Genuine Parts (GPC) 10-K 2005 FY Annual report

EXHIBIT 13

Selected Financial Data

(in thousands, except per share data) Yearended December31,	2005		2004		2003			2002			2001
Net sales	$	9,783,050	$	9,097,267	$	8,449,300		$	8,258,927		$	8,220,668
Cost of goods sold		6,718,964		6,267,544		5,826,684			5,704,749			5,699,174	***
Selling, administrative and other expenses		2,355,022		2,193,804		2,050,873			1,948,442			1,951,559	***
Facility consolidation and impairment charges		—		—		—			—			73,922	***
Income before taxes and accounting change		709,064		635,919		571,743			605,736			496,013
Income taxes		271,630		240,367		218,101			238,236			198,866
Income before cumulative effect of a change in accounting principle		437,434		395,552		353,642			367,500			297,147
Cumulative effect of a change in accounting principle		—		—		19,541	*		395,090	**		—
Net income (loss)	$	437,434	$	395,552	$	334,101		$	(27,590	)	$	297,147
Average common shares outstanding during year - assuming dilution		175,007		175,660		174,480			175,104			173,633
Per common share:
Diluted net income, excluding cumulative effect	$	2.50	$	2.25	$	2.03		$	2.10		$	1.71	***
Diluted net income (loss)		2.50		2.25		1.91			(0.16	)		1.71
Dividends declared		1.25		1.20		1.18			1.16			1.14
December 31 closing stock price		43.92		44.06		33.20			30.80			36.70
Long-term debt, less current maturities		500,000		500,000		625,108			674,796			835,580
Shareholders’ equity		2,693,957		2,544,377		2,312,283			2,130,009			2,345,123
Total assets	$	4,771,538	$	4,455,247	$	4,127,956		$	4,061,055		$	4,206,646

*	The cumulative effect of a change in accounting principle in 2003 represents a non-cash charge related to cash consideration received from vendors in conjunction with the Financial Accounting Standards Board’s EITF 02-16. Had the Company accounted for vendor consideration in accordance with EITF 02-16 in prior years, there would have been no significant impact on net income (loss) and diluted net income (loss) per share for the years ended December 31, 2002 and 2001. In addition, in accordance with EITF 02-16, approximately $102 million was reclassified from selling, administrative and other expenses to cost of goods sold for the year ended December 31, 2003. Had the Company accounted for consideration received from vendors in accordance with EITF 02-16 in prior years, approximately $90 million and $111 million would have been reclassified from selling, administrative and other expenses to cost of goods sold for the years ended December 31, 2002 and 2001, respectively.
**	The cumulative effect of a change in accounting principle in 2002 represents a non-cash charge related to the impairment testing for goodwill in conjunction with the Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.” If the Company had applied the non-amortization provisions of Statement 142 for all periods presented, net income and diluted income per common share would have increased by approximately $11.9 million ($.07 per share) for the year ended December 31, 2001.
***	Facility Consolidation, Impairment and Other Charges (“2001 Charges”) totaled $107.8 million pre-tax in 2001 and $64.4 million after tax. The pre-tax charges include $17.4 million classified in cost of goods sold and $16.4 million classified in selling, administrative and other expenses. Diluted net income per common share before the 2001 Charges was $2.08.

Market and Dividend Information

High and Low Sales Price and Dividends per Common Share Traded on the New York Stock Exchange

	Sales Price of Common Shares
Quarter	2005				2004
	High		Low		High		Low
First	$	44.77	$	41.65	$	35.06	$	32.03
Second		44.50		40.81		40.20		32.65
Third		46.64		40.75		39.94		36.10
Fourth		45.70		41.40		44.32		36.51

	Dividends Declared Per Share
	2005		2004
First	$	0.3125	$	0.30
Second		0.3125		0.30
Third		0.3125		0.30
Fourth		0.3125		0.30

Number of Record Holders of Common Stock as of December 31, 2005: 7,187

13

Segment Data

(dollars in thousands) Year ended December 31,	2005			2004			2003			2002			2001
Net sales:
Automotive	$	5,013,460		$	4,739,261		$	4,477,508		$	4,335,362		$	4,252,913
Industrial		2,795,699			2,511,597			2,253,947			2,246,124			2,234,241
Office products		1,662,393			1,540,878			1,457,149			1,396,453			1,379,859
Electrical/electronic materials		341,513			335,605			297,618			315,826			387,771
Other		(30,015	)		(30,074	)		(36,922	)		(34,838	)		(34,116	)
Total net sales	$	9,783,050		$	9,097,267		$	8,449,300		$	8,258,927		$	8,220,668
Operating profit:
Automotive	$	398,494		$	396,015		$	363,022		$	381,771		$	378,162
Industrial		214,222			173,760			151,109			178,027			172,208
Office products		157,408			150,817			143,263			140,912			141,762
Electrical/electronic materials		17,470			14,611			7,112			2,756			3,229
Total operating profit		787,594			735,203			664,506			703,466			695,361
Interest expense, net		(29,564	)		(37,260	)		(51,538	)		(59,640	)		(59,416	)
Corporate expense		(45,299	)		(58,980	)		(37,121	)		(33,354	)		(27,670	)
Goodwill and intangible amortization		(396	)		(356	)		(1,539	)		(2,421	)		(14,333	)
Minority interests		(3,271	)		(2,688	)		(2,565	)		(2,315	)		(3,077	)
Facility consolidation and impairment charges		—			—			—			—			(94,852	)
Income before income taxes and accounting change	$	709,064		$	635,919		$	571,743		$	605,736		$	496,013
Assets:
Automotive	$	2,711,620		$	2,521,906		$	2,369,969		$	2,313,747		$	2,219,503
Industrial		976,903			955,029			957,735			982,951			867,716
Office products		722,813			681,992			621,523			581,203			538,468
Electrical/electronic materials		113,913			104,918			97,195			98,225			121,721
Corporate		183,572			133,730			23,506			26,224			17,160
Goodwill and intangible assets		62,717			57,672			58,028			58,705			442,078
Total assets	$	4,771,538		$	4,455,247		$	4,127,956		$	4,061,055		$	4,206,646
Depreciation and amortization:
Automotive	$	44,102		$	39,222		$	42,681		$	43,007		$	45,094
Industrial		8,345			8,972			10,265			10,789			11,992
Office products		9,551			10,245			10,639			9,856			9,345
Electrical/electronic materials		1,612			2,011			2,729			3,422			4,009
Corporate		1,523			1,401			1,160			656			1,020
Goodwill and intangible amortization		396			356			1,539			2,421			14,333
Total depreciation and amortization	$	65,529		$	62,207		$	69,013		$	70,151		$	85,793
Capital expenditures:
Automotive	$	68,062		$	52,263		$	58,754		$	38,599		$	26,766
Industrial		5,695			3,922			6,824			10,868			6,388
Office products		8,893			12,354			7,211			13,376			5,941
Electrical/electronic materials		1,550			1,552			394			224			2,466
Corporate		1,514			1,986			721			1,691			383
Total capital expenditures	$	85,714		$	72,077		$	73,904		$	64,758		$	41,944
Net sales:
United States	$	8,768,737		$	8,198,368		$	7,666,389		$	7,568,926		$	7,526,631
Canada		954,317			845,563			731,200			623,686			629,330
Mexico		90,011			83,410			88,633			101,153			98,823
Other		(30,015	)		(30,074	)		(36,922	)		(34,838	)		(34,116	)
Total net sales	$	9,783,050		$	9,097,267		$	8,449,300		$	8,258,927		$	8,220,668
Net long-lived assets:
United States	$	388,916		$	368,345		$	339,020		$	339,495		$	579,635
Canada		62,842			65,649			57,906			47,522			182,041
Mexico		3,254			3,066			4,094			4,739			25,534
Total net long-lived assets	$	455,012		$	437,060		$	401,020		$	391,756		$	787,210

14

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2005

OVERVIEW

Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. The Company has a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. In 2005, business was conducted throughout the United States, in Canada and in Mexico from approximately 1,900 locations.

We recorded consolidated net income of $437 million for the year ended December 31, 2005, up 11% from a record $396 million in 2004. The combination of a healthy national economy, positive trends in the industries we serve and the success of our on-going internal initiatives allowed us to achieve another record level of sales and earnings in 2005. All four of our business segments contributed to our achievement, with each showing gains in revenues and profits.

Our record results in 2004 and 2005 followed the challenge of operating in a slow economy over the three years preceding 2004. During this period, the Company countered the economy’s negative impact on our businesses by implementing a variety of programs, including the introduction of new product lines, sales to new markets and cost savings initiatives. As the economic conditions began to improve in late 2003, we were well positioned for more growth in each of our business segments.

During 2003, we recorded a charge to earnings as a result of a change in accounting principle relating to cash consideration received from vendors. The change, discussed further under “Net Income” below, had no impact on our operating results and no cash implications for us. Our results also depend on the effect of certain accounting assumptions and estimates, which are discussed under “Critical Accounting Estimates” below.

