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Item 2. Management’s Discussion and Analysis

2023-10-19 compared with 2023-07-20 · 122 added, 92 removed, 171 unchanged (56% 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 six months ended June 30, 2023 are not necessarily indicative of results for the year ended December 31, 2023.

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of results for the year ended December 31, 2023.

Forward-Looking Statements

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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;

public health emergencies, 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;

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We conduct business in North America, Europe and Australasia from a network of more than 10,000 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 six months ended June 30, 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 six months ended June 30, 2023.

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 62% of total revenues for the nine months ended September 30, 2023.

Our Industrial Parts Group ("Industrial") operates in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for 38% of our total revenues for the nine months ended September 30, 2023.

Key Performance Indicators

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Results of Operations

Our revenues grew 5.6% compared to the three months ended June 30, 2022, which reflects continued solid overall customer demand as well as the ongoing benefits of our business mix and geographic diversity.

Our revenue growth and gross margin expansion, which reflect the benefits of our strategic pricing and sourcing initiatives, helped drive a 60 basis point improvement in total segment margin, led by our Industrial segment, with sales and segment profit up 5.9% and 25.7%, respectively.

Our results for the three and six months ended June 30, 2022 includes income of $77 million and $51 million, respectively, which primarily related to the net benefit of a gain on sale of real estate and KDG acquisition costs.

Our results of operations are summarized below for the three months ended June 30, 2023 and 2022.

Three Months Ended June 30,

Our results for the third quarter of 2023 reflect a 2.6% increase in sales driven by our international automotive businesses and continued growth in our Industrial segment.

Our year-over-year sales growth was negatively impacted by one less selling day in the U.S., the moderating benefit of inflation on the pricing environment in our global automotive segment and declines in sales in our U.S.

Automotive business.

The combination of continued revenue growth and gross margin expansion led to earnings growth of 12.4% and further expansion of total segment margin.

For the nine months ended September 30, 2023, our revenue grew 5.6%, helping drive earnings growth of 7.4%, which reflects the ongoing benefits of our diverse business mix and geographic footprint.

Our results for the nine months ended September 30, 2022 include costs of $47 million resulting from a gain on the June 2022 sale of real estate and KDG acquisition costs incurred throughout 2022.

Our results of operations are summarized below for the three months ended September 30, 2023 and 2022.

Three Months Ended September 30,

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

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Depreciation and amortization 83,860 1.4 % 86,563 1.5 % (2,703) (3.1) %

Provision for doubtful accounts 8,322 0.1 % 2,899 0.1 % 5,423 NM

Provision for doubtful accounts 8,417 0.1 % 6,146 0.1 % 2,271 37.0 %

Total operating expenses 1,644,076 28.2 % 1,551,127 27.3 % 92,949 6.0 %

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Interest expense, net 15,827 0.3 % 18,220 0.3 % (2,393) (13.1) %

Other (16,649) (0.3) % (3,820) (0.1) % (12,829) NM

Other (15,722) (0.3) % (7,616) (0.1) % (8,106) 106.4 %

Total non-operating expense (income) 105 — % 10,604 0.2 % (10,499) (99.0) %

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Net income $ 351,198 6.0 % $ 312,358 5.5 % $ 38,840 12.4 %

Three Months Ended June 30,

Three Months Ended September 30,

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

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Total segment margin 10.4 % 9.7 %

Our results of operations are summarized below for the six months ended June 30, 2023 and 2022.

Six Months Ended June 30,

Our results of operations are summarized below for the nine months ended September 30, 2023 and 2022.

Nine Months Ended September 30,

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

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Net income $ 999,649 5.7 % $ 930,725 5.6 % $ 68,924 7.4 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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Total segment margin 10.0 % 9.4 %

Our net sales for the three months ended June 30, 2023 increased 5.6% compared to the same period of the prior year.

Our net sales for the three months ended September 30, 2023 increased 2.6% compared to the same period of the prior year.

The increase in sales is attributable to a 0.5% increase in comparable sales, a 1.7% benefit from acquisitions and 0.4% favorable impact of foreign currency and other.

