GENUINE PARTS CO (GPC)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under “Item 1A. Risk Factors” of this Form 10-K.

OVERVIEW

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 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

We consider a variety of performance and financial measures in assessing our business, and the key performance indicators used to measure our results are summarized below.

Comparable Sales

Comparable sales refer to period-over-period comparisons of our net sales excluding the impact of acquisitions, divestitures, foreign currency and other. Our calculation of comparable sales is computed using total business days for the period and is inclusive of both company-owned stores and sales to our independent owner's stores. We consider this metric useful to investors because it provides greater transparency into management’s view and assessment of our core ongoing operations. 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

Gross profit represents net sales less cost of goods sold. Gross profit as a percentage of net sales is referred to as gross margin. Cost of goods sold primarily represents the cost of merchandise sold, including the cost of inbound freight from suppliers. It also includes the effects of supplier volume incentives and inventory adjustments. Our gross profit is variable in nature and generally follows changes in net sales. We believe that gross profit and gross margin are useful measures because they allow management, analysts, investors and others to evaluate the profit we generate from our sales, before operating and other expenses and income.

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. Additional costs in SG&A include our facilities, freight and delivery, marketing, advertising, technology, digital, legal and professional costs. Freight and delivery costs are the shipping and handling costs incurred related to delivering merchandise to our customers. We believe SG&A is a useful measure because it allows management, analysts, investors and others to understand the level of costs we incur operating our business each period.

Segment 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

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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 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. 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).

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 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. See “Non-GAAP Financial Measures” below for a discussion of how we define adjusted net income and adjusted EBITDA and a reconciliation of adjusted net income, EBITDA and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

CONSOLIDATED RESULTS OF OPERATIONS

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

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

Net Sales

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.

Automotive

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. 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. ("Walker"). 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.

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Industrial

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 $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.

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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 $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 $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.

Income Taxes

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, 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

Automotive

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.

Industrial

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

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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

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).

Non-GAAP Financial Measures

The following tables set forth reconciliations of net income and diluted EPS to adjusted net income and adjusted diluted EPS, respectively, to account for the impact of adjustments. We also include 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.

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

The table below represents amounts per common share assuming dilution:

(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, 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

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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 reconciles GAAP net income to adjusted EBITDA:

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

The table below clarifies where the adjusted items are presented in the consolidated statement of income:

OUTLOOK

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 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 $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

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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.

Sources and Uses of Cash

A summary of our consolidated statements of cash flows is as follows:

Operating Activities

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

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

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.

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.

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On November 29, 2023, we entered into a commercial paper program that allows us to issue unsecured commercial paper notes up to $1.5 billion. As of December 31, 2024, we had no borrowings outstanding under our commercial paper program.

At December 31, 2024, we had $4.3 billion of unsecured Senior Notes outstanding. 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, 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 $2.0 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. Our unused letters of credit expire within one year, but have automatic renewal clauses. 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.

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 $97 million and $64 million in 2024 and 2023, respectively. Refer to the Debt Footnote in the Notes to Consolidated Financial Statements for more information.

Contractual and Other Obligations

The following table summarizes our material cash requirements at December 31, 2024 that we expect to be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies and uncertain tax positions. The amounts presented are based on various estimates and actual results may vary from the amounts presented.

Purchase orders or contracts for the purchase of inventory and other goods and services are not included in our estimates. We are not able to determine the aggregate amount of such purchase orders that represent contractual cash requirement, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons. 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). 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’ borrowings.

Share Repurchases

In 2024, we repurchased approximately 1.1 million shares of our common stock for an aggregate $150 million, and we had remaining authority to purchase approximately 7.5 million shares of our common stock at December 31, 2024. We expect to remain active in our share repurchase program and continue to return capital to our shareholders. There were no other repurchase plans announced as of December 31, 2024.

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Capital Resources

Our total debt outstanding at December 31, 2024 increased by $378 million from December 31, 2023, as discussed above. We expect to continue to have access to the capital markets on both short-term and long-term bases when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios. The table below reflects our debt ratings by Standard & Poor’s ("S&P") and Moody’s as of December 31, 2024, which provide an enhanced understanding of our sources of liquidity and the effect of our ratings on our cost of debt. A debt rating is not a recommendation by the rating agency to buy, sell, or

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

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements. For further information on the critical accounting policies, see the Summary of Significant Accounting Policies Footnote in the Notes to Consolidated Financial Statements.

Consideration Received from Vendors

We frequently enter into agreements with our vendors that provide for inventory purchase incentives. Generally, we earn inventory purchase incentives upon achieving specified volume purchasing levels or other similar criteria. We accrue for the receipt of these incentives as a deduction from our inventory carrying cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year. We recognize these incentives in earnings as a reduction of costs of goods sold as the corresponding inventory is sold to our customers. While management believes we will continue to receive consideration from vendors in 2025 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives. Consideration receivable from vendors, generally reflected in prepaid expenses and other current assets, was $973 million and $928 million as of December 31, 2024 and December 31, 2023, respectively.

Impairment of Goodwill and Other Intangible Assets

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. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating for impairment also requires us to estimate future operating results and cash flows which requires judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Refer to the Goodwill and Other Intangible Assets Footnote of the Notes to Consolidated Financial Statements for further information on the results of our annual goodwill impairment testing.

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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. plan.

Our benefit plan committees in the U.S. and Canada establish investment policies and strategies and regularly monitors the performance of our pension plan assets. Our U.S. 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.

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. Other assumptions we make relate to employee demographic factors such as rate of compensation increases, mortality rates, retirement patterns and turnover rates. Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding these assumptions.

Based on the investment policy for the pension plans, as well as an asset study that was performed based on our asset allocations and future expectations, our expected rate of return on plan assets for measuring 2025 pension income is 5.33% for the plans. The asset study forecasted expected rates of return for the approximate duration of our benefit obligations, using capital market data and historical relationships.

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. Based upon this cash flow matching analysis, we selected a weighted average discount rate for the plans of 5.15% at December 31, 2024.

Our pension income for 2024 is determined at the December 31, 2023 measurement date. A 25 basis point increase in discount rate would result in an approximate $38 million decrease on our projected benefit obligation. A 25 basis point decrease in discount rate would result in approximate $40 million increase on our projected benefit obligation. A 25 basis point change in discount rate would have an immaterial impact on our pension income. A 25 basis point change in expected return on asset would have an approximate $6 million impact on our pension income. These sensitivities reflect the effect of changing one assumption at a time and assume no changes to the design of the pension plans.

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 in 2024, 2023 and 2022 reflects the impact of the U.S. plan freeze. The termination of our U.S. plan will significantly reduce pension income prospectively.

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

Business Combinations

When we acquire businesses, we apply the acquisition method of accounting and recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions. Goodwill is measured as the excess of the fair value of the consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method requires us to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period. We must complete the accounting during the measurement period, which cannot exceed one year. Adjustments made during the measurement period could have a material impact on our financial condition and results of operations.

We typically measure customer relationships and other intangible assets using an income approach. Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates and EBITDA margins). 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. 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 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 asbestos liability. 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

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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.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under “Item 1A. Risk Factors” of this Form 10-K.

OVERVIEW

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.

In 2023, we conducted business in North America, Europe and Australasia from more than 10,700 locations. Our Automotive business operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand in 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.

KEY PERFORMANCE INDICATORS

We consider a variety of performance and financial measures in assessing our business, and the key performance indicators used to measure our results are summarized below.

Comparable Sales

Comparable sales refer to period-over-period comparisons of our net sales excluding the impact of acquisitions, divestitures, foreign currency and other. Our calculation of comparable sales is computed using total business days for the period and is inclusive of both company-owned stores and sales to our independent owner's stores. We consider this metric useful to investors because it provides greater transparency into management’s view and assessment of our core ongoing operations. 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.

Gross Profit and Gross Margin

Gross profit represents net sales less cost of goods sold. Gross profit as a percentage of net sales is referred to as gross margin. Cost of goods sold primarily represents the cost of merchandise sold, including the cost of inbound freight from suppliers. It also includes the effects of supplier volume incentives and inventory adjustments. Our gross profit is variable in nature and generally follows changes in net sales. We believe that gross profit and gross margin are useful measures because they allow management, analysts, investors and others to evaluate the profit we generate from our sales, before operating and other expenses and income.

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. Additional costs in SG&A include our facilities, freight and delivery, marketing, advertising, technology, digital, legal and professional costs. Freight and delivery costs are the shipping and handling costs incurred related to delivering merchandise to our customers. We believe SG&A is a useful measure because it allows management, analysts, investors and others to understand the level of costs we incur operating our business each period.

Segment Profit and Segment Margin

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.

