What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-23 · 178 added, 122 removed, 258 unchanged (54% of the section changed)

6 unchanged sentences

In 2023, we conducted business in North America, Europe and Australasia from more than 10,700 locations.

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

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

Our Automotive business operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand in 2023 and accounted for approximately 62% of total revenues for the year.

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

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

3 unchanged sentences

(1) revenue growth in excess of market growth;

(2) improved operating margins;

(3) strong balance sheet and cash flows;

(2) continuously improving operating margins;

(3) maintaining a strong balance sheet and cash flows;

and (4) effective capital allocation.

3 unchanged sentences

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

Our calculation of comparable sales is computed using total business days for the period and is inclusive of both company-owned stores and sales to our independent owner's stores.

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

8 unchanged sentences

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

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

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

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

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

We believe SG&A is a useful measure because it allows management, analysts, investors and others to understand the level of costs we incur operating our business each period.

Segment Profit and Segment Margin

2 unchanged sentences

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

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

operating and other expenses and income associated with those businesses.

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

11 unchanged sentences

Discussions of 2021 results and year-to-year comparisons between 2022 and 2021 results are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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

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

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

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

Our sales increased 4.5% in 2023, highlighted by the strength of our Industrial and international automotive businesses, which continued to grow as a result of increased market share and the benefits of recent acquisitions.

Our sales growth in 2023 was partially offset by a slight decline in sales at our U.S.

Automotive business, which was negatively impacted by moderating inflation levels, which adversely impacted the pricing environment year-over-year, and higher interest rates, which reduced sales to our independent owners.

Our earnings grew 11.3% in 2023, driven by sales growth in our Industrial and international automotive businesses combined with a 90 basis point improvement in gross margin, which resulted from our investments in pricing initiatives and strategic sourcing programs.

Our results of operations are summarized below for the years ended December 31, 2023 and 2022.

12 unchanged sentences

Other (59,764) (0.3) % (32,290) (0.1) % (27,474) 85.1 %

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

Total non-operating expenses 4,705 — % 41,597 0.2 % (36,892) (88.7) %

Income before income taxes 1,742,348 7.5 % 1,572,602 7.1 % 169,746 10.8 %

11 unchanged sentences

Total segment margin 9.9 % 9.4 %

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

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

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

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

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

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

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

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

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

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

Our net sales increase of 4.5% includes a 3.1% comparable sales increase and a 2.0% positive impact from acquisitions, slightly offset by an unfavorable impact of foreign currency and other of 0.6%.

Net sales for Automotive were $14.2 billion in 2023, a 4.2% increase from 2022.

The increase includes a 2.8% contribution from acquisitions and 2.1% growth in comparable sales, partially offset by a 0.7% unfavorable impact from foreign currency and other.

The increase in comparable sales is driven by higher sales in our international businesses, partially offset by a decline in comparable sales in our U.S.

Automotive business.

Our international businesses benefited from successfully executing strategic initiatives to grow market share and a favorable pricing environment driven by inflation levels, particularly in Europe.

These initiatives include investing in technology and enhancing our supply chains to better serve core customers, continuing to expand the rollout of private-label, NAPA branded products in Europe and focusing on the development of key customer accounts.

The decline in sales in our U.S.

Automotive business was due to a combination of factors, including higher interest rates, which reduced sales to our independent owners.

In addition, inflation levels, which produced a benefit to the price we charge to our customers in 2022, moderated throughout 2023, reducing sales year-over-year.

Further, lingering supply chain constraints negatively impacted inventory availability in certain product categories resulting in lower sales.

The net sales benefit Automotive received from acquisitions includes the impact of our entry into new markets in Spain and Portugal in 2022 and continued expansion in those markets in 2023.

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

dollar throughout 2023.

The strengthening of the Euro compared to the U.S.

dollar largely offset this unfavorable impact.

Net sales for Industrial were $8.8 billion in 2023, a 4.9% increase from 2022.

