filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
177K characters. Original on sec.gov ·
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ANNUAL REPORT ON FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Genuine Parts Company and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Genuine Parts Company and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Valuation of Goodwill | |||||
| Description of the Matter | As of December 31, 2020, the Company’s goodwill was $1,917,477,000. As disclosed in Note 1 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. For a reporting unit in which the Company concludes, based on the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount (or if the Company elects to skip the optional qualitative assessment), the Company is required to perform a quantitative impairment test, which includes measuring the fair value of the reporting unit and comparing it to the reporting unit’s carrying amount. In the year ended December 31, 2020, the Company recorded a goodwill impairment charge of $506,721,000 related to its European reporting unit as disclosed in Note 3 to the consolidated financial statements. Auditing management’s quantitative impairment test for goodwill was complex and judgmental due to the significant estimation required to determine the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the weighted average cost of capital and market multiples, and near-term revenue and operating margin projections, which are affected by expectations about future market or economic conditions. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. To test the estimated fair value of the European reporting unit, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. For example, we compared the significant assumptions of the reporting unit to current industry, market and economic trends, to the Company's historical results and those of other guideline companies in the same industry, and to other relevant factors. We involved our valuation specialists to assist in our evaluation of the Company's valuation methodology and significant assumptions. In addition, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. We also recalculated the resulting impairment charge recorded by the Company. | ||||
| Loss Contingencies Related to Product Liabilities | |||||
| Description of the Matter | As disclosed in Notes 1 and 13 to the consolidated financial statements, the Company is subject to pending product liability lawsuits primarily resulting from its national distribution of automotive parts and supplies. The Company accrues for loss contingencies related to product liabilities if it is probable that the Company will incur a loss and the loss can be reasonably estimated. The amount accrued for product liabilities as of December 31, 2020 was $169,461,000. Auditing the Company’s loss contingencies related to product liabilities was complex due to the significant measurement uncertainty associated with the estimate, management’s application of significant judgment and the use of valuation techniques. In addition, the loss contingencies related to product liabilities are sensitive to significant management assumptions, including the number, type, and severity of claims incurred and estimated to be incurred in future periods. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant controls over the Company’s process for estimating loss contingencies related to product liabilities. For example, we tested controls over management's review of the significant assumptions described above and the reconciliation of claims data to that used by the Company’s actuarial specialist. To test the estimated loss contingencies related to product liabilities, our audit procedures included, among others, assessing the methodology used, testing the significant assumptions, including testing the completeness and accuracy of the underlying data, and comparing significant assumptions to historical claims as well as external data. We evaluated the legal letters obtained from internal and external legal counsel, held discussions with legal counsel, and performed a search for new or contrary evidence affecting the estimate. We involved our actuarial specialists to assist in our evaluation of the methodology and assumptions used by management and to independently develop a range of estimated product liabilities using the Company’s historical data as well as other information available for similar cases. We compared the Company's estimated loss contingencies related to product liabilities to the range developed by our actuarial specialists. We also assessed the adequacy of the Company’s disclosures, included in Notes 1 and 13 to the consolidated financial statements, in relation to these matters. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1948.
Atlanta, Georgia
February 19, 2021
Genuine Parts Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data and per Share Amounts)
| As of December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 990,166 | $ | 276,992 | |||||||
| Trade accounts receivable, net | 1,556,966 | 2,440,252 | |||||||||
| Merchandise inventories, net | 3,506,271 | 3,443,876 | |||||||||
| Prepaid expenses and other current assets | 1,060,360 | 1,063,245 | |||||||||
| Current assets of discontinued operations | — | 714,251 | |||||||||
| Total current assets | 7,113,763 | 7,938,616 | |||||||||
| Goodwill | 1,917,477 | 2,293,519 | |||||||||
| Other intangible assets, net | 1,498,257 | 1,492,097 | |||||||||
| Deferred tax assets | 65,658 | 45,921 | |||||||||
| Operating lease assets | 1,038,877 | 995,667 | |||||||||
| Other assets | 644,140 | 457,350 | |||||||||
| Property, plant and equipment, net | 1,162,043 | 1,173,688 | |||||||||
| Noncurrent assets of discontinued operations | — | 248,771 | |||||||||
| Total assets | $ | 13,440,215 | $ | 14,645,629 | |||||||
| Liabilities and equity | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | 4,128,084 | $ | 3,948,000 | |||||||
| Current portion of debt | 160,531 | 624,043 | |||||||||
| Other current liabilities | 1,491,426 | 1,493,109 | |||||||||
| Dividends payable | 114,043 | 110,851 | |||||||||
| Current liabilities of discontinued operations | — | 218,117 | |||||||||
| Total current liabilities | 5,894,084 | 6,394,120 | |||||||||
| Long-term debt | 2,516,614 | 2,802,056 | |||||||||
| Operating lease liabilities | 789,294 | 756,519 | |||||||||
| Pension and other post-retirement benefit liabilities | 265,687 | 249,832 | |||||||||
| Deferred tax liabilities | 212,910 | 233,044 | |||||||||
| Other long-term liabilities | 543,623 | 445,652 | |||||||||
| Noncurrent liabilities of discontinued operations | — | 68,906 | |||||||||
| Equity: | |||||||||||
| Preferred stock, par value $1 per share — authorized 10,000,000 shares; none issued | — | — | |||||||||
| Common stock, par value $1 per share - authorized 450,000,000 shares; issued and outstanding - 2020 - 144,354,335 shares and 2019 - 145,378,158 shares | 144,354 | 145,378 | |||||||||
| Additional paid-in capital | 117,165 | 98,777 | |||||||||
| Accumulated other comprehensive loss | (1,036,502) | (1,141,308) | |||||||||
| Retained earnings | 3,979,779 | 4,571,860 | |||||||||
| Total parent equity | 3,204,796 | 3,674,707 | |||||||||
| Noncontrolling interests in subsidiaries | 13,207 | 20,793 | |||||||||
| Total equity | 3,218,003 | 3,695,500 | |||||||||
| Total liabilities and equity | $ | 13,440,215 | $ | 14,645,629 |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net sales | $ | 16,537,433 | $ | 17,522,234 | $ | 16,831,605 | |||||||||||
| Cost of goods sold | 10,882,592 | 11,662,551 | 11,311,850 | ||||||||||||||
| Gross profit | 5,654,841 | 5,859,683 | 5,519,755 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Selling, administrative and other expenses | 4,386,739 | 4,577,610 | 4,241,203 | ||||||||||||||
| Depreciation and amortization | 272,842 | 257,263 | 227,584 | ||||||||||||||
| Provision for doubtful accounts | 23,577 | 13,876 | 15,929 | ||||||||||||||
| Restructuring costs | 50,019 | 100,023 | — | ||||||||||||||
| Goodwill impairment charge | 506,721 | — | — | ||||||||||||||
| Total operating expenses | 5,239,898 | 4,948,772 | 4,484,716 | ||||||||||||||
| Non-operating expenses (income): | |||||||||||||||||
| Interest expense | 93,713 | 95,583 | 101,796 | ||||||||||||||
| Other | (58,138) | (86,712) | (61,395) | ||||||||||||||
| Special termination costs | — | 42,757 | — | ||||||||||||||
| Total non-operating expenses (income) | 35,575 | 51,628 | 40,401 | ||||||||||||||
| Income before income taxes | 379,368 | 859,283 | 994,638 | ||||||||||||||
| Income taxes | 215,973 | 212,808 | 245,104 | ||||||||||||||
| Net income from continuing operations | 163,395 | 646,475 | 749,534 | ||||||||||||||
| Net (loss) income from discontinued operations | (192,497) | (25,390) | 60,940 | ||||||||||||||
| Net (loss) income | $ | (29,102) | $ | 621,085 | $ | 810,474 | |||||||||||
| Basic (loss) earnings per share: | |||||||||||||||||
| Continuing operations | $ | 1.13 | $ | 4.44 | $ | 5.11 | |||||||||||
| Discontinued operations | (1.33) | (0.18) | 0.42 | ||||||||||||||
| Basic (loss) earnings per share | $ | (0.20) | $ | 4.26 | $ | 5.53 | |||||||||||
| Diluted (loss) earnings per share: | |||||||||||||||||
| Continuing operations | $ | 1.13 | $ | 4.42 | $ | 5.09 | |||||||||||
| Discontinued operations | (1.33) | (0.18) | 0.41 | ||||||||||||||
| Diluted (loss) earnings per share | $ | (0.20) | $ | 4.24 | $ | 5.50 | |||||||||||
| Weighted average common shares outstanding | 144,474 | 145,736 | 146,657 | ||||||||||||||
| Dilutive effect of stock options and non-vested restricted stock awards | 641 | 681 | 584 | ||||||||||||||
| Weighted average common shares outstanding — assuming dilution | 145,115 | 146,417 | 147,241 |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands, Except per Share Amounts)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net (loss) income | $ | (29,102) | $ | 621,085 | $ | 810,474 | |||||||||||
| Other comprehensive income (loss), net of income taxes: | |||||||||||||||||
| Foreign currency translation adjustments | 102,595 | 67,902 | (200,490) | ||||||||||||||
| Cash flow hedge adjustments, net of income taxes in 2020 — $3,453, 2019 — $5,932, and 2018 — $1,713 | (9,336) | (16,039) | (4,631) | ||||||||||||||
| Pension and postretirement benefit adjustments, net of income taxes of 2020 — $4,639, 2019 — $5,036, and 2018 — $21,297 | 11,547 | 44,433 | (57,365) | ||||||||||||||
| Other comprehensive income (loss), net of tax | 104,806 | 96,296 | (262,486) | ||||||||||||||
| Comprehensive income | $ | 75,704 | $ | 717,381 | $ | 547,988 |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Equity
(In Thousands, Except Share Data and per Share Amounts)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Parent Equity | Non- controlling Interests in Subsidiaries | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | 146,652,615 | $ | 146,653 | $ | 68,126 | $ | (852,592) | $ | 4,049,965 | $ | 3,412,152 | $ | 52,004 | $ | 3,464,156 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 810,474 | 810,474 | — | 810,474 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (262,486) | — | (262,486) | — | (262,486) | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared, $2.88 per share | — | — | — | — | (422,352) | (422,352) | — | (422,352) | |||||||||||||||||||||||||||||||||||||||
| Share-based awards exercised, including tax benefit of $4,232 | 235,058 | 235 | (10,462) | — | — | (10,227) | — | (10,227) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 20,716 | — | — | 20,716 | — | 20,716 | |||||||||||||||||||||||||||||||||||||||
| Purchase of stock | (951,060) | (951) | — | — | (91,032) | (91,983) | — | (91,983) | |||||||||||||||||||||||||||||||||||||||
| Cumulative effect from adoption of ASU No. 2014-09, net of tax | — | — | — | — | (5,843) | (5,843) | — | (5,843) | |||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest activities | — | — | — | — | — | — | (30,464) | (30,464) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 145,936,613 | 145,937 | 78,380 | (1,115,078) | 4,341,212 | 3,450,451 | 21,540 | 3,471,991 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 621,085 | 621,085 | — | 621,085 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 96,296 | — | 96,296 | — | 96,296 | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared, $3.05 per share | — | — | — | — | (444,372) | (444,372) | — | (444,372) | |||||||||||||||||||||||||||||||||||||||
| Share-based awards exercised, including tax benefit of $4,920 | 240,568 | 240 | (11,653) | — | — | (11,413) | — | (11,413) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 32,050 | — | — | 32,050 | — | 32,050 | |||||||||||||||||||||||||||||||||||||||
| Purchase of stock | (799,023) | (799) | — | — | (73,388) | (74,187) | — | (74,187) | |||||||||||||||||||||||||||||||||||||||
| Cumulative effect from adoption of ASU No. 2018-02 | — | — | — | (122,526) | 122,526 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Cumulative effect from adoption of ASU No. 2016-02, net of tax | — | — | — | — | 4,797 | 4,797 | — | 4,797 | |||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest activities | — | — | — | — | — | — | (747) | (747) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 145,378,158 | 145,378 | 98,777 | (1,141,308) | 4,571,860 | 3,674,707 | 20,793 | 3,695,500 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (29,102) | (29,102) | — | (29,102) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 104,806 | — | 104,806 | — | 104,806 | |||||||||||||||||||||||||||||||||||||||
| Cash dividend declared, $3.16 per share | — | — | — | — | (456,469) | (456,469) | — | (456,469) | |||||||||||||||||||||||||||||||||||||||
| Share-based awards exercised, including tax benefit of $677 | 112,621 | 113 | (4,233) | — | — | (4,120) | — | (4,120) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 22,621 | — | — | 22,621 | — | 22,621 | |||||||||||||||||||||||||||||||||||||||
| Purchase of stock | (1,136,444) | (1,137) | — | — | (95,078) | (96,215) | — | (96,215) | |||||||||||||||||||||||||||||||||||||||
| Cumulative effect from adoption of ASU 2016-13, net of tax | — | — | — | — | (11,432) | (11,432) | — | (11,432) | |||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest activities | — | — | — | — | — | — | (7,586) | (7,586) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 144,354,335 | $ | 144,354 | $ | 117,165 | $ | (1,036,502) | $ | 3,979,779 | $ | 3,204,796 | $ | 13,207 | $ | 3,218,003 |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
| Year Ended December 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating activities: | |||||||||||||||||
| Net (loss) income | $ | (29,102) | $ | 621,085 | $ | 810,474 | |||||||||||
| Net (loss) income from discontinued operations | (192,497) | (25,390) | 60,940 | ||||||||||||||
| Net income from continuing operations | 163,395 | 646,475 | 749,534 | ||||||||||||||
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 272,842 | 257,263 | 227,584 | ||||||||||||||
| Excess tax benefit from share-based compensation | (677) | (4,920) | (4,232) | ||||||||||||||
| Deferred income taxes | (27,722) | (55,939) | 1,593 | ||||||||||||||
| Share-based compensation | 22,621 | 28,703 | 17,737 | ||||||||||||||
| Realized currency and other divestiture losses | 11,356 | 34,701 | — | ||||||||||||||
| Gain on equity investment | — | (38,663) | — | ||||||||||||||
| Goodwill impairment charge | 506,721 | — | — | ||||||||||||||
| Other operating activities | 12,569 | (17,589) | 1,648 | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Trade accounts receivable, net | 957,514 | (134,163) | (62,103) | ||||||||||||||
| Merchandise inventories, net | 58,462 | (54,765) | (74,148) | ||||||||||||||
| Trade accounts payable | 89,350 | 82,739 | 357,097 | ||||||||||||||
| Other short-term assets and liabilities | (109,812) | 11,740 | (100,616) | ||||||||||||||
| Other long-term assets and liabilities | 57,903 | 76,937 | (57,372) | ||||||||||||||
| Net cash provided by operating activities from continuing operations | 2,014,522 | 832,519 | 1,056,722 | ||||||||||||||
| Investing activities: | |||||||||||||||||
| Purchases of property, plant and equipment | (153,502) | (277,873) | (226,506) | ||||||||||||||
| Proceeds from sale of property, plant and equipment | 18,064 | 24,387 | 14,391 | ||||||||||||||
| Proceeds from divestitures of businesses | 387,379 | 434,609 | — | ||||||||||||||
| Acquisitions of businesses and other investing activities | (69,173) | (724,718) | (257,823) | ||||||||||||||
| Net cash provided by (used in) investing activities from continuing operations | 182,768 | (543,595) | (469,938) | ||||||||||||||
