Genuine Parts Company — Q2 2022 Form 10-Q
Business context and period. The company distributes automotive and industrial replacement parts across more than 10,300 locations. This unaudited report covers the three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net sales | $5.602B | $4.784B | $10.897B | $9.248B |
| Gross profit | $1.961B | $1.689B | $3.787B | $3.230B |
| Gross margin | 35.0% | 35.3% | 34.8% | 34.9% |
| Net income | $373M | $196M | $618M | $414M |
| Diluted EPS | $2.62 | $1.36 | $4.34 | $2.85 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $791M | $704M |
- Q2 sales rose 17.1%; comparable sales increased 11.5%, acquisitions contributed 8.8%, and foreign currency and other effects reduced growth by 3.2%. H1 sales rose 17.8%, including 11.8% comparable growth, an 8.6% acquisition benefit, and a 2.6% unfavorable currency and other impact.
- Q2 cost of goods sold was 65.0% of sales versus 64.7% a year earlier; H1 was 65.2% versus 65.1%. The company cited demand, inflation, foreign exchange and moderation in supplier incentives as cost pressures.
- Reported Q2 net income increased 89.6% and H1 net income increased 49.3%. Adjusted diluted EPS, a non-GAAP measure, was $2.20 for Q2 and $4.06 for H1, up 26.4% and 25.3%, respectively.
- Cash and equivalents were $519M at June 30, down from $715M at year-end 2021. H1 investing cash use was $1.543B, primarily acquisitions and capital spending; financing provided $585M. Cash declined $196M over the half-year.
- Total debt was approximately $3.318B, up from $2.409B at December 31, 2021. The company reported $2.0B of total liquidity, including $1.5B available on its revolving credit facility, and a 2.34% average cost of debt. It said it was in compliance with debt covenants.
Material changes and unusual items
- On January 3, 2022, the company acquired Kaman Distribution Group (KDG) for approximately $1.3B in cash. The acquisition contributed to Industrial growth; the company reported approximately $550M of H1 revenue from Industrial acquisitions and $238M from Automotive acquisitions, net of store closures. KDG purchase accounting remained preliminary.
- Automotive sales rose 8.5% in Q2 and 9.7% in H1; Industrial sales rose 34.5% and 34.0%, respectively. Industrial growth included a roughly 18% acquisition contribution and strong comparable sales.
- Q2 results included a $103M gain on sale of real estate previously leased to S.P. Richards and $25M of KDG transaction and other costs. H1 included $47M of transaction and other costs, including a $17M non-cash impairment of legacy Industrial trade names. The gain and costs materially affect reported-versus-adjusted comparisons.
- H1 operating cash flow included a $200M benefit related to the accounts receivable sales agreement. Receivables sold and outstanding under the agreement were approximately $1B at quarter-end.
- Outstanding supplier obligations settled through voluntary supply-chain-finance programs were $2.8B at June 30, 2022, compared with $2.7B at year-end 2021; these are included in accounts payable.
- The company issued $1B of senior notes in January: $500M at 1.750% due 2025 and $500M at 2.750% due 2032. It declared $1.79 per share in dividends for H1 and announced a 10% increase in its regular quarterly dividend for 2022.
Outlook, risks and contingencies
The filing provides no specific numeric earnings or sales guidance. Management said it expects supply-chain challenges, inflationary pressures and rising fuel costs to continue through the remainder of 2022, while describing both businesses as resilient. It cited continued demand, pricing initiatives, cost management and the expected strategic benefits of KDG. Management believed cash generated from operations and existing credit lines would fund anticipated operations for the foreseeable future.
Risks highlighted include economic weakness, inflation, fuel and freight costs, geopolitical conflict, supply-chain disruption, labor availability, foreign-exchange movements, slower demand, competition, acquisition integration, debt-covenant compliance, litigation and information-system disruption. The company reported no significant change in market-risk exposure, no material expected adverse effect from ordinary-course legal matters, and effective disclosure controls. KDG was still being integrated into internal financial controls.
Important facts for investors to verify
- How much of sales and profit growth is organic and sustainable, versus acquisition-related, pricing-driven or attributable to unusual items.
- Whether KDG integration realizes expected synergies, and the final purchase-price allocation and associated amortization or impairment effects.
- The effects of inflation, supplier incentives, freight costs and supply-chain conditions on gross margins and working capital.
- The continuing availability and terms of the receivables-sale and supplier-finance programs, including their role in reported operating cash flow and accounts payable.
- Debt levels, liquidity, covenant headroom and the potential exposure associated with approximately $902M of guaranteed borrowings of independent businesses and affiliates.