GPC 2017 Annual Report

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial parts and electrical materials and business products. We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. The Company conducted business in 2017 through- out the United States, Canada, Australia, New Zealand, Mexico, the U.K., France, Germany, Poland and Puerto Rico from approximately 3,100 locations. For the periods presented, the Company operates in four business segments: Automotive; Industrial; Busi- ness Products; and, Electrical and Electronic. Effective in 2018, EIS, our Electrical and Electronic business segment, will be identified as the Electrical Specialties Group of Motion Industries, and will be included within the results of our Industrial business segment. The combination of these two segments will provide strong economies of scale and greater operating efficiencies, which we intend to leverage. The opportunity to build synergies by sharing talent, physical resources, greater size and scale, and value-added expertise in each respective market channel is highly compelling. We anticipate this combination will create value for both our customers and all our stakeholders. We recorded consolidated net sales of $16.3 billion for the year ended December 31, 2017, an increase of 6.3% compared to sales in 2016. Consolidated net income for the year ended December 31, 2017 was $617 million and diluted net income per share was $4.18. Adjusted net income was $696 million for the year ended December 31, 2017, and adjusted diluted net income per share was $4.71. Adjusted net income and adjusted diluted net income per share exclude the impact of transaction-related costs primarily related to the Company’s acquisition of Alliance Automotive Group and the transition tax associated with foreign earnings and the revaluation of deferred tax assets and liabilities as required by the Tax Cuts and Jobs Act of 2017. In 2017, our growth strategy centered around positioning the Company for sustained long term sales and earnings growth. We also executed on our initiatives to grow revenues and overcome the challenged sales envi- ronment in our U.S. automotive, business products and electrical/electronic businesses. Additionally, we were focused on creating a lower cost, but highly effective infrastructure. These efforts included steps to accelerate the integration of our acquisitions, investments to enhance our productivity and innovative strategies to offset rising costs. Total sales in 2016 and 2015 were essentially flat relative to the prior year periods. Net income in 2016 was down by 3% and decreased by 1% in 2015 when compared to the prior year. Our revenue and earnings in 2016 reflected the impact of a challenging sales environment that persisted in the U.S. throughout the year. In 2015, revenue and earnings reflected a 3% negative impact of currency translation and after adjusting for this factor, the Company produced an increase in both sales and net income. Over the three year period of 2015 through 2017, our financial performance reflects a variety of initiatives the Company implemented to grow sales and earnings across our businesses. Examples of such initiatives include strategic acquisitions, the introduction of new and expanded product lines, including those carried by acquired companies, geographic expansion, sales to new markets, enhanced customer marketing programs and a variety of gross margin and cost savings initiatives. We discuss these initiatives further below. With regard to the December 31, 2017 consolidated balance sheet, the Company’s cash balance of $315 million compares to cash of $243 million at December 31, 2016. The Company continues to maintain a strong cash position, supported by relatively steady net income and effective asset management. Accounts receivable increased 25% from the prior year and is up 3% excluding the AAG and other recent acquisitions as well as the impact of foreign currency. The 3% increase compares to an approximate 4.5% sales increase in the fourth quarter of 2017. Inventory is up by approximately 17%, including the impact of acquisitions, and is rela- tively unchanged excluding the AAG and other recent acquisitions as well as the impact of foreign currency. Accounts payable increased 18% from the prior year, and is up 3% excluding the AAG and other recent acquis- itions as well as the impact of foreign currency. The slight increase in accounts payable before these items 21

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