| Financing activities: | |||||||||||||||||
| Proceeds from debt | 2,638,014 | 5,037,168 | 5,064,291 | ||||||||||||||
| Payments on debt | (3,533,017) | (4,897,769) | (5,124,265) | ||||||||||||||
| Share-based awards exercised | (4,120) | (11,413) | (10,227) | ||||||||||||||
| Dividends paid | (453,277) | (438,890) | (415,983) | ||||||||||||||
| Purchase of stock | (96,215) | (74,187) | (91,983) | ||||||||||||||
| Other financing activities | (65,150) | (871) | (30,663) | ||||||||||||||
| Net cash used in financing activities from continuing operations | (1,513,765) | (385,962) | (608,830) | ||||||||||||||
| Cash flows from discontinued operations: | |||||||||||||||||
| Net cash flows provided by operating activities from discontinued operations | 5,039 | 59,491 | 88,442 | ||||||||||||||
| Net cash used in investing activities from discontinued operations | (11,131) | (19,611) | (26,186) | ||||||||||||||
| Net cash provided by financing activities from discontinued operations | — | — | — | ||||||||||||||
| Net cash (used in) provided by discontinued operations | (6,092) | 39,880 | 62,256 | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 35,741 | 603 | (21,562) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 713,174 | (56,555) | 18,648 | ||||||||||||||
| Cash and cash equivalents at beginning of year | 276,992 | 333,547 | 314,899 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 990,166 | $ | 276,992 | $ | 333,547 | |||||||||||
| Supplemental disclosures of cash flow information | |||||||||||||||||
| Cash paid during the year for: | |||||||||||||||||
| Income taxes | $ | 223,019 | $ | 303,736 | $ | 236,536 | |||||||||||
| Interest | $ | 91,344 | $ | 95,281 | $ | 102,131 |
See accompanying notes.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
(in thousands, except per share data)
1. Summary of Significant Accounting Policies
Business
Genuine Parts Company (the "Company") is a distributor of automotive replacement parts and industrial parts and materials. The Company serves a diverse customer base through a network of more than 10,000 locations throughout North America, Australasia, and Europe and, therefore, has limited exposure from credit losses to any particular customer, region, or industry segment. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.
The Company's operations are vulnerable to the reduced economic activity caused by the COVID-19 outbreak, which was declared a pandemic in March 2020. The extent to which the COVID-19 pandemic impacts the Company will depend on numerous factors and future developments that the Company cannot predict, including the severity of the virus; the occurrence of additional waves or spikes in infection rates; the duration of the outbreak; governmental, business or other actions taken in response to the pandemic and the efficacy of these actions, including partial or complete shut downs, travel restrictions, and stay-at-home orders among other actions; the effectiveness and distribution of COVID-19 vaccines; and impacts on the Company's supply chain, its ability to keep operating locations open, and on customer demand. The Company benefited from various forms of government economic assistance including certain temporary subsidies that were received in 2020, which have been classified as a reduction of selling, administrative and other expenses. The Company has evaluated subsequent events through the date the financial statements were issued.
On June 30, 2020, the Company completed the divestiture of its Business Products Group. Refer to the acquisitions, divestitures and discontinued operations footnote for more information. The Company's results of operations for the Business Products Group are reported as discontinued operations and all information related to the discontinued operations has been excluded from the notes to the consolidated financial statements for all periods presented. Net (loss) income from discontinued operations for each period includes all costs that are directly attributable to these businesses and excludes certain corporate overhead costs that were previously allocated.
Principles of Consolidation
The consolidated financial statements include all of the accounts of the Company. The net income attributable to noncontrolling interests is not material to the Company’s consolidated net income. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates and the differences could be material. If the pandemic persists or worsens, the estimates and assumptions management made as of December 31, 2020 could change, and it is reasonably possible such changes could be significant.
Revenue Recognition
The Company primarily recognizes revenue at the point the customer obtains control of the products or services and at an amount that reflects the consideration expected to be received for those products or services. Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price and recognizes revenue upon delivery or as services are rendered.
Revenue is recognized net of allowances for returns, variable consideration and any taxes collected from customers that will be remitted to governmental authorities. Revenue recognized over time is not significant. Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant. Liabilities for customer incentives, discounts, or rebates are included in other current liabilities in the consolidated balance sheets.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Product Distribution Revenues
The Company generates revenue primarily by distributing products through wholesale and retail channels. For wholesale customers, revenue is recognized when title and control of the goods has passed to the customer. Retail revenue is recognized at the point of sale when the goods are transferred to customers and consideration is received. Shipping and handling activities are performed prior to the customer obtaining control of the products. Costs associated with shipping and handling are considered costs to fulfill a contract and are included in selling, administrative and other expenses in the period they are incurred.
Other Revenues
The Company offers software support, product cataloging, marketing, training and other membership program and support services to certain customers. This revenue is recognized as services are performed. Revenue from these services is recognized over a short duration and the impact to our consolidated financial statements is not significant.
Variable Consideration
The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. The Company estimates variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company recognizes estimated variable consideration as an adjustment to the transaction price when control of the related product or service is transferred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.
Foreign Currency Translation
The consolidated balance sheets and statements of income of the Company’s foreign subsidiaries have been translated into U.S. dollars at the current and average exchange rates, respectively. The foreign currency translation adjustment is included as a component of accumulated other comprehensive loss.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Trade Accounts Receivable and the Allowance for Doubtful Accounts
The Company evaluates the collectability of trade accounts receivable based on a combination of factors. The Company estimates an allowance for doubtful accounts as a percentage of net sales based on various factors, including historical experience, current economic conditions and future expected credit losses and collectability trends. The Company will periodically adjust 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, 2020, 2019, and 2018, the Company recorded provisions for doubtful accounts of approximately $23,577, $13,876, and $15,929, respectively. At December 31, 2020 and 2019, the allowance for doubtful accounts was approximately $36,622 and $35,047, respectively.
Merchandise Inventories, Including Consideration Received From Vendors
Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out ("LIFO") method for a majority of U.S. automotive and industrial parts, and generally by the first-in, first-out ("FIFO") method for non-U.S. and certain other inventories. If the FIFO method had been used for all inventories, cost would have been approximately $524,400 and $531,800 higher than reported at December 31, 2020 and 2019, respectively. During 2020 and 2019, reductions in industrial parts inventories resulted in liquidations of LIFO inventory layers, which reduced cost of goods sold by approximately $15,500 and $10,400, respectively.
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 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.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The Company enters 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 2021 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives in the future.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of amounts due from vendors, prepaid expenses, and income and other taxes receivable.
Goodwill
The Company reviews its goodwill annually for impairment in the fourth quarter, or sooner if circumstances indicate that the carrying amount may exceed fair value. The Company tests goodwill for impairment at the reporting unit level, which is an operating segment or a level below an operating segment (a component). A component is a reporting unit if the component constitutes a business for which discrete financial information and operating results are available and management regularly reviews that information. However, the Company may aggregate two or more components of an operating segment into a single reporting unit if the components have similar economic characteristics.
To review goodwill at a reporting unit for impairment, the Company generally elects to first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Qualitative factors include adverse macroeconomic, industry or market conditions, cost factors, or financial performance. If the Company elects not to perform a qualitative assessment or concludes from its assessment of qualitative factors that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company must perform a quantitative test to evaluate goodwill impairment.
To perform a quantitative test, the Company calculates the fair value of the reporting unit and compares that amount to the reporting unit's carrying value. The Company typically calculates the fair value by using a combination of a market approach and an income approach that is based on a discounted cash flow model. The assumptions used in the market approach generally include benchmark company market multiples and the assumptions used in the income approach generally include the projected cash flows of the reporting unit, which are based on projected revenue growth rates and operating margins, and the estimated weighted average cost of capital, working capital and terminal value. The Company uses inputs and assumptions it believes are consistent with those a hypothetical marketplace participant would use. The Company recognizes goodwill impairment (if any) as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
Refer to the goodwill and other intangible assets footnote for further information on the results of the Company's annual goodwill impairment testing.
Long-Lived Assets Other Than Goodwill
The Company assesses its long-lived assets other than goodwill for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining life of such assets. If these projected cash flows are less than the carrying amount, an impairment would be recognized, resulting in a write-down of assets with a corresponding charge to earnings. Impairment losses, if any, are measured based upon the difference between the carrying amount and the fair value of the assets. For the years ended December 31, 2020 and 2019, the Company recognized long-lived asset impairments of $6,243 and $5,408, respectively, related to certain assets expected to be abandoned in connection with the 2019 Cost Savings Plan (refer to the restructuring footnote for more information).
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Other Assets
Other assets consist primarily of cash surrender value of life insurance policies, debt securities, equity method and other investments, guarantee fees receivable, and deferred compensation benefits.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are primarily determined on a straight-line basis over the following estimated useful lives of each asset: buildings, 10 to 40 years; machinery and equipment, 5 to 15 years; and the shorter of lease term or useful life for leasehold improvements.
Other Current Liabilities
Other current liabilities consist primarily of current lease obligations, reserves for sales returns expected within the next year, accrued compensation, accrued income and other taxes, and other reserves for expenses incurred.
Other Long-term Liabilities
Other long-term liabilities consist primarily of reserves for sales returns expected after the next year, guarantee obligations, accrued taxes and other non-current obligations.
Self-Insurance
The Company is self-insured for the majority its group health insurance costs. A reserve for claims incurred but not reported is developed by analyzing historical claims data provided by the Company’s claims administrators. These reserves are included in accrued expenses in the accompanying consolidated balance sheets as the expenses are expected to be paid within one year.
Long-term insurance liabilities consist primarily of reserves for the Company's workers’ compensation program. In addition, the Company carries various large risk deductible workers’ compensation policies for the majority of workers’ compensation liabilities. The Company records the workers’ compensation reserves based on an analysis performed by an independent actuary. The analysis calculates development factors, which are applied to total reserves as provided by the various insurance companies who underwrite the program. While the Company believes that the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect workers’ compensation costs.
Business Combinations
When the Company acquires businesses, it applies the acquisition method of accounting and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions. Goodwill is measured as the excess of the fair value of the consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method requires the Company to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period. The Company must complete the accounting during the measurement period, which cannot exceed one year. Adjustments made during the measurement period could have a material impact on the Company's financial condition and results of operations.
The Company typically measures customer relationship and other intangible assets using an income approach. Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates, operating margins and attrition rates). If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could record impairment charges. In addition, the Company has estimated the economic lives of certain acquired tangible and intangible assets and these lives are used to calculate depreciation and amortization expense. If the Company's estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
Legal and Product Liabilities
The Company accrues for potential losses related to legal disputes, litigation, product liabilities, and regulatory matters when it is probable (the future event or events are likely to occur) that the Company will incur a loss and the amount of the loss can be reasonably estimated.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The amount of the product liability reflects the Company’s reasonable estimate of losses based upon currently known facts. To calculate the liability, the Company estimates potential losses relating to pending claims and also estimates the likelihood of additional, similar claims being filed against the Company in the future. To estimate potential losses on claims that could be filed in the future, the Company considers claims pending against the Company, claim filing rates, the number of codefendants and the extent to which they share in settlements, and the amount of loss by claim type. The estimated losses for pending and potential future claims are calculated on a discounted basis using risk-free interest rates derived from market data about monetary assets with maturities comparable to those of the projected product liabilities. The Company uses an actuarial specialist to assist with measuring its product liabilities.
