GENUINE PARTS CO (GPC) FY 2023 MD&A

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

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

OVERVIEW

Genuine Parts Company is a global service organization engaged in the distribution of automotive and industrial replacement parts. We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia.

In 2023, we conducted business in North America, Europe and Australasia from more than 10,700 locations. Our Automotive business operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand in 2023 and accounted for approximately 62% of total revenues for the year. Our Industrial business operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore and accounted for approximately 38% of total revenues.

Our mission is to be an employer of choice, supplier of choice, valued customer, good corporate citizen and investment of choice for all our shareholders. Additionally, we strive to be a respected community member that gives back to the communities in which we operate. Our strategic financial objectives are intended to align with our mission and drive value for all our stakeholders. Our strategic financial objectives include: (1) revenue growth in excess of market growth; (2) continuously improving operating margins; (3) maintaining a strong balance sheet and cash flows; and (4) effective capital allocation.

KEY PERFORMANCE INDICATORS

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

Comparable Sales

Comparable sales refer to period-over-period comparisons of our net sales excluding the impact of acquisitions, divestitures, foreign currency and other. Our calculation of comparable sales is computed using total business days for the period and is inclusive of both company-owned stores and sales to our independent owner's stores. We consider this metric useful to investors because it provides greater transparency into management’s view and assessment of our core ongoing operations. This metric is widely used by analysts, investors and competitors in our industry, although our calculation of the metric may not be comparable to similar measures disclosed by other companies, because not all companies and analysts calculate this metric in the same manner.

Gross Profit and Gross Margin

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

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

SG&A includes all personnel and personnel-related costs at our corporate offices, segment headquarters, distribution centers, stores and branches, which accounts for more than 60% of total SG&A. Additional costs in SG&A include our facilities, freight and delivery, marketing, advertising, technology, digital, legal and professional costs. Freight and delivery costs are the shipping and handling costs incurred related to delivering merchandise to our customers. We believe SG&A is a useful measure because it allows management, analysts, investors and others to understand the level of costs we incur operating our business each period.

Segment Profit and Segment Margin

Segment profit is calculated as net sales less costs of goods sold, operating expenses, and certain non-operating expenses attributable to the segment (e.g., foreign currency), excluding general corporate expenses, net interest expense, intangible asset amortization, and other unallocated amounts that are primarily driven by corporate initiatives. Operating expenses include SG&A at our segments. Segment profit as a percentage of segment net sales is referred to as segment margin.

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

Net Income and EBITDA

We believe that net income and EBITDA, along with their adjusted measures, are useful measures of operating performance. EBITDA helps us assess the underlying profitability of our company’s business operations before the effects of certain net expenses that directly arise from our capital investment decisions (depreciation, amortization), financing decisions (interest), and tax strategies (income taxes). Net Income represents our profitability after the effects of all operating and other expenses and income.

The adjusted measures of EBITDA and net income eliminate certain non-recurring charges and other items that we do not believe are reflective of our ongoing business performance. These adjusted measures help us evaluate our operating performance on a comparable basis from period-to-period so that we can better understand the ongoing factors and trends affecting our business operations. We also use adjusted EBITDA, together with net income and segment profit, to forecast our performance, evaluate our actual results against our forecasts and compare our results to others in the industries that we serve. Adjusted EBITDA is also a measure of performance included in our executive incentive compensation plans. See “Non-GAAP Financial Measures” below for a discussion of how we define adjusted net income and adjusted EBITDA and a reconciliation of adjusted net income, EBITDA and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

CONSOLIDATED RESULTS OF OPERATIONS

Our discussion of our results focuses on 2023 and 2022 and year-to-year comparisons between those periods. Discussions of 2021 results and year-to-year comparisons between 2022 and 2021 results are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Our sales increased 4.5% in 2023, highlighted by the strength of our Industrial and international automotive businesses, which continued to grow as a result of increased market share and the benefits of recent acquisitions. Our sales growth in 2023 was partially offset by a slight decline in sales at our U.S. Automotive business, which was negatively impacted by moderating inflation levels, which adversely impacted the pricing environment year-over-year, and higher interest rates, which reduced sales to our independent owners.

Our earnings grew 11.3% in 2023, driven by sales growth in our Industrial and international automotive businesses combined with a 90 basis point improvement in gross margin, which resulted from our investments in pricing initiatives and strategic sourcing programs.

