What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-20 compared with 2022-10-20 · 152 added, 140 removed, 64 unchanged (82% of the section changed)

1 unchanged sentence

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, 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.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of results for the year ended December 31, 2023.

Forward-Looking Statements

1 unchanged sentence

All statements in the future tense and all statements accompanied by words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “position,” “will,” “project,” “intend,” “plan,” “on track,” “anticipate,” “to come,” “may,” “possible,” “assume,” or similar expressions are intended to identify such forward-looking statements.

These forward-looking statements include our view of business and economic trends for the remainder of the year and our expectations regarding our ability to capitalize on these business and economic trends and to execute our strategic

Senior officers may also make verbal statements to analysts, investors, the media and others that are forward-looking.

1 unchanged sentence

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

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

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

volatility in oil prices;

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

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

public health emergencies such as the COVID-19 pandemic, including the effects on the financial health of our business partners and customers, on supply chains and our suppliers, on vehicle miles driven as well as other metrics that affect our business, and on access to capital and liquidity provided by the financial and capital markets;

our ability to maintain compliance with our debt covenants;

11 unchanged sentences

the uncertainties and costs of litigation;

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

disruptions caused by a failure or breach of our information systems, as well as other risks and uncertainties discussed in our 2022 Annual Report on Form 10-K and from time to time in our subsequent filings with the SEC.

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

3 unchanged sentences

We conduct business in North America, Europe and Australasia from a network of more than 10,500 locations.

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

This is our purpose and the foundation of how we do business.

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

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

Our strategic financial objectives include:

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

(2) improved operating margin;

(3) strong balance sheet and cash flows;

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 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 nine months ended September 30, 2022.

Key Business Metrics - Comparable Sales

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

Management uses comparable sales to evaluate the results of operations and we believe that this key indicator provides additional perspective and insights when analyzing the operating performance of our business from period to period and trends in its historical operating results.

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

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

Our Automotive Parts Group ("Automotive") operates in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand, and accounted for 61% of total revenues for the three months ended March 31, 2023.

Our Industrial Parts Group ("Industrial") operates in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for 39% of our total revenues for the three months ended March 31, 2023.

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 Comparable Sales, Gross Profit and Gross Margin, Selling, Administrative and Other Expenses ("SG&A"), Segment Profit and Segment Margin, and Net Income and EBITDA along with their adjusted measures.

For more information regarding our key performance indicators please reference the 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, 2022.

Results of Operations

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 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 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.

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.

Overall, continued strong customer demand in Industrial and growth in our automotive businesses in Europe, Australasia and Canada, allowed us to deliver 8.9% revenue growth compared to the three months ended March 31, 2022, despite slower growth in our U.S.

automotive business.

Our revenue growth and gross margin expansion, driven by execution of our strategic initiatives, drove a 50 basis point improvement in total segment margin.

These results allow us to continue investing in our businesses through strategic initiatives and capital expenditures.

Our results of operations are summarized below for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

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

Net sales $ 5,765,118 100.0 % $ 5,294,635 100.0 % $ 470,483 8.9 %

Cost of goods sold 3,751,717 65.1 % 3,468,688 65.5 % 283,029 8.2 %

Gross profit 2,013,401 34.9 % 1,825,947 34.5 % 187,454 10.3 %

Operating expenses:

Selling, administrative and other expenses 1,511,244 26.2 % 1,403,979 26.5 % 107,265 7.6 %

Depreciation and amortization 87,215 1.5 % 87,369 1.7 % (154) (0.2) %

Provision for doubtful accounts 5,639 0.1 % 4,494 0.1 % 1,145 25.5 %

Total operating expenses 1,604,098 27.8 % 1,495,842 28.3 % 108,256 7.2 %

Non-operating expenses (income):