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. Additionally, ASC 820, Fair Value Measurements, defines levels within a hierarchy based upon observable and non-observable inputs.
-
Level 1. Observable inputs such as quoted prices in active markets;
-
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
-
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions
At December 31, 2020 and 2019, the fair value of the Company's senior unsecured notes was approximately $2,680,545 and $2,013,542, respectively, which are designated as Level 2 in the fair value hierarchy. Our valuation technique is based primarily on prices and other relevant information generated by observable transactions involving identical or comparable assets or liabilities.
Derivative instruments are recognized in the consolidated balance sheets at fair value and are designated as Level 2 in the fair value hierarchy. They are valued using inputs other than quoted prices, such as foreign exchange rates and yield curves.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analyses of goodwill, other intangible assets, and long-lived assets. These involve fair value measurements on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable, trade accounts payable, and borrowings under the line of credit approximate their respective fair values based on the short-term nature of these instruments.
Derivatives and Hedging
The Company is exposed to various risks arising from business operations and market conditions, including fluctuations in interest rates and certain foreign currencies. When deemed appropriate, the Company uses derivative and non-derivative instruments as risk management tools to mitigate the potential impact of interest rate and foreign exchange rate risks. The objective of using these tools is to reduce fluctuations in the Company’s earnings, cash flows and net investments in certain foreign subsidiaries associated with changes in these rates. Derivative financial instruments are not used for trading or other speculative purposes. The Company has not historically incurred, and does not expect to incur in the future, any losses as a result of counterparty default related to derivative instruments.
The Company formally documents relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative and non-derivative instruments that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When a designated instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively.
Shipping and Handling Costs
Shipping and handling costs are classified as selling, administrative and other expenses in the accompanying consolidated statements of income and totaled approximately $301,900, $303,900, and $278,500, for the years ended December 31, 2020, 2019, and 2018, respectively.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Advertising Costs
Advertising costs are expensed as incurred and totaled $193,900, $201,600, and $203,500 in the years ended December 31, 2020, 2019, and 2018, respectively.
Accounting for Legal Costs
The Company’s legal costs expected to be incurred in connection with loss contingencies are expensed as such costs are incurred.
Share-Based Compensation
The Company maintains various long-term incentive plans, which provide for the granting of stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), performance awards, dividend equivalents and other share-based awards. SARs represent a right to receive upon exercise an amount, payable in shares of common stock, equal to the excess, if any, of the fair market value of the Company’s common stock on the date of exercise over the base value of the grant. The terms of such SARs require net settlement in shares of common stock and do not provide for cash settlement. RSUs represent a contingent right to receive one share of the Company’s common stock at a future date. The majority of awards previously granted vest on a pro-rata basis for periods ranging from one to five years and are expensed accordingly on a straight-line basis. Forfeitures are accounted for as they occur. The Company issues new shares upon exercise or conversion of awards under these plans.
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.
Net Income from Continuing Operations per Common Share
Basic net income from continuing operations per common share is computed by dividing net income from continuing operations by the weighted average number of common shares outstanding during the year. The computation of diluted net income from continuing operations per common share includes the dilutive effect of stock options, stock appreciation rights and nonvested restricted stock awards options. Options to purchase approximately 1,602, 210, and 1,490 shares of common stock ranging from $72 - $105 per share were outstanding at December 31, 2020, 2019, and 2018, respectively. These options were excluded from the computation of diluted net income from continuing operations per common share because the options’ exercise prices were greater than the average market prices of common stock in each respective year.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standard Updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs and any not listed below were assessed and determined to be not applicable or are expected to have a minimal impact on the Company's consolidated financial statements.
Credit Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. Among other things, the ASU and its amendments replace the incurred loss impairment model for receivables and loan guarantees with a current expected credit loss model. The new model measures impairment based on expected credit losses over the remaining contractual life of an asset, considering available information about the collectability of cash flows, past events, current conditions, and reasonable and supportable forecasts. Additional quantitative and qualitative disclosures are required. The Company adopted ASU 2016-13 and its amendments as of January 1, 2020, which included recognizing a cumulative-effect adjustment to reduce opening retained earnings by $11,432, net of taxes.
Compensation - Retirement Benefits (Topic 715)
In August 2018, the FASB issued ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans. The updated accounting guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing, adding and clarifying certain disclosures. The Company adopted this new accounting standard on January 1, 2020 on a retrospective basis. The adoption of this ASU did not have an impact on the Company’s financial position, results of operations, or cash flows.
Income Statement - Reporting Comprehensive Income (Topic 220)
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU permits a company to make a one-time election to reclassify stranded tax effects caused by the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The ASU also requires companies to disclose their accounting policies for releasing income tax effects from accumulated other comprehensive income. ASU 2018-02 was effective for periods beginning after December 15, 2018, with an election to adopt early. The Company adopted ASU 2018-02 as of January 1, 2019 and recognized an adjustment to increase retained earnings and to adjust accumulated other comprehensive loss by approximately $122,526.
Intangibles - Goodwill and Other (Topic 350)
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The ASU simplifies the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. ASU 2017-04 requires applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The Company adopted ASU 2017-04 as of October 1, 2019 and performed its annual evaluation of goodwill in accordance with this standard.
Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases, which, among other things, requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, including operating leases. Expanded disclosures with additional qualitative and quantitative information are also required. ASU 2016-02 and its amendments were effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption was permitted.
The Company adopted ASU 2016-02 and its amendments as of January 1, 2019 using the modified retrospective method and utilized the optional transition method to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company elected a policy of not recording leases on its consolidated balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
an option to purchase the leased asset. The Company recognizes payments on these leases within selling, administrative and other expenses on a straight-line basis over the lease term.
The Company's adoption of the standard resulted in a cumulative-effect adjustment to increase retained earnings by $4,797, net of taxes, as of January 1, 2019. The standard did not materially impact the Company's consolidated net income or liquidity. The standard did not have an impact on debt-covenant compliance under the Company's current debt agreements.
2. Accumulated Other Comprehensive Loss
The following tables present the changes in accumulated other comprehensive loss (“AOCL”) by component:
| Changes in Accumulated Other Comprehensive Loss by Component | |||||||||||||||||||||||
| Pension and Other Post-Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation | Total | ||||||||||||||||||||
| Beginning balance, January 1, 2020 | $ | (704,415) | $ | (20,671) | $ | (416,222) | $ | (1,141,308) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (17,343) | (21,509) | 91,239 | 52,387 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 28,890 | 12,173 | 11,356 | 52,419 | |||||||||||||||||||
| Net current period other comprehensive income (loss) | 11,547 | (9,336) | 102,595 | 104,806 | |||||||||||||||||||
| Ending balance, December 31, 2020 | $ | (692,868) | $ | (30,007) | $ | (313,627) | $ | (1,036,502) |
| Changes in Accumulated Other Comprehensive Loss by Component | |||||||||||||||||||||||
| Pension and Other Post-Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation | Total | ||||||||||||||||||||
| Beginning balance, January 1, 2019 | $ | (626,322) | $ | (4,632) | $ | (484,124) | $ | (1,115,078) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 22,120 | (18,419) | 33,201 | 36,902 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss (1) | 22,313 | 2,380 | 34,701 | 59,394 | |||||||||||||||||||
| Net current period other comprehensive income (loss) | 44,433 | (16,039) | 67,902 | 96,296 | |||||||||||||||||||
| Cumulative effect from adoption of ASU 2018-02 | (122,526) | — | — | (122,526) | |||||||||||||||||||
| Ending balance, December 31, 2019 | $ | (704,415) | $ | (20,671) | $ | (416,222) | $ | (1,141,308) |
(1) Amount includes realized currency losses of $34,701 that were reclassified out of foreign currency translation into earnings in connection with the March 7, 2019 sale of Grupo Auto Todo and the September 30, 2019 sale of EIS. Refer to the acquisitions, divestitures and discontinued operations footnote for further details.
The AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote. The nature of the cash flow hedges are discussed in the derivatives and hedging footnote. Generally, tax effects in AOCL are established at the currently enacted tax rate and reclassified to net (loss) income in the same period that the related pre-tax AOCL reclassifications are recognized.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
3. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill during the years ended December 31, 2020 and 2019 by reportable segment, as well as other identifiable intangible assets, are summarized as follows:
| Goodwill | |||||||||||||||||||||||
| Automotive | Industrial | Total | Other Intangible Assets, Net | ||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 1,721,823 | $ | 324,997 | $ | 2,046,820 | $ | 1,327,898 | |||||||||||||||
| Additions | 194,561 | 185,679 | 380,240 | 340,799 | |||||||||||||||||||
| Divestitures | (294) | (115,437) | (115,731) | (89,030) | |||||||||||||||||||
| Amortization | — | — | — | (92,206) | |||||||||||||||||||
| Impairments | — | — | — | (2,194) | |||||||||||||||||||
| Foreign currency translation | (18,595) | 785 | (17,810) | 6,830 | |||||||||||||||||||
| Balance as of December 31, 2019 | 1,897,495 | 396,024 | 2,293,519 | 1,492,097 | |||||||||||||||||||
| Additions | 15,061 | 5,261 | 20,322 | 21,890 | |||||||||||||||||||
| Amortization | — | — | — | (94,962) | |||||||||||||||||||
| Impairments | (506,721) | — | (506,721) | — | |||||||||||||||||||
| Foreign currency translation | 99,688 | 10,669 | 110,357 | 79,232 | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | 1,505,523 | $ | 411,954 | $ | 1,917,477 | $ | 1,498,257 |
Due to several factors that coalesced in the second quarter of 2020 the Company performed an interim impairment test as of May 31, 2020 for its European reporting unit and recorded a goodwill impairment charge of $506,721. The factors primarily resulted from the ongoing market volatility and uncertainty caused by the COVID-19 pandemic, which extended into the second quarter and impacted several critical impairment testing assumptions including weighted average cost of capital and market multiples, and near-term revenue and operating margin projections for the reporting unit. During the second quarter, the Company also assessed the finite-lived, identifiable tangible and intangible assets at the European reporting unit for impairment under the undiscounted cash flows approach and concluded there was no impairment.
The European reporting unit’s fair value was calculated using a combination of both income and market approaches and involved significant unobservable inputs (Level 3 inputs). The assumptions used in the income approach include projected revenue growth rates, operating margins, the estimated weighted average cost of capital and terminal value. The weighted-average cost of capital used in the income approach was adjusted to reflect the specific risks and uncertainties associated with the COVID-19 pandemic in developing the cash flow projections. The assumptions used in the market approach include benchmark company market multiples. The Company used inputs and assumptions it believed are consistent with those a hypothetical marketplace participant would use.
The Company completed its annual qualitative goodwill assessment as of October 1, 2020. Based on the Company's assessment, which included reviewing historical revenue and operating profit growth trends and evaluating the inputs to a weighted average cost of capital, the Company has determined that it is not more likely than not that the goodwill is impaired for all reporting units.
Should actual results differ from certain key assumptions used in the interim or annual impairment tests, including revenue and operating margin growth rates, which are both impacted by economic conditions, or should other key impairment testing assumptions change in subsequent periods, there can be no assurance that goodwill at one or more reporting units may not be impaired.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The gross carrying amounts and accumulated amortization relating to other intangible assets at December 31, 2020 and 2019 are as follows:
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| Customer relationships | $ | 1,578,153 | $ | (388,120) | $ | 1,190,033 | $ | 1,481,470 | $ | (287,851) | $ | 1,193,619 | |||||||||||||||||||||||
| Trademarks | 358,253 | (50,227) | 308,026 | 334,643 | (36,501) | 298,142 | |||||||||||||||||||||||||||||
| Non-competition agreements | 5,719 | (5,521) | 198 | 5,268 | (4,932) | 336 | |||||||||||||||||||||||||||||
| $ | 1,942,125 | $ | (443,868) | $ | 1,498,257 | $ | 1,821,381 | $ | (329,284) | $ | 1,492,097 |
Amortization expense for other intangible assets totaled $94,962, $92,206, and $83,489 for the years ended December 31, 2020, 2019, and 2018, respectively. Estimated other intangible assets amortization expense for the succeeding five years is as follows:
| 2021 | $ | 100,630 | |||
| 2022 | 100,623 | ||||
| 2023 | 99,984 | ||||
| 2024 | 99,236 | ||||
| 2025 | 98,915 | ||||
| $ | 499,388 |
4. Property, Plant and Equipment
Property, plant and equipment as of December 31, 2020 and December 31, 2019, consisted of the following:
| 2020 | 2019 | |||||||||||||
| Land | $ | 131,117 | $ | 128,353 | ||||||||||
| Buildings and leasehold improvements | 899,723 | 779,124 | ||||||||||||
| Machinery, equipment and other | 1,529,298 | 1,466,899 | ||||||||||||
| Property, plant and equipment, at cost | 2,560,138 | 2,374,376 | ||||||||||||
| Less: accumulated depreciation | 1,398,095 | 1,200,688 | ||||||||||||
| Property, plant and equipment, net | $ | 1,162,043 | $ | 1,173,688 |
5. Debt
The principal amounts of the Company’s borrowings subject to variable rates (after consideration of hedging arrangements) totaled approximately $114,002 and $554,902 at December 31, 2020 and 2019, respectively. The weighted average interest rate on the Company’s outstanding borrowings was approximately 2.65% and 2.18% at December 31, 2020 and 2019, respectively.
