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
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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| | Year Ended December 31, | | | | |
| | 2022 | | 2021 | | | | |
(in thousands) | | $ | | % of Sales | | $ | | % of Sales | | $ Change | | % Change |
Net sales | | $ | 22,095,973 | | | 100.0 | % | | $ | 18,870,510 | | | 100.0 | % | | $ | 3,225,463 | | | 17.1 | % |
Cost of goods sold | | 14,355,869 | | | 65.0 | % | | 12,236,374 | | | 64.8 | % | | 2,119,495 | | | 17.3 | % |
Gross profit | | 7,740,104 | | | 35.0 | % | | 6,634,136 | | | 35.2 | % | | 1,105,968 | | | 16.7 | % |
Operating expenses: | | | | | | | | | | | | |
Selling, administrative and other expenses | | 5,758,295 | | | 26.1 | % | | 5,162,506 | | | 27.4 | % | | 595,789 | | | 11.5 | % |
Depreciation and amortization | | 347,819 | | | 1.6 | % | | 290,971 | | | 1.5 | % | | 56,848 | | | 19.5 | % |
Provision for doubtful accounts | | 19,791 | | | 0.1 | % | | 17,739 | | | 0.1 | % | | 2,052 | | | 11.6 | % |
Total operating expenses | | 6,125,905 | | | 27.7 | % | | 5,471,216 | | | 29.0 | % | | 654,689 | | | 12.0 | % |
Non-operating expenses (income): | | | | | | | | | | | | |
Interest expense, net | | 73,887 | | | 0.3 | % | | 62,150 | | | 0.3 | % | | 11,737 | | | 18.9 | % |
Other | | (32,290) | | | (0.1) | % | | (99,576) | | | (0.5) | % | | 67,286 | | | (67.6) | % |
Total non-operating expenses (income) | | 41,597 | | | 0.2 | % | | (37,426) | | | (0.2) | % | | 79,023 | | | (211.1) | % |
Income before income taxes | | 1,572,602 | | | 7.1 | % | | 1,200,346 | | | 6.4 | % | | 372,256 | | | 31.0 | % |
Income taxes | | 389,901 | | | 1.8 | % | | 301,556 | | | 1.6 | % | | 88,345 | | | 29.3 | % |
Net income | | $ | 1,182,701 | | | 5.4 | % | | $ | 898,790 | | | 4.8 | % | | $ | 283,911 | | | 31.6 | % |
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| | Year Ended December 31, | | | | |
(in thousands, except per share data) | | 2022 | | 2021 | | $ Change | | % Change |
Diluted EPS | | $ | 8.31 | | $ | 6.23 | | $ | 2.08 | | | 33.4 | % |
Adjusted EBITDA | | $ | 1,999,329 | | $ | 1,681,515 | | $ | 317,814 | | | 18.9 | % |
Automotive segment profit | | $ | 1,191,674 | | $ | 1,073,427 | | $ | 118,247 | | | 11.0 | % |
Industrial segment profit | | $ | 886,636 | | $ | 595,232 | | $ | 291,404 | | | 49.0 | % |
Total segment profit | | $ | 2,078,310 | | $ | 1,668,659 | | $ | 409,651 | | | 24.5 | % |
Automotive segment margin | | 8.7 | % | | 8.6 | % | | | | |
Industrial segment margin | | 10.5 | % | | 9.4 | % | | | | |
Total segment margin | | 9.4 | % | | 8.8 | % | | | | |
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
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).
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.
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| | Year Ended December 31, |
(in thousands) | | 2022 | | 2021 |
GAAP net income | | $ | 1,182,701 | | | $ | 898,790 | |
| | | | |
Adjustments: | | | | |
Gain on sales of real estate (1) | | (102,803) | | | — | |
Gain on insurance proceeds (2) | | (1,507) | | | (3,862) | |
Product liability adjustment (3) | | 28,730 | | | — | |
Product liability damages award (4) | | — | | | 77,421 | |
Loss on software disposal (5) | | — | | | 61,063 | |
Gain on equity investment (6) | | — | | | (10,229) | |
Transaction and other costs (7) | | 80,601 | | | 3,655 | |
Total adjustments | | 5,021 | | | 128,048 | |
Tax impact of adjustments | | (137) | | | (29,828) | |
Adjusted net income | | $ | 1,187,585 | | | $ | 997,010 | |
The table below represents amounts per common share assuming dilution:
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| | Year Ended December 31, |
(in thousands, except per share data) | | 2022 | | 2021 |
GAAP diluted EPS | | $ | 8.31 | | | $ | 6.23 | |
| | | | |
Adjustments: | | | | |
Gain on sales of real estate (1) | | (0.72) | | | — | |
Gain on insurance proceeds (2) | | (0.01) | | | (0.03) | |
Product liability adjustment (3) | | 0.20 | | | — | |
Product liability damages award (4) | | — | | | 0.54 | |
Loss on software disposal (5) | | — | | | 0.42 | |
Gain on equity investment (6) | | — | | | (0.07) | |
Transaction and other costs (7) | | 0.56 | | | 0.03 | |
Total adjustments | | 0.03 | | | 0.89 | |
Tax impact of adjustments | | — | | | (0.21) | |
Adjusted diluted EPS | | $ | 8.34 | | | $ | 6.91 | |
Weighted average common shares outstanding - assuming dilution | | 142,322 | | | 144,221 | |
(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.
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| | Year Ended December 31, |
(in thousands) | | 2022 | | 2021 |
GAAP net income | | $ | 1,182,701 | | | $ | 898,790 | |
Depreciation and amortization | | 347,819 | | | 290,971 | |
Interest expense, net | | 73,887 | | | 62,150 | |
Income taxes | | 389,901 | | | 301,556 | |
EBITDA | | 1,994,308 | | | 1,553,467 | |
Total adjustments (8) | | 5,021 | | | 128,048 | |
Adjusted EBITDA | | $ | 1,999,329 | | | $ | 1,681,515 | |
(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:
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| | Year Ended December 31, |
(in thousands) | | 2022 | | 2021 |
Line item: | | | | |
Cost of goods sold | | $ | 5,000 | | | $ | — | |
Selling, administrative and other expenses | | (7,472) | | | 142,139 | |
Non-operating expenses (income): Other | | 7,493 | | | (14,091) | |
Total adjustments | | $ | 5,021 | | | $ | 128,048 | |
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.
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.
Sources and Uses of Cash
A summary of our consolidated statements of cash flows is as follows:
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| | Year Ended December 31, | | |
(In thousands) | | 2022 | | 2021 | | $ Change | | % Change |
Operating activities | | $ | 1,466,971 | | | $ | 1,258,285 | | | $ | 208,686 | | | 16.6 | % |
Investing activities | | $ | (1,684,240) | | | $ | (506,164) | | | $ | (1,178,076) | | | 232.7 | % |
Financing activities | | $ | 205,101 | | | $ | (989,532) | | | $ | 1,194,633 | | | (120.7) | % |
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.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payment Due by Period |
(In thousands) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | Over 5 Years |
Credit facilities | | $ | 3,351,185 | | | $ | 252,029 | | | $ | 847,452 | | | $ | 743,264 | | | $ | 1,508,440 | |
Operating leases | | 1,243,248 | | | 325,370 | | | 467,485 | | | 234,308 | | | 216,085 | |
Total material cash requirements | | $ | 4,594,433 | | | $ | 577,399 | | | $ | 1,314,937 | | | $ | 977,572 | | | $ | 1,724,525 | |
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.
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
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
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ANNUAL REPORT ON FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Genuine Parts Company and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Genuine Parts Company and Subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Fair Value of Customer Relationships Acquired in the Kaman Distribution Group Business Combination
|
Description of the Matter | As disclosed in Note 10 to the consolidated financial statements, the Company completed the acquisition of Kaman Distribution Group (KDG) during 2022 for an aggregate net purchase price of $1.3 billion. This acquisition was accounted for under the acquisition method of accounting for business combinations. The Company allocated the net purchase price to the assets acquired and the liabilities assumed based on their respective fair values as of the date of acquisition, including other intangible assets of $568 million. Of the other intangible assets acquired, the largest was customer relationships of $527 million.
Auditing the Company's valuation of customer relationships was complex and required significant auditor judgment due to the significant estimation uncertainty in evaluating certain assumptions required to estimate the fair value. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair value of the customer relationships to assumptions about the future cash flows that the Company expects to generate from the acquired business. The Company used the multi-period excess earnings method under the income approach to measure the customer relationships. The fair value measure was sensitive to underlying assumptions including discount rates and certain assumptions that form the basis of the forecasted results (e.g., future revenue growth rates and EBITDA margins). The significant assumptions are forward-looking and could be affected by future economic and market conditions. |
| |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant controls over the Company’s process for estimating the fair value of customer relationships, including controls over management's review of the significant assumptions, including the future revenue growth rates and EBITDA margins, used in the valuation of this this intangible asset and review of the valuation model.
To test the estimated fair value of the customer relationships, we performed audit procedures that included, among others, evaluating the Company's valuation methodologies and evaluating the significant assumptions used by the Company. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. Our testing also included comparing the significant assumptions used to the historical results of the acquired business and to other guideline companies within the same industry. We also performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value of the intangible assets resulting from changes in the assumptions. |
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| Loss Contingencies Related to Product Liabilities
|
Description of the Matter | As disclosed in Notes 1 and 15 to the consolidated financial statements, the Company is subject to pending product liability lawsuits primarily resulting from its national distribution of automotive parts and supplies. The Company accrues for loss contingencies related to product liabilities if it is probable that the Company will incur a loss and the loss can be reasonably estimated. The amount accrued for product liabilities as of December 31, 2022 was $220 million.
Auditing the Company’s loss contingencies related to product liabilities was complex due to the significant measurement uncertainty associated with the estimate, management’s application of significant judgment and the use of valuation techniques. In addition, the loss contingencies related to product liabilities are sensitive to significant management assumptions, including the number, type, and severity of claims incurred and estimated to be incurred in future periods. |
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| |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant controls over the Company’s process for estimating loss contingencies related to product liabilities. For example, we tested controls over management's review of the significant assumptions described above and the reconciliation of claims data to that used by the Company’s actuarial specialist.
To test the estimated loss contingencies related to product liabilities, our audit procedures included, among others, assessing the methodology used, testing the significant assumptions, including testing the completeness and accuracy of the underlying data, and comparing significant assumptions to historical claims as well as external data. We evaluated the legal letters obtained from internal and external legal counsel, held discussions with legal counsel, and performed a search for new or contrary evidence affecting the estimate. We involved our actuarial specialists to assist in our evaluation of the methodology and assumptions used by management and to independently develop a range of estimated product liabilities using the Company’s historical data as well as other information available for similar cases. We compared the Company's estimated loss contingencies related to product liabilities to the range developed by our actuarial specialists. We also assessed the adequacy of the Company’s disclosures, included in Notes 1 and 15 to the consolidated financial statements, in relation to these matters. |
/s/ Ernst & Young LLP
We have served as the company’s auditor since 1948.
