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Item 2. Management’s Discussion and Analysis

2024-04-18 compared with 2023-10-19 · 81 added, 158 removed, 135 unchanged (64% of the section changed)

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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, 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.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of results for the year ended December 31, 2024.

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 and the conflict in the Gaza strip;

volatility in oil prices;

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We conduct business in North America, Europe and Australasia from a network of more than 10,700 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 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.

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 approximately 62% of total revenues for the three months ended March 31, 2024.

Our Industrial Parts Group ("Industrial") operates in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for approximately 38% of our total revenues for the three months ended March 31, 2024.

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, as well as Net Income and EBITDA along with their adjusted measures.

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, 2023.

Results of Operations

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

Net sales $ 5,824,602 100.0 % $ 5,675,274 100.0 % $ 149,328 2.6 %

Cost of goods sold 3,715,361 63.8 % 3,695,607 65.1 % 19,754 0.5 %

Gross profit 2,109,241 36.2 % 1,979,667 34.9 % 129,574 6.5 %

Operating expenses:

Selling, administrative and other expenses 1,551,799 26.6 % 1,458,418 25.7 % 93,381 6.4 %

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

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 %

Non-operating expense (income):

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

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) %

Income before income taxes 465,060 8.0 % 417,936 7.4 % 47,124 11.3 %

Income taxes 113,862 2.0 % 105,578 1.9 % 8,284 7.8 %

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

Three Months Ended September 30,

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

Diluted EPS $ 2.49 $ 2.20 $ 0.29 13.2 %

Total adjusted EBITDA $ 564,747 $ 526,181 $ 38,566 7.3 %

Automotive segment profit $ 322,004 $ 309,349 $ 12,655 4.1 %

Industrial segment profit $ 282,807 $ 242,505 $ 40,302 16.6 %

Total segment profit $ 604,811 $ 551,854 $ 52,957 9.6 %

Automotive segment margin 8.9 % 8.9 %

Industrial segment margin 12.9 % 11.1 %

Total segment margin 10.4 % 9.7 %

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

Nine Months Ended September 30,

Our first quarter net sales grew slightly year-over-year, as our Automotive segment sales increased, which was mostly offset by lower sales in our Industrial segment.

Automotive segment sales increased due to the performance of our European and Australasia businesses, the benefit of prior year acquisitions, mostly in Europe, offset by year-over-year moderation in the benefit from inflation in the pricing environment.

Our industrial segment sales declined, as customers reduced their maintenance spending in light of weaker economic conditions.

Our continued execution of strategic pricing and sourcing initiatives drove a 100 basis point gross margin increase year over year.

First quarter net income was down 18.1% year over year, primarily due to restructuring and other costs of $83 million from the global restructuring we approved and initiated in February 2024.

Adjusted net income, which excludes restructuring costs, was up 2.3%, reflecting improved profitability in both of our segments due to the operating discipline in our operations.

Our first quarter results of operations are summarized below for the three months ended March 31, 2024 and 2023.

Three Months Ended March 31,

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

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Gross profit 2,074,655 35.9 % 2,013,401 34.9 % 61,254 3.0 %

Operating expenses:

Operating expense:

Selling, administrative and other expenses 1,574,927 27.2 % 1,511,244 26.2 % 63,683 4.2 %

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Provision for doubtful accounts 6,211 0.1 % 5,639 0.1 % 572 10.1 %

Total operating expenses 4,929,022 28.2 % 4,499,773 27.2 % 429,249 9.5 %

Non-operating expense (income):

Restructuring and other costs 83,042 1.4 % — — % 83,042 — %

Total operating expense 1,754,790 30.3 % 1,604,098 27.8 % 150,692 9.4 %

Non-operating (income) expense:

Interest expense, net 17,690 0.3 % 16,864 0.3 % 826 4.9 %

Other (23,006) (0.4) % (11,967) (0.2) % (11,039) 92.2 %

Total non-operating expense (income) 4,808 — % 31,421 0.2 % (26,613) (84.7) %

Total non-operating (income) expense (5,316) (0.1) % 4,897 0.1 % (10,213) (208.6) %

Income before income taxes 325,181 5.6 % 404,406 7.0 % (79,225) (19.6) %

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Net income $ 248,894 4.3 % $ 303,957 5.3 % $ (55,063) (18.1) %

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands, except per share data) 2024 2023 $ Change % Change

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Total segment margin 9.4 % 9.1 %

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 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.

