 60 basis point improvement in segment margin and provided $1.5 billion in cash from operations, a 16.6% increase from 2021.

These results allowed us to continue investing in our businesses through strategic acquisitions and capital expenditures.

Our results of operations are summarized below for the years ended December 31, 2022 and 2021.

Year Ended December 31,

(In thousands, except per share data) 2021 2020

(in thousands) $ % of Sales $ % of Sales $ Change % Change

Net sales $ 22,095,973 100.0 % $ 18,870,510 100.0 % $ 3,225,463 17.1 %

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

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

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

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

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

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

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

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

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

Automotive Group

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

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

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

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

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

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

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

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

Industrial Parts Group

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

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

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

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

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

Cost of goods sold 14,355,869 65.0 % 12,236,374 64.8 % 2,119,495 17.3 %

The Company includes in cost of goods sold the actual cost of merchandise, which represents the vast majority of this line item.

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

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

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

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

Gross profit 7,740,104 35.0 % 6,634,136 35.2 % 1,105,968 16.7 %

Operating expenses:

The Company includes in selling, administrative and other expenses (“SG&A”) all personnel and personnel-related costs at its headquarters, distribution centers, stores and branches, which accounts for more than 60% of total SG&A.

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

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

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

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

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

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

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

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

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

Goodwill Impairment

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

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

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

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

As of December 31, 2021, we determined that there were no indicators that goodwill was impaired at any of our reporting units.

Selling, administrative and other expenses 5,758,295 26.1 % 5,162,506 27.4 % 595,789 11.5 %

Depreciation and amortization 347,819 1.6 % 290,971 1.5 % 56,848 19.5 %

Provision for doubtful accounts 19,791 0.1 % 17,739 0.1 % 2,052 11.6 %

Total operating expenses 6,125,905 27.7 % 5,471,216 29.0 % 654,689 12.0 %

Non-operating expenses (income):

Interest expense, net 73,887 0.3 % 62,150 0.3 % 11,737 18.9 %

Other (32,290) (0.1) % (99,576) (0.5) % 67,286 (67.6) %

Total non-operating expenses (income) 41,597 0.2 % (37,426) (0.2) % 79,023 (211.1) %

Income before income taxes 1,572,602 7.1 % 1,200,346 6.4 % 372,256 31.0 %

Income taxes 389,901 1.8 % 301,556 1.6 % 88,345 29.3 %

Net income $ 1,182,701 5.4 % $ 898,790 4.8 % $ 283,911 31.6 %

Year Ended December 31,

(in thousands, except per share data) 2022 2021 $ Change % Change

Diluted EPS $ 8.31 $ 6.23 $ 2.08 33.4 %

Adjusted EBITDA $ 1,999,329 $ 1,681,515 $ 317,814 18.9 %

Automotive segment profit $ 1,191,674 $ 1,073,427 $ 118,247 11.0 %

Industrial segment profit $ 886,636 $ 595,232 $ 291,404 49.0 %

Total segment profit $ 2,078,310 $ 1,668,659 $ 409,651 24.5 %

Automotive segment margin 8.7 % 8.6 %

Industrial segment margin 10.5 % 9.4 %

Total segment margin 9.4 % 8.8 %

Our net sales increase of 17.1% includes an 11.8% comparable sales increase and an 8.6% positive impact from acquisitions, slightly offset by an unfavorable impact of foreign currency of 3.3%.

Strong customer demand, which was consistent throughout 2022, and a favorable pricing environment were the primary drivers of our comparable sales growth.

We deployed strategic pricing increases throughout 2022 to offset the dynamic product cost increases we faced across our businesses from elevated inflationary pressure, particularly in Automotive.

Separately, we continued to invest in strategic acquisitions in both segments, with the KDG acquisition in particular providing a significant sales benefit in 2022.

Our sales growth was negatively impacted by the U.S.

dollar strengthening relative to other foreign currencies during the year, most significantly against the Euro.

Net sales for Automotive were $13.7 billion in 2022, an 8.9% increase from 2021.

