GENUINE PARTS CO annual report, FY2012

Genuine Parts Company — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials through approximately 2,000 locations, primarily in North America.

Financial performance and liquidity

MetricFY 2012FY 2011Change
Net sales$13.014 billion$12.459 billion+4.5%
Gross profit$3.778 billion$3.606 billion+4.8%
Gross margin29.0%28.9%+0.1 percentage point
Net income$648.0 million$565.1 million+15%
Diluted EPS$4.14$3.58+16%
Cash from operations$906.4 million$624.9 million+45%
Cash and equivalents at year-end$403.1 million$525.1 millionDown $122.0 million
Total debt at year-end$500 million$500 millionUnchanged

SG&A was 20.4% of sales, down from 20.8%; income before taxes was 7.8% of sales, up from 7.1%. The effective tax rate was 36.4%, compared with 36.6%. The current ratio was 1.9 at year-end, versus 2.4 in 2011; excluding current debt, it was 2.2. The company reported available cash and credit sources sufficient for expected operating and other requirements.

Fourth quarter: Sales were $3.119 billion, up 3.5% year over year; net income was $160.2 million versus $135.0 million, and diluted EPS was $1.03 versus $0.86.

Segments and changes versus prior year

  • Automotive: Sales of $6.321 billion, up 4%. Quaker City acquisition contributed approximately 3%; comparable-store sales rose slightly more than 1%. Operating margin improved to 8.6% from 7.7%.
  • Industrial: Sales of $4.454 billion, up 7%, reflecting approximately 5% higher volume and 2% price inflation. Operating margin declined to 7.9% from 8.1% as growth slowed and volume incentives decreased.
  • Office Products: Sales of $1.687 billion, essentially flat. Volume fell 3%, offset by approximately 3% price inflation. Operating margin was 8.0%, compared with 7.9%.
  • Electrical/Electronic Materials: Sales of $583 million, up 4.5%; acquisitions added approximately 8%, offset by a 2.5% volume decline and a negative copper-price effect. Operating margin rose to 8.7% from 7.3%.

Consolidated sales growth slowed from 11% in both 2010 and 2011. Management cited moderating industry conditions during 2012. Working capital and acquisitions affected balance-sheet movements: inventory increased about 7%, primarily from acquisitions, while accounts payable rose $241 million, or 17%, largely due to improved supplier payment terms.

Cash, debt, investment and distributions

  • Investing activities used $651.9 million, including $558.4 million for acquisitions and other investments; capital expenditures were $102.0 million.
  • The company acquired Quaker City for approximately $343 million, acquired Light Fabrications, and invested approximately $165.6 million for a 30% interest in Australia-based Exego. Exego is accounted for under the equity method; an option to acquire the remaining interest is contingent on earnings thresholds.
  • Debt included $250 million of 4.67% notes due November 2013 and $250 million of 3.35% notes due November 2016. A new $850 million revolving facility matures in 2017 and was undrawn at year-end; the company reported compliance with debt covenants.
  • Dividends paid were $301.0 million; share repurchases were $81.8 million. The annual dividend declared per share rose to $1.98 from $1.80.
  • Management estimated 2013 capital expenditures of $115–$135 million and expected a $70 million contribution to qualified defined-benefit plans.

Outlook, commentary, risks and unusual items

  • Management expected sales growth in Automotive, opportunities for Industrial growth in a stable near-term manufacturing environment, improved Office sales volume as the economy and white-collar employment recovered, and reasonable Electrical growth assuming stronger manufacturing expansion. No specific consolidated earnings or EPS guidance was provided.
  • Management attributed performance to internal growth initiatives, cost controls, acquisitions and improved working-capital management. It noted slowing trends across businesses as 2012 progressed.
  • A one-time, noncash $23.5 million pension curtailment gain followed the amendment freezing the U.S. defined-benefit plan effective December 31, 2013. The plan will provide no further benefit accruals for service or earnings after that date.
  • The company corrected its accounting for potential automotive-part sales returns. The cumulative adjustment increased 2011 inventory and total assets by $178.1 million and $323.2 million, respectively, and reduced retained earnings by $39.2 million. The filing says the impact on each year’s net income was less than $3 million and immaterial; the cumulative balance-sheet correction had an immaterial effect on working capital.
  • Risks include demand sensitivity to economic and industry conditions, intense competition and pricing pressure, vendor concentration and loss of supplier return privileges, acquisition execution, foreign-exchange exposure, pension assumptions, and litigation or regulatory costs. The company disclosed approximately 3,000 product-liability lawsuits and said it did not expect pending and reasonably anticipated claims to materially affect its business or financial condition.
  • Other exposures include $231.5 million of guaranteed borrowings of independent stores and affiliates, approximately $58.0 million of gross unrecognized tax benefits (excluded from contractual obligations because settlement timing was uncertain), and a $70 million expected 2013 pension contribution.

Key facts for investors to verify

  • Whether 2013 organic sales and segment margins could sustain growth as quarterly momentum weakened in Industrial and Electrical and Office volume remained pressured.
  • The recurring earnings effect of the $23.5 million pension gain and the longer-term costs and funding needs of the frozen plan.
  • Integration and returns from the Quaker City and Light Fabrications acquisitions and the Exego investment, including the conditions attached to the option for Exego’s remaining shares.
  • Liquidity after the $250 million debt maturity in November 2013, planned capital spending, pension contribution, dividends and repurchases.
  • Potential effects of the sales-returns accounting correction, supplier incentives and return privileges, tax audits, foreign-exchange movements, and product-liability claims.