gpc-20210331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-5690

__________________________________________

GENUINE PARTS COMPANY

(Exact name of registrant as specified in its charter)

__________________________________________


GA						58-0254510
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2999 WILDWOOD PARKWAY,

30339

ATLANTA,

(Address of principal executive offices)

(Zip Code)

678-934-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of each exchange on which registered

Common Stock, $1.00 par value per share

GPC

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 144,472,216 shares of common stock outstanding as of April 19, 2021.


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PART I		Page

Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20

PART II

Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	23
	Signatures	24

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(in thousands, except share and per share data)	March 31, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	1,117,988	$	990,166
Trade accounts receivable, less allowance for doubtful accounts (2021 – $39,800; 2020 – $36,622)	1,809,637		1,556,966
Merchandise inventories, net	3,600,658		3,506,271
Prepaid expenses and other current assets	1,149,877		1,060,360
Total current assets	7,678,160		7,113,763
Goodwill	1,885,447		1,917,477
Other intangible assets, less accumulated amortization	1,455,333		1,498,257
Deferred tax assets	51,907		65,658
Property, plant and equipment, less accumulated depreciation (2021 – $1,296,920; 2020 – $1,268,170)	1,165,236		1,162,043
Operating lease assets	1,044,127		1,038,877
Other assets	663,333		644,140
Total assets	$	13,943,543	$	13,440,215

Liabilities and equity
Current liabilities:
Trade accounts payable	$	4,479,398	$	4,128,084
Current portion of debt	160,373		160,531
Dividends payable	117,714		114,043
Other current liabilities	1,578,866		1,491,426
Total current liabilities	6,336,351		5,894,084
Long-term debt	2,458,020		2,516,614
Operating lease liabilities	788,907		789,294
Pension and other post–retirement benefit liabilities	254,558		265,687
Deferred tax liabilities	206,630		212,910
Other long-term liabilities	562,968		543,623
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 – 2021 – 144,458,057 shares; 2020 – 144,354,335 shares	144,458		144,354
Additional paid-in capital	117,867		117,165
Accumulated other comprehensive loss	(1,023,760)		(1,036,502)
Retained earnings	4,085,998		3,979,779
Total parent equity	3,324,563		3,204,796
Noncontrolling interests in subsidiaries	11,546		13,207
Total equity	3,336,109		3,218,003
Total liabilities and equity	$	13,943,543	$	13,440,215

See accompanying notes to condensed consolidated financial statements.

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GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended March 31,
(in thousands, except per share data)	2021		2020
Net sales	$	4,464,714	$	4,092,526
Cost of goods sold	2,923,899		2,704,348
Gross profit	1,540,815		1,388,178
Operating expenses:
Selling, administrative and other expenses	1,195,164		1,142,697
Depreciation and amortization	72,296		67,254
Provision for doubtful accounts	4,909		6,519
Restructuring costs	—		2,982
Total operating expenses	1,272,369		1,219,452
Non-operating (income) expense:
Interest expense	19,062		20,965
Other	(36,475)		(12,832)
Total non-operating (income) expense	(17,413)		8,133
Income before income taxes	285,859		160,593
Income taxes	68,149		38,247
Net income from continuing operations	217,710		122,346
Net income from discontinued operations	—		14,189
Net income	$	217,710	$	136,535
Dividends declared per common share	$	0.8150	$	0.7900
Basic earnings per share:
Continuing operations	$	1.51	$	0.84
Discontinued operations	—		0.10
Basic earnings per share	$	1.51	$	0.94
Diluted earnings per share:
Continuing operations	$	1.50	$	0.84
Discontinued operations	—		0.10
Diluted earnings per share	$	1.50	$	0.94

Weighted average common shares outstanding	144,413		145,052
Dilutive effect of stock options and non-vested restricted stock awards	887		571
Weighted average common shares outstanding – assuming dilution	145,300		145,623

See accompanying notes to condensed consolidated financial statements.