The increase includes 9.0% growth in comparable sales and a 4.5% contribution from acquisitions, partially offset by a 4.6% unfavorable impact from foreign currency and other.

Our growth in sales was driven by continued solid demand for automotive parts, a strong pricing environment due to elevated inflation in product costs, and footprint expansion through acquisitions, such as our entry into new markets in Spain and Portugal.

Several underlying factors driving customer demand for automotive parts in the markets we serve include increases in the average age of cars on the road and miles driven, and the lack of availability of new cars due to supply chain constraints.

Net sales for Industrial were $8.4 billion in 2022, a 33.2% increase from 2021.

The increase includes 17.3% growth in comparable sales and a 16.8% contribution from acquisitions primarily driven by the addition of KDG.

This was slightly offset by a 0.9% unfavorable impact of currency translation.

Our growth in comparable sales reflects the positive impact of our ongoing sales initiatives and strength in numerous industry segments in North America throughout much of 2022.

We experienced double-digit sales growth across all 14 customer sectors we served, with the largest percent increases in oil and gas, mining, and aggregate and cement.

The increase in sales volume drove the majority of our growth, in addition to a contribution of low single-digit product cost inflation.

Our acquisition of KDG contributed significantly to our sales growth, and it enhanced our position as a market leader in the industrial supply chain for MRO and OEM customer support and advanced engineering and automation solutions.

Gross Profit & Gross Margin

Gross profit increased $1.1 billion, or approximately 16.7% from 2021, primarily driven by the increase in net sales, and gross margin decreased slightly to 35.0% from 35.2% in 2021.

The positive contributions to gross margin from our pricing and sourcing initiatives, among others, were more than offset by the negative impact of lower supplier incentives as a percentage of sales;

the relative sales growth of Industrial as a component of total sales, which generates lower gross margins than Automotive;

and the unfavorable impact of foreign currency.

Operating Expenses

SG&A expenses represent 26.1% of net sales in 2022 compared to 27.4% of net sales in 2021.

The decrease in SG&A expense as a percent of net sales was primarily driven by leveraging strong core sales growth, cost

reduction and productivity initiatives, as well as a one-time benefit of $103 million on the sale of real estate that had been previously leased to S.P.

Richards Company ("SPR").

These benefits were partially offset by higher personnel and freight and delivery costs in 2022, and costs of $67 million associated with the acquisition and integration of KDG, which includes an impairment of $17 million from the retirement of certain legacy trade names.

Additionally we had a remeasurement to increase our product liability by $29 million due to a revision of our estimate of the number of claims to be incurred in future periods, among other assumptions.

The increase in depreciation and amortization expense of $57 million was due to higher amortization from intangible assets associated with the acquisition of KDG and higher depreciation from increased capital investments to improve our distribution facilities, streamline our supply chain and invest in enhanced technology solutions.

Non-Operating Expenses and Income

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

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

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

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

We incurred $42 million in net non-operating expenses in 2022, a $79 million change from $37 million in net non-operating income in 2021.

This category primarily includes net interest expense, pension and investment income, foreign currency gains and losses, and Accounts Receivable Sales Agreement ("A/R Sales Agreement") fees.

The $79 million change includes the effects of a $12 million increase in net interest expense in 2022 due to increased borrowing to fund the acquisition of KDG.

It also includes the effects of a $67 million decrease in other non-operating income.

The decrease primarily resulted from a $32 million year-over-year net decline in income on certain investments, a $17 million increase in A/R Sales Agreement fees, and the net change of $12 million as foreign currency moved from gains in the prior year to losses in the current year.

Segment Profit

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

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

Automotive Group

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

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

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

Industrial Group

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

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

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

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

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

Net Income from Continuing Operations

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

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

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

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

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

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

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

Both adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share are non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

Certain Information Regarding Non-GAAP Financial Measures

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

The Company believes that the presentation of adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share, which are not calculated in accordance with GAAP, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of the Company's core operations.

The Company considers these metrics useful to investors because they provide greater transparency into management’s view and assessment of the Company’s ongoing operating performance by removing items management believes are not representative of our continuing operations and may distort our longer-term operating trends.