The major December 31, 2005 consolidated balance sheet categories, with the exception of our improved cash position and accounts payable balance, were relatively consistent with the December 31, 2004 balance sheet categories. The Company’s cash balances increased $54 million or 40% from December 31, 2004, due primarily to improved operating results and improved payment terms with certain vendors. These extended payment terms also explain our increase in accounts payable. Accounts receivable grew 6%, which is less than our increase in revenues, and inventory was up less than 1%. Total debt outstanding at December 31, 2005 was unchanged from December 31, 2004.

RESULTS OF OPERATIONS

The Company’s results of operations are summarized for the three years ended December 31, 2005, 2004 and 2003.

	(in thousands, except per share data)
Year ended December 31,	2005		2004		2003
Net Sales	$	9,783,050	$	9,097,267	$	8,449,300
Gross Profit		3,064,086		2,829,723		2,622,616
Income before Cumulative Effect of a Change in Accounting Principle		437,434		395,552		353,642
Cumulative Effect of a Change in Accounting Principle		—		—		(19,541	)
Net Income		437,434		395,552		334,101
Diluted Earnings Per Share:
Before Change in Accounting Principle		2.50		2.25		2.03
After Change in Accounting Principle		2.50		2.25		1.91

Net Sales

Net sales for the year ended December 31, 2005 totaled $9.8 billion, a record sales level for the Company and an 8% increase from 2004. All of the business segments contributed to our sales growth for the year, as our internal initiatives, healthy economy and positive trends in the industries we serve enhanced the sales volume in each of our four groups. Prices were up approximately 2% in the Automotive segment, 3% in the Office and Electrical segments and 6% in the Industrial segment in 2005. Net sales for the year ended December 31, 2004 totaled $9.1 billion, an 8% increase from 2003. In 2004, we experienced improved economic conditions relative to the prior few years, and this favorably impacted the sales volume in each of our four groups. In 2004, prices were up approximately 1% in the Automotive, Office and Electrical segments, and pricing in the Industrial segment increased 5%.

Automotive Group

Net sales for the Automotive Group (“Automotive”) were $5.0 billion in 2005, an increase of 6% over 2004. Among the quarters, sales increases over the same period of the prior year ranged from an increase of 4% in the first quarter to 8% in the third quarter, our strongest period for the year. The continued effectiveness of our growth initiatives in this group, as well as positive industry trends, helped produce these results. Stronger growth in our core NAPA operations was offset by a decrease in sales at Johnson Industries, where we sold eight of twelve operations during the year. Automotive sales were $4.7 billion in 2004, an increase of 6% over 2003. The 2004 sales increase was due to factors which enhanced sales volume, and this was Automotive’s largest percentage sales growth in several years. We were pleased to match that level of increase in 2005.

Industrial Group

Net sales for Motion Industries, our Industrial Group (“Industrial”), were $2.8 billion in 2005, an 11% increase compared to 2004. Our sales volume has been strong in the Industrial operations for the past two years, and in 2005, this group had double-digit growth in each quarter except in the fourth quarter when sales increased 9%. U.S. industrial production and capacity utilization indices showed continued strength for the manufacturing sector during the year, and based on current indices, the outlook is positive for this sector in 2006. Industrial sales were $2.5 billion in 2004, an 11% increase over 2003. Improved economic conditions across our industrial customer base in 2004 helped to significantly improve our growth opportunities relative to the prior few years, when weak conditions were pervasive in the markets served by Industrial. As a result, we benefited from a combination of price increases common in the industry as well as stronger sales volume.

Office Group

Net sales for S.P. Richards, our Office Products Group (“Office”), were $1.7 billion, up 8% over 2004. This represents a solid increase for the Office group and reflects the success of its product and customer expansion strategy. Among the quarters, revenues grew stronger over the year, with sales increasing 6% in the first quarter, 8% in the second and third quarters and 10% in the fourth quarter. Office sales were $1.5 billion in 2004, up 6% over 2003. For 2004, sales increases resulting from improved sales volume in the office furniture category and at our Canadian operations helped lead Office to its strongest growth in several years. We were pleased to achieve even greater growth in 2005.

Electrical Group

Net sales for EIS, our Electrical and Electronic Group (“Electrical”), were up 2% to $342 million in 2005. Electrical’s strongest performance was in the fourth quarter, after generally flat results over the first three quarters of the year. EIS sold its Circuit Supply division in April of 2005, which impacted its overall growth rate. The ongoing Electrical operations were up 9% for the year, reflecting the continued strength

15

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

in the manufacturing sector, which began to show improvement late in 2003. Electrical sales were $336 million in 2004, up 13% over 2003 due to increased sales volume. This was the best performance for Electrical in several years, as this group operated in a difficult economic environment during the three years preceding 2004.

Cost of Goods Sold/Expenses

Cost of goods sold in 2005 was $6.7 billion or 68.7% of net sales compared to $6.3 billion or 68.9% in 2004. Selling, administrative and other expenses (“SG&A”) increased to $2.4 billion in 2005, remaining constant at 24.1% of sales compared to last year. The decrease in cost of goods sold as a percent of net sales reflects our ongoing efforts to improve our gross margins. Each of our business segments experienced vendor price increases in 2005, and by working with our customers we were able to pass some of these along to them. In addition, initiatives to enhance our pricing strategies, promote and sell higher margin products, and minimize material acquisition costs have helped us to reduce our cost of goods sold as a percentage of sales in each of the last two years. These initiatives were initially developed to offset the usual competitive pricing pressures as well as lower levels of vendor discounts and volume incentives earned over the last few years, especially in Industrial. Our SG&A expenses as a percent of net sales reflect cost savings associated with our tight controls over most operating expenses, offset by the effect of increasing costs in certain areas such as employee benefits, insurance and legal and professional expenses. Our cost management initiatives include continuous improvement programs designed to optimize our utilization of people and systems.

Cost of goods sold was $6.3 billion or 68.9% of net sales in 2004 compared to $5.8 billion or 69.0% in 2003. SG&A expenses of $2.2 billion were 24.1% of net sales in 2004 compared to $2.1 billion or 24.3% in 2003. The slight decrease in cost of goods sold as a percent of net sales was the result of our initiatives developed to improve our gross margins. Our gross margin trend improved over the year but did not reflect a gain until the fourth quarter of 2004. We were pleased with the success of our initiatives and the progress made in this area during the year. The decrease in SG&A expenses as a percent of net sales in 2004 reflected our on-going cost savings initiatives.

Operating Profit

Operating profit was $788 million in 2005, an increase of 7.1% from $735 million in 2004. Operating profit as a percentage of net sales, which we refer to as operating margin, was 8.1% in 2005, reflecting no change from 2004. The benefits of our overall improvement in gross margin and SG&A expense as a percentage of net sales were offset by specific margin pressures in Automotive, as discussed below. Without these concerns, the Company would have achieved greater operating profit in 2005. We remain optimistic that our margins will show improvement in the year ahead. Operating profit as a percentage of net sales was 8.1% in 2004 compared to 7.9% in 2003. These results reflected the improvement in our net sales, gross margins and SG&A expenses as a percentage of sales.

Automotive Group

Automotive operating margins decreased to 7.9% in 2005 from 8.4% in 2004. Despite showing progress in our core NAPA operations, Automotive was challenged with specific issues associated with Johnson Industries and our re-manufacturing operations. At Johnson Industries, we sold or closed eight of twelve locations during the year, resulting in selling and closure costs. Within our re-manufacturing operations, we made some price adjustments to certain product lines to drive sales growth, and this resulted in lower margins for this group relative to the prior year. We consider these issues to be a 2005 concern and in consideration of the gains in our core NAPA operations, we believe our Automotive operating margins will show improvement in the year ahead. Automotive operating margins increased to 8.4% in 2004 from 8.1% in 2003, primarily due to the impact on net sales of positive industry trends and improved economic conditions, in addition to the success of our internal initiatives.

Industrial Group

Industrial operating margins increased to 7.7% in 2005 from 6.9% in 2004. This was the strongest margin gain among our business segments and reflects the success of our sales and operating initiatives, as well as the ongoing strength in the industries served by Industrial. Industrial operating margins increased to 6.9% in 2004 from 6.7% in 2003, primarily due to the improved conditions across Industrial’s customer base and the benefits of internal operating and other cost initiatives. The progress in 2004 was partially offset by factors such as a decrease in vendor discounts and volume incentives relative to the prior year.

Office Group

Operating margins in Office were 9.5% in 2005, down from 9.8% in 2004. The success of this Group’s product and customer expansion strategy was offset by pricing pressures, which resulted in the decrease in operating margin in 2005. Office operating margins were 9.8% in both 2004 and 2003. Office maintained its margins in 2004 through initiatives to positively influence the customer and product mix of sales, as well as further improve its marketing programs and dealer services offered to customers.