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We believe that segment profit and segment margin are useful measures because they allow management, analysts, investors, and other interested parties to evaluate the profitability of our segments, after the effects of operating and other expenses and income associated with those businesses. Refer to the Segment Data Footnote in the Notes to Consolidated Financial Statements for additional information.

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). 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. 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. Adjusted EBITDA is also a measure of performance included in our executive incentive compensation plans. See “Non-GAAP Financial Measures” below for a discussion of how we define adjusted net income and adjusted EBITDA and a reconciliation of adjusted net income, EBITDA and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

CONSOLIDATED RESULTS OF OPERATIONS

Our discussion of our results focuses on 2023 and 2022 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.

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

Net Sales

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%.

Automotive

Net sales for Automotive were $14.2 billion in 2023, a 4.2% increase from 2022. The increase includes a 2.8% contribution from acquisitions and 2.1% growth in comparable sales, partially offset by a 0.7% unfavorable impact from foreign currency and other.

The increase in comparable sales is driven by higher sales in our international businesses, partially offset by a decline in comparable sales in our U.S. Automotive business. Our international businesses benefited from successfully executing strategic initiatives to grow market share and a favorable pricing environment driven by inflation levels, particularly in Europe. These initiatives include investing in technology and enhancing our supply chains to better serve core customers, continuing to expand the rollout of private-label, NAPA branded products in Europe and focusing on the development of key customer accounts. The decline in sales in our U.S. Automotive business was due to a combination of factors, including higher interest rates, which reduced sales to our independent owners. In addition, inflation levels, which produced a benefit to the price we charge to our customers in 2022, moderated throughout 2023, reducing sales year-over-year. Further, lingering supply chain constraints negatively impacted inventory availability in certain product categories resulting in lower sales.

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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.

Industrial

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.

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. and Europe.

In February 2024, we approved and announced a global restructuring designed to better align our assets and further improve the efficiency of the business. This initiative includes an announced voluntary retirement offer in the U.S., along with a rationalization and optimization of certain distribution centers, stores and other facilities. We expect to incur costs of between $100 million and $200 million related to the restructuring efforts in 2024. As a result of the global restructuring, we expect to realize approximately $20 to $40 million of savings in 2024, and approximately $45 million to $90 million on an annualized basis. We expect to substantially complete the initiative by the end of 2025. The estimated charges that we expect to incur are subject to a number of assumptions, and actual amounts may differ materially from such estimates. We may also incur additional charges not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of these initiatives.

Non-Operating Expenses and Income

We incurred $5 million in net non-operating expenses in 2023, a $37 million change from $42 million in net non-operating expenses in 2022. This category primarily includes net interest expense, pension and investment income, foreign currency gains and losses, and fees associated with our Accounts Receivable Sales Agreement ("A/R Sales Agreement"). The $37 million change includes the effects of a $27 million increase in other non-operating income driven by increased pension income, foreign currency gains, and income from cash surrender value of life insurance policies. It also includes the effects of a $9 million decrease in net interest expense in 2023, which reflects the effects of funding more capital expenditures and adjusting our capital structure to reduce our dependency on higher-cost, short-term financing.

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Segment Profit

Automotive

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

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.

Income Taxes

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

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.

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

Non-GAAP Financial Measures

The following tables set forth reconciliations of net income and diluted EPS to adjusted net income and adjusted diluted EPS, respectively, to account for the impact of adjustments. We also include reconciliations from net income to adjusted EBITDA, net income to total segment profit and total segment margin and segment profit to segment EBITDA and adjusted EBITDA for each segment. We believe that the presentation of adjusted net income, adjusted diluted EPS, total segment profit and adjusted EBITDA, which are not calculated in accordance with GAAP, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of our core operations. We consider these metrics useful to investors because they provide greater transparency into management’s view and assessment of our ongoing operating performance by removing items management believes are not representative of our operations and may distort our longer-term operating trends. We believe these measures to be useful to enhance the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not associated with our core operations. We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.

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

The table below represents amounts per common share assuming dilution:

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

(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.

(5)We determine the tax effect of non-GAAP adjustments by considering the tax laws and statutory income tax rates applicable in the tax jurisdictions of the underlying non-GAAP adjustments, including any related valuation allowances. For the year ended December 31, 2022, we applied the statutory income tax rates to the taxable portion of all of our adjustments, which resulted in a tax impact of $137 thousand. A portion of our transaction

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costs included in our non-GAAP adjustments for the year ended December 31, 2022 were not deductible for income tax purposes; therefore, no statutory income tax rate was applied to such costs.

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

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

The table below clarifies where the adjusted items are presented in the consolidated statement of income:

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

(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.

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

(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.

OUTLOOK

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

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and earnings growth throughout 2024, while continuing to return cash to our shareholders. Our outlook for 2024 reflects the ongoing confidence in our strategic plans and our ability to execute through the dynamic economic environment.

FINANCIAL CONDITION

Our cash balance at December 31, 2023 was $1.1 billion compared to cash of $653 million a year ago. Accounts receivable increased $35 million, or 1.6%, from December 31, 2022 primarily due to higher net sales. Inventory increased $235 million, or 5.3% from December 31, 2022 in association with new store openings in Automotive and improving inventory levels based on customer demand. Accounts payable increased $43 million, or 0.8% from December 31, 2022 due to increased purchases to support higher net sales. Total debt of $3.9 billion at December 31, 2023 increased $577 million from December 31, 2022 primarily due to the November 1, 2023 Senior Notes offering (as discussed below).

LIQUIDITY AND CAPITAL RESOURCES

Our strong financial position and cash flow performance have provided us with the capacity to invest in acquisitions, capital expenditures and technology to support our global growth strategy, as well as return value to our shareholders through dividends and share repurchases. Our sources of capital consist primarily of cash flows from operations, supplemented as necessary by issuing commercial paper, private and public issuances of debt and bank borrowings.

Sources and Uses of Cash

A summary of our consolidated statements of cash flows is as follows:

Operating Activities

The cash provided by operating activities decreased $31 million compared to 2022. The decrease is driven by changes in working capital, primarily the result of extended payment terms received in 2021 and 2022 that did not repeat in the current year. The decrease was partially offset by an increase in net income.

Investing Activities

We continue to invest in our business through strategic acquisitions and capital expenditures to broaden our product and service offerings, improve our business operations and expand our global footprint. In 2023, net cash used in investing activities included $513 million in capital expenditures to improve our supply chain, facilities, and technology environment and $309 million used for acquisitions of businesses and other investing activities. Additionally, we received $80 million related to cash proceeds from the sale of our remaining investment in S.P. Richards and other investments and $25 million proceeds from the sale of property, plant and equipment.

Financing Activities

Cash used in financing activities reflects dividends paid to shareholders of $527 million and repurchases of our common stock of $261 million. This was partially offset by $531 million of cash after application of the net proceeds from debt primarily from the 2023 Senior Notes offering (described below). In 2023, we announced a 6% increase in our regular quarterly cash dividend, we have paid a cash dividend every year since going public in 1948, and 2023 marks the 67th consecutive year of increased dividends paid to shareholders.

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.

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.

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On November 29, 2023, we entered into a commercial paper program that allows us to issue unsecured commercial paper notes up to $1.5 billion. As of December 31, 2023, we had no borrowings outstanding under our commercial paper program.

At December 31, 2023, we had $3.9 billion of unsecured Senior Notes outstanding. Approximately $1.6 billion of these borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings. At December 31, 2023, we were in compliance with the covenants under our Syndicated Facility Agreement, dated as of October 30, 2020, as amended (the "Unsecured Revolving Credit Facility") and our outstanding unsecured Senior Notes. Any failure to comply with our debt covenants or restrictions could result in a default under our financing arrangements or require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could create cross defaults under other debt arrangements and have a material adverse effect on our business, financial condition, results of operations and cash flows.

We ended the year with $2.6 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $1.1 billion of cash and cash equivalents). Due to the workers’ compensation and insurance reserve requirements in certain states, we also had unused letters of credit of approximately $71 million outstanding at December 31, 2023. Our unused letters of credit expire within one year, but have automatic renewal clauses. 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.

Our total average cost of debt was 3.16% at December 31, 2023 and 2.33% at December 31, 2022. Total interest expense, net of interest income, for all borrowings was $64 million and $74 million in 2023 and 2022, respectively. Refer to the Debt Footnote in the Notes to Consolidated Financial Statements for more information.

Contractual and Other Obligations

The following table summarizes our material cash requirements at December 31, 2023 that we expect to be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies and uncertain tax positions. The amounts presented are based on various estimates and actual results may vary from the amounts presented.

Purchase orders or contracts for the purchase of inventory and other goods and services are not included in our estimates. We are not able to determine the aggregate amount of such purchase orders that represent contractual cash requirement, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons. 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. These loans generally mature over periods from one to six years. Our amount of commitment expiring in 2024 is approximately $342 million. To date, we have had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

Share Repurchases

In 2023, we repurchased approximately 1.8 million shares of our common stock for an aggregate $261 million, and we had remaining authority to purchase approximately 8.5 million shares of our common stock at December 31, 2023. We expect to remain active in our share repurchase program and continue to return capital to our shareholders. There were no other repurchase plans announced as of December 31, 2023.

