Genuine Parts (GPC) 10-Q2022 Q3 Quarterly report

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. Except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Genuine Parts Company (the “Company,” “we,” “our,” “us,” or “its”) for the year ended December 31, 2021. Accordingly, the unaudited condensed consolidated financial statements and related disclosures herein should be read in conjunction with our 2021 Annual Report on Form 10-K. Significant accounting policies and other items disclosed in our Annual Report have been omitted from this report because they have not changed.

The preparation of interim financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements. Specifically, we make estimates and assumptions in our unaudited condensed consolidated financial statements for inventory adjustments, the accrual of bad debts, credit losses on guaranteed loans, customer sales returns, and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out (“LIFO”) method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation. Reserves for bad debts, credit losses on guaranteed loans and customer sales returns are estimated and accrued on an interim basis based on a consideration of historical experience, current conditions, and reasonable and supportable forecasts. Volume incentives are estimated based upon cumulative and projected purchasing levels.

In the opinion of management, all adjustments necessary for a fair presentation of our financial results for the interim periods have been made. These adjustments are of a normal recurring nature. We have reclassified certain prior period amounts to conform to the current period presentation. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the year ended December 31, 2022. We have evaluated subsequent events through the date the unaudited condensed consolidated financial statements covered by this quarterly report were issued.

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”) to the FASB Accounting Standards Codification (“ASC”). We consider the applicability and impact of all ASUs and have determined that any recently adopted accounting pronouncements did not have a material impact on our condensed consolidated financial statements.

The tables below present gains related to designated net investment hedges:

As of September 30, 2022 the fair value of our senior unsecured notes was approximately $2.8 billion, 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.

We guarantee the borrowings of certain independently controlled automotive parts stores and businesses (“independents”) and certain other affiliates in which we have a noncontrolling equity ownership interest (“affiliates”). While such borrowings of the independents and affiliates are outstanding, we are required to maintain compliance with certain covenants. At September 30, 2022, we were in compliance with all such covenants.

agencies of the independents and affiliates that participate in the guarantee programs. In the event that we are required to make payments in connection with these guarantees, we would obtain and liquidate certain collateral pledged by the independents or affiliates (e.g., accounts receivable and inventory) to recover all or a substantial portion of the amounts paid under the guarantees. We recognize a liability equal to current expected credit losses over the lives of the loans in the guaranteed loan portfolio, based on a consideration of historical experience, current conditions, the nature and expected value of any collateral, and reasonable and supportable forecasts. To date, we have not had significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the current expected credit loss reserve is not material. As of September 30, 2022, there are no material guaranteed loans for which the borrower is experiencing financial difficulty and recovery is expected to be provided substantially through the operation or sale of the collateral.

As of September 30, 2022, we have recognized certain assets and liabilities amounting to $74 million each for the guarantees related to the independents’ and affiliates’ borrowings. These assets and liabilities are included in other assets and other long-term liabilities in the condensed consolidated balance sheets. The liabilities relate to our noncontingent obligation to stand ready to perform under the guarantee programs and they are distinct from our current expected credit loss reserve.

We maintain various long-term incentive plans, which provide for the granting of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalents and other share-based awards. Certain outstanding options are not included in the diluted earnings per share calculation because their inclusion would have been anti-dilutive.

The following table presents a summary of our reportable segment financial information:

Net sales are disaggregated by geographical region for each of our reportable segments, as we deem this presentation best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table presents disaggregated geographical net sales from contracts with customers by reportable segment:

Under our accounts receivable sales agreement (the "A/R Sales Agreement"), we continuously sell designated pools of receivables as they are originated by us and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The A/R Sales Agreement has a three year term, which we intend to renew.

We continue to be involved with the receivables transferred by the SPE to the unaffiliated financial institution by providing collection services. As cash is collected on sold receivables, the SPE continuously transfers ownership and control of new qualifying receivables to the unaffiliated financial institution so that the total principal amount outstanding of receivables sold is approximately $1 billion at any point in time (which is the maximum amount allowed under the agreement as amended on January 3, 2022).

