GENUINE PARTS CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 months ended March 31, 2023 are not necessarily indicative of results for the year ended December 31, 2023. Forward-Looking Statements Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (“SEC”), release to the public, or make available on our website, constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 priorities. Senior officers may also make verbal statements to analysts, investors, the media and others that are forward-looking. We caution you that all forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements. 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, 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; 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; our ability to successfully integrate acquired businesses into our operations and to realize the anticipated synergies and benefits; our ability to successfully implement our business initiatives in our two business segments; slowing demand for our products; the ability to maintain favorable supplier arrangements and relationships; changes in national and international legislation or government regulations or policies, including changes to import tariffs, environmental and social policy, infrastructure programs and privacy legislation, and their impact to us, our suppliers and customers; changes in tax policies; volatile exchange rates; our ability to successfully attract and retain employees in the current labor market; uncertain credit markets and other macroeconomic conditions; competitive product, service and pricing pressures; failure or weakness in our disclosure controls and procedures and internal controls over financial reporting, including as a result of the work from home environment; 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 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. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the SEC. Overview Genuine Parts Company is a service organization engaged in the global 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. We conduct business in North America, Europe and Australasia from a network of more than 10,500 locations. 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. 14 Table of Contents 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 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, 2023 2022 (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 % 15 Table of Contents Net Sales 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. Automotive 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. Industrial 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. 16 Table of Contents Segment Profit 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 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 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. Income Taxes 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. Net Income 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 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 17 Table of Contents 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 Adjustments: Gain on insurance proceeds (1) — (634) Transaction and other costs (2) — 26,549 Total adjustments — 25,915 Tax impact of adjustments — (6,103) Adjusted net income $ 303,957 $ 265,650 The table below represent amounts per common share assuming dilution: Three Months Ended March 31, (in thousands, except per share data) 2023 2022 GAAP diluted earnings per share $ 2.14 $ 1.72 Adjustments: Gain on insurance proceeds (1) — (0.01) Transaction and other costs (2) — 0.19 Total adjustments — 0.18 Tax impact of adjustments — (0.04) 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 March 31, (in thousands) 2023 2022 Line item: Cost of goods sold $ — $ 5,000 Selling, administrative and other expenses — 21,549 Non-operating expense (income): Other — (634) Total adjustments $ — $ 25,915 18 Table of Contents 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 Automotive: Segment Profit $ 264,420 $ 264,573 Depreciation 38,109 36,254 Other costs (2) — 8,927 Automotive segment EBITDA 302,529 309,754 Industrial: Segment Profit 261,987 188,353 Depreciation 7,050 7,951 Other costs (2) — 5,587 Industrial segment EBITDA 269,037 201,891 Corporate: 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 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 19 Table of Contents 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 $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 We ended the quarter with $2.1 billion of total liquidity (comprising $1.4 billion availability on the revolving credit facility and $651 million of cash and cash equivalents). 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. 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. Dollar. 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 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 $3.80 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our 2022 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2022.