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

The increase includes 4.8% growth in comparable sales and a 0.6% contribution from acquisitions.

This was slightly offset by a 0.5% unfavorable impact of currency translation.

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

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

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

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

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.

Our initiatives include investments to drive improved pricing, technology and supply chain capabilities that are helping to win market share.

We attribute our success to our highly diversified product and service offerings, the size and scale or our global network, and strategic acquisitions, including the ongoing benefits from the 2022 acquisition of KDG.

Gross Profit & Gross Margin

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

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

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

and the unfavorable impact of foreign currency.

Gross profit increased $551 million, or approximately 7.1%, from 2022 and gross margin increased to 35.9% from 35.0% in 2022.

The increase in gross profit in 2023 was primarily driven by the increases in net sales.

The 90 basis point improvement in gross margin was driven by our strategic pricing and sourcing initiatives.

These initiatives include enhancing technology to generate better pricing data and analytics, which allows us to respond in real time to shifting pricing dynamics across each market we serve as well as strategies related to sourcing product more efficiently.

Operating Expenses

SG&A expenses represent 26.7% of net sales in 2023 compared to 26.1% of net sales in 2022.

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

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

Richards Company ("SPR").

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

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

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

The increase is primarily driven by planned increases in personnel costs due to wage inflation and global investments in information technology to support our ongoing strategic initiatives.

Our investments in technology include improving the digital experience for our employees and customers, enhancing our pricing technology, increasing the automation used in our distribution centers, and modernizing our payment platforms, among others.

We also are investing in our supply chain to ensure we have the right assortment for our customers, positioned closer to their places of business so that we can distribute product at a lower cost.

Finally, we incurred increased rent and facilities costs in 2023, primarily from inflation on lease renewals and costs for new automotive stores and outlets opened in the U.S.

In February 2024, we approved and announced a global restructuring designed to better align our assets and further improve the efficiency of the business.

This initiative includes an announced voluntary retirement offer in the U.S., along with a rationalization and optimization of certain distribution centers, stores and other facilities.

We expect to incur costs of between $100 million and $200 million related to the restructuring efforts in 2024.

As a result of the global restructuring, we expect to realize approximately $20 to $40 million of savings in 2024, and approximately $45 million to $90 million on an annualized basis.

We expect to substantially complete the initiative by the end of 2025.

The estimated charges that we expect to incur are subject to a number of assumptions, and actual amounts may differ materially from such estimates.

We may also incur additional charges not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of these initiatives.

Non-Operating Expenses and Income

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

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

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

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

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

We incurred $5 million in net non-operating expenses in 2023, a $37 million change from $42 million in net non-operating expenses in 2022.

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

The $37 million change includes the effects of a $27 million increase in other non-operating income driven by increased pension income, foreign currency gains, and income from cash surrender value of life insurance policies.

It also includes the effects of a $9 million decrease in net interest expense in 2023, which reflects the effects of funding more capital expenditures and adjusting our capital structure to reduce our dependency on higher-cost, short-term financing.

Segment Profit

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

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

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

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

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

Automotive segment profit for 2023 was $1.2 billion, a decrease of 1.4% from 2022.

Segment margin decreased 50 basis points to 8.2% in 2023 compared to 8.7% in 2022.

Automotive segment margin was negatively impacted by lower sales in the U.S., as described herein, combined with planned investments in wages and information technology.

Industrial segment profit increased 24.4% to $1.1 billion and its segment margin improved 200 basis points to 12.5% compared to 10.5% in 2022.

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 segment margin also benefited from the accelerated integration of KDG, allowing us to realize more synergies earlier than planned.

Our effective income tax rate was 24.4% as of December 31, 2023, compared to 24.8% in 2022.

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

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

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

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

For the year ended December 31, 2023, the rate decrease is primarily due to domestic tax credit benefits and statute-related adjustments.