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

Net Sales

Our net sales increase of 4.5% includes a 3.1% comparable sales increase and a 2.0% positive impact from acquisitions, slightly offset by an unfavorable impact of foreign currency and other of 0.6%.

Automotive

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

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

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The net sales benefit Automotive received from acquisitions includes the impact of our entry into new markets in Spain and Portugal in 2022 and continued expansion in those markets in 2023. The unfavorable impact of foreign currency primarily results from the weakening of the Australian and Canadian dollars compared to the U.S. dollar throughout 2023. The strengthening of the Euro compared to the U.S. dollar largely offset this unfavorable impact.

Industrial

Net sales for Industrial were $8.8 billion in 2023, a 4.9% increase from 2022. The increase includes 4.8% growth in comparable sales and a 0.6% contribution from acquisitions. This was slightly offset by a 0.5% unfavorable impact of currency translation.

Our growth in comparable sales reflects the positive impact of our ongoing sales and pricing initiatives and continued growth in many of the industry segments we serve. Our initiatives include investments to drive improved pricing, technology and supply chain capabilities that are helping to win market share. We attribute our success to our highly diversified product and service offerings, the size and scale or our global network, and strategic acquisitions, including the ongoing benefits from the 2022 acquisition of KDG.

Gross Profit & Gross Margin

Gross profit increased $551 million, or approximately 7.1%, from 2022 and gross margin increased to 35.9% from 35.0% in 2022. The increase in gross profit in 2023 was primarily driven by the increases in net sales. The 90 basis point improvement in gross margin was driven by our strategic pricing and sourcing initiatives. These initiatives include enhancing technology to generate better pricing data and analytics, which allows us to respond in real time to shifting pricing dynamics across each market we serve as well as strategies related to sourcing product more efficiently.

Operating Expenses

SG&A expenses represent 26.7% of net sales in 2023 compared to 26.1% of net sales in 2022. The increase is primarily driven by planned increases in personnel costs due to wage inflation and global investments in information technology to support our ongoing strategic initiatives. Our investments in technology include improving the digital experience for our employees and customers, enhancing our pricing technology, increasing the automation used in our distribution centers, and modernizing our payment platforms, among others. We also are investing in our supply chain to ensure we have the right assortment for our customers, positioned closer to their places of business so that we can distribute product at a lower cost. Finally, we incurred increased rent and facilities costs in 2023, primarily from inflation on lease renewals and costs for new automotive stores and outlets opened in the U.S. and Europe.

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

Non-Operating Expenses and Income

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

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Segment Profit

Automotive

Automotive segment profit for 2023 was $1.2 billion, a decrease of 1.4% from 2022. Segment margin decreased 50 basis points to 8.2% in 2023 compared to 8.7% in 2022. Automotive segment margin was negatively impacted by lower sales in the U.S., as described herein, combined with planned investments in wages and information technology.

Industrial

Industrial segment profit increased 24.4% to $1.1 billion and its segment margin improved 200 basis points to 12.5% compared to 10.5% in 2022. The improved Industrial segment margin is primarily due to continued sales growth and our focus on leveraging expenses and executing supply chain initiatives as well as other strategic initiatives in areas such as category management and pricing. Our segment margin also benefited from the accelerated integration of KDG, allowing us to realize more synergies earlier than planned.

Income Taxes

Our effective income tax rate was 24.4% as of December 31, 2023, compared to 24.8% in 2022. For the year ended December 31, 2023, the rate decrease is primarily due to domestic tax credit benefits and statute-related adjustments.

Effective for years starting on or after December 31, 2023, certain countries have enacted legislation establishing a global 15% per-country minimum tax, which we do not expect to have a material impact to our financial statements.

Net Income

Net income was $1.3 billion in 2023 compared to $1.2 billion in 2022. Diluted earnings per share ("EPS") was $9.33 in 2023, up 12.3% compared to $8.31 in 2022. Adjusted net income was $1.3 billion in 2023, an increase of 10.9% from $1.2 billion in 2022. Adjusted diluted EPS was $9.33, a 11.9% increase compared to $8.34 in 2022. EBITDA was $2.2 billion in 2023, an increase of 8.2% from $2.0 billion in 2022. Adjusted EBITDA was $2.2 billion in 2023, an increase of 7.9% from $2.0 billion in 2022.