Our net sales for the nine months ended September 30, 2023 increased 5.6% compared to the same period of the prior year.

The increase in sales is attributable to a 4.6% increase in comparable sales and a 2.0% benefit from acquisitions, partially offset by a net unfavorable impact of foreign currency and other of 1.0%.

Our net sales for the six months ended June 30, 2023 increased 7.2% compared to the same period of the prior year.

The increase in sales is attributable to a 6.8% increase in comparable sales and a 2.1% benefit from acquisitions, partially offset by a net unfavorable impact of foreign currency and other 1.7%.

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

Our comparable sales growth was driven by Industrial and our international automotive businesses for the three and nine months ended September 30, 2023.

Both segments also experienced the ongoing benefits of strategic pricing initiatives and acquisitions completed in prior periods.

Net sales for Automotive were $3.7 billion for the three months ended June 30, 2023, an increase of 5.4%, compared to the same period in the prior year.

The increase for the three months ended June 30, 2023 consisted of a 4.3% increase in comparable sales and a 2.6% benefit from acquisitions, offset by a 1.5% unfavorable impact of foreign currency and other.

Net sales for Automotive were $7.2 billion for the six months ended June 30, 2023, an increase of 6.2%, compared to the same period in the prior year.

The increase for the six months ended June 30, 2023 consisted of a 5.4% increase in comparable sales and a 3.0% benefit from acquisitions, offset by a 2.2% unfavorable impact of foreign currency and other.

Net sales growth was primarily driven by continued solid demand for automotive parts in Europe and Australasia and a continued favorable pricing environment in all regions due to elevated inflation in product costs.

We also continue to benefit from acquisitions, such as our entry into new markets in Spain and Portugal midway through the second quarter of 2022.

These benefits were partially offset by the unfavorable impact of foreign exchange rates, primarily related to Australia and Canada.

Net sales for Industrial were $2.3 billion, an increase of 5.9% for the three months ended June 30, 2023 compared to the same period in 2022.

For the three months ended September 30, 2023, sales growth was negatively impacted by one less sales day compared to the same prior year period and declines in our U.S.

Automotive sales.

Net sales for Automotive were $3.6 billion for the third quarter of 2023, an increase of 3.9%, compared to the same period in the prior year.

The increase for the third quarter of 2023 consisted of a 2.4% benefit from acquisitions, 0.9% favorable impact of foreign currency and other and 0.6% increase in comparable sales.

Comparable sales was impacted by one less sales day and lower sales in our U.S.

Automotive business.

While our sales growth was impacted by the prior year benefit from price increases to offset higher product costs and other inflationary pressures, we continued to benefit from the positive effects of our strategic sales initiatives in our European and Australasia businesses.

The benefit from acquisitions includes our recent acquisition of Recambios y Accesorios Gaudí, S.L.

("Gaudi") in Spain, and the favorable impact from foreign currency primarily reflects the appreciation of the Euro against the U.S.

dollar during the period.

Net sales for Automotive were $10.8 billion for the nine months ended September 30, 2023, an increase of 5.4%, compared to the same period in the prior year.

The increase for the nine months ended September 30, 2023 consisted of a 3.7% increase in comparable sales and a 2.8% benefit from acquisitions, offset by a 1.1% unfavorable impact of foreign currency and other.

The increase in comparable sales is due to higher sales in our international businesses.

The benefit from acquisitions includes the effects of our entry into new markets in Spain and Portugal.

The unfavorable impact of foreign currency primarily results from the weakening of the Australian and Canadian dollars compared to the U.S.

dollar throughout the period.

Net sales for Industrial were $2.2 billion, an increase of 0.6% for the three months ended September 30, 2023 compared to the same period in 2022.

The increase reflects a 0.3% increase in comparable sales and a 0.6% benefit from acquisitions, slightly offset by a 0.3% unfavorable impact of foreign currency compared to the same period in 2022.

Net sales for Industrial were $4.5 billion, an increase of 8.8% for the six months ended June 30, 2023 compared to the same period in 2022.

Net sales for Industrial were $6.7 billion, an increase of 6.0% for the nine months ended September 30, 2023 compared to the same period in 2022.

