Item 6. SELECTED FINANCIAL DATA.

The following table sets forth certain selected historical financial and operating data of the Company as of the dates and for the periods indicated. The following selected financial data are qualified by reference to, and should be read in conjunction with, the consolidated financial statements, related notes and other financial information beginning on page F-1, as well as in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.

		Year Ended December 31,
(In thousands, except per share data)		2018				2017				2016				2015				2014
Net sales		$	18,735,073			$	16,308,801			$	15,339,713			$	15,280,044			$	15,341,647
Cost of goods sold		$	12,751,286			$	11,402,403			$	10,740,106			$	10,724,192			$	10,747,886
Operating and non-operating expenses, net		$	4,908,175			$	3,897,130			$	3,525,267			$	3,432,171			$	3,476,022
Income before taxes		$	1,075,612			$	1,009,268			$	1,074,340			$	1,123,681			$	1,117,739
Income taxes		$	265,138			$	392,511			$	387,100			$	418,009			$	406,453
Net income		$	810,474			$	616,757			$	687,240			$	705,672			$	711,286
Weighted average common shares outstanding during year — assuming dilution		147,241				147,701				149,804				152,496				154,375
Per common share:
Diluted net income		$	5.50			$	4.18			$	4.59			$	4.63			$	4.61
Dividends declared		$	2.88			$	2.70			$	2.63			$	2.46			$	2.30
December 31 closing stock price		$	96.02			$	95.01			$	95.54			$	85.89			$	106.57
Total debt, less current maturities		$	2,432,133			$	2,550,020			$	550,000			$	250,000			$	500,000
Total equity		$	3,471,991			$	3,464,156			$	3,207,356			$	3,159,242			$	3,312,364
Total assets		$	12,683,040			$	12,412,381			$	8,859,400			$	8,144,771			$	8,246,238

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

OVERVIEW

Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial parts and electrical specialty materials and business products. We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. The Company conducted business in 2018 throughout the North America, Australia, New Zealand, the U.K., France, Germany, Poland, and Puerto Rico from approximately 3,100 locations.

For the periods presented, the Company operates in three business segments: Automotive, Industrial, and Business Products. Effective in 2018, EIS, Inc., formerly our Electrical and Electronic business segment, was combined with Motion Industries and is now identified as the Electrical Specialties Group of Motion Industries. As a result, the Industrial segment is comprised of Motion Industries and EIS, Inc. and the results from prior periods have been combined, accordingly. The combination of these two segments provides strong economies of scale and greater operating efficiencies, which we intend to leverage. The opportunity to build synergies by sharing talent, physical resources, greater size and scale, and value-added expertise in each respective market channel is highly compelling.

We recorded consolidated net sales of $18.7 billion for the year ended December 31, 2018, an increase of 14.9% compared to sales in 2017. Consolidated net income for the year ended December 31, 2018 was $810.5 million and diluted net income per share was $5.50. Adjusted net income was $836.1 million for the year ended December 31, 2018, and adjusted diluted net income per share was $5.68. Adjusted net income and adjusted diluted net income per share, both non-GAAP measures, exclude the impact of transaction and other costs primarily related to the Company's acquisition of AAG and the attempted transaction to spin-off the Business Products Group, net of a termination fee received. See "Non-GAAP Measures."

In 2018, our growth strategy centered around plans and initiatives to position the Company for sustained long term sales and earnings growth. Specifically, we executed on our initiatives to maximize revenues and improve our operating performance across each of our businesses. Additionally, we were focused on our plans for creating a lower cost, but highly effective infrastructure. These efforts included ongoing steps to accelerate the integration of our acquisitions, investments to enhance our productivity and innovative strategies to offset rising costs.

Total sales of $16.3 billion in 2017 increased 6.3% compared to sales in 2016. Net income in 2017 was $617 million and diluted net income per share was $4.18. Adjusted net income was $696 million and adjusted diluted net income per share was $4.71. Adjusted net income and adjusted diluted net income per share exclude the impact of transaction and other costs primarily

related to the Company's acquisition of AAG and the transition tax associated with foreign earnings and the revaluation of deferred tax assets and liabilities as required by the Tax Cuts and Jobs Act of 2017. In 2016, sales were essentially flat with the prior year and net income was down by 3%. These results primarily reflect the impact of a challenging sales environment that persisted in the U.S. throughout the year. Over the three year period of 2016 through 2018, our financial performance reflects a variety of initiatives the Company implemented to grow sales and earnings across our businesses. Examples of such initiatives include strategic acquisitions, the introduction of new and expanded product lines, including those carried by acquired companies, geographic expansion, sales to new markets, enhanced customer marketing programs and a variety of gross margin and cost savings initiatives. We discuss these initiatives further below.