The growth in these metrics in all periods presented reflects improved segment margin, primarily in our Industrial segment, driven by higher revenue, particularly in our international business. We also benefited from the continued execution of our strategic pricing and other initiatives, as discussed more fully in the commentary above.

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

Non-GAAP Financial Measures

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

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

The table below represents amounts per common share assuming dilution:

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

(2)Adjustment reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs.

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

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

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

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

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

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

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

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

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

(2)Represents GAAP net income as a percentage of GAAP net sales.

(3)Represents total segment profit as a percentage of GAAP net sales.

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

(1)    These represent costs for certain functions, including cybersecurity and product liability litigation that were transferred to Corporate beginning in 2023 to be streamlined and centrally managed. We presented the 2022 comparative period to reflect how management manages these costs in 2023 and going forward.

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

OUTLOOK

We expect continued revenue and earnings growth in 2024, despite uncertain economic conditions. Positive trends related to miles driven, aging vehicles and continued limited new car inventory remain supportive of the sustained demand for our global Automotive business. In addition, we believe our Industrial business benefits from the diversity of our product and service offerings. We expect our growing capabilities in industrial solutions, including automation, fluid power and conveyance to be differentiators for our business.

We expect macroeconomic headwinds to result in continued pressure in 2024. In particular, our customers are facing economic challenges from persistent cost and wage inflation, heightened interest rates and general economic uncertainty. Our 2024 Automotive net sales growth includes the negative impact of new supplier incentives that will benefit our customers. We negotiated these as part of changing certain supplier relationships. The new supplier incentives we receive will be recognized as part of our inventory cost, reducing cost of sales, and the incentives we pass to our customers will be recognized as a reduction of net sales. On a like-for-like basis, we do not anticipate any significant negative impact to gross profit from these new arrangements. We expect this structure, among other factors, to continue to impact our overall sales growth throughout 2024.

We are committed to improving operating leverage and continued earnings growth through disciplined cost actions and initiatives. We continue to execute our strategic pricing and sourcing initiatives and expect to drive improvement in gross margins. We expect to continue to make global investments in information technology and supply chain to support our ongoing strategic initiatives and improve our product availability across all categories, which will impact our costs. We will continue to manage inventory strategically to maximize our ability to quickly adjust with customer demand, which will impact our cash from operations. We remain committed to driving sales

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

FINANCIAL CONDITION

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

LIQUIDITY AND CAPITAL RESOURCES

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

Sources and Uses of Cash

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

Operating Activities

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

Investing Activities

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

Financing Activities

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

Currently, we believe that our cash on hand and available short-term and long-term sources of capital are sufficient to fund our operations in both the short and long term, including working capital requirements, strategic acquisitions, dividends, share repurchases, capital expenditures, scheduled debt and interest payments, and income tax obligations.

Notes and Other Borrowings

On November 1, 2023, we issued $425 million of unsecured 6.50% Senior Notes due 2028. Simultaneously, we issued $375 million of unsecured 6.88% Senior Notes due 2033. For both offerings, interest is payable semi-annually on November 1 and May 1 of each year, beginning on May 1, 2024.

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

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

We ended the year with $2.6 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $1.1 billion of cash and cash equivalents). Due to the workers’ compensation and insurance reserve requirements in certain states, we also had unused letters of credit of approximately $71 million outstanding at December 31, 2023. Our unused letters of credit expire within one year, but have automatic renewal clauses. From time to time, we may enter into other credit facilities or financing arrangements to provide additional liquidity and to manage against foreign currency risk.

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

Contractual and Other Obligations

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

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

Additionally, we guarantee the borrowings of certain independently owned automotive parts stores (independents) and certain other affiliates in which we have a noncontrolling equity ownership interest (affiliates). Our maximum exposure to loss as a result of our involvement with these independents and affiliates is generally equal to the total borrowings subject to our guarantee. At December 31, 2023, the total borrowings of the independents and affiliates subject to guarantee by the company were approximately $954 million. These loans generally mature over periods from one to six years. Our amount of commitment expiring in 2024 is approximately $342 million. To date, we have had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

