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Item 7. Management’s Discussion and Analysis

2025-02-21 compared with 2024-02-22 · 253 added, 227 removed, 209 unchanged (70% of the section changed)

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Risk Factors” of this Form 10-K.

Genuine Parts Company is a global service organization engaged in the distribution of automotive and industrial replacement parts.

We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia.

Genuine Parts Company ("GPC") is a global service organization with a long history of growth and innovation dating back to our founding in Atlanta, Georgia, in 1928.

Over nearly a century, we’ve built a reputation for delivering excellent customer service, profitable growth, leading distribution capabilities and strong cash flow.

In 2024, 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 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.

Additionally, we strive to be a respected community member that gives back to the communities in which we operate.

Our strategic financial objectives are intended to align with our mission and drive value for all our stakeholders.

Our strategic financial objectives include:

(1) revenue growth in excess of market growth;

(2) continuously improving operating margins;

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

and (4) effective capital allocation.

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 and accounted for 63% 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 37% of total revenues.

Our mission is to be the employer, supplier, and investment of choice, while also being a valued corporate citizen in the communities we serve.

This mission drives our strategic financial objectives:

outpacing market revenue growth, improving operating margins, maintaining a strong balance sheet and cash flows, and allocating capital effectively.

As we look to the future, we are leaning into modernizing our supply chain and technology through digital innovation, and data-driven strategies to enhance our competitive edge.

By leveraging technology and optimizing supply chains, we are empowering our teams with cutting-edge tools to focus on delivering exceptional customer service and driving sustainable growth.

At the heart of it all is our commitment to excellence, supported by a culture of continuous improvement and a legacy of strong leadership that has guided us for nearly 100 years.

KEY PERFORMANCE INDICATORS

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

This metric is widely used by analysts, investors and competitors in our industry, although our calculation of the metric may not be comparable to similar measures disclosed by other companies, because not all companies and analysts calculate this metric in the same manner.

This metric is widely used by analysts, investors and competitors in our industry, however our calculation of the metric is not comparable to similar measures disclosed by other companies, because not all companies and analysts calculate this metric in the same manner.

Gross Profit and Gross Margin

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Selling, Administrative and Other Expenses ("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.

SG&A includes all personnel and personnel-related costs at our corporate offices, segment headquarters, distribution centers, stores and branches.

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

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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

Segment profit is calculated as net sales less costs of goods sold, operating expenses, and certain non-operating expenses attributable to the segment (e.g., foreign currency), excluding general corporate expenses, net interest expense, intangible asset amortization, and other unallocated amounts that are primarily driven by corporate initiatives.

Operating expenses include SG&A at our segments.

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.

Segment EBITDA and Segment EBITDA Margin

Segment EBITDA is the measure we use to assess the profitability of our company’s business segments and it is calculated as net sales less cost of goods sold and total other operating expenses of the business segment, and it

excludes amounts reflected in Corporate EBITDA, net interest expense, depreciation and amortization and other unallocated costs.

Segment EBITDA as a percentage of Segment Net Sales is referred to as Segment EBITDA margin.

We changed our segment profit and segment profit margin measures in the fourth quarter of 2024 to Segment EBITDA and Segment EBITDA margin, respectively.

We believe that Segment EBITDA and Segment EBITDA margin are useful measures because they allow management, analysts, investors, and other interested parties to evaluate the profitability of our segments and they align with how management evaluates performance and sets compensation plans.

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

Net Income and EBITDA

We believe that net income and EBITDA, along with their adjusted measures, are useful measures of operating performance.

EBITDA helps us assess the underlying profitability of our company’s business operations before the effects of certain net expenses that directly arise from our capital investment decisions (depreciation, amortization), financing decisions (interest), and tax strategies (income taxes).

We believe that net income and EBITDA, along with their respective adjusted measures, are useful measures of operating performance.

Net income represents our profitability after the effects of all operating and other expenses and income.

The adjusted measures of EBITDA and net income eliminate certain non-recurring charges and other items that we do not believe are reflective of our ongoing business performance.

The adjusted measures of net income and EBITDA eliminate certain non-recurring charges and other items that we do not believe are reflective of our ongoing business performance.

These adjusted measures help us evaluate our operating performance on a comparable basis from period-to-period so that we can better understand the ongoing factors and trends affecting our business operations.