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 $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.

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.

Our first quarter 2024 net sales increased slightly compared to 2023.

We experienced a 1.9% benefit from acquisitions, offset by a 0.9% decrease in comparable sales and a net unfavorable impact of foreign currency and other of 0.7%.

The decrease in comparable sales is primarily driven by a sales decline in our Industrial business due to the impact of weaker macro-economic conditions on our customers in 2024 and a difficult year-over-year comparison.

First quarter net sales for Automotive were $3.6 billion, an increase of 1.9% from 2023.

The increase consisted of a 2.8% benefit from acquisitions, a 0.2% increase in comparable sales and a 1.1% unfavorable impact of foreign currency and other.

The modest increase in comparable sales includes the positive contribution of continued demand for automotive parts in Europe and Australasia.

First quarter net sales for Industrial were $2.2 billion, a decrease of 2.2% compared to 2023.

The decrease reflects a 2.6% decrease in comparable sales and a 0.1% unfavorable impact of foreign currency, slightly offset by a 0.5% benefit from acquisitions.

The decrease in comparable sales reflects moderation in demand in certain customer sectors and longer than expected softness in industrial production, partially offset by the positive impact of pricing initiatives.

We experienced an adverse macro-economic environment when compared to 2023, which caused slowing global industrial demand.

Gross Profit and Gross Margin

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 primarily reflect the positive contributions of our strategic pricing and sourcing initiatives.

Gross profit increased $61 million, or 3.0%, during the first quarter of 2024 compared to last year, and gross margin increased 100 basis points to 35.9% compared to that same period of the previous year.

These increases reflect the positive contributions of 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 26.6% 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.

SG&A expenses represent 27.2% of sales in the first quarter of 2024 compared to 26.2% last year.

We experienced increased personnel and rent costs primarily due to annual merit wage increases and inflation, as well as made investments in information technology to support our ongoing strategic initiatives.

In addition, we incurred $83 million of restructuring and other costs from the global restructuring we approved and initiated in February 2024.

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

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 $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 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 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 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 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.

Automotive segment profit increased 3.2% in the first quarter compared to 2023, and Automotive segment profit margin increased to 7.6% compared to 7.5% last year.

These increases are driven by continued execution on our global growth and productivity initiatives.

These benefits were partially offset by higher personnel and rent costs in 2024 due to inflationary pressures.

Industrial segment profit increased 3.4% in the first quarter compared to 2023, and Industrial segment profit margin increased to 12.3% compared to 11.6% last year.

These improvements occurred, despite a year-over-year sales decline of 2.2%, primarily due to expense management and the ongoing execution of our supply chain initiatives and other strategic category management and pricing initiatives.

Our effective income tax rates were 23.5% and 24.8% for first quarter 2024 and 2023, respectively.

The rate decrease from 2023 is primarily due to a shift in the mix of earnings across our international businesses and expanded investment benefits.

First quarter 2024 net income was $249 million, a decrease of 18.1% compared to net income of $304 million for the same three month period of the prior year.

On a per share diluted basis, net income was $1.78, a decrease of 16.8% compared to $2.14 in 2023.

These decreases are primarily due to restructuring and other costs of $83 million from the global restructuring we approved and initiated in February 2024.

First quarter 2024 adjusted net income of $311 million increased 2.3% compared to 2023.

On a per share basis, first quarter 2024 net income on an adjusted basis of $2.22, increased 3.7% compared to $2.14 in 2023.

First quarter 2024 adjusted EBITDA was $517 million, an increase of 1.6% from $508 million from 2023.