Share Repurchases

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

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Capital Resources

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

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

CRITICAL ACCOUNTING POLICIES

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

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

Consideration Received from Vendors

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

Impairment of Goodwill and Other Intangible Assets

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

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Employee Benefit Plans

Our benefit plan committees in the U.S. and Canada establish investment policies and strategies and regularly monitor the performance of our pension plan assets. Our U.S. plan, our largest pension plan, is well-funded, with a fund status of 131% at December 31, 2023. The plans in Europe are unfunded and therefore there are no plan assets. Our pension plan investment strategy implemented by our management is to achieve long-term objectives and invest the pension assets in accordance with the applicable pension legislation in the U.S. and Canada, as well as fiduciary standards. The long-term primary objectives for the pension plan funds are to provide for a reasonable amount of long-term growth of capital without undue exposure to risk, protect the assets from erosion of purchasing power and provide investment results that meet or exceed the pension plans’ actuarially assumed long-term rates of return. Our investment strategy with respect to pension plan assets is to generate a return in excess of the passive portfolio benchmark (38% U.S. Large-cap stocks, 4% U.S. Mid-cap stocks, 5% U.S. Small-cap stocks, 10% International stocks, 3% Emerging Market stocks and 40% Barclays U.S. Gov/Credit Index).

We make several critical assumptions in determining our pension plan assets and liabilities and related pension income. We believe the most critical of these assumptions are the expected rate of return on plan assets and the discount rate. Other assumptions we make relate to employee demographic factors such as rate of compensation increases, mortality rates, retirement patterns and turnover rates. Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding these assumptions.

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

The discount rate is chosen as the rate at which pension obligations could be effectively settled and is based on capital market conditions as of the measurement date. We have matched the timing and duration of the expected cash flows of our pension obligations to a yield curve generated from a broad portfolio of high-quality fixed income debt instruments to select our discount rate. Based upon this cash flow matching analysis, we selected a weighted average discount rate for the plans of 5.30% at December 31, 2023.

Our pension income for 2023 is determined at the December 31, 2022 measurement date. A 25 basis point increase in discount rate would result in an approximate $44 million decrease on our projected benefit obligation. A 25 basis point decrease in discount rate would result in approximate $46 million increase on our projected benefit obligation. A 25 basis point change in discount rate would have an immaterial impact on our pension income. A 25 basis point change in expected return on asset would have an approximate $6 million impact on our pension income. These sensitivities reflect the effect of changing one assumption at a time and assume no changes to the design of the pension plans.

Effective December 31, 2013, our defined benefit pension plans were amended to freeze benefit plan accruals for participants and provide for immediate vesting of accrued benefits. Net periodic benefit income for our defined benefit pension plans was $44 million, $27 million, and $19 million for the years ended December 31, 2023, 2022 and 2021, respectively. The income associated with the pension plans in 2023, 2022 and 2021 reflects the impact of the freeze. Refer to the Employee Benefit Plans Footnote of the Notes to Consolidated Financial Statements for more information regarding employee benefit plans.

Business Combinations

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

We typically measure customer relationships and other intangible assets using an income approach. Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates and EBITDA margins). If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired tangible and intangible

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assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.

Legal and Product Liabilities

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

To calculate product liabilities, we estimate potential losses relating to pending claims and also estimate the likelihood of additional, similar claims being filed against us in the future. To estimate potential losses on claims that could be filed in the future, we consider claims pending against us, claim filing rates, the number of codefendants and the extent to which they share in settlements, and the amount of loss by claim type. The estimated losses for pending and potential future claims are calculated on a discounted basis using risk-free interest rates derived from market data about monetary assets with maturities comparable to those of the projected product liabilities. We use an actuarial specialist to assist with measuring our product liabilities. While we believe our legal and product liability estimates are reasonable in light of all available information, if one or more legal claims were to greatly exceed our estimates, our results of operations and cash flows could be materially and adversely affected. Refer to the Commitments and Contingencies Footnote of the Notes to Consolidated Financial Statements for additional information regarding product liabilities.

Self Insurance

We are self-insured for the majority of our group health insurance costs. A reserve for claims incurred but not reported is developed by analyzing historical claims data provided by our claims administrators. These reserves are included in accrued expenses in the accompanying consolidated balance sheets as the expenses are expected to be paid within one year.

Long-term insurance liabilities consist primarily of reserves for our workers’ compensation program. In addition, we carry various large risk deductible workers’ compensation policies for the majority of workers’ compensation liabilities. We record the workers’ compensation reserves based on an analysis performed by an independent actuary. The analysis calculates development factors, which are applied to total reserves as provided by the various insurance companies who underwrite the program. While we believe that the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect workers’ compensation costs.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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