We also use adjusted EBITDA, together with net income and segment profit, to forecast our performance, evaluate our actual results against our forecasts and compare our results to others in the industries that we serve.

We also use adjusted net income, together with adjusted EBITDA, to forecast our performance, evaluate our actual results against our forecasts and compare our results to others in the industries that we serve.

Adjusted EBITDA is also a measure of performance included in our executive incentive compensation plans.

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Our discussion of our results focuses on 2024 and 2023 and year-to-year comparisons between those periods.

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.

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.

Discussions of 2022 results and year-to-year comparisons between 2023 and 2022 results that are not included in this Form 10-K 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, 2023.

In 2024, our net sales of $23.5 billion increased 1.7% year-over-year.

Our sales growth was driven primarily by acquisitions in our Automotive segment and two additional selling days.

Sales growth was partially offset by the negative impact of weak market conditions in both segments, as persistent high interest rates and economic uncertainty led to lower customer demand which resulted in flat Automotive comparable sales and declines in Industrial comparable sales in 2024.

Economic activity in the U.S.

manufacturing sector, measured by the Purchasing Mangers' Index ("PMI"), contracted through most of 2024, negatively impacting purchases from our Industrial customers.

In 2024, net income totaled $904 million, down 31.3%, driven by costs associated with our global restructuring program, which was designed to better align our assets and cost structure to the current economic environment.

During the year, we incurred $221 million in restructuring and other costs under this program, and a charge of $62 million to cost of goods sold to write down certain existing inventory associated with a new global rebranding and relaunch of a key tool and equipment offering.

Our earnings in 2024 were also negatively impacted by higher SG&A costs, which were driven by increases in personnel and rent costs due to inflationary pressure and planned investments in technology to modernize our systems and digital platforms.

The investments we are making in technology, as well as new supply chain capabilities, are driving higher year-over-year depreciation and interest expense.

These costs were partially offset by improved gross margin due to the benefits from acquired businesses and ongoing initiatives around pricing and sourcing and from our global restructuring program.

Our results of operations are summarized below for the years ended December 31, 2024 and 2023.

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Provision for doubtful accounts 30,001 0.1 % 25,947 0.1 % 4,054 15.6 %

Restructuring and other costs 213,520 0.9 % — — % 213,520 100.0 %

Total operating expenses 7,294,399 31.1 % 6,543,619 28.3 % 750,780 11.5 %

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Diluted EPS $ 6.47 $ 9.33 $ (2.86) (30.7) %

Adjusted diluted EPS $ 8.16 $ 9.33 $ (1.17) (12.5) %

Automotive segment EBITDA $ 1,283,531 $ 1,339,134 $ (55,603) (4.2) %

Industrial segment EBITDA $ 1,102,188 $ 1,132,921 $ (30,733) (2.7) %

Corporate EBITDA $ (389,217) $ (314,709) $ (74,508) 23.7 %

Adjusted EBITDA $ 1,996,502 $ 2,157,346 $ (160,844) (7.5) %

Automotive segment profit $ 1,174,880 $ 1,191,674 $ (16,794) (1.4) %

Industrial segment profit $ 1,102,836 $ 886,636 $ 216,200 24.4 %

Total segment profit $ 2,277,716 $ 2,078,310 $ 199,406 9.6 %

Automotive segment margin 8.2 % 8.7 %

Industrial segment margin 12.5 % 10.5 %

Total segment margin 9.9 % 9.4 %

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 segment EBITDA margin 8.7 % 9.4 %

Industrial segment EBITDA margin 12.6 % 12.8 %

Corporate EBITDA margin (1.7) % (1.4) %

Adjusted EBITDA margin 8.5 % 9.3 %

Our consolidated net sales increase of 1.7% includes a 2.6% benefit from acquisitions, which was partially offset by a 0.8% comparable sales decrease as described in the following segment discussions.

Net sales for Automotive were $14.8 billion in 2024, a 3.7% increase from 2023, driven by acquisitions, particularly 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 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 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.

In 2024, we completed strategic acquisitions of more than 500 stores in the U.S., mostly from our independent owners, including the acquisition of our two largest, Motor Parts & Equipment Corporation ("MPEC") and Walker Automotive Supply, Inc.

These store acquisitions were in strategic markets and enable us to capture commercial benefits, leverage synergies and further drive revenue growth.