We believe these measures to be useful to enhance the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not associated with the Company’s core operations.

The Company does not, nor does it suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.

Automotive segment profit increased 11.0% and its segment margin improved 10 basis points from 2021.

The increased segment profit reflects the benefits of strong sales growth due to solid customer demand, a favorable pricing environment and footprint expansion into new markets, such as in Europe.

We were able to improve segment margin in Automotive, despite elevated inflationary product cost pressures, primarily through our strategic pricing initiatives and our ability to leverage operating costs through strong core sales growth and the benefits of our strategic supply chain initiatives.

Industrial segment profit increased 49.0% and its segment margin improved 110 basis points from 2021.

The improvement in Industrial segment profit and margin primarily reflects the benefits of leveraging expenses through double-digit core sales growth, the acquisition of KDG and our strategic supply chain and other operating initiatives.

Our effective income tax rate was 24.8% as of December 31, 2022, compared to 25.1% in 2021.

For the year ended December 31, 2022, the rate decrease is primarily due to the inclusion in the prior year results of the impact of a United Kingdom rate change that required deferred tax asset and liability remeasurement, partially offset by other one time adjustments.

On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law, and is effective beginning January 1, 2023.

The IRA contains tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases which we do not expect to have material impacts to our financial statements.

Net income was $1.2 billion in 2022, a significant increase compared to $899 million in 2021.

Diluted earnings per share ("EPS") was $8.31 in 2022, up 33.4% compared to $6.23 in 2021.

Adjusted net income was $1.2 billion in 2022, an increase of 19.1% from $997 million in 2021.

Adjusted diluted EPS was $8.34, a 20.7% increase compared to $6.91 in 2021.

EBITDA was $2.0 billion in 2022, an increase of 28.4% from $1.6 billion in 2021.

Adjusted EBITDA was $2.0 billion in 2022, an increase of 18.9% from $1.7 billion in 2021.

The growth in net income, adjusted net income, EBITDA and adjusted EBITDA in all periods presented reflects strong operating results in both of our segments, driven primarily by strong sales growth, the benefits of key acquisitions (including KDG), and the continued execution of our strategic pricing and other initiatives, as discussed more fully in the commentary above.

Adjusted net income, adjusted diluted EPS, EBITDA and adjusted EBITDA are non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

Non-GAAP Financial Measures

The following tables sets forth reconciliations of net income, diluted EPS to adjusted net income and adjusted diluted EPS to account for the impact of adjustments.

We also include adjusted EBITDA with a reconciliation to pretax earnings.

We believe that the presentation of adjusted net income, adjusted diluted EPS and adjusted EBITDA, which are not calculated in accordance with GAAP, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of our core operations.

We consider these metrics useful to investors because they provide greater transparency into management’s view and assessment of our ongoing operating performance by removing items management believes are not representative of our continuing operations and may distort our longer-term operating trends.

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

Year Ended December 31,

(in thousands) 2022 2021

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

Loss on software disposal (1) 61,063 —

GAAP net income $ 1,182,701 $ 898,790

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

Gain on insurance proceeds (2) (1,507) (3,862)

Product liability adjustment (3) 28,730 —

Product liability damages award (4) — 77,421

Goodwill impairment charge (3) — 506,721

Restructuring costs (4) — 50,019

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

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

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

Inventory adjustment (8) — 40,000

Loss on software disposal (5) — 61,063

Gain on equity investment (6) — (10,229)

Transaction and other costs (7) 80,601 3,655

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Tax impact of adjustments (137) (29,828)

Adjusted net income from continuing operations $ 997,010 $ 765,038

Adjusted net income $ 1,187,585 $ 997,010

The table below represents amounts per common share assuming dilution:

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(in thousands, except per share data) 2022 2021

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

Loss on software disposal (1) 0.42 —

GAAP diluted EPS $ 8.31 $ 6.23

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

Gain on insurance proceeds (2) (0.01) (0.03)