Atlanta, Georgia
February 23, 2023
Genuine Parts Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data and per Share Amounts)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 653,463 | | | $ | 714,701 | |
Trade accounts receivable, net | 2,188,868 | | | 1,797,955 | |
Merchandise inventories, net | 4,441,649 | | | 3,889,919 | |
Prepaid expenses and other current assets | 1,532,759 | | | 1,353,847 | |
Total current assets | 8,816,739 | | | 7,756,422 | |
Goodwill | 2,588,113 | | | 1,915,307 | |
Other intangible assets, net | 1,812,510 | | | 1,406,401 | |
Operating lease assets | 1,104,678 | | | 1,053,689 | |
Other assets | 847,325 | | | 985,884 | |
Property, plant and equipment, net | 1,326,014 | | | 1,234,399 | |
Total assets | $ | 16,495,379 | | | $ | 14,352,102 | |
| | | |
Liabilities and equity | | | |
Current liabilities: | | | |
Trade accounts payable | $ | 5,456,550 | | | $ | 4,804,939 | |
Current portion of debt | 252,029 | | | — | |
Other current liabilities | 1,851,340 | | | 1,660,768 | |
Dividends payable | 126,191 | | | 115,876 | |
Total current liabilities | 7,686,110 | | | 6,581,583 | |
Long-term debt | 3,076,794 | | | 2,409,363 | |
Operating lease liabilities | 836,019 | | | 789,175 | |
Pension and other post-retirement benefit liabilities | 197,879 | | | 265,134 | |
Deferred tax liabilities | 391,163 | | | 280,778 | |
Other long-term liabilities | 502,967 | | | 522,779 | |
Equity: | | | |
Preferred stock, par value $1 per share — authorized 10,000,000 shares; none issued | — | | | — | |
Common stock, par value $1 per share - authorized 450,000,000 shares; issued and outstanding - 2022 - 140,941,649 shares and 2021 - 142,180,683 shares | 140,941 | | | 142,181 | |
Additional paid-in capital | 140,324 | | | 119,975 | |
Accumulated other comprehensive loss | (1,032,542) | | | (857,739) | |
Retained earnings | 4,541,640 | | | 4,086,325 | |
Total parent equity | 3,790,363 | | | 3,490,742 | |
Noncontrolling interests in subsidiaries | 14,084 | | | 12,548 | |
Total equity | 3,804,447 | | | 3,503,290 | |
Total liabilities and equity | $ | 16,495,379 | | | $ | 14,352,102 | |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net sales | $ | 22,095,973 | | | $ | 18,870,510 | | | $ | 16,537,433 | |
Cost of goods sold | 14,355,869 | | | 12,236,374 | | | 10,882,592 | |
Gross profit | 7,740,104 | | | 6,634,136 | | | 5,654,841 | |
Operating expenses: | | | | | |
Selling, administrative and other expenses | 5,758,295 | | | 5,162,506 | | | 4,386,739 | |
Depreciation and amortization | 347,819 | | | 290,971 | | | 272,842 | |
Provision for doubtful accounts | 19,791 | | | 17,739 | | | 23,577 | |
Restructuring costs | — | | | — | | | 50,019 | |
Goodwill impairment charge | — | | | — | | | 506,721 | |
Total operating expenses | 6,125,905 | | | 5,471,216 | | | 5,239,898 | |
Non-operating expenses (income): | | | | | |
Interest expense, net | 73,887 | | | 62,150 | | | 91,048 | |
Other | (32,290) | | | (99,576) | | | (55,473) | |
Total non-operating expenses (income) | 41,597 | | | (37,426) | | | 35,575 | |
Income before income taxes | 1,572,602 | | | 1,200,346 | | | 379,368 | |
Income taxes | 389,901 | | | 301,556 | | | 215,973 | |
Net income from continuing operations | 1,182,701 | | | 898,790 | | | 163,395 | |
Net loss from discontinued operations | — | | | — | | | (192,497) | |
Net income (loss) | $ | 1,182,701 | | | $ | 898,790 | | | $ | (29,102) | |
Basic earnings (loss) per share: | | | | | |
Continuing operations | $ | 8.36 | | | $ | 6.27 | | | $ | 1.13 | |
Discontinued operations | — | | | — | | | (1.33) | |
Basic earnings (loss) per share | $ | 8.36 | | | $ | 6.27 | | | $ | (0.20) | |
Diluted earnings (loss) per share: | | | | | |
Continuing operations | $ | 8.31 | | | $ | 6.23 | | | $ | 1.13 | |
Discontinued operations | — | | | — | | | (1.33) | |
Diluted earnings (loss) per share | $ | 8.31 | | | $ | 6.23 | | | $ | (0.20) | |
Weighted average common shares outstanding | 141,468 | | | 143,435 | | | 144,474 | |
Dilutive effect of stock options and non-vested restricted stock awards | 854 | | | 786 | | | 641 | |
Weighted average common shares outstanding — assuming dilution | 142,322 | | | 144,221 | | | 145,115 | |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands, Except per Share Amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income (loss) | $ | 1,182,701 | | | $ | 898,790 | | | $ | (29,102) | |
Other comprehensive (loss) income, net of income taxes: | | | | | |
Foreign currency translation adjustments | (143,890) | | | (65,843) | | | 102,595 | |
Cash flow hedge adjustments, net of income taxes in 2022 — $4,612, 2021 — $5,535, and 2020 — $3,453 | 12,470 | | | 14,965 | | | (9,336) | |
Pension and postretirement benefit adjustments, net of income taxes of 2022 — $15,846, 2021 — $84,650, and 2020 — $4,639 | (43,383) | | | 229,641 | | | 11,547 | |
Other comprehensive (loss) income, net of tax | (174,803) | | | 178,763 | | | 104,806 | |
Comprehensive income | $ | 1,007,898 | | | $ | 1,077,553 | | | $ | 75,704 | |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Equity
(In Thousands, Except Share Data and per Share Amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Parent Equity | | Non- controlling Interests in Subsidiaries | | Total Equity |
|
|
Shares | | Amount | |
Balance at January 1, 2020 | 145,378,158 | | | $ | 145,378 | | | $ | 98,777 | | | $ | (1,141,308) | | | $ | 4,571,860 | | | $ | 3,674,707 | | | $ | 20,793 | | | $ | 3,695,500 | |
Net loss | — | | | — | | | — | | | — | | | (29,102) | | | (29,102) | | | — | | | (29,102) | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 104,806 | | | — | | | 104,806 | | | — | | | 104,806 | |
Cash dividends declared, $3.16 per share | — | | | — | | | — | | | — | | | (456,469) | | | (456,469) | | | — | | | (456,469) | |
Share-based awards exercised, including tax benefit of $677 | 112,621 | | | 113 | | | (4,233) | | | — | | | — | | | (4,120) | | | — | | | (4,120) | |
Share-based compensation | — | | | — | | | 22,621 | | | — | | | — | | | 22,621 | | | — | | | 22,621 | |
Purchase of stock | (1,136,444) | | | (1,137) | | | — | | | — | | | (95,078) | | | (96,215) | | | — | | | (96,215) | |
Cumulative effect from adoption of ASU No. 2016-13 | — | | | — | | | — | | | — | | | (11,432) | | | (11,432) | | | — | | | (11,432) | |
Noncontrolling interest activities | — | | | — | | | — | | | — | | | — | | | — | | | (7,586) | | | (7,586) | |
Balance at December 31, 2020 | 144,354,335 | | | 144,354 | | | 117,165 | | | (1,036,502) | | | 3,979,779 | | | 3,204,796 | | | 13,207 | | | 3,218,003 | |
Net income | — | | | — | | | — | | | — | | | 898,790 | | | 898,790 | | | — | | | 898,790 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 178,763 | | | — | | | 178,763 | | | — | | | 178,763 | |
Cash dividends declared, $3.26 per share | — | | | — | | | — | | | — | | | (467,482) | | | (467,482) | | | — | | | (467,482) | |
Share-based awards exercised, including tax benefit of $7,076 | 440,667 | | | 441 | | | (22,787) | | | — | | | — | | | (22,346) | | | — | | | (22,346) | |
Share-based compensation | — | | | — | | | 25,597 | | | — | | | — | | | 25,597 | | | — | | | 25,597 | |
Purchase of stock | (2,614,319) | | | (2,614) | | | — | | | — | | | (330,985) | | | (333,599) | | | — | | | (333,599) | |
Cumulative effect from adoption of ASU 2019-12 | — | | | — | | | — | | | — | | | 6,223 | | | 6,223 | | | — | | | 6,223 | |
Noncontrolling interest activities | — | | | — | | | — | | | — | | | — | | | — | | | (659) | | | (659) | |
Balance at December 31, 2021 | 142,180,683 | | | 142,181 | | | 119,975 | | | (857,739) | | | 4,086,325 | | | 3,490,742 | | | 12,548 | | | 3,503,290 | |
Net income | — | | | — | | | — | | | — | | | 1,182,701 | | | 1,182,701 | | | — | | | 1,182,701 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | (174,803) | | | — | | | (174,803) | | | — | | | (174,803) | |
Cash dividend declared, $3.58 per share | — | | | — | | | — | | | — | | | (506,232) | | | (506,232) | | | — | | | (506,232) | |
Share-based awards exercised, including tax benefit of $5,495 | 333,185 | | | 332 | | | (17,709) | | | — | | | — | | | (17,377) | | | — | | | (17,377) | |
Share-based compensation | — | | | — | | | 38,058 | | | — | | | — | | | 38,058 | | | — | | | 38,058 | |
Purchase of stock | (1,572,219) | | | (1,572) | | | — | | | — | | | (221,154) | | | (222,726) | | | — | | | (222,726) | |
Noncontrolling interest activities | — | | | — | | | — | | | — | | | — | | | — | | | 1,536 | | | 1,536 | |
Balance at December 31, 2022 | 140,941,649 | | | $ | 140,941 | | | $ | 140,324 | | | $ | (1,032,542) | | | $ | 4,541,640 | | | $ | 3,790,363 | | | $ | 14,084 | | | $ | 3,804,447 | |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands) | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2022 | | 2021 | | 2020 |
Operating activities: | | | | | |
Net income (loss) | $ | 1,182,701 | | | $ | 898,790 | | | $ | (29,102) | |
Net loss from discontinued operations | — | | | — | | | (192,497) | |
Net income from continuing operations | 1,182,701 | | | 898,790 | | | 163,395 | |
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 347,819 | | | 290,971 | | | 272,842 | |
Deferred income taxes | 2,220 | | | 31,676 | | | (27,722) | |
Share-based compensation | 38,058 | | | 25,597 | | | 22,621 | |
Gain on sale of real estate | (102,803) | | | — | | | — | |
Goodwill impairment charge | — | | | — | | | 506,721 | |
Other operating activities | 18,377 | | | 22,575 | | | 23,248 | |
Changes in operating assets and liabilities: | | | | | |
Trade accounts receivable, net | (244,371) | | | (258,994) | | | 957,514 | |
Merchandise inventories, net | (380,420) | | | (329,237) | | | 58,462 | |
Trade accounts payable | 676,406 | | | 777,318 | | | 89,350 | |
Other assets and liabilities | (71,016) | | | (200,411) | | | (51,909) | |
Net cash provided by operating activities from continuing operations | 1,466,971 | | | 1,258,285 | | | 2,014,522 | |
Investing activities: | | | | | |
Purchases of property, plant and equipment | (339,632) | | | (266,136) | | | (153,502) | |
Proceeds from sale of property, plant and equipment | 145,007 | | | 26,549 | | | 18,064 | |
Proceeds from divestitures of businesses | 33,604 | | | 17,738 | | | 387,379 | |
Proceeds from settlement of net investment hedge | 158,441 | | | — | | | — | |
Acquisitions and other investing activities | (1,681,660) | | | (284,315) | | | (69,173) | |
Net cash (used in) provided by investing activities from continuing operations | (1,684,240) | | | (506,164) | | | 182,768 | |
Financing activities: | | | | | |
Proceeds from debt | 5,108,641 | | | 892,694 | | | 2,638,014 | |
Payments on debt | (4,147,773) | | | (1,053,423) | | | (3,533,017) | |
Share-based awards exercised | (17,377) | | | (22,346) | | | (4,120) | |
Dividends paid | (495,917) | | | (465,649) | | | (453,277) | |
Purchase of stock | (222,726) | | | (333,599) | | | (96,215) | |
Other financing activities | (19,747) | | | (7,209) | | | (65,150) | |
Net cash provided by (used in) financing activities from continuing operations | 205,101 | | | (989,532) | | | (1,513,765) | |
Cash flows from discontinued operations: | | | | | |
Net cash flows provided by operating activities from discontinued operations | — | | | — | | | 5,039 | |
Net cash used in investing activities from discontinued operations | — | | | — | | | (11,131) | |
Net cash provided by financing activities from discontinued operations | — | | | — | | | — | |
Net cash (used in) provided by discontinued operations | — | | | — | | | (6,092) | |
Effect of exchange rate changes on cash and cash equivalents | (49,070) | | | (38,054) | | | 35,741 | |
Net (decrease) increase in cash and cash equivalents | (61,238) | | | (275,465) | | | 713,174 | |
Cash and cash equivalents at beginning of year | 714,701 | | | 990,166 | | | 276,992 | |
Cash and cash equivalents at end of year | $ | 653,463 | | | $ | 714,701 | | | $ | 990,166 | |
| | | | | |
Supplemental disclosures of cash flow information | | | | | |
Cash paid during the year for: | | | | | |
Income taxes | $ | 362,859 | | | $ | 305,326 | | | $ | 223,019 | |
Interest | $ | 73,368 | | | $ | 65,732 | | | $ | 91,344 | |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2022
1.Summary of Significant Accounting Policies
Business
Genuine Parts Company (the "company") is a distributor of automotive replacement parts and industrial parts and materials. We serve a diverse customer base through a network of more than 10,600 locations throughout North America, Australasia, and Europe and, therefore, have limited exposure from credit losses to any particular customer, region, or industry segment. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral.