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Capital Resources

Our total debt outstanding at December 31, 2023 increased by $577 million from December 31, 2022, as discussed above. We expect to continue to have access to the capital markets on both short-term and long-term bases when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios. The table below reflects our debt ratings by Standard & Poor’s ("S&P") and Moody’s as of December 31, 2023, which provide an enhanced understanding of our sources of liquidity and the effect of our ratings on our cost of debt. A debt rating is not a recommendation by the rating agency to buy, sell, or

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

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements. For further information on the critical accounting policies, see the Summary of Significant Accounting Policies Footnote in the Notes to Consolidated Financial Statements.

Consideration Received from Vendors

We frequently enter into agreements with our vendors that provide for inventory purchase incentives. Generally, we earn inventory purchase incentives upon achieving specified volume purchasing levels or other similar criteria. We accrue for the receipt of these incentives as a deduction from our inventory carrying cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year. We recognize these incentives in earnings as a reduction of costs of goods sold as the corresponding inventory is sold to our customers. While management believes we will continue to receive consideration from vendors in 2024 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives. Consideration receivable from vendors, generally reflected in prepaid expenses and other current assets, was $928 million and $847 million as of December 31, 2023 and December 31, 2022, respectively.

Impairment of Goodwill and Other Intangible Assets

At least annually, we evaluate property, plant and equipment, 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. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating for impairment also requires us to estimate future operating results and cash flows which requires judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Refer to the Goodwill and Other Intangible Assets Footnote of the Notes to Consolidated Financial Statements for further information on the results of our annual goodwill impairment testing.

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Employee Benefit Plans

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. Our U.S. plan, our largest pension plan, is well-funded, with a fund status of 131% at December 31, 2023. 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. We believe the most critical of these assumptions are the expected rate of return on plan assets and the discount rate. Other assumptions we make relate to employee demographic factors such as rate of compensation increases, mortality rates, retirement patterns and turnover rates. Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding these assumptions.

Based on the investment policy for the pension plans, as well as an asset study that was performed based on our asset allocations and future expectations, our expected rate of return on plan assets for measuring 2024 pension income is 7.61% for the plans. The asset study forecasted expected rates of return for the approximate duration of our benefit obligations, using capital market data and historical relationships.

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. 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. Based upon this cash flow matching analysis, we selected a weighted average discount rate for the plans of 5.30% at December 31, 2023.

Our pension income for 2023 is determined at the December 31, 2022 measurement date. A 25 basis point increase in discount rate would result in an approximate $44 million decrease on our projected benefit obligation. A 25 basis point decrease in discount rate would result in approximate $46 million increase on our projected benefit obligation. A 25 basis point change in discount rate would have an immaterial impact on our pension income. A 25 basis point change in expected return on asset would have an approximate $6 million impact on our pension income. 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 $44 million, $27 million, and $19 million for the years ended December 31, 2023, 2022 and 2021, respectively. The income associated with the pension plans in 2023, 2022 and 2021 reflects the impact of the freeze. Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding employee benefit plans.

Business Combinations

When we acquire businesses, we apply the acquisition method of accounting and recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions. Goodwill is measured as the excess of the fair value of the consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method requires us to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period. We must complete the accounting during the measurement period, which cannot exceed one year. Adjustments made during the measurement period could have a material impact on our financial condition and results of operations.

We typically measure customer relationships and other intangible assets using an income approach. Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates and EBITDA margins). 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

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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. 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.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under “Item 1A. Risk Factors” of this Form 10-K.

OVERVIEW

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.

In 2022, we conducted business in North America, Europe and Australasia from more than 10,600 locations. Our Automotive business operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand in 2022 and accounted for 62% of total revenues for the year. Our Industrial business operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore and accounted for 38% of total revenues.

Our 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) improved operating margins; (3) strong balance sheet and cash flows; and (4) effective capital allocation.

KEY PERFORMANCE INDICATORS

We consider a variety of performance and financial measures in assessing our business, and the key performance indicators used to measure our results are summarized below.

Comparable Sales

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

Gross Profit and Gross Margin

Gross profit represents net sales less cost of goods sold. Gross profit as a percentage of net sales is referred to as gross margin. Cost of goods sold primarily represents the cost of merchandise sold, including the cost of inbound freight from suppliers. It also includes the effects of supplier volume incentives and inventory adjustments. Our gross profit is variable in nature and generally follows changes in net sales. We believe that gross profit and gross margin are useful measures because they allow management, analysts, investors and others to evaluate the profit we generate from our sales, before operating and other expenses and income.

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

SG&A includes all personnel and personnel-related costs at our segment headquarters, distribution centers, stores and branches, which accounts for more than 60% of total SG&A. Additional costs in SG&A include our facilities, freight and delivery, marketing, advertising, technology, digital, legal and professional costs. Freight and delivery costs are the shipping and handling costs incurred related to delivering merchandise to our customers.

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

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operating and other expenses and income associated with those businesses. Refer to the Segment Data Footnote in the Notes to Consolidated Financial Statements for additional information.

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). 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. 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. Adjusted EBITDA is also a measure of performance included in our executive incentive compensation plans. See “Non-GAAP Financial Measures” below for a discussion of how we define adjusted net income and adjusted EBITDA and a reconciliation of adjusted net income, EBITDA and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

CONSOLIDATED RESULTS OF OPERATIONS

Our discussion of our results focuses on 2022 and 2021 and year-to-year comparisons between those periods. Discussions of 2020 results and year-to-year comparisons between 2021 and 2020 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, 2021.

In 2022, we experienced strong and consistent customer demand and a favorable pricing environment for our services. These factors, combined with our Industrial segment's $1.3 billion acquisition of Kaman Distribution Group ("KDG"), contributed to 17.1% revenue growth over 2021. Our strong revenue growth, expense leverage and strategic initiatives drove a 60 basis point improvement in segment margin and provided $1.5 billion in cash from operations, a 16.6% increase from 2021. These results allowed us to continue investing in our businesses through strategic acquisitions and capital expenditures.

Our results of operations are summarized below for the years ended December 31, 2022 and 2021.

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Net Sales

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

Strong customer demand, which was consistent throughout 2022, and a favorable pricing environment were the primary drivers of our comparable sales growth. We deployed strategic pricing increases throughout 2022 to offset the dynamic product cost increases we faced across our businesses from elevated inflationary pressure, particularly in Automotive. Separately, we continued to invest in strategic acquisitions in both segments, with the KDG acquisition in particular providing a significant sales benefit in 2022. Our sales growth was negatively impacted by the U.S. dollar strengthening relative to other foreign currencies during the year, most significantly against the Euro.

Automotive

Net sales for Automotive were $13.7 billion in 2022, an 8.9% increase from 2021. The increase includes 9.0% growth in comparable sales and a 4.5% contribution from acquisitions, partially offset by a 4.6% unfavorable impact from foreign currency and other.

Our growth in sales was driven by continued solid demand for automotive parts, a strong pricing environment due to elevated inflation in product costs, and footprint expansion through acquisitions, such as our entry into new markets in Spain and Portugal. Several underlying factors driving customer demand for automotive parts in the markets we serve include increases in the average age of cars on the road and miles driven, and the lack of availability of new cars due to supply chain constraints.

Industrial

Net sales for Industrial were $8.4 billion in 2022, a 33.2% increase from 2021. The increase includes 17.3% growth in comparable sales and a 16.8% contribution from acquisitions primarily driven by the addition of KDG. This was slightly offset by a 0.9% unfavorable impact of currency translation.

Our growth in comparable sales reflects the positive impact of our ongoing sales initiatives and strength in numerous industry segments in North America throughout much of 2022. We experienced double-digit sales growth across all 14 customer sectors we served, with the largest percent increases in oil and gas, mining, and aggregate and cement. The increase in sales volume drove the majority of our growth, in addition to a contribution of low single-digit product cost inflation. Our acquisition of KDG contributed significantly to our sales growth, and it enhanced our position as a market leader in the industrial supply chain for MRO and OEM customer support and advanced engineering and automation solutions.

Gross Profit & Gross Margin

Gross profit increased $1.1 billion, or approximately 16.7% from 2021, primarily driven by the increase in net sales, and gross margin decreased slightly to 35.0% from 35.2% in 2021. The positive contributions to gross margin from our pricing and sourcing initiatives, among others, were more than offset by the negative impact of lower supplier incentives as a percentage of sales; the relative sales growth of Industrial as a component of total sales, which generates lower gross margins than Automotive; and the unfavorable impact of foreign currency.

