Business context and reporting period
Genuine Parts Company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2009; amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $2,606.8 | $2,882.1 | $7,586.3 | $8,495.1 |
| Gross profit | $765.2 | $849.0 | $2,242.3 | $2,520.7 |
| Operating profit | $177.7 | $232.6 | $531.7 | $684.6 |
| Net income | $107.6 | $131.0 | $300.4 | $387.6 |
| Diluted EPS | $0.67 | $0.81 | $1.88 | $2.36 |
- Gross margin was 29.4% in Q3 and 29.6% for nine months, slightly below 29.5% and 29.7%, respectively, in 2008. Operating margin was 6.8% and 7.0%, versus 8.1% for both comparable periods.
- Operating cash flow was $766.5 for nine months, compared with $469.0 in 2008. The filing attributes the increase primarily to a $390.0 favorable change in operating assets and liabilities.
- At September 30, cash was $363.1; current assets were $4,034.3 and current liabilities $1,444.5, for a 2.8-to-1 current ratio. Long-term debt was $500.0, unchanged from year-end, at fixed rates and maturing in 2011 and 2013. No borrowings were outstanding on the $350.0 revolving credit facility.
- Capital expenditures were $49.4; acquisitions and other investing uses were $123.0; and dividends paid were $189.7 during the first nine months.
Material changes and segment trends
- Q3 sales declined 10% and nine-month sales declined 11%; net income fell 18% and 23%, respectively. Lower demand and weaker expense leverage weighed on results, although selling, administrative and other expenses declined in absolute dollars through cost controls.
- Q3 segment sales were down 1% in Automotive, 22% in Industrial, 5% in Office Products, and 30% in Electrical/Electronic Materials. Industrial operating profit fell 53% in Q3; operating profit also declined in each of the other groups.
- Inventory fell $128.7 (6%) from December 31, while accounts payable rose $114.9 (11%), which the company attributed primarily to reduced purchasing and inventory initiatives, and more favorable vendor terms, respectively.
- Retirement and post-retirement benefit liabilities decreased $212.9 from year-end. A pension-plan remeasurement following a workforce reorganization reduced these liabilities by $141.7; the company also recorded a $4.3 noncash curtailment gain.
- The company acquired eight Industrial and Automotive businesses for approximately $60.0 and bought the remaining noncontrolling interest in Balkamp for approximately $63.0. It also purchased leased properties for $72.8.
Outlook, risks, and contingencies
- No formal earnings or sales guidance is provided. Management expected gradual, steady Automotive improvement in Q4, citing anticipated demand improvement. It noted early stabilization in industrial indicators and modest improvement in Office Products trends.
- Management cited weak consumer spending, unemployment, low industrial production, reduced purchasing incentives, and foreign-exchange effects. The Canadian dollar was the principal foreign-currency exposure; exchange rates negatively affected 2009 results.
- The company believed cash from operations and available credit would fund anticipated operations, including voluntary share repurchases, if any. It cautioned that credit-market volatility could raise borrowing costs or limit market access.
- Guarantees covered approximately $199.2 of borrowings by independent automotive stores and affiliates. Recorded guarantee liabilities were not material; the company reported no significant historical losses and was in compliance with applicable covenants.
- Interim results may change with year-end bad-debt, inventory, incentive, and LIFO estimates; the filing cautions that interim results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Automotive demand improves as management anticipated, and whether weakness persists in Industrial and Electrical/Electronic Materials.
- How much of the strong operating cash flow reflects sustainable operating performance versus working-capital timing.
- The ongoing effects of lower purchasing incentives, expense deleverage, and foreign-currency movements on margins and earnings.
- Funding needs and potential exposure related to pension plans, guaranteed borrowings, acquisitions, and the remaining share-repurchase authorization.
- Year-end adjustments to interim estimates, particularly inventory and LIFO valuation, and whether the reported benefit-liability reduction persists.