With regard to the December 31, 2018 consolidated balance sheet, the Company’s cash balance of $334 million compares to cash of $315 million at December 31, 2017. The Company continues to maintain a strong cash position, supported by the increase in net income and effective working capital management. Accounts receivable increased 3%, which related directly to our sales increase in the fourth quarter of 2018, and inventory is down by approximately 4% due primarily to a change in classification of certain estimated merchandise returns in connection with adopting Accounting Standards Update ("ASU") ASU 2014-09, Revenue from Contracts with Customers. Accounts payable increased 10% from the prior year, due primarily to improved payment terms with certain suppliers. Total debt outstanding at December 31, 2018 was $3.1 billion, a decrease from total debt of $3.2 billion at December 31, 2017.

RESULTS OF OPERATIONS

Our results of operations are summarized below for the three years ended December 31, 2018, 2017 and 2016.

		Year Ended December 31,
(In thousands except per share data)		2018				2017				2016
Net sales		$	18,735,073			$	16,308,801			$	15,339,713
Gross margin		5,983,787				$	4,906,398			$	4,599,607
Net income		810,474				$	616,757			$	687,240
Diluted net income per common share		5.50				$	4.18			$	4.59

Net Sales

Consolidated net sales for the year ended December 31, 2018 totaled $18.7 billion, up 14.9% from 2017. 2018 net sales included an approximate 11.2% contribution from acquisitions, net of store closures, and an approximate 3.6% increase in core sales. Core sales growth, which represents the Company's comparable sales, included both the increase in sales volume and product inflation. The impact of product inflation varied by business in 2018, with prices up approximately 1.8% in the U.S. Automotive segment, all of which was effective over the second half of the year, up approximately 3.8% in the Industrial segment and up approximately 1.8% in the Business Products segment. Due to the Company's global initiatives to grow revenues and create a lower cost, but highly effective infrastructure, we believe it is well positioned for sustainable long-term growth.

Consolidated net sales for the year ended December 31, 2017 totaled $16.3 billion, up 6.3% from 2016. 2017 net sales included a 4.4% contribution from acquisitions, net of store closures, an approximate 1.5% increase in core sales and an approximate 0.4% positive impact of currency translation. Core sales growth, which represents the Company's comparable sales, included an approximate 0.6% increase in sales volume and product inflation of approximately 0.9%. The impact of product inflation varied by business in 2017, as prices were up approximately 0.3% in the Automotive segment, up approximately 2.0% in the Industrial segment and up approximately 0.6% in the Business Products segment.

Automotive Group

Net sales for the Automotive Group (“Automotive”) were $10.5 billion in 2018, a 22.6% increase from 2017. The increase in sales for the year consists of an approximate 20% contribution from acquisitions, a 2.5% comparable sales increase and a slight negative impact of currency translation associated with our automotive businesses in Canada, Australasia, Europe and Mexico. Automotive sales were positively impacted by product inflation of 1.8% in the U.S. operations, although the majority of these supplier price increases became effective in the fourth quarter of 2018 and would not be reflected in our comparable sales increase. In 2018, total Automotive revenues were up approximately 30% in the first quarter, up 28% in the second quarter, up 23% in the third quarter and up 11% in the fourth quarter, with the lower fourth quarter increase due to the impact of the AAG acquisition, which anniversaried on November 2, 2018. In 2018, the sales environment for the automotive aftermarket was condusive to growth. Our international markets, including Europe, Australasia, Canada and Mexico, remained steady, and conditions in the U.S. aftermarket gradually improved during the year. In our view, the underlying fundamentals in the automotive aftermarket, including trends related to the overall number and age of the vehicle population as well as the continued increase in miles driven, remain supportive of sustained demand for automotive aftermarket maintenance and supply items across the markets we serve. We expect these fundamentals as well as key sales initiatives to drive sales growth for the Automotive business in 2019.

Net sales for Automotive were $8.6 billion in 2017, a 6.8% increase from 2016. The increase in sales for the year consists of an approximate 5% contribution from acquisitions, a 1% comparable sales increase and an approximate 1% positive impact of currency translation associated with our automotive businesses in Canada, Australasia and Mexico. Automotive sales were also positively impacted by product inflation of 0.3%, which is included in the comparable sales increase. In 2017, Automotive revenues were up approximately 3% in the first quarter, up 4% in the second and third quarters and up 17% in the fourth quarter. The fourth quarter sales increase reflects two months of sales for AAG.

Industrial Parts Group

Net sales for the Industrial Parts Group (“Industrial”), were $6.3 billion in 2018, up 8.5% from 2017. The increase in sales for the year reflects an approximate 6.5% comparable sales increase and an approximate 2% contribution from acquisitions. Total Industrial sales were also positively impacted by product inflation of 3.8%, as a portion of this increase, depending on its effective date, is passed through to customers and is included in the comparable sales increase. Industrial revenues were up approximately 8% in the first quarter of 2018, up 9% in the second quarter, up 8% in the third quarter and up 9% in the fourth quarter. These strong quarterly increases correlate to the ongoing strength in the industrial economy throughout the year. This was evidenced by favorable economic indicators such as Manufacturing Industrial Production, the Purchasing Managers Index, the level of exports and the continued stabilization of the energy sector. We believe the Industrial business is well positioned for ongoing profitable growth in 2019.