In 2024, our comparable sales were flat due to softer demand, as macro-economic headwinds such as high interest rates and persistent cost inflation continued to impact customer buying behavior.

The impact on net sales from foreign currency translation was negligible.

Net sales for Industrial were $8.7 billion in 2024, a 1.4% decrease from 2023, driven by a 2.1% decrease in comparable sales and a 0.1% unfavorable impact of currency translation.

This was partially offset by a 0.8% contribution from acquisitions.

Our comparable sales decreased as we experienced softness in industrial production and an ongoing moderation in demand in many customer end markets.

We continued to experience an adverse macro-economic environment when compared to 2023, as persistently high interest rates and economic uncertainty led customers to delay discretionary capital expenditures.

Economic activity in the U.S.

manufacturing sector, measured by PMI, remained contractionary through most of 2024.

Gross Profit & Gross Margin

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 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.

Gross profit increased $233 million, or approximately 2.8%, from 2023 due primarily to an increase in net sales.

This was partially offset by a charge of $62 million to write down certain existing inventory associated with a new global rebranding and relaunch of a key tool and equipment offering.

Gross margin increased to 36.3% from 35.9% in 2023, a 40 basis point improvement, which was primarily driven by the benefit of acquired businesses.

Inventory Rebranding Strategic Initiative

We are implementing a strategic realignment of our global tools and equipment inventory strategy.

This strategy targets a new generation of installers by reducing our global product offerings to two primary tiers and launching a new global branding initiative in 2025, which we expect to enhance market penetration across all regions.

As part of this initiative, we have elected to liquidate certain otherwise marketable tools and equipment inventory in 2025 to accelerate the realization of the program benefits, thereby improving operational efficiency and enhancing the projected financial outcomes.

By streamlining our product range in this key category, we enhance warehouse space for new inventory and enable our sales force to focus on the new strategy, facilitating earlier market capture.

Accordingly, we have recognized a $62 million non-cash charge reflected in cost of goods sold to write down the inventory to its market value, assuming liquidation.

Selling, Administrative and Other Expenses

SG&A expenses increased $476 million, or 7.7%, from 2023.

Approximately 50% of the increase was driven by personnel expense and 10% by higher rent expense, reflecting inflationary pressures on annual wage increases and lease renewals and higher operating costs due to acquisitions, primarily from the addition of more U.S.

automotive stores.

Additionally, 10% of the increase was attributable to our investments in technology as we continue to enhance our digital capabilities to improve the customer experience, increase automation in distribution centers, and modernize payment platforms.

The remainder of the increase was attributable to other SG&A categories, as we incurred higher operating costs from acquired businesses, and we continued to invest in our supply chain to optimize product assortment and positioning, which helps reduce distribution costs.

Partially offsetting the increase were $43 million in real estate sale gains, primarily from sale-leaseback transactions to enhance our financial operational flexibility on properties we continue to use in our ongoing operations.

SG&A as a percentage of sales increased to 28.3% in 2024 from 26.7% in 2023.

The 160 basis point increase was primarily driven by approximately 80 basis points from inflationary pressures on certain operating expenses, 40 basis points from increased operating expenses from acquisitions and 25 basis points from fixed cost deleverage.

Comparable sales were flat for Automotive and down for Industrial, which drove fixed cost deleveraging.

Restructuring and Other Costs

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

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

We incurred a $62 million inventory charge, described above, and $221 million of restructuring and other costs related to the initiative, which includes $91 million of severance costs.

We recognized approximately $45 million in cost savings related to this global restructuring initiative for 2024.

In 2025, we are expanding our restructuring initiatives and expect to incur additional restructuring and other costs in the range of $150 to $180 million.

These global restructuring initiatives are expected to generate approximately $100 to $125 million in savings for 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.

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

When fully annualized in 2026, we expect that our 2024 and 2025 restructuring efforts and cost actions will deliver approximately $200 million of cost savings.

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

Depreciation and Amortization

Depreciation and amortization expenses increased $57 million related to ongoing investments in technology and supply chain initiatives.

Non-Operating Expenses and Income

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.

We incurred $53 million in net non-operating expenses in 2024, a $48.5 million increase from $5 million in net non-operating expenses in 2023.

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 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.