Product liability adjustment (3) 0.20 —

Product liability damages award (4) — 0.54

Goodwill impairment charge (3) — 3.49

Restructuring costs (4) — 0.34

Realized currency and other divestiture losses (5) — 0.08

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

Gain on equity investments (7) (0.07) —

Inventory adjustment (8) — 0.28

Loss on software disposal (5) — 0.42

Gain on equity investment (6) — (0.07)

Transaction and other costs (7) 0.56 0.03

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Tax impact of adjustments — (0.21)

Adjusted net income from continuing operations $ 6.91 $ 5.27

Adjusted diluted EPS $ 8.34 $ 6.91

Weighted average common shares outstanding - assuming dilution 142,322 144,221

(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.

(3) Adjustment to remeasure product liability for a revised estimate of the number of claims to be incurred in future periods, among other assumptions.

(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 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.

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

(7) Adjustment for 2022 primarily includes costs of $67 million associated with the January 3, 2022 acquisition and integration of KDG which includes a $17 million impairment charge.

The impairment charge was 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.

Separately, this adjustment includes an $11 million loss related to an investment.

Adjustment for 2021 includes transaction and other non-recurring costs related to acquisitions.

Year Ended December 31,

(in thousands) 2022 2021

GAAP net income $ 1,182,701 $ 898,790

Depreciation and amortization 347,819 290,971

Interest expense, net 73,887 62,150

Income taxes 389,901 301,556

EBITDA 1,994,308 1,553,467

Total adjustments (8) 5,021 128,048

Adjusted EBITDA $ 1,999,329 $ 1,681,515

(8) Adjustments are the same as adjustments included within the adjusted net income table above.

The table below clarifies where the adjusted items are presented in the consolidated statement of income:

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Selling, administrative and other expenses (7,472) 142,139

Restructuring costs — 50,019

Goodwill impairment charge — 506,721

Non-operating (income) expenses:

Non-operating expenses (income):

Other 7,493 (14,091)

Total adjustments $ 5,021 $ 128,048

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

Refer to the property, plant and equipment footnote in the Notes to Consolidated financial statements for more information.

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

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

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

(4) Adjustment reflects restructuring costs related to the 2019 Cost Savings Plan.

The costs are primarily associated with severance and other employee costs, including a voluntary retirement program, and facility and closure costs related to the consolidation of operations.

(5) Adjustment reflects realized currency losses related to divestitures.

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

Richards Headquarters and Distribution Center.

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

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

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

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

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

We expect continued revenue and earnings growth in 2023 despite uncertain economic conditions.

We anticipate revenue growth in 2023, as positive trends related to miles driven, aging vehicles and limited new car inventory remain supportive of sustained demand for our Automotive business.

In addition, we believe the strong performance in our Industrial business reflects the diversity of our product and service offerings.

We expect our growing capabilities in industrial solutions, including automation, fluid power and conveyance to be differentiators for our business.

We continue to execute our strategic pricing and sourcing initiatives to mitigate product and other inflationary cost pressures which we expect to drive improvement in gross margins and earnings.

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

FINANCIAL CONDITION

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

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

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

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

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

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

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

We continue to negotiate extended payment dates with our suppliers.

Our current payment terms with the majority of our suppliers range from 30 to 360 days.

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

Our cash balance at December 31, 2022 was $653 million compared to cash of $715 million a year ago.

Accounts receivable increased $391 million, or 21.7%, from December 31, 2021 primarily due to higher net sales inclusive of the KDG acquisition.

Inventory increased $552 million, or 14.2% from December 31, 2021 in association with higher product demand and increased net sales, and acquisitions (including KDG).

Accounts payable increased $652 million, or 13.6% from December 31, 2021 due to increased purchases to support higher net sales and extended payment terms with certain suppliers.

Total debt of $3.3 billion at December 31, 2022 increased $919 million from December 31, 2021 primarily due to the Senior Notes offering (as discussed below) to fund the acquisition of KDG.

Supply Chain Finance Programs

We have negotiated extended payment dates with our suppliers through supply chain finance programs.