Net sales for Industrial were $5.8 billion in 2017, up 7.5% from 2016. The increase in sales for the year reflects an approximate 4% comparable sales increase, a 3.3% contribution from acquisitions and a slight positive impact of currency translation associated with our Canadian and Mexican operations. Industrial's sales were also positively impacted by product inflation of 1.9%, as a portion of this increase is passed through to customers and is included in the comparable sales increase. Industrial revenues were up approximately 6% in the first quarter of 2017 and up 8% in the second, third and fourth quarters, which correlates to the strength in the industrial economy throughout the year.

Business Products Group

Net sales for S.P. Richards, our Business Products Group (“Business Products”), were $1.9 billion in 2018, a decrease of 0.5% from 2017. The decrease in sales is driven by the decline in core sales and is the result of a slow first quarter relative to the balance of the year. Sales were down approximately 5% in the first quarter, flat in the second quarter, up 1% in the third quarter and up 2% in the fourth quarter of 2018. While the business products industry continues to face significant challenges, our strategy to diversify our traditional product offering into the large and growing Facilities, Breakroom and Safety Supplies ("FBS") category has proven beneficial. In addition, sales in our general office supplies category were improved in the second half of 2018. Looking ahead, we remain focused on our core growth initiatives and maximizing the growth prospects for our diversified business, but will also continue to evaluate all opportunities that may help us more effectively navigate the evolving industry dynamics in which this group competes.

Net sales for Business Products were $1.9 billion in 2017, an increase of 1.1% from 2016. The increase in sales reflects an approximate 5% contribution from acquisitions, offset by an approximate 4% decrease in comparable sales, inclusive of a 0.6% increase in higher transaction values associated with price inflation. Sales were up approximately 8% in the first quarter, up 4% in the second quarter, down 5% in the third quarter and down 2% in the fourth quarter of 2017.

Cost of Goods Sold

The Company includes in cost of goods sold the actual cost of merchandise, which represents the vast majority of this line item. Other items in cost of goods sold include warranty costs and in-bound freight from the suppliers, net of any vendor allowances and incentives. Cost of goods sold was $12.75 billion in 2018, $11.40 billion in 2017 and $10.74 billion in 2016. Cost of goods sold in 2018 and 2017 changed from the prior year periods in accordance with the related percentage change in sales for the same periods. The increases for these periods were partially offset by the favorable impact of the lower cost of goods sold model at AAG as well as at certain other acquired companies and the improvement in the automotive and industrial businesses. Primarily, the improvement in these businesses relates to the change in supplier incentives associated with higher purchasing volumes and product mix. Cost of goods sold represented 68.1% of net sales in 2018, 69.9% of net sales in 2017 and 70.0% of net sales in 2016 and thus, as a percent of net sales, decreased in both 2018 and 2017.

In 2018 and 2017, each of the Company's business segments experienced vendor price increases, while in 2016, only the Industrial and Business Products segments experienced vendor price increases. In any year where we experience price increases, we are able to work with our customers to pass most of these increases along to them.

Operating Expenses

The Company includes in selling, administrative and other expenses (“SG&A”) all personnel and personnel-related costs at its headquarters, distribution centers, stores and branches, which accounts for approximately 65% of total SG&A. Additional costs in SG&A include our facilities, delivery, marketing, advertising, technology, digital, legal and professional costs.

SG&A of $4.6 billion in 2018 increased by $889 million or approximately 23.9% from 2017. This represents 24.6% of net sales in 2018 compared to 22.8% of net sales in 2017. The increase in SG&A expenses from the prior year reflect a combination of factors, including the impact of increased sales for the year. In addition, our expenses reflect the impact of higher cost, and higher gross margin, models at select acquisitions, including AAG. We also experienced rising costs in areas such as labor, freight and delivery, technology and warehousing. Further, we incurred incremental costs associated with our 23 acquisitions during the year and, in addition, recorded $30.3 million in transaction and other costs primarily associated with the acquisition of AAG and the attempted transaction to spin-off the Company's Business Products Group, net of the favorable impact of a termination fee received. The increase in SG&A expenses as a percentage of net sales in 2018 from the prior year reflect the increases in costs described above as well as the loss of leverage associated with the first half and full year comparable sales growth in the automotive and business products businesses, respectively. To improve on our SG&A expense levels, we continue to work towards a lower cost, but highly effective infrastructure. These efforts include steps to accelerate the integration of our acquisitions, investments to enhance our productivity and innovative strategies to unlock greater savings and efficiencies across our operations.

