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Income (Unaudited) (Parenthetical)
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(Exact name of registrant as specified in its charter)
__________________________________________
iGA
i58-0254510
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i2999 WILDWOOD PARKWAY,
i30339
iATLANTA,
iGA
(Address
of principal executive offices)
(Zip Code)
i678-i934-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant
to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of each exchange on which registered
iCommon Stock, $1.00 par value per share
iGPC
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated filer
☐
Non-accelerated
filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
There were i139,298,651
shares of common stock outstanding as of April 15, 2024.
Trade
accounts receivable, less allowance for doubtful accounts (2024 – $i60,326; 2023 – $i56,608)
i2,425,043
i2,223,431
Merchandise
inventories, net
i4,736,108
i4,676,686
Prepaid expenses and other current
assets
i1,595,566
i1,603,728
Total
current assets
i9,806,305
i9,605,852
Goodwill
i2,736,841
i2,734,681
Other
intangible assets, less accumulated amortization
i1,772,359
i1,792,913
Property,
plant and equipment, less accumulated depreciation (2024 – $i1,620,069; 2023 – $i1,592,658)
i1,665,920
i1,616,785
Operating
lease assets
i1,363,075
i1,268,742
Other
assets
i992,013
i949,481
Total
assets
$
i18,336,513
$
i17,968,454
Liabilities
and equity
Current liabilities:
Trade accounts payable
$
i5,725,745
$
i5,499,536
Current
portion of debt
i845,055
i355,298
Dividends
payable
i139,385
i132,635
Other
current liabilities
i1,929,301
i1,839,640
Total
current liabilities
i8,639,486
i7,827,109
Long-term
debt
i3,029,610
i3,550,930
Operating
lease liabilities
i1,070,462
i979,938
Pension
and other post–retirement benefit liabilities
i219,791
i219,644
Deferred
tax liabilities
i452,455
i437,674
Other
long-term liabilities
i507,533
i536,174
Equity:
Preferred
stock, par value – $ii1/ per share; authorized – ii10,000,000/
shares; iinone/ issued
i—
i—
Common
stock, par value – $ii1/ per share; authorized – ii450,000,000/
shares; issued and outstanding – 2024 – ii139,335,342/ shares; 2023 – ii139,567,071/
shares
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.iGeneral
Basis
of Presentation
iThe accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. Except as disclosed herein, there have been no material changes in the information disclosed in the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K of Genuine Parts Company (the “Company,”“we,”“our,”“us,” or “its”) for the
year ended December 31, 2023. Accordingly, the unaudited Condensed Consolidated Financial Statements and related disclosures herein should be read in conjunction with our 2023 Annual Report on Form 10-K.
i
The preparation of interim financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited Condensed Consolidated Financial Statements. Specifically, we make estimates and assumptions in our unaudited Condensed Consolidated Financial Statements for inventory adjustments, the accrual of bad debts, credit losses on guaranteed loans, customer
sales returns, and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out (“LIFO”) method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation. Reserves for bad debts, credit losses on guaranteed loans and customer sales returns are estimated and accrued on an interim basis based on a consideration of historical experience, current conditions, and reasonable and supportable forecasts. Volume incentives are estimated based upon cumulative and projected purchasing levels.
In the opinion of management, all adjustments necessary for a fair presentation of our financial results for the interim periods have been made. These adjustments are of a normal recurring nature. The results of operations for the three months ended
March 31, 2024 are not necessarily indicative of results for the year ended December 31, 2024. We have evaluated subsequent events through the date the unaudited Condensed Consolidated Financial Statements covered by this quarterly report were issued.
i
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.
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. The guidance is effective for our Annual Report on Form 10-K for the year ended December 31, 2024, and subsequent interim periods, with early adoption permitted. We are currently evaluating the impact of adopting this standard on our financial statements and disclosures.
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.