The $49 million expense increase includes the effects of a $32 million increase in net interest expense in 2024, due to increased borrowings, including the senior notes issued in August 2024, and a $16 million decrease in other non-operating income driven by decreased pension income, foreign currency gains, and income from cash surrender value of life insurance policies.

Our effective income tax rate was 23.1% as of December 31, 2024, compared to 24.4% in 2023.

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 $1.3 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.

EBITDA was $2.2 billion in 2023, an increase of 8.2% from $2.0 billion in 2022.

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

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.

For the year ended December 31, 2024, the rate decrease is primarily due to expanded investment and domestic credit benefits.

Net Income and Adjusted Net Income

Net income was $904 million in 2024, a decrease of 31.3% compared to $1.3 billion in 2023.

Diluted earnings per share ("EPS") was $6.47 in 2024, down $2.86 compared to $9.33 in 2023.

Adjusted net income was $1.1 billion in 2024, a decrease of 13.4% compared to $1.3 billion in 2023.

Adjusted diluted EPS was $8.16, down $1.17 compared to $9.33 in 2023.

The year over year declines in these metrics are primarily due to $221 million in restructuring and other costs, $62 million in inventory liquidation charges, and higher SG&A expenses driven by inflationary pressures and investments in technology.

These impacts were partially offset by improved gross profit and margin from acquisitions and pricing and sourcing initiatives and the benefits from the restructuring program.

Segment EBITDA

2024 EBITDA decreased 4.2% or $56 million from 2023, and EBITDA margin decreased 70 basis points to 8.7% in 2024 compared to 9.4% in 2023, driven by the following factors.

Automotive segment sales grew $522 million or 3.7% due primarily to acquisitions.

Gross profit increased $275 million or 4.9% and gross margin improved 50 basis points primarily due to strategic acquisitions in our U.S.

business, including MPEC and Walker.

Our gross profit improvement was offset by rising operating expenses.

Operating expenses increased $330 million, with approximately 75% of the increase driven by personnel cost increases of $200 million and rent increases of $53 million.

Operating expenses increased partly due to acquisitions, however the EBITDA and EBITDA margin declines largely were driven by persistent cost inflation, primarily in wages and rent, in our existing businesses.

2023 EBITDA was $1.3 billion, a decrease of 2.6% from 2022, and EBITDA margin decreased 70 basis points to 9.4% in 2023 compared to 10.1% in 2022, driven by the following factors.

Automotive segment sales increased 4.2% driven by 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.

Gross profit increased $295 million, or 5.5%, in 2023 due to sales growth.

This improvement was offset by a $330 million increase in operating expenses, including $160 million attributed to higher personnel expenses that were driven by persistent cost inflation and the effects of acquisitions.

2024 EBITDA decreased 2.7% to $1.1 billion from 2023, and EBITDA margin declined 20 basis points to 12.6% in 2024 compared to 12.8% in 2023, driven by the following factors.

Industrial segment sales declined $126 million or 1.4%, primarily driven by a decline of 2.1% in comparable sales due to contractionary market conditions and partially offset by 0.8% benefit from acquisitions.

Gross profit increased $21 million or 0.8% in 2024 due to a 70 basis point improvement in gross margin primarily driven by acquisitions and strategic pricing and sourcing initiatives, partially offset by a decline in sales.

In 2024, operating expenses increased due to continued pressure

from ongoing cost inflation and to a lesser extent acquisitions, particularly personnel costs and rent, which increased $38 million and $15 million, respectively.

2023 EBITDA increased 20.7% to $1.1 billion in 2023, and EBITDA margin improved 170 basis points to 12.8% compared to 11.1% in 2022, driven by the following factors.

Industrial segment sales increased 4.9% driven by 4.8% growth in comparable sales due to sales initiatives and strong market conditions and a 0.6% contribution from acquisitions.

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

Gross profit increased $246 million, or 10.3%, in 2023 due to 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.

This improvement was partially offset by a $52 million increase in operating expenses, primarily driven by a $32 million increase in personnel expenses due to inflationary pressures and a $15 million increase in technology expense for planned investments.

Corporate EBITDA and other Segment Reconciling items

Corporate EBITDA primarily reflects costs related to our corporate headquarter's broad support to our business units and other costs that are managed centrally and not allocated to business segments.

These include personnel and other costs for company-wide functions such as executive leadership, human resources, technology, cybersecurity, legal, corporate finance, internal audit, and risk management, as well as asbestos-related product liability costs and A/R Sales Agreement fees.