We have reclassified certain prior period amounts to conform to the current period presentation.
We have evaluated subsequent events through the date the financial statements were issued.
On June 30, 2020, we completed the divestiture of our Business Products Group. Refer to the Acquisitions, Divestitures and Discontinued Operations Footnote for more information. Our results of operations for the Business Products Group are reported as discontinued operations and all information related to the discontinued operations has been excluded from the Notes to the Consolidated Financial Statements for all periods presented. Net loss from discontinued operations includes all costs that are directly attributable to these businesses and excludes certain corporate overhead costs that were previously allocated.
Principles of Consolidation
The consolidated financial statements include all of our accounts. The net income attributable to noncontrolling interests is not material to our consolidated net income. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates and the differences could be material.
Revenue Recognition
We primarily recognize revenue at the point the customer obtains control of the products or services and at an amount that reflects the consideration expected to be received for those products or services.
Revenue is recognized net of allowances for returns, variable consideration and any taxes collected from customers that will be remitted to governmental authorities. Revenue recognized over time is not significant. Payment terms with customers vary by the type and location of the customer and the products or services offered. We do not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant. Liabilities for customer incentives, discounts, or rebates are included in other current liabilities in the consolidated balance sheets.
Product Distribution Revenues
We generate revenue primarily by distributing products through wholesale and retail channels. For wholesale customers, revenue is recognized when title and control of the goods has passed to the wholesale customer. Retail revenue is recognized at the point of sale when the goods are transferred to customers and consideration is received. Shipping and handling activities are performed prior to the customer obtaining control of the products. Costs associated with shipping and handling to our customers are considered costs to fulfill a contract and are included in selling, administrative and other expenses in the period they are incurred.
Other Revenues
We offer software support, product cataloging, marketing, training and other membership program and support services to certain customers. This revenue is recognized as services are performed. Revenue from these services is recognized over a short duration and the impact to our consolidated financial statements is not significant.
Variable Consideration
Our products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. We estimate variable consideration based on historical experience to determine the expected amount to which we will be entitled in exchange for transferring the promised goods or services to a customer. We recognize estimated variable consideration as an adjustment to the transaction price when control of the related product or service is transferred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.
Foreign Currency Translation
The consolidated balance sheets and statements of income of our foreign subsidiaries have been translated into U.S. dollars at the current and average exchange rates, respectively. The foreign currency translation adjustment is included as a component of accumulated other comprehensive loss.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Trade Accounts Receivable and the Allowance for Doubtful Accounts
We evaluate the collectability of trade accounts receivable based on a combination of factors. We estimate an allowance for doubtful accounts as a percentage of net sales based on various factors, including historical experience, current economic conditions and future expected credit losses and collectability trends. We will periodically adjust this estimate when we become 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 we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults and, therefore, the need to revise estimates for bad debts. For the years ended December 31, 2022, 2021, and 2020, we recorded provisions for doubtful accounts of approximately $20 million, $18 million, and $24 million, respectively. At December 31, 2022 and 2021, the allowance for doubtful accounts was approximately $54 million and $44 million, respectively.
Merchandise Inventories, Including Consideration Received From Vendors
Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out ("LIFO") method for a majority of U.S. automotive and industrial parts, and generally by the weighted average method for non-U.S. and certain other inventories. If the FIFO method had been used in place of LIFO, cost would have been approximately $835 million and $628 million higher than reported at December 31, 2022 and 2021, respectively. Reductions in certain industrial parts inventories resulted in liquidations of LIFO inventory layers, which reduced cost of goods sold by immaterial amounts in 2021 and 2020. There were no liquidations of LIFO inventory layers in 2022.
We identify slow moving or obsolete inventories and estimate appropriate provisions related thereto. Historically, these losses have not been significant as the vast majority of our inventories are not highly susceptible to obsolescence and are eligible for return under various vendor return programs. While we have no reason to believe our inventory return privileges will be discontinued in the future, our risk of loss associated with obsolete or slow moving inventories would increase if such were to occur.
We 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.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of amounts due from vendors, prepaid expenses, debt securities, and income and other taxes receivable.
Goodwill
We review our goodwill annually for impairment in the fourth quarter, or sooner if circumstances indicate that the carrying amount may exceed fair value. We test goodwill for impairment at the reporting unit level, which is an operating segment or a level below an operating segment (a component). A component is a reporting unit if the component constitutes a business for which discrete financial information and operating results are available and management regularly reviews that information. However, we may aggregate two or more components of an operating segment into a single reporting unit if the components have similar economic characteristics.
To review goodwill at a reporting unit for impairment, we generally elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Qualitative factors include adverse macroeconomic, industry or market conditions, cost factors, or financial performance. If we elect not to perform a qualitative assessment or conclude from our assessment of qualitative factors that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we must perform a quantitative test to evaluate goodwill impairment.
To perform a quantitative test, we calculate the fair value of the reporting unit and compare that amount to the reporting unit's carrying value. We typically calculate the fair value by using a combination of a market approach and an income approach that is based on a discounted cash flow model. The assumptions used in the market approach generally include benchmark company market multiples and the assumptions used in the income approach generally include the projected cash flows of the reporting unit, which are based on projected revenue growth rates and EBITDA margins, the estimated weighted average cost of capital, working capital and terminal value. We use inputs and assumptions we believe are consistent with those a hypothetical marketplace participant would use. We recognize goodwill impairment (if any) as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
Refer to the Goodwill and Other Intangible Assets Footnote for further information on the results of our annual goodwill impairment testing.
Long-Lived Assets Other Than Goodwill
We assess our long-lived assets other than goodwill for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. To analyze recoverability, we project undiscounted net future cash flows over the remaining life of such assets. If these projected cash flows are less than the carrying amount, an impairment would be recognized, resulting in a write-down of assets with a corresponding charge to earnings. Impairment losses, if any, are measured based upon the difference between the carrying amount and the fair value of the assets. For the years ended December 31, 2022, 2021, and 2020 we recognized losses related to impairments and disposals of $17 million, $61 million, and $6 million, respectively. (Refer to the Goodwill and Other Intangible Assets Footnote and the Property, Plant and Equipment Footnote for more information on the losses that occurred in 2022 and 2021, respectively).
Other Assets
Other assets consist primarily of cash surrender value of life insurance policies, equity method and other investments, guarantee fees receivable, and deferred compensation benefits.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are primarily determined on a straight-line basis over the following estimated useful lives of each asset: buildings, 10 to 40 years; machinery and equipment, 5 to 15 years; and the shorter of lease term or useful life for leasehold improvements.
Other Current Liabilities
Other current liabilities consist primarily of current lease obligations, allowances for sales returns expected within the next year, accrued compensation, accrued income and other taxes, and other reserves for expenses incurred.
Other Long-term Liabilities
Other long-term liabilities consist primarily of allowances for sales returns expected after the next year, guarantee obligations, accrued taxes and other non-current obligations.
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. We carry high deductible policies for a majority of these liabilities. We record our reserves based on an analysis performed by an independent actuary. The analysis involves calculating loss development factors and applying them to reserves supplied by our insurance providers. While we believe the assumptions used in these calculations are appropriate, significant changes in actual experience or our assumptions could materially affect the worker’s compensation costs and reserves recorded.
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 Margin). 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.
The product liability amount reflects our reasonable estimate of losses based upon currently known facts. To calculate the liability, we estimate potential losses relating to pending claims and also estimates 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.
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. Additionally, ASC 820, Fair Value Measurements, defines levels within a hierarchy based upon observable and non-observable inputs.
•Level 1- Observable inputs such as quoted prices in active markets;
•Level 2- Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3- Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions
At December 31, 2022 and 2021, the fair value of our senior unsecured notes was approximately $2.9 billion and $2.5 billion, respectively, which are designated as Level 2 in the fair value hierarchy. Our valuation technique is based primarily on prices and other relevant information generated by observable transactions involving identical or comparable assets or liabilities.
Derivative instruments are recognized in the 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.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analyses of goodwill, other intangible assets, and long-lived assets. These involve fair value measurements on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable, trade accounts payable, and borrowings under the line of credit approximate their respective fair values based on the short-term nature of these instruments.
Fair value measurement using unobservable inputs is inherently uncertain, and the use of different methodologies or assumptions to determine the fair value instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2021.
Derivatives and Hedging
We are exposed to various risks arising from business operations and market conditions, including fluctuations in interest rates and certain foreign currencies. When deemed appropriate, we use derivative and non-derivative instruments as risk management tools to mitigate the potential impact of interest rate and foreign exchange rate risks. The objective of using these tools is to reduce fluctuations in our earnings, cash flows and net investments in certain foreign subsidiaries associated with changes in these rates. Derivative financial instruments are not used for trading or other speculative purposes. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default related to derivative instruments.
We formally document relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivative and non-derivative instruments that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When a designated instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively.
Shipping and Handling Costs
Shipping and handling costs are classified as selling, administrative and other expenses in the accompanying consolidated statements of income and totaled approximately $407 million, $350 million, and $302 million, for the years ended December 31, 2022, 2021, and 2020, respectively.
Advertising Costs
Advertising costs are expensed as incurred and totaled $236 million, $211 million, and $194 million in the years ended December 31, 2022, 2021, and 2020, respectively.
Restructuring Costs
In October 2019, we approved certain restructuring actions (the "2019 Cost Savings Plan") across our subsidiaries primarily targeted at simplifying organizational structures and distribution networks. Among other things, the 2019 Cost Savings Plan resulted in workforce reductions and facility closures and consolidations. We executed a voluntary retirement program for our U.S. and Canadian subsidiaries in the fourth quarter of 2019 in connection with this plan. We incurred $50 million in costs for the plan in the year ended December 31, 2020. No further material costs have been incurred.
Accounting for Legal Costs
We expense legal costs related to loss contingencies as they are incurred.
Share-Based Compensation
We maintain various long-term incentive plans, which provide for the granting of stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), performance awards, dividend equivalents and other share-based awards. SARs represent a right to receive upon exercise an amount, payable in shares of common stock, equal to the excess, if any, of the fair market value of our common stock on the date of exercise over the base value of the grant. The terms of such SARs require net settlement in shares of common stock and do not provide for cash settlement. RSUs represent a contingent right to receive one share of our common stock at a future date. The majority of awards previously granted vest on a pro-rata basis for periods ranging from one to three years and are expensed accordingly on a straight-line basis. Forfeitures are accounted for as they occur. We issue new shares upon exercise or conversion of awards under these plans.
Income Taxes
We account 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, we consider all available positive and negative evidence including projected future taxable income, future reversals of existing temporary differences, recent financial operations and tax planning strategies.
We recognize 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.