Prepaid Expenses and Other Current Assets
i
The
following table provides a detail of prepaid expenses and other current assets reported within the Condensed Consolidated Balance Sheets as of:
We are exposed to various risks arising from business operations and market conditions, including fluctuations in certain foreign currencies. We use derivative and non-derivative instruments as risk management tools to mitigate the potential impact of foreign exchange rate risks. The objective of using these tools is to reduce fluctuations in our earnings and cash flows associated with changes in these rates. Derivative instruments are recognized in the Condensed Consolidated Balance Sheets at fair value and are designated as Level 2 in the fair value hierarchy. They are valued using inputs other than quoted prices, such as foreign exchange rates and yield curves.
i
The
following table summarizes the classification and carrying amounts of the derivative instruments and the foreign currency denominated debt, a non-derivative financial instrument, that are designated and qualify as part of hedging relationships (in thousands):
As of March 31, 2024, the fair value of our senior unsecured notes was approximately $i3.7 billion, which are designated as Level 2 in the fair value hierarchy. iOur valuation technique is based primarily on
prices and other relevant information generated by observable transactions involving identical or comparable assets or liabilities.
Guarantees
i
We guarantee the borrowings of certain independently controlled automotive parts stores and businesses (“independents”) and certain other affiliates in which we have a noncontrolling equity ownership interest (“affiliates”). While such borrowings of the independents and affiliates
are outstanding, we are required to maintain compliance with certain covenants. As of March 31, 2024, we were in compliance with all such covenants.
As of March 31, 2024, the total borrowings of the independents and affiliates subject to guarantee by us were approximately $i934 million. These loans generally mature over periods from one to isix
years. We regularly monitor the performance of these loans and the ongoing operating results, financial condition and ratings from credit rating agencies of the independents and affiliates that participate in the guarantee programs. In the event that we are required to make payments in connection with these guarantees, we would obtain and liquidate certain collateral
pledged by the independents or affiliates (e.g., accounts receivable and inventory) to recover all or a substantial portion of the amounts paid under the guarantees. We recognize a liability equal to current expected credit losses over the lives of the loans in the guaranteed loan portfolio,
based on a consideration of historical experience, current conditions, the nature and expected value of any collateral, and reasonable and supportable forecasts. To date, we have not had significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the current expected credit loss reserve is not material. As of March 31, 2024, there are no material guaranteed loans for which the borrower is experiencing financial difficulty and recovery is expected to be provided substantially through the operation or sale of the collateral.
As of March 31, 2024, we have recognized certain assets and liabilities amounting to $ii55/
million each for the guarantees related to the independents’ and affiliates’ borrowings. These assets and liabilities are included in other assets and other long-term liabilities in the Condensed Consolidated Balance Sheets. The liabilities relate to our noncontingent obligation to stand ready to perform under the guarantee programs and they are distinct from our current expected credit loss reserve.
i
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. 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 i30 to i360
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 Condensed 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 Condensed Consolidated Statement of Cash Flows. As of March 31, 2024 and December 31, 2023, the outstanding payment obligations to the financial institutions are $i3.0 billion
and $i3.0 billion, respectively. The amount settled through the SCF program was $i1.0 billion and $i1.0 billion
for the three months ended March 31, 2024 and March 31, 2023, respectively.
Obligations outstanding at the beginning of the
year
$
i3,026,824
Invoices confirmed during the year
i995,254
Confirmed
invoices paid during the year
(i987,476)
Confirmed obligations outstanding at the end of the year
$
i3,034,602
/i
Earnings
Per Share
We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding. Certain outstanding options are not included in the diluted earnings per share calculation
because their inclusion would have been anti-dilutive. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation are not material.
i
The
following table summarizes basic and diluted shares outstanding:
Three Months Ended March 31,
(in thousands, except per share data)
2024
2023
Net income
$
i248,894
$
i303,957
Weighted
average common shares outstanding
i139,429
i140,804
Dilutive
effect of stock options and non-vested restricted stock awards
i667
i921
Weighted
average common shares outstanding – assuming dilution
i140,096
i141,725
Basic
earnings per share
$
i1.79
$
i2.16
Diluted
earnings per share
$
i1.78
$
i2.14
/
2.
