Genuine Parts Company — Q2 2016 Form 10-Q
Business and period: The company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. This report covers the quarter and six months ended June 30, 2016; operations spanned approximately 2,650 locations in the U.S. and several other countries.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $3.900B | $3.940B | $7.618B | $7.676B |
| Gross profit | $1.165B | $1.178B | $2.270B | $2.291B |
| Operating profit | $340.5M | $349.4M | $625.1M | $639.8M |
| Net income | $191.4M | $195.4M | $349.4M | $356.4M |
| Diluted EPS | $1.28 | $1.28 | $2.33 | $2.33 |
- Sales declined 1% in both the quarter and first half. Foreign currency reduced sales by approximately 1% in each period.
- Gross margin was 29.9% in Q2 and 29.8% for the first half, unchanged from the respective prior-year periods. Operating margin eased to 8.7% in Q2 from 8.9%, and to 8.2% for the half from 8.3%.
- Net income fell 2% in both periods; diluted EPS was unchanged. The effective tax rate declined to 36.2% for Q2 and 36.1% for the half, partly reflecting a higher share of lower-taxed foreign earnings and more favorable retirement-plan valuation.
- By segment, Q2 sales were down approximately 1% in Automotive, 2% in Industrial, up 1% in Office Products, and down 5% in Electrical/Electronic Materials. Industrial and Electrical/Electronic Materials faced weak demand; Office Products’ organic sales declined despite acquisition contributions.
Cash flow, balance sheet, and capital
- First-half operating cash flow was $530.5M, versus $454.1M a year earlier. Investing used $355.1M, including $305.4M for acquisitions and other investing activities and $49.7M for capital expenditures. Financing used $161.4M, including $190.9M of dividends and $119.4M of share repurchases. Cash increased $22.0M to $233.6M.
- At June 30, total debt was $775M: $525M current and $250M long-term, up $150M from year-end. The company had $275M drawn on its $1.2B revolving facility; $500M of fixed-rate notes remained outstanding. It extended the facility’s maturity to June 2021. In July, it agreed to issue $50M of 2.39% notes due 2021 to repay revolving debt.
- Current assets were $5.87B and current liabilities $4.41B; the current ratio was 1.3, versus 1.4 at year-end. Management said cash and credit facilities should fund anticipated operations and discretionary repurchases for the foreseeable future.
- First-half acquisitions totaled approximately $236M; purchase-price allocations were preliminary. The company declared dividends of $1.315 per share for the first half, versus $1.230 in 2015.
Outlook, risks, and notable items
- Management expects ongoing growth initiatives and acquisitions to support Automotive, Office Products, and gradual improvement in Electrical/Electronic Materials, while currency may continue to weigh on results. It expects difficult Industrial demand and weakness in certain Electrical/Electronic Materials markets to persist for at least the next few quarters. No specific earnings or revenue guidance was provided.
- Key stated risks include slowing demand, economic and foreign-exchange changes, competitive pricing, vendor disruptions or relationships, acquisition integration, litigation, and information-system failures or breaches.
- The company guaranteed approximately $382.1M of borrowings by independent stores and affiliates. This is the stated maximum exposure generally; $40M of related guarantee assets and liabilities was recorded. The company reported covenant compliance and no significant guarantee losses to date.
- Interim results rely on estimates, including inventory/LIFO adjustments, bad debts, returns, and volume incentives; management cautioned that year-end determinations may change estimates. The six-month results are not necessarily indicative of full-year results.
Investor verification points
- Check whether weak organic sales and segment margin pressure persisted, particularly in Industrial, Office Products, and Electrical/Electronic Materials.
- Assess the contribution and integration of acquisitions, including the preliminary purchase-price allocations and goodwill/intangibles recorded.
- Monitor debt, revolving-facility usage, the November 2016 note maturity, and the July 2021 note issuance.
- Review foreign-currency effects, operating cash conversion, and the scale of dividends and repurchases relative to cash generation.
- Track the guaranteed borrowings and any changes in collateral, covenant compliance, or recognized guarantee exposure.