The increase reflects a 6.0% increase in comparable sales and a 0.6% from acquisitions, slightly offset by a 0.6% unfavorable impact of foreign currency compared to the same period in 2022.

Our growth in comparable sales reflects the positive impact of our ongoing sales and pricing initiatives and continued solid growth in many of the industry segments we serve.

All industries in North America improved over the prior year period and many experienced double-digit growth, with the largest impact in food products, iron and steel, and pulp and paper.

We attribute part of our sales growth to the diversification of our products and service offerings, and ongoing benefits from the KDG acquisition, including enhanced capabilities in industrial solutions, such as automation and robotic solutions, fluid power and conveyance.

For the three months ended September 30, 2023, our results reflect anticipated softer economic activity and industry demand.

For the nine months ended September 30, 2023, our growth in comparable sales reflects the positive impact of our ongoing sales and pricing initiatives and continued growth in many of the industry segments we serve.

We attribute part of our sales growth to the diversification of our products and service offerings, and ongoing benefits from the KDG acquisition.

Gross Profit and Gross Margin

Gross profit for the three months ended June 30, 2023, increased $174 million, or approximately 8.9%, compared to the same period in the prior year.

Gross margin increased 110 basis points to 36.1% for the three months ended June 30, 2023.

Gross profit for the six months ended June 30, 2023 increased $361 million or 9.5% compared to the same period in prior year.

Gross margin increased 70 basis points to 35.5% for the six months ended June 30, 2023.

Gross profit for the three months ended September 30, 2023, increased $130 million, or approximately 6.5%, compared to the same period in the prior year.

Gross margin increased 130 basis points to 36.2% for the three months ended September 30, 2023.

Gross profit for the nine months ended September 30, 2023 increased $491 million or 8.5% compared to the same period in prior year.

Gross margin increased 90 basis points to 35.7% for the nine months ended September 30, 2023.

Gross profit increases for the quarter and for the year-to-date periods were primarily driven by the increases in net sales and expanded gross margins.

Gross margin improvements for the periods reflect the positive contributions of our strategic pricing and sourcing initiatives.

Gross margin improvements for the periods primarily reflect the positive contributions of our strategic pricing and sourcing initiatives.

Operating Expenses

SG&A expenses represent 26.7% of sales for the three months ended June 30, 2023, an increase of 240 basis points from 24.3% in the second quarter of 2022.

SG&A expenses represent 26.5% for the six months ended June 30, 2023, an increase of 110 basis points from 25.4% in the first half of 2022.

SG&A expenses as a percentage of sales for the three and six months ended June 30, 2022 include income of $77 million and $51 million, respectively, which primarily related to the net benefit of a gain on sale of real estate offset by KDG acquisition costs.

Excluding those effects, SG&A expense as a percent of sales increased 100 basis points and 60 basis points for the three and six month periods ended June 30, 2023, respectively.

The increases are primarily driven by increased personnel costs due to wage inflation, and global investments in information technology to support our ongoing strategic initiatives.

SG&A expenses represent 26.6% of sales for the three months ended September 30, 2023, an increase of 90 basis points from 25.7% in the third quarter of 2022.

SG&A expenses represent 26.5% for the nine months ended September 30, 2023, an increase of 100 basis points from 25.5% for the same period in 2022.

SG&A expenses as a percentage of sales for the three and nine months ended September 30, 2022 include costs of $3 million and income of $47 million, respectively, which primarily related to the net benefit of a gain on the June 2022 sale of real estate and KDG acquisition costs incurred throughout 2022.

The increases in both periods are primarily driven by planned increases in personnel costs due to wage inflation and global investments in information technology to support our ongoing strategic initiatives, and the timing of additional product liability expense for the three months ended September 30, 2023 due to increases in our estimated product liability claim exposure.

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 and $29 million for the three and six months ended June 30, 2022, of which $9 million and $18 million were allocated to Automotive and $6 million and $11 million were allocated to Industrial based on several factors, including sales volumes and headcount.

