Genuine Parts Company — Q1 2015 Form 10-Q
Business context and period: The company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. It operated approximately 2,600 locations across the U.S. and several international markets. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014 unless otherwise noted.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $3,736.1 million | $3,624.9 million; up 3% |
| Gross profit | $1,112.8 million; 29.8% margin | $1,084.6 million; 29.9% margin |
| Operating expenses | $861.4 million; 23.1% of sales | $840.7 million; 23.2% of sales |
| Operating profit | $290.4 million; 7.8% margin | $282.6 million; 7.8% margin |
| Income before taxes | $251.4 million | $244.0 million |
| Net income | $161.0 million | $157.5 million; up 2% |
| Diluted EPS | $1.05 | $1.02; up 3% |
| Operating cash flow | $122.5 million | $59.8 million |
| Capital expenditures | $16.4 million | $18.4 million |
| Dividends declared per share | $0.615 | $0.575 |
Segments and material changes
- Automotive sales were flat: approximately 3% organic growth and less than 1% acquisition contribution were offset by roughly 4% adverse currency effects. Operating profit increased marginally; margin remained 7.9%.
- Industrial sales rose 3%, reflecting 3% organic growth and about 1% acquisition contribution, partly offset by 1% currency impact. Operating profit rose 6%; margin increased to 7.4% from 7.3%.
- Office Products sales increased 17%—11% organic growth and about 6% from acquisitions. Operating profit rose 8%, while margin declined to 7.4% from 8.1%, primarily due to customer mix.
- Electrical/Electronic Materials sales rose 1%, as acquisition contribution was offset by lower organic sales and copper pricing. Operating profit and margin declined slightly; margin was 8.5% versus 8.6%.
- Cost of goods sold increased 3%; as a share of sales it edged up to 70.2% from 70.1%. The effective tax rate increased to 35.9% from 35.5%, reflecting earnings mix and retirement-plan valuation effects.
- Comprehensive income fell to $53.5 million from $161.4 million, mainly because of a $113.3 million foreign-currency translation loss; net income increased.
Cash, debt, and liquidity
- Cash was $166.5 million at quarter-end, up $28.8 million from December 31, 2014. Operating cash flow was $122.5 million; investing activities used $46.6 million and financing activities used $42.5 million.
- Cash uses included $30.1 million for acquisitions and other investing activities, $88.0 million of dividends, $16.4 million of capital expenditures, and $84.3 million of share repurchases. Net debt proceeds were $129.9 million.
- Total debt was approximately $893.7 million, up $128.2 million (17%) from year-end. This comprised $393.7 million outstanding under the $850 million revolving credit facility and $500.0 million of fixed-rate notes. The revolver matures in September 2017; the notes mature in November 2016 and December 2023.
- The current ratio was 1.5 to 1, versus 1.6 to 1 at year-end. The company reported compliance with borrowing covenants and expects cash generated from operations and available credit to fund anticipated needs, including share repurchases.
- Quarter-end accounts receivable rose 6% from year-end, while inventory fell 1%; accounts payable increased 2%.
Outlook, risks, and contingencies
- Management anticipated continued underlying automotive growth, supported by organic initiatives; continued industrial growth, despite moderating demand; and office-product growth from initiatives and acquisitions despite an industry slowdown. It expected gradual organic improvement in electrical/electronic materials. No quantified company-wide earnings or revenue guidance was provided.
- Management cited strategic acquisitions, expanded product lines, geographic expansion, new markets, marketing, and gross-margin and cost-saving initiatives as growth priorities.
- Risks include weaker demand or adverse economic conditions, vendor relationship or supply disruptions, competition and pricing pressure, acquisition integration, litigation, information-system failures or breaches, and foreign-exchange movements, particularly in the Australian dollar, Canadian dollar, and Mexican peso. Currency effects adversely affected Q1 results.
- The company guaranteed approximately $293.9 million of borrowings of independent automotive stores and certain affiliates; maximum exposure is generally tied to guaranteed borrowings. It had recognized $31.0 million each in related assets and liabilities, reported covenant compliance, and stated it had incurred no significant guarantee losses to date.
- Interim results rely on estimates, including inventory/LIFO adjustments, bad debts, returns, and volume incentives; management cautioned that year-end determinations may change estimates. Q1 results are not necessarily indicative of the full year.
Important facts for investors to verify
- Whether the stated segment growth expectations materialize, especially amid moderating industrial demand and the office-products industry slowdown.
- How foreign-exchange movements, customer mix, merchandise costs, and vendor income affect margins and earnings.
- Whether acquisitions and share repurchases continue to increase revolver borrowings, and the company’s ability to meet debt covenants and liquidity needs.
- The level of exposure and recoverability associated with guaranteed independent-store and affiliate borrowings.
- Whether interim inventory, LIFO, and other estimates change materially at year-end.