The total principal amount outstanding of receivables sold is approximately $1.0 billion and $800 million as of September 30, 2022 and December 31, 2021, respectively. The amount of receivables pledged as collateral as of September 30, 2022 and December 31, 2021 is approximately $1.1 billion and $973 million, respectively.

The following table summarizes the activity and amounts outstanding under the A/R Sales Agreement as of:

Continuous cash activity related to the A/R Sales Agreement is reflected in net cash provided by operating activities in the condensed consolidated statements of cash flows. The SPE incurs fees due to the unaffiliated financial institution related to the accounts receivable sales transactions. Those fees, which are immaterial, are recorded within other non-operating expense (income) in the condensed consolidated statements of income. The SPE has a recourse obligation to repurchase from the unaffiliated financial 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 September 30, 2022 and December 31, 2021 is not material. The servicing liability related to our collection services also is not material, given the high quality of the customers underlying the receivables and the anticipated short collection period.

Net periodic benefit income from our pension plans included the following components for our pension benefits:

Service cost is recorded in selling, administrative and other expenses in the condensed consolidated statements of income while all other components are recorded within other non-operating expense (income). Pension benefits also include amounts related to supplemental retirement plans.

On January 3, 2022, we, through our wholly-owned subsidiary, Motion Industries, Inc., acquired all of the equity interests in KDG for a purchase price of approximately $1.3 billion in cash. KDG, which is headquartered in Bloomfield, Connecticut, is a power transmission, automation and fluid power industrial distributor and solutions provider with operations throughout the United States, providing electro-mechanical products, bearings, power transmission, motion control and electrical and fluid power components to MRO and OEM customers. KDG has approximately 1,700 employees with approximately 220 locations across the United States and Puerto Rico. As of January 3, 2022, KDG had estimated annual revenues of approximately $1 billion.

The net cash consideration transferred of approximately $1.3 billion is net of the estimated cash acquired of approximately $30 million.

The KDG acquisition was financed using a combination of borrowings under the existing unsecured revolving credit facility, proceeds of $200 million from the selling of additional receivables under our amended A/R Sales Agreement and $109 million of cash.

The following table summarizes the preliminary, estimated fair values of the assets acquired and liabilities assumed at the acquisition date as well as adjustments made to the acquisition accounting during the nine months ended September 30, 2022 (referred to as the "measurement period adjustments"). The measurement period adjustments primarily resulted from revisions to the valuation of certain tangible and intangible assets. The fair value of the acquired identifiable intangible assets is provisional pending completion of the final valuations for these assets. We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed as of the acquisition date, including, among other things, obtaining valuations of certain tangible and intangible assets, as well as the fair value of certain contracts and the determination of certain tax balances. Additional adjustments may be made to the acquisition accounting during the measurement period primarily related to intangible asset revaluations, tax accounting and leases.

The other intangible assets acquired included $527 million of customer relationship intangibles and a $41 million favorable trade name licensing agreement, with amortization lives of 17 and 1.5 years, respectively. The other intangible assets have a total weighted amortization life of 16 years.

The goodwill was assigned to the Industrial segment and is attributable primarily to expected synergies and the assembled workforce. Approximately $261 million of the estimated goodwill recognized as part of the KDG acquisition is expected to be tax deductible.

For the nine months ended September 30, 2022, approximately $5 million of inventory amortization step-up cost related to this acquisition was included in cost of goods sold. Further, $49 million of transaction and other one-time

costs, inclusive of the impairment charge described below, were included in selling, administrative, and other expenses in the condensed consolidated statements of income.

In June 2022, we incurred a $17 million non-cash impairment charge related to our decision to retire certain legacy Industrial trade names, classified as other intangible assets, prior to the end of their estimated useful lives as part of the KDG integration and rebranding strategy. We evaluate other intangible assets for potential impairment indicators annually or more frequently if circumstances change.

The following tables present the changes in AOCL by component for the nine months ended September 30:

The AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote. Generally, tax effects in AOCL are established at the currently enacted tax rate and reclassified to net income in the same period that the related pre-tax AOCL reclassifications are recognized.