Effective for years starting on or after December 31, 2023, certain countries have enacted legislation establishing a global 15% per-country minimum tax, which we do not expect to have a material impact to our financial statements.

Net income was $1.3 billion in 2023 compared to $1.2 billion in 2022.

Diluted earnings per share ("EPS") was $9.33 in 2023, up 12.3% compared to $8.31 in 2022.

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

Adjusted net income was $1.3 billion in 2023, an increase of 10.9% from $1.2 billion in 2022.

Adjusted diluted EPS was $9.33, a 11.9% increase compared to $8.34 in 2022.

1 unchanged sentence

Adjusted EBITDA was $2.2 billion in 2023, an increase of 7.9% from $2.0 billion in 2022.

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

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.

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

Non-GAAP Financial Measures

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

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

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

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

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 reconciliations from net income to adjusted EBITDA, net income to total segment profit and total segment margin and segment profit to segment EBITDA and adjusted EBITDA for each segment.

We believe that the presentation of adjusted net income, adjusted diluted EPS, total segment profit 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 operations and may distort our longer-term operating trends.

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

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

Year Ended December 31,

4 unchanged sentences

Product liability adjustment (3) — 28,730

Product liability damages award (4) — 77,421

Loss on software disposal (5) — 61,063

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

Transaction and other costs (4) — 80,601

9 unchanged sentences

Product liability adjustment (3) — 0.20

Product liability damages award (4) — 0.54

Loss on software disposal (5) — 0.42

Gain on equity investment (6) — (0.07)

Transaction and other costs (4) — 0.56

6 unchanged sentences

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

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

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

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

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

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

The impairment charge was driven by a decision to retire certain legacy trade names, classified as other intangible assets, prior to the end of their estimated useful lives as part of executing our KDG integration and rebranding strategy.

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

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

(5) 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 year ended December 31, 2022, we applied the statutory income tax rates to the taxable portion of all of our adjustments, which resulted in a tax impact of $137 thousand.

A portion of our transaction

costs included in our non-GAAP adjustments for the year ended December 31, 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:

Year Ended December 31,

7 unchanged sentences

Adjusted EBITDA $ 2,157,346 $ 1,999,329

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

(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 consolidated statement of income:

6 unchanged sentences

Total adjustments $ — $ 5,021

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

Year Ended December 31,

(in thousands) 2023 2022

GAAP net income $ 1,316,524 $ 1,182,701

Income taxes 425,824 389,901

Income before income taxes 1,742,348 1,572,602

Interest expense, net 64,469 73,886

Corporate expense 323,721 269,364

Intangible asset amortization 147,178 157,437

Other unallocated costs (1) — 5,021

Total segment profit $ 2,277,716 $ 2,078,310

GAAP net sales $ 23,090,610 $ 22,095,973

GAAP net income margin (2) 5.7 % 5.4 %

Total segment profit margin (3) 9.9 % 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:

Year Ended December 31,

(in thousands) 2023 2022

Segment Profit $ 1,174,880 $ 1,191,674

Depreciation 164,254 146,819

Other costs (1) — 35,708

Automotive segment EBITDA 1,339,134 1,374,201

Segment Profit 1,102,836 886,636

Depreciation 30,085 29,670

Other costs (1) — 22,348

Industrial segment EBITDA 1,132,921 938,654

Corporate expense (323,721) (269,364)

Depreciation 9,012 13,893

Other costs (1) — (58,055)

Other unallocated costs (2) — (5,021)

Corporate EBITDA (314,709) (318,547)

Total adjustments (2) — 5,021

Corporate adjusted EBITDA $ (314,709) $ (313,526)

Adjusted EBITDA $ 2,157,346 $ 1,999,329

(1) 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.

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

We expect continued revenue and earnings growth in 2024, despite uncertain economic conditions.

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

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

Positive trends related to miles driven, aging vehicles and continued limited new car inventory remain supportive of the sustained demand for our global Automotive business.