Our operational objective is to maintain Corporate EBITDA within a range of 1.5% to 2.0% of net sales.

Corporate EBITDA amounted to a loss of $389 million, or 1.7% of net sales, in 2024, compared to a loss of $315 million, or 1.4% of net sales, in 2023.

Corporate EBITDA increased primarily due to the impact of a higher asbestos liability costs and ongoing investments in technology, each of which accounted for approximately 30% of the increase.

Other unallocated costs represent restructuring and other costs and acquisition and integration related costs and other.

These increased year-over-year due to the global restructuring initiative that was approved in February 2024 and the significant increase in acquisition activity in 2024.

EBITDA was $1.7 billion in 2024, a decrease of 22.1% from $2.2 billion in 2023.

Adjusted EBITDA was $2.0 billion in 2024, a decrease of 7.5% from $2.2 billion in 2023.

Results were affected by $221 million of costs related to the global restructuring initiative, $33 million of acquisition and integration costs, and a $62 million inventory liquidation charge (described above).

Decreases in adjusted EBITDA margin were primarily driven by an 80 basis point negative impact from inflationary pressures, particularly personnel costs and rent.

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).

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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 also include reconciliations from net income to adjusted EBITDA.

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

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

For example, for the year ended December 31, 2024, certain of the non-GAAP metrics contained herein exclude costs relating to our global restructuring initiative and acquisition of Motor Parts & Equipment Corporation, which are one-time events that do not recur in the ordinary course of business.

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:

The table below reconciles GAAP net income to adjusted net income:

Year Ended December 31,

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GAAP net income $ 904,076 $ 1,316,524

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

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

Product liability adjustment (3) — 28,730

Transaction and other costs (4) — 80,601

Restructuring and other costs (1) 221,007 —

Acquisition and integration related costs and other (2) 33,126 —

Inventory rebranding strategic initiative (3) 61,596 —

Total adjustments 315,729 —

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GAAP diluted EPS $ 6.47 $ 9.33

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

Gain on insurance proceeds (2) — (0.01)

Product liability adjustment (3) — 0.20

Transaction and other costs (4) — 0.56

Restructuring and other costs (1) 1.58 —

Acquisition and integration related costs and other (2) 0.24 —

Inventory rebranding strategic initiative (3) 0.44 —

Total adjustments 2.26 —

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Weighted average common shares outstanding - assuming dilution 139,670 141,034

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

(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.

(1) Adjustment reflects costs related to 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, including related inventory liquidation costs.

The inventory liquidation costs, recognized in cost of goods sold, total $7 million and arise from facility closures.

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

(3) Adjustment reflects a charge to write down certain existing inventory associated with a new global rebranding and relaunch of a key tool and equipment offering.

The existing inventory that will be liquidated is comprised of otherwise saleable inventory, and the liquidation does not arise from our normal, recurring operational activities.

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

For the 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;

For the year ended December 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 $80 million.

A portion of our transaction costs

included in our non-GAAP adjustments for the year ended December 31, 2024 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:

The table below reconciles GAAP net income to adjusted EBITDA:

Year Ended December 31,

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Selling, administrative and other expenses 33,126 —

Non-operating expenses (income):

Other — 7,493

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)

Restructuring and other costs 213,520 —

Total adjustments $ 315,729 $ —

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.

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 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.

We expect revenue and earnings growth in 2025 to be pressured by weak market conditions, particularly in the first half of the year.

Despite the current macroeconomic conditions, we expect gross margin improvement in 2025 driven by the benefit of acquired businesses and are committed to improving operating leverage through disciplined cost actions and initiatives as evidenced by our ongoing global restructuring.

We will continue to focus on disciplined capital allocation, increasing our dividend as we continue to grow earnings, pursuing strategic bolt-on acquisitions that expand our capabilities and geographic footprint and continuing to invest in technology and supply chain to enhance the customer experience and improve efficiencies in our business.

In 2025, we intend to reduce our net outstanding debt, further strengthening our balance sheet.

We are confident that when the macroeconomic conditions begin to improve that these disciplined cost actions and initiatives will propel our sales and earnings growth.

FINANCIAL CONDITION

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.

Our balance sheet reflects our disciplined financial management and strategic investments to support our growth and operational priorities.