From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity and capital resources. There have been no significant developments to the information presented in our 2021 Annual Report on Form 10-K with respect to litigation or commitments and contingencies.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and with the audited consolidated financial statements, accompanying notes, related information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the year ended December 31, 2022.

Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (“SEC”), release to the public, or make available on our website, constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in the future tense and all statements accompanied by words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “position,” “will,” “project,” “intend,” “plan,” “on track,” “anticipate,” “to come,” “may,” “possible,” “assume,” or similar expressions are intended to identify such forward-looking statements. These forward-looking statements include our view of business and economic trends for the remainder of the year and our expectations regarding our ability to capitalize on these business and economic trends and to execute our strategic

We caution you that all forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements. Actual results or events may differ materially from those indicated as a result of various important factors. Such factors may include, among other things, changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation and geopolitical conflicts such as the conflict between Russia and Ukraine; volatility in oil prices; significant cost increases, such as rising fuel and freight expenses; the extent and duration of the disruption to our business operations caused by the global health crisis associated with the COVID-19 pandemic, including the effects on the financial health of our business partners and customers, on supply chains and our suppliers, on vehicle miles driven as well as other metrics that affect our business, and on access to capital and liquidity provided by the financial and capital markets; our ability to maintain compliance with our debt covenants; our ability to successfully integrate acquired businesses into our operations and to realize the anticipated synergies and benefits; our ability to successfully implement our business initiatives in our two business segments; slowing demand for our products; the ability to maintain favorable supplier arrangements and relationships; changes in national and international legislation or government regulations or policies, including changes to import tariffs, environmental and social policy, infrastructure programs and privacy legislation, and their impact to us, our suppliers and customers; changes in tax policies; volatile exchange rates; our ability to successfully attract and retain employees in the current labor market; uncertain credit markets and other macroeconomic conditions; competitive product, service and pricing pressures; failure or weakness in our disclosure controls and procedures and internal controls over financial reporting, including as a result of the work from home environment; the uncertainties and costs of litigation; disruptions caused by a failure or breach of our information systems, as well as other risks and uncertainties discussed in our 2021 Annual Report on Form 10-K and Item 1A, Risk Factors, in our report on Form 10-Q for the quarter ended March 31, 2022 (all of which may be amplified by the COVID-19 pandemic and geopolitical conflicts, such as the current conflict between Russia and Ukraine) and from time to time in our subsequent filings with the SEC.

Forward-looking statements speak only as of the date they are made, and we undertake no duty to update any forward-looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the SEC.

Genuine Parts Company is a service organization engaged in the global distribution of automotive and industrial replacement parts. We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. We conduct business in North America, Europe and Australasia from a network of more than 10,300 locations.

At Genuine Parts Company, our mission is to be a world-class service organization and the employer of choice, supplier of choice, valued customer of choice and investment of choice - we keep the world moving! This is our purpose and the foundation of how we do business. Additionally, we strive to be a respected business community member and a good corporate citizen. Our strategic financial objectives are intended to align with our mission and drive value for all our stakeholders. Our strategic financial objectives include: (1) top line revenue growth in excess of market growth; (2) improved operating margin; (3) strong balance sheet and cash flows; and (4) effective capital allocation.

Our Automotive Parts Group operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand as of September 30, 2022, and accounted for 62% of total revenues for the three and nine months ended September 30, 2022. Our Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore. The Industrial Parts Group accounted for 38% of our total revenues for the three and nine months ended September 30, 2022.

We consider comparable sales, which refers to period-over-period comparisons of our net sales excluding the impact of acquisitions, foreign currency and other, to be a key business metric. Management uses comparable sales to evaluate the results of operations and we believe that this key indicator provides additional perspective and insights when analyzing the operating performance of our business from period to period and trends in its historical operating results. While this metric is widely used by industry stakeholders, our calculation of the metric may not be comparable to similar measures disclosed by other companies, because not all companies and analysts calculate this metric in the same manner. This metric should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in this report.