iSegment Information
i
The following table presents a summary of our reportable segment financial information:
Three
Months Ended March 31,
(in thousands)
2024
2023
Net sales:
Automotive
$
i3,574,020
$
i3,505,827
Industrial
i2,209,611
i2,259,291
Total
net sales
$
i5,783,631
$
i5,765,118
Segment
profit:
Automotive
$
i272,936
$
i264,420
Industrial
i270,839
i261,987
Total
segment profit
i543,775
i526,407
Interest
expense, net
(i17,690)
(i16,864)
Intangible
asset amortization
(i34,100)
(i39,122)
Corporate
expense
(i83,762)
(i66,015)
Other
unallocated costs (1)
(i83,042)
i—
Income
before income taxes
$
i325,181
$
i404,406
(1)
The following table presents a summary of the other unallocated costs:
Three Months Ended March 31,
(in thousands)
2024
2023
Other unallocated costs:
Restructuring
and other costs (2)
$
(i83,042)
$
i—
Total
other unallocated costs
$
(i83,042)
$
i—
(2) Please
refer to the Restructuring Footnote in the Notes to Condensed Consolidated Financial Statements for more information.
/
Net sales are disaggregated by geographical region for each of our reportable segments, as we deem this presentation best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected
by economic factors. iThe
following table presents disaggregated geographical net sales from contracts with customers by reportable segment:
Three Months Ended March 31,
(in thousands)
2024
2023
North America:
Automotive
$
i2,196,890
$
i2,205,385
Industrial
i2,080,126
i2,130,715
Total
North America
$
i4,277,016
$
i4,336,100
Australasia:
Automotive
$
i400,348
$
i406,762
Industrial
i129,485
i128,576
Total
Australasia
$
i529,833
$
i535,338
Europe
– Automotive
$
i976,782
$
i893,680
Total
net sales
$
i5,783,631
$
i5,765,118
3.
iAccounts Receivable Sales Agreement
Under our accounts receivable sales agreement (the "A/R Sales Agreement"), we continuously sell designated pools of receivables as they are originated by us and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The A/R Sales Agreement has a ithree-year
term expiring in January 2025, which we intend to renew.
We continue to be involved with the receivables transferred by the SPE to the unaffiliated financial institutions by providing collection services. As cash is collected on sold receivables, the SPE continuously transfers ownership and control of new qualifying receivables to the unaffiliated financial institutions so that the total principal amount outstanding of receivables sold is approximately $i1.0 billion at any point in time (which is the maximum amount allowed under the agreement as amended
on January 3, 2022).
The total principal amount outstanding of receivables sold is approximately $ii1.0/
billion as of both March 31, 2024 and December 31, 2023. The amount of receivables pledged as collateral as of March 31, 2024 and December 31, 2023 is approximately $i1.4 billion and $i1.2
billion, respectively.
i
The following table summarizes the activity and amounts outstanding under the A/R Sales Agreement as of:
Three Months Ended March 31,
(in
thousands)
2024
2023
Receivables sold to the financial institutions and derecognized
$
i2,170,043
$
i2,165,407
Cash
collected on sold receivables
$
i2,170,044
$
i2,165,411
/
Continuous
cash activity related to the A/R Sales Agreement is reflected in net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The SPE incurs fees due to the unaffiliated financial institutions related to the accounts receivable sales transactions. Those fees, which totaled $i15 million and $i14 million
for the three months ended March 31, 2024 and 2023, respectively, are recorded within other non-operating expense (income) in the Condensed Consolidated Statements of Income. The SPE has a recourse obligation to repurchase from the unaffiliated financial institutions any previously sold receivables that are not collected due to the occurrence of certain events, including credit quality deterioration and customer sales returns. The reserve recognized for this recourse obligation as of March 31, 2024 and December 31, 2023 is not material. The servicing liability related to our collection services also is not material, given the high quality of the customers underlying the receivables and the anticipated short collection period.
Net periodic benefit income from our pension plans included the following components for the three months ended March 31:
Pension
Benefits
(in thousands)
2024
2023
Service cost
$
i1,727
$
i1,494
Interest
cost
i25,365
i26,117
Expected
return on plan assets
(i44,404)
(i41,240)
Amortization
of prior service cost
i281
i173
Amortization
of actuarial loss
i3,567
i2,341
Net
periodic benefit income
$
(i13,464)
$
(i11,115)
/
Service
cost is recorded in selling, administrative and other expenses in the Condensed Consolidated Statements of Income while all other components are recorded within other non-operating (income) expense. Pension benefits also include amounts related to supplemental retirement plans.