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GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	Three Months Ended March 31,
(in thousands, except per share data)	2021		2020
Net income	$	217,710	$	136,535
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments, net of income taxes in 2021 — $21,185; 2020 — $15,560	(295)		(182,613)
Cash flow hedge adjustments, net of income taxes in 2021 — $1,384; 2020 — $6,604	3,741		(17,856)
Pension and postretirement benefit adjustments, net of income taxes in 2021 — $3,421; 2020 — $3,017	9,296		8,448
Other comprehensive income (loss), net of income taxes	12,742		(192,021)
Comprehensive income (loss)	$	230,452	$	(55,486)

See accompanying notes to condensed consolidated financial statements.

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GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)


	Three Months Ended March 31, 2021
(in thousands, except share and per share data)	Common Stock Shares	Common Stock Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Total Parent Equity		Non-controlling Interests in Subsidiaries		Total Equity
January 1, 2021	144,354,335	$	144,354	$	117,165	$	(1,036,502)	$	3,979,779	$	3,204,796	$	13,207	$	3,218,003
Net income	—	—		—		—		217,710		217,710		—		217,710
Other comprehensive income, net of tax	—	—		—		12,742		—		12,742		—		12,742
Cash dividend declared, $0.8150 per share	—	—		—		—		(117,714)		(117,714)		—		(117,714)
Share-based awards exercised, including tax benefit of $1,764	103,722	104		(5,533)		—		—		(5,429)		—		(5,429)
Share-based compensation	—	—		6,235		—		—		6,235		—		6,235
Cumulative effect from adoption of ASU 2019-12 (1)	—	—		—		—		6,223		6,223		—		6,223
Noncontrolling interest activities	—	—		—		—		—		—		(1,661)		(1,661)
March 31, 2021	144,458,057	$	144,458	$	117,867	$	(1,023,760)	$	4,085,998	$	3,324,563	$	11,546	$	3,336,109


	Three Months Ended March 31, 2020
(in thousands, except share and per share data)	Common Stock Shares	Common Stock Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Total Parent Equity		Non-controlling Interests in Subsidiaries		Total Equity
January 1, 2020	145,378,158	$	145,378	$	98,777	$	(1,141,308)	$	4,571,860	$	3,674,707	$	20,793	$	3,695,500
Net income	—	—		—		—		136,535		136,535		—		136,535
Other comprehensive loss, net of tax	—	—		—		(192,021)		—		(192,021)		—		(192,021)
Cash dividend declared, $0.7900 per share	—	—		—		—		(114,476)		(114,476)		—		(114,476)
Share-based awards exercised, including tax benefit of $221	7,629	7		(348)		—		—		(341)		—		(341)
Share-based compensation	—	—		5,449		—		—		5,449		—		5,449
Purchase of stock	(1,136,444)	(1,136)		—		—		(94,583)		(95,719)		—		(95,719)
Cumulative effect from adoption of ASU 2016-13 (2)	—	—		—		—		(11,432)		(11,432)		—		(11,432)
Noncontrolling interest activities	—	—		—		—		—		—		(464)		(464)
March 31, 2020	144,249,343	$	144,249	$	103,878	$	(1,333,329)	$	4,487,904	$	3,402,702	$	20,329	$	3,423,031

(1)The Company adopted Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes, during the first quarter of 2021.

(2)The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, during the first quarter of 2020.

See accompanying notes to condensed consolidated financial statements.

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GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,
(in thousands)	2021		2020
Operating activities:
Net income	$	217,710	$	136,535
Net income from discontinued operations	—		14,189
Net income from continuing operations	217,710		122,346
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	72,296		67,254
Share-based compensation	6,235		4,495
Excess tax benefits from share-based compensation	(1,764)		(221)
Changes in operating assets and liabilities	6,465		(166,014)
Net cash provided by operating activities from continuing operations	300,942		27,860
Investing activities:
Purchases of property, plant and equipment	(48,391)		(38,914)
Proceeds from sale of property, plant and equipment	16,863		3,327
Proceeds from divestitures of businesses	10,345		10,442
Acquisitions of businesses and other investing activities	(19,489)		(3,833)
Net cash used in investing activities from continuing operations	(40,672)		(28,978)
Financing activities:
Proceeds from debt	31,599		1,318,905
Payments on debt	(26,767)		(1,057,667)
Share-based awards exercised	(5,429)		(341)
Dividends paid	(114,043)		(110,851)
Purchases of stock	—		(95,719)
Other financing activities	(1,354)		(871)
Net cash (used in) provided by financing activities from continuing operations	(115,994)		53,456
Cash flows from discontinued operations:
Net cash provided by operating activities from discontinued operations	—		46,200
Net cash used in investing activities from discontinued operations	—		(6,495)
Net cash provided by financing activities from discontinued operations	—		—
Net cash provided by discontinued operations	—		39,705
Effect of exchange rate changes on cash and cash equivalents	(16,454)		(14,566)
Net increase in cash and cash equivalents	127,822		77,477
Cash and cash equivalents at beginning of period	990,166		276,992
Cash and cash equivalents at end of period	$	1,117,988	$	354,469