Interest expense, net 16,864 0.3 % 19,850 0.4 % (2,986) (15.0) %

Other (11,967) (0.2) % (15,461) (0.3) % 3,494 (22.6) %

Total non-operating expenses (income) 4,897 0.1 % 4,389 0.1 % 508 11.6 %

Income before income taxes 404,406 7.0 % 325,716 6.2 % 78,690 24.2 %

Income taxes 100,449 1.7 % 79,878 1.5 % 20,571 25.8 %

Net income $ 303,957 5.3 % $ 245,838 4.6 % $ 58,119 23.6 %

Three Months Ended March 31,

(in thousands, except per share data) 2023 2022 $ Change % Change

Diluted EPS $ 2.14 $ 1.72 $ 0.42 24.4 %

Total adjusted EBITDA $ 508,485 $ 458,850 $ 49,635 10.8 %

Automotive segment profit $ 264,420 $ 264,573 $ (153) (0.1) %

Industrial segment profit $ 261,987 $ 188,353 $ 73,634 39.1 %

Total segment profit $ 526,407 $ 452,926 $ 73,481 16.2 %

Automotive segment margin 7.5 % 8.1 %

Industrial segment margin 11.6 % 9.3 %

Total segment margin 9.1 % 8.6 %

Our net sales for the three months ended March 31, 2023 increased 8.9% compared to the same period of the prior year.

The increase in sales is attributable to an 8.7% increase in comparable sales and a 2.4% benefit from acquisitions, partially offset by a net unfavorable impact of foreign currency and other of 2.2%.

Strong customer demand, particularly in Industrial and in our international automotive businesses, combined with a favorable pricing environment, were the primary drivers of our comparable sales growth.

These factors were partially offset by slower growth in our U.S.

automotive business which was impacted by weather conditions as discussed below.

We continued to deploy strategic pricing increases in 2023 to offset the ongoing product cost increases we face across our businesses from elevated inflationary pressure, particularly in Automotive.

Separately, we experienced the ongoing benefits of strategic acquisitions in both segments.

Net sales for Automotive was $3.5 billion for the three months ended March 31, 2023, an increase of 7.0%, compared to the same period in the prior year.

The increase for the three months ended March 31, 2023 consisted of an approximate 6.6% increase in comparable sales and a 3.5% benefit from acquisitions, offset by a 3.1% unfavorable impact of foreign currency and other.

Net sales growth was driven by continued strong demand for automotive parts in Europe and Australasia, a continued strong pricing environment in all regions due to elevated inflation in product costs, and ongoing benefits of footprint expansion through acquisitions, such as our entry into new markets in Spain and Portugal in the second quarter of 2022.

Sales growth in the U.S.

was positive, but revenue growth was negatively impacted by adverse and unusual weather conditions in the U.S., including winter snowstorms in certain west coast regions that caused periodic facility closures, and milder winter weather in certain regions in the east that resulted in a decrease in demand for certain higher-margin products we typically sell during this period.

Net sales for Industrial was $2.3 billion, an increase of 11.9% for the three months ended March 31, 2023 compared to the same period in 2022.

The increase reflects a 12.1% increase in comparable sales and a 0.6% benefit from acquisitions, slightly offset by a 0.8% unfavorable impact of foreign currency as compared to the same period in 2022.

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

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

The increase in sales volume was due to the diversification of our products and service offerings, in addition to a contribution of low single-digit product cost inflation.

Further, we are benefiting from the KDG acquisition and enhanced capabilities in industrial solutions, including automation and robotic solutions, fluid power and conveyance.

Gross Profit and Gross Margin

Gross profit increased $187 million, or approximately 10.3% for the three months ended March 31, 2023, primarily driven by the increase in net sales, and gross margin increased 40 basis points to 34.9% for the three months ended March 31, 2023.

Gross margin reflects the positive contributions of our strategic pricing and sourcing initiatives, among others.

Operating Expenses

SG&A expenses represent 26.2% of sales for the three months ended March 31, 2023 compared to 26.5% in the prior year period.

The decrease in SG&A expense as a percent of net sales was primarily driven by certain transaction costs of $26.5 million related to the KDG acquisition, among other things, in the prior year period.

In addition, we were able to leverage SG&A expenses on strong sales growth in Industrial, but this was offset by increased personnel costs primarily due to wage inflation, investments in information technology to support our ongoing strategic initiatives and higher outbound freight delivery costs in our U.S.

automotive business due to higher rates from transportation providers.

Segment Profit

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.

Beginning in 2023, certain functions, including cybersecurity and the management of our product liability litigation, were transferred to corporate to be streamlined and centrally managed.

These costs totaled $15 million for the three months ended March 31, 2022, of which $9 million were allocated to Automotive and $6 million were allocated to Industrial based on several factors, including sales volumes and headcount.