In addition, we believe our Industrial business benefits from the diversity of our product and service offerings.

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

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

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

We expect macroeconomic headwinds to result in continued pressure in 2024.

In particular, our customers are facing economic challenges from persistent cost and wage inflation, heightened interest rates and general economic uncertainty.

Our 2024 Automotive net sales growth includes the negative impact of new supplier incentives that will benefit our customers.

We negotiated these as part of changing certain supplier relationships.

The new supplier incentives we receive will be recognized as part of our inventory cost, reducing cost of sales, and the incentives we pass to our customers will be recognized as a reduction of net sales.

On a like-for-like basis, we do not anticipate any significant negative impact to gross profit from these new arrangements.

We expect this structure, among other factors, to continue to impact our overall sales growth throughout 2024.

We are committed to improving operating leverage and continued earnings growth through disciplined cost actions and initiatives.

We continue to execute our strategic pricing and sourcing initiatives and expect to drive improvement in gross margins.

We expect to continue to make global investments in information technology and supply chain to support our ongoing strategic initiatives and improve our product availability across all categories, which will impact our costs.

We will continue to manage inventory strategically to maximize our ability to quickly adjust with customer demand, which will impact our cash from operations.

We remain committed to driving sales

and earnings growth throughout 2024, while continuing to return cash to our shareholders.

Our outlook for 2024 reflects the ongoing confidence in our strategic plans and our ability to execute through the dynamic economic environment.

FINANCIAL CONDITION

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

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

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

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

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

Supply Chain Finance Programs

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

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

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

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

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

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

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

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

No guarantees are provided by 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 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 consolidated statement of cash flows.

We have been informed by the financial institutions that as of December 31, 2022 and 2021, suppliers elected to sell $3.1 billion and $2.7 billion, respectively, of our outstanding payment obligations to the financial institutions.

The amount settled through the SCF program was $3.7 billion for the year ended December 31, 2022.

Our cash balance at December 31, 2023 was $1.1 billion compared to cash of $653 million a year ago.

Accounts receivable increased $35 million, or 1.6%, from December 31, 2022 primarily due to higher net sales.

Inventory increased $235 million, or 5.3% from December 31, 2022 in association with new store openings in Automotive and improving inventory levels based on customer demand.

Accounts payable increased $43 million, or 0.8% from December 31, 2022 due to increased purchases to support higher net sales.

Total debt of $3.9 billion at December 31, 2023 increased $577 million from December 31, 2022 primarily due to the November 1, 2023 Senior Notes offering (as discussed below).

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

Sources and Uses of Cash

6 unchanged sentences

Operating Activities

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

The cash provided by operating activities decreased $31 million compared to 2022.

The decrease is driven by changes in working capital, primarily the result of extended payment terms received in 2021 and 2022 that did not repeat in the current year.

The decrease was partially offset by an increase in net income.

Investing Activities

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

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

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

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

In 2023, net cash used in investing activities included $513 million in capital expenditures to improve our supply chain, facilities, and technology environment and $309 million used for acquisitions of businesses and other investing activities.

Additionally, we received $80 million related to cash proceeds from the sale of our remaining investment in S.P.

Richards and other investments and $25 million proceeds from the sale of property, plant and equipment.

Financing Activities

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

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

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

Cash used in financing activities reflects dividends paid to shareholders of $527 million and repurchases of our common stock of $261 million.

This was partially offset by $531 million of cash after application of the net proceeds from debt primarily from the 2023 Senior Notes offering (described below).

In 2023, we announced a 6% increase in our regular quarterly cash dividend, we have paid a cash dividend every year since going public in 1948, and 2023 marks the 67th consecutive year of increased dividends paid to shareholders.

Notes and Other Borrowings

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 Consolidated Financial Statements for more information.

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

On November 1, 2023, we issued $425 million of unsecured 6.50% Senior Notes due 2028.

