Genuine Parts Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company distributes automotive replacement parts, industrial parts and business products across more than 3,100 locations. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $5,015 | $4,723 | $14,686 | $14,131 |
| Gross profit | $1,624 | $1,484 | $4,731 | $4,442 |
| Operating profit | $381 | $366 | $1,088 | $1,074 |
| Net income | $227 | $220 | $612 | $624 |
| Diluted EPS | $1.56 | $1.49 | $4.18 | $4.23 |
- Q3 sales rose 6.2% and net income rose 3.3%; nine-month sales rose 3.9%, while net income declined 1.9% and diluted EPS declined 1.2%.
- Gross margin improved to 32.4% from 31.4% in Q3 and to 32.2% from 31.4% for the nine-month period. Operating margin was 7.6% versus 7.7% in Q3 and 7.4% versus 7.6% year to date.
- Q3 sales growth reflected approximately 1.2% comparable growth and 6.7% from acquisitions, partly offset by currency and the Grupo Auto Todo divestiture. Nine-month growth included 2.1% comparable growth and 3.9% from acquisitions, offset by 1.5% unfavorable currency effects.
- By segment, Q3 sales increased 5.3% in Automotive and 9.9% in Industrial, while Business Products declined 0.9%. Industrial operating profit grew 15.4% in Q3; Automotive operating profit declined 2.0%.
- Operating cash flow was $745, down from $926 in the prior-year period. Investing used $391, including $626 for acquisitions and capital expenditures of $183, partly offset by $417 of divestiture proceeds. Financing used $229, including $328 of dividends paid.
Balance sheet and liquidity
- Cash was $451 at September 30, 2019, compared with $334 at year-end 2018. Total debt was approximately $3,418, up $275, or 8.7%, from year-end; debt included $622 current and $2,796 long-term.
- Management reported an average debt cost of 2.2%, covenant compliance, and expected existing credit lines and operating cash generation to fund foreseeable operations, including discretionary repurchases.
- The company issued €250 of long-term notes and A$310 of long-term notes during 2019, at stated rates ranging from 1.55% to 1.95% and 3.10% to 3.43%, respectively.
- Operating lease assets of $1,048 and lease liabilities of $1,072 were recognized following adoption of the new lease standard. Management said adoption did not materially affect net income or liquidity.
Outlook, unusual items and risks
- No numerical earnings or revenue guidance is provided. Management highlighted growth initiatives, acquisitions, digital expansion, margin improvement and cost control as priorities, and expressed confidence in the Industrial segment’s longer-term growth prospects.
- Operating expenses rose as a percentage of sales, reflecting higher payroll, freight, IT and cybersecurity costs and weaker expense leverage in certain operations. Tariffs had no material impact in the periods presented.
- Q3 included a net $12.4 benefit from specified currency, transaction and other items and the Inenco investment remeasurement gain; the nine-month period included $25.8 of net expense from such items. The $38.7 Inenco gain and $34.7 of realized currency losses were among the disclosed items. Adjusted net income is a non-GAAP measure.
- The company acquired businesses for $642 net of cash acquired, including the remaining 65% of Inenco. It sold Grupo Auto Todo in March and EIS on September 30; EIS contributed $588 of revenue in the first nine months before its sale and was not classified as discontinued operations.
- Disclosure controls were not effective because of a previously reported material weakness in transaction-level and IT controls at European automotive subsidiary AAG. Remediation and testing were ongoing; no material errors or restatements were reported.
- The company reported a jury award in an automotive product-liability dispute but did not expect a material financial impact based on its defenses, insurance and reserves. Following a fire at S.P. Richards’ Atlanta headquarters and distribution center, it expected insurance to cover losses and related costs.
- Other stated risks include acquisition integration, economic and demand conditions, tariffs, foreign exchange, freight and labor costs, competition, litigation and information-system disruptions. The company also guaranteed approximately $864 of borrowings by independent stores and affiliates; it reported covenant compliance and no significant historical losses on these guarantees.
Investor facts to verify
- Whether AAG control remediation is completed and operating effectively, and whether any future filing reports changes or errors.
- How much reported sales and earnings growth is recurring versus acquisition-related, and the ongoing effects of the EIS and Grupo Auto Todo sales.
- Whether operating cash flow and margins improve as costs rise and comparable sales vary by segment.
- Debt levels, covenant headroom and potential exposure under the $864 of guarantees.
- Insurance recovery and final costs related to the S.P. Richards fire, and developments in the product-liability matter.