Depreciation and amortization expense was $242 million in 2018, an increase of approximately $74 million or 44% from 2017, due primarily to the impact of acquisitions and the increase in capital expenditures relative to the prior year. The provision for doubtful accounts was $17 million in 2018, a $3 million increase from 2017. We believe the Company is adequately reserved for bad debts at December 31, 2018.

SG&A of $3.73 billion in 2017 increased by $334 million or approximately 10% from 2016. This represents 22.8% of net sales compared to 22.1% of net sales in 2016. The increase in SG&A expenses from the prior year reflect a combination of factors, including the impact of increased sales for the year. We also experienced rising costs in areas such as labor, freight, technology, warehousing, insurance, healthcare and other employee benefits. Further, we incurred incremental costs associated with our 15 acquisitions during the year and, in addition, recorded $43.5 million in transaction-related costs primarily associated with the acquisition of AAG. Finally, our SG&A expenses reflect the impact of higher cost, and higher gross margin, models at select acquisitions, including AAG. The increase in SG&A expenses as a percentage of net sales from the prior year reflect the increases in costs described above as well as the loss of leverage associated with the Company's 1.5% consolidated comparable sales growth.

Depreciation and amortization expense was $168 million in 2017, an increase of approximately $20 million or 14% from 2016. The provision for doubtful accounts was $14 million in 2017, an increase of $2 million from 2016.

Total share-based compensation expense for the years ended December 31, 2018, 2017 and 2016 was $20.7 million, $16.9 million and $19.7 million, respectively. Refer to the share-based compensation footnote in the Consolidated Financial Statements for further information regarding share-based compensation.

Non-Operating Expenses and Income

Non-operating expenses consist primarily of interest. Interest expense was $102 million in 2018, $41 million in 2017 and $21 million in 2016. The $60.4 million increase in interest expense in 2018 reflects the combination of higher debt levels throughout the year, primarily related to the increase in debt associated with the AAG acquisition on November 2, 2017, and rising interest rates on certain variable interest debt instruments. To offset these rising interest rates, the Company has entered into interest hedge products to increase our fixed interest rate debt relative to total debt. In 2017, the $20 million increase in interest expense reflects the combination of higher debt levels relative to the prior year, including the increase in debt for AAG described above, and rising interest rates on certain variable interest debt instruments.

In “Other”, the net benefit of interest income, equity method investment income, investment dividends, noncontrolling interests and pension income in 2018 was $68 million, a $16 million increase from the prior year. The increase in Other reflects higher interest income, pension income and investments income earned in 2018 relative to 2017. These items totaled $52 million in 2017, a $5 million increase from 2016 due to higher investment income and interest income relative to the prior year.

Income Before Income Taxes

Income before income taxes was $1.1 billion in 2018, up 7% from 2017. As a percentage of net sales, income before income taxes, which we refer to as operating margin, was 5.7% in 2018 compared to 6.2% in 2017. Adjusted for $36.1 million in transaction and other costs primarily associated with the Company's acquisition of AAG on November 2, 2017 and the attempted transaction to spin-off the Company's Business Products Group, net of the favorable impact of a termination fee received, income before income taxes was 5.9% of net sales. In 2017, income before income taxes was $1.0 billion, down 6% from 2016 and as a percentage of net sales was 6.2% compared to 7.0% in 2016. Adjusted for $49.1 million in transaction-related costs primarily associated with the Company's acquisition of AAG described above, income before income taxes was 6.5% of net sales.

Automotive Group

Automotive income before income taxes increased 18.6% in 2018 from 2017 and operating margin was 8.1% in 2018 as compared to 8.4% in 2017. The decrease in operating margin reflects the loss of expense leverage due to the 2.5% growth in comparable sales for Automotive, as this group requires approximately 3% comparable sales growth to leverage its fixed costs. In addition, rising costs in several areas as described above negatively impacted Automotive's operating margin. To improve Automotive's operating margin, this group is focused on several initiatives to grow sales and has also enhanced its cost management initiatives to drive savings in 2019 and the years ahead.

Automotive’s income before income taxes increased 0.7% in 2017 and operating margin of 8.4% was down from 8.8% in 2016. The decrease in operating margin primarily reflects the loss of expense leverage due to 1% growth in comparable sales for Automotive.

Industrial Group

Industrial’s income before income taxes increased 10.6% in 2018 from 2017 and operating margin was 7.7%, an increase from 7.6% in 2017. The improvement in operating margin for this group primarily reflects the continued benefit of strong sales growth throughout the year, as gross margins benefited from the increase in supplier incentives and rebates and operating expenses were better leveraged. We believe that Industrial enters 2019 in position to further expand their operating margin.

Industrial’s income before income taxes increased 10.9% in 2017 and operating margin was 7.6%, which was up from 7.4% in 2016. The improvement in operating margin for this group primarily reflects the positive impact of stronger sales growth in 2017 relative to 2016, driven by an improved industrial economy.