Our Automotive Parts Group and Industrial Parts Group both reported strong sales and segment profit growth during the three and nine months ended September 30, 2022 when compared to the same prior year period. Our Industrial Parts Group also benefited from the January 2022 acquisition of KDG. We expect this strategic and highly synergistic acquisition to significantly enhance our scale and to strengthen our market leading position in industrial solutions. Additionally both businesses continued to be highly effective in managing the impacts of inflationary pressures, a dynamic geopolitical landscape and ongoing supply chain challenges, all of which we expect to continue throughout the remainder of the year.

Sales for the three months ended September 30, 2022 were $5.7 billion, a 17.8% increase compared to $4.8 billion for the same period of the prior year. The increase in sales is attributable to a 12.7% increase in comparable sales and a 9.1% benefit from acquisitions, slightly offset by a net unfavorable impact of foreign currency and other of 4.0%. Sales for the nine months ended September 30, 2022 were $16.6 billion, a 17.8% increase compared to $14.1 billion for the same period of the prior year. The increase in sales is due to a 12.1% increase in comparable sales, a 8.7% benefit from acquisitions, slightly offset by a 3.0% net unfavorable impact of foreign currency and other. The increase in comparable sales reflects the benefits of price increases to offset higher product costs and other inflationary pressures and, to a lesser extent, continued increase in consumer activity when compared to the three and nine months ended September 30, 2021. We continue to execute our strategic pricing and other sales initiatives to mitigate product and other inflationary cost pressures.

Sales for the Automotive Parts Group increased 8.9% and 9.4% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. This group's revenue increase for the three months ended September 30, 2022 consisted of an approximate 9.2% increase in comparable sales driven by price increases to offset higher product costs and other inflationary pressures and strong demand. The overall sales increase also included a 5.3% benefit from acquisitions, partially offset by a 5.6% net unfavorable impact of foreign currency and other. This group's revenue increase for the nine months ended September 30, 2022

consisted of an approximate 9.3% increase in comparable sales and 4.4% benefit from acquisitions, partially offset by a 4.3% net unfavorable impact from foreign currency and other compared to the same period in 2021.

Sales for the Industrial Parts Group increased 35.3% and 34.5% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases for both periods reflect benefits of approximately 17% and primarily from the acquisition of KDG and increases of 19.6% and 17.9% in comparable sales for the three and nine months ended September 30, 2022, respectively. Our Industrial Parts Group continues to benefit from the ongoing execution of our pricing, supply chain and other strategic initiatives and the continued resilience and expansion in the industrial economy, which is evident in indicators such as the Purchasing Managers Index and Industrial Production Index.

Cost of goods sold includes the total cost of merchandise sold, including freight expenses associated with moving merchandise from our suppliers to our distribution centers, retail stores and branches, as well as supplier volume incentives and inventory adjustments.

Cost of goods sold for the three months ended September 30, 2022 was $3.7 billion, an 18.9% increase from $3.1 billion for the same period in 2021. As a percentage of net sales, cost of goods sold was 65.1% for the three months ended September 30, 2022 compared to 64.5% for the same period in 2021. As a result, gross margin declined to 34.9% from 35.5% for the same period in 2021. For the nine months ended September 30, 2022, cost of goods sold was $10.8 billion, an 18.4% increase from $9.1 billion for the same nine month period in 2021. As a percentage of net sales, cost of goods sold was 65.2% for the nine months ended September 30, 2022 compared to 64.9% for the same period in 2021. As a result, gross margin declined to 34.8% from 35.1% in the same period in 2021.

The decreases in gross margin for the three and nine months ended September 30, 2022 was driven primarily by the impact of supplier incentives as compared to the same period in 2021, unfavorable foreign exchange, and a business mix shift due to the increased sales from our Industrial Parts Group. This decline was partially offset by the ongoing favorable impact of strategic category management and pricing initiatives in our business.

Our operating expenses are substantially comprised of compensation and benefit-related costs for personnel. Other major expense categories include facility occupancy costs for headquarters, distribution centers and retail store/branch operations, transportation and delivery costs, technology and digital costs, accounting, legal and professional services, insurance costs, and travel and advertising.