Operating Expenses

SG&A expenses represent 26.1% of net sales in 2022 compared to 27.4% of net sales in 2021. The decrease in SG&A expense as a percent of net sales was primarily driven by leveraging strong core sales growth, cost

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reduction and productivity initiatives, as well as a one-time benefit of $103 million on the sale of real estate that had been previously leased to S.P. Richards Company ("SPR"). These benefits were partially offset by higher personnel and freight and delivery costs in 2022, and costs of $67 million associated with the acquisition and integration of KDG, which includes an impairment of $17 million from the retirement of certain legacy trade names. Additionally we had a remeasurement to increase our product liability by $29 million due to a revision of our estimate of the number of claims to be incurred in future periods, among other assumptions.

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

Non-Operating Expenses and Income

We incurred $42 million in net non-operating expenses in 2022, a $79 million change from $37 million in net non-operating income in 2021. This category primarily includes net interest expense, pension and investment income, foreign currency gains and losses, and Accounts Receivable Sales Agreement ("A/R Sales Agreement") fees. The $79 million change includes the effects of a $12 million increase in net interest expense in 2022 due to increased borrowing to fund the acquisition of KDG. It also includes the effects of a $67 million decrease in other non-operating income. The decrease primarily resulted from a $32 million year-over-year net decline in income on certain investments, a $17 million increase in A/R Sales Agreement fees, and the net change of $12 million as foreign currency moved from gains in the prior year to losses in the current year.

Segment Profit

Automotive

Automotive segment profit increased 11.0% and its segment margin improved 10 basis points from 2021. The increased segment profit reflects the benefits of strong sales growth due to solid customer demand, a favorable pricing environment and footprint expansion into new markets, such as in Europe. We were able to improve segment margin in Automotive, despite elevated inflationary product cost pressures, primarily through our strategic pricing initiatives and our ability to leverage operating costs through strong core sales growth and the benefits of our strategic supply chain initiatives.

Industrial

Industrial segment profit increased 49.0% and its segment margin improved 110 basis points from 2021. The improvement in Industrial segment profit and margin primarily reflects the benefits of leveraging expenses through double-digit core sales growth, the acquisition of KDG and our strategic supply chain and other operating initiatives.

Income Taxes

Our effective income tax rate was 24.8% as of December 31, 2022, compared to 25.1% in 2021. For the year ended December 31, 2022, the rate decrease is primarily due to the inclusion in the prior year results of the impact of a United Kingdom rate change that required deferred tax asset and liability remeasurement, partially offset by other one time adjustments.

On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law, and is effective beginning January 1, 2023. The IRA contains tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases which we do not expect to have material impacts to our financial statements.

Net Income

Net income was $1.2 billion in 2022, a significant increase compared to $899 million in 2021. Diluted earnings per share ("EPS") was $8.31 in 2022, up 33.4% compared to $6.23 in 2021. Adjusted net income was $1.2 billion in 2022, an increase of 19.1% from $997 million in 2021. Adjusted diluted EPS was $8.34, a 20.7% increase compared to $6.91 in 2021. EBITDA was $2.0 billion in 2022, an increase of 28.4% from $1.6 billion in 2021. Adjusted EBITDA was $2.0 billion in 2022, an increase of 18.9% from $1.7 billion in 2021.

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

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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Non-GAAP Financial Measures

The following tables sets forth reconciliations of net income, diluted EPS to adjusted net income and adjusted diluted EPS to account for the impact of adjustments. We also include adjusted EBITDA with a reconciliation to pretax earnings. We believe that the presentation of adjusted net income, adjusted diluted EPS and adjusted EBITDA, which are not calculated in accordance with GAAP, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of our core operations. We consider these metrics useful to investors because they provide greater transparency into management’s view and assessment of our ongoing operating performance by removing items management believes are not representative of our continuing operations and may distort our longer-term operating trends. 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 amounts per common share assuming dilution:

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

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

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

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

(7)Adjustment for 2022 primarily includes costs of $67 million associated with the January 3, 2022 acquisition and integration of KDG which includes a $17 million impairment charge. The impairment charge was driven by a decision to retire certain legacy trade names, classified as other intangible assets, prior to the end of their estimated useful lives as part of executing our KDG integration and rebranding strategy. Separately, this adjustment includes an $11 million loss related to an investment. Adjustment for 2021 includes transaction and other non-recurring costs related to acquisitions.

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

The table below clarifies where the adjusted items are presented in the consolidated statement of income:

OUTLOOK

We expect continued revenue and earnings growth in 2023 despite uncertain economic conditions. We anticipate revenue growth in 2023, as positive trends related to miles driven, aging vehicles and limited new car inventory remain supportive of sustained demand for our Automotive business. In addition, we believe the strong performance in our Industrial business reflects the diversity of our product and service offerings. We expect our growing capabilities in industrial solutions, including automation, fluid power and conveyance to be differentiators for our business.

We continue to execute our strategic pricing and sourcing initiatives to mitigate product and other inflationary cost pressures which we expect to drive improvement in gross margins and earnings. With our global growth initiatives and strong industry fundamentals, we believe we are well positioned for both near-term and sustainable long-term sales and earnings growth.

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FINANCIAL CONDITION

Our cash balance at December 31, 2022 was $653 million compared to cash of $715 million a year ago. Accounts receivable increased $391 million, or 21.7%, from December 31, 2021 primarily due to higher net sales inclusive of the KDG acquisition. Inventory increased $552 million, or 14.2% from December 31, 2021 in association with higher product demand and increased net sales, and acquisitions (including KDG). Accounts payable increased $652 million, or 13.6% from December 31, 2021 due to increased purchases to support higher net sales and extended payment terms with certain suppliers. Total debt of $3.3 billion at December 31, 2022 increased $919 million from December 31, 2021 primarily due to the Senior Notes offering (as discussed below) to fund the acquisition of KDG.

Supply Chain Finance Programs

We have negotiated extended payment dates with our suppliers through supply chain finance programs. Several global financial institutions offer voluntary supply chain finance ("SCF") programs which enable our suppliers (generally those that grant extended terms), at their sole discretion, to sell their receivables from us to these financial institutions on a non-recourse basis at a rate that takes advantage of our credit rating and may be beneficial to them. The SCF program is primarily available to suppliers of goods and services included in cost of goods sold in our consolidated statements of income. We and our suppliers agree on commercial terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. Our current payment terms with the majority of our suppliers range from 30 to 360 days. The suppliers sell goods or services, as applicable, to us and they issue the associated invoices to us based on the agreed-upon contractual terms. Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, they want to sell to the financial institutions. In turn, we direct payment to the financial institutions, rather than the suppliers, for the invoices sold to the financial institutions. No guarantees are provided by us or any of our subsidiaries on third-party performance under the SCF program; however, we guarantee the payment by our subsidiaries to the financial institutions participating in the SCF program for the applicable invoices. We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program. Accordingly, amounts due to our suppliers that elected to participate in the SCF program are included in the line item accounts payable in our consolidated balance sheets. All activity related to amounts due to suppliers that elected to participate in the SCF program is reflected in cash flows from operating activities in our consolidated statement of cash flows. We have been informed by the financial institutions that as of December 31, 2022 and 2021, suppliers elected to sell $3.1 billion and $2.7 billion, respectively, of our outstanding payment obligations to the financial institutions. The amount settled through the SCF program was $3.7 billion for the year ended December 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

Our strong financial position and cash flow performance have provided us with the capacity to invest in acquisitions, capital expenditures and technology to support our global growth strategy, as well as return value to our shareholders through dividends and share repurchases. Our sources of capital consist primarily of cash flows from operations, supplemented as necessary by private and public issuances of debt and bank borrowings. Currently, we believe that our cash on hand and available short-term and long-term sources of capital are sufficient to fund our operations in both the short and long term, including working capital requirements, strategic acquisitions, dividends, share repurchases, capital expenditures, scheduled debt and interest payments, and income tax obligations.

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

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Sources and Uses of Cash

A summary of our consolidated statements of cash flows is as follows:

Operating Activities

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

Investing Activities

We continue to invest in our business through strategic acquisitions and capital expenditures to broaden our product and service offerings, improve our business operations and expand our global footprint. In 2022, net cash used in investing activities included $1.7 billion used for acquisitions of businesses and other investing activities primarily in connection with the acquisition of KDG and a $158 million benefit from the settlement of a net investment hedge. Additionally, we invested $340 million in capital expenditures to improve our supply chain, facilities, and technology environment. These items were partially offset by $145 million in proceeds from the sale of property, plant and equipment (primarily real estate that had been previously leased to SPR) and $34 million in proceeds from divestitures of store operations in Automotive.