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

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

The Company and our suppliers agree on commercial terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program.

The suppliers sell goods or services, as applicable, to the Company and they issue the associated invoices to the Company based on the agreed-upon contractual terms.

We and our suppliers agree on commercial terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program.

Our current payment terms with the majority of our suppliers range from 30 to 360 days.

The suppliers sell goods or services, as applicable, to us and they issue the associated invoices to us based on the agreed-upon contractual terms.

Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, they want to sell to the financial institutions.

In turn, we direct payment to the financial institutions, rather than the suppliers, for the invoices sold to the financial institutions.

No guarantees are provided by the Company or any of our subsidiaries on third-party performance under the SCF program;

however, the Company guarantees the payment by our subsidiaries to the financial institutions participating in the SCF program for the applicable invoices.

No guarantees are provided by us or any of our subsidiaries on third-party performance under the SCF program;

however, we guarantee the payment by our subsidiaries to the financial institutions participating in the SCF program for the applicable invoices.

We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program.

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LIQUIDITY AND CAPITAL RESOURCES

The Company’s sources of capital consist primarily of cash flows from operations, supplemented as necessary by private and public issuances of debt and bank borrowings.

Currently, we believe that our cash on hand and available short-term and long-term sources of capital are sufficient to fund the Company’s operations in both the short and long term, including working capital requirements, scheduled debt payments, interest payments, capital expenditures, benefit plan contributions, income tax obligations, dividends, share repurchases and contemplated acquisitions.

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

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

Our strong financial position and cash flow performance have provided us with the capacity to invest in acquisitions, capital expenditures and technology to support our global growth strategy, as well as return value to our shareholders through dividends and share repurchases.

Our sources of capital consist primarily of cash flows from operations, supplemented as necessary by private and public issuances of debt and bank borrowings.

Currently, we believe that our cash on hand and available short-term and long-term sources of capital are sufficient to fund our operations in both the short and long term, including working capital requirements, strategic acquisitions, dividends, share repurchases, capital expenditures, scheduled debt and interest payments, and income tax obligations.

Our total debt outstanding at December 31, 2022 increased by $919 million from December 31, 2021, as discussed above.

Sources and Uses of Cash

A summary of the Company’s consolidated statements of cash flows is as follows:

A summary of our consolidated statements of cash flows is as follows:

Year Ended December 31,

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Operating Activities

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

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

We generated strong positive cash flow in 2022 with the increase in cash provided by operating activities primarily driven by higher earnings and the effective management of our working capital, including a $200 million benefit related to increasing the amount of receivables sold under our A/R Sales Agreement.

Investing Activities

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

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

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

We continue to invest in our business through strategic acquisitions and capital expenditures to broaden our product and service offerings, improve our business operations and expand our global footprint.

In 2022, net cash used in investing activities included $1.7 billion used for acquisitions of businesses and other investing activities primarily in connection with the acquisition of KDG and a $158 million benefit from the settlement of a net investment hedge.

Additionally, we invested $340 million in capital expenditures to improve our supply chain, facilities, and technology environment.

These items were partially offset by $145 million in proceeds from the sale of property, plant and equipment (primarily real estate that had been previously leased to SPR) and $34 million in proceeds from divestitures of store operations in Automotive.

Financing Activities

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

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

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

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

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

Cash provided by financing activities reflects $919 million of net proceeds from debt primarily from the Senior Notes offering, which was mostly offset by dividends paid to shareholders of $496 million and repurchases of our common stock of $223 million.

In 2022, we announced a 10% increase in our regular quarterly cash dividend and we expect this trend of increasing dividends to continue in the foreseeable future.

We also expect to remain active in our share repurchase program, but the amount and value of shares repurchased will vary and is subject to authorization of our Board of Directors.

Notes and Other Borrowings

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

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

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

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

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

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

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

Due to the workers’ compensation and insurance reserve requirements in certain states, the Company also had unused letters of credit of approximately $72.8 million outstanding at December 31, 2021.