Electrical Group

Operating margins in Electrical increased to 5.1% in 2005 from 4.4% in 2004. Electrical growth reflects the continued strength in the manufacturing sector of the economy, combined with Electrical’s successful growth strategy. Electrical increased its operating margins to 4.4% in 2004 from 2.4% in 2003, primarily due to an increase in sales to the manufacturing sector, as well as continued focus on enhancing gross margins and controlling costs.

Income Taxes

The effective income tax rate increased to 38.3% in 2005 from 37.8% in 2004. The increase in 2005 is primarily due to higher state income taxes in the current year and favorable non-recurring items in the prior year. The effective income tax rate decreased to 37.8% in 2004 from 38.1% in 2003, primarily due to favorable permanent tax differences, lower state income taxes and the utilization of foreign tax credits.

In the fourth quarter 2005, the Company completed its evaluation of the repatriation provisions of the American Jobs Creation Act of 2004. Based on this evaluation, no funds were repatriated in 2005.

16

Net Income

Net income was $437 million in 2005, up 11% from $396 million in 2004, and on a per share diluted basis, net income was $2.50 in 2005 compared to $2.25 in 2004. Net income in 2005 was 4.5% of net sales compared to 4.3% in 2004.

Net income of $396 million in 2004 was up 12% from $354 million in 2003 before the cumulative effect of an accounting change adopted January 1, 2003. On a per share diluted basis, net income was $2.25 in 2004 compared to $2.03 in 2003 before the cumulative effect adjustment. After the 2003 cumulative effect adjustment, net income in 2004 was up 18% from $334 million, or $1.91 diluted earnings per share in 2003. Net income in 2004 was 4.3% of net sales compared to 4.2% in 2003 before the cumulative effect adjustment, and 4.0% of net sales in 2003 after the cumulative effect adjustment.

FINANCIAL CONDITION

The major consolidated balance sheet categories at December 31, 2005, with the exception of the accounts discussed below, were relatively consistent with the December 31, 2004 balance sheet categories. The Company’s cash balances increased $54 million or 40% from December 31, 2004, primarily due to improved operating results and improved payment terms with certain vendors. Our accounts receivable balance at December 31, 2005 increased 6% compared to last year, primarily due to our December sales increase. Inventory increased less than 1% from December 31, 2004, reflecting our continued emphasis on inventory management. Prepaid expenses and other current assets increased $39 million or 22% from December 31, 2004, reflecting the increase in receivables due from vendors. Other assets at December 31, 2005 increased $125 million or 32% due primarily to contributions to company sponsored defined benefit plans. Accounts payable at December 31, 2005 increased $117 million or 14% from December 31, 2004 due to the Company’s increased purchases associated with increased sales volume, as well as improved payment terms with certain vendors.

LIQUIDITY AND CAPITAL RESOURCES

The ratio of current assets to current liabilities was 3.0 to 1 at December 31, 2005, and the Company’s cash position improved significantly from December 31, 2004. The Company had $501 million in total debt outstanding at December 31, 2005 and 2004.

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

	Year Ended December 31,									Percent Change
	(in thousands)									2005 vs.			2004 vs.
Net Cash Provided by (Used in):	2005			2004			2003			2004			2003
Operating Activities	$	440,517		$	555,236		$	402,185			-21	%		38	%
Investing Activities		(70,174	)		(67,955	)		(75,275	)		3	%		-10	%
Financing Activities		(317,469	)		(369,328	)		(330,640	)		-14	%		12	%

Net Cash Provided by Operating Activities:

The Company continues to generate excellent cash flows, with $441 million in cash from operations in 2005. Despite an increase in net income in 2005, the 2005 operating cash flows decreased from 2004 primarily due to an increase of $70 million in contributions into company sponsored defined benefit plans. In addition, the Company’s extended term negotiations and other working capital improvements in 2004 were especially favorable for operating cash flows in that year. This, as well as the growth in net income in 2004 from 2003, also explains the increase in cash from operations in 2004 compared to 2003. The Company believes existing credit facilities and cash generated from operations will be sufficient to fund future operations, and to meet its short-term and long-term cash requirements.

Net Cash Used in Investing Activities:

Cash flow used in investing activities was $70 million in 2005 and has remained relatively consistent for each of the three years ending December 31, 2005, 2004 and 2003. In 2005, capital expenditures were $86 million, and the Company expects capital expenditures to approximate this level in the foreseeable future.

Net Cash Used in Financing Activities:

The Company used $317 million in financing activities in 2005, primarily for dividends to shareholders and the repurchase of the Company’s common stock. During 2004 and 2003, the primary financing activities were the dividends and repayment of borrowings. The Company paid dividends to shareholders of $216 million, $209 million, and $205 million during 2005, 2004, and 2003, respectively. The Company expects this trend of increasing dividends to continue in the foreseeable future. While no borrowings were repaid in 2005, the Company repaid variable rate borrowings of approximately $177 million and $113 million in 2004 and 2003, respectively. Long-term debt of $500 million at December 31, 2005 is comprised of two $250 million term notes with a consortium of financial and insurance institutions due in 2008 and 2010. The Company does not anticipate repaying these notes prior to their scheduled expiration. During 2005, the Company repurchased $119 million in Company stock as compared to repurchases of $21 million and $18 million in 2004 and 2003, respectively. We plan to remain active in our share repurchase program, but the amount and value of shares repurchased will vary annually. The increasing dividends and fluctuations in cash used for the reduction of debt and share repurchases primarily explain the changes in cash used for financing activities in 2005, 2004 and 2003.

Notes and Other Borrowings

The Company maintains a $350 million unsecured revolving line of credit with a consortium of financial institutions which matures in October 2008 and bears interest at LIBOR plus .25% (4.61% at December 31, 2005). At December 31, 2005 and 2004, no amounts were outstanding under the line of credit.

At December 31, 2005, the Company had unsecured Senior Notes outstanding under a $500 million financing arrangement as follows: $250 million, Series A, 5.86% fixed, due 2008; and $250 million, Series B, 6.23% fixed, due 2011 and approximately $1 million in other borrowings. Certain borrowings contain covenants related to a maximum debt-to-equity ratio, a minimum fixed-charge coverage ratio, and certain limitations on additional borrowings. At December 31, 2005, the Company was in compliance with all such covenants. The weighted average interest rate on the Company’s outstanding borrowings was approximately 6.05% at December 31, 2005 and 2004. Total interest expense for all borrowings was $29.6 million and $37.3 million in 2005 and 2004, respectively.

17

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Construction and Lease Facility

The Company also has an $85 million construction and lease facility. Properties acquired by the lessor are constructed and then leased to the Company under operating lease agreements. The total amount advanced and outstanding under this facility at December 31, 2005 was approximately $84 million. Since the resulting leases are operating leases, no debt obligation is recorded on the Company’s balance sheet. This construction and lease facility expires in 2008. Lease payments fluctuate based upon current interest rates and are generally based upon LIBOR plus .50%. The lease facility contains residual value guarantee provisions and guarantees under events of default. Although management believes the likelihood of funding to be remote, the maximum guarantee obligation, which represents our residual value guarantee, under the construction and lease facility is approximately $73 million at December 31, 2005.

Contractual and Other Obligations

The following table shows the Company’s approximate obligations and commitments, excluding interest due on credit facilities, to make future payments under contractual obligations as of December 31, 2005:

	PAYMENT DUE BY PERIOD
			Less than						Over
(in thousands)	Total		1 year		1-3 years		4-5 years		5 years
Credit facilities	$	500,881	$	881	$	250,000	$	—	$	250,000
Capital leases		27,376		3,537		7,105		6,672		10,062
Operating leases		475,118		134,530		179,433		81,459		79,696
Total Contractual Cash Obligations	$	1,003,375	$	138,948	$	436,538	$	88,131	$	339,758

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

As discussed in ‘Construction and Lease Facility’ above, the Company has approximately $84 million outstanding under a construction and lease facility which expires in 2008. In addition, the Company guarantees the borrowings of certain independently controlled automotive parts stores (independents) and certain other affiliates in which the Company has a minority equity ownership interest (affiliates). The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is equal to the total borrowings subject to the Company’s guarantee. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings. The following table shows the Company’s approximate commercial commitments under these two arrangements as of December 31, 2005:

	PAYMENT DUE BY PERIOD
	Total
	Amounts		Less than		1-3		4-5		Over
(in thousands)	Committed		1 year		years		years		5 years
Guaranteed borrowings of independents and affiliates	$	175,832	$	40,871	$	22,039	$	14,646	$	98,276
Residual value guarantee under operating leases		72,640		—		—		72,640		—
Total commercial commitments	$	248,472	$	40.871	$	22,039	$	87,286	$	98,276

In addition, the Company sponsors defined benefit pension plans that may obligate us to make contributions to the plans from time to time. Contributions in 2005 were $134 million. We expect to make a cash contribution to our qualified defined benefit plans in 2006, and contributions required for 2007 and future years will depend on a number of unpredictable factors including the market performance of the plans’ assets and future changes in interest rates that affect the actuarial measurement of the plans’ obligations.