Total operating expenses increased 9.6% to $1.6 billion for the three months ended September 30, 2022 compared to $1.4 billion for the same three month period in 2021. As a percentage of net sales, operating expenses decreased to 27.3% compared to 29.4% for same three month period in the prior year. For the nine months ended September 30, 2022, these expenses totaled $4.5 billion, compared to $4.1 billion for the same period in 2021, and as a percentage of net sales, operating expenses decreased to 27.2% compared to 29.3% for the same nine month period in 2021. For the nine months ended September 30, 2022 operating expenses included $57 million of transaction and other costs associated with the KDG acquisition, inclusive of a non-cash impairment charge of $17 million from the retirement of certain legacy trade names that will no longer be used as result of the on-going KDG integration. The increase in total operating expenses for the nine month period was partially offset by a one-time benefit of $103 million from a gain on the sale of real estate that had been leased to S.P. Richards. The overall decrease in operating expenses as a percentage of net sales for the period is primarily related to improved leverage on stronger sales and cost control initiatives.

The Automotive Parts Group's segment profit increased 10.0% in the three months ended September 30, 2022 compared to the same period of 2021, and its segment profit margin improved to 8.9% compared to 8.8% for the same period of the previous year. For the nine months ended September 30, 2022, segment profit increased 11.0% compared to the same period of the prior year, and segment profit margin increased to 8.8% compared to 8.6% for the same period in 2021. These improvements in segment profit and segment profit margin, despite inflationary headwinds, reflect strong operating results in all geographical regions, driven primarily by strong sales demand and the execution of our strategic growth and operating initiatives around supply chain, pricing and technology.

The Industrial Parts Group's segment profit increased 46.3% and 48.7% in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily driven by the acquisition of KDG. For the three months and nine months ended September 30, 2022, this group's segment profit margin increased to 11.1% and 10.4%, respectively, compared to 10.3% and 9.4%, respectively, for the same periods of the previous year. These improved segment profit margins are primarily due to the benefit of strong sales growth and strategic initiatives in areas such as supply chain, category management and pricing.

For the three months ended September 30, 2022, net income was $312 million, an increase of 36.6% compared to net income of $229 million for the same three month period of the prior year. On a per share diluted basis, net income was $2.20, an increase of 38.4% compared to $1.59 for the same three month period of 2021. For the nine months ended September 30, 2022, net income was $931 million, an increase of 44.8% compared to net income of $643 million for the same nine month period in 2021. On a per share diluted basis, net income was $6.53, an increase of 47.1% compared to $4.44 for the same nine month period of the prior year.

For the three months ended September 30, 2022, net income on an adjusted basis was $317 million, an increase of 17.3% compared to adjusted net income of $270 million for the same three month period of the prior year. On a per share basis, net income on an adjusted diluted basis was $2.23 for the three months ended September 30, 2022, an increase of 18.6% compared to $1.88 for the same three month period of 2021. For the nine months ended September 30, 2022, net income on an adjusted basis was $896 million, an increase of 21.0% compared to adjusted net income of $741 million for the same nine month period of the prior year. On a per share basis, net income on an adjusted diluted basis was $6.29 for the nine months ended September 30, 2022, an increase of 22.9% compared to $5.12 for the same nine month period of 2021. Adjusted net income and adjusted diluted earnings per share are both non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).

The growth in net income and adjusted net income in all periods presented reflects strong operating results in both of our segments, driven primarily by strong sales demand, the benefits of key acquisitions (including KDG), and the execution of our strategic growth initiatives, despite inflationary and other macroeconomic headwinds.

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

The table below represent amounts per common share assuming dilution:

Our cash balance of $629 million at September 30, 2022 decreased $86 million, from December 31, 2021. For the nine months ended September 30, 2022, we had net cash provided by operating activities of $1.2 billion, net cash used in investing activities of $1.7 billion and net cash provided by financing activities of $386 million.

The cash provided by operating activities was driven by higher net income for the nine months ended September 30, 2022 and the effective management of our working capital, including a $200 million benefit related to increasing the facility limit of our A/R Sales Agreement. We used $1.7 billion cash for investing activities primarily in connection with the acquisition of KDG, in addition to $244 million for capital expenditures. The financing activities consisted primarily of $1 billion of net proceeds from debt primarily from the Senior Notes offering (as discussed below). This was partially offset by $369 million for dividends paid to our shareholders and $173 million of share repurchases.