Business Products Group

Business Product's income before income tax was down 10.2% in 2018 from 2017 and operating margin decreased to 4.6% from 5.1%. The decrease in operating margin reflects the gross margin pressures associated with lower supplier incentives as well as increased costs and the deleveraging of expenses due to comparable sales declines. The Business Products Group enters 2019 focused on its core growth initiatives, the further diversification of its business and the evaluation of options for new and enhanced opportunities to maximize the growth prospects for this business.

Business Product's income before income taxes was down 15.5% in 2017 from 2016 and operating margin decreased to 5.1% from 5.9%, as gross margin pressures, rising costs and the deleveraging of expenses negatively impacted the operating margin for this business.

Income Taxes

The Tax Cuts and Jobs Act ("the Act") was enacted December 22, 2017. While not all inclusive, certain provisions of the Act materially impact the Company. The Act reduces the U.S. federal corporate tax rate from 35% to 21% for taxable years starting after December 31, 2017, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were not previously subject to U.S. Federal income tax and creates new taxes on certain foreign sourced earnings.

The effective income tax rate of 24.6% in 2018 decreased from 38.9% in 2017. The decrease in rate primarily reflects the positive impact of the lower U.S. federal tax rate described above and the comparative benefit associated with the transition tax expense in 2017, as required by the the Act.

The effective income tax rate of 38.9% in 2017 increased from 36.0% in 2016. The increase in the 2017 rate reflects the $51 million tax expense related to the transition tax associated with foreign earnings and the revaluation of deferred tax assets and liabilities as required by the Act, offset by a favorable mix of U.S. and foreign earnings, including earnings from AAG.

Net Income

Net income was $810.5 million in 2018, an increase of 31.4% from $617 million in 2017. On a per share diluted basis, net income was $5.50 in 2018, up 31.6% compared to $4.18 in 2017. Net income was 4.3% of net sales in 2018 compared to 3.8% of net sales in 2017. Adjusted net income was $836.1 million in 2018, up 20.2% from adjusted net income in 2017. On a per share diluted basis, adjusted net income was $5.68, a 20.6% increase compared to adjusted diluted net income per share of $4.71 in 2017. Adjusted net income and adjusted diluted net income per share, both non-GAAP measures, in 2018 and 2017 exclude the impact of transaction and other costs primarily related to the Company's acquisition of AAG and the attempted transaction to spin-off the Business Products Group, net of the favorable impact of a termination fee received. In 2017, adjusted net income also excludes the impact of the one-time transition tax associated with foreign earnings and the revaluation of deferred tax assets and liabilities as required by the Tax Cuts and Jobs Act of 2017.

Net income was $617 million in 2017, a decrease of 10.3% from $687 million in 2016. On a per share diluted basis, net income was $4.18 in 2017, down 8.9% compared to $4.59 in 2016. Net income was 3.8% of net sales in 2017 compared to 4.5% of net sales in 2016.

Non-GAAP Measures

The following table sets forth a reconciliation of net income and diluted net income per common share to adjusted net income and adjusted diluted net income per common share to account for the impact of these adjustments. The Company believes that the presentation of adjusted net income and adjusted net income per common share, which are not calculated in accordance with generally accepted accounting principles in the U.S. (“GAAP”), provide meaningful supplemental information to both management and investors that is indicative of the Company's core operations. The Company does not, nor does it suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.

		Year Ended December 31,
(In thousands, except per share data)		2018				2017				2016
GAAP net income		$	810,474			$	616,757			$	687,240
Diluted net income per common share		$	5.50			$	4.18			$	4.59
Add after-tax adjustments:
Provisional transition tax and deferred tax revaluation		$	—			$	50,986			$	—
Transaction and other costs		34,653				28,039				—
Termination fee		(9,045		)		—				—
Adjusted net income		$	836,082			$	695,782			$	687,240
Adjusted diluted net income per common share		$	5.68			$	4.71			$	4.59

FINANCIAL CONDITION

The Company’s cash balance of $334 million at December 31, 2018 compares to cash of $315 million at December 31, 2017, as discussed further below. For the year ended December 31, 2018, the Company used $278 million for acquisitions and other investing activities, $416 million for dividends paid to the Company’s shareholders, and $232 million for investments in the Company via capital expenditures. These items were offset by the Company’s earnings and net cash provided by operating activities.

Accounts receivable at December 31, 2018 increased by approximately 3% from the prior year, which is due to the Company's higher sales volume in the three month period ended December 31, 2018 as compared to the fourth quarter of 2017. Inventory at December 31, 2018 decreased from the prior year by approximately 4% due primarily to a change in classification of certain estimated merchandise returns in connection with adopting ASU 2014-09. Accounts payable increased 10% from the prior year primarily due to more favorable payment terms negotiated with the Company's vendors as well as more normalized levels of purchasing volumes relative to the fourth quarter of the prior year.