Share Repurchases

On April 19, 1999, our Board of Directors authorized the repurchase of 15 million shares of our common stock. Through December 31, 2005, approximately 12 million shares have been repurchased under this authorization.

CRITICAL ACCOUNTING ESTIMATES

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements. For further information on the critical accounting policies, see Note 1 of the notes to our consolidated financial statements.

18

Inventories — Provisions for Slow Moving and Obsolescence

The Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions related thereto. Historically, these loss provisions 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.

Allowance for Doubtful Accounts — Methodology

The Company evaluates the collectibility of accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is periodically adjusted 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, 2005, 2004 and 2003, the Company recorded provisions for bad debts of $16.4 million, $20.7 million and $23.8 million, respectively.

Consideration Received from Vendors

The Company enters into agreements at the beginning of each year with many of its vendors providing for inventory purchase incentives and advertising allowances. Generally, the Company earns inventory purchase incentives upon achieving specified volume purchasing levels and advertising allowances upon fulfilling its obligations related to cooperative advertising programs. The Company accrues for the receipt of inventory purchase 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 and, in the case of advertising allowances, upon completion of the Company’s obligations related thereto. While management believes the Company will continue to receive such amounts in 2006 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives and allowances in the future.

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

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

Employee Benefit Plans

The Company’s benefit plan committees in the U.S. and Canada establish investment policies and strategies and regularly monitor the performance of the funds. 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 and fiduciary standards. The long-term primary objectives for the pension plan 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 plan’s actuarially assumed long term rate of return.

Based on the investment policy for the U.S. pension plan, 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 2006 pension expense or income is 8.25% for the U.S. plan. The asset study forecasted expected rates of return for the approximate duration of the Company’s benefit obligations, using capital market data and historical relationships.

The discount rate is chosen as the rate at which pension obligations could be effectively settled and is based on capital market conditions as of the measurement date. We have matched the timing and duration of the expected cash flows of our pension obligations to a yield curve generated from a broad portfolio of high-quality fixed income debt instruments to select our discount rate. Based upon this cash flow matching analysis, we selected a discount rate for the U.S. plan of 5.75% at December 31, 2005.

Net periodic cost for our defined benefit pension plans was $32.4 million, $26.4 million, and $17.7 million for the years ended December 31, 2005, 2004 and 2003, respectively. The increasing trend in pension cost over these periods was due to the change in assumptions for the rate of return on plan assets and the discount rate. These expenses are included in SG&A expenses.

QUARTERLY RESULTS OF OPERATIONS

The preparation of interim consolidated financial statements requires management to make estimates and assumptions for the amounts reported in the interim condensed consolidated financial statements. Specifically, the Company makes certain estimates in its interim consolidated financial statements for the accrual of bad debts, inventory adjustments and discounts and volume incentives earned. Bad debts are accrued based on a percentage of sales, and volume incentives are estimated based upon cumulative and projected purchasing levels. Inventory adjustments are accrued on an interim basis and adjusted in the fourth quarter based on the annual October 31 book-to-physical inventory adjustment. The methodology and practices used in deriving estimates for interim reporting typically result in adjustments upon accurate determination at year-end. The effect of these adjustments in 2005 and 2004 was not significant.

19

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The following is a summary of the quarterly results of operations for the years ended December 31, 2005 and 2004:

			Three Months Ended
	March 31,		June 30,		Sept. 30,		Dec. 31,
	(in thousands except per share data)
2005
Net Sales	$	2,342,201	$	2,475,657	$	2,555,503	$	2,409,689
Gross Profit		736,480		761,257		778,502		787,847
Net Income		106,598		110,967		110,876		108,993
Diluted Earnings Per Share:		.61		.63		.63		.63
2004
Net Sales	$	2,196,991	$	2,297,686	$	2,349,283	$	2,253,307
Gross Profit		686,911		693,065		699,393		750,354
Net Income		100,199		101,146		97,893		96,314
Diluted Earnings Per Share:		.57		.58		.56		.55

FORWARD-LOOKING STATEMENTS

Some statements in this report constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cautions that its forward-looking statements involve risks and uncertainties. The Company undertakes no duty to update its forward-looking statements, which reflect the Company’s beliefs, expectations and plans as of the present time. Actual results or events may differ materially from those indicated as a result of various important factors. Such factors include, but are not limited to, changes in general economic conditions, the growth rate of the market for the Company’s products and services, the ability to maintain favorable supplier arrangements and relationships, competitive product and pricing pressures, including internet related initiatives, the effectiveness of the Company’s promotional, marketing and advertising programs, changes in laws and regulations, including changes in accounting and taxation guidance, the uncertainties of litigation, as well as other risks and uncertainties discussed from time to time in the Company’s filings with the Securities and Exchange Commission. In particular, see “Item 1A. Risk Factors” in our 2005 Annual Report on Form 10-K. Readers are cautioned that other factors not listed here, in such Form 10-K or in our other Securities and Exchange Commission filings could materially impact the Company’s future earnings, financial position and cash flows. You should not place undue reliance upon forward-looking statements contained herein, and you should carefully read the other reports that the Company will, from time to time, file with the Securities and Exchange Commission.

20

REPORT OF MANAGEMENT

Genuine Parts Company

Management’s Responsibility for the Financial Statements

We have prepared the accompanying consolidated financial statements and related information included herein for the years ended December 31, 2005, 2004 and 2003. The opinion of Ernst & Young LLP, the Company’s independent registered public accounting firm, on those consolidated financial statements is included herein. The primary responsibility for the integrity of the financial information included in this annual report rests with management. Such information was prepared in accordance with generally accepted accounting principles appropriate in the circumstances based on our best estimates and judgments and giving due consideration to materiality.

Management’s Report on Internal Control over Financial Reporting

The management of Genuine Parts Company and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.

The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and to the board of directors regarding the preparation and fair presentation of the Company’s published financial statements. The Company’s internal control over financial reporting includes those policies and procedures that:

i.	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
ii.	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
iii.	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on this assessment, management concluded that, as of December 31, 2005, the Company’s internal control over financial reporting was effective.

Ernst & Young LLP has issued an audit report on our assessment of the Company’s internal control over financial reporting and the operating effectiveness of internal control over financial reporting as of December 31, 2005. This report appears on page 22.

Audit Committee Responsibility

The Audit Committee of Genuine Parts Company’s Board of Directors is responsible for reviewing and monitoring the Company’s financial reports and accounting practices to ascertain that they are within acceptable limits of sound practice in such matters. The membership of the Committee consists of non-employee Directors. At periodic meetings, the Audit Committee discusses audit and financial reporting matters and the internal audit function with representatives of financial management and with representatives from Ernst & Young LLP.

JERRY W. NIX
Vice Chairman and Chief Financial Officer
March 1, 2006

21

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors
Genuine Parts Company

We have audited management’s assessment, included in the accompanying Report of Management, that Genuine Parts Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Genuine Parts Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Genuine Parts Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Genuine Parts Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Genuine Parts Company and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005, and our report dated March 1, 2006 expressed an unqualified opinion thereon.

March 1, 2006
Atlanta, Georgia

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE FINANCIAL STATEMENTS

Board of Directors
Genuine Parts Company

We have audited the accompanying consolidated balance sheets of Genuine Parts Company and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genuine Parts Company and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1, effective January 1, 2003, the Company adopted Emerging Issues Task Force Issue No. 02-16,Accounting by a Customer (Including a Reseller) for Certain Consideration Received fromaVendor.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Genuine Parts Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2006, expressed an unqualified opinion thereon.

March 1, 2006
Atlanta, Georgia

22

Consolidated Balance Sheets

(dollars in thousands) December 31,	2005		2004
Assets
Current assets:
Cash and cash equivalents	$	188,911	$	134,940
Trade accounts receivable, net		1,186,865		1,123,900
Merchandise inventories, net		2,216,542		2,198,957
Prepaid expenses and other assets		214,564		175,687
Total current assets		3,806,882		3,633,484
Goodwill and intangible assets, less accumulated amortization		62,717		57,672
Other assets		509,644		384,703
Property, plant and equipment:
Land		52,335		46,251
Buildings, less allowance for depreciation (2005 - $133,950; 2004 - $125,104)		147,061		151,895
Machinery and equipment, less allowance for depreciation (2005 - $403,294; 2004 - $397,124)		192,899		181,242
Net property, plant and equipment		392,295		379,388
	$	4,771,538	$	4,455,247
Liabilities and Shareholders’ Equity
Current liabilities:
Trade accounts payable	$	973,615	$	856,653
Other borrowings		881		968
Accrued compensation		99,402		96,337
Other accrued expenses		84,760		83,330
Dividends payable		54,150		52,495
Income taxes payable		36,296		42,932
Total current liabilities		1,249,104		1,132,715
Long-term debt		500,000		500,000
Deferred income taxes		156,807		115,683
Minority interests in subsidiaries		57,047		52,394
Other long-term liabilities		114,623		110,078
Shareholders’ 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 173,032,697 in 2005 and 174,964,884 shares in 2004		173,033		174,965
Additional paid-in capital		—		56,571
Accumulated other comprehensive income		45,535		26,478
Retained earnings		2,475,389		2,286,363
Total shareholders’ equity		2,693,957		2,544,377
	$	4,771,538	$	4,455,247

Seeaccompanying notes.