5. iAcquisitions
We acquired several businesses for approximately $i132 million
and $i40 million, net of cash acquired, during the three months ended March 31, 2024 and March 31, 2023, respectively. During the three months ended March 31, 2024, we recognized approximately $i99 million
and $i10 million of revenue, net of store closures, related to our current year Automotive and Industrial acquisitions, respectively. We recorded approximately $i92 million
of goodwill and other intangible assets associated with these acquisitions, primarily related to our European Automotive acquisitions. Other intangible assets acquired of $i41 million consisted of customer relationships with a weighted average amortization lives of i20
years. For each acquisition, we allocate the purchase price to the assets acquired and the liabilities assumed based on their fair values as of their respective acquisition dates. The results of operations for acquired businesses are included in our Condensed Consolidated Statements of Income beginning on their respective acquisition dates.
6. iAccumulated Other Comprehensive Loss
i
The
following tables present the changes in AOCL by component for the three months ended March 31:
Changes in Accumulated Other Comprehensive Loss by Component
The
AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the Employee Benefit Plans Footnote. Generally, tax effects in AOCL are established at the currently enacted tax rate and reclassified to net income in the same period that the related pre-tax AOCL reclassifications are recognized.
7. iCommitments and Contingencies
Legal Matters
We
are subject to various legal proceedings, many involving routine litigation incidental to the businesses, including approximately i2,466 pending product liability lawsuits resulting from our national distribution of automotive parts and supplies. Many of these involve claims of personal injury allegedly resulting from the use of automotive parts we distributed. The amount accrued for pending and future claims was $i235 million
as of March 31, 2024, which represents our best estimate of the liability within our calculated range of $i187 million to $i265 million,
discounted using a discount rate of i4.20%. The amount accrued for pending and future claims was $i244 million as of December 31, 2023, which represents our
best estimate of the liability within our calculated range of $i196 million to $i277 million, discounted using a discount rate of i3.88%.
Our undiscounted product liability was $i297 million and $i308 million as of March 31, 2024 and December
31, 2023, respectively. There have been no significant developments to the information presented in our 2023 Annual Report on Form 10-K with respect to litigation or commitments and contingencies.
Environmental Liabilities
Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe will exceed an applied threshold not to exceed $1 million. Applying this threshold, there are no environmental matters to disclose for this period.
In February 2024, we approved and initiated 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.
In the first quarter 2024, we incurred $i83 million
in restructuring and other costs. We expect to incur total costs up to $i200 million related to the global restructuring efforts in 2024 and to substantially complete the initiative by the end of 2025. We may incur additional charges not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of these initiatives.
The global restructuring was approved and funded by our corporate office and therefore these costs are not allocated to our segments.
i
The
table below summarizes the activity related to the restructuring costs discussed above.
(1)
Amount reflects moving expenses, accelerated rent, professional fees, facility closure costs and asset impairment costs that are attributable to our restructuring.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying notes contained herein and with the audited Consolidated Financial Statements, accompanying notes, related
information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of results for the year ended December 31, 2024.
Forward-Looking Statements
Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (“SEC”), release to the public, or make available on our website,
constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in the future tense and all statements accompanied by words such as “expect,”“likely,”“outlook,”“forecast,”“preliminary,”“would,”“could,”“should,”“position,”“will,”“project,”“intend,”“plan,”“on track,”“anticipate,”“to come,”“may,”“possible,”“assume,” or similar expressions are intended to identify such forward-looking statements. These forward-looking statements include our view of business and economic trends for the remainder of the year and our expectations regarding our ability to capitalize on these business and economic trends and to execute our strategic priorities. Senior officers may also make verbal statements to analysts, investors, the media and others
that are forward-looking.
