Genuine Parts Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. It operated through approximately 2,650 locations across the U.S., Canada, Australia, New Zealand, Mexico, and Puerto Rico. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $3,718.3 | $3,736.1 | Down 0.5% |
| Gross profit | $1,104.5 | $1,112.8 | Down 0.8% |
| Gross margin | 29.7% | 29.8% | Down 0.1 percentage point |
| Operating profit | $284.6 | $290.4 | Down 2.0% |
| Operating margin | 7.7% | 7.8% | Down 0.1 percentage point |
| Net income | $158.0 | $161.0 | Down 1.9% |
| Diluted EPS | $1.05 | $1.05 | Unchanged |
| Operating cash flow | $135.0 | $122.5 | Up $12.5 |
| Capital expenditures | $11.7 | $16.4 | Down $4.8 |
Cost of goods sold was 70.3% of sales versus 70.2% a year earlier. Operating expenses were $857.8 million, or 23.1% of sales, unchanged as a share of sales. The effective tax rate was 35.9% in both periods. Basic EPS was $1.06 versus $1.05; weighted-average diluted shares declined to 150.3 million from 153.6 million, helping support unchanged diluted EPS despite lower net income. Dividends declared were $0.6575 per share, up from $0.6150.
Segment results
- Automotive: Sales rose 2% to $1,932.2 million; operating profit increased 2% to $153.7 million. Margin improved to 8.0% from 7.9%.
- Industrial: Sales fell 2.5% to $1,152.6 million; operating profit declined about 7% to $81.8 million. Margin fell to 7.1% from 7.4%.
- Office products: Sales fell 3% to $476.7 million; operating profit declined about 6% to $34.2 million. Margin fell to 7.2% from 7.4%.
- Electrical/electronic materials: Sales fell 3% to $175.8 million; operating profit declined 4% to $14.8 million. Margin fell to 8.4% from 8.5%.
Cash, liquidity, and debt
Cash and equivalents were $205.1 million at March 31, down $6.5 million from year-end. Operating activities generated $135.0 million; investing used $85.3 million, including $73.6 million for acquisitions and other investing; financing used $64.5 million. The company paid $92.6 million in dividends and spent $46.4 million on share purchases. Cash flow also reflected a $38.7 million pension contribution.
Total debt was approximately $700 million, up $75 million from December 31. It comprised $200 million outstanding on a $1.2 billion unsecured revolving credit facility and $500 million of fixed-rate notes. Of the notes, $250 million is due November 2016 at 3.35% and $250 million is due December 2023 at 2.99%. The revolver matures in June 2020, with two optional one-year extensions and an option to increase capacity by $350 million. The company reported compliance with borrowing covenants. Its current ratio was 1.4 to 1, unchanged from year-end. Management said cash generated from operations and available credit are expected to fund foreseeable operations, including discretionary repurchases.
Receivables increased 9% and inventories 2% from year-end; payables increased 5%, partly due to acquisitions and improved vendor payment terms.
Changes, outlook, and risks
Sales were slightly lower year over year, with foreign exchange reducing sales by approximately 1.5%. Automotive growth reflected organic growth and acquisitions, partly offset by currency effects. Industrial demand remained difficult; management expected those conditions to persist for at least the next few quarters. Management anticipated continued underlying Automotive growth, while initiatives and acquisitions were expected to support improvement in Office Products and Electrical/Electronic Materials. No numerical full-year earnings or revenue guidance was provided.
Management attributed lower operating profit primarily to lower sales and weaker supplier incentives and expense leverage in Industrial, and reduced expense leverage in Office Products and Electrical/Electronic Materials. Cost controls and technology and supply-chain initiatives continued. The company cited risks including weaker demand or adverse economic conditions, currency volatility, vendor disruptions or less favorable terms, competition, acquisition integration, litigation, and information-system failures or breaches.
Comprehensive income was $226.1 million versus $53.5 million in Q1 2015, mainly reflecting a $63.4 million foreign-currency translation gain compared with a $113.3 million loss a year earlier; net income itself declined. The company guarantees borrowings of certain independent stores and affiliates: guaranteed borrowings totaled approximately $350.6 million, with $37.0 million of related assets and liabilities recognized. Management reported no significant historical guarantee losses and compliance with related covenants. Interim results rely on estimates, including inventory/LIFO adjustments, bad debts, returns, and volume incentives, and are not necessarily indicative of full-year results.
The company adopted ASU 2015-02 without material impact. It was evaluating the effects of new lease and share-based compensation accounting standards. Disclosure controls were reported effective, with no material change in internal control over financial reporting identified during the quarter.
Important facts for investors to verify
- Whether Industrial demand and the reported weakness in organic sales across several segments persist, and whether management’s growth initiatives improve trends.
- The size and duration of foreign-exchange headwinds, particularly for the Australian dollar, Canadian dollar, and Mexican peso.
- Repayment or refinancing of the $250 million note due November 2016, along with total debt and revolving-credit usage.
- Acquisition spending, share repurchases, dividends, and their effects on cash, debt, and diluted share count.
- Exposure under the $350.6 million of guaranteed borrowings and changes in the recognized guarantee-related assets and liabilities.
- Potential year-end adjustments to interim inventory, LIFO, bad-debt, returns, and volume-incentive estimates.