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Item 2. Management’s Discussion and Analysis

2024-07-23 compared with 2024-04-18 · 119 added, 62 removed, 154 unchanged (54% 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 months ended March 31, 2024 are not necessarily indicative of results for the year ended December 31, 2024.

The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of results for the year ended December 31, 2024.

Forward-Looking Statements

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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 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

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Results of Operations

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,

Our second quarter year-over-year net sales growth of 0.8% was driven by growth in Automotive, partially offset by a modest decline at Industrial.

The macroeconomic environment remained challenging, with lagging industrial production driving soft demand and difficult trading conditions in Industrial.

Performance in our U.S.

and European automotive businesses also reflected moderating demand and a softer pricing environment from lower inflation.

Despite this, Automotive sales continued to benefit from the prior year European acquisitions and current quarter acquisitions in the U.S.

On April 30, we completed the acquisition of MPEC, our largest independent owner of NAPA Auto Parts stores in the U.S., operating 181 locations.

Second quarter gross margin improved 50 basis points year-over-year, however net income declined $49 million primarily due to restructuring costs, investments in technology, and increased personnel costs resulting from acquisitions and inflation.

Our results of operations are summarized below for the three and six months ending June 30, 2024 and 2023.

Three Months Ended June 30,

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

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Net income $ 295,544 5.0 % $ 344,494 5.8 % $ (48,950) (14.2) %

Three Months Ended March 31,

Three Months Ended June 30,

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

Diluted EPS $ 2.11 $ 2.44 $ (0.33) (13.5) %

Adjusted diluted EPS $ 2.44 $ 2.44 $ — — %

Total adjusted EBITDA $ 569,349 $ 561,417 $ 7,932 1.4 %

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Total segment margin 9.9 % 10.4 %

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.

Six Months Ended June 30,

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

Net sales $ 11,746,198 100.0 % $ 11,680,124 100.0 % $ 66,074 0.6 %

Cost of goods sold 7,491,240 63.8 % 7,531,980 64.5 % (40,740) (0.5) %

Gross profit 4,254,958 36.2 % 4,148,144 35.5 % 106,814 2.6 %

Operating expense:

Selling, administrative and other expenses 3,222,383 27.4 % 3,092,897 26.5 % 129,486 4.2 %

Depreciation and amortization 189,812 1.6 % 178,088 1.5 % 11,724 6.6 %

Provision for doubtful accounts 11,889 0.1 % 13,961 0.1 % (2,072) (14.8) %

Restructuring and other costs 112,802 1.0 % — — % 112,802 — %

Total operating expense 3,536,886 30.1 % 3,284,946 28.1 % 251,940 7.7 %

Non-operating (income) expense:

Interest expense, net 39,611 0.3 % 33,319 0.3 % 6,292 18.9 %

Other (32,921) (0.3) % (28,616) (0.2) % (4,305) 15.0 %

Total non-operating (income) expense 6,690 0.1 % 4,703 — % 1,987 42.2 %

Income before income taxes 711,382 6.1 % 858,495 7.4 % (147,113) (17.1) %

Income taxes 166,944 1.4 % 210,044 1.8 % (43,100) (20.5) %

Net income $ 544,438 4.6 % $ 648,451 5.6 % $ (104,013) (16.0) %

Six Months Ended June 30,

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

Diluted EPS $ 3.89 $ 4.58 $ (0.69) (15.1) %

Adjusted diluted EPS $ 4.66 $ 4.58 $ 0.08 1.7 %

Total adjusted EBITDA $ 1,085,872 $ 1,069,902 $ 15,970 1.5 %

Automotive segment profit $ 586,911 $ 593,767 $ (6,856) (1.2) %

Industrial segment profit $ 547,680 $ 545,359 $ 2,321 0.4 %

Total segment profit $ 1,134,591 $ 1,139,126 $ (4,535) (0.4) %

Automotive segment margin 8.0 % 8.3 %

Industrial segment margin 12.3 % 12.1 %

Total segment margin 9.7 % 9.8 %

For the three months ended June 30, 2024 our net sales increased slightly compared to 2023.

We experienced a 2.2% benefit from acquisitions, partially offset by a 0.9% decrease in comparable sales and a net unfavorable impact of foreign currency and other of 0.5%.

For the six months ended June 30, 2024 our net sales increased slightly compared to 2023.

We experienced a 2.1% benefit from acquisitions, partially offset by a 0.9% decrease in comparable sales and a net unfavorable impact of foreign currency and other of 0.6%.

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 as discussed below.

Automotive sales for the three months ended June 30, 2024 were $3.7 billion, an increase of 2.0% from 2023.

The increase consisted of a 3.1% benefit from acquisitions which was primarily driven by our European acquisitions and the MPEC acquisition, partially offset by a 0.6% decrease in comparable sales and a 0.5% unfavorable impact of foreign currency and other.