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

1. Basis of Presentation

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. 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 condensed consolidated financial statements for all periods presented. Net 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. Additionally, revenue from freight services provided by the Automotive Parts Group are grossed up and recast in continuing operations in each period because those sales are continuing with the discontinued operations after the divestiture. 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, 2020. Accordingly, the unaudited condensed consolidated financial statements and related disclosures herein should be read in conjunction with the Company’s 2020 Annual Report on Form 10-K.

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, the Company makes estimates and assumptions in its 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 the Company’s financial results for the interim periods have been made. These adjustments are of a normal recurring nature. The Company has reclassified certain prior period amounts to conform to the current period presentation.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of results for the year ended December 31, 2021. The Company's results of operations improved in the first quarter of 2021 relative to the first quarter of 2020 as a result of several positive trends caused by the global response to the coronavirus (“COVID-19”) outbreak, which was declared a pandemic in March 2020. In particular, as widespread vaccine distribution continued, we have seen economic recovery in many of the markets where we operate and a significant uptick in consumer mobility. However, the Company's operations remain vulnerable to reversal of these trends or other continuing negative effects caused by COVID-19. The extent to which the 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 shelter-in-place 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 has evaluated subsequent events through the date the unaudited condensed consolidated financial statements covered by this quarterly report were issued.

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2. Segment Information

The following table presents a summary of the Company's reportable segment financial information from continuing operations:


	Three Months Ended March 31,
	2021		2020
Net sales:
Automotive	$	2,953,165	$	2,582,685
Industrial	1,511,549		1,509,841
Total net sales	$	4,464,714	$	4,092,526
Segment profit:
Automotive	$	235,678	$	142,578
Industrial	125,292		113,933
Total segment profit	360,970		256,511
Interest expense, net	(18,324)		(19,868)
Intangible asset amortization	(25,544)		(22,740)
Corporate expense	(31,243)		(55,061)
Other unallocated costs (1)	—		1,751
Income before income taxes from continuing operations	$	285,859	$	160,593

(1) The following table presents a summary of the other unallocated costs:


	Three Months Ended March 31,
	2021		2020
Other unallocated costs:
Restructuring costs (2)	$	—	$	(2,982)
Gain on insurance proceeds related to SPR Fire (3)	—		12,282
Transaction and other costs (4)	—		(7,549)
Total other unallocated costs	$	—	$	1,751

(2) Adjustment reflects restructuring costs related to the execution of the 2019 Cost Savings Plan. 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 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.

(4) Adjustment reflects $6,000 of incremental costs associated with COVID-19 for the three months ended March 31, 2020 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.

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Net sales are disaggregated by geographical region for each of the Company’s reportable segments, as the Company deems 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:


	Three Months Ended March 31,
	2021		2020
North America:
Automotive	$	1,862,805	$	1,731,496
Industrial	1,399,399		1,410,715
Total North America	$	3,262,204	$	3,142,211
Australasia:
Automotive	$	367,869	$	272,924
Industrial	112,150		99,126
Total Australasia	$	480,019	$	372,050
Europe – Automotive	$	722,491	$	578,265
Total net sales	$	4,464,714	$	4,092,526

3. Accumulated Other Comprehensive Loss

The following tables present the changes in accumulated other comprehensive loss (“AOCL”) by component for the three months ended March 31:


	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, 2021	$	(692,868)	$	(30,007)	$	(313,627)	$	(1,036,502)
Other comprehensive loss before reclassifications	—		—		(295)		(295)
Amounts reclassified from accumulated other comprehensive loss	9,296		3,741		—		13,037
Other comprehensive income (loss), net of income taxes	9,296		3,741		(295)		12,742
Ending balance, March 31, 2021	$	(683,572)	$	(26,266)	$	(313,922)	$	(1,023,760)


	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 loss before reclassifications	—		(19,300)		(182,613)		(201,913)
Amounts reclassified from accumulated other comprehensive loss	8,448		1,444		—		9,892
Other comprehensive income (loss), net of income taxes	8,448		(17,856)		(182,613)		(192,021)
Ending balance, March 31, 2020	$	(695,967)	$	(38,527)	$	(598,835)	$	(1,333,329)

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.

