Genuine Parts Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Genuine Parts distributes automotive and industrial replacement parts across North America, Europe and Australasia. The Business Products Group was divested in 2020 and is reported as discontinued operations; comparisons below are generally for continuing operations. Dollar figures are in millions unless noted.
Key financial results
- Revenue: $4,464.7, up 9.1% from $4,092.5. Comparable sales increased 4.6%; foreign currency and other contributed 3.7%, and acquisitions 0.8%.
- Segments: Automotive sales were $2,953.2, up 14.3%, and segment profit was $235.7, up 65.3%; segment margin improved to 8.0% from 5.5%. Industrial sales were $1,511.5, up 0.1%, and segment profit was $125.3, up 10.0%; segment margin rose to 8.3% from 7.5%.
- Gross margin and expenses: Gross profit was $1,540.8; gross margin increased to 34.5% from 33.9%. Operating expenses were $1,272.4, up 4.3%, but declined to 28.5% of sales from 29.8%.
- Profit: Income from continuing operations was $217.7, up 77.9%; diluted continuing-operations EPS was $1.50 versus $0.84. Net income was $217.7 versus $136.5, which included $14.2 from discontinued operations. The effective tax rate was 23.8% in both periods.
- Cash flow: Continuing-operations operating cash flow was $300.9 versus $27.9. Investing used $40.7 and financing used $116.0. Cash increased $127.8 during the quarter to $1,118.0.
- Debt and liquidity: Total debt was approximately $2.6 billion, down 2.2% from year-end; average debt cost was 2.65%. Cash plus revolving-credit availability totaled $2.6 billion, including $1.5 billion available on the facility. The company reported compliance with debt covenants.
- Other balance-sheet items: Accounts receivable were $1,809.6 and inventory $3,600.7 at quarter-end. Accounts payable included $1.9 billion of obligations to financial institutions under the supplier finance program.
Material changes and management commentary
- Automotive growth was driven by stronger comparable sales across regions; Industrial comparable sales declined approximately 1.8%, with currency and acquisitions offsetting the decline.
- Management attributed improved results to economic recovery and increased consumer mobility as vaccine distribution continued, stronger demand, improved product availability, favorable product and channel mix, category-management initiatives, and cost controls. It also cited stimulus as a contributor to U.S. customer demand.
- Management said supply chains remained strained by labor and inventory shortages, fulfillment delays and backlogs, although service levels remained strong and substantially all operations were open.
- Q1 2020 included $1.8 million in net adjustments: restructuring and transaction costs, partly offset by an insurance gain related to the S.P. Richards fire. No comparable adjustments were recorded in Q1 2021. Q1 2020 also included discontinued-operations income.
- The company declared a quarterly dividend of $0.815 per share, up from $0.79; it announced a 3% increase in the annual dividend rate to $3.26 per share for 2021. No specific earnings or sales guidance was provided in the filing.
Outlook, risks and contingencies
- The company said cash and existing credit lines should fund anticipated operations for the foreseeable future, but warned that COVID-19 effects remain uncertain and could reverse with renewed outbreaks or restrictions, weaker demand, or supply-chain disruption.
- Other cited risks include inflation and freight costs, supplier arrangements, competition, labor availability, foreign exchange, acquisitions and integration, litigation, information-system disruption, and maintaining debt-covenant compliance. Management stated market-risk exposure had not changed materially since year-end.
- Guarantees covered approximately $911.9 million of borrowings by independent automotive stores and affiliates; the company reported covenant compliance and no material expected-credit-loss reserve. It had recorded $82.0 million each in guarantee-related assets and liabilities.
- A Washington automotive product-liability case remained pending before the state Supreme Court. Management expected a ruling in 2021 and did not believe the matter would materially affect the financial statements, citing legal defenses and insurance coverage.
- The company retained a $70.9 million investment in S.P. Richards and an associated $17.0 million allowance for expected credit losses on that investment and related assets.
Important facts for investors to verify
- Whether comparable-sales momentum and segment-margin improvements continued beyond Q1, particularly in Industrial.
- How much operating cash flow reflects sustainable earnings and working-capital performance, and how supplier payment terms and the $1.9 billion supplier-finance balance evolve.
- The terms, renewal and ongoing use of the receivables-sale agreement, under which approximately $800 million of receivables remained sold at quarter-end.
- COVID-19, labor and inventory constraints, inflation and freight costs, and their effects on demand, margins and service levels.
- Developments in the Washington litigation, the S.P. Richards exposure, and the company’s debt-covenant headroom and liquidity.