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

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

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

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

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

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

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

Any failure to comply with our debt covenants or

restrictions could result in a default under our financing arrangements or could require us to obtain waivers from our lenders for failure to comply with these restrictions.

The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could create cross defaults under other debt arrangements and have a material adverse effect on our business, financial condition, results of operations and cash flows.

On January 3, 2022, we amended our A/R Sales Agreement to increase the facility limit by an additional $200 million, bringing the total to $1 billion.

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

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

Bank National Association as trustee.

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

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

Bank National Association as trustee.

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

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 on August 1, 2022.

At December 31, 2022, we had $3.4 billion of unsecured Senior Notes outstanding.

Approximately $1.8 billion of these borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings.

At December 31, 2022, we were in compliance with the covenants under our Unsecured Revolving Credit Facility and our outstanding unsecured Senior Notes.

Any failure to comply with our debt covenants or restrictions could result in a default under our financing arrangements or require us to obtain waivers from our lenders for failure to comply with these restrictions.

We ended the year with $2.2 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $653 million of cash and cash equivalents).

Due to the workers’ compensation and insurance reserve requirements in certain states, we also had unused letters of credit of approximately $71 million outstanding at December 31, 2022.

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

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

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

Our total average cost of debt was 2.33% at December 31, 2022 and 2.35% at December 31, 2021.

Total interest expense, net of interest income, for all borrowings was $74 million and $62 million in 2022 and 2021, respectively.

Refer to the Debt Footnote in the Notes to Consolidated Financial Statements for more information.

Contractual and Other Obligations

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Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons.

The Company does not have significant agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Additionally, the Company guarantees the borrowings of certain independently owned automotive parts stores (independents) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (affiliates).

The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is generally equal to the total borrowings subject to the Company’s guarantee.

We do not have significant agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Additionally, we guarantee the borrowings of certain independently owned automotive parts stores (independents) and certain other affiliates in which we have a noncontrolling equity ownership interest (affiliates).

Our maximum exposure to loss as a result of our involvement with these independents and affiliates is generally equal to the total borrowings subject to our guarantee.

At December 31, 2022, the total borrowings of the independents and affiliates subject to guarantee by the company were approximately $916 million.

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Our amount of commitment expiring in 2023 is approximately $401 million.

To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

To date, we have had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

Share Repurchases

In 2021, the Company repurchased approximately 2.6 million shares of its common stock and the Company had remaining authority to purchase approximately 11.9 million shares of its common stock at December 31, 2021.

In 2022, we repurchased approximately 1.6 million shares of our common stock for an aggregate $223 million, and we had remaining authority to purchase approximately 10.3 million shares of our common stock at December 31, 2022.

We expect to remain active in our share repurchase program and continue to return capital to our shareholders.

There were no other repurchase plans announced as of December 31, 2022.

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For further information on the critical accounting policies, see the Summary of Significant Accounting Policies Footnote in the Notes to Consolidated Financial Statements.

Inventories — Provisions for Slow Moving and Obsolescence

The Company identifies slow moving or obsolete inventories and estimates appropriate provisions related thereto.

Historically, these losses have not been significant as the vast majority of the Company’s inventories are not highly susceptible to obsolescence and a majority are eligible for return under various vendor return programs.

While the Company has no reason to believe its inventory return privileges will be discontinued in the future, its risk of loss associated with obsolete or slow moving inventories would increase if such were to occur.

Allowance for Doubtful Accounts — Methodology

The Company evaluates the collectability of trade accounts receivable based on a combination of factors.

The Company estimates an allowance for doubtful accounts as a percentage of net sales based on various factors, including historical experience, current economic conditions and expected future credit losses and collectability trends.

The Company periodically adjusts this estimate when the Company becomes aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable.

While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults and, therefore, the need to revise estimates for bad debts.

For the years ended December 31, 2021, 2020 and 2019, the Company recorded provisions for doubtful accounts of approximately $17.7 million, $23.6 million, and $13.9 million, respectively.

Consideration Received from Vendors

The Company may enter into agreements at the beginning of each year with many of its vendors that provide for inventory purchase incentives.