We caution you that all forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements. Actual results or events may differ materially from those indicated as a result of various important factors. Such factors may include, among other things, changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation, financial institution disruptions and geopolitical conflicts such as the conflict between Russia and Ukraine, the conflict in the Gaza strip and other unrest in the Middle East; volatility in oil prices; significant cost increases, such as rising fuel and freight expenses; public health emergencies, including the effects on the financial health of our
business partners and customers, on supply chains and our suppliers, on vehicle miles driven as well as other metrics that affect our business, and on access to capital and liquidity provided by the financial and capital markets; our ability to maintain compliance with our debt covenants; our ability to successfully integrate acquired businesses into our operations and to realize the anticipated synergies and benefits; our ability to successfully implement our business initiatives in our two business segments; slowing demand for our products; the ability to maintain favorable supplier arrangements and relationships; changes in national and international legislation or government regulations or policies, including changes to import tariffs, environmental and social policy, infrastructure programs and privacy legislation, and their impact to us, our suppliers and customers; changes in tax policies; volatile exchange rates; our ability to successfully attract and retain
employees in the current labor market; uncertain credit markets and other macroeconomic conditions; competitive product, service and pricing pressures; failure or weakness in our disclosure controls and procedures and internal controls over financial reporting, including as a result of the work from home environment; the uncertainties and costs of litigation; disruptions caused by a failure or breach of our information systems, as well as other risks and uncertainties discussed in our 2023 Annual Report on Form 10-K and from time to time in our subsequent filings with the SEC.
Forward-looking statements speak only as of the date they are made, and we undertake no duty to update any forward-looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the SEC.
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. We conduct business in North America, Europe and Australasia from a network of more than 10,700 locations.
Our Automotive Parts Group ("Automotive") operates in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand, and accounted for approximately 62% of total revenues for the three months ended March 31, 2024. Our Industrial Parts Group ("Industrial") operates in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for approximately 38% of our total revenues for the three months ended March
31, 2024.
We consider a variety of performance and financial measures in assessing our business, and the key performance indicators used to measure our results are Comparable Sales, Gross Profit and Gross Margin, Selling, Administrative and Other Expenses ("SG&A"), Segment Profit and Segment Margin, and Net Income and EBITDA along with their adjusted measures. For more information regarding our key performance indicators please reference the Management’s
Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Results of Operations
Our first quarter net sales grew slightly year-over-year, as our Automotive segment sales increased, which was mostly offset by lower sales in our Industrial segment. Automotive segment sales increased due to the performance of our European and Australasia businesses, the benefit of prior year acquisitions, mostly in Europe, offset by year-over-year moderation in the benefit from inflation in the pricing environment. Our industrial segment sales declined, as customers reduced their maintenance spending in light of weaker economic conditions.
Our continued execution of strategic pricing and sourcing initiatives drove a 100 basis point gross margin increase year over year.
First quarter net income was down 18.1% year over year, primarily due to restructuring and other costs of $83 million from the global restructuring we approved and initiated in February 2024. Adjusted net income, which excludes restructuring costs, was up 2.3%, reflecting improved profitability in both of our segments due to the operating discipline in our operations.
Our first quarter results of operations are summarized below for the three months ended March 31, 2024 and 2023.
Our first quarter 2024 net sales increased slightly compared to 2023. We experienced a 1.9% benefit from acquisitions, offset by a 0.9% decrease in comparable sales and a net unfavorable impact of foreign currency and other of 0.7%.
The decrease in comparable sales is primarily driven by a sales decline in our Industrial business due to the impact of weaker macro-economic conditions on our customers in 2024 and a difficult year-over-year comparison.
Automotive
First quarter net sales for Automotive were $3.6 billion, an increase of 1.9% from 2023. The increase consisted of a 2.8% benefit from acquisitions, a 0.2% increase in comparable sales and a 1.1% unfavorable impact of foreign currency and other. The modest increase in comparable sales includes the positive contribution of continued
demand for automotive parts in Europe and Australasia.
Industrial
First quarter net sales for Industrial were $2.2 billion, a decrease of 2.2% compared to 2023. The decrease reflects a 2.6% decrease in comparable sales and a 0.1% unfavorable impact of foreign currency, slightly offset by a 0.5% benefit from acquisitions.
The decrease in comparable sales reflects moderation in demand in certain customer sectors and longer than expected softness in industrial production, partially offset by the positive impact of pricing initiatives. We experienced an adverse macro-economic environment when compared to 2023, which caused slowing global industrial demand.
Gross Profit and Gross Margin
Gross profit increased $61 million, or 3.0%, during the first quarter
of 2024 compared to last year, and gross margin increased 100 basis points to 35.9% compared to that same period of the previous year. These increases reflect the positive contributions of our strategic pricing and sourcing initiatives. These initiatives include enhancing technology to generate better pricing data and analytics, which allows us to respond in real time to shifting pricing dynamics across each market we serve as well as strategies related to sourcing product more efficiently.