Key changes in cash, working capital, and debt demonstrate our commitment to maintaining financial flexibility while meeting customer demands and driving long-term value creation.

Our cash balance at December 31, 2024 was $480 million compared to cash of $1.1 billion a year ago.

Accounts receivable decreased $41 million, or 1.8%, from December 31, 2023 primarily due to foreign currency translation.

Inventory increased $838 million, or 17.9% from December 31, 2023 as a result of our U.S.

automotive acquisitions and enhanced investment in our product assortment and a more strategic approach to ensuring we have the right products available to meet customer demands.

Accounts payable increased $424 million, or 7.7% from December 31, 2023 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).

Total debt of $4.3 billion at December 31, 2024 increased $378 million from December 31, 2023 primarily due to the August 7, 2024 Senior Notes offering (as discussed below), partially offset by the repayment of our Series J Senior Unsecured Notes upon their maturity.

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 shareholders through dividends and share repurchases.

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.

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The cash provided by operating activities decreased $184 million compared to 2023.

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.

The decrease is driven by lower net income and changes in working capital, including higher inventory levels compared to prior year as a result of our U.S.

automotive acquisitions and enhanced investment in our product assortment and a more strategic approach to ensuring we have the right products available to meet customer demands.

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 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.

In 2024, net cash used in investing activities included $1.1 billion used for acquisitions and $567 million used for capital expenditures to improve our supply chain, facilities, and technology environment.

Financing Activities

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).

Cash provided by financing activities reflects $399 million of net proceeds from debt primarily from the August 7, 2024 Senior Notes offering, dividends paid to shareholders of $555 million and repurchases of our common stock of $150 million.

In 2024, we announced a 5% increase in our regular quarterly cash dividend, 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.

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.

Planned Pension Plan Termination

On April 29, 2024, our Board of Directors approved the termination of the frozen U.S.

qualified defined benefit plan (pension plan), effective September 30, 2024.

As part of the plan settlement process, pension plan participants not currently receiving payments will have the opportunity to select a single lump sum payment or an annuity from the insurance company that will pay and administer future benefit payments.

We intend to settle the pension plan and transfer the management and delivery of continuing benefits associated with the pension plan to a third-party insurance company by the end of 2025 or early 2026, subject to government approvals.

As of December 31, 2024 the benefit obligation for the pension plan was determined based on the amount expected to be required to settle the obligations.

Assumptions utilized considered the portion of the obligations expected to be settled through participant elections of lump sum payments or annuities and the cost to purchase annuities, which are subject to change upon actual plan settlement.

Upon settlement, we expect to recognize a non-cash, pre-tax pension settlement charge in 2025 or early 2026 equal to the actuarial losses accumulated in accumulated other comprehensive income ("AOCI"), which totaled approximately $735 million ($540 million, net of tax) as of December 31, 2024.

Once settled, we will be fully relieved of all obligations under the pension plan.

Furthermore, in connection with this anticipated transaction, we have adjusted our investment strategy for our plan assets, which will significantly reduce our pension income in 2025.

Notes and Other Borrowings

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 November 1 and May 1 of each year, beginning on May 1, 2024.

On August 7, 2024, we issued $750 million of unsecured 4.950% Senior Notes due 2029.

Interest is payable on February 15 and August 15 of each year, beginning February 15, 2025.

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.

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Approximately $1.2 billion of these borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings.

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.

At December 31, 2024, we were in compliance with the covenants under our outstanding unsecured Senior Notes, as well as our covenants under the Syndicated Facility Agreement, dated as of October 30, 2020, as amended (the "Unsecured Revolving Credit Facility").

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

We ended the year with $2.0 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $480 million 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, 2024.

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Our total average cost of debt was 3.62% at December 31, 2024 and 3.16% at December 31, 2023.

Total interest expense, net of interest income, for all borrowings was $64 million and $74 million in 2023 and 2022, respectively.

Total interest expense, net of interest income, for all borrowings was $97 million and $64 million i n 2024 and 2023, respectively.

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

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We do not have significant agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Additionally, we guarantee the borrowings of certain independently owned automotive parts stores (independents) and certain other affiliates in which we have a noncontrolling equity ownership interest (affiliates).

Our maximum exposure to loss as a result of our involvement with these independents and affiliates is generally equal to the total borrowings subject to our guarantee.