Generally, the Company earns inventory purchase incentives upon achieving specified volume purchasing levels or other criteria.

The Company accrues for the receipt of these incentives as part of its inventory cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year.

While management believes the Company will continue to receive consideration from vendors in 2022 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives.

Impairment of Property, Plant and Equipment and Goodwill and Other Intangible Assets

At least annually, the Company evaluates property, plant and equipment, goodwill and other intangible assets for potential impairment indicators.

The Company’s judgments regarding the existence of impairment indicators are based on market conditions and operational performance, among other factors.

Future events could cause the Company to conclude that impairment indicators exist and that assets associated with a particular operation are impaired.

Evaluating for impairment also requires the Company to estimate future operating results and cash flows which requires judgment by management.

Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

Refer to the goodwill and other intangible assets footnote of the Notes to Consolidated Financial Statements for further information on the results of the Company's annual goodwill impairment testing.

We may enter into agreements at the beginning of each year with many of our vendors that provide for inventory purchase incentives.

Generally, we earn inventory purchase incentives upon achieving specified volume purchasing levels or other criteria.

We accrue for the receipt of these incentives as part of our inventory cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year.

While management believes we will continue to receive consideration from vendors in 2023 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives.

Impairment of Goodwill and Other Intangible Assets

At least annually, we evaluate property, plant and equipment, goodwill and other intangible assets for potential impairment indicators.

Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance, among other factors.

Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired.

Evaluating for impairment also requires us to estimate future operating results and cash flows which requires judgment by management.

Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Refer to the Goodwill and Other Intangible Assets Footnote of the Notes to Consolidated Financial Statements for further information on the results of our annual goodwill impairment testing.

Employee Benefit Plans

The Company’s benefit plan committees in the U.S.

and Canada establish investment policies and strategies and regularly monitor the performance of the Company’s pension plan assets.

Our benefit plan committees in the U.S.

and Canada establish investment policies and strategies and regularly monitor the performance of our pension plan assets.

plan, our largest pension plan, is well-funded, with a fund status of 127% at December 31, 2022.

The plans in Europe are unfunded and therefore there are no plan assets.

The pension plan investment strategy implemented by the Company’s management is to achieve long-term objectives and invest the pension assets in accordance with the applicable pension legislation in the U.S.

Our pension plan investment strategy implemented by our management is to achieve long-term objectives and invest the pension assets in accordance with the applicable pension legislation in the U.S.

and Canada, as well as fiduciary standards.

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

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

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

Large-cap stocks, 9% U.S.

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We believe the most critical of these assumptions are the expected rate of return on plan assets and the discount rate.

Other assumptions we make relate to employee demographic factors such as rate of compensation increases, mortality rates, retirement patterns and turnover rates.

Other assumptions we make relate to employee demographic factors such as rate of

compensation increases, mortality rates, retirement patterns and turnover rates.

Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding these assumptions.

Based on the investment policy for the pension plans, as well as an asset study that was performed based on the Company’s asset allocations and future expectations, the Company’s expected rate of return on plan assets for measuring 2022 pension income is 6.34% for the plans.

The asset study forecasted expected rates of return for the approximate duration of the Company’s benefit obligations, using capital market data and historical relationships.

Based on the investment policy for the pension plans, as well as an asset study that was performed based on our asset allocations and future expectations, our expected rate of return on plan assets for measuring 2023 pension income is 7.09% for the plans.

The asset study forecasted expected rates of return for the approximate duration of our benefit obligations, using capital market data and historical relationships.

The discount rate is chosen as the rate at which pension obligations could be effectively settled and is based on capital market conditions as of the measurement date.

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A 25 basis point decrease in discount rate would result in approximate $48 million increase on our projected benefit obligation.

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

A 25 basis point change in discount rate would have an immaterial impact on our pension income.

A 25 basis point change in expected return on asset would have an approximate $6 million impact on our pension income.

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Business Combinations

When the Company acquires businesses, it applies the acquisition method of accounting and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions.