23

Consolidated Statements of Income

(in thousands, except per share data) Year ended December 31,	2005		2004		2003
Net sales	$	9,783,050	$	9,097,267	$	8,449,300
Cost of goods sold		6,718,964		6,267,544		5,826,684
		3,064,086		2,829,723		2,622,616
Selling, administrative and other expenses		2,355,022		2,193,804		2,050,873
Income before income taxes and cumulative effect of a change in accounting principle		709,064		635,919		571,743
Income taxes		271,630		240,367		218,101
Income before cumulative effect of a change in accounting principle		437,434		395,552		353,642
Cumulative effect of a change in accounting principle		—		—		(19,541	)
Net income	$	437,434	$	395,552	$	334,101
Basic net income per common share:
Before cumulative effect of a change in accounting principle	$	2.51	$	2.26	$	2.03
Cumulative effect of a change in accounting principle		—		—		(0.11	)
Basic net income	$	2.51	$	2.26	$	1.92
Diluted net income per common share:
Before cumulative effect of a change in accounting principle	$	2.50	$	2.25	$	2.03
Cumulative effect of a change in accounting principle		—		—		(0.12	)
Diluted net income	$	2.50	$	2.25	$	1.91
Weighted average common shares outstanding		174,054		174,687		173,995
Dilutive effect of stock options and non-vested restricted stock awards		953		973		485
Weighted average common shares outstanding — assuming dilution		175,007		175,660		174,480

Seeaccompanying notes.

24

Consolidated Statements of Shareholders’ Equity

							Additional			Accumulated Other						Total
	Common Stock						Paid-in			Comprehensive			Retained			Shareholders’
(dollars in thousands, except per share data)	Shares			Amount			Capital			Income (Loss)			Earnings			Equity
Balance at January 1, 2003		174,380,634		$	174,381		$	44,371		$	(60,522	)	$	1,971,779		$	2,130,009
Net income		—			—			—			—			334,101			334,101
Foreign currency translation adjustment		—			—			—			54,864			—			54,864
Changes in fair value of derivative instruments, net of income taxes of $6,990		—			—			—			10,493			—			10,493
Comprehensive income																	399,458
Cash dividends declared, $1.18 per share		—			—			—			—			(205,330	)		(205,330	)
Stock options exercised, including tax benefit of $1,256		280,821			280			5,575			—			—			5,855
Purchase of stock		(616,192	)		(616	)		(17,093	)		—			—			(17,709	)
Balance at December 31, 2003		174,045,263			174,045			32,853			4,835			2,100,550			2,312,283
Net income		—			—			—			—			395,552			395,552
Foreign currency translation adjustment		—			—			—			27,202			—			27,202
Changes in fair value of derivative instruments, net of income taxes of $1,764		—			—			—			2,786			—			2,786
Change in minimum pension liability, net of income taxes of $5,079		—			—			—			(8,345	)		—			(8,345	)
Comprehensive income																	417,195
Cash dividends declared, $1.20 per share		—			—			—			—			(209,739	)		(209,739	)
Stock options exercised, including tax benefit of $6,073		1,498,002			1,498			42,097			—			—			43,595
Stock based compensation		—			—			2,518			—			—			2,518
Purchase of stock		(578,381	)		(578	)		(20,897	)		—			—			(21,475	)
Balance at December 31, 2004		174,964,884			174,965			56,571			26,478			2,286,363			2,544,377
Net income		—			—			—			—			437,434			437,434
Foreign currency translation adjustment		—			—			—			14,351			—			14,351
Changes in fair value of derivative instruments, net of income taxes of $2,041		—			—			—			3,372			—			3,372
Change in minimum pension liability. net of income taxes of $(258)		—			—			—			1,334			—			1,334
Comprehensive income																	456,491
Cash dividends declared, $1.25 per share		—			—			—			—			(217,523	)		(217,523	)
Stock options exercised, including tax benefit of $5,242		852,745			853			22,114			—			—			22,967
Stock based compensation		—			—			6,884			—			—			6,884
Purchase of stock		(2,784,932	)		(2,785	)		(85,569	)		—			(30,885	)		(119,239	)
Balance at December 31, 2005		173,032,697		$	173,033		$	—		$	45,535		$	2,475,389		$	2,693,957

Seeaccompanying notes.

25

Consolidated Statements of Cash Flows

(dollars in thousands) Year ended December 31,		2005			2004		2003
Operating activities
Net income	$	437,434		$	395,552		$	334,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		65,529			62,207			69,013
Gain on sale of property, plant and equipment		(2,675	)		(1,656	)		(5,210	)
Deferred income taxes		43,935			19,670			27,354
Cumulative effect of a change in accounting principle		—			—			19,541
Minority interests		3,271			2,688			2,565
Stock based compensation		12,126			8,590			1,254
Changes in operating assets and liabilities:
Trade accounts receivable, net		(59,949	)		(33,370	)		(21,735	)
Merchandise inventories, net		(19,869	)		(28,406	)		20,232
Trade accounts payable		112,087			143,456			(43,230	)
Other long-term assets		(118,358	)		(60,147	)		(4,189	)
Other, net		(33,014	)		46,652			2,489
		3,083			159,684			68,084
Net cash provided by operating activities		440,517			555,236			402,185
Investing activities
Purchases of property, plant and equipment		(85,714	)		(72,077	)		(73,904	)
Proceeds from sale of property, plant and equipment		7,110			7,140			13,619
Acquisition of businesses and other investments		(27,518	)		(3,018	)		(14,990	)
Proceeds from disposal of businesses		35,948			—			—
Net cash used in investing activities		(70,174	)		(67,955	)		(75,275	)
Financing activities
Proceeds from credit facilities		113,432			555,848			935,000
Payments on credit facilities		(113,519	)		(732,649	)		(1,047,976	)
Stock options exercised		17,725			37,523			4,601
Dividends paid		(215,868	)		(208,575	)		(204,556	)
Purchase of stock		(119,239	)		(21,475	)		(17,709	)
Net cash used in financing activities		(317,469	)		(369,328	)		(330,640	)
Effect of exchange rate changes on cash		1,097			1,594			(872	)
Net increase (decrease) in cash and cash equivalents		53,971			119,547			(4,602	)
Cash and cash equivalents at beginning of year		134,940			15,393			19,995
Cash and cash equivalents at end of year	$	188,911		$	134,940		$	15,393
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes	$	235,384		$	205,148		$	205,451
Interest	$	29,084		$	38,714		$	49,807

Seeaccompanying notes.

26

Notes to Consolidated Financial Statements
December 31, 2005

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Genuine Parts Company and all of its majority-owned subsidiaries (the Company) is a distributor of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. The Company serves a diverse customer base through more than 1,900 locations in North America 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.

Principles of Consolidation

The consolidated financial statements include all of the accounts of the Company. Income applicable to minority interests is included in selling, administrative and other expenses. Significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States 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.

Revenue Recognition

The Company recognizes revenues from product sales upon shipment to its customers.

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 income.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash and cash equivalents.

Trade Accounts Receivable and the Allowance for Doubtful Accounts

The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is periodically adjusted 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, 2005, 2004, and 2003, the Company recorded provisions for bad debts of approximately $16,356,000, $20,697,000, and $23,800,000, respectively. At December 31, 2005 and 2004, the allowance for doubtful accounts was approximately $11,386,000 and $12,793,000, respectively.

Merchandise Inventories, including Consideration Received from Vendors

Merchandise inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for a majority of automotive parts, electrical/electronic materials, and industrial parts, and by the first-in, first-out (FIFO) method for office products and certain other inventories. If the FIFO method had been used for all inventories, cost would have been approximately $272,631,000 and $226,914,000 higher than reported at December 31, 2005 and 2004, 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.

The Company enters into agreements at the beginning of each year with many of its vendors providing for inventory purchase incentives and advertising allowances. Generally, the Company earns inventory purchase incentives and advertising allowances upon achieving specified volume purchasing levels or other criteria. The Company accrues for the receipt of inventory purchase incentives and advertising allowances as part of its inventory cost based on cumulative purchases of inventory to date and projected inventory purchases through the end of the year, or, in the case of specific advertising allowances, upon completion of the Company’s obligations related thereto. While management believes the Company will continue to receive consideration from vendors in 2006 and beyond, there can be no assurance that vendors will continue to provide comparable amounts of incentives and allowances in the future.