Net Income from Continuing Operations per Common Share
Basic net income from continuing operations per common share is computed by dividing net income from continuing operations by the weighted average number of common shares outstanding during the year. The computation of diluted net income from continuing operations per common share includes the dilutive effect of stock options, stock appreciation rights and nonvested restricted stock awards options. Options to purchase approximately 4 thousand, 186 thousand, and 1.6 million shares of common stock ranging from $72 - $179 per share were outstanding at December 31, 2022, 2021, and 2020, respectively. These options were excluded from the computation of diluted net income from continuing operations per common share because the options’ exercise prices were greater than the average market prices of common stock in each respective year.
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standard Updates (“ASUs”) 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 be not applicable or are expected to have a minimal impact on our consolidated financial statements.
Credit Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. Among other things, the ASU and its amendments replace the incurred loss impairment model for receivables and loan guarantees with a current expected credit loss model. The new model measures impairment based on expected credit losses over the remaining contractual life of an asset, considering available information about the collectability of cash flows, past events, current conditions, and reasonable and supportable forecasts. Additional quantitative and qualitative disclosures are required. We adopted ASU 2016-13 and its amendments as of January 1, 2020, which included recognizing a cumulative-effect adjustment to reduce opening retained earnings by $11 million, net of taxes.
Income Taxes (Topic 740)
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The updated accounting guidance removes certain exceptions for performing intraperiod tax allocations, recognizing deferred taxes for investments, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. The company adopted ASU 2019-12 as of January 1, 2021, and recognized a cumulative-effect adjustment to increase opening retained earnings by $6 million.
Liabilities—Supplier Finance Programs (Subtopic 405-50)
In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs. This standard requires disclosure of the key terms of outstanding supply chain finance programs and a rollforward of the related amounts due to vendors participating in these programs. The new standard does not affect the recognition, measurement or financial statement presentation of any amounts due. The ASU becomes effective January 1, 2023, except for the rollforward requirement, which becomes effective January 1, 2024.
2. Segment Data
Our reportable segments consist of the Automotive Parts Group ("Automotive") and Industrial Parts Group ("Industrial"). Within the reportable segments, certain of our operating segments are aggregated since they have similar economic characteristics, products and services, type and class of customers, and distribution methods.
Our Automotive segment distributes replacement parts (other than body parts) for substantially all makes and models of automobiles, trucks, and other vehicles.
Our Industrial segment distributes a wide variety of industrial bearings, mechanical and fluid power transmission equipment, including hydraulic and pneumatic products, material handling components and related parts and supplies.
Inter-segment sales are not significant. Segment profit for each industry segment 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.. Approximately $472 million and $438 million of income before income taxes were generated in jurisdictions outside the U.S. for the years ended December 31, 2022, and 2021, respectively. Approximately $327 million of loss before income taxes was generated in jurisdictions outside the U.S. for the year ended December 31, 2020. Net sales and net property, plant and equipment by country relate directly to our operations in the respective country. Corporate assets are principally cash and cash equivalents and headquarters’ facilities and equipment.
The following table presents a summary of our reportable segment financial information from continuing operations:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Net sales: | | | | | | |
Automotive | | $ | 13,666,634 | | | $ | 12,544,131 | | | $ | 10,860,695 | |
Industrial | | 8,429,339 | | | 6,326,379 | | | 5,676,738 | |
Total net sales | | $ | 22,095,973 | | | $ | 18,870,510 | | | $ | 16,537,433 | |
Segment profit: | | | | | | |
Automotive | | $ | 1,191,674 | | | $ | 1,073,427 | | | $ | 867,743 | |
Industrial | | 886,636 | | | 595,232 | | | 481,854 | |
Total segment profit | | $ | 2,078,310 | | | $ | 1,668,659 | | | $ | 1,349,597 | |
Interest expense, net | | (73,886) | | | (62,150) | | | (91,048) | |
Corporate expense | | (269,364) | | | (174,842) | | | (149,754) | |
Intangible asset amortization | | (157,437) | | | (103,273) | | | (94,962) | |
Other unallocated costs | | (5,021) | | | (128,048) | | | (634,465) | |
Income before income taxes from continuing operations | | $ | 1,572,602 | | | $ | 1,200,346 | | | $ | 379,368 | |
The following table presents a summary of the other unallocated costs:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Other unallocated costs: | | | | | | |
Gain on sales of real estate (1) | | $ | 102,803 | | | $ | — | | | $ | — | |
Gain on insurance proceeds (2) | | 1,507 | | | 3,862 | | | 13,448 | |
Product liability adjustment (3) | | (28,730) | | | — | | | — | |
Product liability damages award (4) | | — | | | (77,421) | | | — | |
Loss on software disposal (5) | | — | | | (61,063) | | | — | |
Gain on equity investment (6) | | — | | | 10,229 | | | — | |
Goodwill impairment charge (7) | | — | | | — | | | (506,721) | |
Restructuring costs and special termination costs (8) | | — | | | — | | | (50,019) | |
Realized currency and other divestiture losses (9) | | — | | | — | | | (11,356) | |
Inventory adjustment (10) | | — | | | — | | | (40,000) | |
Transaction and other costs (11) | | (80,601) | | | (3,655) | | | (39,817) | |
Total other unallocated costs | | $ | (5,021) | | | $ | (128,048) | | | $ | (634,465) | |
(1)Amount reflects a gain on the sale of real estate that had been leased to S.P. Richards.
(2)Amount reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs.
(3)Amount to remeasure product liability for a revised estimate of the number of claims to be incurred in future periods, among other assumptions.
(4)Amount reflects damages reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim.
(5)Amount 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)Amount relates to gains recognized upon remeasurement of certain equity investments to fair value upon acquiring the remaining equity of those entities.
(7)Amount reflects a goodwill impairment charge related to our European reporting unit.
(8)Amount reflects restructuring and special termination 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.
(9)Amount reflects realized currency losses related to divestitures.
(10) Amount 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.
(11) Amount 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. Amount for 2021 include transaction and other costs related to acquisitions. For 2020, amount 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.
The following table presents a summary of our reportable segment total assets:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Assets: | | | | |
Automotive | | $ | 8,755,363 | | | $ | 8,508,487 | |
Industrial | | 2,474,392 | | | 1,909,053 | |
Corporate | | 865,001 | | | 612,854 | |
Goodwill and other intangible assets | | 4,400,623 | | | 3,321,708 | |
Total assets | | $ | 16,495,379 | | | $ | 14,352,102 | |
The following table presents a summary of select financial information by reportable segment from continuing operations:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Depreciation and amortization: | | | | | | |
Automotive | | $ | 146,819 | | | $ | 143,052 | | | $ | 120,932 | |
Industrial | | 29,670 | | | 24,100 | | | 16,315 | |
Corporate | | 13,893 | | | 20,546 | | | 40,633 | |
Intangible asset amortization | | 157,437 | | | 103,273 | | | 94,962 | |
Total depreciation and amortization | | $ | 347,819 | | | $ | 290,971 | | | $ | 272,842 | |
Capital expenditures: | | | | | | |
Automotive | | $ | 235,182 | | | $ | 198,268 | | | $ | 133,523 | |
Industrial | | 33,165 | | | 35,626 | | | 19,287 | |
Corporate | | 71,285 | | | 32,242 | | | 692 | |
Total capital expenditures | | $ | 339,632 | | | $ | 266,136 | | | $ | 153,502 | |
Net sales: | | | | | | |
United States | | $ | 14,965,462 | | | $ | 12,136,689 | | | $ | 10,863,348 | |
Europe | | 3,071,964 | | | 2,908,156 | | | 2,408,913 | |
Canada | | 1,960,227 | | | 1,779,663 | | | 1,526,202 | |
Australasia | | 2,044,432 | | | 2,002,188 | | | 1,691,190 | |
Mexico | | 53,888 | | | 43,814 | | | 47,780 | |
Total net sales | | $ | 22,095,973 | | | $ | 18,870,510 | | | $ | 16,537,433 | |
Net property, plant and equipment: | | | | | | |
United States | | $ | 790,121 | | | $ | 750,267 | | | $ | 728,802 | |
Europe | | 200,898 | | | 179,001 | | | 164,268 | |
Canada | | 113,574 | | | 102,484 | | | 102,409 | |
Australasia | | 220,839 | | | 201,971 | | | 165,596 | |
Mexico | | 582 | | | 676 | | | 968 | |
Total net property, plant and equipment | | $ | 1,326,014 | | | $ | 1,234,399 | | | $ | 1,162,043 | |
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. The following table presents disaggregated geographical net sales from contracts with customers by reportable segment:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
North America: | | | | | |
Automotive | $ | 9,015,501 | | | $ | 8,103,896 | | | $ | 7,177,543 | |
Industrial | 7,964,076 | | | 5,856,270 | | | 5,259,787 | |
Total North America | $ | 16,979,577 | | | $ | 13,960,166 | | | $ | 12,437,330 | |
Australasia: | | | | | |
Automotive | $ | 1,579,169 | | | $ | 1,532,079 | | | $ | 1,274,239 | |
Industrial | 465,263 | | | 470,109 | | | 416,951 | |
Total Australasia | $ | 2,044,432 | | | $ | 2,002,188 | | | $ | 1,691,190 | |
Europe - Automotive | $ | 3,071,964 | | | $ | 2,908,156 | | | $ | 2,408,913 | |
Total net sales | $ | 22,095,973 | | | $ | 18,870,510 | | | $ | 16,537,433 | |
3. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill during the years ended December 31, 2022 and 2021 by reportable segment, as well as other identifiable intangible assets, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | |
| Automotive | | Industrial | | Total | | Other Intangible Assets, Net |
Balance as of January 1, 2021 | $ | 1,505,523 | | | $ | 411,954 | | | $ | 1,917,477 | | | $ | 1,498,257 | |
Additions | 85,182 | | | 2,701 | | | 87,883 | | | 72,189 | |
| | | | | | | |
Amortization | — | | | — | | | — | | | (103,273) | |
Foreign currency translation | (83,243) | | | (6,810) | | | (90,053) | | | (60,772) | |
Balance as of December 31, 2021 | 1,507,462 | | | 407,845 | | | 1,915,307 | | | 1,406,401 | |
Additions | 149,896 | | | 609,892 | | | 759,788 | | | 663,077 | |
Amortization | — | | | — | | | — | | | (157,437) | |
Impairments | — | | | — | | | — | | | (17,461) | |
Foreign currency translation | (77,824) | | | (9,158) | | | (86,982) | | | (82,070) | |
Balance as of December 31, 2022 | $ | 1,579,534 | | | $ | 1,008,579 | | | $ | 2,588,113 | | | $ | 1,812,510 | |
We completed our annual goodwill impairment testing as of October 1, 2022 using a mixture of quantitative and qualitative assessments for our various reporting units. To complete a qualitative assessment, we evaluate historical revenue and operating profit growth trends, market conditions and other factors to determine whether it is more likely than not that the reporting unit's goodwill is impaired. We complete quantitative assessments for reporting units that fail our qualitative assessments, or otherwise on a periodic basis. To complete a quantitative assessment, we calculate a reporting unit's fair value using a combination of income and market approaches, which involve significant unobservable inputs (Level 3). In the income approach, we primarily use these assumptions: projected revenue growth rates, EBITDA margins, the estimated weighted average cost of capital, and terminal value. In the market approach, we primarily use benchmark company market multiples. We believe the inputs and assumptions we use are consistent with those a hypothetical marketplace participant would use. Once calculated, we verify whether the reporting unit's fair value is higher than its carrying amount. If the fair value is lower, we recognize an impairment, generally for the difference.
Based on these assessments, we did not recognize any goodwill impairments during 2022 or 2021. 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 $507 million.
If there are sustained declines in macroeconomic or business conditions in future periods 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.
In June 2022, we recognized a $17 million non-cash impairment charge related to our decision to retire certain legacy Industrial trade names, classified as other intangible assets, prior to the end of their estimated useful lives as part of the KDG integration and rebranding strategy. We evaluate other intangible assets for potential impairment indicators annually, or more frequently if circumstances change.