Financing Activities

Cash provided by financing activities reflects $919 million of net proceeds from debt primarily from the Senior Notes offering, which was mostly offset by dividends paid to shareholders of $496 million and repurchases of our common stock of $223 million. In 2022, we announced a 10% increase in our regular quarterly cash dividend and we expect this trend of increasing dividends to continue in the foreseeable future. We also expect to remain active in our share repurchase program, but the amount and value of shares repurchased will vary and is subject to authorization of our Board of Directors.

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Notes and Other Borrowings

On January 3, 2022, we amended our A/R Sales Agreement to increase the facility limit by an additional $200 million, bringing the total to $1 billion. The terms of the A/R Sales Agreement limit the balance of receivables sold to approximately $1 billion at any point in time. Refer to the A/R Sales Agreement Footnote in the Notes to Consolidated Financial Statements for more information.

On January 6, 2022, we issued $500 million of unsecured 1.750% Senior Notes due 2025. Simultaneously, we issued $500 million of unsecured 2.750% Senior Notes due 2032. For both offerings, interest is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2022.

At December 31, 2022, we had $3.4 billion of unsecured Senior Notes outstanding. Approximately $1.8 billion of these borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings. At December 31, 2022, we were in compliance with the covenants under our Unsecured Revolving Credit Facility and our outstanding unsecured Senior Notes. Any failure to comply with our debt covenants or restrictions could result in a default under our financing arrangements or require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could create cross defaults under other debt arrangements and have a material adverse effect on our business, financial condition, results of operations and cash flows.

We ended the year with $2.2 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $653 million of cash and cash equivalents). 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, 2022. Our unused letters of credit expire within one year, but have automatic renewal clauses. From time to time, we may enter into other credit facilities or financing arrangements to provide additional liquidity and to manage against foreign currency risk. We currently believe that the existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future.

Our total average cost of debt was 2.33% at December 31, 2022 and 2.35% at December 31, 2021. Total interest expense, net of interest income, for all borrowings was $74 million and $62 million in 2022 and 2021, respectively. Refer to the Debt Footnote in the Notes to Consolidated Financial Statements for more information.

Contractual and Other Obligations

The following table summarizes our material cash requirements at December 31, 2022 that we expect to be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies and uncertain tax positions. The amounts presented are based on various estimates and actual results may vary from the amounts presented.

Purchase orders or contracts for the purchase of inventory and other goods and services are not included in our estimates. We are not able to determine the aggregate amount of such purchase orders that represent contractual cash requirement, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons. 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, 2022, the total borrowings of the independents and affiliates subject to guarantee by the company were approximately $916 million. These loans generally mature over periods from one to six years. Our amount of commitment expiring in 2023 is approximately $401 million. To date, we have had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

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Share Repurchases

In 2022, we repurchased approximately 1.6 million shares of our common stock for an aggregate $223 million, and we had remaining authority to purchase approximately 10.3 million shares of our common stock at December 31, 2022. We expect to remain active in our share repurchase program and continue to return capital to our shareholders. There were no other repurchase plans announced as of December 31, 2022.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements. For further information on the critical accounting policies, see the Summary of Significant Accounting Policies Footnote in the Notes to Consolidated Financial Statements.

Consideration Received from Vendors

We may enter into agreements at the beginning of each year with many of our vendors that provide for inventory purchase incentives. Generally, we earn inventory purchase incentives upon achieving specified volume purchasing levels or other criteria. We accrue for the receipt of these incentives as part of our inventory cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year. While management believes we will continue to receive consideration from vendors in 2023 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives.

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. Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance, among other factors. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating for impairment also requires us to estimate future operating results and cash flows which requires judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Refer to the Goodwill and Other Intangible Assets Footnote of the Notes to Consolidated Financial Statements for further information on the results of our annual goodwill impairment testing.

Employee Benefit Plans

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. Our U.S. plan, our largest pension plan, is well-funded, with a fund status of 127% at December 31, 2022. 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, 9% U.S. Mid-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. We believe the most critical of these assumptions are the expected rate of return on plan assets and the discount rate. Other assumptions we make relate to employee demographic factors such as rate of

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compensation increases, mortality rates, retirement patterns and turnover rates. Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding these assumptions.

Based on the investment policy for the pension plans, as well as an asset study that was performed based on our asset allocations and future expectations, our expected rate of return on plan assets for measuring 2023 pension income is 7.09% for the plans. The asset study forecasted expected rates of return for the approximate duration of our benefit obligations, using capital market data and historical relationships.

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. 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. Based upon this cash flow matching analysis, we selected a weighted average discount rate for the plans of 5.61% at December 31, 2022.

Our pension income for 2022 is determined at the December 31, 2021 measurement date. A 25 basis point increase in discount rate would result in an approximate $46 million decrease on our projected benefit obligation. A 25 basis point decrease in discount rate would result in approximate $48 million increase on our projected benefit obligation. A 25 basis point change in discount rate would have an immaterial impact on our pension income. A 25 basis point change in expected return on asset would have an approximate $6 million impact on our pension income. 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 $27 million, $19 million, and $18 million for the years ended December 31, 2022, 2021 and 2020, respectively. The income associated with the pension plans in 2022, 2021 and 2020 reflects the impact of the freeze. Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding employee benefit plans.

Business Combinations

When we acquire businesses, we apply the acquisition method of accounting and recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions. Goodwill is measured as the excess of the fair value of the consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method requires us to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period. We must complete the accounting during the measurement period, which cannot exceed one year. Adjustments made during the measurement period could have a material impact on our financial condition and results of operations.

We typically measure customer relationships and other intangible assets using an income approach. Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates and EBITDA margins). 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. 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. 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

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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.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under “Item 1A. Risk Factors” of this Form 10-K.

This section of this Form 10-K generally discusses 2021 and 2020 results and year-to-year comparisons between 2021 and 2020 results. Discussions of 2019 results and year-to-year comparisons between 2020 and 2019 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, 2020.

BUSINESS PRODUCTS GROUP

On June 30, 2020, the Company completed the divestiture of its Business Products Group which had previously been reported as a segment. The Business Products Group is reported as discontinued operations in our consolidated financial statements for all periods presented. Refer to the acquisitions, divestitures and discontinued operations footnote in the accompanying consolidated financial statements for more information.

COVID-19 PANDEMIC

The COVID-19 pandemic continues to impact various aspects of our business, and the long-term impact to our business remains unknown. During the year ended December 31, 2021, our business and results of operations continued to improve relative to the same period of 2020. In particular, as widespread vaccine distribution continued, we have seen economic recovery in many of the markets where we operate and a significant uptick in consumer mobility. However, all regions in which we operate continue to experience periodic surges in infection rates. As a result, our business segments continue to face many uncertainties and our operations remain vulnerable to continuing negative effects caused by the pandemic. However, we are encouraged to see the impact of the pandemic subsiding as evidenced by the improving industrial economy, increase in miles driven and overall consumer activity.

As of December 31, 2021, all our operations are open for business. Our supply chain partners have been very supportive and accommodating, despite strains on the supply chain caused by labor shortages, inventory shortages, delays in order fulfillment and increased backlogs. This has allowed us to continue to provide quality customer service. We remain in constant communication with our employees regarding changing conditions and protocol. Based on the length and severity of the pandemic, we may experience continued volatility in customer demand and supply chain disruption. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources.

KEY BUSINESS METRICS

We consider comparable sales to be a key business metric because management has evaluated its results of operations using this metric and we believe that this key indicator provides additional perspective and insights when analyzing the operating performance of our business from period to period and trends in its historical operating results. This metric should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in this report.

Comparable Sales

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

OVERVIEW

Genuine Parts Company is a service organization engaged in the global 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. In 2021, the Company conducted business in North America, Europe and Australasia from more than 10,300 locations.

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The Company's Automotive Parts Group operated in the U.S., Canada, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Australia and New Zealand in 2021, and accounted for 66% of total revenues for the year. The Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for 34% of the Company's total revenues for the year.

At Genuine Parts Company, our mission is to be a world-class service organization and the employer of choice, supplier of choice, valued customer of choice and investment of choice. Additionally, we strive to be a respected business community member and a good corporate citizen. Our strategic financial objectives are intended to align with our mission and drive value for all our stakeholders. Our strategic financial objectives include: (1) top line revenue growth in excess of market growth; (2) improved operating margin; (3) strong balance sheet and cash flows; and (4) effective capital allocation.

Top Line Revenue

The Company's strategy for top-line revenue growth includes a combination of organic and acquisitive initiatives designed to outpace the industry, improve the market share in each of our business segments and position the Company for sustained long-term growth. In 2021, each business segment experienced a year of strong recovery as pandemic related restrictions eased around the globe and markets reopened. The economic recovery along with strong consumer demand and execution of our sales initiatives led to double-digit top-line growth for the year despite continued uncertainties with COVID-19. Additionally, after limited merger and acquisition activity in 2020, we were active in 2021 with strategic bolt-on acquisitions that support the Company's ongoing growth initiatives, including our Industrial segment's $1.3 billion acquisition of Kaman Distribution Group in early 2022. While we continue to face uncertainties in the business due to supply chain disruption, cost inflation and labor market constraints, we are encouraged by the current economic outlook and strong consumer demand trends. We believe these factors and the positive impact of our ongoing strategic initiatives position us for continued sales growth in the upcoming year.