27

Notes to Consolidated Financial Statements
(continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist primarily of prepaid expenses and amounts due from vendors.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets primarily represent the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. Statement of Financial Accounting Standards No. 142,Goodwill and Other IntangibleAssets (SFAS No. 142) requires that when the fair value of goodwill is less than the related carrying value, entities are required to reduce the amount of goodwill. In accordance with the provisions of SFAS No.142, the Company reviews its goodwill annually in the fourth quarter, or sooner if circumstances indicate that the carrying amount may exceed fair value. No goodwill impairments have been recorded in 2005, 2004, or 2003. The impairment-only approach required by SFAS No. 142 may have the effect of increasing the volatility of the Company’s earnings if goodwill impairment occurs at a future date.

SFAS No. 142 also requires that entities discontinue amortization of all purchased goodwill, including amortization of goodwill recorded in past business combinations. Accordingly, the Company no longer amortizes goodwill.

Other Assets

Other assets is comprised of the following:

(in thousands) December 31,	2005		2004
Prepaid pension asset	$	402,993	$	297,496
Investment accounted for under the cost method		21,400		21,400
Cash surrender value of life insurance policies		42,142		37,689
Other		43,109		28,118
Total other assets	$	509,644	$	384,703

Property, Plant, and Equipment

Property, plant and equipment are stated at cost. Land and buildings include certain leases capitalized at December 31, 2005 and 2004. Depreciation and amortization is primarily determined on a straight-line basis over the following estimated useful life of each asset: buildings and improvements, 10 to 40 years; machinery and equipment, 5 to 15 years.

Long-Lived Assets Other Than Goodwill

The Company assesses its long-lived assets other than goodwill for impairment annually or 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.

Other Long-Term Liabilities

Other long-term liabilities consist primarily of certain benefit liabilities, obligations under capital leases and insurance liabilities. Insurance liabilities are primarily comprised of group health and workers’ compensation liabilities. The Company is self-insured for the majority of group health insurance costs and carries various large risk deductible policies for the majority of workers’ compensation liabilities. The Company calculates these insurance liabilities based on historical claims information. While the Company believes the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect insurance costs.

Accumulated Other Comprehensive Income

Accumulated Other Comprehensive Income is comprised of the following:

(in thousands) December 31,	2005			2004
Foreign currency translation	$	53,164		$	38,813
Net unrealized loss on derivative instruments, net of taxes		(618	)		(3,990	)
Minimum pension liability, net of taxes		(7,011	)		(8,345	)
Total accumulated other comprehensive income	$	45,535		$	26,478

28

Fair Value of Financial Instruments

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable and trade accounts payable approximate their respective fair values based on the short-term nature of these instruments. At December 31, 2005 and 2004, the fair market value of fixed rate long-term debt was approximately $526,000,000 and $534,000,000, respectively, based primarily on quoted prices for these or similar instruments. The fair value of fixed rate long-term debt was estimated by calculating the present value of anticipated cash flows. The discount rate used was an estimated borrowing rate for similar debt instruments with like maturities.

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 $238,000,000, $216,000,000 and $202,000,000 in the years ended December 31, 2005, 2004, and 2003, respectively.

Advertising costs

Advertising costs are expensed as incurred and totaled $44,100,000, $41,500,000 and $38,100,000 in the years ended December 31, 2005, 2004, and 2003, respectively.

Stock Compensation

Effective January 1, 2003, the Company prospectively adopted the fair value method of accounting for stock compensation. The Company recognizes compensation expense based on the straight-line method. The adoption of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(SFAS No. 123), had no significant impact on the Company’s consolidated financial statements for the years ended December 31, 2005, 2004, and 2003.

Until January 1, 2003, the Company had elected to follow Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB No. 25), and related Interpretations in accounting for stock compensation. Under APB No. 25, no compensation expense is recognized if the exercise price of stock options equals the market price of the underlying stock on the date of grant. Note 5 contains a tabular presentation as if the Company had applied the alternative fair value accounting provided for under SFAS No. 123, to all stock options.

Net Income per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. The computation of diluted net income per common share includes the dilutive effect of stock options and non-vested restricted stock awards. Options to purchase 5,219,000 shares of common stock at prices ranging from $32 to $38 per share were outstanding at December 31, 2003, but were not included in the computation of diluted net income per common share because the options’ exercise price was greater than the average market price of the common shares at the time. At December 31, 2005, 2004 and 2003, the dilutive effect of options to purchase approximately 12,000, 12,000, and 39,000 shares of common stock, respectively, at an average exercise price of approximately $18 per share issued in connection with a 1998 acquisition have been included in the computation of diluted net income per common share since the date of the acquisition.

Recently Issued Accounting Pronouncements

In January 2003, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) issued EITF Issue No. 02-16,Accounting by a Customer (Including Reseller) for Certain Consideration Received from a Vendor(EITF 02-16). EITF 02-16 addresses accounting and reporting issues related to how a reseller should account for certain consideration received from vendors. Generally, certain consideration received from vendors is presumed to be a reduction of prices of the vendor’s products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the customer’s income statement. However, under certain circumstances, this presumption may be overcome and recognition as revenue or as a reduction of other costs in the income statement may be appropriate. The Company, in certain circumstances, previously included funds of this type in selling, administrative and other expenses. Under the new method, vendor allowances for advertising and catalog related programs are generally considered a reduction of cost of goods sold. On January 1, 2003, the Company adopted EITF 02-16 and recorded a non-cash charge of $19.5 million ($.11 and $.12 per basic and diluted share, respectively), net of a tax benefit of $13.6 million, related to the capitalization of certain vendor consideration as part of inventory cost.

29

Notes to Consolidated Financial Statements
(continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(SFAS No. 123(R)), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB No. 25,Accounting for Stock Issued to Employees,and amends FASB Statement No. 95,Statement of Cash Flows.Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company will adopt SFAS No. 123(R) on January 1, 2006.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

1.	A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share- based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
2.	A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in FASB Statement No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure an Amendment of FASB Statement No. 123. Currently, the Company uses the Black-Scholes formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS No. 123(R) on January 1, 2006. Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R).

However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 5 to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption as more fully disclosed in Note 5 of the notes to the consolidated financial statements.

In March 2005, the FASB issued Interpretation No. 47 (FIN 47),Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.Asset retirement obligations are legal obligations associated with the retirement of long-lived assets, except for certain obligations of lessees. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional on future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company has evaluated the guidance in FIN 47 and determined that the impact of adoption was not significant.

In May 2005, the FASB issued Statement No. 154, (SFAS No. 154)Accounting Changes and Error Corrections.Under SFAS No. 154, entities will be required to report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless impracticable to do so. Under SFAS No. 154 a change in the method of applying an accounting principle is considered a change in accounting principle. Further, any errors in the financial statements of a prior period discovered subsequent to their issuance shall be reported as a prior period adjustment by restating the prior period financial statements. SFAS No. 154 will be effective for accounting changes and corrections of errors made, if any, beginning in 2006.

2. GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with SFAS No. 142, the Company performed an annual goodwill and indefinite lived intangible asset impairment test during the fourth quarter of 2005, 2004, and 2003. The present value of future cash flows approach was used to determine any potential impairment. The Company determined that these assets were not impaired and, therefore, no

30

impairment was recognized for the years ended December 31, 2005, 2004, and 2003.

The changes in the carrying amount of goodwill during the years ended December 31, 2005 and 2004, by reportable segment, as well as other identifiable intangible assets, are summarized as follows:

	GOODWILL						Identifiable
					Office		Tangible
(in thousands)	Automotive		Industrial		Products		Assets			Total
Balance as of January 1, 2004	$	21,617	$	31,170	$	2,131	$	3,110		$	58,028
Amortization during the year		—		—		—		(356	)		(356	)
Balance as of December 31, 2004		21,617		31,170		2,131		2,754			57,672
Goodwill acquired during the year		4,522		239		—		680			5,441
Amortization during the year		—		—		—		(396	)		(396	)
Balance as of December 31, 2005	$	26,139	$	31,409	$	2,131	$	3,038		$	62,717

3. CREDIT FACILITIES

The principal amount of the Company’s borrowings subject to variable rates totaled approximately $881,000 and $968,000 at December 31, 2005 and 2004, respectively. The weighted average interest rate on the Company’s outstanding borrowings was approximately 6.05% at December 31, 2005 and 2004. In November 2004, the Company repaid in full a $125,000,000 financing with a consortium of financial institutions and insurance companies (the Notes) scheduled to mature in November 2010.

The Company maintains a $350,000,000 unsecured revolving line of credit with a consortium of financial institutions that matures in October 2008 and bears interest at LIBOR plus .25% (4.61% at December 31, 2005). No amounts were outstanding under this line of credit at December 31, 2005 and 2004. Certain borrowings contain covenants related to a maximum debt-to-equity ratio, a minimum fixed-charge coverage ratio, and certain limitations on additional borrowings. At December 31, 2005, 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 $52,600,000 and $47,500,000 outstanding at December 31, 2005 and 2004, respectively.