The slight decrease in comparable sales reflects softened demand in our U.S.

and European businesses and the negative impact of moderating inflation.

Automotive sales for the six months ended June 30, 2024 were $7.3 billion, an increase of 2.0% from 2023.

The increase consisted of a 3.0% benefit from acquisitions, partially offset by a 0.2% decrease in comparable sales and a 0.8% unfavorable impact of foreign currency and other.

Net sales for the three months ended June 30, 2024 were $2.2 billion, a decrease of 1.1% compared to 2023.

The decrease reflects a 1.6% decrease in comparable sales and a 0.2% unfavorable impact of foreign currency, slightly offset by a 0.7% 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.

Net sales for six months ended June 30, 2024 were $4.4 billion, a decrease of 1.6% compared to 2023.

The decrease reflects a 2.1% decrease in comparable sales and a 0.1% unfavorable impact of foreign currency, slightly offset by a 0.6% benefit from acquisitions.

The decrease in comparable sales reflects moderation in demand in certain customer sectors and continued softness in industrial production.

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

Gross Profit and Gross Margin

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.

Gross profit for the three months ended June 30, 2024 increased $46 million, or 2.1%, compared to last year, and gross margin increased 50 basis points to 36.6% compared to the same period of the previous year.

Gross profit for the six months ended June 30, 2024 increased $107 million, or 2.6% compared to the same period in the prior year.

Gross margin increased 70 basis points to 36.2% compared to that same period of the previous year.

These increases reflect the positive contributions of our strategic category management and sourcing initiatives.

We continue to invest in enhancing technology to generate better pricing data and analytics, which allows us to shift pricing dynamics across each market we serve.

Operating Expenses

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.

SG&A expenses represent 27.6% and 27.4% of sales for the three and six months ended June 30, 2024, respectively, compared to 26.7% and 26.5% in the prior year.

We experienced increased personnel and rent costs primarily related to acquisitions, annual merit wage increases and inflation.

In addition, we incurred $37 million of costs related to the global restructuring initiative and $25 million primarily related to the acquisition and integration of MPEC, which closed on April 30, 2024.

Refer to the Restructuring Footnote in the Notes to Condensed Consolidated Financial Statements for more information on our global restructuring initiative.

Segment Profit

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.

For the three months ended June 30, 2024, Automotive segment profit decreased 4.7% compared to the same period in 2023, and Automotive segment profit margin decreased to 8.4% compared to 9.0% in the same

period last year.

For six months ended June 30, 2024, Automotive segment profit decreased 1.2% compared to the same period in 2023, and Automotive segment profit margin decreased to 8.0% compared to 8.3% for the same period last year.

These decreases are primarily due to increased freight costs as well as personnel costs resulting from acquisitions and inflation.

For the three months ended June 30, 2024, Industrial segment profit decreased 2.3% compared to the same period in 2023 and Industrial segment profit margin was 12.4%, down 10 basis points from the prior year.

For the six months ended June 30, 2024, Industrial segment profit increased 0.4% compared to the same period last year and Industrial segment profit margin increased to 12.3% compared to 12.1% in the same period in the previous year.

The decrease in segment profit for the three months ended June 30, 2024 resulted from deleveraging expenses driven by lower sales.

The improvements in the six months ended June 30, 2024 occurred, despite a year-over-year sales decline of 1.6%, primarily due to expense management and ongoing execution of our supply chain initiatives and strategic category management.

Our effective income tax rate for the three and six month periods ended June 30, 2024 was 23.5% compared to 24.1% and 24.5% for the same periods in 2023, respectively.

The rate decrease is primarily due to expanded investment benefits and earnings mix shift across our global businesses.

For the three months ended June 30, 2024, net income was $296 million, a decrease of 14.2% compared to net income of $344 million for the same three month period of the prior year.

On a per share diluted basis, net income was $2.11, a decrease of 13.5% compared to $2.44 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.

These decreases are primarily due to $37 million of costs related to the global restructuring initiative and $25 million primarily related to the acquisition of MPEC.

Adjusted net income for the three months ended June 30, 2024 was $342 million, a decrease of 0.9% compared to net income of $344 million for the same period of 2023.

On a per share diluted basis, adjusted net income was $2.44, remaining flat compared to diluted earnings per share of $2.44 last year.

Second quarter 2024 adjusted EBITDA was $569 million, an increase of 1.4% from $561 million in 2023.

For the six months ended June 30, 2024, net income was $544 million, a decrease of 16.0% compared to net income of $648 million for the same three month period of the prior year.

On a per share diluted basis, net income was $3.89, a decrease of 15.1% compared to $4.58 in 2023.

These decreases are primarily due to $120 million of costs related to the global restructuring initiative and $25 million primarily related to the acquisition of MPEC.