At December 31, 2023, the total borrowings of the independents and affiliates subject to guarantee by the company were approximately $954 million.

Additionally, we guarantee the borrowings of certain independently owned automotive parts stores (independents).

Our maximum exposure to loss as a result of our involvement with these independents is generally equal to the total borrowings subject to our guarantee.

At December 31, 2024, the total borrowings of the independents subject to guarantee by the company were approximately $575 million, down from $954 million at December 31, 2023.

These loans generally mature over periods from one to six years.

Our amount of commitment expiring in 2025 is approximately $375 million.

To date, we have had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

To date, we have had no significant losses in connection with guarantees of independents’ borrowings.

Share Repurchases

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Impairment of Goodwill and Other Intangible Assets

At least annually, we evaluate property, plant and equipment, goodwill and other intangible assets for potential impairment indicators.

At least annually, we evaluate goodwill and other intangible assets for potential impairment indicators.

Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance, among other factors.

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Employee Benefit Plans

Effective December 31, 2013, our U.S.

pension plan was amended to freeze benefit plan accruals for participants and provide for immediate vesting of accrued benefits.

On April 29, 2024, our Board of Directors approved the termination of the frozen U.S.

plan, effective September 30, 2024.

Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for further information on the termination of the frozen U.S.

Our benefit plan committees in the U.S.

and Canada establish investment policies and strategies and regularly monitor the performance of our pension plan assets.

plan, our largest pension plan, is well-funded, with a fund status of 131% at December 31, 2023.

and Canada establish investment policies and strategies and regularly monitors the performance of our pension plan assets.

plan, our largest pension plan, is well-funded, with a funded status of 128% at December 31, 2024.

The plans in Europe are unfunded and therefore there are no plan assets.

Our pension plan investment strategy implemented by our management is to achieve long-term objectives and invest the pension assets in accordance with the applicable pension legislation in the U.S.

and Canada, as well as fiduciary standards.

The long-term primary objectives for the pension plan funds are to provide for a reasonable amount of long-term growth of capital without undue exposure to risk, protect the assets from erosion of purchasing power and provide investment results that meet or exceed the pension plans’ actuarially assumed long-term rates of return.

Our investment strategy with respect to pension plan assets is to generate a return in excess of the passive portfolio benchmark (38% U.S.

Large-cap stocks, 4% 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).

We make several critical assumptions in determining our pension plan assets and liabilities and related pension income.

Beginning in 2024, the U.S.

pension plan strategy implemented by our management is to minimize funded status volatility through the plan termination process.

Our investment strategy with respect to U.S.

pension plan assets is to fully hedge plan obligations on a termination basis.

In connection with the planned U.S.

pension plan termination process, we acquired certain annuity contracts from an insurance company using existing plan assets to fund on-going obligations under the U.S.

pension plan prior to termination.

The Canadian pension plan investment strategy implemented by our management is to achieve long-term objectives and invest the pension assets in accordance with the applicable pension legislation in Canada, as well as fiduciary standards.

The long-term primary objectives for the Canadian pension plan is to provide for a reasonable amount of long-term growth of capital without undue exposure to risk, protect the assets from erosion of purchasing power and provide investment results that meet or exceed the pension plans’ actuarially assumed long-term rates of return.

The Company's Investment Strategy with respect to Canadian pension plan assets is to generate a return in excess of the passive portfolio benchmark (50% Equity, 40% Fixed Income, 10% Other).

We make several assumptions in determining our pension plan assets and liabilities and related pension income.

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

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The discount rate is chosen as the rate at which pension obligations could be effectively settled and is based on capital market conditions as of the measurement date.

Prior to December 31, 2024, the discount rate for the U.S.

pension plan was calculated using a bond matching approach to select specific bonds that would satisfy the projected benefit payments.

As a result of the of the decision to terminate the U.S.

pension plan, as of December 31, 2024, the benefit obligation for the U.S.

pension plan was determined based on the amount expected to be required to settle the obligations.

Assumptions utilized included the portion of the obligations expected to be settled through elections of lump sum payments or annuities and the cost to purchase annuities, which are subject to change upon actual plan settlement.

We have matched the timing and duration of the expected cash flows of our pension obligations to a yield curve generated from a broad portfolio of high-quality fixed income debt instruments to select our discount rate.