Each of our working capital line items were impacted by the acquisition of KDG (refer to our acquisitions footnote in the notes to condensed consolidated financial statements for further information). Accounts receivable increased $417 million, or 23.2%, from December 31, 2021. Inventory increased $411 million, or 10.6%, from December 31, 2021. In addition to the KDG acquisition, accounts receivable and inventory were both impacted by increases in revenues and related product demand. Accounts payable increased $726 million, or 15.1% from December 31, 2021. Apart from KDG, this was due largely to increased purchases to meet demand, inflationary pressures, and extended payment terms with certain suppliers. Total debt of $3.2 billion at September 30, 2022 increased $824 million, or 34.2%, from December 31, 2021 driven primarily by the Senior Notes offering (as discussed below).

We continue to negotiate extended payment dates with our suppliers. Our current payment terms with the majority of our suppliers range from 30 to 360 days. Several global financial institutions offer voluntary supply chain finance (“SCF”) programs which enable our suppliers, at their sole discretion, to sell their receivables from us to these financial institutions on a non-recourse basis at a rate that takes advantage of our credit rating and may be beneficial to them. The SCF program is primarily available to suppliers of goods and services included in cost of goods sold in our condensed consolidated statements of income. Our suppliers and us agree on commercial terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. The suppliers sell goods or services, as applicable, to us and they issue the associated invoices to us based on the agreed-upon contractual terms. Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, they want to sell to the financial institutions. In turn, we direct payment to the financial institutions, rather than the suppliers, for the invoices sold to the financial institutions. No guarantees are provided by us or any of our subsidiaries on third-party performance under the SCF program; however, we guarantee the payment by our subsidiaries to the financial institutions participating in the SCF program for the applicable invoices. We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program. Accordingly, amounts due to our suppliers that elected to participate in the SCF program are included in the line item accounts payable in our condensed consolidated balance sheets. All activity related to amounts due to suppliers that elected to participate in the SCF program is reflected in cash flows from operating activities in our condensed consolidated statements of cash flows. As of September 30, 2022 and December 31, 2021, the outstanding payment obligations to the financial institutions are $3.1 billion and $2.7 billion, respectively. The amount settled through the SCF program was $2.7 billion and $2.3 billion for the nine months ended September 30, 2022 and September 30, 2021, respectively.

We have a healthy cash position and the financial strength to pursue future growth opportunities through disciplined, strategic capital deployment. Our key priorities include reinvesting in our businesses through capital expenditures, mergers and acquisitions, the dividend and share repurchases. These investments are designed to drive growth, improve efficiencies and productivity, and enhance shareholder value.

On January 3, 2022, we amended our A/R Sales Agreement to increase the facility limit by an additional $200 million bringing the total to $1 billion. The terms of the A/R Sales Agreement limit the balance of receivables sold to approximately $1 billion at any point in time. Refer to the A/R Sales Agreement footnote in the notes to condensed consolidated financial statements for more information.

At September 30, 2022, our total average cost of debt was 2.34%, and we remain in compliance with all covenants connected with our borrowings. Any failure to comply with our debt covenants or restrictions could result in a default under our financing arrangements or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could create cross defaults under other debt arrangements and have a material adverse effect on our business, financial condition, results of operations and cash flows.

On February 14, 2022, we announced a 10% increase in the regular quarterly cash dividend for 2022. Our Board of Directors increased the cash dividend payable to an annual rate of $3.58 per share compared with the previous dividend of $3.26 per share. We have paid a cash dividend every year since going public in 1948, and 2022 marks the 66th consecutive year of increased dividends paid to shareholders.

For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our 2021 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2021.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or furnishes under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

On January 3, 2022, we completed the KDG acquisition. We are in the process of integrating KDG into our system of internal control over financial reporting.

Excluding the KDG acquisition, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the SEC that occurred during our last quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Information with respect to our legal proceedings may be found in the Commitments and Contingencies footnote in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report on Form 10-K and our quarterly report on Form 10-Q for the quarter ended March 31, 2022, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The following table provides information about the purchases of shares of our common stock during the three months ended September 30, 2022:

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.