Genuine Parts Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited results compared with Q1 2010. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials across approximately 2,000 locations in the U.S., Canada, Mexico, and Puerto Rico.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $2.974 billion | $2.602 billion | +14% |
| Gross profit | $848.8 million | $760.5 million | +12% |
| Gross margin | 28.5% | 29.2% | Down 0.7 percentage points |
| Operating expenses | $656.8 million | $598.4 million | +10% |
| Operating profit | $211.4 million | $181.1 million | +17% |
| Income before taxes | $192.0 million | $162.1 million | +18% |
| Net income | $126.5 million | $100.6 million | +26% |
| Diluted EPS | $0.80 | $0.63 | +27% |
| Operating cash flow | $53.4 million | $139.6 million | Down $86.2 million |
The effective tax rate fell to 34.1% from 37.9%, primarily due to a favorable adjustment related to expiration of the statute of limitations on international taxes. Dividends declared were $0.45 per share, versus $0.41.
Segments and material changes
- Automotive: Sales rose 9%; operating profit increased 10%. Foreign currency contributed about 1% to sales growth, with the remainder attributed to volume, sales initiatives, and economic improvement.
- Industrial: Sales rose 24% and operating profit 35%; acquisitions contributed about 5% to sales growth. Management cited sales initiatives and improving industrial markets.
- Office products: Sales increased 5% and operating profit 2%, but margin declined to 8.6% from 8.9% amid soft market conditions.
- Electrical/electronic materials: Sales increased 39% and operating profit 48%. Acquisitions contributed about 15% and higher copper pricing about 5% to sales growth.
Cost of goods sold rose 15%, faster than sales, and increased to 71.5% of sales from 70.8%. Management attributed the margin pressure to competitive pricing and customer/product mix. Operating expenses declined to 22.1% of sales from 23.0%, reflecting cost savings and improved expense leverage; overall operating margin edged up to 7.1% from 7.0%.
Cash flow, balance sheet, and liquidity
- Cash and equivalents were $465.9 million at March 31, down $64.1 million from year-end. Operating assets and liabilities used $95.7 million of cash, compared with a $15.8 million source in Q1 2010.
- Investing cash outflow was $48.4 million, including $14.5 million of capital spending and $33.9 million for acquisitions and other items. Financing cash outflow was $72.6 million, including $64.6 million of dividends and $9.1 million of share purchases.
- Total debt remained $500 million, consisting of $250 million current and $250 million long-term debt, at fixed rates and with maturities in 2011 and 2013. The company had no borrowings under its $350 million revolving credit facility, which matures in December 2012.
- Current assets were $4.495 billion and current liabilities $2.004 billion; the reported current ratio was 2.2 to 1. Management said cash, operating cash generation, and available credit should fund anticipated operations, including share repurchases, for the foreseeable future.
- Total assets were $5.570 billion. Receivables increased 9% from year-end, mainly due to higher sales and acquisitions; inventory increased 0.5%. Equity totaled $2.879 billion.
Outlook, risks, and unusual items
No specific earnings or revenue guidance was provided. Management described continued focus on product-line expansion, entering new markets through acquisitions, gross-margin initiatives, and cost savings. It cautioned that Q1 results are not necessarily indicative of full-year results and that interim estimates, including inventory and LIFO adjustments, may change at year-end.
Key stated risks include weaker product demand and macroeconomic conditions, high energy costs and uncertain credit markets, vendor disruptions or unfavorable vendor arrangements, competitive pricing pressures, execution of initiatives across business segments, and litigation. Foreign-currency exposure, particularly the Canadian dollar, positively affected Q1 results; management reported no other material change in market risks.
The company acquired two Industrial Group businesses for approximately $34 million and recorded about $19 million of goodwill and other intangible assets; purchase-price allocation remained preliminary. Guarantees of certain independent stores’ and affiliates’ borrowings totaled approximately $201 million. The company was in compliance with related covenants and reported no significant guarantee losses to date.
Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales momentum and segment growth persist, particularly in Industrial and Electrical/Electronic Materials, and how much growth reflects acquisitions, currency, and commodity pricing.
- Whether competitive pricing and product/customer mix continue to pressure gross margin, and whether cost savings can sustain operating-margin improvement.
- Whether operating cash flow recovers from the substantial working-capital outflow in Q1.
- Debt maturities, refinancing plans, and the company’s capacity to maintain dividends and repurchases while funding operations and acquisitions.
- Final purchase-price allocations for the two acquisitions, and the exposure associated with approximately $201 million of guaranteed borrowings.
- Year-end effects of interim estimates, including LIFO and inventory adjustments; the filing notes these estimates may change and does not quantify potential changes.