LIQUIDITY AND CAPITAL RESOURCES

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

The ratio of current assets to current liabilities was 1.3 to 1 at both December 31, 2018 and 2017, and our liquidity position remains solid. We continue to negotiate extended payment dates with our vendors. Certain vendors participate in financing arrangements with financial institutions that allow the vendors to receive payment earlier while we pay the financial institution based on the underlying vendor invoice amounts and due dates. The Company’s total debt outstanding at December 31, 2018 decreased by $102 million or 3% from December 31, 2017, due primarily to improvements in working capital.

Sources and Uses of Cash

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

		Year Ended December 31,
(In thousands)		2018				2017				$ Change				% Change
Operating activities		$	1,145,164			$	815,043			$	330,121			40.5	%
Investing activities		$	(496,124	)		$	(1,630,280	)		$	1,134,156			(69.6	)%
Financing activities		$	(608,830	)		$	872,059			$	(1,480,889	)		(169.8	)%

		Year Ended December 31,
(In thousands)		2017				2016				$ Change				% Change
Operating activities		$	815,043			$	946,078			$	(131,035	)		(13.9	)%
Investing activities		$	(1,630,280	)		$	(593,999	)		$	(1,036,281	)		174.5	%
Financing activities		$	872,059			$	(322,406	)		$	1,194,465			(370.5	)%

Operating Activities

The Company continues to generate cash, and in 2018, net cash provided by operating activities totaled $1.1 billion. This reflects a $330 million or 41% increase from 2017, and is primarily related to the Company’s ongoing working capital initiatives and the increase in the Company’s net income during 2018. The primary source of cash relates to the Company’s increased payables that are a result of ongoing strategic negotiations with key suppliers. In addition, the Company achieved a $194 million increase in net income or 31% increase from 2017.

Net cash provided by operating activities was $815 million in 2017, a 14% decrease from 2016, and represents the lower source of cash from trade accounts receivable, merchandise inventories, trade accounts payable and other short term assets and liabilities, collectively, relative to 2016. Other changes in operating activities were essentially offsetting.

Investing Activities

Net cash used in investing activities was $496 million in 2018 compared to $1.6 billion in 2017, a $1.1 billion or 70% decrease. Cash used for acquisitions of businesses and other investing activities in 2018 was $278 million, or $1.2 billion less than in 2017. The decrease in 2018 reflects the Company's smaller acquisitions as compared to the purchase of AAG in 2017. Capital expenditures of $232 million in 2018 compare to $157 million in 2017 and were higher than our original estimate of $200 to $220 million for the year due to the timing of certain capitalized investments. We estimate that cash used for capital expenditures in 2019 will be approximately $300 to $325 million.

Net cash used in investing activities was $1.63 billion in 2017 compared to $594 million in 2016, a $1.0 billion or 174% increase. Cash used for acquisitions of businesses and other investing activities in 2017 was $1.5 billion, or $1.0 billion more than in 2016. Primarily, this increase reflects the Company's purchase of AAG. Capital expenditures of $157 million in 2017 compare to $161 million in 2016 and were within the range of our original estimate of $145 to $165 million for the year.

Financing Activities

Net cash used in financing activities in 2018 totaled $609 million, a decrease of $1.5 billion or 170% from the $872 million in cash provided by financing activities in 2017. The decrease reflects no new debt issuance in 2018 and the paying down of our credit facilities. Net cash provided by financing activities in 2017 was up 370% from the $322 million used in 2016, and primarily reflects the new debt issued in 2017 associated with the purchase of AAG. For the three years presented, the Company's financing activities included the use of cash for dividends paid to shareholders and repurchases of the Company’s common stock. The Company paid dividends to shareholders of $416 million, $395 million and $387 million during 2018, 2017 and 2016, respectively. The Company expects this trend of increasing dividends to continue in the foreseeable future. During 2018, 2017 and 2016, the Company repurchased $92 million, $174 million and $181 million, respectively, of the Company’s common stock. We expect to remain active in our share repurchase program, but the amount and value of shares repurchased will vary.

Notes and Other Borrowings

The Company maintains a $2.6 billion multi-currency Syndicated Facility Agreement (the "Syndicated Facility") with a consortium of financial institutions, which matures in October 2022 and bears interest at London Inter-bank Offered Rate ("LIBOR") plus a margin, which is based on the Company’s debt to earnings before interest, tax, depreciation and amortization ("EBITDA") ratio. The Company also has the option to increase the borrowing capacity up to an additional $1 billion, as well as an option to decrease the borrowing capacity or terminate the facility with appropriate notice. At December 31, 2018, approximately $1.6 billion was outstanding under this line of credit. Due to the workers’ compensation and insurance reserve requirements in certain states, the Company also had unused letters of credit of approximately $64 million and $62 million outstanding at December 31, 2018 and 2017, respectively.