Certain borrowings require the Company to comply with a financial covenant with respect to a maximum debt to Adjusted EBITDA ratio. At December 31, 2020, the Company was in compliance with all such covenants. Due to the workers’ compensation and insurance reserve requirements in certain states, the Company also had unused letters of credit of approximately $69,899 and $65,322 outstanding at December 31, 2020 and 2019, respectively.
On October 27, 2020, the Company issued $500,000 aggregate principal amount of 1.875% Senior Unsecured Notes due 2030 at a price to the public of 99.069% of their face value with U.S. Bank National Association as trustee. Interest on the 1.875% Senior Unsecured Notes due 2030 is payable semi-annually on May 1 and November 1 of each year, which begins on May 1, 2021, and is computed on the basis of a 360-day year.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
On October 30, 2020, the Company entered into a new $1.5 billion Syndicated Facility Agreement (the "October 30, 2020 Syndicated Facility"). Simultaneously with the entry into the October 30, 2020 Syndicated Facility, the Company terminated and paid in full all outstanding indebtedness under the previous October 30, 2017 Syndicated Facility and repaid the existing term loan A facility.
Amounts outstanding under the Company’s credit facilities, net of debt issuance costs consist of the following:
| December 31, 2020 | December 31, 2019 | |||||||||||||
| Unsecured Revolving Credit Facility, $1,500,000, LIBOR plus 1.50% variable, due October 30, 2025 | $ | — | $ | — | ||||||||||
| Unsecured Revolving Credit Facility, $1,500,000, LIBOR plus 1.50% variable, due October 30, 2022 (Terminated as of October 30, 2020) | — | 477,873 | ||||||||||||
| Unsecured Term Loan A, $1,100,000, LIBOR plus 1.50% variable, due October 30, 2022 | — | 962,500 | ||||||||||||
| October 27, 2020, Senior Unsecured Notes, $500,000, 1.875% fixed, due November 1, 2030 | 500,000 | — | ||||||||||||
| July 29, 2016, Series G Senior Unsecured Notes, $50,000, 3.14% fixed, due July 29, 2021 | 50,000 | 50,000 | ||||||||||||
| December 2, 2013, Series F Senior Unsecured Notes, $250,000, 3.74% fixed, due December 2, 2023 | 250,000 | 250,000 | ||||||||||||
| June 30, 2019, Series A Senior Unsecured Notes, A$155,000, 3.60% fixed, due June 30, 2024 | 119,133 | 108,422 | ||||||||||||
| October 30, 2017, Series J Senior Unsecured Notes, €225,000, 1.90% fixed, due October 30, 2024 | 276,773 | 252,000 | ||||||||||||
| June 30, 2019, Series B Senior Unsecured Notes, A$155,000, 3.93% fixed, due June 30, 2026 | 119,133 | 108,422 | ||||||||||||
| November 30, 2016, Series H Senior Unsecured Notes, $250,000, 3.74% fixed, due November 30, 2026 | 250,000 | 250,000 | ||||||||||||
| October 30, 2017, Series K Senior Unsecured Notes, €250,000, 2.31% fixed, due October 30, 2027 | 307,525 | 280,000 | ||||||||||||
| October 30, 2017, Series I Senior Unsecured Notes, $120,000, 4.20% fixed, due October 30, 2027 | 120,000 | 120,000 | ||||||||||||
| May 31, 2019, Series A Senior Unsecured Notes, €50,000, 2.05% fixed, due May 31, 2029 | 61,505 | 56,000 | ||||||||||||
| October 30, 2017, Series L Senior Unsecured Notes, €125,000, 2.52% fixed, due October 30, 2029 | 153,762 | 140,000 | ||||||||||||
| May 31, 2019, Series B Senior Unsecured Notes, €100,000, 2.24% fixed, due May 31, 2031 | 123,010 | 112,000 | ||||||||||||
| October 30, 2017, Series M Senior Unsecured Notes, €100,000, 2.82% fixed, due October 30, 2032 | 123,010 | 112,000 | ||||||||||||
| May 31, 2019, Series C Senior Unsecured Notes, €100,000, 2.45% fixed, due May 31, 2034 | 123,010 | 112,000 | ||||||||||||
| Other unsecured debt | 114,002 | 40,340 | ||||||||||||
| Total unsecured debt | 2,690,863 | 3,431,557 | ||||||||||||
| Unamortized debt issuance costs | (9,136) | (5,458) | ||||||||||||
| Unamortized discounts | (4,582) | — | ||||||||||||
| Total debt | 2,677,145 | 3,426,099 | ||||||||||||
| Less debt due within one year | 160,531 | 624,043 | ||||||||||||
| Long-term debt, excluding current portion | $ | 2,516,614 | $ | 2,802,056 |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Approximate maturities under the Company’s credit facilities are as follows:
| 2021 | $ | 162,429 | |||
| 2022 | 1,573 | ||||
| 2023 | 250,000 | ||||
| 2024 | 395,906 | ||||
| 2025 | — | ||||
| Thereafter | 1,880,955 | ||||
| $ | 2,690,863 |
6. Accounts Receivable Sales Agreement
On May 29, 2020 the Company entered into an agreement (the “A/R Sales Agreement”) to sell short-term receivables from certain customer trade accounts to an unaffiliated financial institution. The A/R Sales Agreement has a 364 day term, which the Company intends to renew each year.
As part of the A/R Sales Agreement, the Company continuously sells designated pools of receivables as they are originated by it and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The assets of the SPE would be first available to satisfy the creditor claims of the unaffiliated financial institution. The Company controls and therefore consolidates the SPE in its consolidated financial statements.
At the inception of the A/R Sales Agreement, the SPE transferred ownership and control of approximately $500,000 in receivables that met certain qualifying conditions to the unaffiliated financial institution in exchange for cash. On October 29, 2020 the Company transferred ownership and control of an additional $300,000 in receivables under the A/R Sales Agreement bringing the total to $800,000. The Company accounts for transactions with the unaffiliated financial institution as sales of financial assets, with the associated receivables derecognized from the Company's consolidated balance sheet. The remaining receivables held by the special purpose subsidiary were pledged to secure the collectability of the sold receivables. The amount of receivables pledged as collateral as of December 31, 2020 is approximately $771,000.
The Company continues to be involved with the receivables transferred by the SPE to the unaffiliated financial institution by providing collection services. As cash is collected on sold receivables, the SPE continuously transfers ownership and control of new qualifying receivables to the unaffiliated financial institution so that the total principal amount outstanding of receivables sold is approximately $800,000 at any point in time (which is the maximum amount allowed under the amended agreement). The future amount of receivables outstanding as sold could decrease, based on the level of activity and other factors.
The following table summarizes the activity and amounts outstanding under the A/R Sales Agreement as of period end:
| December 31, 2020 | ||||||||
| Receivables sold to the financial institution and derecognized since inception | $ | 3,928,024 | ||||||
| Cash collected on sold receivables since inception | $ | 3,128,023 | ||||||
| Total principal amount outstanding of receivables sold at period end | $ | 800,001 |
Cash activity related to the A/R Sales Agreement is presented in cash from operating activities in the consolidated statement of cash flows. The SPE incurs fees due to the unaffiliated financial institution related to the accounts receivable sales transactions. Those fees, which are immaterial, are recorded within other non-operating (income) expenses in the consolidated statements of income. The SPE has a recourse obligation to repurchase from the unaffiliated financial institution any previously sold receivables that are not collected due to the occurrence of certain events, including credit quality deterioration and customer sales returns. The reserve recognized for this recourse obligation as of December 31, 2020 is not material. The servicing liability related to the Company's collection services also is not material, given the high quality of the customers underlying the receivables and the anticipated short collection period.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
7. Derivatives and Hedging
The following table summarizes the location and carrying amounts of the derivative instruments and the foreign currency denominated debt, a non-derivative financial instrument, that are designated and qualify as part of hedging relationships:
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
| Instrument | Balance sheet location | Notional | Balance | Notional | Balance | |||||||||||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||||||||||||||
| Interest rate swaps | Other current liabilities | $ | — | $ | — | $ | 800,000 | $ | 24,792 | |||||||||||||||||||||||
| Net investment hedges: | ||||||||||||||||||||||||||||||||
| Forward contracts | Prepaid expenses and other current assets | $ | 800,000 | $ | 7,668 | $ | 925,810 | $ | 39,965 | |||||||||||||||||||||||
| Forward contracts | Other current liabilities | $ | 360,990 | $ | 19,442 | $ | — | $ | — | |||||||||||||||||||||||
| Foreign currency debt | Long-term debt | € | 700,000 | $ | 861,070 | € | 700,000 | $ | 784,000 |
Cash Flow Hedges
The Company uses interest rate swaps to mitigate variability in forecasted interest payments on a portion of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate interest payment. The Company designates the interest rate swaps as qualifying hedging instruments and accounts for them as cash flow hedges. On May 1, 2020, the Company dedesignated its interest rate swaps and modified them to match the terms of its modified debt agreement and as a result the $48,492 payable as of that date was deemed a financing transaction. The Company redesignated the portion of the modified interest rate swap that is not related to the financing agreement as a qualifying hedging instrument. Gains and losses from fair value adjustments on the qualifying hedging instruments are initially classified in AOCL and are reclassified to interest expense on the dates interest payments are accrued. On October 30, 2020 the Company terminated its interest rate swaps and settled the outstanding balances through cash payments totaling $41,000, which were primarily classified in financing activities on the Consolidated Statement of Cash Flows because they primarily related to the financing agreement. The remaining amount in AOCL is being amortized to interest expense on a straight-line basis over the remaining life of the hedged instrument.
Hedges of Net Investments in Foreign Operations
The Company has designated certain derivative instruments and a portion of its foreign currency denominated debt, a non-derivative financial instrument, as hedges of the foreign currency exchange rate exposure of the Company's Euro-denominated net investment in a European subsidiary. The Company applies the spot method to assess the hedge effectiveness of the derivative instruments and this assessment for each instrument excludes the initial value related to the difference at contract inception between the foreign exchange spot rate and the forward rate (i.e., the forward points). The initial value of this excluded component is recognized as a reduction to interest expense in a systematic and rational manner over the term of the derivative instrument. All other changes in value for the net investment hedges are included in accumulated other comprehensive loss and would only be reclassified to earnings if the European subsidiary were liquidated, or otherwise disposed.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The table below presents pre-tax gains and losses related to cash flow hedges and net investment hedges:
| (Loss) Gain Recognized in AOCL Before Reclassifications | Gain Recognized in Interest Expense For Excluded Components | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contract | $ | (29,464) | $ | (21,972) | $ | (7,896) | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Net Investment Hedges: | ||||||||||||||||||||||||||||||||||||||
| Cross-currency swap | — | 2,936 | 6,006 | — | 2,294 | 6,740 | ||||||||||||||||||||||||||||||||
| Forward contracts | (85,390) | 20,679 | — | 27,146 | 17,892 | — | ||||||||||||||||||||||||||||||||
| Foreign currency debt | (77,070) | 17,010 | 38,850 | — | — | — | ||||||||||||||||||||||||||||||||
| Total | $ | (191,924) | $ | 18,653 | $ | 36,960 | $ | 27,146 | $ | 20,186 | $ | 6,740 |
Amounts reclassified from accumulated other comprehensive loss to interest expense for the periods presented were not material.
8. Leased Properties
The Company primarily leases real estate for certain retail stores, distribution centers, office space and land. The Company also leases equipment (primarily vehicles).
Most real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term from one to 20 years or more. The exercise of lease renewal options is at the Company's discretion. The Company evaluates renewal options at lease inception and on an ongoing basis, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
The table below presents the locations of the operating lease assets and liabilities on the consolidated balance sheets:
| Balance Sheet Line Item | December 31, 2020 | December 31, 2019 | ||||||||||||||||||
| Operating lease assets | Operating lease assets | $ | 1,038,877 | $ | 995,667 | |||||||||||||||
| Operating lease liabilities: | ||||||||||||||||||||
| Current operating lease liabilities | Other current liabilities | $ | 270,739 | $ | 255,207 | |||||||||||||||
| Noncurrent operating lease liabilities | Operating lease liabilities | 789,294 | 756,519 | |||||||||||||||||
| Total operating lease liabilities | $ | 1,060,033 | $ | 1,011,726 |
The depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term.