Operating Margins

The Company targets continuous operating margin improvement each year. In 2020, we took certain restructuring actions across its subsidiaries to simplify our cost structure and distribution networks (the "2019 Cost Savings Plan"). We recognized permanent expense reductions of $150 million driven by transformative reductions in payroll and facility costs. Additionally, we had approximately $300 million in temporary savings in response to the impact of COVID-19. These actions led to improved segment margins in 2020 and permanently lowered our cost structure. As business normalized in 2021, the temporary savings ended and we experienced cost increases in areas such as wages, freight and health insurance. Despite these challenges, we improved segment margins 60 basis points by leveraging strong top-line growth, improving gross margins through pricing and sourcing actions and managing costs through ongoing strategic initiatives. We believe continued execution of our strategic priorities in 2022 will further improve our margins.

Balance Sheet and Cash Flow

The Company is focused on maintaining a strong balance sheet and generating strong cash flow to support our growth initiatives. Our working capital was a source of operating cash flow, and we improved our debt position and took advantage of favorable financing arrangements throughout the year. In 2021, we generated $1.3 billion in cash from operations.

Capital Allocation

The Company's priorities for disciplined and effective capital allocation remain consistent with prior years. In 2021, we used cash for investments in the form of capital expenditures and bolt-on acquisitions, while also returning capital to our shareholders through cash dividends and share repurchases. We plan to continue to support the dividend, which we have increased for 65 consecutive years through 2021.

RESULTS OF OPERATIONS

Our results of operations are summarized below for the years ended December 31, 2021 and 2020.

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Net Sales

Consolidated net sales for the year ended December 31, 2021 totaled $18.9 billion, up 14.1% from 2020. The increase in net sales is due to a 10.5% comparable sales increase, the favorable impact of foreign currency and other of 2.1% and a 1.5% positive impact from acquisitions.

The Company's comparable sales growth reflects both an increase in sales volume and product inflation as compared to the year ended December 31, 2020. Higher sales volume was driven primarily by the increase in consumer activity associated with the reopening of our key markets and the execution of our strategic growth initiatives throughout the year. Additionally, sales were positively impacted by price inflation of approximately 3% for the year ended December 31, 2021. With our global growth initiatives and strong industry fundamentals, we believe we are well positioned for both near-term and sustainable long-term sales growth.

Automotive Group

Net sales for the Automotive Group (“Automotive”) were $12.5 billion in 2021, a 15.5% increase from 2020. The increase in sales consists of an approximate 11.0% increase in comparable sales, a 2.5% favorable impact of currency translation and other and a 2.0% contribution from acquisitions. Foreign currency translation was positively impacted by our automotive businesses across all regions.

In 2021, total Automotive revenues were up approximately 14.3% in the first quarter, up 28.1% in the second quarter, up 8.2% in the third quarter and up 13.1% in the fourth quarter. All periods reflect a strong recovery from the decline in demand caused by COVID-19 in 2020. We remain optimistic that our Automotive sales trends will continue to show positive growth as the global markets fully recover. Positive trends related to the overall number and age of the vehicle population and the continued improvement in miles driven remain supportive of sustained demand for automotive aftermarket maintenance and supply items across the markets we serve. We expect these fundamentals and our ongoing sales initiatives to drive sales growth for the Automotive Group in 2022.

Industrial Parts Group

Net sales for the Industrial Parts Group (“Industrial”) were $6.3 billion in 2021, up 11.4% from 2020. The increase in sales reflects a 9.7% increase in comparable sales, a 1.3% favorable impact of currency translation and an approximate 0.4% contribution from acquisitions.

In 2021, total Industrial revenues were up approximately 0.1% in the first quarter of 2021, up 19.6% in the second quarter, up 14.5% in the third quarter and up 12.8% in the fourth quarter. These quarterly results reflect the positive impact of key sales initiatives, the ongoing industrial recovery and broad increase in customer productivity, which correlate to the improvement in industrial indicators such as the Purchasing Managers Index and Industrial Production. We are confident in our growth plans for 2022, both in North America and Australasia, and expect to see continued improvement in our sales trends.

Cost of Goods Sold

The Company includes in cost of goods sold the actual cost of merchandise, which represents the vast majority of this line item. Other items in cost of goods sold include warranty costs and in-bound freight from the suppliers, net of any vendor allowances and incentives.

Cost of goods sold was $12.2 billion in 2021, a 12.4% increase from $10.9 billion in 2020. As a percentage of net sales, cost of goods sold was 64.8% in 2021, decreasing from 65.8% of net sales in 2020. The decrease in cost of goods sold as a percentage of net sales in 2021 reflects the favorable impact of increased supplier incentives, business unit channel and product mix shifts and strategic category management initiatives in areas such as pricing and global sourcing in 2021 compared to 2020.

Operating Expenses

The Company includes in selling, administrative and other expenses (“SG&A”) all personnel and personnel-related costs at its headquarters, distribution centers, stores and branches, which accounts for more than 60% of total SG&A. Additional costs in SG&A include our facilities, delivery, marketing, advertising, technology, digital, legal and professional costs.

SG&A of $5.2 billion in 2021 increased by $0.8 billion, or approximately 17.7% from 2020. This represents 27.4% of net sales in 2021 compared to 26.5% of net sales in 2020. The increase in SG&A as a percent of net sales primarily reflects a $77.4 million charge related to damages in connection with a 2017 automotive product liability claim and a $61.1 million loss on a software disposal. In addition, we had the headwind of more than $300 million in temporary COVID-19 related cost savings in 2020. The increase in SG&A was partially offset by the leveraging of expenses on strong sales and our initiatives to improve operational efficiencies and optimize the productivity of our distribution network.

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Depreciation and amortization expense was $291.0 million in 2021, an increase of approximately $18.1 million, or 6.6%, from 2020, due to an increase in capital investments to improve our distribution facilities, streamline our supply chain and invest in technology solutions. The provision for doubtful accounts was $17.7 million in 2021, a $5.8 million decrease from 2020, reflecting the improved financial health of our customers as our key markets recover from the COVID-19 pandemic. We believe the Company is adequately reserved for bad debts and credit losses at December 31, 2021.

Goodwill Impairment

Due to several factors that coalesced in the second quarter of 2020 we performed an interim impairment test as of May 31, 2020 for our European reporting unit and recorded a goodwill impairment charge of $506.7 million. These factors primarily resulted from the ongoing market volatility and uncertainty caused by the COVID-19 pandemic, which extended into the second quarter of 2020 and impacted several critical impairment testing assumptions including weighted average cost of capital and market multiples, and near-term revenue and operating margin projections for the reporting unit. Refer to the goodwill and other intangible assets footnote within the Notes to the Consolidated Financial Statements for additional information. If there are sustained declines in macroeconomic or business conditions in future periods, including as a result of the continued COVID-19 pandemic, affecting the projected earnings and cash flows at our reporting units, among other things, there can be no assurance that goodwill at one or more reporting units may not be impaired. As of December 31, 2021, we determined that there were no indicators that goodwill was impaired at any of our reporting units.

Non-Operating Expenses and Income

Non-operating expenses included net interest expense of $62.2 million in 2021 and $91.0 million in 2020. The decrease in net interest expense of $28.9 million in 2021 primarily reflects the combination of the repayment of debt and lowered interest rates on our remaining outstanding debt.

“Other” includes equity method investment income, investment dividends, noncontrolling interests and pension income. Other income in 2021 was $99.6 million, an approximate $44.1 million increase from the prior year due to a variety of factors, including favorable changes in gains on equity investments and retirement plan valuations.

Segment Profit

Segment profit is calculated as net sales less operating expenses excluding general corporate expenses, net interest expense, equity in income from investees, intangible asset amortization, income attributable to noncontrolling interests and other unallocated amounts that are primarily driven by corporate initiatives and adjusted in Non-GAAP Measures (as described further below). Refer to the segment data footnote in the Notes to Consolidated Financial Statements for additional information.

Automotive Group

Automotive's segment profit increased 23.7% in 2021 from 2020 and segment profit margin was 8.6% in 2021 compared to 8.0% in 2020. The improvement reflects strong operating results across our geographies resulting from double-digit organic sales growth, gross margin expansion and ongoing cost control actions. To further improve Automotive's segment margin, this group will continue to execute on its growth plans and cost initiatives going forward.