Beginning in 2023, these costs, which totaled $8 million and $18 million for the three and six months ended June 30, 2023, are no longer allocated to our segments when measuring their operating performance.

These costs totaled $15 million and $44 million for the three and nine months ended September 30, 2022, of which $9 million and $27 million were allocated to Automotive and $6 million and $17 million were allocated to Industrial based on several factors, including sales volumes and headcount.

Beginning in 2023, these costs, which totaled $30 million and $49 million for the three and nine months ended September 30, 2023, are no longer allocated to our segments when measuring their operating performance.

We have not restated the 2022 comparative segment profit financial information.

Automotive segment profit for the three months ended June 30, 2023, increased 2.1% compared to the same period in 2022.

Automotive segment margin decreased 30 basis points to 9.0% for the three months ended June 30, 2023.

For the six months ended June 30, 2023, Automotive segment profit increased 1.1% compared to the same period in the prior year, and Automotive segment margin decreased 40 basis points to 8.3% for the same period in 2022.

Global Automotive segment profit was negatively impacted by lower than expected sales in the U.S.

combined with higher wages and investments in information technology.

Industrial segment profit increased 25.7% and 31.8% for the three and six months ended June 30, 2023 compared to the same periods in 2022.

For the three and six months ended June 30, 2023, Industrial segment margin increased 190 basis points and 210 basis points to 12.5% and 12.1%, respectively, when compared to the same periods in the previous year.

The improved Industrial segment margin is primarily due to strong sales growth and our continued focus on leveraging expenses and executing supply chain initiatives as well as other strategic initiatives in areas such as category management and pricing.

Our effective income tax rate for the three month period ended June 30, 2023 was 24.1% compared to 24.2% for the same period in 2022.

The rate decrease is primarily due to excess tax stock compensation benefits.

Our effective income tax rate for the six months ended June 30, 2023 was 24.5% compared to 24.3% for the same period in 2022.

The rate increase for the six month period is primarily related to one-time adjustments reducing the 2022 comparative rate.

The full year estimated effective tax rate is expected to be between 24.4% and 24.8%.

For the three months ended June 30, 2023, net income was $344 million, a decrease of 7.5% compared to net income of $373 million for the same three month period in the prior year.

On a per share diluted basis, net income was $2.44, a decrease of 6.9% compared to $2.62 for the same period in 2022.

Our results for the three months ended June 30, 2022 include income of $77 million, which primarily related to the net benefit of a gain on sale of real estate and KDG acquisition costs.

Automotive segment profit for the three months ended September 30, 2023 increased 4.1% compared to the same period in 2022.

Automotive segment margin remained at 8.9% for the three months ended September 30, 2023.

For the nine months ended September 30, 2023, Automotive segment profit increased 2.2% compared to the same period in the prior year, and Automotive segment margin decreased 30 basis points to 8.5% for the same period in 2022.

Automotive segment margin was negatively impacted by the loss of expense leverage primarily caused by slowing demand and the impact of lower sales in the U.S., combined with planned investments in wages and information technology.

Our results in the U.S.

also reflect operational execution challenges and further tightening of market conditions.

Industrial segment profit increased 16.6% and 26.2% for the three and nine months ended September 30, 2023 compared to the same periods in 2022.

For the three and nine months ended September 30, 2023, Industrial segment margin increased 180 basis points and 190 basis points to 12.9% and 12.3%, respectively, when compared to the same periods in the previous year.

The improved Industrial segment margin is primarily due to continued sales growth and our focus on leveraging expenses and executing supply chain initiatives as well as other strategic initiatives in areas such as category management and pricing.

Our effective income tax rate for the three and nine months ended September 30, 2023 was 24.5%, compared to 25.3% and 24.7% for the same periods in 2022.

The rate decrease is primarily due to statute-related adjustments and domestic tax credit benefits.

For the three months ended September 30, 2023, net income was $351 million, an increase of 12.4% compared to net income of $312 million for the same three month period in the prior year.

On a per share diluted basis, net income was $2.49, an increase of 13.2% compared to $2.20 for the same period in 2022.

Our results for the three months ended September 30, 2022 include costs of $3 million, which primarily related to KDG acquisition costs.