Operating Expenses
SG&A expenses represent 27.2% of sales in the first quarter of 2024 compared to 26.2% last year. We experienced increased personnel and rent costs primarily due to annual merit wage increases and inflation, as well as made investments in information technology
to support our ongoing strategic initiatives.
In addition, we incurred $83 million of restructuring and other costs from the global restructuring we approved and initiated in February 2024. Refer to the Restructuring Footnote in the Notes to Condensed Consolidated Financial Statements for more information.
Segment Profit
Automotive
Automotive segment profit increased 3.2% in the first quarter compared to 2023, and Automotive segment profit margin increased to 7.6% compared to 7.5% last year. These increases are driven by continued execution on our global growth and productivity initiatives. These benefits were partially offset by higher personnel and rent costs in 2024 due to
inflationary pressures.
Industrial segment profit increased 3.4% in the first quarter compared to 2023, and Industrial segment profit margin increased to 12.3% compared to 11.6% last year. These improvements occurred, despite a year-over-year sales decline of 2.2%, primarily due to expense management and the ongoing execution of our supply chain initiatives and other strategic category management and pricing initiatives.
Income Taxes
Our
effective income tax rates were 23.5% and 24.8% for first quarter 2024 and 2023, respectively. The rate decrease from 2023 is primarily due to a shift in the mix of earnings across our international businesses and expanded investment benefits.
Net Income
First quarter 2024 net income was $249 million, a decrease of 18.1% compared to net income of $304 million for the same three month period of the prior year. On a per share diluted basis, net income was $1.78, a decrease of 16.8% compared to $2.14 in 2023. These decreases are primarily due to restructuring and other costs of $83 million from the global restructuring we approved and initiated in February 2024.
First quarter 2024 adjusted net income of $311 million increased
2.3% compared to 2023. On a per share basis, first quarter 2024 net income on an adjusted basis of $2.22, increased 3.7% compared to $2.14 in 2023. First quarter 2024 adjusted EBITDA was $517 million, an increase of 1.6% from $508 million from 2023.
The increases in these adjusted measures reflects the positive effects of executing our strategic pricing and other initiatives, as discussed more fully in the commentary above.
Non-GAAP Financial Measures
Adjusted net income, adjusted diluted EPS, adjusted EBITDA, total segment profit, total segment margin, and adjusted EBITDA for each segment are non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).
The
following tables set forth reconciliations of net income and diluted EPS to adjusted net income and adjusted diluted EPS, respectively, to account for the impact of adjustments. We also include reconciliations from net income to adjusted EBITDA, net income to total segment profit and total segment margin and segment profit to segment EBITDA and adjusted EBITDA for each segment. We believe that the presentation of adjusted net income, adjusted diluted EPS, total segment profit and adjusted EBITDA, which are not calculated in accordance with GAAP, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of our core operations. We consider these metrics useful to investors because they provide greater transparency into management’s view and assessment of our ongoing operating performance by removing items management believes
are not representative of our operations and may distort our longer-term operating trends. In the case of adjusted EBITDA by segment, we believe this additional metric is useful to investors as it provides further insight into the performance of our segments. We believe the non-GAAP metrics included herein also enhance the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not associated with our core operations. 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:
Three Months Ended March 31,
(in thousands, except per share data)
2024
2023
GAAP diluted earnings per share
$
1.78
$
2.14
Adjustments:
Restructuring
and other costs (1)
0.59
—
Total adjustments
0.59
—
Tax impact of adjustments (2)
(0.15)
—
Adjusted diluted earnings per share
$
2.22
$
2.14
Weighted
average common shares outstanding – assuming dilution
140,096
141,725
(1) Amount reflects the global restructuring initiative which includes a voluntary retirement offer in the U.S., and rationalization and optimization of certain distribution centers, stores and other facilities.
(2) We determine the tax effect of non-GAAP adjustments by considering the tax laws and statutory income tax rates applicable in the tax jurisdictions of the underlying non-GAAP adjustments, including any related valuation allowances. For the three months ended March 31, 2024, we applied the statutory income tax rates to the taxable portion
of all of our adjustments, which resulted in a tax impact of $21 million.