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4. Recent Accounting Pronouncements

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”). The Company considers the applicability and impact of all ASUs and has determined that any recently adopted accounting pronouncements did not have a material impact on the Company's condensed consolidated financial statements and all recent accounting pronouncements not yet adopted are not applicable or are expected to have an immaterial impact on the Company's condensed consolidated financial statements.

5. Employee Benefit Plans

Net periodic benefit income from the Company's pension plans included the following components for the three months ended March 31:


	Pension Benefits
	2021		2020
Service cost	$	3,041	$	2,982
Interest cost	17,906		20,925
Expected return on plan assets	(38,732)		(38,523)
Amortization of prior service cost	172		173
Amortization of actuarial loss	12,456		11,122
Net periodic benefit income	$	(5,157)	$	(3,321)

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 (income) expense. Pension benefits also include amounts related to supplemental retirement plans.

6. 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 March 31, 2021, the Company was in compliance with all such covenants.

As of March 31, 2021, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $911,865. 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 March 31, 2021, 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.

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As of March 31, 2021, the Company has recognized certain assets and liabilities amounting to $82,000 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 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.

7. Accounts Receivable Sales Agreement

In 2020, the Company entered into an accounts receivable sales agreement (the “A/R Sales Agreement”) to sell short-term receivables from certain customer trade accounts to an unaffiliated financial institution on a revolving basis. 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 condensed consolidated financial statements.

The SPE transferred ownership and control of certain receivables that met certain qualifying conditions to the unaffiliated financial institution in exchange for cash. The Company accounts for transactions with the unaffiliated financial institution as sales of financial assets, with the associated receivables derecognized from the Company's condensed consolidated balance sheet. The remaining receivables held by the SPE were pledged to secure the collectability of the sold receivables. The amount of receivables pledged as collateral as of March 31, 2021 and December 31, 2020 is approximately $957,000 and $771,000, respectively.

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 agreement). The future amount of receivables outstanding as sold could decrease, based on the level of activity and other factors. Total principal amount outstanding of receivables sold is approximately $800,000 as of March 31, 2021 and December 31, 2020, respectively.

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


	Three Months Ended March 31,
	2021		2020
Receivables sold to the financial institution and derecognized	$	1,927,931	$	—
Cash collected on sold receivables	$	1,927,928	$	—

Upon entry into the A/R Sales Agreement, the Company received an initial benefit from cash from operations of approximately $800,000 in the year ended December 31, 2020. Continuous cash activity related to the A/R Sales Agreement is reflected in cash from operating activities in the condensed 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) expense 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 March 31, 2021 and 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.

8. Fair Value of Financial Instruments

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

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•Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions

As of March 31, 2021 the fair value of the Company's senior unsecured notes was approximately $2,617,989, 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. Refer to the Derivatives and Hedging footnote for further information.

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.

9. 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 and cash flows 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 flows 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.

Cash Flow Hedges

In 2020, the Company terminated its interest rate swaps and settled the outstanding balances through cash payments totaling $41,000. The remaining amount in AOCL is being amortized to interest expense on a straight-line basis over the remaining life of the previously hedged instrument.

Net Investment Hedges

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 AOCL within foreign currency translation and would only be reclassified to earnings if the European subsidiary were liquidated, or otherwise disposed.

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:


		March 31, 2021				December 31, 2020
Instrument	Balance Sheet Location	Notional		Balance		Notional		Balance
Net investment hedges:
Forward contracts	Prepaid expenses and other current assets	$	925,810	$	43,870	$	800,000	$	7,668
Forward contracts	Other current liabilities	$	235,180	$	11,556	$	360,990	$	19,442
Foreign currency debt	Long-term debt	€	700,000

SEC Form 10-Q filed by Genuine Parts Company