Other Intangible Assets
The gross carrying amounts and accumulated amortization relating to other intangible assets at December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Customer relationships | $ | 2,121,171 | | | $ | (566,111) | | | $ | 1,555,060 | | | $ | 1,590,733 | | | $ | (464,198) | | | $ | 1,126,535 | |
Trademarks | 342,136 | | | (85,188) | | | 256,948 | | | 337,802 | | | (58,073) | | | 279,729 | |
Non-competition agreements | 5,575 | | | (5,073) | | | 502 | | | 5,430 | | | (5,293) | | | 137 | |
| $ | 2,468,882 | | | $ | (656,372) | | | $ | 1,812,510 | | | $ | 1,933,965 | | | $ | (527,564) | | | $ | 1,406,401 | |
Amortization expense for other intangible assets totaled $157 million, $103 million, and $95 million for the years ended December 31, 2022, 2021, and 2020, respectively. Estimated other intangible assets amortization expense for the succeeding five years is as follows:
| | | | | |
2023 | $ | 145,357 | |
2024 | 131,443 | |
2025 | 130,103 | |
2026 | 128,508 | |
2027 | 127,706 | |
| $ | 663,117 | |
4. Property, Plant and Equipment
Property, plant and equipment as of December 31, 2022 and December 31, 2021, consisted of the following:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Land | | $ | 115,845 | | | $ | 126,513 | |
Buildings and leasehold improvements | | 834,786 | | | 873,912 | |
Machinery, equipment and other | | 1,811,060 | | | 1,573,680 | |
Property, plant and equipment, at cost | | 2,761,691 | | | 2,574,105 | |
Less: accumulated depreciation | | 1,435,677 | | | 1,339,706 | |
Property, plant and equipment, net | | $ | 1,326,014 | | | $ | 1,234,399 | |
During the third quarter of 2021, we reconsidered our approach to an internally developed software project due to a change in management strategy related to advances in alternative technologies. We decided to dispose of the software project as of September 30, 2021. As a result, we recognized $61 million of selling, administrative and other expense related to the disposal of this software.
During the second quarter of 2022, we recognized a $103 million gain on the sale of real estate that had been leased to S.P. Richards Company ("SPR"). Refer to the discontinued operations section of the Acquisitions, Divestitures and Discontinued Operations Footnote for additional information regarding the divestiture of our business products group.
5. Accounts Receivable Sales Agreement
We have an A/R sales agreement to sell short-term receivables from certain customer trade accounts to an unaffiliated financial institution on a revolving basis. The A/R Sales Agreement has a 3 year term, which we intend to renew.
As part of the A/R Sales Agreement, we routinely sell designated pools of receivables as they are originated by it and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The assets of the SPE would be first available to satisfy the creditor claims of the unaffiliated financial institution. We control and therefore consolidate the SPE in our consolidated financial statements.
The SPE transferred ownership and control of certain receivables that met certain qualifying conditions to the unaffiliated financial institution in exchange for cash. We account for transactions with the unaffiliated financial institution as sales of financial assets, with the associated receivables derecognized from our consolidated balance sheet. The remaining receivables held by the SPE were pledged to secure the collectability of the sold receivables. The amount of receivables pledged as collateral as of December 31, 2022 and December 31, 2021 is approximately $1.1 billion and $973 million, respectively.
We continue to be involved with the receivables transferred by the SPE to the unaffiliated financial institution 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 institution so that the total principal amount outstanding of receivables sold is approximately $1.0 billion at any point in time (which is the maximum amount allowed under the agreement). The future amount of receivables outstanding as sold could decrease, based on the level of activity and other factors. Total principal amount outstanding of receivables sold is approximately $1.0 billion and $800 million as of December 31, 2022 and December 31, 2021, respectively.
The following table summarizes the activity and amounts outstanding under the A/R Sales Agreement as of period end:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Receivables sold to the financial institution and derecognized | | $ | 8,946,730 | | | $ | 7,520,474 | |
Cash collected on sold receivables | | $ | 8,746,740 | | | $ | 7,520,465 | |
Continuous cash activity related to the A/R Sales Agreement is reflected in cash from operating activities in the consolidated statement of cash flows. We received a benefit to cash from operations of approximately $200 million from increasing the amount of receivables sold under the A/R Sales Agreement in the year ended December 31, 2022.
The SPE incurs fees due to the unaffiliated financial institution related to the accounts receivable sales transactions. Those fees, which totaled $27 million, $11 million, and $6 million in 2022, 2021, and 2020, respectively, are recorded within other non-operating expense (income) in the consolidated statements of income. The SPE has a recourse obligation to repurchase from the unaffiliated financial institution 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 December 31, 2022 and December 31, 2021 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.
6. Debt
The weighted average interest rate on our outstanding borrowings was approximately 2.33% and 2.35% at December 31, 2022 and 2021, respectively.
Certain borrowings require us to comply with a financial covenant with respect to a maximum debt to EBITDA ratio. At December 31, 2022, we were in compliance with all such covenants. Due to the workers’ compensation and insurance reserve requirements in certain states, we also had unused letters of credit of approximately $71 million and $73 million outstanding at December 31, 2022 and 2021, respectively.
On January 6, 2022, we issued $500 million of unsecured 1.75% Senior Notes due 2025. Simultaneously, we issued $500 million of unsecured 2.75% Senior Notes due 2032. For both offerings, interest is payable semi-annually on February 1 and August 1 of each year, beginning August 1, 2022. We utilized the proceeds from these offerings to repay borrowings under our Revolving Credit Facility, which were incurred to finance a significant portion of the Kaman Distribution Group ("KDG") acquisition.
Amounts outstanding under our credit facilities, net of debt issuance costs consist of the following:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Unsecured Revolving Credit Facility, $1,500,000, LIBOR plus 1.13% variable, due September 30, 2026 | | $ | — | | | $ | — | |
January 6, 2022, Senior Unsecured Notes, $500,000, 1.75% fixed, due February 1, 2025 | | 500,000 | | | — | |
January 6, 2022, Senior Unsecured Notes, $500,000, 2.75% fixed, due February 1, 2032 | | 500,000 | | | — | |
October 27, 2020, Senior Unsecured Notes, $500,000, 1.88% fixed, due November 1, 2030 | | 500,000 | | | 500,000 | |
December 2, 2013, Series F Senior Unsecured Notes, $250,000, 3.24% fixed, due December 2, 2023 | | 250,000 | | | 250,000 | |
June 30, 2019, Series A Senior Unsecured Notes, A$155,000, 3.10% fixed, due June 30, 2024 | | 105,664 | | | 112,375 | |
October 30, 2017, Series J Senior Unsecured Notes, €225,000, 1.40% fixed, due October 30, 2024 | | 240,840 | | | 254,835 | |
June 30, 2019, Series B Senior Unsecured Notes, A$155,000, 3.43% fixed, due June 30, 2026 | | 105,664 | | | 112,375 | |
November 30, 2016, Series H Senior Unsecured Notes, $250,000, 3.24% fixed, due November 30, 2026 | | 250,000 | | | 250,000 | |
October 30, 2017, Series K Senior Unsecured Notes, €250,000, 1.81% fixed, due October 30, 2027 | | 267,600 | | | 283,150 | |
October 30, 2017, Series I Senior Unsecured Notes, $120,000, 3.70% fixed, due October 30, 2027 | | 120,000 | | | 120,000 | |
May 31, 2019, Series A Senior Unsecured Notes, €50,000, 1.55% fixed, due May 31, 2029 | | 53,520 | | | 56,630 | |
October 30, 2017, Series L Senior Unsecured Notes, €125,000, 2.02% fixed, due October 30, 2029 | | 133,800 | | | 141,575 | |
May 31, 2019, Series B Senior Unsecured Notes, €100,000, 1.74% fixed, due May 31, 2031 | | 107,040 | | | 113,260 | |
October 30, 2017, Series M Senior Unsecured Notes, €100,000, 2.32% fixed, due October 30, 2032 | | 107,040 | | | 113,260 | |
May 31, 2019, Series C Senior Unsecured Notes, €100,000, 1.95% fixed, due May 31, 2034 | | 107,040 | | | 113,260 | |
Other unsecured debt | | 2,977 | | | 840 | |
Total unsecured debt | | 3,351,185 | | | 2,421,560 | |
Unamortized debt issuance costs | | (12,236) | | | (8,041) | |
Unamortized discounts | | (10,126) | | | (4,156) | |
Total debt | | 3,328,823 | | | 2,409,363 | |
Less debt due within one year | | 252,029 | | | — | |
Long-term debt, excluding current portion | | $ | 3,076,794 | | | $ | 2,409,363 | |
Approximate maturities under our credit facilities are as follows:
| | | | | |
2023 | $ | 252,029 | |
2024 | 347,452 | |
2025 | 500,000 | |
2026 | 355,664 | |
2027 | 387,600 | |
Thereafter | 1,508,440 | |
| $ | 3,351,185 | |
7. Derivatives and Hedging
Net Investment Hedges
We have designated certain derivative instruments and a portion of our foreign currency denominated debt, a non-derivative financial instrument, as hedges of the foreign currency exchange rate exposure of our Euro-denominated net investment in a European subsidiary. We apply the spot method to assess the hedge effectiveness of the derivative instruments and this assessment for each instrument excludes the initial value related to the difference at contract inception between the foreign exchange spot rate and the forward rate (i.e., the forward points). The initial value of this excluded component is recognized as a reduction to interest expense in a systematic and rational manner over the term of the derivative instrument. All other changes in value for the net investment hedges are included in AOCL within foreign currency translation and would only be reclassified to earnings if the European subsidiary were liquidated, or otherwise disposed. Upon settlement, the cash paid or received generally is reflected in investing activities in the statement of cash flows.
The following table summarizes the location 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | December 31, 2021 |
Instrument | | Balance sheet location | | Notional | | Balance | | Notional | | Balance |
Net investment hedges: | | | | | | | | | | |
Forward contracts | | Prepaid expenses and other current assets | | $ | 606,950 | | | $ | 46,670 | | | $ | 925,810 | | | $ | 73,819 | |
Forward contracts | | Other current liabilities | | $ | 106,800 | | | $ | 3,064 | | | $ | 235,180 | | | $ | 2,935 | |
Foreign currency debt | | Long-term debt | | € | 700,000 | | | $ | 749,280 | | | € | 700,000 | | | $ | 792,820 | |
The table below presents pre-tax gains and losses related to cash flow hedges and net investment hedges:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in AOCL Before Reclassifications | | Gain Recognized in Interest Expense For Excluded Components |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Year Ended December 31, | | | | | | | | | | | | |
Cash Flow Hedges: | | | | | | | | | | | | |
Interest rate contract | | $ | — | | | $ | — | | | $ | (29,464) | | | $ | — | | | $ | — | | | $ | — | |
Net Investment Hedges: | | | | | | | | | | | | |
Forward contracts | | 103,240 | | | 56,362 | | | (85,390) | | | 27,923 | | | 26,295 | | | 27,146 | |
Foreign currency debt | | 43,540 | | | 68,250 | | | (77,070) | | | — | | | — | | | — | |
Total | | $ | 146,780 | | | $ | 124,612 | | | $ | (191,924) | | | $ | 27,923 | | | $ | 26,295 | | | $ | 27,146 | |
8. Leased Properties
We primarily lease real estate for retail stores, branches, distribution centers, office space and land. We also lease equipment (primarily vehicles).
Most real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term from one to 20 years or more. The exercise of lease renewal options is at our discretion. We evaluate renewal options at lease inception and on an ongoing basis, and include renewal options that we are reasonably certain to exercise in the expected lease terms when classifying leases and measuring lease liabilities. We elected a policy of not recording leases on the consolidated balance sheets when the leases have a term of 12 months or less and we are not reasonably certain to elect an option to purchase the leased asset. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
The table below presents the locations of the operating lease assets and liabilities on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Line Item | | December 31, 2022 | | December 31, 2021 |
Operating lease assets | | Operating lease assets | | $ | 1,104,678 | | | $ | 1,053,689 | |
| | | | | | |
Operating lease liabilities: | | | | | | |
Current operating lease liabilities | | Other current liabilities | | $ | 286,713 | | | $ | 280,575 | |
Noncurrent operating lease liabilities | | Operating lease liabilities | | $ | 836,019 | | | $ | 789,175 | |
Total operating lease liabilities | | | | $ | 1,122,732 | | | $ | 1,069,750 | |
The depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term.
