Genuine Parts Company — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. The company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $2.535 billion | $2.873 billion | $4.980 billion | $5.613 billion |
| Gross profit | $744.9 million | $852.2 million | $1.477 billion | $1.672 billion |
| Operating profit | $188.0 million | $239.3 million | $353.9 million | $451.9 million |
| Net income | $103.6 million | $133.1 million | $192.8 million | $256.6 million |
| Diluted EPS | $0.65 | $0.81 | $1.21 | $1.56 |
| Operating margin | 7.4% | 8.3% | 7.1% | 8.1% |
- Q2 sales fell 12%; six-month sales fell 11%. Net income declined 22% in Q2 and 25% year to date.
- Gross margin was approximately 29.4% in Q2 versus 29.7% a year earlier. Management attributed the decline in gross margin to lower volume incentives from reduced purchasing. Selling, administrative and other expenses, including depreciation and amortization, were 22.8% of Q2 sales versus 22.2%.
- Six-month cash from operations was $488.8 million, up from $277.2 million. Investing used $144.4 million, including $107.4 million for acquisitions and other items and $37.0 million for capital expenditures. Financing used $175.9 million, including $125.9 million of dividends.
- Cash and equivalents were $238.6 million at June 30, up from $67.8 million at year-end 2008. Current assets were $3.916 billion and current liabilities $1.413 billion; the current ratio was 2.8, compared with 3.0 at year-end.
- Debt was unchanged at $500 million, fixed-rate, with maturities in 2011 and 2013. No borrowings were outstanding on the $350 million revolving credit facility, which matures in December 2012.
Business trends and changes
- Automotive sales decreased 5% in Q2 and 6% for the half; about half the decline was attributed to weaker demand and half to foreign exchange. Automotive operating profit rose 2% in Q2, with margin improving to 8.7% from 8.1%.
- Industrial sales fell 22% in Q2 and 19% for the half, as manufacturing conditions weakened. Q2 operating profit fell 59%, and segment operating margin declined to 4.5% from 8.5%.
- Office Products sales declined 6% in both periods. Electrical/Electronic Materials sales fell 34% in Q2 and 30% for the half; Q2 operating profit declined 49%.
- Inventory declined $101 million, or 4%, from year-end, reflecting lower purchases and inventory-management initiatives. Accounts payable increased $54 million, primarily due to improved vendor terms.
Outlook, risks and unusual items
- No specific consolidated earnings or sales guidance was provided. Management expected gradual, steady improvement in Automotive over the remainder of 2009, citing sales initiatives. It described continued consumer and industrial weakness, lower demand, and rising unemployment as pressures on results.
- Management said operating-margin pressure primarily reflected reduced expense leverage from lower sales. Initiatives included new and expanded product lines, entry into markets through acquisitions, and margin and cost-saving programs.
- The company reported a $4.3 million noncash pension curtailment gain in Q2 in connection with an employee reorganization. Pension plan remeasurement reduced retirement and post-retirement benefit liabilities by $141.7 million; total such liabilities fell $197 million from year-end.
- Six-month acquisitions comprised six companies for approximately $44 million, with about $8 million of goodwill and intangible assets recorded. The company also paid approximately $63 million for the remaining noncontrolling interest in Balkamp.
- A lease/construction agreement expired June 26; the company elected to purchase the properties for approximately $73 million, including closing costs, paid in July 2009.
- Guarantees covered approximately $195.4 million of borrowings by independent stores and affiliates. Accrued guarantee liabilities were not material, and the company reported no significant guarantee losses to date.
- Key stated risks include economic conditions and product demand, competition and pricing pressure, supplier relationships, capital and credit market access, foreign exchange exposure, regulation, and litigation. Management cautioned that interim estimates may change at year-end and that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales and operating margins stabilize, particularly in Industrial and Electrical/Electronic Materials, and whether Automotive’s expected improvement materializes.
- How much of the strong operating cash flow reflects sustainable operations versus working-capital changes; the filing attributes the cash increase primarily to improved working capital.
- The effect of pension remeasurement and the curtailment on future benefit costs, contributions, and reported liabilities.
- Post-acquisition performance and integration of the six acquired businesses and Balkamp ownership change.
- Liquidity and credit access if adverse economic or capital-market conditions persist, and potential exposure under the $195.4 million of guarantees.