Beginning in 2023, these costs, which totaled $11 million for the three months ended March 31, 2023, are no longer allocated to our segments when measuring their operating performance.

We have not restated the 2022 comparative segment financial information.

Automotive segment profit decreased 0.1% in the three months ended March 31, 2023 compared to the same period of 2022, and Automotive segment profit margin decreased to 7.5% compared to 8.1% for the same period of the previous year.

While we continue to execute on our global growth and productivity initiatives, these efforts were more than offset by lower sales growth in the U.S., combined with higher wage and freight delivery costs, as described above.

Industrial segment profit increased 39.1% in the three months ended March 31, 2023 compared to the same three month period of 2022.

This group's segment profit margin increased to 11.6% compared to 9.3% for the same period of the previous year.

The improved segment profit margin is primarily due to the benefit of strong sales growth and the additional margin improvement as we continue to leverage our expenses and execute on our supply chain initiatives and other strategic initiatives in areas such as category management and pricing.

Our effective income tax rate was 24.8% and 24.5% for the three months ended March 31, 2023 and 2022, respectively.

The rate increase is primarily due to international tax rate adjustments.

For the three months ended March 31, 2023, net income was $304 million, an increase of 23.6% compared to net income of $246 million for the same three month period of the prior year.

On a per share diluted basis, net income was $2.14, an increase of 24.4% compared to $1.72 for the same three month period of 2022.

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.

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

We believe that the presentation of adjusted net income and adjusted diluted net income per common share, 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 operations and may distort our longer-term operating trends.

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

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 September 30, Nine Months Ended September 30,

For the three months ended March 31, 2023, net income increased 14.4% compared to adjusted net income of $266 million for the same three month period of the prior year.

On a per share basis, net income for the three months ended March 31, 2023, increased 15.1% compared to $1.86 on an adjusted basis for the same three month period of 2022.

For the three months ended March 31, 2023, adjusted EBITDA was $508 million, an increase of 10.8% from $459 million for the same three month period of the prior year.

The growth in these metrics in all periods presented reflects the strong operating results, primarily in our Industrial segment, driven by strong sales growth and the continued execution of our strategic pricing and other initiatives, as discussed more fully in the commentary above.

Non-GAAP Financial Measures

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

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

We also include a reconciliation from segment profit to segment EBITDA and adjusted EBITDA.

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.

In the case of adjusted EBITDA by Segment, we believe this additional metric is useful to investors as it provides further insight into the performance of our segments.

We believe the non-GAAP metrics included herein also 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 our core operations.

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.

Three Months Ended March 31,

(in thousands) 2023 2022

GAAP net income $ 303,957 $ 245,838

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

Gain on insurance proceeds (1) — (634)

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

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

Transaction and other costs (2) — 26,549

3 unchanged sentences

The table below represent amounts per common share assuming dilution:

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

Three Months Ended March 31,

(in thousands, except per share data) 2023 2022

GAAP net income $ 2.20 $ 1.59 $ 6.53 $ 4.44

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

GAAP diluted earnings per share $ 2.14 $ 1.72

Gain on insurance proceeds (1) — (0.01)

Product liability damages award (3) — — — 0.54

Loss on software disposal (4) — 0.42 — 0.42

Transaction and other costs (2) — 0.19

1 unchanged sentence

Tax impact of adjustments — (0.04)

Adjusted diluted net income per common share $ 2.23 $ 1.88 $ 6.29 $ 5.12

Adjusted diluted earnings per share $ 2.14 $ 1.86

Weighted average common shares outstanding – assuming dilution 141,725 142,842

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

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

The table below clarifies where the adjusted items are presented in the Condensed Consolidated Statements of Income:

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

Three Months Ended March 31,

(in thousands) 2023 2022

4 unchanged sentences

Total adjustments $ — $ 25,915

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

(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.