Adjusted net income for the six months ended June 30, 2024 was $652 million an increase of 0.6% compared to net income of $648 million in 2023.

On a per share diluted basis, adjusted net income was $4.66, an increase of 1.7% compared to diluted earnings per share of $4.58 last year.

Second quarter 2024 adjusted EBITDA was $1.09 billion, an increase of 1.5% from EBITDA of $1.07 billion from 2023.

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

Non-GAAP Financial Measures

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We believe the non-GAAP metrics included herein also enhance the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not associated with our core operations.

For example, for the

three and six months ended June 30, 2024, adjusted net income, adjusted EBITDA and adjusted diluted earnings per share exclude costs relating to our global restructuring initiative and acquisition of Motor Parts and Equipment Corporation.

We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.

Three Months Ended March 31,

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

(in thousands) 2024 2023 2024 2023

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Restructuring and other costs (1) 37,247 — 120,289 —

Acquisition and integration related costs and other (2) 24,778 — 24,778 —

Total adjustments 62,025 — 145,067 —

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The table below represents amounts per common share assuming dilution:

Three Months Ended March 31,

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

(in thousands, except per share data) 2024 2023 2024 2023

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Restructuring and other costs (1) 0.27 — 0.86 —

Acquisition and integration related costs and other (2) 0.17 — 0.17 —

Total adjustments 0.44 — 1.03 —

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Weighted average common shares outstanding – assuming dilution 139,829 141,247 139,961 141,496

(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.

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

(2) Amount primarily reflects integration costs related to the completion of the acquisition of MPEC in April 2024, including professional services costs, personnel costs, and lease and other exit costs.

(3) 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 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.

For the three and six months ended June 30, 2024, we applied the statutory income tax rates to the taxable portion of all of our adjustments, which resulted in a tax impact of $16 million and $37 million.

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

Three Months Ended March 31,

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

(in thousands) 2024 2023 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 March 31,

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

(in thousands) 2024 2023 2024 2023

Cost of goods sold $ 7,487 $ — $ 7,487 $ —

Selling, administrative and other expenses 24,778 — 24,778 —

Restructuring and other costs 29,760 — 112,802 —

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

Three Months Ended March 31,

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

(in thousands) 2024 2023 2024 2023

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Intangible asset amortization 34,685 40,625 68,785 79,747

Other unallocated (loss) income, net (1) 83,042 —

Other unallocated income, net (1) 62,025 — 145,067 —

Total segment profit $ 590,816 $ 612,719 $ 1,134,591 $ 1,139,126

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

Three Months Ended March 31,

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

(in thousands) 2024 2023 2024 2023

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Depreciation 48,894 40,901 95,634 79,010

Other costs (2) — —

Automotive segment EBITDA 362,869 370,248 682,545 672,777

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Depreciation 8,119 7,080 16,267 14,130

Other costs (2) — —

Industrial segment EBITDA 284,960 290,452 563,947 559,489

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Financial Condition

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.

Our cash balance was $555 million as of June 30, 2024, a decrease of $547 million from December 31, 2023.

For the six months ended June 30, 2024, we had net cash provided by operating activities of $612 million, net cash used in investing activities of $762 million and net cash used in financing activities of $382 million.

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

We had $762 million in net cash used for investing activities, consisting of capital expenditures and acquisitions and other investing activities of $839 million, partially offset by proceeds from the sale of property, plant and equipment and the divestiture of businesses.

The financing activities consisted primarily of $272 million for dividends paid to our shareholders and $75 million of stock repurchases.

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Inventory increased $427 million, or 9.1%.

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

Accounts receivable and inventory were both impacted by second quarter increases in revenues and related product demand.

Inventory also increased $200 million as a result of the MPEC acquisition.

Accounts payable increased $432 million, or 7.9% 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.

Total debt of $3.9 billion at June 30, 2024 decreased $26 million, or 0.7%, from December 31, 2023.

Liquidity and Capital Resources

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).

We ended the quarter with $2.0 billion of total liquidity.

Total liquidity comprises of $555 million of cash and cash equivalents and $1.4 billion of our $1.5 billion revolving credit facility available after the effect of $100 million of commercial paper outstanding as of June 30, 2024.

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

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

We currently believe that the existing lines of credit, commercial paper program, 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 March 31, 2024, our total average cost of debt was 3.17%, and we remain in compliance with all covenants connected with our borrowings.

At June 30, 2024, our total average cost of debt was 3.25%, and we remain in compliance with all covenants connected with our borrowings.

In addition, we repaid the 155 million Australian dollar principal amount of our Series A Senior Unsecured Note, due June 30, 2024.

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 2024 will mark the 68th consecutive year of increased dividends paid to shareholders.

We have paid a cash dividend every year since going public in 1948, and 2024 marks 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