The table below represents a reconciliation from GAAP net income to adjusted EBITDA:
Three Months Ended March 31,
(in thousands)
2024
2023
GAAP net income
$
248,894
$
303,957
Depreciation
and amortization
90,610
87,215
Interest expense, net
17,690
16,864
Income taxes
76,287
100,449
EBITDA
433,481
508,485
Total
adjustments (1)
83,042
—
Adjusted EBITDA
$
516,523
$
508,485
(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 Condensed Consolidated Statements of Income:
Three
Months Ended March 31,
(in thousands)
2024
2023
Line item:
Restructuring and other costs
$
83,042
$
—
Total adjustments
$
83,042
$
—
The
table below represents a reconciliation from GAAP net income to total segment profit:
Our cash balance was $1.0 billion as
of March 31, 2024, a decrease of $52 million from December 31, 2023. For the three months ended March 31, 2024, we had net cash provided by operating activities of $318 million, net cash used in investing activities of $178 million and net cash used in financing activities of $175 million.
The cash provided by operating activities decreased as compared to prior year primarily driven by changes in working capital. We had $178 million in net cash used for investing activities primarily for capital expenditures and acquisitions and other investing activities of $250 million. The financing activities consisted primarily of $133 million for dividends paid to our shareholders and $38 million of stock repurchases.
Accounts receivable increased
$202 million, or 9.1%, from December 31, 2023. Inventory increased $59 million, or 1.3%. Accounts receivable and inventory were both impacted by first quarter increase in revenues and related product demand. Accounts payable increased $226 million, or 4.1% from December 31, 2023, in line with the increase in inventory. Total debt of $3.9 billion at March 31, 2024 decreased $32 million, or 0.8%, from December 31, 2023.
Liquidity and Capital Resources
We ended the quarter with $2.5 billion of total liquidity (comprising $1.5 billion availability on the revolving credit
facility and $1.0 billion of cash and cash equivalents). From time to time, we may enter into other credit facilities or financing arrangements to provide additional liquidity and to manage against foreign currency risk. We currently believe that the existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future.
We have a strong cash position and solid financial strength to pursue strategic growth opportunities through disciplined, strategic capital deployment. Our key priorities include the reinvestment in our businesses through capital expenditures, mergers and acquisitions, the dividend and share repurchases. We have plans for additional investments in our businesses to drive growth, improve efficiencies and productivity, and drive shareholder value.
We expect
to be able to continue to borrow funds at reasonable rates over the long term. At March 31, 2024, our total average cost of debt was 3.17%, and we remain in compliance with all covenants connected with our borrowings.
Any failure to comply with our debt covenants or restrictions could result in a default under our financing arrangements or could require us to obtain waivers from our lenders for failure to comply with these restrictions. 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 February 15, 2024, we announced a 5.3% increase in the regular quarterly
cash dividend for 2024. Our Board of Directors increased the cash dividend payable to an annual rate of $4.00 per share compared with the prior year dividend of $3.80 per share. We have paid a cash dividend every year since going public in 1948, and 2024 will mark the 68th consecutive year of increased dividends paid to shareholders.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our 2023 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2023.
Item 4.
Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the SEC that occurred during our last quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information with respect to our legal proceedings may be found in the Commitments and Contingencies Footnote in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk
Factors” in our 2023 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about the purchases of shares of our common stock during the three months ended March 31, 2024:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total
Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
(1)Includes
shares surrendered by employees to satisfy tax withholding obligations in connection with the vesting of shares of restricted stock, the exercise of share appreciation rights and/or tax withholding obligations.
(2)On August 21, 2017, the Board of Directors announced that it had authorized the repurchase of 15 million shares. The authorization for the repurchase continues until all such shares have been repurchased or the repurchase plan is terminated by action of the Board of Directors. Approximately 8.3 million shares authorized remain available to be repurchased. There were no other repurchase plans announced as of March 31, 2024.
Item
5. Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended March 31, 2024, none of the Company’s directors or executive officers iiadopted/,
modified or iiterminated/ any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule
10b5-1 trading arrangement.”
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.