Excluding these amounts, on an adjusted basis, net income increased 10.7% compared to $317 million for the same period in the prior year.

On an adjusted per share diluted basis, net income increased 11.7% compared to $2.23 for the same period in 2022.

For the six months ended June 30, 2023, net income was $648 million, an increase of 4.9% compared to net income of $618 million for the same six month period in the prior year.

For the nine months ended September 30, 2023, net income was $1.0 billion, an increase of 7.4% compared to net income of $931 million for the same nine month period in the prior year.

On a per share diluted basis, net income was $7.08, an increase of 8.4% compared to $6.53 for the same period in 2022.

Our results for the six months ended June 30, 2022 include income of $51 million, which primarily related to the net benefit of a gain on sale of real estate and KDG acquisition costs.

Our results for the nine months ended September 30, 2022 include income of $47 million, which primarily related to the net benefit of a gain on sale of real estate and KDG acquisition costs.

Excluding these amounts, on an adjusted basis, net income increased 11.6% compared to $896 million for the same period in the prior year.

On an adjusted per share diluted basis, net income increased 12.6% compared to $6.29 for the same period in 2022.

For the three months ended June 30, 2023, adjusted EBITDA was $561 million, an increase of 7.8% from $521 million for the same three month period in the prior year.

For the six months ended June 30, 2023, adjusted EBITDA was $1.1 billion, an increase of 9.2% from $980 million for the same six month period in the prior year.

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

For the three months ended September 30, 2023, adjusted EBITDA was $565 million, an increase of 7.3% from $526 million for the same three month period in the prior year.

For the nine months ended September 30, 2023, adjusted EBITDA was $1.6 billion, an increase of 8.5% from $1.5 billion for the same nine month period in the prior year.

The growth in these metrics in all periods presented reflects improved segment margin, primarily in our Industrial segment, driven by higher revenue, particularly in our international business.

We also benefited from 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.

Adjusted net income, adjusted diluted EPS, adjusted EBITDA, total segment profit, total segment margin, and adjusted EBITDA for each segment 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, as well as net income to adjusted EBITDA, in each case, to account for the impact of adjustments.

We also include a reconciliation from net income to total segment profit and total segment margin, as well as a reconciliation from segment profit to adjusted EBITDA for each segment.

We believe that the presentation these non-GAAP measures, when considered together with the corresponding GAAP financial measures and related reconciliations, 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.

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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 June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 2023 2022

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Adjusted net income $ 351,198 $ 317,284 $ 999,649 $ 896,021

The table below represent amounts per common share assuming dilution:

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

The table below represents amounts per common share assuming dilution:

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

(in thousands, except per share data) 2023 2022 2023 2022

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

(4) We determine the tax effect of non-GAAP adjustments by considering the tax laws and statutory income tax rates applicable in the tax jurisdictions of the underlying non-GAAP adjustments, including any related valuation allowances.

For the three and nine months ended September 30, 2022, we applied the statutory income tax rates to the taxable portion of all of our adjustments, which resulted in a tax impact of $1.5 million and $12.7 million respectively.

A portion of our transaction costs included in our non-GAAP adjustments for the three and nine months ended September 30, 2022 were not deductible for income tax purposes;

therefore, no statutory income tax rate was applied to such costs.

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

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

(in thousands) 2023 2022 2023 2022

GAAP net income $ 351,198 $ 312,358 $ 999,649 $ 930,725

Depreciation and amortization 83,860 86,563 261,948 259,822

Interest expense, net 15,827 18,220 49,146 58,318

Income taxes 113,862 105,578 323,906 304,494

EBITDA 564,747 522,719 1,634,649 1,553,359

Total adjustments (1) — 3,462 — (47,355)

Adjusted EBITDA $ 564,747 $ 526,181 $ 1,634,649 $ 1,506,004

(1) Amounts 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 Condensed Consolidated Statements of Income:

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

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

(in thousands) 2023 2022 2023 2022

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Total adjustments $ — $ 3,462 $ — $ (47,355)

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

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

The table below represents a reconciliation from GAAP net income to total segment profit:

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

(in thousands) 2023 2022 2023 2022

GAAP net income $ 351,198 $ 312,358 $ 999,649 $ 930,725

Depreciation and amortization 90,873 85,890 178,088 173,259

Interest expense, net 16,455 20,248 33,319 40,098

Income taxes 113,862 105,578 323,906 304,494

EBITDA 561,417 597,705 1,069,902 1,030,640

Total adjustments (1) — (76,732) — (50,817)

Adjusted EBITDA $ 561,417 $ 520,973 $ 1,069,902 $ 979,823

Income before income taxes 465,060 417,936 1,323,555 1,235,219

Interest expense, net 15,827 18,220 49,146 58,318

Corporate expense 90,257 72,820 257,822 187,883

Intangible asset amortization 33,667 39,416 113,414 118,740

Other unallocated (loss) income, net (1) — 3,462 — (47,355)

Total segment profit $ 604,811 $ 551,854 $ 1,743,937 $ 1,552,805

GAAP net sales $ 5,824,602 $ 5,675,274 $ 17,504,726 $ 16,572,323

GAAP net income margin (2) 6.0 % 5.5 % 5.7 % 5.6 %

Total segment profit margin (3) 10.4 % 9.7 % 10.0 % 9.4 %

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

(2) Represents GAAP net income as a percentage of GAAP net sales.

(3) Represents total segment profit as a percentage of GAAP net sales.

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

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

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

(in thousands) 2023 2022 2023 2022

2 unchanged sentences

Other costs (2) — 8,927 — 26,780

Automotive segment EBITDA 370,248 367,917 672,777 677,671

Automotive segment adjusted EBITDA 362,677 354,611 1,035,454 1,032,283

Segment profit 282,807 242,505 828,166 656,330

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Other costs (2) — 5,587 — 16,761

Industrial segment EBITDA 290,452 237,633 559,489 439,524

Industrial segment adjusted EBITDA 290,451 255,432 849,940 694,956

Corporate expense (90,257) (72,820) (257,822) (187,883)

1 unchanged sentence

Other costs (2) — (14,514) — (43,541)

Other unallocated costs (1) — 76,732 — 50,817

Other unallocated (loss) income, net (1) — (3,462) — 47,355

Corporate EBITDA (88,381) (87,324) (250,745) (173,880)

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Financial Condition

Our cash balance was $530 million as of June 30, 2023, a decrease of $123 million from December 31, 2022.

For the six months ended June 30, 2023, we had net cash provided by operating activities of $457 million, net cash used in investing activities of $226 million and net cash used in financing activities of $358 million.

Our cash balance was $655 million as of September 30, 2023, an increase of $1.2 million from December 31, 2022.

For the nine months ended September 30, 2023, we had net cash provided by operating activities of $1.1 billion, net cash used in investing activities of $473 million and net cash used in financing activities of $599 million.

The cash provided by operating activities decreased $162 million compared to the prior year period.

The six months ended June 30, 2022 received a $200 million benefit because we increased the facility limit of our A/R Sales Agreement.

The remaining decrease is due to other net working capital changes primarily due to an increase of approximately 2 days in our day sales outstanding as a result of challenging economic conditions.

The decrease is driven by a $200 million benefit in the prior year from increasing the facility limit of our A/R Sales Agreement.

We had $473 million in net cash used for investing activities, primarily for capital expenditures and acquisitions, and other investing activities of $561 million, partially offset by $80 million related to cash proceeds from the sale of our remaining investment in S.P.

1 unchanged sentence

The financing activities consisted primarily of $393 million for dividends paid to our shareholders and $172 million of stock repurchases.

Total debt of $3.4 billion at June 30, 2023 increased $75 million, or 2.3%, from December 31, 2022.

Total debt of $3.3 billion at September 30, 2023 decreased $11 million, or 0.3%, from December 31, 2022.

Liquidity and Capital Resources

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

At June 30, 2023, our total average cost of debt was 2.39%, and we remain in compliance with all covenants connected with our borrowings.

At September 30, 2023, our total average cost of debt was 2.33%, 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.

8 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