The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company's weighted average remaining lease term and weighted average discount rate for operating leases are:
| December 31, 2020 | December 31, 2019 | |||||||||||||
| Weighted average remaining lease term (in years) | 5.35 | 5.50 | ||||||||||||
| Weighted average discount rate | 2.47 | % | 2.82 | % |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the consolidated balance sheets as of December 31, 2020:
| 2021 | $ | 295,841 | |||
| 2022 | 252,303 | ||||
| 2023 | 188,357 | ||||
| 2024 | 128,278 | ||||
| 2025 | 81,625 | ||||
| Thereafter | 186,135 | ||||
| Total undiscounted future minimum lease payments | 1,132,539 | ||||
| Less: Difference between undiscounted lease payments and discounted operating lease liabilities | 72,506 | ||||
| Total operating lease liabilities | $ | 1,060,033 |
Future minimum lease payments include $60,198 related to options to extend lease terms that are reasonably certain of being exercised.
The table below presents operating lease costs and supplemental cash flow information related to leases:
| 2020 | 2019 | |||||||||||||
| Operating lease costs | $ | 313,315 | $ | 310,028 | ||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 323,336 | $ | 311,170 | ||||||||||
| Operating lease assets obtained in exchange for new operating lease liabilities | $ | 302,114 | $ | 330,103 |
Operating lease costs (as defined under ASU 2016-02) are included within selling, administrative and other expenses on the consolidated statements of income. Short-term lease costs, variable lease costs and sublease income were not material for the periods presented.
Rental expense for operating leases (as defined prior to the adoption of ASU 2016-02) was approximately $334,000 for the year ended December 31, 2018.
Cash paid for amounts included in the measurement of operating lease liabilities is included in operating activities in the condensed consolidated statements of cash flows.
9. Share-Based Compensation
Share-based compensation costs of $22,621, $28,703, and $17,737, were recorded for the years ended December 31, 2020, 2019, and 2018, respectively. The total income tax benefits recognized in the consolidated statements of income for share-based compensation arrangements were approximately $6,108, $8,700, and $5,600 for 2020, 2019, and 2018, respectively. At December 31, 2020, total compensation cost related to nonvested awards not yet recognized was approximately $33,754. There have been no modifications to valuation methodologies or methods during the years ended December 31, 2020, 2019, or 2018.
As of December 31, 2020, there were 7,601 shares of common stock available for issuance pursuant to future equity-based compensation awards.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
A summary of the Company’s restricted stock units activity and related information is as follows:
| Nonvested Share Awards (RSUs) | Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||||
| Nonvested at beginning of year | 677 | $ | 95 | |||||||||||||||||||||||
| Granted | 426 | $ | 72 | |||||||||||||||||||||||
| Vested | (89) | $ | 89 | |||||||||||||||||||||||
| Forfeited | (160) | $ | 92 | |||||||||||||||||||||||
| Nonvested at end of year | 854 | $ | 85 | 1.9 | $ | 85,775 |
A summary of the Company’s stock appreciation rights activity and related information is as follows:
| Stock Appreciation Rights (SARs) | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||||
| Outstanding at beginning of year | 2,154 | $ | 88 | |||||||||||||||||||||||
| Granted | — | $ | — | |||||||||||||||||||||||
| Exercised | (331) | $ | 80 | |||||||||||||||||||||||
| Forfeited | (36) | $ | 94 | |||||||||||||||||||||||
| Outstanding at end of year | 1,787 | $ | 89 | 3.5 | $ | 20,515 | ||||||||||||||||||||
| Exercisable at end of year | 1,787 | $ | 89 | 3.5 | $ | 20,515 |
The aggregate intrinsic value of SARs and RSUs exercised during the years ended December 31, 2020, 2019, and 2018 was $14,417, $36,200 and $32,600, respectively. The fair value of RSUs is based on the 60-day average price of the Company's stock on the date of grant for the year ended December 31, 2020. The fair value of RSUs is based on the price of the Company’s stock on the date of grant for the years ended December 31, 2019 and 2018. The fair value of SARs is estimated using a Black-Scholes option pricing model. The Company ceased issuing SARs in 2017. The total fair value of SARs and RSUs vested during the years ended December 31, 2020, 2019, and 2018 were $10,014, $26,200, and $20,800, respectively.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
10. Income Taxes
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| 2020 | 2019 | |||||||||||||
| Deferred tax assets related to: | ||||||||||||||
| Expenses not yet deducted for tax purposes | $ | 343,308 | $ | 271,358 | ||||||||||
| Operating lease liabilities | 289,114 | 281,853 | ||||||||||||
| Pension liability not yet deducted for tax purposes | 257,526 | 261,909 | ||||||||||||
| Capital loss | 10,875 | 18,317 | ||||||||||||
| Net operating loss | 56,028 | 43,932 | ||||||||||||
| 956,851 | 877,369 | |||||||||||||
| Deferred tax liabilities related to: | ||||||||||||||
| Employee and retiree benefits | 226,356 | 215,899 | ||||||||||||
| Inventory | 90,213 | 92,577 | ||||||||||||
| Operating lease assets | 282,486 | 274,630 | ||||||||||||
| Other intangible assets | 365,825 | 343,649 | ||||||||||||
| Property, plant and equipment | 73,333 | 63,518 | ||||||||||||
| Other | 29,961 | 38,936 | ||||||||||||
| 1,068,174 | 1,029,209 | |||||||||||||
| Net deferred tax liability before valuation allowance | (111,323) | (151,840) | ||||||||||||
| Valuation allowance | (35,930) | (35,282) | ||||||||||||
| Total net deferred tax liability | $ | (147,253) | $ | (187,122) |
The Company currently holds approximately $213,504 in net operating losses, of which approximately $156,144 will carry forward indefinitely. The remaining net operating losses of approximately $57,360 will begin to expire in 2024.
The components of income before income taxes are as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| United States | $ | 706,594 | $ | 613,910 | $ | 712,951 | ||||||||||||||
| Foreign | (327,226) | 245,373 | 281,687 | |||||||||||||||||
| Income before income taxes | $ | 379,368 | $ | 859,283 | $ | 994,638 |
The components of income tax expense are as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | 130,680 | $ | 162,883 | $ | 130,144 | ||||||||||||||
| State | 35,474 | 45,488 | 36,457 | |||||||||||||||||
| Foreign | 77,541 | 60,376 | 76,910 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | 2,048 | (21,617) | 13,295 | |||||||||||||||||
| State | 801 | (11,273) | 5,427 | |||||||||||||||||
| Foreign | (30,571) | (23,049) | (17,129) | |||||||||||||||||
| $ | 215,973 | $ | 212,808 | $ | 245,104 |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The reasons for the difference between total tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes are as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Statutory rate applied to income (1) | $ | 79,667 | $ | 180,449 | $ | 208,874 | ||||||||||||||
| Plus state income taxes, net of Federal tax benefit | 28,658 | 27,030 | 33,088 | |||||||||||||||||
| Taxation of foreign operations, net (2) | (9,072) | (17,663) | (7,862) | |||||||||||||||||
| U.S. tax reform - transition tax (3) | — | 4,492 | 4,875 | |||||||||||||||||
| U.S. tax reform - deferred tax remeasurement (3) | — | — | 424 | |||||||||||||||||
| Non-deductible goodwill impairment tax effect | 106,411 | — | — | |||||||||||||||||
| Foreign rate change - deferred tax remeasurement | 9,045 | 6,215 | (1,461) | |||||||||||||||||
| Book tax basis difference in investment | — | — | (11,944) | |||||||||||||||||
| Valuation allowance | 1,995 | 4,503 | 20,505 | |||||||||||||||||
| Other | (731) | 7,782 | (1,395) | |||||||||||||||||
| $ | 215,973 | $ | 212,808 | $ | 245,104 |
(1)U.S. statutory rates applied to income are as follows: 2020, 2019 and 2018 at 21%.
(2)The Company's effective tax rate reflects the net benefit of having operations outside of the U.S. which are taxed at statutory rates different from the U.S. statutory rate, with some income being fully or partially exempt from income taxes due to various operating and financing activities.
(3)Impact of the Tax Cuts and Jobs Act, enacted December 22, 2017.
The Company accounts for Global Intangible Low Taxed income in the year the tax is incurred as a period cost.
The Company, or one of its subsidiaries, files income tax returns in the U.S., various states, and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local tax examinations by tax authorities for years before 2017 or subject to non-United States income tax examinations for years ended prior to 2013. The Company is currently under audit in the U.S. and some of its foreign jurisdictions. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not possible to estimate the effect, if any, of the amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Balance at beginning of year | $ | 21,461 | $ | 18,428 | $ | 14,697 | ||||||||||||||
| Additions based on tax positions related to the current year | 3,771 | 3,701 | 2,034 | |||||||||||||||||
| Additions for tax positions of prior years | 3,480 | 620 | 4,787 | |||||||||||||||||
| Reductions for tax positions for prior years | (1,382) | (965) | (725) | |||||||||||||||||
| Reduction for lapse in statute of limitations | (3,765) | — | (2,338) | |||||||||||||||||
| Settlements | (328) | (323) | (27) | |||||||||||||||||
| Balance at end of year | $ | 23,237 | $ | 21,461 | $ | 18,428 |
The amount of gross unrecognized tax benefits, including interest and penalties, as of December 31, 2020 and 2019 was approximately $25,870 and $24,347, respectively, of which approximately $21,426 and $18,286, respectively, if recognized, would affect the effective tax rate.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
During the years ended December 31, 2020, 2019, and 2018, the Company paid, received refunds, or accrued insignificant amounts of interest and penalties. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.
As of December 31, 2020, the Company estimates that it has an outside basis difference in certain foreign subsidiaries of approximately $520,000, which includes the cumulative undistributed earnings from the Company's foreign subsidiaries. The Company continues to be indefinitely reinvested in this outside basis difference. Determining the amount of net unrecognized deferred tax liability related to any additional outside basis difference in these entities is not practicable. This is due to the complexities associated with the calculation to determine residual taxes on the undistributed earnings, including the availability of foreign tax credits, applicability of any additional local withholding tax and other indirect tax consequences that may arise due to the distribution of these earnings.
11. Employee Benefit Plans
The Company’s defined benefit pension plans cover employees in the U.S., Canada, and Europe who meet eligibility requirements. The plan covering U.S. employees is noncontributory, and the Company implemented a hard freeze for the U.S. qualified defined benefit plan as of December 31, 2013. No further benefits were provided after this date for additional credited service or earnings, and all participants became fully vested as of December 31, 2013. The Canadian plan is contributory, and benefits are based on career average compensation. The Company’s funding policy is to contribute an amount equal to the minimum required contribution under applicable pension legislation. For the plans in the U.S. and Canada, the Company may increase its contribution above the minimum, if appropriate to its tax and cash position and the plans’ funded position. The European plans are funded in accordance with local regulations.
The Company also sponsors supplemental retirement plans covering employees in the U.S. and Canada. The Company uses a measurement date of December 31 for its pension and supplemental retirement plans.
Several assumptions are used to determine the benefit obligations, plan assets, and net periodic income. The discount rate for the U.S. pension plan is calculated using a bond matching approach to select specific bonds that would satisfy the projected benefit payments. The bond matching approach reflects the process that would be used to settle the pension obligations. The discount rate for non U.S. plans are set by using Willis Towers Watson's RATE:Link model. For each plan, this approach reflects yields available on high quality corporate bonds that would generate the cash flow necessary to pay the plan's benefits when due. The expected return on plan assets is based on a calculated market-related value of plan assets, where gains and losses on plan assets are amortized over a five year period and accumulate in other comprehensive income. Other non-investment unrecognized gains and losses are amortized in future net income based on a “corridor” approach, where the corridor is equal to 10% of the greater of the benefit obligation or the market-related value of plan assets at the beginning of the year. The unrecognized gains and losses in excess of the corridor criteria are amortized over the average future lifetime or service of plan participants, depending on the plan. These assumptions are updated at each annual measurement date.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Changes in benefit obligations for the years ended December 31, 2020 and 2019 were:
| 2020 | 2019 | |||||||||||||
| Changes in benefit obligation | ||||||||||||||
| Benefit obligation at beginning of year | $ | 2,496,600 | $ | 2,278,043 | ||||||||||
| Service cost | 12,105 | 9,558 | ||||||||||||
| Interest cost | 83,732 | 97,441 | ||||||||||||
| Plan participants’ contributions | 1,864 | 2,246 | ||||||||||||
| Actuarial loss | 218,534 | 246,352 | ||||||||||||
| Foreign currency exchange rate changes | 9,394 | 9,073 | ||||||||||||
| Gross benefits paid | (144,508) | (119,789) | ||||||||||||
| Plan amendments | — | 3,327 | ||||||||||||
| Curtailments | (472) | (6,569) | ||||||||||||
| Settlements | — | (67,831) | ||||||||||||
| Special termination costs | — | 42,757 | ||||||||||||
| Acquired plans | 1,717 | 1,992 | ||||||||||||
| Benefit obligation at end of year | $ | 2,678,966 | $ | 2,496,600 |
The benefit obligations for the Company’s U.S. pension plans included in the above were $2,373,884 and $2,228,066 at December 31, 2020 and 2019, respectively. The total accumulated benefit obligation for the Company’s defined benefit pension plans in the U.S., Canada, and Europe was approximately $2,649,418 and $2,466,322 at December 31, 2020 and 2019, respectively.
For the U.S. pension plan, there was a net actuarial liability loss of $175,200 and an asset gain of $184,200. The liability loss was comprised primarily of a $173,000 loss due to discount rate changes. For the U.S. supplemental retirement plan, there was a net actuarial liability loss of $20,300 comprised primarily of a $21,400 loss due to discount rate changes.