Our leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. We used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
Our weighted average remaining lease term and weighted average discount rate for operating leases are:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Weighted average remaining lease term (in years) | | 5.32 | | 5.19 |
Weighted average discount rate | | 2.51 | % | | 2.03 | % |
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the consolidated balance sheets as of December 31, 2022:
| | | | | |
2023 | $ | 325,370 | |
2024 | 269,385 | |
2025 | 198,100 | |
2026 | 138,333 | |
2027 | 95,975 | |
Thereafter | 216,085 | |
Total undiscounted future minimum lease payments | 1,243,248 | |
Less: Difference between undiscounted lease payments and discounted operating lease liabilities | 120,516 | |
Total operating lease liabilities | $ | 1,122,732 | |
Future minimum lease payments include $53 million related to options to extend lease terms that are reasonably certain of being exercised. Future minimum lease payments exclude $165 million related to operating leases that have not yet commenced. These leases are expected to commence in 2023 and 2024 with lease terms of 3 to 25 years.
The table below presents operating lease costs and supplemental cash flow information related to leases:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Operating lease costs | | $ | 350,025 | | | $ | 336,228 | | | $ | 313,315 | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 358,767 | | | $ | 340,243 | | | $ | 323,336 | |
Operating lease assets obtained in exchange for new operating lease liabilities | | $ | 411,052 | | | $ | 358,393 | | | $ | 302,114 | |
Operating lease costs are included within selling, administrative and other expenses on the consolidated statements of income. Short-term lease costs, variable lease costs and sublease income were not material for the periods presented. Cash paid for amounts included in the measurement of operating lease liabilities is included in operating activities in the consolidated statements of cash flows.
9. Employee Benefit Plans
Our defined benefit pension plans cover employees in the U.S., Canada, and Europe who meet eligibility requirements. The plan covering U.S. employees is noncontributory, and we implemented a hard freeze for the U.S. qualified defined benefit plan as of December 31, 2013. No further benefits were provided after this date for additional credited service or earnings, and all participants became fully vested as of December 31, 2013. The Canadian plan is contributory, and benefits are based on career average compensation. Our funding policy is to contribute an amount equal to the minimum required contribution under applicable pension legislation. For the plans in the U.S. and Canada, we may increase our contribution above the minimum, if appropriate to our tax and cash position and the plans’ funded position. The European plans are funded in accordance with local regulations.
We also sponsor supplemental retirement plans covering employees in the U.S. and Canada. We use a measurement date of December 31 for our pension and supplemental retirement plans.
Several assumptions are used to determine the benefit obligations, plan assets, and net periodic income. The discount rate for the U.S. pension plan is calculated using a bond matching approach to select specific bonds that would satisfy the projected benefit payments. The bond matching approach reflects the process that would be used to settle the pension obligations. The discount rate for non U.S. plans are set by using Willis Towers Watson's RATE:Link model. For each plan, this approach reflects yields available on high quality corporate bonds that would generate the cash flow necessary to pay the plan's benefits when due. The expected return on plan assets is based on a calculated market-related value of plan assets, where gains and losses on plan assets are amortized over a five year period and accumulate in other comprehensive income. Other non-investment unrecognized gains and losses are amortized in future net income based on a “corridor” approach, where the corridor is equal to 10% of the greater of the benefit obligation or the market-related value of plan assets at the beginning of the year. The unrecognized gains and losses in excess of the corridor criteria are amortized over the average future lifetime or service of plan participants, depending on the plan. These assumptions are updated at each annual measurement date.
Changes in benefit obligations for the years ended December 31, 2022 and 2021 were:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Changes in benefit obligation | | | | |
Benefit obligation at beginning of year | | $ | 2,532,973 | | | $ | 2,678,966 | |
Service cost | | 10,204 | | | 12,218 | |
Interest cost | | 75,248 | | | 71,693 | |
Plan participants’ contributions | | 1,892 | | | 1,908 | |
Actuarial gain | | (546,266) | | | (87,966) | |
Foreign currency exchange rate changes | | (15,744) | | | (1,184) | |
Gross benefits paid | | (135,907) | | | (142,327) | |
Curtailments | | — | | | (80) | |
Settlements | | (276) | | | (255) | |
Acquired plans | | 1,039 | | | — | |
Benefit obligation at end of year | | $ | 1,923,163 | | | $ | 2,532,973 | |
The benefit obligations for our U.S. pension plans included in the above were $1.7 billion and $2.2 billion at December 31, 2022 and 2021, respectively. The total accumulated benefit obligation for our defined benefit pension plans in the U.S., Canada, and Europe was approximately $1.9 billion and $2.5 billion at December 31, 2022 and 2021, respectively.
For the U.S. pension plan, there was a net actuarial liability gain of $442 million and an asset loss of $581 million. The liability gain was comprised primarily of a $466 million gain due to discount rate changes. For the U.S. supplemental retirement plan, there was a net actuarial liability gain of $61 million comprised primarily of a $63 million gain due to discount rate changes.
The assumptions used to measure the pension benefit obligations for the plans at December 31, 2022 and 2021, were:
| | | | | | | | | | | |
| 2022 | | 2021 |
Weighted average discount rate | 5.61 | % | | 3.04 | % |
Rate of increase in future compensation levels | 3.16 | % | | 3.13 | % |
Changes in plan assets for the years ended December 31, 2022 and 2021 were:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Changes in plan assets | | | | |
Fair value of plan assets at beginning of year | | $ | 2,756,803 | | | $ | 2,545,359 | |
Actual return on plan assets | | (493,359) | | | 330,402 | |
Foreign currency exchange rate changes | | (15,599) | | | 80 | |
Employer contributions | | 15,504 | | | 21,635 | |
Plan participants’ contributions | | 1,892 | | | 1,908 | |
Benefits paid | | (135,907) | | | (142,327) | |
Settlements | | (276) | | | (254) | |
Fair value of plan assets at end of year | | $ | 2,129,058 | | | $ | 2,756,803 | |
The fair values of plan assets for our U.S. pension plans included in the above were $1.9 billion and $2.5 billion at December 31, 2022 and 2021, respectively.
For the years ended December 31, 2022 and 2021, the aggregate projected benefit obligation and aggregate fair value of plan assets for plans with projected benefit obligations in excess of plan assets were as follows: | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Aggregate projected benefit obligation | | $ | 208,939 | | | $ | 323,593 | |
Aggregate fair value of plan assets | | $ | — | | | $ | 47,445 | |
For the years ended December 31, 2022 and 2021, the aggregate accumulated benefit obligation and aggregate fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were as follows: | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Aggregate accumulated benefit obligation | | $ | 192,421 | | | $ | 247,277 | |
Aggregate fair value of plan assets | | $ | — | | | $ | — | |
The asset allocations for our funded pension plans at December 31, 2022 and 2021, and the target allocation for 2023, by asset category were:
| | | | | | | | | | | | | | | | | |
| Target Allocation | | Percentage of Plan Assets at December 31 |
| 2023 | 2022 | | 2021 |
Asset Category | | | | | |
Equity securities | 58 | % | | 59 | % | | 57 | % |
Debt securities | 41 | % | | 41 | % | | 43 | % |
Other | 1 | % | | — | % | | — | % |
| 100 | % | | 100 | % | | 100 | % |
Our benefit plan committees in the U.S. and Canada establish investment policies and strategies and regularly monitor the performance of the funds. The plans in Europe are unfunded and, therefore, there are no plan assets. The pension plan 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 investment objectives for the pension plans 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% US Large-cap stocks, 9% US Mid-cap stocks, 10% International stocks, 3% Emerging Market stocks and 40% Barclays U.S. Gov/Credit Index).
The fair values of the plan assets as of December 31, 2022 and 2021, by asset category, are shown in the tables below. Various inputs are considered when determining the value of our pension plan assets. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Level 1 represents observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 represents other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.). Level 3 represents significant unobservable inputs (including our own assumptions in determining the fair value of investments). Certain investments are measured at fair value using the net asset value ("NAV") per share as a practical expedient and have not been classified in the fair value hierarchy.
The valuation methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Equity securities are valued at the closing price reported on the active market on which the individual securities are traded on the last day of the calendar plan year. Debt securities including corporate bonds, U.S. Government securities, and asset-backed securities are valued using price evaluations reflecting the bid and/or ask sides of the market for an investment as of the last day of the calendar plan year.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | Total | | Assets Measured at NAV | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Equity Securities | | | | | | | | | | |
Common stocks — mutual funds — equity | | $ | 285,103 | | | $ | 48,521 | | | $ | 236,582 | | | $ | — | | | $ | — | |
Genuine Parts Company common stock | | 261,869 | | | — | | | 261,869 | | | — | | | — | |
Other stocks | | 711,830 | | | — | | | 711,830 | | | — | | | — | |
| | | | | | | | | | |
Debt Securities | | | | | | | | | | |
Short-term investments | | 41,076 | | | — | | | 41,076 | | | — | | | — | |
Cash and equivalents | | 8,632 | | | — | | | 8,632 | | | — | | | — | |
Government bonds | | 344,787 | | | — | | | 411 | | | 344,376 | | | — | |
Corporate bonds | | 412,896 | | | — | | | — | | | 412,896 | | | — | |
Asset-backed and mortgage-backed securities | | 9,925 | | | — | | | — | | | 9,925 | | | — | |
Convertible Securities | | 1,159 | | | — | | | — | | | 1,159 | | | — | |
Other-international | | 37,304 | | | — | | | 37,304 | | | — | | | — | |
Municipal bonds | | 14,442 | | | — | | | — | | | 14,442 | | | — | |
| | | | | | | | | | |
Other | | | | | | | | | | |
Options and Futures | | 35 | | | — | | | 35 | | | — | | | — | |
Total | | $ | 2,129,058 | | | $ | 48,521 | | | $ | 1,297,739 | | | $ | 782,798 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Total | | Assets Measured at NAV | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Equity Securities | | | | | | | | | | |
Common stocks — mutual funds — equity | | $ | 388,591 | | | $ | 64,669 | | | $ | 323,922 | | | $ | — | | | $ | — | |
Genuine Parts Company common stock | | 210,510 | | | — | | | 210,510 | | | — | | | — | |
Other stocks | | 971,020 | | | — | | | 971,020 | | | — | | | — | |
| | | | | | | | | | |
Debt Securities | | | | | | | | | | |
Short-term investments | | 46,815 | | | — | | | 46,815 | | | — | | | — | |
Cash and equivalents | | 22,084 | | | — | | | 22,084 | | | — | | | — | |
Government bonds | | 425,877 | | | — | | | 4,513 | | | 421,364 | | | — | |
Corporate bonds | | 598,216 | | | — | | | — | | | 598,216 | | | — | |
Asset-backed and mortgage-backed securities | | 12,894 | | | — | | | — | | | 12,894 | | | — | |
Other-international | | 61,008 | | | — | | | 46,133 | | | 14,875 | | | — | |
Municipal bonds | | 19,621 | | | — | | | — | | | 19,621 | | | — | |
| | | | | | | | | | |
Other | | | | | | | | | | |
Cash surrender value of life insurance policies | | 167 | | | — | | | 167 | | | — | | | — | |
Total | | $ | 2,756,803 | | | $ | 64,669 | | | $ | 1,625,164 | | | $ | 1,066,970 | | | $ | — | |
Equity securities include Genuine Parts Company common stock in the amounts of $262 million (12% of total plan assets) and $211 million (8% of total plan assets) at December 31, 2022 and 2021, respectively. Dividend payments received by the plan on company stock totaled approximately $5 million and $5 million in 2022 and 2021, respectively. Fees paid during the year for services rendered by parties in interest were based on customary and reasonable rates for such services.