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

The table below represents a reconciliation from GAAP net income to adjusted EBITDA:

Three Months Ended March 31,

(in thousands) 2023 2022

GAAP net income $ 303,957 $ 245,838

Depreciation and amortization 87,215 87,369

Interest expense, net 16,864 19,850

Income taxes 100,449 79,878

EBITDA 508,485 432,935

Total adjustments (1) — 25,915

Adjusted EBITDA $ 508,485 $ 458,850

The table below represents a reconciliation from segment profit to segment EBITDA and adjusted EBITDA:

Three Months Ended March 31,

(in thousands) 2023 2022

Segment Profit $ 264,420 $ 264,573

Depreciation 38,109 36,254

Other costs (2) — 8,927

Automotive segment EBITDA 302,529 309,754

Segment Profit 261,987 188,353

Depreciation 7,050 7,951

Other costs (2) — 5,587

Industrial segment EBITDA 269,037 201,891

Corporate expense (66,015) (41,751)

Depreciation 2,934 3,470

Other costs (2) — (14,514)

Other unallocated costs (1) — (25,915)

Corporate EBITDA (63,081) (78,710)

Total adjustments (1) — 25,915

Corporate adjusted EBITDA (63,081) (52,795)

Adjusted EBITDA $ 508,485 $ 458,850

(1) Amounts are the same as adjustments included within the adjusted net income table above.

(2) These represent costs for certain functions, including cybersecurity and product liability litigation that were transferred to Corporate beginning in 2023 to be streamlined and centrally managed.

We presented the 2022 comparative period to reflect how management manages these costs in 2023 and going forward.

Financial Condition

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 $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).

Our cash balance was $651 million as of March 31, 2023, consistent with December 31, 2022.

For the three months ended March 31, 2023, we had net cash provided by operating activities of $198 million, net cash used in investing activities of $45 million and net cash used in financing activities of $158 million.

The cash provided by operating activities decreased as compared to prior year primarily driven by the $200 million benefit related to increasing the facility limit of our A/R Sales Agreement in the three months ended March 31, 2022.

We had $45 million in net cash used for investing activities primarily for capital expenditures and

acquisitions and other investing activities of $128 million, partially offset by $80 million in cash proceeds from the sale of our remaining investment in S.P.

Richards and other investments.

The financing activities consisted primarily of $126 million for dividends paid to our shareholders and $68 million of stock repurchases.

Accounts receivable increased $232 million, or 10.6%, from December 31, 2022.

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.

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, 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 condensed consolidated statements of income.

Our suppliers and us 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 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 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.

Accordingly, amounts due to our suppliers that elected to participate in the SCF program are included in the line item accounts payable in our condensed consolidated balance sheets.

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 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.

Inventory increased $138 million, or 3.1%.

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

Accounts payable increased $221 million, or 4.0% from December 31, 2022, in line with the increase in inventory.

Total debt of $3.4 billion at March 31, 2023 increased $56 million, or 1.7%, from December 31, 2022.

Liquidity and Capital Resources

2 unchanged sentences

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 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.

The terms of the A/R Sales Agreement limit the balance of receivables sold to approximately $1 billion at any point in time.

Refer to the A/R Sales Agreement footnote in the notes to condensed consolidated financial statements for more information.

On January 6, 2022, we issued $500 million of unsecured 1.750% Senior Notes due 2025.

Simultaneously, we issued $500 million of unsecured 2.750% Senior Notes due 2032.

For both offerings, interest is payable semi-annually on February 1 and August 1 of each year, beginning August 1, 2022.

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

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.

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

At March 31, 2023, our total average cost of debt was 2.36%, and we remain in compliance with all covenants connected with our borrowings.

On March 14, 2023, we entered into a second amendment to our syndicated facility agreement dated October 30, 2020 to replace the benchmark rate, the 1-month London Inter Bank Offered Rate, with the 1-month Secured Overnight Financing Rate for borrowings denominated in U.S.

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.

1 unchanged sentence

On February 21, 2023, we announced a 6% increase in the regular quarterly cash dividend for 2023.

Our Board of Directors increased the cash dividend payable to an annual rate of $3.58 per share compared with the previous dividend of $3.26 per share.

We have paid a cash dividend every year since going public in 1948, and 2022 marks the 66th consecutive year of increased dividends paid to shareholders.

Our Board of Directors increased the cash dividend payable to an annual rate of $3.80 per share compared with the prior year dividend of $3.58 per share.

We have paid a cash dividend every year since going public in 1948, and 2023 will mark the 67th consecutive year of increased dividends paid to shareholders.

Quantitative and Qualitative Disclosures about Market Risk

2 unchanged sentences

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