Total interest expense, net of interest income, for all borrowings was $29,564,000 in 2005, $37,260,000 in 2004, and $51,538,000 in 2003.

Amounts outstanding under the Company’s credit facilities consist of the following:

(in thousands) December 31,	2005		2004
Unsecured term notes:
November 30, 2002, Series A Senior Notes, $250,000,000, 5.86% fixed, due November 30, 2008	$	250,000	$	250,000
November 30, 2002, Series B Senior Notes, $250,000,000, 6.23% fixed, due November 30, 2011		250,000		250,000
Long term debt		500,000		500,000
Other borrowings		881		968
	$	500,881	$	500,968

Approximate maturities under the Company’s credit facilities are as follows:

(in thousands)
2006	$	881
2007		—
2008		250,000
2009		—
2010		—
Thereafter		250,000
	$	500,881

4. LEASED PROPERTIES

The Company leases land, buildings and equipment. Certain land and building leases have renewal options generally for periods ranging from two to fifteen years. In addition, certain properties occupied under operating leases contain normal purchase options. The Company also has an $85,000,000 construction and lease facility. Properties acquired by the lessor are constructed and/or then leased to the Company under operating lease agreements. The total amount advanced and outstanding under this facility at December 31, 2005, was approximately $83,880,000. Since the resulting leases are accounted for as operating leases, no debt obligation is recorded on the Company’s balance sheet.

Land and buildings includes $8,781,000 and $20,490,000, respectively, with accumulated depreciation of $7,393,000, for leases of distribution centers and stores capitalized at December 31, 2005. Expenses for capital leases were approximately $3,466,000, $2,776,000 and $2,103,000 in 2005, 2004, and 2003, respectively.

31

Notes to Consolidated Financial Statements
(continued)

4. LEASED PROPERTIES (CONTINUED)

Future minimum payments, by year and in the aggregate, under the capital and noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 2005:

	Capital		Operating
(in thousands)	Leases		Leases
2006	$	3,537	$	134,530
2007		3,551		104,861
2008		3,554		74,572
2009		3,596		48,483
2010		3,076		32,976
Thereafter		10,062		79,696
Total minimum lease payments		27,376	$	475,118
Amounts representing interest		5,665
Present value of future minimum lease payments	$	21,711

Rental expense for operating leases was approximately $147,187,000 in 2005, $132,493,000 in 2004 and $117,652,000 in 2003.

5. STOCK OPTIONS AND RESTRICTED STOCK AWARDS

In 1999, the Company authorized the grant of options of up to 9,000,000 shares of common stock. In accordance with stock option plans approved by shareholders, options are granted to key personnel for the purchase of the Company’s stock at prices not less than the fair market value of the shares on the dates of grant. Most options may be exercised not earlier than twelve months nor later than ten years from the date of grant.

Pro forma information regarding net income and earnings per share is required by SFAS No. 123, as amended, determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2005, 2004 and 2003, respectively: risk-free interest rates of 4.1%, 4.0%, and 4.0%; dividend yield of 3.2%, 3.7%, and 3.6%; annual volatility factor of the expected market price of the Company’s common stock of 0.23, 0.23, and 0.25; an expected life of the options of 6, 8, and 8 years; and turnover of 4.0 to 4.4% based on the historical pattern of existing grants.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures under SFAS No. 123, as amended by SFAS No. 148, the estimated fair value of the options is amortized to expense over the options’ vesting period. The following table illustrates the effect on net income and income per share if the fair value based method had been applied to all outstanding and unvested awards in each period:

(in thousands, except per share amounts)Year ended December 31,	2005			2004			2003
Net income, as reported	$	437,434		$	395,552		$	334,101
Add: Stock-based employee compensation expense related to option grants after January 1, 2003 included in reported net income, net of related tax effects		4,247			1,566			13
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(6,225	)		(5,324	)		(5,688	)
Pro forma net income	$	435,456		$	391,794		$	328,426
Income per share:
Basic — as reported	$	2.51		$	2.26		$	1.92
Basic — pro forma	$	2.50		$	2.24		$	1.89
Diluted — as reported	$	2.50		$	2.25		$	1.91
Diluted — pro forma	$	2.49		$	2.23		$	1.88

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A summary of the Company’s stock option activity and related information is as follows:

	2005					2004					2003
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Exercise		Shares			Exercise		Shares			Exercise
	(000’s)			Price		(000’s)			Price		(000’s)			Price
Outstanding at beginning of year		5,759		$	31		6,913		$	30		7,590		$	29
Granted (1)		1,260			44		1,270			37		20			32
Exercised		(1,246	)		28		(2,096	)		29		(500	)		23
Forfeited		(184	)		29		(328	)		32		(197	)		31
Outstanding at end of year		5,589		$	34		5,759		$	31		6,913		$	30
Exercisable at end of year		3,216		$	32		3,092		$	30		4,171		$	29
Weighted-average fair value of options granted during the year	$	8.58				$	6.94				$	6.92
Shares available for future grants		1,547					2,689					3,631

(1)	Total includes 91,000 and 124,000Restricted Stock Units(RSUS) granted in 2005 and 2004, respectively.
	The weighted average exercise price excludes RSUS.

Exercise prices for options outstanding as of December 31, 2005, ranged from approximately $21 to $37, except for 12,000 options granted in connection with a 1998 acquisition for which the exercise price is approximately $18. The weighted-average remaining contractual life of options outstanding is approximately 6.5 years.

In 2004, the Company granted approximately 1,146,000Stock Appreciation Rights(SARS) and 124,000Restricted Stock Units(RSUS). In 2005, the Company granted approximately 1,169,000Stock Appreciation Rights(SARS) and 91,000Restricted Stock Units (RSUS). SARS represent a right to receive the excess, if any, of the fair market value of one share of common stock on the date of exercise over the grant price. RSUS represent a contingent right to receive one share of the Company’s common stock at a future date provided certain pre-tax profit targets are achieved.

33

Notes to Consolidated Financial Statements
(continued)

6. INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested. As such, no U.S. federal and state income taxes have been provided thereon, and it is not practicable to determine the amount of the related unrecognized deferred income tax liability. Significant components of the Company’s deferred tax assets and liabilities are as follows:

(in thousands)	2005		2004
Deferred tax assets related to:
Expenses not yet deducted for tax purposes	$	115,890	$	109,602
Deferred tax liabilities related to:
Employee and retiree benefits		159,890		117,617
Inventory		90,920		80,377
Property and equipment		28,828		28,043
Other		17,973		20,466
		297,611		246,503
Net deferred tax liability		181,721		136,901
Current portion of deferred tax liability		24,914		21,218
Non-current deferred tax liability	$	156,807	$	115,683

The current portion of the deferred tax liability is included in income taxes payable in the consolidated balance sheets.

The components of income tax expense are as follows:

(in thousands)	2005		2004		2003
Current:
Federal	$	183,387	$	180,709	$	155,559
State		32,977		31,599		26,869
Foreign		11,331		8,389		8,319
Deferred		43,935		19,670		27,354
	$	271,630	$	240,367	$	218,101

The 2005 deferred tax expense includes $41,688,000 related to 2005 pension contributions.

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 and the cumulative effect of a change in accounting principle are as follows:

(in thousands)	2005			2004			2003
Statutory rate applied to income before the cumulative effect of a change in accounting principle	$	248,172		$	222,572		$	200,110
Plus state income taxes, net of Federal tax benefit		25,571			22,370			19,969
Other		(2,113	)		(4,575	)		(1,978	)
	$	271,630		$	240,367		$	218,101

7. EMPLOYEE BENEFIT PLANS

The Company’s defined benefit pension plans cover substantially all of its employees in the U.S. and Canada. The plan covering U.S. employees is noncontributory and benefits are based on the employees’ compensation during the highest five of their last ten years of credited service. The Canadian plan is contributory and benefits are based on career average compensation. The Company’s funding policy is to fund amounts deductible for income tax purposes.

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The Company also sponsors unfunded supplemental retirement plans covering employees in the U.S. and Canada and other postretirement benefit plans in the U.S. The Company uses a measurement date of December 31 for its pension and other postretirement benefit plans.

		Pension Benefits					Other Postretirement Benefits
(in thousands)	2005			2004			2005			2004
Changes in benefit obligation
Benefit obligation at beginning of year	$	1,035,858		$	943,023		$	22,705		$	24,408
Service cost		41,910			35,740			453			460
Interest cost		64,102			60,039			1,310			1,256
Plan participants’ contributions		2,446			2,338			3.867			3,297
Plan amendments		902			—			—			—
Actuarial loss/(gain)		123,140			21,255			2,821			(483	)
Exchange rate loss		3,031			6,496			—			—
Gross benefits paid		(35,010	)		(33,033	)		(6,889	)		(6,233	)
Benefit obligation at end of year	$	1,236,379		$	1,035,858		$	24,267		$	22,705

The benefit obligation for the Company’s U.S. pension plans included in the above was $1,130,210,000 and $946,406,000 at December 31, 2005 and 2004, respectively. The total accumulated benefit obligation for the Company’s defined benefit pension plans was approximately $996,100,000 and $841,392,000 at December 31, 2005 and 2004, respectively.