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 following table sets forth the funded status of the plans and the amounts recognized in the consolidated balance sheets at December 31:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Other long-term asset | | $ | 414,834 | | | $ | 499,978 | |
Other current liability | | (12,537) | | | (12,546) | |
Pension and other post-retirement liabilities | | (196,402) | | | (263,602) | |
| | $ | 205,895 | | | $ | 223,830 | |
Amounts recognized in accumulated other comprehensive (loss) income consist of:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Net actuarial loss | | $ | 682,884 | | | $ | 625,339 | |
Prior service cost | | 7,273 | | | 7,958 | |
| | $ | 690,157 | | | $ | 633,297 | |
The following table reflects the total benefits expected to be paid from the pension plans’ or our assets. Of the pension benefits expected to be paid in 2023, approximately $13 million is expected to be paid from employer assets. Expected employer contributions below reflect amounts expected to be contributed to funded plans. Information about the expected cash flows for the pension plans follows:
| | | | | |
Employer contribution | |
2023 (expected) | $ | 4,449 | |
Expected benefit payments: | |
2023 | $ | 138,411 | |
2024 | $ | 140,826 | |
2025 | $ | 143,591 | |
2026 | $ | 145,953 | |
2027 | $ | 147,677 | |
2027 through 2030 | $ | 736,560 | |
Net periodic benefit income included the following components:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Service cost | | $ | 10,204 | | | $ | 12,218 | | | $ | 12,105 | |
Interest cost | | 75,248 | | | 71,693 | | | 83,732 | |
Expected return on plan assets | | (150,318) | | | (153,822) | | | (154,111) | |
Amortization of prior service cost | | 691 | | | 690 | | | 692 | |
Amortization of actuarial loss | | 37,065 | | | 49,897 | | | 39,613 | |
Net periodic benefit income | | $ | (27,110) | | | $ | (19,324) | | | $ | (17,969) | |
Service cost is recorded in selling, administrative and other expenses in the consolidated statements of income while all other components are recorded within other non-operating expenses (income). Pension benefits also include amounts related to supplemental retirement plans.
Other changes in plan assets and benefit obligations recognized in other comprehensive income are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Current year actuarial loss (gain) | | $ | 97,412 | | | $ | (264,547) | | | $ | 24,613 | |
Recognition of actuarial loss | | (37,065) | | | (49,897) | | | (39,613) | |
Recognition of prior service cost | | (691) | | | (690) | | | (692) | |
Recognition of curtailment (loss) gain | | — | | | (5) | | | 435 | |
Other | | 68 | | | (29) | | | — | |
Total recognized in other comprehensive (loss) income | | $ | 59,724 | | | $ | (315,168) | | | $ | (15,257) | |
Total recognized in net periodic benefit income and other comprehensive (loss) income | | $ | 32,614 | | | $ | (334,492) | | | $ | (33,226) | |
The assumptions used in measuring the net periodic benefit income for the plans follow:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Weighted average discount rate | 3.04 | % | | 2.72 | % | | 3.43 | % |
Rate of increase in future compensation levels | 3.13 | % | | 3.11 | % | | 3.13 | % |
Expected long-term rate of return on plan assets | 6.34 | % | | 6.88 | % | | 7.11 | % |
We have one defined contribution plan in the U.S. that covers substantially all of our domestic employees. Employees receive a matching contribution of 100% of the first 5% of the employees’ salary. Total plan expense was approximately $69 million in 2022, $60 million in 2021, and $55 million in 2020.
10. Acquisitions, Divestitures and Discontinued Operations
Acquisitions
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 consolidated statements of income beginning on their respective acquisition dates.
2022
We acquired several businesses for approximately $1.6 billion, net of cash acquired, during the year ended December 31, 2022. Approximately $1.3 billion was related to our Industrial segment, primarily the acquisition of KDG discussed further below, and $300 million was related to Automotive.
We recognized approximately $562 million of revenue, net of store closures, and $239 million of goodwill and other intangible assets related to our Automotive acquisitions during the year ended December 31, 2022. The other intangible assets acquired consisted of customer relationships of $76 million, trademarks of $9 million, and other intangibles of $4 million with weighted average amortization lives of 18, 15, and 3 years, respectively.
On January 3, 2022, the company, through its wholly-owned subsidiary, Motion Industries, Inc., acquired all of the equity interests in KDG for a purchase price of approximately $1.3 billion in cash, net of cash acquired of approximately $30 million. KDG contributed approximately 5% of net sales included in our consolidated statement of income from January 3, 2022 to December 31, 2022. The KDG acquisition was financed using a combination of borrowing under the existing unsecured revolving credit facility, proceeds of $200 million from the selling of additional receivables under our amended A/R Sales Agreement, and $109 million of cash.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date for the KDG acquisition as well as adjustments made when finalizing the acquisition accounting during the year ended December 31, 2022 (referred to as the "measurement period adjustments"). The measurement period adjustments primarily resulted from revisions to the valuation of inventory and intangible assets, deferred taxes, and long-term liabilities.
| | | | | | | | | | | | | | |
| | As of January 3, 2022 |
| | Initial Balance | Measurement Period Adjustments | As Adjusted |
Trade accounts receivable | | $ | 156,000 | | $ | — | | $ | 156,000 | |
Merchandise inventories | | 166,000 | | (14,000) | | 152,000 | |
Prepaid expenses and other current assets | | 39,000 | | (1,000) | | 38,000 | |
Property, plant and equipment | | 26,000 | | (2,000) | | 24,000 | |
Operating lease assets | | 49,000 | | (5,000) | | 44,000 | |
Other assets | | 1,000 | | — | | 1,000 | |
Other intangible assets | | 574,000 | | (6,000) | | 568,000 | |
Goodwill | | 592,000 | | 9,000 | | 601,000 | |
Total assets acquired | | 1,603,000 | | (19,000) | | 1,584,000 | |
Trade accounts payable | | 85,000 | | — | | 85,000 | |
Other current liabilities | | 32,000 | | — | | 32,000 | |
Operating lease liabilities | | 17,000 | | (1,000) | | 16,000 | |
Deferred tax liabilities | | 121,000 | | (13,000) | | 108,000 | |
Other long-term liabilities | | 39,000 | | (8,000) | | 31,000 | |
Total liabilities assumed | | 294,000 | | (22,000) | | 272,000 | |
Net assets acquired | | $ | 1,309,000 | | $ | 3,000 | | $ | 1,312,000 | |
The other intangible assets acquired included $527 million of customer relationship intangibles and a $41 million favorable trade name licensing agreement, with amortization lives of 17 and 1.5 years, respectively. The other intangible assets have a total weighted amortization life of 16 years. We used the multi-period excess earnings method under the income approach to measure KDG's customer relationships, which is sensitive to certain assumptions including discount rates and certain assumptions that form the basis for the forecasted results (e.g., future revenue growth rates and EBITDA margins). These assumptions are forward-looking in nature and are dependent on the future performance of the acquired business and could be affected by future economic and market conditions.
The goodwill was assigned to the Industrial segment and is attributable primarily to expected synergies and the assembled workforce. Approximately $261 million of the goodwill recognized as part of the acquisition was tax deductible.
For the twelve months ended December 31, 2022, approximately $5 million of inventory amortization step-up cost related to this acquisition was included in cost of goods sold. Further, $62 million of transaction and other one-time costs, inclusive of an impairment charge, were included in selling, administrative, and other expenses in the consolidated statements of income. Refer to the Goodwill and Other Intangible Assets Footnote for more information on the impairment charge.
If the KDG acquisition had occurred on January 1, 2021 and if its results of operations had been included in our consolidated results since that date, our unaudited pro forma consolidated statements of income would have reflected net sales of approximately $22.1 billion and $19.9 billion and net income on a per share diluted basis of $8.47 and $6.02 for the years ended December 31, 2022 and 2021, respectively. The pro forma information is not necessarily indicative of the results of operations that we would have reported had the transaction actually occurred at the beginning of this period, nor is it necessarily indicative of future results.
The adjustments to the pro forma amounts include, but are not limited to, applying our accounting policies, amortization related to fair value adjustments to intangible assets, one-time acquisition accounting adjustments, interest expense on acquisition related debt and debt not assumed, and any associated tax effects. The pro forma results do not include any cost savings or other synergies that may result from the acquisition.
Earnings related to KDG included in our consolidated statement of income from January 3, 2022 to December 31, 2022 are impracticable to provide due to KDG’s ongoing integration into Motion, which commenced shortly after the acquisition date.
2021
We acquired several businesses for approximately $282 million, net of cash acquired, during the year ended December 31, 2021.
During the year ended December 31, 2021, we recognized approximately $220 million and $25 million of revenue, net of store closures, related to our 2021 Automotive and Industrial acquisitions, respectively. We recorded approximately $160 million of goodwill and other intangible assets associated with the 2021 acquisitions. Other intangible assets acquired consisted of customer relationships with a weighted average amortization life of 20 years.
We did not recognize any significant measurement period adjustments related to finalizing acquisition accounting during the year ended December 31, 2021.
2020
We acquired several businesses for approximately $86 million, net of cash acquired, during the year ended December 31, 2020.
Divestitures
We received proceeds from divestitures of businesses totaling $34 million, $18 million and $387 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Discontinued Operations
Business Products Group
Effective June 30, 2020, we completed the divestiture of our Business Products Group by selling Supply Source Enterprises, Inc. ("SSE") and SPR in separate transactions. These divestitures were part of our long-term strategic initiative to streamline our operations and optimize our portfolio so that we can drive shareholder value by focusing on our global Automotive and Industrial businesses. The Business Products Group was previously a reportable segment of the company. These divestitures, together with prior period divestitures of Garland C. Norris (effective December 13, 2019), SPR Canada (effective January 1, 2020) and Safety Zone Canada (effective March 2, 2020), represented a single plan to exit the Business Products Group segment and was considered a strategic shift that had a major effect on our operations and financial results. Therefore, the results of operations, financial position and cash flows for the Business Products Group were reported as discontinued operations for all periods presented.
Our results of operations for discontinued operations were: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net sales | | $ | — | | | $ | — | | | $ | 846,944 | |
Cost of goods sold | | — | | | — | | | 632,007 | |
Gross profit | | — | | | — | | | 214,937 | |
Operating and non-operating expenses | | — | | | — | | | 179,461 | |
Loss on disposal | | — | | | — | | | 223,928 | |
Loss before income taxes | | — | | | — | | | (188,452) | |
Income taxes | | — | | | — | | | 4,045 | |
Net loss from discontinued operations | | $ | — | | | $ | — | | | $ | (192,497) | |
In December 2022, we came to an agreement to sell our remaining investment in SPR in connection with a pending acquisition of SPR by a third party. The acquisition closed and we sold our investment in SPR on January 31, 2023. Any remaining transition services will cease by June 30, 2023. As of December 31, 2022, we reduced the net carrying value of our SPR investment by $3 million to $55 million, which was reclassed from other assets to current
assets on the consolidated balance sheet, and recognized a charge within non-operating expenses (income) on the consolidated statement of income for the three months ended December 31, 2022.
11. Share-Based Compensation
Share-based compensation costs of $38 million, $26 million, and $23 million, were recorded for the years ended December 31, 2022, 2021, and 2020, respectively. The total income tax benefits recognized in the consolidated statements of income for share-based compensation arrangements were approximately $10 million, $7 million, and $6 million for 2022, 2021, and 2020, respectively. At December 31, 2022, total compensation cost related to nonvested awards not yet recognized was approximately $64 million. There have been no modifications to valuation methodologies or methods during the years ended December 31, 2022, 2021, or 2020.
As of December 31, 2022, there were 6.9 million shares of common stock available for issuance pursuant to future equity-based compensation awards.