In 2019, the Company recorded $42,757 in special termination costs related to benefits provided through the Company's defined benefit plans to employees that accepted the voluntary retirement program (“VRP”) as part of the Company's 2019 Cost Savings Plan. Refer to the restructuring footnote for more information.
The assumptions used to measure the pension benefit obligations for the plans at December 31, 2020 and 2019, were:
| 2020 | 2019 | ||||||||||
| Weighted average discount rate | 2.72 | % | 3.43 | % | |||||||
| Rate of increase in future compensation levels | 3.11 | % | 3.13 | % |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Changes in plan assets for the years ended December 31, 2020 and 2019 were:
| 2020 | 2019 | |||||||||||||
| Changes in plan assets | ||||||||||||||
| Fair value of plan assets at beginning of year | $ | 2,311,227 | $ | 2,043,379 | ||||||||||
| Actual return on plan assets | 347,560 | 427,597 | ||||||||||||
| Foreign currency exchange rate changes | 7,451 | 9,826 | ||||||||||||
| Employer contributions | 21,765 | 15,799 | ||||||||||||
| Plan participants’ contributions | 1,864 | 2,246 | ||||||||||||
| Benefits paid | (144,508) | (119,789) | ||||||||||||
| Settlements | — | (67,831) | ||||||||||||
| Fair value of plan assets at end of year | $ | 2,545,359 | $ | 2,311,227 |
The fair values of plan assets for the Company’s U.S. pension plans included in the above were $2,258,246 and $2,051,474 at December 31, 2020 and 2019, respectively.
For the years ended December 31, 2020 and 2019, the aggregate projected benefit obligation and aggregate fair value of plan assets for plans with projected benefit obligations in excess of plan assets were as follows:
| 2020 | 2019 | |||||||||||||
| Aggregate projected benefit obligation | $ | 328,517 | $ | 298,565 | ||||||||||
| Aggregate fair value of plan assets | $ | 45,728 | $ | 39,672 |
For the years ended December 31, 2020 and 2019, the aggregate accumulated benefit obligation and aggregate fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were as follows:
| 2020 | 2019 | |||||||||||||
| Aggregate accumulated benefit obligation | $ | 290,271 | $ | 270,230 | ||||||||||
| Aggregate fair value of plan assets | $ | 34,164 | $ | 39,672 |
The asset allocations for the Company’s funded pension plans at December 31, 2020 and 2019, and the target allocation for 2021, by asset category were:
| Target Allocation | Percentage of Plan Assets at December 31 | ||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Asset Category | |||||||||||||||||
| Equity securities | 68 | % | 70 | % | 70 | % | |||||||||||
| Debt securities | 32 | % | 30 | % | 30 | % | |||||||||||
| 100 | % | 100 | % | 100 | % |
The Company’s benefit plan committees in the U.S. and Canada establish investment policies and strategies and regularly monitor the performance of the funds. The plans in Europe are unfunded and, therefore, there are no plan assets. The pension plan strategy implemented by 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 investment objectives for the pension plans are to provide for a reasonable amount of long-term growth of capital, without undue exposure to risk, protect the assets from erosion of purchasing power, and provide investment results that meet or exceed the pension plans’ actuarially assumed long-term rates of return. 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 Midcap Index, 7% Russell 2000 Index, 5% MSCI EAFE Index, 5% DJ Global Moderate Index, 3% MSCI Emerging Market Net, and 28% Barclays U.S. Govt/Credit).
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The fair values of the plan assets as of December 31, 2020 and 2019, by asset category, are shown in the tables below. Various inputs are considered when determining the value of the Company’s pension plan assets. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Level 1 represents observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 represents other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.). Level 3 represents significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments). Certain investments are measured at fair value using the net asset value ("NAV") per share as a practical expedient and have not been classified in the fair value hierarchy.
The valuation methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Equity securities are valued at the closing price reported on the active market on which the individual securities are traded on the last day of the calendar plan year. Debt securities including corporate bonds, U.S. Government securities, and asset-backed securities are valued using price evaluations reflecting the bid and/or ask sides of the market for an investment as of the last day of the calendar plan year.
| 2020 | ||||||||||||||||||||||||||||||||
| Total | Assets Measured at NAV | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
| Equity Securities | ||||||||||||||||||||||||||||||||
| Common stocks — mutual funds — equity | $ | 586,196 | $ | 204,303 | $ | 381,893 | $ | — | $ | — | ||||||||||||||||||||||
| Genuine Parts Company common stock | 202,711 | — | 202,711 | — | — | |||||||||||||||||||||||||||
| Other stocks | 989,258 | — | 989,258 | — | — | |||||||||||||||||||||||||||
| Debt Securities | ||||||||||||||||||||||||||||||||
| Short-term investments | 30,746 | — | 30,746 | — | — | |||||||||||||||||||||||||||
| Cash and equivalents | 18,631 | — | 18,631 | — | — | |||||||||||||||||||||||||||
| Government bonds | 257,221 | — | 192,288 | 64,933 | — | |||||||||||||||||||||||||||
| Corporate bonds | 393,450 | — | — | 393,450 | — | |||||||||||||||||||||||||||
| Asset-backed and mortgage-backed securities | 10,161 | — | — | 10,161 | — | |||||||||||||||||||||||||||
| Other-international | 39,992 | — | 37,041 | 2,951 | — | |||||||||||||||||||||||||||
| Municipal bonds | 14,724 | — | — | 14,724 | — | |||||||||||||||||||||||||||
| Mutual funds—fixed income | — | — | — | — | — | |||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Cash surrender value of life insurance policies | 2,269 | — | — | — | 2,269 | |||||||||||||||||||||||||||
| Total | $ | 2,545,359 | $ | 204,303 | $ | 1,852,568 | $ | 486,219 | $ | 2,269 |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
| 2019 | ||||||||||||||||||||||||||||||||
| Total | Assets Measured at NAV | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
| Equity Securities | ||||||||||||||||||||||||||||||||
| Common stocks — mutual funds — equity | $ | 527,151 | $ | 187,500 | $ | 339,651 | $ | — | $ | — | ||||||||||||||||||||||
| Genuine Parts Company common stock | 214,418 | — | 214,418 | — | — | |||||||||||||||||||||||||||
| Other stocks | 865,078 | — | 865,070 | — | 8 | |||||||||||||||||||||||||||
| Debt Securities | ||||||||||||||||||||||||||||||||
| Short-term investments | 34,516 | — | 34,516 | — | — | |||||||||||||||||||||||||||
| Cash and equivalents | 15,833 | — | 15,833 | — | — | |||||||||||||||||||||||||||
| Government bonds | 259,939 | — | 167,394 | 92,545 | — | |||||||||||||||||||||||||||
| Corporate bonds | 255,352 | — | — | 255,352 | — | |||||||||||||||||||||||||||
| Asset-backed and mortgage-backed securities | 9,316 | — | — | 9,316 | — | |||||||||||||||||||||||||||
| Other-international | 27,903 | — | 27,903 | — | — | |||||||||||||||||||||||||||
| Municipal bonds | 10,153 | — | — | 10,153 | — | |||||||||||||||||||||||||||
| Mutual funds—fixed income | 89,298 | 89,298 | — | — | — | |||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Cash surrender value of life insurance policies | 2,270 | — | — | — | 2,270 | |||||||||||||||||||||||||||
| Total | $ | 2,311,227 | $ | 276,798 | $ | 1,664,785 | $ | 367,366 | $ | 2,278 |
Equity securities include Genuine Parts Company common stock in the amounts of $202,711 (8% of total plan assets) and $214,418 (9% of total plan assets) at December 31, 2020 and 2019, respectively. Dividend payments received by the plan on Company stock totaled approximately $6,378 and $6,156 in 2020 and 2019, respectively. Fees paid during the year for services rendered by parties in interest were based on customary and reasonable rates for such services.
The changes in the fair value measurement of plan assets using significant unobservable inputs (Level 3) during 2020 and 2019 were not material.
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 2021 pension income is 6.88% 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 following table sets forth the funded status of the plans and the amounts recognized in the consolidated balance sheets at December 31:
| 2020 | 2019 | |||||||||||||
| Other long-term asset | $ | 149,182 | $ | 73,520 | ||||||||||
| Other current liability | (17,572) | (11,692) | ||||||||||||
| Pension and other post-retirement liabilities | (265,216) | (247,201) | ||||||||||||
| $ | (133,606) | $ | (185,373) |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Amounts recognized in accumulated other comprehensive loss consist of:
| 2020 | 2019 | |||||||||||||
| Net actuarial loss | $ | 939,290 | $ | 952,133 | ||||||||||
| Prior service cost | 8,648 | 9,343 | ||||||||||||
| $ | 947,938 | $ | 961,476 |
The following table reflects the total benefits expected to be paid from the pension plans’ or the Company’s assets. Of the pension benefits expected to be paid in 2021, approximately $17,574 is expected to be paid from employer assets. Expected employer contributions below reflect amounts expected to be contributed to funded plans. Information about the expected cash flows for the pension plans follows:
| Employer contribution | |||||
| 2021 (expected) | $ | 5,724 | |||
| Expected benefit payments: | |||||
| 2021 | $ | 136,183 | |||
| 2022 | $ | 134,054 | |||
| 2023 | $ | 137,788 | |||
| 2024 | $ | 140,987 | |||
| 2025 | $ | 144,405 | |||
| 2026 through 2030 | $ | 741,572 |
Net periodic benefit income included the following components:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Service cost | $ | 12,105 | $ | 9,558 | $ | 10,410 | ||||||||||||||
| Interest cost | 83,732 | 97,441 | 88,247 | |||||||||||||||||
| Expected return on plan assets | (154,111) | (154,137) | (154,006) | |||||||||||||||||
| Amortization of prior service cost (credit) | 692 | (67) | (147) | |||||||||||||||||
| Amortization of actuarial loss | 39,613 | 31,000 | 39,721 | |||||||||||||||||
| Net periodic benefit income | $ | (17,969) | $ | (16,205) | $ | (15,775) |
Service cost is recorded in selling, administrative and other expenses in the consolidated statements of income while all other components except for special termination costs are recorded within other non-operating expenses (income). The special termination costs incurred in connection with the 2019 Cost Savings Plan are presented on their own line within non-operating expenses (income).
Other changes in plan assets and benefit obligations recognized in other comprehensive income are as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Current year actuarial loss (gain) | $ | 24,613 | $ | (33,677) | $ | 117,867 | ||||||||||||||
| Recognition of actuarial loss | (39,613) | (31,000) | (39,721) | |||||||||||||||||
| Current year prior service cost | — | 3,327 | — | |||||||||||||||||
| Recognition of prior service (cost) credit | (692) | 67 | 147 | |||||||||||||||||
| Recognition of curtailment gain (loss) | 435 | (155) | — | |||||||||||||||||
| Other | — | (50) | — | |||||||||||||||||
| Total recognized in other comprehensive (loss) income | $ | (15,257) | $ | (61,488) | $ | 78,293 | ||||||||||||||
| Total recognized in net periodic benefit income and other comprehensive (loss) income | $ | (33,226) | $ | (77,693) | $ | 62,518 |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The assumptions used in measuring the net periodic benefit income for the plans follow:
| 2020 | 2019 | 2018 | |||||||||||||||
| Weighted average discount rate | 3.43 | % | 4.36 | % | 3.70 | % | |||||||||||
| Rate of increase in future compensation levels | 3.13 | % | 3.14 | % | 3.11 | % | |||||||||||
| Expected long-term rate of return on plan assets | 7.11 | % | 7.12 | % | 7.14 | % |
The Company has one defined contribution plan in the U.S. that covers substantially all of its domestic employees. Employees receive a matching contribution of 100% of the first 5% of the employees’ salary. Total plan expense was approximately $54,885 in 2020, $64,990 in 2019, and $62,335 in 2018.
The Company has a defined contribution plan that covers full-time Canadian employees after six months of employment and part-time employees upon meeting provincial minimum standards. Employees receive a matching contribution of 100% of the first 5% of the employees’ salary. Total plan expense was approximately $4,486 in 2020 and $4,433 in 2019.
12. Guarantees
The Company guarantees the borrowings of certain independently controlled automotive parts stores and businesses (“independents”) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (“affiliates”). Presently, the independents are generally consolidated by unaffiliated enterprises that have controlling financial interests through ownership of a majority voting interest in the independents. The Company has no voting interest or equity conversion rights in any of the independents. The Company does not control the independents or the affiliates but receives a fee for the guarantees. The Company has concluded that the independents are variable interest entities, but that the Company is not the primary beneficiary. Specifically, the equity holders of the independents have the power to direct the activities that most significantly impact the entities’ economic performance including, but not limited to, decisions about hiring and terminating personnel, local marketing and promotional initiatives, pricing and selling activities, credit decisions, monitoring and maintaining appropriate inventories, and store hours. Separately, the Company concluded that the affiliates are not variable interest entities. 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 guarantees. While such borrowings of the independents and affiliates are outstanding, the Company is required to maintain compliance with certain covenants, including a debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio and certain limitations on additional borrowings. At December 31, 2020, the Company was in compliance with all such covenants.