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These sensitivities reflect the effect of changing one assumption at a time and assume no changes to the design of the pension plans.

Effective December 31, 2013, our defined benefit pension plans were amended to freeze benefit plan accruals for participants and provide for immediate vesting of accrued benefits.

Net periodic benefit income for our defined benefit pension plans was $54 million, $44 million, and $27 million for the years ended December 31, 2024, 2023 and 2022, respectively.

The income associated with the pension plans in 2023, 2022 and 2021 reflects the impact of the freeze.

The income associated with the pension in 2024, 2023 and 2022 reflects the impact of the U.S.

The termination of our U.S.

plan will significantly reduce pension income prospectively.

Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding employee benefit plans.

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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.

Legal and Product Liabilities

We accrue for potential losses related to legal disputes, litigation, product liabilities, and regulatory matters when it is probable (the future event or events are likely to occur) that we will incur a loss and the amount of the loss can be reasonably estimated.

To calculate product liabilities, we estimate potential losses relating to pending claims and also estimate the likelihood of additional, similar claims being filed against us in the future.

Legal and Asbestos Liabilities

We accrue for potential losses related to legal disputes, litigation, asbestos liability, and regulatory matters when it is probable (the future event or events are likely to occur) that we have incurred a loss and the amount of the loss can be reasonably estimated.

To calculate our asbestos liability, we estimate potential losses relating to pending claims and also estimate the likelihood of additional, similar claims being filed against us in the future.

To estimate potential losses on claims that could be filed in the future, we consider claims pending against us, claim filing rates, the number of codefendants and the extent to which they share in settlements, and the amount of loss by claim type.

The estimated losses for pending and potential future claims are calculated on a discounted basis using risk-free interest rates derived from market data about monetary assets with maturities comparable to those of the projected product liabilities.

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.

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

Self Insurance

We are self-insured for the majority of our group health insurance costs.

A reserve for claims incurred but not reported is developed by analyzing historical claims data provided by our claims administrators.

These reserves are included in accrued expenses in the accompanying consolidated balance sheets as the expenses are expected to be paid within one year.

Long-term insurance liabilities consist primarily of reserves for our workers’ compensation program.

In addition, we carry various large risk deductible workers’ compensation policies for the majority of workers’ compensation liabilities.

We record the workers’ compensation reserves based on an analysis performed by an independent actuary.

The analysis calculates development factors, which are applied to total reserves as provided by the various insurance companies who underwrite the program.

While we believe that the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect workers’ compensation costs.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to the Summary of Significant Accounting Policies Footnote in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.

We use an actuarial specialist to assist with measuring our asbestos liability.

While we believe our legal and asbestos 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 our asbestos liability.

RECENT ACCOUNTING PRONOUNCEMENTS

Changes to U.S.

GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”) to the FASB Accounting Standards Codification (“ASC”).

We consider the applicability and impact of all ASUs and any not listed below were assessed and determined to not be applicable or are expected to have an immaterial impact on our Condensed Consolidated Financial Statements.

Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses

In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses.

This standard requires disclosure in the notes to financial statements, at each interim and annual reporting period, of specified information about certain costs and expenses including purchases of inventory, employee compensation, depreciation and intangible asset amortization included in each relevant expense caption.

Also required is a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated.

This guidance is effective for all public entities for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027, and early adoption is permitted.

This guidance should be applied either prospectively to financial statements issued after the effective date of this update or retrospectively to all prior

periods presented in the financial statements.

We are currently evaluating the impact of adopting this standard on our financial statements and disclosures.

Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.

This standard requires disclosures of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss, an amount and description of other segment items by reportable segment, and all annual disclosures currently required by Topic 280 to be included in interim periods.

This standard also requires disclosure of the title and position of the CODM.

We adopted this standard effective December 31, 2024.

Income Taxes (Topic 740):

Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

The standard requires disclosure of specific categories in the rate reconciliation and additional information for reconciling items, income before tax expense disaggregated between domestic and foreign, income tax expense disaggregated by federal, state and foreign, as well as further information on income taxes paid.

The guidance is effective for our Annual Report on Form 10-K for the year ended December 31, 2025, with early adoption permitted.

The guidance should be applied on a prospective basis, with retrospective application permitted.

We are currently evaluating the impact of adopting this standard on our financial statements and disclosures.

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