Genuine Parts Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company distributes automotive replacement parts, industrial parts and electrical materials, and business products through approximately 3,100 locations.
Financial performance
Unless otherwise noted, figures are in millions of dollars. The filing states that interim results are not necessarily indicative of full-year results.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $4,586.3 | $3,905.6 |
| Gross profit / gross margin | $1,435.8 / 31.3% | $1,155.7 / 29.6% |
| Operating profit / operating margin | $318.5 / 6.9% | $286.9 / 7.3% |
| Income before income taxes | $229.3 | $243.8 |
| Net income | $176.6 | $160.2 |
| Diluted earnings per share | $1.20 | $1.08 |
| Operating cash flow | $138.4 | $101.8 |
| Capital expenditures | $31.6 | $24.8 |
Sales increased 17.4%; management attributed approximately 2% to organic growth, 14% to acquisitions and 1% to favorable currency. Gross margin improved, but operating margin fell as operating expenses rose to 26.1% of sales from 23.5%. The effective tax rate declined to 23.0% from 34.3%, primarily due to U.S. tax reform, earnings mix and excess tax benefits from stock compensation. Dividends declared were $0.72 per share, versus $0.675.
Segments and changes versus prior year
- Automotive: Sales of $2,564.3 million, up 29.6%; operating profit of $184.7 million, up 21.7%. Growth included a substantial acquisition contribution, primarily AAG, acquired in November 2017. Segment operating margin declined to 7.2% from 7.7%.
- Industrial: Sales of $1,547.9 million, up 8.3%; operating profit of $112.2 million, up 7.9%. Organic sales growth was approximately 5%; margin was 7.2% versus 7.3%. Electrical/electronic materials was combined with Industrial effective January 1, 2018, with prior-period segment information reclassified.
- Business Products: Sales of $474.1 million, down 4.8%; operating profit of $21.6 million, down 30.6%. Margin declined to 4.6% from 6.2%, reflecting lower organic volume and volume incentives.
Consolidated net income rose 10.2% and diluted EPS rose 11.1%, despite lower pretax income, reflecting the lower tax rate. Excluding $9.9 million of after-tax transaction-related costs, the company reported non-GAAP adjusted net income of $186.5 million and adjusted diluted EPS of $1.27; these measures are not substitutes for GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $326.0 million at March 31, 2018, up from $314.9 million at year-end. Operating cash flow was $138.4 million; investing cash outflow was $70.2 million, including $38.6 million for acquisitions and other investing activities; financing cash outflow was $55.5 million, including $99.0 million of dividends paid.
- Total debt was approximately $3.32 billion, up $71 million from December 31, 2017, primarily to fund working capital. Average cost of debt was 2.84%; the company reported compliance with borrowing covenants.
- Current assets were $7.58 billion and current liabilities were $5.76 billion; the current ratio was 1.3 to 1. Management said cash and existing credit lines were expected to fund anticipated operations for the foreseeable future.
- Receivables rose $219.6 million from year-end, attributed to acquisitions and higher sales; inventory was virtually unchanged. The filing reports no share repurchases under the public repurchase plans in the quarter; reported share acquisitions were employee tax-withholding shares.
Outlook, transactions and notable risks
- No quantified earnings or sales guidance is provided. Management highlighted customer share growth, disciplined acquisitions, digital capability expansion, footprint growth, and gross-margin and cost initiatives. It noted expense pressure from slower comparable sales in U.S. Automotive and Business Products, higher personnel and technology-related costs, freight and delivery, and acquisition-related expenses.
- On April 12, 2018, after quarter-end, the company agreed to separate its Business Products Group and combine it with Essendant through a Reverse Morris Trust transaction. The agreement provides for approximately $347 million in cash payments to Genuine Parts, subject to closing adjustments; its shareholders are expected to own approximately 51% of the combined company and Essendant shareholders approximately 49%. Closing was expected before year-end 2018, subject to regulatory, Essendant shareholder and other customary approvals. The group remains classified as held and used; a possible impairment at closing cannot be predicted.
- The company cited risks including AAG integration and realizing expected benefits, completing the Essendant transaction, demand and competitive pressures, vendor relationships, foreign exchange, economic conditions, litigation, and information-system disruptions. A jury had awarded damages in an automotive product-liability dispute; management did not expect a material financial-statement impact based on its defenses, insurance and reserves.
- Guaranteed borrowings of independent stores and affiliates totaled approximately $651.3 million. The company reported $70 million of related guarantee assets and liabilities and no significant historical losses. It was in compliance with applicable guarantee covenants.
- Accounting estimates for interim inventory adjustments, bad debts, returns and volume incentives may change at year-end. Adoption of the new lease standard was expected to significantly affect the balance sheet; disclosed future minimum operating lease payments were approximately $1.14 billion. Accounting for certain Tax Cuts and Jobs Act effects remained under evaluation.
Key facts for investors to verify
- How much of subsequent sales and earnings growth reflects organic performance versus AAG and other acquisitions, and whether acquisition synergies are realized.
- Whether Automotive and Business Products improve comparable sales and expense leverage, and whether operating margins recover.
- Progress, approvals, closing adjustments, tax treatment and any impairment associated with the Essendant transaction.
- Debt, working-capital needs, cash generation, and the company’s capacity to sustain dividends and fund investment.
- Updates on the product-liability matter, guaranteed borrowings, lease-standard implementation and remaining tax-reform accounting estimates.