At December 31, 2020, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $884,721. These loans generally mature over periods from one to six years. The Company regularly monitors the performance of these loans and the ongoing operating results, financial condition and ratings from credit rating agencies of the independents and affiliates that participate in the guarantee programs. In the event that the Company is required to make payments in connection with these guarantees, the Company would obtain and liquidate certain collateral pledged by the independents or affiliates (e.g., accounts receivable and inventory) to recover all or a substantial portion of the amounts paid under the guarantees. The Company recognizes a liability equal to current expected credit losses over the lives of the loans in the guaranteed loan portfolio, based on a consideration of historical experience, current conditions, the nature and expected value of any collateral, and reasonable and supportable forecasts. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the current expected credit loss reserve is not material. As of December 31, 2020, there are no material guaranteed loans for which the borrower is experiencing financial difficulty and recovery is expected to be provided substantially through the operation or sale of the collateral.
The Company has recognized certain assets and liabilities amounting to $81,000 and $90,000 for the guarantees related to the independents’ and affiliates’ borrowings at December 31, 2020 and 2019, respectively. These assets and liabilities are included in other assets and other long-term liabilities in the consolidated balance sheets. The liabilities relate to the Company's noncontingent obligation to stand ready to perform under the guarantee programs and they are distinct from the Company's current expected credit loss reserve.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
13. Commitments and Contingencies
Legal Matters
The Company is subject to various legal proceedings, many involving routine litigation incidental to the businesses, including approximately 1,819 pending product liability lawsuits resulting from its national distribution of automotive parts and supplies. Many of these involve claims of personal injury allegedly resulting from the use of automotive parts distributed by the Company. The amount accrued for pending and future claims as of December 31, 2020 and 2019 was $169,461 and $146,230, respectively. While litigation of any type contains an element of uncertainty, the Company believes that its insurance coverage and its defense, and ultimate resolution of pending and reasonably anticipated claims will continue to occur within the ordinary course of the Company’s business and that resolution of these claims will not have a material effect on the Company’s business, results of operations or financial condition.
Pending Claims
On April 17, 2017, a jury awarded damages against the Company of $81,500 in a litigated automotive product liability dispute. Through post-trial motions and offsets from previous settlements, the initial verdict was reduced to $77,100. The Company believed the verdict was not supported by the facts or the law and was contrary to the Company’s role in the automotive parts industry. The Company challenged the verdict through an appeal to a higher court. On February 19, 2020, the Washington Court of Appeals issued an order entirely reversing the jury’s finding on damages and ordering a new trial on damages. The plaintiffs subsequently appealed this order to the Washington Supreme Court. On July 7, 2020, the Washington Supreme Court indicated that it would consider a further appeal on this matter and oral arguments occurred on November 10, 2020. A ruling from Washington Supreme Court is expected in 2021. At the time of the filing of these financial statements, based upon the Company’s legal defenses and insurance coverage, the Company does not believe this matter will have a material impact to the consolidated financial statements.
Fire at S.P. Richards Headquarters and Distribution Center
On July 19, 2019, a fire occurred at a building owned by the Company in Atlanta, Georgia, which primarily held the S.P. Richards headquarters office and was connected to its Atlanta distribution center. The Company maintains property and casualty loss insurance coverage. The Company recognized a gain of $13,448 during the year ended December 31, 2020 for insurance recoveries in excess of losses it has incurred on inventory, property, plant and equipment and other fire-related costs. The gain is included within other non-operating expenses (income) on the consolidated statements of income.
14. Acquisitions, Divestitures and Discontinued Operations
Acquisitions
For each acquisition, the Company allocates the purchase price to the assets acquired and the liabilities assumed based on their fair values as of their respective acquisition dates. The results of operations for acquired businesses are included in the Company’s consolidated statements of income beginning on their respective acquisition dates.
2020
The Company acquired several businesses for approximately $86,384, net of cash acquired, during the year ended December 31, 2020. The Company has not recognized any significant measurement period adjustments related to finalizing acquisition accounting during the year ended December 31, 2020.
2019
The Company's cash used in acquisitions of businesses totaled $732,142, net of cash acquired, during the year ended December 31, 2019. In the Automotive Parts Group, the acquired businesses included all of its equity interests in Hennig Fahrzeugteile Group ("Hennig") in January 2019 and of PartsPoint Group in June 2019, which together generate estimated annual revenues of approximately $520,000, as well as several bolt-on acquisitions.
In the Industrial Parts Group, the Company acquired all of the equity interests in Axis New England and Axis New York ("Axis") in March 2019, which generate estimated annual revenue of approximately $55,000, and the remaining 65% equity investment in Inenco Group Pty Ltd (now referred to as Motion Asia Pacific) in July 2019. Motion Asia Pacific is one of Australasia's leading industrial distributors of key product categories such as bearings, power transmission and seals and it generates estimated annual revenues of approximately $400,000. Prior to the 65% acquisition, the Company accounted for its 35% investment in Motion Asia Pacific under the equity method of accounting. Upon acquisition the Company recognized the
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
35% investment at its acquisition-date fair value of $123,385. The difference between the acquisition-date fair value and the carrying amount of the equity method investment resulted in the recognition of a gain of $38,663 on the acquisition date. The acquisition-date fair value was determined using a market and income approach with the assistance of a third party valuation firm. The gain is included in the line item "other" within non-operating expenses (income) on the consolidated statement of income for the year ended December 31, 2019.
The total acquisition date fair value of the consideration transferred for the businesses and of any previously held equity interests was $860,712, net of cash acquired of $16,591, and it consisted of the following:
| December 31, 2019 | ||||||||
| Cash | $ | 732,142 | ||||||
| Fair value of 35% investment in Motion Asia Pacific held prior to business combination | 123,385 | |||||||
| Fair value of other investments held prior to business combination | 5,185 | |||||||
| Total | $ | 860,712 |
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition dates for the aggregate of these businesses.
| As of Acquisition Dates | ||||||||
| Trade accounts receivable | $ | 148,543 | ||||||
| Merchandise inventories | 319,579 | |||||||
| Prepaid expenses and other current assets | 788 | |||||||
| Intangible assets | 340,799 | |||||||
| Deferred tax assets | 1,480 | |||||||
| Property, plant and equipment | 70,958 | |||||||
| Operating lease assets | 127,470 | |||||||
| Other assets | 20,318 | |||||||
| Total identifiable assets acquired | 1,029,935 | |||||||
| Current liabilities | 122,307 | |||||||
| Long-term debt | 164,662 | |||||||
| Operating lease liabilities | 61,626 | |||||||
| Deferred tax liabilities | 67,081 | |||||||
| Other long-term liabilities | 132,187 | |||||||
| Total liabilities assumed | 547,863 | |||||||
| Net identifiable assets acquired | 482,072 | |||||||
| Noncontrolling interests in a subsidiary | (1,600) | |||||||
| Goodwill | 380,240 | |||||||
| Net assets acquired | $ | 860,712 |
The acquired intangible assets of approximately $340,799 were assigned to customer relationships of $304,302, trademarks of $32,907, and other intangibles of $3,590 with weighted average amortization lives of 16.6, 21.7, and 5.0 years, respectively, for a total weighted average amortization life of 17.0 years.
The goodwill recognized as part of the acquisitions is generally not tax deductible. The goodwill is attributable primarily to the expected synergies and assembled workforces of the acquired businesses.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
2018
For the year ended December 31, 2018, the Company acquired several businesses for approximately $262,510, net of cash acquired. The Company recorded approximately $167,000 of goodwill and other intangible assets associated with the 2018 acquisitions. Other intangible assets acquired consisted of customer relationships of $76,000 with weighted average amortization lives of 15 years.
Divestitures
2020
The Company received proceeds from divestitures of businesses totaling $387,379 during the year ended December 31, 2020. Refer to the discontinued operations section below for additional information.
2019
The Company received proceeds from divestitures of businesses totaling $434,609 during the year ended December 31, 2019. The divestitures are not considered strategic shifts that will have a major effect on the Company’s operations or financial results; therefore, they are not reported as discontinued operations. The Company recognized realized currency losses of $34,701 during the year ended December 31, 2019. These losses are included in the line item "other" within non-operating expenses (income) on the consolidated statement of income for the year ended December 31, 2019.
Grupo Auto Todo
On March 7, 2019, the Company sold all of its equity in Grupo Auto Todo, a Mexican subsidiary within the Automotive Parts Group. Grupo Auto Todo contributed revenues of $15,900 for the year ended December 31, 2019 and $93,000 for the year ended December 31, 2018.
EIS
During the third quarter of 2019, the Company approved a transaction to sell EIS, a wholly owned subsidiary within the Industrial Parts Group. The transaction closed on September 30, 2019. EIS contributed revenues of $588,031 for the year ended December 31, 2019 and $817,249 for the year ended December 31, 2018.
Discontinued Operations
Business Products Group
Effective June 30, 2020, the Company completed the divestiture of its Business Products Group by selling Supply Source Enterprises, Inc. ("SSE") and S.P. Richards Company ("SPR") in separate transactions. These divestitures are part of the Company's long-term strategic initiative to streamline its operations and optimize its portfolio so that it can drive shareholder value by focusing on its global Automotive and Industrial Parts Groups. The Business Products Group was previously a reportable segment of the Company. These divestitures, together with prior period divestitures of Garland C. Norris (effective December 13, 2019), SPR Canada (effective January 1, 2020) and Safety Zone Canada (effective March 2, 2020), represent a single plan to exit the Business Products Group segment and are considered a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations, financial position and cash flows for the Business Products Group are reported as discontinued operations for all periods presented.
The Company maintains an investment in SPR with a carrying value of $67,601, which is included within other assets on the consolidated balance sheet, as of December 31, 2020. During the three months ended December 31, 2020, the Company recognized an allowance on the investment and corresponding charge of $17,000 equal to the current expected credit losses based on a consideration of historical experience, current market conditions and reasonable and supportable forecasts related to this investment. This charge is included within non-operating expenses (income) on the consolidated statement of income for the year ended December 31, 2020.
The Company also remains involved with SPR for a limited period of time through various lease, sublease, freight distribution and transition service agreements. The Company has concluded that SPR is a variable interest entity, but the Company is not the primary beneficiary and therefore the entity is not consolidated. Among other things, the Company does not have any voting rights and does not have the power to direct the activities that most significantly affect SPR's economic performance. For a limited period of time as SPR completes its transition away from the Company’s shared services platform, the Company
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
continues to pay certain payables on SPR’s behalf and at SPR’s direction with full, weekly reimbursement from SPR under the terms of a transition services agreement.
The Company’s results of operations for discontinued operations were:
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net sales | $ | 846,944 | $ | 1,870,071 | $ | 1,903,468 | ||||||||||||||
| Cost of goods sold | 632,007 | 1,413,485 | 1,439,436 | |||||||||||||||||
| Gross profit | 214,937 | 456,586 | 464,032 | |||||||||||||||||
| Operating and non-operating expenses | 179,461 | 476,521 | 383,058 | |||||||||||||||||
| Loss on disposal | 223,928 | 9,048 | — | |||||||||||||||||
| (Loss) income before income taxes | (188,452) | (28,983) | 80,974 | |||||||||||||||||
| Income taxes | 4,045 | (3,593) | 20,034 | |||||||||||||||||
| Net (loss) income from discontinued operations | $ | (192,497) | $ | (25,390) | $ | 60,940 |
The Company’s assets and liabilities for discontinued operations, by major class, were:
| December 31, 2019 | ||||||||
| Assets | ||||||||
| Trade accounts receivable, net | $ | 194,903 | ||||||
| Merchandise inventories, net | 387,307 | |||||||
| Prepaid expenses and other current assets | 132,041 | |||||||
| Other intangible assets, net | 76,829 | |||||||
| Operating lease assets | 80,302 | |||||||
| Other assets | 91,640 | |||||||
| Total assets of discontinued operations | $ | 963,022 | ||||||
| Liabilities | ||||||||
| Trade accounts payable | $ | 158,163 | ||||||
| Other current liabilities | 59,954 | |||||||
| Long-term liabilities | 68,906 | |||||||
| Total liabilities of discontinued operations | $ | 287,023 |
15. Segment Data
The Company’s reportable segments consist of automotive and industrial parts. Within the reportable segments, certain of the Company’s operating segments are aggregated since they have similar economic characteristics, products and services, type and class of customers, and distribution methods.
The Company’s automotive segment distributes replacement parts (other than body parts) for substantially all makes and models of automobiles, trucks, and other vehicles.
The Company’s industrial segment distributes a wide variety of industrial bearings, mechanical and fluid power transmission equipment, including hydraulic and pneumatic products, material handling components and related parts and supplies.
Inter-segment sales are not significant. Segment profit for each industry segment is calculated as net sales less operating expenses excluding general corporate expenses, interest expense, equity in income from investees, intangible asset amortization, income attributable to noncontrolling interests and other unallocated amounts that are driven by corporate
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
initiatives. Approximately $327,226 of loss before income taxes for the year ended December 31, 2020 and approximately $245,373 and $281,687 of income before income taxes was generated in jurisdictions outside the U.S. for the years ended 2019, and 2018, respectively. Net sales and net property, plant and equipment by country relate directly to the Company’s operations in the respective country. Corporate assets are principally cash and cash equivalents and headquarters’ facilities and equipment.