Industrial Group

Industrial’s segment profit increased 23.5% in 2021 from 2020 and segment profit margin improved to 9.4%, an increase from 8.5% in 2020. The improvement primarily reflects the benefits of double-digit organic sales growth and improved gross margin and operational efficiencies. We believe the strength of economic indicators such as Industrial Production and the Purchasing Managers Index combined with effective growth initiatives and cost actions position the Industrial Group for further growth in 2022.

Income Taxes

The Company's effective income tax rate was 25.1% as of December 31, 2021, compared to 56.9% in 2020. For the year ended December 31, 2021, the rate decrease is primarily due to the non-deductible goodwill impairment charge that occurred in 2020.

Net Income from Continuing Operations

Net income from continuing operations was $898.8 million in 2021, a significant increase compared to $163.4 million in 2020. On a per share diluted basis, net income from continuing operations was $6.23 in 2021, up 451.3% compared to $1.13 in 2020. Net income from continuing operations was 4.8% of net sales in 2021 compared to 1.0% of net sales in 2020. The increase in net income from continuing operations for the year ended December 31,

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2021 primarily reflects the goodwill impairment charge of $506.7 million that occurred during the second quarter of 2020.

Adjusted net income from continuing operations was $997.0 million in 2021, an increase of 30.3% from $765.0 million in 2020. On a per share diluted basis, adjusted net income from continuing operations was $6.91, a 31.1% increase compared to adjusted net income per diluted share from continuing operations of $5.27 in 2020.

Both adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share are non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

Certain Information Regarding Non-GAAP Financial Measures

The following table sets forth a reconciliation of net income from continuing operations and diluted net income from continuing operations per common share to adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share to account for the impact of adjustments. The Company believes that the presentation of adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share, 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 the Company's core operations. The Company considers these metrics useful to investors because they provide greater transparency into management’s view and assessment of the Company’s ongoing operating performance by removing items management believes are not representative of our continuing operations and may distort our longer-term operating trends. We believe these measures to be useful to enhance the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not associated with the Company’s core operations. The Company does not, nor does it suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.

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The table below represents amounts per common share assuming dilution:

The table below clarifies where the adjusted items are presented in the consolidated statement of income:

(1)Adjustment reflects a loss on an internally developed software project that was disposed of due to a change in management strategy related to advances in alternative technologies. Refer to the property, plant and equipment footnote in the Notes to Consolidated financial statements for more information.

(2)Adjustment reflects damages reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim. Refer to the commitments and contingencies footnote in the Notes to Consolidated Financial Statements for more information.

(3)Adjustment reflects a goodwill impairment charge related to our European reporting unit.

(4)Adjustment reflects restructuring costs related to the 2019 Cost Savings Plan. The costs are primarily associated with severance and other employee costs, including a voluntary retirement program, and facility and closure costs related to the consolidation of operations.

(5)Adjustment reflects realized currency losses related to divestitures.

(6)Adjustment reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs related to the S.P. Richards Headquarters and Distribution Center.

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

(8)Adjustment reflects a $40 million increase to cost of goods sold due to the correction of an immaterial error related to the accounting in prior years for consideration received from vendors.

(9)Adjustment for 2021 include transaction and other costs related to acquisitions. For 2020, adjustment includes a $17 million loss on investment, $10 million of incremental costs associated with COVID-19 and costs associated with certain divestitures. COVID-19 related costs include incremental costs incurred relating to fees to cancel marketing events and increased cleaning and sanitization materials, among other things.

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FINANCIAL CONDITION

The Company’s cash balance at December 31, 2021 was $714.7 million compared to cash of $990.2 million at December 31, 2020. For the year ended December 31, 2021, the Company used $160.7 million to pay down debt (net of proceeds), $465.6 million for dividends paid to the Company’s shareholders, $333.6 million for the repurchase of the Company's common stock, $266.1 million for investments in the Company via capital expenditures and $284.3 million for acquisitions and other investing activities. These items were offset by the Company’s earnings and net cash provided by operating activities.

Accounts receivable increased $241.0 million, or 15.5%, from December 31, 2020 primarily due to higher sales volume. Inventory increased $383.6 million, or 10.9% from December 31, 2020 in association with higher product demand and increase in sales. Accounts payable increased $676.9 million, or 16.4% from December 31, 2020 due to the increase in purchases related to sales volume and extended payment terms with certain suppliers. Total debt of $2.4 billion at December 31, 2021 decreased $267.8 million, or 10.0%, from December 31, 2020 primarily due to the pay down of our short-term debt and foreign currency impact during the year.

We continue to negotiate extended payment dates with our suppliers. Our current payment terms with the majority of our suppliers range from 30 to 360 days. Several global financial institutions offer voluntary supply chain finance ("SCF") programs which enable our suppliers (generally those that grant extended terms), at their sole discretion, to sell their receivables from the Company to these financial institutions on a non-recourse basis at a rate that takes advantage of our credit rating and may be beneficial to them. The SCF program is primarily available to suppliers of goods and services included in cost of goods sold in our consolidated statements of income. The Company and our suppliers agree on commercial terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. The suppliers sell goods or services, as applicable, to the Company and they issue the associated invoices to the Company based on the agreed-upon contractual terms. Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, they want to sell to the financial institutions. In turn, we direct payment to the financial institutions, rather than the suppliers, for the invoices sold to the financial institutions. No guarantees are provided by the Company or any of our subsidiaries on third-party performance under the SCF program; however, the Company guarantees the payment by our subsidiaries to the financial institutions participating in the SCF program for the applicable invoices. We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program. Accordingly, amounts due to our suppliers that elected to participate in the SCF program are included in the line item accounts payable in our consolidated balance sheets. All activity related to amounts due to suppliers that elected to participate in the SCF program is reflected in cash flows from operating activities in our consolidated statement of cash flows. We have been informed by the financial institutions that as of December 31, 2021 and 2020, suppliers elected to sell $2.7 billion and $1.8 billion, respectively, of our outstanding payment obligations to the financial institutions. The amount settled through the SCF program was $3.2 billion for the year ended December 31, 2021.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s sources of capital consist primarily of cash flows from operations, supplemented as necessary by private and public issuances of debt and bank borrowings. Currently, we believe that our cash on hand and available short-term and long-term sources of capital are sufficient to fund the Company’s operations in both the short and long term, including working capital requirements, scheduled debt payments, interest payments, capital expenditures, benefit plan contributions, income tax obligations, dividends, share repurchases and contemplated acquisitions.

The ratio of current assets to current liabilities was 1.18 to 1 at December 31, 2021 and 1.21 to 1 at 2020, and our liquidity position remains strong. The Company’s total debt outstanding at December 31, 2021 decreased by $267.8 million or 10.0% from December 31, 2020, primarily due to the pay down of our short-term debt and foreign currency impact during the year.

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Sources and Uses of Cash

A summary of the Company’s consolidated statements of cash flows is as follows:

Operating Activities

The Company continues to generate positive cash flow, and in 2021 net cash provided by operating activities totaled $1.3 billion, a $0.8 billion, or 37.5%, decrease from 2020. The decrease in cash provided by operating activities was primarily driven by the $800 million benefit to operating cash flow in 2020 for the A/R Sales Agreement to sell receivables.

Investing Activities

Net cash used in investing activities was $506.2 million in 2021 compared to net cash provided by investing activities of $182.8 million in 2020, a $688.9 million, or 376.9%, decrease. In 2021, net cash used in investing activities included capital expenditures of $266.1 million, an increase of $112.6 million, or 73.4%, from the prior year, and $284.3 million used for acquisitions of businesses and other investing activities, an increase of $215.1 million, or 311.0%, from 2020. These items were partially offset by $17.7 million in proceeds from the divestitures, down $369.6 million or 95.4%, primarily due to the sale of the Business Products Group in 2020.

Financing Activities

Net cash used in financing activities in 2021 totaled $1.0 billion, a decrease of $0.5 billion, or 34.6%, from the $1.5 billion in cash used in financing activities in 2020. The decrease is primarily due to the $160.7 million pay down of debt (net of proceeds) in 2021 relative to the $895.0 million pay down of debt (net of proceeds) in 2020, which was partially offset by an additional $237.4 million in repurchases of our common stock as compared to 2020. For 2021, the Company's financing activities included dividends paid to shareholders of $465.6 million and repurchases of the Company's common stock of $333.6 million. The Company expects this trend of increasing dividends to continue in the foreseeable future. We also expect to remain active in our share repurchase program, but the amount and value of shares repurchased will vary and is at the discretion of the Company's board of directors.

Notes and Other Borrowings

The Company ended the year with $2.2 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $0.7 billion of cash and cash equivalents). From time to time, the Company may enter into other credit facilities or financing arrangements to provide additional liquidity and to manage against foreign currency risk. The Company currently believes that the existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future.