At December 31, 2018, the Company had unsecured Senior Notes outstanding under financing arrangement as follows: $50 million series G senior unsecured notes, 2.64% fixed, due 2021; $250 million series F senior unsecured notes, 3.24% fixed, due 2023; €225 million series J senior unsecured notes, 1.40% fixed, maturing on October 30, 2024; $250 million series H senior unsecured notes, 3.24% fixed, due 2026; €250 million series K senior unsecured notes, 1.81% fixed, maturing on October 30, 2027; $120 million series I senior unsecured notes, 3.70% fixed, maturing on October 30, 2027; €125 million series L senior unsecured notes, 2.02% fixed, maturing on October 30, 2029; and €100 million series M senior unsecured notes, 2.32% fixed, maturing on October 30, 2032. These borrowings contain covenants related to a maximum debt to EBITDA ratio and certain

limitations on additional borrowings. At December 31, 2018, the Company was in compliance with all such covenants. The weighted average interest rate on the Company’s total outstanding borrowings was approximately 2.71% at December 31, 2018 and 2.70% at December 31, 2017. Total interest expense, net of interest income, for all borrowings was $92.1 million, $38.7 million and $19.5 million in 2018, 2017 and 2016, respectively.

Contractual and Other Obligations

The following table shows the Company’s approximate obligations and commitments, including interest due on credit facilities, to make future payments under specified contractual obligations as of December 31, 2018:

Contractual Obligations

		Payment Due by Period
(In thousands)		Total				Less Than 1 Year				1-3 Years				3-5 Years				Over 5 Years
Credit facilities		$	3,427,974			$	747,974			$	371,531			$	1,034,070			$	1,274,399
Operating leases		1,115,725				305,257				412,748				204,858				192,862
Total contractual cash obligations		$	4,543,699			$	1,053,231			$	784,279			$	1,238,928			$	1,467,261

Due to the uncertainty of the timing of future cash flows associated with the Company’s unrecognized tax benefits at December 31, 2018, the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $21 million of unrecognized tax benefits and the remaining $30 million one-time transition tax related to the Tax Cuts and Jobs Act have been excluded from the contractual obligations table above. Refer to the income taxes footnote in the Consolidated Financial Statements for a discussion on income taxes.

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 obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons. The Company does not have significant agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed our expected requirements.

The Company guarantees the borrowings of certain independently owned automotive parts stores (independents) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (affiliates). The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is generally equal to the total borrowings subject to the Company’s guarantee. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings. The following table shows the Company’s approximate commercial commitments as of December 31, 2018:

Other Commercial Commitments

					Amount of Commitment Expiration per Period
(In thousands)	Total Amounts Committed				Less Than 1 Year				1-3 Years				3-5 Years				Over 5 Years
Standby letters of credit	$	63,504			$	63,504			$	—			$	—			$	—
Guaranteed borrowings of independents and affiliates	759,726				4,861				746,857				8,008				—
Total commercial commitments	$	823,230			$	68,365			$	746,857			$	8,008			$	—

In addition, the Company sponsors defined benefit pension plans that may obligate us to make contributions to the plans from time to time. Contributions in 2018 were $57.5 million. We expect to make $6.0 million in cash contributions to our qualified defined benefit plans in 2019, however, contributions required for 2019 and future years will depend on a number of unpredictable factors including the market performance of the plans’ assets and future changes in interest rates that affect the actuarial measurement of the plans’ obligations.

Share Repurchases

In 2018, the Company repurchased approximately 1.0 million shares of its common stock and the Company had remaining authority to purchase approximately 16.4 million shares of its common stock at December 31, 2018.

CRITICAL ACCOUNTING POLICIES

General

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 Consolidated Financial Statements.

Inventories — Provisions for Slow Moving and Obsolescence

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

Allowance for Doubtful Accounts — Methodology

The Company evaluates the collectability of trade accounts receivable based on a combination of factors. The Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience and periodically adjusts this estimate when the Company becomes aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults and, therefore, the need to revise estimates for bad debts. For the years ended December 31, 2018, 2017 and 2016, the Company recorded provisions for doubtful accounts of approximately $17.1 million, $13.9 million, and $11.5 million, respectively.

Consideration Received from Vendors

The Company may enter into agreements at the beginning of each year with many of its vendors that provide for inventory purchase incentives. Generally, the Company earns inventory purchase incentives upon achieving specified volume purchasing levels or other criteria. The Company accrues for the receipt of these incentives as part of its inventory cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year. While management believes the Company will continue to receive consideration from vendors in 2019 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future or that we will be able to achieve the specified volumes necessary to take advantage of such incentives.