The increases in these adjusted measures reflects the positive effects of executing our strategic pricing and other initiatives, as discussed more fully in the commentary above.

Non-GAAP Financial Measures

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.

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.

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 September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2024 2023

GAAP net income $ 248,894 $ 303,957

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

Gain on insurance proceeds (2) — — — (1,507)

Transaction and other costs (3) — 3,462 — 56,955

Restructuring and other costs (1) 83,042 —

Total adjustments 83,042 —

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The table below represents amounts per common share assuming dilution:

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

Three Months Ended March 31,

(in thousands, except per share data) 2024 2023

GAAP diluted earnings per share $ 1.78 $ 2.14

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

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

Transaction and other costs (3) — 0.02 — 0.40

Restructuring and other costs (1) 0.59 —

Total adjustments 0.59 —

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Weighted average common shares outstanding – assuming dilution 140,096 141,725

(1) Adjustment reflects a gain on the sale of real estate that had been leased to S.P.

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

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

(1) Amount reflects the global restructuring initiative which includes a voluntary retirement offer in the U.S., and rationalization and optimization of certain distribution centers, stores and other facilities.

(2) 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.

For the three months ended March 31, 2024, we applied the statutory income tax rates to the taxable portion of all of our adjustments, which resulted in a tax impact of $21 million.

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

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

Three Months Ended March 31,

(in thousands) 2024 2023

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

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

Three Months Ended March 31,

(in thousands) 2024 2023

Cost of goods sold $ — $ — $ — $ 5,000

Selling, administrative and other expenses — 3,462 — (50,848)

Non-operating income:

Other — — — (1,507)

Restructuring and other costs $ 83,042 $ —

Total adjustments $ 83,042 $ —

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

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

Three Months Ended March 31,

(in thousands) 2024 2023

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

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

Three Months Ended March 31,

(in thousands) 2024 2023

2 unchanged sentences

Other costs (2) — —

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

Automotive segment EBITDA 319,676 302,529

Segment Profit 270,839 261,987

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Other costs (2) — —

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

Industrial segment EBITDA 278,987 269,037

Corporate expense (83,762) (66,015)

Depreciation 1,622 2,934

Other costs (2) — (14,514) — (43,541)

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

Other unallocated costs (1) 83,042 —

Corporate EBITDA 902 (63,081)

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(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 $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 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.

Richards and other investments.

Our cash balance was $1.0 billion as of March 31, 2024, a decrease of $52 million from December 31, 2023.

For the three months ended March 31, 2024, we had net cash provided by operating activities of $318 million, net cash used in investing activities of $178 million and net cash used in financing activities of $175 million.

The cash provided by operating activities decreased as compared to prior year primarily driven by changes in working capital.

We had $178 million in net cash used for investing activities primarily for capital expenditures and acquisitions and other investing activities of $250 million.

The financing activities consisted primarily of $133 million for dividends paid to our shareholders and $38 million of stock repurchases.

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

Accounts receivable increased $202 million, or 9.1%, from December 31, 2023.

Inventory increased $59 million, or 1.3%.

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

Accounts payable increased $226 million, or 4.1% from December 31, 2023, in line with the increase in inventory.

Total debt of $3.9 billion at March 31, 2024 decreased $32 million, or 0.8%, from December 31, 2023.

Liquidity and Capital Resources

We ended the quarter with $2.2 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $655 million of cash and cash equivalents).

We ended the quarter with $2.5 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $1.0 billion 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 our ongoing operating activities and our anticipated cash commitments for investing and financing activities, such as capital expenditures and potential acquisitions, future debt obligations, and dividends.

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.

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

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.

At March 31, 2024, our total average cost of debt was 3.17%, and we remain in compliance with all covenants connected with our borrowings.

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.

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Our Board of Directors increased the cash dividend payable to an annual rate of $4.00 per share compared with the prior year dividend of $3.80 per share.

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.

We have paid a cash dividend every year since going public in 1948, and 2024 will mark the 68th consecutive year of increased dividends paid to shareholders.

Quantitative and Qualitative Disclosures about Market Risk

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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