Genuine Parts Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Genuine Parts distributes automotive and industrial replacement parts through more than 10,500 locations. Automotive represented 61% of sales and Industrial 39%.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $5.765 billion | $5.295 billion | +8.9% |
| Gross profit / margin | $2.013 billion / 34.9% | $1.826 billion / 34.5% | Profit +10.3%; margin +0.4 percentage points |
| Operating expenses | $1.604 billion | $1.496 billion | +7.2% |
| Income before taxes | $404 million | $326 million | +24.2% |
| Net income | $304 million | $246 million | +23.6% |
| Diluted EPS | $2.14 | $1.72 | +24.4% |
| Adjusted EBITDA | $508 million | $459 million | +10.8% |
| Operating cash flow | $198 million | $399 million | Down $201 million |
Adjusted EBITDA is a non-GAAP measure. No 2023 adjustment was reported; Q1 2022 adjusted results excluded acquisition-related costs and an insurance gain.
Business performance and material changes
- Comparable sales increased 8.7%; acquisitions contributed 2.4%, partly offset by a 2.2% unfavorable foreign-currency and other impact.
- Automotive: Sales were $3.506 billion, up 7.0%; segment profit was $264 million, essentially unchanged. Segment margin declined to 7.5% from 8.1%. Management cited slower U.S. growth, adverse and unusual weather, wage inflation and higher U.S. outbound freight costs. International markets, pricing and acquisitions supported growth.
- Industrial: Sales were $2.259 billion, up 11.9%; segment profit rose 39.1% to $262 million and margin expanded to 11.6% from 9.3%. Management attributed improvement to strong demand, pricing, expense leverage and supply-chain and other initiatives.
- Total segment profit increased 16.2% to $526 million; total segment margin rose to 9.1% from 8.6%. Comparability is affected by cybersecurity and product-liability functions moved to corporate in 2023; 2022 segment figures were not restated.
- SG&A was 26.2% of sales versus 26.5%. The prior-year comparison included $26.5 million of Kaman Distribution Group acquisition-related costs. Wage inflation, IT investment and freight costs were ongoing offsets.
Cash, debt and liquidity
- Cash was $651 million at quarter-end. Total liquidity was $2.1 billion, including $1.4 billion available under the revolving credit facility.
- Total debt was approximately $3.4 billion, up 1.7% from year-end 2022. Average debt cost was 2.36%; the company reported compliance with debt covenants.
- Operating cash flow fell to $198 million, primarily because Q1 2022 benefited by about $200 million from an increase in the accounts-receivable sales facility limit. Working-capital changes used $202 million of cash in Q1 2023, versus a $59 million source in Q1 2022.
- Investing activities used $45 million, including capital spending and acquisitions, partly offset by $80 million of proceeds from investment sales. Financing activities used $158 million, including $126 million of dividends and $68 million of share repurchases.
- Receivables and inventory increased $232 million and $138 million, respectively, from December 31, 2022, with management linking both increases to higher first-quarter sales and demand.
Outlook, risks and other notable items
- The filing provides no specific numerical full-year earnings or sales guidance. Management said cash, operating cash generation and existing credit lines are expected to fund anticipated operations for the foreseeable future, and stated that it intends to invest in the business, pursue acquisitions, pay dividends and repurchase shares.
- On February 21, 2023, the company announced a 6% increase in its regular quarterly dividend, to an annualized $3.80 per share from $3.58.
- Key disclosed risks include economic and inflationary pressures, slowing demand, fuel and freight costs, supplier and labor conditions, foreign-exchange movements, acquisition integration, competition, information-system disruptions, litigation and debt-covenant compliance. Management said market-risk exposure had not changed materially since year-end 2022.
- The company reported approximately 2,224 pending product-liability lawsuits. Its accrued liability for pending and future claims was $216 million, within an estimated range of $195 million to $275 million; undiscounted liability was $276 million.
- Supplier-finance obligations were $3.0 billion at March 31, 2023, included in accounts payable. The receivables-sale program had approximately $1.0 billion outstanding; related fees were $14 million versus $2 million in Q1 2022.
- Acquisitions were approximately $40 million in Q1 2023, compared with $1.4 billion in Q1 2022, which included the Kaman Distribution Group acquisition.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Industrial’s strong sales and margin gains continue and whether Automotive margins recover from the Q1 decline.
- How working-capital requirements affect operating cash flow and the company’s reliance on receivables sales and supplier-finance arrangements.
- Debt levels, borrowing costs, revolving-credit availability and continued covenant compliance.
- Developments in product-liability claims, including changes in the accrued estimate and its assumptions.
- Progress against any later full-year guidance, as this filing does not provide numerical 2023 guidance.