A summary of our restricted stock units activity and related information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonvested Share Awards (RSUs) | | Shares | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
Nonvested at beginning of year | | 829 | | | $ | 98.25 | | | | | |
Granted | | 506 | | | $ | 129.87 | | | | | |
Vested | | (276) | | | $ | 104.22 | | | | | |
Forfeited | | (65) | | | $ | 105.01 | | | | | |
Nonvested at end of year | | 994 | | | $ | 110.45 | | | 1.4 | | $ | 172,409 | |
A summary of our stock appreciation rights activity and related information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Appreciation Rights (SARs) | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
Outstanding at beginning of year | | 634 | | | $ | 90.93 | | | | | |
Granted | | — | | | $ | — | | | | | |
Exercised | | (310) | | | $ | 89.22 | | | | | |
Forfeited | | (7) | | | $ | 89.27 | | | | | |
Outstanding at end of year | | 317 | | | $ | 92.65 | | | 2.4 | | $ | 25,607 | |
Exercisable at end of year | | 317 | | | $ | 92.65 | | | 2.4 | | $ | 25,607 | |
The aggregate intrinsic value of SARs exercised and RSUs vested during the years ended December 31, 2022, 2021, and 2020 was $62 million, $73 million, and $14 million, respectively. The fair value of RSUs is based on the price of our stock on the date of grant for the years ended December 31, 2022 and 2021. The fair value of RSUs is based on the 60-day average price of our stock on the date of grant for the year ended December 31, 2020. The fair value of SARs is estimated using a Black-Scholes option pricing model. We ceased issuing SARs in 2017. The total fair value of SARs and RSUs vested during the years ended December 31, 2022, 2021, and 2020 were $29 million, $25 million, and $10 million, respectively.
12. Accumulated Other Comprehensive Loss
The following tables present the changes in AOCL by component:
| | | | | | | | | | | | | | | | | | | | | | | |
| Changes in Accumulated Other Comprehensive Loss by Component |
| Pension and Other Post-Retirement Benefits | | Cash Flow Hedges | | Foreign Currency Translation | | Total |
Beginning balance, January 1, 2022 | $ | (463,227) | | | $ | (15,042) | | | $ | (379,470) | | | $ | (857,739) | |
Other comprehensive (loss) before reclassifications | (71,258) | | | — | | | (143,890) | | | (215,148) | |
Amounts reclassified from accumulated other comprehensive loss | 27,875 | | | 12,470 | | | — | | | 40,345 | |
Net current period other comprehensive (loss) | (43,383) | | | 12,470 | | | (143,890) | | | (174,803) | |
Ending balance, December 31, 2022 | $ | (506,610) | | | $ | (2,572) | | | $ | (523,360) | | | $ | (1,032,542) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Changes in Accumulated Other Comprehensive Loss by Component |
| Pension and Other Post-Retirement Benefits | | Cash Flow Hedges | | Foreign Currency Translation | | Total |
Beginning balance, January 1, 2021 | $ | (692,868) | | | $ | (30,007) | | | $ | (313,627) | | | $ | (1,036,502) | |
Other comprehensive income before reclassifications | 192,382 | | | — | | | (65,843) | | | 126,539 | |
Amounts reclassified from accumulated other comprehensive loss | 37,259 | | | 14,965 | | | — | | | 52,224 | |
Net current period other comprehensive income | 229,641 | | | 14,965 | | | (65,843) | | | 178,763 | |
Ending balance, December 31, 2021 | $ | (463,227) | | | $ | (15,042) | | | $ | (379,470) | | | $ | (857,739) | |
The AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the Employee Benefit Plans Footnote. The nature of the cash flow hedges are discussed in the Derivatives and Hedging 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.
13. Income Taxes
Significant components of our deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Deferred tax assets related to: | | | | |
Expenses not yet deducted for tax purposes | | $ | 312,445 | | | $ | 301,302 | |
Operating lease liabilities | | 314,804 | | | 300,705 | |
Pension liability not yet deducted for tax purposes | | 168,925 | | | 171,256 | |
Capital loss | | — | | | 7,333 | |
Net operating loss | | 49,787 | | | 48,865 | |
| | 845,961 | | | 829,461 | |
Deferred tax liabilities related to: | | | | |
Employee and retiree benefits | | 225,947 | | | 235,847 | |
Inventory | | 77,866 | | | 87,062 | |
Operating lease assets | | 305,885 | | | 295,801 | |
Other intangible assets | | 468,733 | | | 365,557 | |
Property, plant and equipment | | 91,706 | | | 72,740 | |
Other | | 38,597 | | | 18,176 | |
| | 1,208,734 | | | 1,075,183 | |
Net deferred tax liability before valuation allowance | | (362,773) | | | (245,722) | |
Valuation allowance | | (27,362) | | | (34,227) | |
Total net deferred tax liability | | $ | (390,135) | | | $ | (279,949) | |
We currently hold approximately $183 million in gross net operating losses, of which approximately $108 million will carry forward indefinitely. The remaining net operating losses of approximately $75 million will begin to expire in 2024.
The components of income before income taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
United States | | $ | 1,100,584 | | | $ | 762,472 | | | $ | 706,594 | |
Foreign | | 472,018 | | | 437,874 | | | (327,226) | |
Income before income taxes | | $ | 1,572,602 | | | $ | 1,200,346 | | | $ | 379,368 | |
The components of income tax expense are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Current: | | | | | | |
Federal | | $ | 196,634 | | | $ | 116,425 | | | $ | 130,680 | |
State | | 70,453 | | | 34,311 | | | 35,474 | |
Foreign | | 120,594 | | | 119,144 | | | 77,541 | |
Deferred: | | | | | | |
Federal | | 12,727 | | | 24,233 | | | 2,048 | |
State | | 4,981 | | | 9,485 | | | 801 | |
Foreign | | (15,488) | | | (2,042) | | | (30,571) | |
| | $ | 389,901 | | | $ | 301,556 | | | $ | 215,973 | |
The reasons for the difference between total tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Statutory rate applied to income (1) | | $ | 330,246 | | | $ | 252,073 | | | $ | 79,667 | |
Plus state income taxes, net of Federal tax benefit | | 59,593 | | | 34,599 | | | 28,658 | |
Taxation of foreign operations, net (2) | | 3,347 | | | 2,299 | | | (9,072) | |
Non-deductible goodwill impairment tax effect | | — | | | — | | | 106,411 | |
Foreign rate change - deferred tax remeasurement | | — | | | 17,032 | | | 9,045 | |
Valuation allowance | | (7,153) | | | (2,486) | | | 1,995 | |
Other | | 3,868 | | | (1,961) | | | (731) | |
| | $ | 389,901 | | | $ | 301,556 | | | $ | 215,973 | |
(1)U.S. statutory rates applied to income are as follows: 2022, 2021 and 2020 at 21%.
(2)Our effective tax rate reflects the impact of having operations outside of the U.S. which are taxed at statutory rates different from the U.S. statutory rate, with some income being fully or partially exempt from income taxes due to various operating and financing activities.
We account for Global Intangible Low Taxed income in the year the tax is incurred as a period cost.
We, or one of our subsidiaries, file income tax returns in the U.S., various states, and foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local tax examinations by tax authorities for years before 2019 or subject to foreign income tax examinations for years ended prior to 2013. We are currently under audit in some of our state and foreign jurisdictions. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not possible to estimate the effect, if any, of the amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits; however, we do not anticipate that total unrecognized tax benefits will significantly change in the next 12 months.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Balance at beginning of year | | $ | 19,501 | | | $ | 23,237 | | | $ | 21,461 | |
Additions based on tax positions related to the current year | | 1,475 | | | 2,196 | | | 3,771 | |
Additions for tax positions of prior years | | 89 | | | 156 | | | 3,480 | |
Reductions for tax positions for prior years | | (523) | | | (733) | | | (1,382) | |
Reduction for lapse in statute of limitations | | (921) | | | (2,843) | | | (3,765) | |
Settlements | | — | | | (2,512) | | | (328) | |
Balance at end of year | | $ | 19,621 | | | $ | 19,501 | | | $ | 23,237 | |
The amount of gross unrecognized tax benefits, including interest and penalties, as of December 31, 2022 and 2021 was approximately $21 million and $20 million, respectively, of which approximately $19 million and $19 million, respectively, if recognized, would affect the effective tax rate.
During the tax years ended December 31, 2022, 2021 and 2020, we paid, received refunds, or accrued insignificant interest and penalties. We recognize potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.
As of December 31, 2022, we estimate that we have an outside basis difference in certain foreign subsidiaries of approximately $928 million, which includes the cumulative undistributed earnings from our foreign subsidiaries. We continue to be indefinitely reinvested in this outside basis difference. Determining the amount of net unrecognized deferred tax liability related to any additional outside basis difference in these entities is not practicable. This is due to the complexities associated with the calculation to determine residual taxes on the undistributed earnings,
including the availability of foreign tax credits, applicability of any additional local withholding tax and other indirect tax consequences that may arise due to the distribution of these earnings.
14. Guarantees
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”). Presently, the independents are generally consolidated by unaffiliated enterprises that have controlling financial interests through ownership of a majority voting interest in the independents. We have no voting interest or equity conversion rights in any of the independents. We do not control the independents or the affiliates but receive a fee for the guarantees. We have concluded that the independents are variable interest entities, but that we are not the primary beneficiary. Specifically, the equity holders of the independents have the power to direct the activities that most significantly impact the entities’ economic performance including, but not limited to, decisions about hiring and terminating personnel, local marketing and promotional initiatives, pricing and selling activities, credit decisions, monitoring and maintaining appropriate inventories, and store hours. Separately, we concluded that the affiliates are not variable interest entities. Our maximum exposure to loss as a result of its involvement with these independents and affiliates is generally equal to the total borrowings subject to our guarantees. While such borrowings of the independents and affiliates are outstanding, we are required to maintain compliance with certain covenants. At December 31, 2022, we were in compliance with all such covenants.
At December 31, 2022, the total borrowings of the independents and affiliates subject to guarantee by us were approximately $916 million. These loans generally mature over periods from one to six 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 had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the current expected credit loss reserve is not material. As of December 31, 2022, 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.
We have recognized certain assets and liabilities amounting to $67 million and $81 million for the guarantees related to the independents’ and affiliates’ borrowings at December 31, 2022 and 2021, respectively. These assets and liabilities are included in other assets and other long-term liabilities in the 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.
15. Commitments and Contingencies
Legal Matters
We are subject to various legal proceedings, many involving routine litigation incidental to the businesses, including approximately 2,228 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. During the fourth quarter of 2022, we revised our estimate of the number of claims to be incurred in future periods, among other assumptions, and recognized $29 million of expense included in selling, administrative and other expenses in the consolidated statements of income. The amount accrued for pending and future claims as of December 31, 2022 was $220 million, the central estimate within our range of $190 million to $270 million, discounted using a discount rate of 3.83%. The undiscounted product liability as of December 31, 2022 was $285 million. The amount accrued for pending and future claims as of December 31, 2021 was $181 million.
The amounts recorded are based on the best available information and assumptions that we believe are reasonable. While litigation of any type contains an element of uncertainty, we believe that our insurance coverage and our defense, and ultimate resolution of pending and reasonably anticipated claims will continue to occur within
the ordinary course of our business and that resolution of these claims will not have a material adverse effect on our business, results of operations or financial condition.
On April 17, 2017, a jury awarded damages against the company of $82 million in a litigated automotive product liability dispute. Through post-trial motions and offsets from previous settlements, the initial verdict was reduced to $77 million. We believed the verdict was not supported by the facts or the law and was contrary to our role in the automotive parts industry. We challenged the verdict through an appeal to a higher court. On February 19, 2020, the Washington Court of Appeals issued an order entirely reversing the jury's finding on damages and ordering a new trial on damages. The plaintiffs subsequently appealed this order to the Washington Supreme Court. On July 7, 2020, the Washington Supreme Court indicated that it would consider a further appeal on this matter, and oral arguments occurred on November 10, 2020. On July 8, 2021, the Washington Supreme Court overturned the order of the Washington Court of Appeals and reinstated the trial court's damage award of $77 million against the company. We recorded an adjustment to increase selling, administrative and other expenses by approximately $77 million, inclusive of statutory interest and insurance coverage, in the consolidated statements of income for the year ended December 31, 2021. The damage award and statutory interest was fully paid as of December 31, 2021.
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.