The assumptions used to measure the pension and other postretirement plan obligations for the plans at December 31, 2005 and 2004 were:

						Other
	Pension					Postretirement
	Benefits					Benefits
		2005		2004			2005		2004
Weighted-average discount rate		5.75	%	6.00	%		5.75	%	6.00	%
Rate of increase in future compensation levels		3.75	%	3.50	%		—		—

A 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2006. The rate was assumed to decrease ratably to 5% in 2010 and thereafter.

							Other
	Pension						Postretirement
	Benefits						Benefits
(in thousands)	2005			2004			2005			2004
Changes in plan assets
Fair value of plan assets at beginning of year	$	962,871		$	834,015		$	—		$	—
Actual return on plan assets		47,621			90,385			—			—
Exchange rate gain		3,518			6,429			—			—
Employer contributions		133,534			62,737			3,022			2,936
Plan participants’ contribution		2,446			2,338			3,867			3,297
Gross benefits paid		(35,010	)		(33,033	)		(6,889	)		(6,233
Fair value of plan assets at end of year	$	1,114,980		$	962,871		$	—		$	—

The fair values of plan assets for the Company’s U.S. pension plans included in the above were $1,005,525,000 and $875,236,000 at December 31, 2005 and 2004, respectively.

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Notes to Consolidated Financial Statements
(continued)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

Following are the asset allocations for the Company’s funded pension plans at December 31, 2005 and 2004, and the target allocation for 2006, by asset category:

	Target		Percentage of Plan
	Allocation		Assets at December 31,
Asset Category	2006		2005		2004
Equity securities	65	%	64	%	64	%
Debt securities	35	%	34	%	33	%
Real estate and other	—		2	%	3	%
	100	%	100	%	100	%

At December 31, 2005 and 2004, the plan held 2,016,932 shares of common stock of the Company with a market value of approximately $88,584,000 and $88,866,000, respectively. Dividend payments received by the plan on Company stock totaled approximately $2,521,000 and $2,420,000 in 2005 and 2004, respectively. Fees paid during the year for services rendered by parties-in-interest were based on customary and reasonable rates for such services.

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 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 objectives for the pension plan 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 plan’s actuarially assumed long term rate of return.

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 2006 pension expense or income is 8.25% 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:

							Other
	Pension						Postretirement
	Benefits						Benefits
(In thousands)	2005			2004			2005			2004
Funded status at end of year	$	(121,399	)	$	(72,987	)	$	(24,267	)	$	(22,705	)
Unrecognized net actuarial loss		490,558			341,262			20,906			19,309
Unrecognized prior service cost (income)		233			(1,115	)		2,275			2,646
Net asset (liability) recognized at end of year	$	369,392		$	267,160		$	(1,086	)	$	(750	)
Prepaid benefit cost	$	402,993		$	297,496		$	—		$	—
Accrued benefit cost		(33,601	)		(30,336	)		(1,086	)		(750	)
Additional minimum liability		(11,995	)		(14,112	)		—			—
Intangible asset		163			688			—			—
Accumulated other comprehensive income		11,832			13,424			—			—
Net asset (liability) recognized at end of year	$	369,392		$	267,160		$	(1,086	)	$	(750	)

For the pension benefits, the following table reflects the total benefits expected to be paid from the plans’ or the Company’s assets. Of the pension benefits expected to be paid in 2006, $2,066,000 is expected to be paid from employer assets. Expected contributions reflect amounts expected to be contributed to funded plans. For other postretirement benefits, the table below reflects only the Company’s share of the benefit cost without regard to income from federal subsidy payments received pursuant to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA). Expected MMA subsidy payments, which will reduce the Company’s cost for the plan, are shown separately.

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Information about the expected cash flows for the pension plans and other post retirement benefit plans follows:

			Other Postretirement Benefits
			Net Employer
	Pension		Contribution		Value Due to
(in thousands)	Benefits		(Excluding MMA Subsidy)		MMA Subsidy
Employer Contribution
2006 (expected)	$	33,859	$	—	$	—
Expected Benefit Payments
2006		34,963		4,091		(710	)
2007		37,460		3,881		(753	)
2008		40,645		3,691		(796	)
2009		44,598		3,494		(527	)
2010		48,035		3,218		(481	)
2011 through 2015		330,939		11,961		—

Net periodic benefit cost included the following components:

	Pension Benefits									Other Postretirement Benefits
(in thousands)	2005			2004			2003			2005		2004		2003
Service cost	$	41,910		$	35,740		$	32.488		$	453	$	460	$	90
Interest cost		64,102			60,039			57,520			1,310		1,256		481
Expected return on plan assets		(89,422	)		(81,962	)		(77,763	)		—		—		—
Amortization of prior service cost		(386	)		(1,006	)		(3,145	)		371		371		372
Amortization of actuarial loss		16,172			13,600			8,588			1,224		996		150
Net periodic benefit cost	$	32,376		$	26,411		$	17,688		$	3,358	$	3,083	$	1,093

The assumptions used in measuring the net periodic benefit costs for the plans follow:

	Pension Benefits									Other Postretirement Benefits
	2005			2004			2003				2005		2004		2003
Weighted average discount rate		6.00	%		6.25	%		6.75	%		6.00	%	6.25	%	6.75	%
Rate of increase in future compensation levels		3.50	%		3.25	%		4.15	%		—		—		—
Expected long-term rate of return on plan assets		8.50	%		8.75	%		8.95	%		—		—		—
Health care cost trend covered charges		—			—			—			10.00	%	10.00	%	10.00	%

37

Notes to Consolidated Financial Statements
(continued)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

The effect of a one-percentage point change in the 2005 assumed health care cost trend is as follows:

(in thousands)	Decrease			Increase
Total service and interest cost components on 2005 net periodic postretirement health care benefit cost	$	(364	)	$	573
Accumulated postretirement benefit obligation for health care benefits at December 31, 2005		(3,368	)		5,128

The Company has a defined contribution plan that covers substantially all of its domestic employees. The Company’s matching contributions are determined based on 20% of the first 6% of the covered employee’s salary. Total plan expense was approximately $6,722,000 in 2005, $6,034,000 in 2004, and $5,674,000 in 2003.

8. GUARANTEES

Certain operating leases expiring in 2008 contain residual value guarantee provisions and other guarantees which would become due in the event of a default under the operating lease agreement, or at the expiration of the operating lease agreement if the fair value of the leased properties is less than the guaranteed residual value. The maximum amount of the Company’s potential guarantee obligation, representing the residual value guarantee, at December 31, 2005, is approximately $72,640,000. The Company believes the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.

The Company guarantees the borrowings of certain independently controlled automotive parts stores (independents) and certain other affiliates in which the Company has a minority equity ownership interest (affiliates). Presently, the independents are generally consolidated by an unaffiliated enterprise that has a controlling financial interest through ownership of a majority voting interest in the entity. The Company has no voting interest or other equity conversion rights in any of the independents. The Company does not control the independents or the affiliates, but receives a fee for the guarantee. The Company has concluded that it is not the primary beneficiary with respect to any of the independents and 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 equal to the total borrowings subject to the Company’s guarantee.

At December 31, 2005, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $175,800,000. These loans generally mature over periods from one to ten years. In the event that the Company is required to make payments in connection with guaranteed obligations of the independents or the affiliates, the Company would obtain and liquidate certain collateral (e.g. accounts receivable and inventory) to recover all or a portion of the amounts paid under the guarantee. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

9. SEGMENT DATA

The segment data for the past five years presented on page 14 is an integral part of these consolidated financial statements.

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.

The Company’s office products segment distributes a wide variety of office products, computer supplies, office furniture, and business electronics.

The Company’s electrical/electronic materials segment distributes a wide variety of electrical/electronic materials, including insulating and conductive materials for use in electronic and electrical apparatus.

Inter-segment sales are not significant. Operating profit for each industry segment is calculated as net sales less operating expenses excluding general corporate expenses, interest expense, equity in income from investees, amortization and minority interests. Approximately $39,700,000, $34,700,000, and $19,200,000 of income before income taxes and cumulative effect of a change in accounting principle was generated in jurisdictions outside the United States for the years ending December 31, 2005, 2004, and 2003, respectively. Net sales and net long-lived assets 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.

For management purposes, net sales by segment exclude the effect of certain discounts, incentives and freight billed to customers. The line item “other” represents the net effect of the discounts, incentives and freight billed to customers, which are reported as a component of net sales in the Company’s consolidated statements of income.

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