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

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

Employee Benefit Plans

The Company’s benefit plan committees in the U.S. and Canada establish investment policies and strategies and regularly monitor the performance of the Company’s pension plan assets. The plans in Europe are unfunded and therefore there are no plan assets. The pension plan investment strategy implemented by the Company’s management is to achieve long-term objectives and invest the pension assets in accordance with the applicable pension legislation in the U.S. and Canada, as well as fiduciary standards. The long-term primary objectives for the pension plan funds are to provide for a reasonable amount of long-term growth of capital

without undue exposure to risk, protect the assets from erosion of purchasing power and provide investment results that meet or exceed the pension plans’ actuarially assumed long-term rates of return. The Company’s investment strategy with respect to pension plan assets is to generate a return in excess of the passive portfolio benchmark (47% S&P 500 Index, 5% Russell Mid Cap Index, 7% Russell 2000 Index, 5% MSCI EAFE Index, 5% DJ Global Moderate Index, 3% MSCI Emerging Market Net, and 28% BarCap U.S. Govt/Credit).

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 Note 10 of the Consolidated Financial Statements for more information regarding these assumptions.

Based on the investment policy for the pension plans, as well as an asset study that was performed based on the Company’s asset allocations and future expectations, the Company’s expected rate of return on plan assets for measuring 2019 pension income is 7.12% for the plans. The asset study forecasted expected rates of return for the approximate duration of the Company’s benefit obligations, using capital market data and historical relationships.

The discount rate is chosen as the rate at which pension obligations could be effectively settled and is based on capital market conditions as of the measurement date. We have matched the timing and duration of the expected cash flows of our pension obligations to a yield curve generated from a broad portfolio of high-quality fixed income debt instruments to select our discount rate. Based upon this cash flow matching analysis, we selected a weighted average discount rate for the plans of 4.36% at December 31, 2018.

Net periodic benefit income for our defined benefit pension plans was $15.8 million, $12.6 million, and $13.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. The income associated with the pension plans in 2018, 2017 and 2016 reflects the impact of the hard freeze effective 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. Refer to Note 10 of the Consolidated Financial Statements for more information regarding employee benefit plans.

Business Combinations

From time to time, the Company may enter into business combinations. The Company generally recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. The Company measures goodwill as the excess of consideration transferred, which the Company also measures at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires the Company to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities, including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies. This method also requires the Company to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If the Company is required to adjust provisional amounts that it has recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on the the Company's financial condition and results of operations.

Significant estimates and assumptions in estimating the fair value of acquired customer relationships and other identifiable intangible assets include future cash flows that the Company expects to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could record impairment charges. In addition, the Company has estimated the economic lives of certain acquired tangible and intangible assets and these lives are used to calculate depreciation and amortization expense. If the Company's estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.

Self Insurance

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

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

Income Taxes

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

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to the summary of significant accounting policies footnote in the Consolidated Financial Statements for information on recent accounting pronouncements.

QUARTERLY RESULTS OF OPERATIONS

The following is a summary of the quarterly results of operations for the years ended December 31, 2018 and 2017:

		Three Months Ended
(In thousands except per share data)		March 31, 2018				June 30, 2018				Sept. 30, 2018				Dec. 31, 2018
Net sales		$	4,586,294			$	4,822,065			$	4,722,922			$	4,603,792
Gross profit		$	1,435,807			$	1,521,586			$	1,484,235			$	1,542,159
Net income		$	176,576			$	226,972			$	220,227			$	186,699
Earnings per share:
Basic		$	1.20			$	1.55			$	1.50			$	1.28
Diluted		$	1.20			$	1.54			$	1.49			$	1.27

		Three Months Ended
(In thousands except per share data)		March 31, 2017				June 30, 2017				Sept. 30, 2017				Dec. 31, 2017
Net sales		$	3,905,641			$	4,100,178			$	4,095,906			$	4,207,076
Gross profit		$	1,155,721			$	1,239,712			$	1,226,890			$	1,284,075
Net income		$	160,160			$	189,972			$	158,442			$	108,183
Earnings per share:
Basic		$	1.08			$	1.29			$	1.08			$	0.74
Diluted		$	1.08			$	1.29			$	1.08			$	0.73

We recorded the quarterly earnings per share amounts as if each quarter was a discrete period. As a result, the sum of the basic and diluted earnings per share will not necessarily total the annual basic and diluted earnings per share.

The preparation of interim consolidated financial statements requires management to make estimates and assumptions for the amounts reported in the interim condensed consolidated financial statements. Specifically, the Company makes estimates and assumptions in its interim condensed consolidated financial statements for inventory adjustments, the accrual of bad debts, the accrual of insurance reserves, customer sales returns and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out ("LIFO") method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation, which is performed each year-end. Reserves for bad debts, insurance and customer sales returns are estimated and accrued on an interim basis based upon historical experience. Volume incentives are estimated based upon cumulative and projected purchasing levels. Income taxes are estimated on an interim basis to reflect the impact of tax reform assumptions and other considerations. The estimates and assumptions for interim reporting may change upon final determination at year-end, and such changes may be significant. The effect of these adjustments in 2018 and 2017 was not significant.