Simultaneously, we issued $375 million of unsecured 6.88% Senior Notes due 2033.

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

For both offerings, interest is payable semi-annually on November 1 and May 1 of each year, beginning on May 1, 2024.

On November 29, 2023, we entered into a commercial paper program that allows us to issue unsecured commercial paper notes up to $1.5 billion.

As of December 31, 2023, we had no borrowings outstanding under our commercial paper program.

At December 31, 2023, we had $3.9 billion of unsecured Senior Notes outstanding.

Approximately $1.6 billion of these borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings.

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

At December 31, 2023, we were in compliance with the covenants under our Syndicated Facility Agreement, dated as of October 30, 2020, as amended (the "Unsecured Revolving Credit Facility") and our outstanding unsecured Senior Notes.

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

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.

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

We ended the year with $2.6 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $1.1 billion of cash and cash equivalents).

Due to the workers’ compensation and insurance reserve requirements in certain states, we also had unused letters of credit of approximately $71 million outstanding at December 31, 2023.

1 unchanged sentence

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

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

Our total average cost of debt was 3.16% at December 31, 2023 and 2.33% at December 31, 2022.

7 unchanged sentences

(In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years Over 5 Years

Credit facilities $ 3,351,185 $ 252,029 $ 847,452 $ 743,264 $ 1,508,440

Debt $ 3,934,374 $ 355,298 $ 856,627 $ 823,143 $ 1,899,306

Operating leases 1,509,024 348,947 533,046 279,918 347,113

14 unchanged sentences

There were no other repurchase plans announced as of December 31, 2023.

Capital Resources

Our total debt outstanding at December 31, 2023 increased by $577 million from December 31, 2022, as discussed above.

We expect to continue to have access to the capital markets on both short-term and long-term bases when needed for liquidity purposes by issuing commercial paper or new long-term debt.

The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios.

The table below reflects our debt ratings by Standard & Poor’s ("S&P") and Moody’s as of December 31, 2023, which provide an enhanced understanding of our sources of liquidity and the effect of our ratings on our cost of debt.

A debt rating is not a recommendation by the rating agency to buy, sell, or

hold and each rating should be evaluated independently of any other rating.

Credit rating agencies review their ratings periodically and, therefore, the credit ratings assigned to us by each agency may be subject to revision at any time.

Debt Ratings S&P Moody's

Commercial paper A-2 P-2

Long-term debt BBB Baa1

Outlook Stable Stable

CRITICAL ACCOUNTING POLICIES

8 unchanged sentences

Consideration Received from Vendors

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

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

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

We frequently enter into agreements with our vendors that provide for inventory purchase incentives.

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

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

We recognize these incentives in earnings as a reduction of costs of goods sold as the corresponding inventory is sold to our customers.

While management believes we will continue to receive consideration from vendors in 2024 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives.

Consideration receivable from vendors, generally reflected in prepaid expenses and other current assets, was $928 million and $847 million as of December 31, 2023 and December 31, 2022, respectively.

Impairment of Goodwill and Other Intangible Assets

15 unchanged sentences

Large-cap stocks, 4% U.S.

Mid-cap stocks, 10% International stocks, 3% Emerging Market stocks and 40% Barclays U.S.

Mid-cap stocks, 5% U.S.

Small-cap stocks, 10% International stocks, 3% Emerging Market stocks and 40% Barclays U.S.

Gov/Credit Index).

1 unchanged sentence

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

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

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

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

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

23 unchanged sentences

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

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

In addition, we have estimated the economic lives of certain acquired tangible and intangible

assets and these lives are used to calculate depreciation and amortization expense.

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

5 unchanged sentences

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

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

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

While we believe our legal and product liability estimates are reasonable in light of all available information, if one or more legal claims were to greatly exceed our estimates, our results of operations and cash flows could be materially and adversely affected.

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

11 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-K

Item 7. Management’s Discussion and Analysis