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Automotive | $ | 10,860,695 | $ | 10,993,902 | $ | 10,533,021 | ||||||||||||||
| Industrial | 5,676,738 | 6,528,332 | 6,298,584 | |||||||||||||||||
| Total net sales | $ | 16,537,433 | $ | 17,522,234 | $ | 16,831,605 | ||||||||||||||
| Segment profit: | ||||||||||||||||||||
| Automotive | $ | 867,743 | $ | 831,951 | $ | 856,014 | ||||||||||||||
| Industrial | 481,854 | 521,830 | 487,360 | |||||||||||||||||
| Total segment profit | $ | 1,349,597 | $ | 1,353,781 | $ | 1,343,374 | ||||||||||||||
| Interest expense, net | (91,048) | (91,405) | (93,281) | |||||||||||||||||
| Corporate expense | (149,754) | (140,815) | (137,036) | |||||||||||||||||
| Intangible asset amortization | (94,962) | (92,206) | (83,489) | |||||||||||||||||
| Other unallocated costs | (634,465) | (170,072) | (34,930) | |||||||||||||||||
| Income before income taxes from continuing operations | $ | 379,368 | $ | 859,283 | $ | 994,638 |
The following table presents a summary of the other unallocated costs:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Other unallocated costs: | ||||||||||||||||||||
| Goodwill impairment charge (1) | $ | (506,721) | $ | — | $ | — | ||||||||||||||
| Restructuring costs (2) | (50,019) | (100,023) | — | |||||||||||||||||
| Special termination costs (2) | — | (42,757) | — | |||||||||||||||||
| Realized currency and other divestiture losses (3) | (11,356) | (34,701) | — | |||||||||||||||||
| Gain on insurance proceeds related to SPR fire (4) | 13,448 | — | — | |||||||||||||||||
| Gain on equity investment (5) | — | 38,663 | — | |||||||||||||||||
| Inventory adjustment (6) | (40,000) | — | — | |||||||||||||||||
| Transaction and other costs (7) | (39,817) | (31,254) | (34,930) | |||||||||||||||||
| Total other unallocated costs | $ | (634,465) | $ | (170,072) | $ | (34,930) |
(1) Adjustment reflects a second quarter goodwill impairment charge related to our European reporting unit.
(2) Adjustment reflects restructuring and special termination costs related to the 2019 Cost Savings Plan announced in the fourth quarter of 2019. The costs are primarily associated with severance and other employee costs, including a voluntary retirement program, and facility and closure costs related to the consolidation of operations.
(3) Adjustment reflects realized currency losses related to divestitures.
(4) Adjustment reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs related to the S.P. Richards Headquarters and Distribution Center.
(5) Adjustment relates to the gain recognized upon remeasuring the Company's preexisting 35% equity investment to fair value upon acquiring the remaining equity of Motion Asia Pacific on July 1, 2019.
(6) Adjustment reflects a $40 million increase to cost of goods sold recorded during the quarter ended December 31, 2020 due to the correction of an immaterial error related to the accounting in prior years for consideration received from vendors.
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
(7) Adjustment includes a $17 million loss on investment, $10 million of incremental costs associated with COVID-19 and costs associated with certain divestitures. COVID-19 related costs include incremental costs incurred relating to fees to cancel marketing events and increased cleaning and sanitization materials, among other things. For the three and twelve months ended December 31, 2019, adjustment reflects transaction and other costs related to acquisitions and divestitures.
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Automotive | $ | 7,858,334 | $ | 7,376,408 | $ | 6,248,117 | ||||||||||||||
| Industrial | 1,911,520 | 1,993,457 | 1,792,662 | |||||||||||||||||
| Corporate | 254,627 | 527,126 | 297,282 | |||||||||||||||||
| Goodwill and other intangible assets | 3,415,734 | 3,785,616 | 3,374,718 | |||||||||||||||||
| Discontinued operations | — | 963,022 | 970,261 | |||||||||||||||||
| Total assets | $ | 13,440,215 | $ | 14,645,629 | $ | 12,683,040 |
| Depreciation and amortization: | ||||||||||||||||||||
| Automotive | $ | 120,932 | $ | 122,905 | $ | 105,238 | ||||||||||||||
| Industrial | 16,315 | 17,577 | 14,518 | |||||||||||||||||
| Corporate | 40,633 | 24,575 | 24,339 | |||||||||||||||||
| Intangible asset amortization | 94,962 | 92,206 | 83,489 | |||||||||||||||||
| Total depreciation and amortization | $ | 272,842 | $ | 257,263 | $ | 227,584 | ||||||||||||||
| Capital expenditures: | ||||||||||||||||||||
| Automotive | $ | 133,523 | $ | 227,420 | $ | 198,910 | ||||||||||||||
| Industrial | 19,287 | 39,003 | 21,783 | |||||||||||||||||
| Corporate | 692 | 11,450 | 5,813 | |||||||||||||||||
| Total capital expenditures | $ | 153,502 | $ | 277,873 | $ | 226,506 | ||||||||||||||
| Net sales: | ||||||||||||||||||||
| United States | $ | 10,863,348 | $ | 12,226,381 | $ | 12,083,120 | ||||||||||||||
| Europe | 2,408,913 | 2,223,498 | 1,860,912 | |||||||||||||||||
| Canada | 1,526,202 | 1,614,659 | 1,565,393 | |||||||||||||||||
| Australasia | 1,691,190 | 1,369,361 | 1,193,148 | |||||||||||||||||
| Mexico | 47,780 | 88,335 | 129,032 | |||||||||||||||||
| Total net sales | $ | 16,537,433 | $ | 17,522,234 | $ | 16,831,605 | ||||||||||||||
| Net property, plant and equipment: | ||||||||||||||||||||
| United States | $ | 728,802 | $ | 763,746 | $ | 693,683 | ||||||||||||||
| Europe | 164,268 | 153,357 | 110,184 | |||||||||||||||||
| Canada | 102,409 | 103,320 | 91,195 | |||||||||||||||||
| Australasia | 165,596 | 147,457 | 95,578 | |||||||||||||||||
| Mexico | 968 | 5,808 | 4,014 | |||||||||||||||||
| Total net property, plant and equipment | $ | 1,162,043 | $ | 1,173,688 | $ | 994,654 |
The following table presents disaggregated geographical net sales from contracts with customers by reportable segment. The Company believes this presentation best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors:
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
| 2020 | 2019 | 2018 | |||||||||||||||
| North America: | |||||||||||||||||
| Automotive | $ | 7,177,543 | $ | 7,613,047 | $ | 7,478,961 | |||||||||||
| Industrial | 5,259,787 | 6,316,328 | 6,298,584 | ||||||||||||||
| Total North America | $ | 12,437,330 | $ | 13,929,375 | $ | 13,777,545 | |||||||||||
| Australasia: | |||||||||||||||||
| Automotive | $ | 1,274,239 | $ | 1,157,357 | $ | 1,193,148 | |||||||||||
| Industrial | 416,951 | 212,004 | — | ||||||||||||||
| Total Australasia | $ | 1,691,190 | $ | 1,369,361 | $ | 1,193,148 | |||||||||||
| Europe - Automotive | $ | 2,408,913 | $ | 2,223,498 | $ | 1,860,912 | |||||||||||
| Total net sales | $ | 16,537,433 | $ | 17,522,234 | $ | 16,831,605 |
16. Restructuring
In October of 2019, the Company approved certain restructuring actions (the "2019 Cost Savings Plan") across its subsidiaries primarily targeted at simplifying organizational structures and distribution networks. Among other things, the 2019 Cost Savings Plan resulted in workforce reductions and facility closures and consolidations. The Company executed a VRP for its U.S. and Canadian subsidiaries in the fourth quarter of 2019 in connection with this plan.
The table below summarizes costs incurred for the 2019 Cost Savings Plan:
| 2020 | 2019 | |||||||||||||
| Restructuring costs | $ | 50,019 | $ | 100,023 | ||||||||||
| Special termination costs | — | 42,757 | ||||||||||||
| Total costs incurred | $ | 50,019 | $ | 142,780 |
The 2019 Cost Savings Plan was approved and funded by the Company's corporate office and therefore these costs are not allocated to the Company's segments. See the segment data footnote for more information. No material further costs are expected to be incurred for the 2019 Cost Savings Plan.
The table below summarizes the activity related to the restructuring costs discussed above. As of December 31, 2020, the current portion of the restructuring liability is included in other current liabilities on the consolidated balance sheet.
| Severance and other employee costs | Facility and closure costs | Accelerated operating lease costs | Asset impairments | Total | ||||||||||||||||||||||||||||
| Liability as of January 1, 2020 | $ | 72,192 | $ | 6,639 | $ | — | $ | — | $ | 78,831 | ||||||||||||||||||||||
| Restructuring costs | 20,631 | 16,421 | 6,724 | 6,243 | 50,019 | |||||||||||||||||||||||||||
| Cash payments | (72,365) | (13,245) | — | — | (85,610) | |||||||||||||||||||||||||||
| Non-cash charges | — | — | (6,724) | (6,243) | (12,967) | |||||||||||||||||||||||||||
| Translation | 936 | 318 | — | 1,254 | ||||||||||||||||||||||||||||
| Liability as of December 31, 2020 | $ | 21,394 | $ | 10,133 | $ | — | $ | — | $ | 31,527 |
Genuine Parts Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
17. Quarterly Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2020 and 2019:
| Three Months Ended | ||||||||||||||||||||||||||
| (In thousands, except per share data) | March 31, 2020 | June 30, 2020 | Sept. 30, 2020 | Dec. 31, 2020 | ||||||||||||||||||||||
| Net sales | $ | 4,092,526 | $ | 3,823,227 | $ | 4,370,086 | $ | 4,251,594 | ||||||||||||||||||
| Gross profit | $ | 1,388,178 | $ | 1,290,487 | $ | 1,528,066 | $ | 1,448,110 | ||||||||||||||||||
| Net income (loss) from continuing operations | $ | 122,346 | $ | (363,501) | $ | 232,918 | $ | 171,632 | ||||||||||||||||||
| Net income (loss) | $ | 136,535 | $ | (564,372) | $ | 227,531 | $ | 171,204 | ||||||||||||||||||
| Earnings per share from continuing operations: | ||||||||||||||||||||||||||
| Basic | $ | 0.84 | $ | (2.52) | $ | 1.61 | $ | 1.19 | ||||||||||||||||||
| Diluted | $ | 0.84 | $ | (2.52) | $ | 1.61 | $ | 1.18 | ||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | 0.94 | $ | (3.91) | $ | 1.58 | $ | 1.19 | ||||||||||||||||||
| Diluted | $ | 0.94 | $ | (3.91) | $ | 1.57 | $ | 1.18 |
| Three Months Ended | ||||||||||||||||||||||||||
| (In thousands, except per share data) | March 31, 2019 | June 30, 2019 | Sept. 30, 2019 | Dec. 31, 2019 | ||||||||||||||||||||||
| Net sales | $ | 4,259,129 | $ | 4,457,931 | $ | 4,525,284 | $ | 4,279,890 | ||||||||||||||||||
| Gross profit | $ | 1,392,798 | $ | 1,482,704 | $ | 1,505,233 | $ | 1,478,948 | ||||||||||||||||||
| Net income from continuing operations | $ | 145,684 | $ | 209,519 | $ | 212,256 | $ | 79,016 | ||||||||||||||||||
| Net income | $ | 160,250 | $ | 224,430 | $ | 227,487 | $ | 8,918 | ||||||||||||||||||
| Earnings per share from continuing operations: | ||||||||||||||||||||||||||
| Basic | $ | 1.00 | $ | 1.43 | $ | 1.46 | $ | 0.54 | ||||||||||||||||||
| Diluted | $ | 0.99 | $ | 1.43 | $ | 1.45 | $ | 0.54 | ||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | 1.10 | $ | 1.54 | $ | 1.56 | $ | 0.06 | ||||||||||||||||||
| Diluted | $ | 1.09 | $ | 1.53 | $ | 1.56 | $ | 0.06 |
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.
Certain of the quarterly results identified in the table above include material, unusual or infrequently occurring items as follows on a pre-tax basis:
In the second quarter of 2020, the Company recorded a goodwill impairment charge of $506,721. Refer to the goodwill and other intangible assets footnote within the Notes to the Consolidated Financial Statements for additional information.
In the fourth quarter of 2019, the Company recognized $142,780 in total restructuring costs and special termination costs. The Company recognized $50,019 in total restructuring costs for the year ending December 31, 2020. Refer to the restructuring footnote in the Notes to Consolidated Financial Statements for additional information.
During the fourth quarter of 2020, the Company determined that inventory was overstated because certain consideration received from vendors was not properly recognized as a reduction to carrying amount of inventory in the years ending December 31, 2019 and prior. The Company corrected this misstatement and recorded an adjustment to decrease inventory and increase cost of goods sold by $40,000 during the quarter ended December 31, 2020. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company concluded that this misstatement was not material to the Company's previously issued annual and interim financial statements. The Company also concluded the correction of this misstatement during the quarter ended December 31, 2020 was not material to the 2020 consolidated financial statements.
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.