On September 30, 2021, we entered into the first amendment to the Syndicated Facility Agreement (the "Unsecured Revolving Credit Facility"), dated as of October 30, 2020. The interest rates were amended to reduce the applicable rate by 12.5 basis points (resulting in a rate of LIBOR + 112.5 basis points) and the LIBOR floor from 0.5% to 0.0%. The amendment also extended the maturity by one year to September 30, 2026.

At December 31, 2021, approximately $1.5 billion was available under this line of credit. Due to the workers’ compensation and insurance reserve requirements in certain states, the Company also had unused letters of credit of approximately $72.8 million outstanding at December 31, 2021. Our unused letters of credit expire within one year, but have automatic renewal clauses.

At December 31, 2021, the Company had $2.4 billion of unsecured Senior Notes outstanding. Approximately $1.9 billion of these borrowings contain covenants related to a maximum debt to EBITDA ratio and certain limitations on additional borrowings. The weighted average interest rate on the Company’s total outstanding borrowings was approximately 2.35% at December 31, 2021 and 2.65% at December 31, 2020. Total interest expense, net of interest income, for all borrowings was $62.2 million and $91.0 million in 2021 and 2020, respectively. Refer to the debt footnote in the Notes to Consolidated Financial Statements for more information.

At December 31, 2021, the Company was in compliance with the covenants under our Unsecured Revolving Credit Facility and our outstanding unsecured Senior Notes. Any failure to comply with our debt covenants or

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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. 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.

On January 3, 2022, we amended our A/R Sales Agreement to increase the facility limit by an additional $200 million bringing the total to $1.0 billion. The terms of the A/R Sales Agreement limit the balance of receivables sold to approximately $1.0 billion at any point in time. Refer to the A/R Sales Agreement footnote in the Notes to Consolidated Financial Statements for more information.

On January 6, 2022, we issued $500,000 aggregate principal amount of unsecured 1.750% Senior Notes due 2025 at a price to the public of 99.721% of their face value with U.S. Bank National Association as trustee. Interest on the 1.750% Senior Notes due 2025 is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2022, and is computed on the basis of a 360-day year. Simultaneously, on January 6, 2022, the Company issued $500,000 aggregate principal amount of unsecured 2.750% Senior Notes due 2032 at a price to the public of 98.810% of their face value with U.S. Bank National Association as trustee. Interest on the 2.750% Senior Notes due 2032 is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2022, and is computed on the basis of a 360-day year.

Contractual and Other Obligations

The following table summarizes our material cash requirements at December 31, 2021 that we expect to be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies and uncertain tax positions. The amounts presented are based on various estimates and actual results may vary from the amounts presented.

Purchase orders or contracts for the purchase of inventory and other goods and services are not included in our estimates. We are not able to determine the aggregate amount of such purchase orders that represent contractual cash requirement, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons. The Company does not have significant agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Additionally, the Company guarantees the borrowings of certain independently owned automotive parts stores (independents) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (affiliates). The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is generally equal to the total borrowings subject to the Company’s guarantee. At December 31, 2021, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $917.5 million. These loans generally mature over periods from one to six years. Our amount of commitment expiring in 2022 is approximately $304.6 million. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

Share Repurchases

In 2021, the Company repurchased approximately 2.6 million shares of its common stock and the Company had remaining authority to purchase approximately 11.9 million shares of its common stock at December 31, 2021. There were no other repurchase plans announced as of December 31, 2021.

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CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements. For further information on the critical accounting policies, see the summary of significant accounting policies footnote in the Notes to Consolidated Financial Statements.

Inventories — Provisions for Slow Moving and Obsolescence

The Company identifies slow moving or obsolete inventories and estimates appropriate provisions related thereto. Historically, these losses have not been significant as the vast majority of the Company’s inventories are not highly susceptible to obsolescence and a majority are eligible for return under various vendor return programs. While the Company has no reason to believe its inventory return privileges will be discontinued in the future, its risk of loss associated with obsolete or slow moving inventories would increase if such were to occur.

Allowance for Doubtful Accounts — Methodology

The Company evaluates the collectability of trade accounts receivable based on a combination of factors. The Company estimates an allowance for doubtful accounts as a percentage of net sales based on various factors, including historical experience, current economic conditions and expected future credit losses and collectability trends. The Company periodically adjusts this estimate when the Company becomes aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults and, therefore, the need to revise estimates for bad debts. For the years ended December 31, 2021, 2020 and 2019, the Company recorded provisions for doubtful accounts of approximately $17.7 million, $23.6 million, and $13.9 million, respectively.

Consideration Received from Vendors

The Company may enter into agreements at the beginning of each year with many of its vendors that provide for inventory purchase incentives. Generally, the Company earns inventory purchase incentives upon achieving specified volume purchasing levels or other criteria. The Company accrues for the receipt of these incentives as part of its inventory cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year. While management believes the Company will continue to receive consideration from vendors in 2022 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives.

Impairment of Property, Plant and Equipment and Goodwill and Other Intangible Assets

At least annually, the Company evaluates property, plant and equipment, goodwill and other intangible assets for potential impairment indicators. The Company’s judgments regarding the existence of impairment indicators are based on market conditions and operational performance, among other factors. Future events could cause the Company to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating for impairment also requires the Company to estimate future operating results and cash flows which requires judgment by management. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Refer to the goodwill and other intangible assets footnote of the Notes to Consolidated Financial Statements for further information on the results of the Company's annual goodwill impairment testing.

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Employee Benefit Plans

The Company’s benefit plan committees in the U.S. and Canada establish investment policies and strategies and regularly monitor the performance of the Company’s pension plan assets. The plans in Europe are unfunded and therefore there are no plan assets. The pension plan investment strategy implemented by the Company’s 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. The Company’s 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, 9% U.S. Mid-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. We believe the most critical of these assumptions are the expected rate of return on plan assets and the discount rate. Other assumptions we make relate to employee demographic factors such as rate of compensation increases, mortality rates, retirement patterns and turnover rates. Refer to the employee benefit plans footnote of the Notes to Consolidated Financial Statements for more information regarding these assumptions.

Based on the investment policy for the pension plans, as well as an asset study that was performed based on the Company’s asset allocations and future expectations, the Company’s expected rate of return on plan assets for measuring 2022 pension income is 6.34% for the plans. The asset study forecasted expected rates of return for the approximate duration of the Company’s benefit obligations, using capital market data and historical relationships.

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. 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. Based upon this cash flow matching analysis, we selected a weighted average discount rate for the plans of 3.04% at December 31, 2021.

Our pension income for 2021 is determined at the December 31, 2020 measurement date. A 25 basis point increase in discount rate would result in an approximate $73 million decrease on our projected benefit obligation. A 25 basis point decrease in discount rate would result in approximate $77 million increase on our projected benefit obligation. A 25 basis point change in discount rate would have an approximate $1.2 million impact on our pension income. A 25 basis point change in expected return on asset would have an approximate $5.7 million impact on our pension income. 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 $19.3 million, $18.0 million, and $16.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. The income associated with the pension plans in 2021, 2020 and 2019 reflects the impact of the freeze. Refer to the employee benefit plans footnote of the Notes to Consolidated Financial Statements for more information regarding employee benefit plans.

Business Combinations

When the Company acquires businesses, it applies the acquisition method of accounting and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions. Goodwill is measured as the excess of the fair value of the consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method requires the Company to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period. The Company must complete the accounting during the measurement period, which cannot exceed one year. Adjustments made during the measurement period could have a material impact on the Company's financial condition and results of operations.

The Company typically measures customer relationship and other intangible assets using an income approach. Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates, operating margins and attrition rates). 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, the Company could record impairment charges. In addition, the Company has estimated the

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economic lives of certain acquired tangible and intangible assets and these lives are used to calculate depreciation and amortization expense. If the Company's 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

The Company accrues 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 the Company will incur a loss and the amount of the loss can be reasonably estimated.

To calculate product liabilities, the Company estimates potential losses relating to pending claims and also estimates the likelihood of additional, similar claims being filed against the Company in the future. To estimate potential losses on claims that could be filed in the future, the Company considers claims pending against the Company, 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. The Company uses an actuarial specialist to assist with measuring its product liabilities. Refer to the commitments and contingencies footnote of the Notes to Consolidated Financial Statements for additional information regarding product liabilities.

Self Insurance

The Company is self-insured for the majority of its group health insurance costs. A reserve for claims incurred but not reported is developed by analyzing historical claims data provided by the Company’s 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 the Company's workers’ compensation program. In addition, the Company carries various large risk deductible workers’ compensation policies for the majority of workers’ compensation liabilities. The Company records 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 the Company believes 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.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amount and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes. In addition, valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In making this determination, the Company considers all available positive and negative evidence including projected future taxable income, future reversals of existing temporary differences, recent financial operations and tax planning strategies.

The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

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.