Genuine Parts Company — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials across approximately 2,670 locations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $4.10 billion | $3.90 billion | $8.01 billion | $7.62 billion |
| Gross profit | $1.24 billion | $1.17 billion | $2.40 billion | $2.27 billion |
| Operating profit | $349.3 million | $340.5 million | $636.1 million | $625.1 million |
| Net income | $190.0 million | $191.4 million | $350.1 million | $349.4 million |
| Diluted EPS | $1.29 | $1.28 | $2.36 | $2.33 |
- Sales rose about 5% in both periods. Q2 growth reflected approximately 3.5% from acquisitions, 2% organic growth, and a 0.5% currency headwind. First-half growth comprised approximately 3.5% from acquisitions and 1.5% organic growth.
- Gross margin improved to 30.2% from 29.9% in Q2 and to 29.9% from 29.8% for the first half. Operating margin declined to 8.5% from 8.7% in Q2 and to 7.9% from 8.2% for the first half, as expense growth outpaced sales.
- First-half operating cash flow was $345.3 million, down from $530.5 million. Capital expenditures were $54.1 million, implying operating cash flow less capex of approximately $291.2 million, versus $480.8 million a year earlier.
- Cash was $203.1 million at June 30, down $39.7 million from year-end. Current assets were $6.30 billion and current liabilities $4.80 billion; the current ratio was 1.3, versus 1.4 at December 31, 2016.
- Total debt was approximately $1.13 billion, up $255 million from year-end: $580 million under the revolving facility and $550 million in fixed-rate notes. Average debt cost was 2.49%; the company reported compliance with debt covenants. The $1.2 billion revolving facility maturity was extended to June 2022.
- Dividends declared were $0.675 per share for Q2 and $1.35 for the first half. The company paid $197.4 million in dividends and repurchased $153.5 million of stock during the first half.
Changes by business and versus prior period
- Automotive sales increased 4% in Q2; operating profit rose 2%, while margin eased to 9.6% from 9.7%. Management cited weak U.S. organic sales and reduced expense leverage.
- Industrial sales increased approximately 7% in Q2; operating profit rose 9%, with margin improving to 7.7% from 7.6%.
- Office Products sales increased approximately 5%, mainly from acquisitions; organic sales fell 3%. Operating profit declined 8%, and margin fell to 6.0% from 6.8%.
- Electrical/Electronic Materials sales rose 11%, largely due to acquisitions; organic sales declined approximately 1%. Operating profit fell 3%, and margin declined to 7.6% from 8.7%.
- Q2 net income decreased approximately 1%, though diluted EPS increased about 1%, partly reflecting fewer weighted-average shares. First-half net income was nearly flat and diluted EPS rose about 1%.
Outlook, risks, and unusual items
- No numerical earnings or sales guidance was provided. Management expects growth initiatives, acquisitions, expanded products and markets, and cost-saving efforts to support future performance. It cited ongoing investments in technology, freight, digital, and logistics.
- Operating expense ratios increased, which management attributed to weaker comparable-sales leverage, customer and product mix, and acquisition integration costs. Office Products also faced lower organic volume and higher costs serving multiple sales channels.
- On April 17, 2017, a jury awarded $81.5 million in an automotive product-liability case. The company intends to challenge the verdict; potential settlement and bankruptcy-trust offsets were not yet known. Management said, based on defenses, insurance, and reserves, it did not then expect a material financial-statement impact, subject to change.
- The company guaranteed approximately $499.2 million of borrowings by independent automotive parts stores and affiliates. It reported no significant historical losses on these guarantees and recognized $53.0 million each in related assets and liabilities.
- First-half acquisitions and equity investments cost approximately $217.9 million, including a $72.1 million investment for a 35% stake in Australia-based Inenco. Purchase-price allocations were preliminary; options relating to the remaining 65% are conditional.
- Management identified economic and demand conditions, competition, vendor relationships, foreign exchange, acquisition integration, litigation, and information-system disruptions among relevant risks. It expects lease accounting adoption to significantly affect the balance sheet; disclosed future minimum operating lease payments were approximately $865 million.
- The company reported no material impact from adopting the inventory and share-based compensation accounting updates during the period. It planned modified-retrospective adoption of the revenue standard and did not expect a material revenue impact, while its lease-standard impact remained under evaluation.
Important facts for investors to verify
- Whether organic sales and expense leverage improve, particularly in Automotive, Office Products, and Electrical/Electronic Materials.
- Cash conversion and working-capital needs, given the decline in operating cash flow and the first-half acquisition, dividend, and repurchase outlays.
- Debt levels, revolving-facility classification and maturity, covenant compliance, and the company’s capacity to fund planned investment and shareholder returns.
- Developments in the $81.5 million jury verdict, including appeals, offsets, insurance coverage, and any resulting change in recorded exposure.
- Integration results and final purchase accounting for acquisitions, including Inenco and the possible future transaction for its remaining ownership.
- The balance-sheet effect of lease accounting and exposure under the independent-store and affiliate guarantees.