When we acquire businesses, we apply the acquisition method of accounting and recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions.

Goodwill is measured as the excess of the fair value of the consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed.

The acquisition method requires the Company to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period.

The Company must complete the accounting during the measurement period, which cannot exceed one year.

Adjustments made during the measurement period could have a material impact on the Company's financial condition and results of operations.

The Company typically measures customer relationship and other intangible assets using an income approach.

Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates, operating margins and attrition rates).

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

In addition, the Company has estimated the

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

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

The acquisition method requires us to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period.

We must complete the accounting during the measurement period, which cannot exceed one year.

Adjustments made during the measurement period could have a material impact on our financial condition and results of operations.

We typically measure customer relationships and other intangible assets using an income approach.

In addition, we have estimated the economic lives of certain acquired tangible and intangible assets and these lives are used to calculate depreciation and amortization expense.

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

Legal and Product Liabilities

The Company accrues for potential losses related to legal disputes, litigation, product liabilities, and regulatory matters when it is probable (the future event or events are likely to occur) that the Company will incur a loss and the amount of the loss can be reasonably estimated.

To calculate product liabilities, the Company estimates potential losses relating to pending claims and also estimates the likelihood of additional, similar claims being filed against the Company in the future.

To estimate potential losses on claims that could be filed in the future, the Company considers claims pending against the Company, claim filing rates, the number of codefendants and the extent to which they share in settlements, and the amount of loss by claim type.

We accrue for potential losses related to legal disputes, litigation, product liabilities, and regulatory matters when it is probable (the future event or events are likely to occur) that we will incur a loss and the amount of the loss can be reasonably estimated.

To calculate product liabilities, we estimate potential losses relating to pending claims and also estimate the likelihood of additional, similar claims being filed against us in the future.

To estimate potential losses on claims that could be filed in the future, we consider claims pending against us, claim filing rates, the number of codefendants and the extent to which they share in settlements, and the amount of loss by claim type.

The estimated losses for pending and potential future claims are calculated on a discounted basis using risk-free interest rates derived from market data about monetary assets with maturities comparable to those of the projected product liabilities.

The Company uses an actuarial specialist to assist with measuring its product liabilities.

We use an actuarial specialist to assist with measuring our product liabilities.

While we believe our legal and product liability estimates are reasonable in light of all available information, if one or more legal claims were to greatly exceed our

estimates, our results of operations and cash flows could be materially and adversely affected.

Refer to the Commitments and Contingencies Footnote of the Notes to Consolidated Financial Statements for additional information regarding product liabilities.

Self Insurance

The Company is self-insured for the majority of its group health insurance costs.

A reserve for claims incurred but not reported is developed by analyzing historical claims data provided by the Company’s claims administrators.

We are self-insured for the majority of our group health insurance costs.

A reserve for claims incurred but not reported is developed by analyzing historical claims data provided by our claims administrators.

These reserves are included in accrued expenses in the accompanying consolidated balance sheets as the expenses are expected to be paid within one year.

Long-term insurance liabilities consist primarily of reserves for the Company's workers’ compensation program.

In addition, the Company carries various large risk deductible workers’ compensation policies for the majority of workers’ compensation liabilities.

The Company records the workers’ compensation reserves based on an analysis performed by an independent actuary.

Long-term insurance liabilities consist primarily of reserves for our workers’ compensation program.

In addition, we carry various large risk deductible workers’ compensation policies for the majority of workers’ compensation liabilities.

We record the workers’ compensation reserves based on an analysis performed by an independent actuary.

The analysis calculates development factors, which are applied to total reserves as provided by the various insurance companies who underwrite the program.

While the Company believes that the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect workers’ compensation costs.

The Company accounts for income taxes under the asset and liability method.

Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amount and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.

In addition, valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.

In making this determination, the Company considers all available positive and negative evidence including projected future taxable income, future reversals of existing temporary differences, recent financial operations and tax planning strategies.

The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

While we believe that the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect workers’ compensation costs.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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What changed 10-K

Item 7. Management’s Discussion and Analysis