Genuine Parts Company — Q1 2019 Form 10-Q
Business context and period: The company distributes automotive replacement parts, industrial parts and business products. This filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Operations spanned approximately 3,100 locations.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $4.737 billion | $4.586 billion | +3.3% |
| Gross profit | $1.508 billion | $1.436 billion | +5.0% |
| Gross margin | 31.8% | 31.3% | +0.5 percentage points |
| Operating profit | $321.5 million | $318.5 million | +0.9% |
| Operating margin | 6.8% | 6.9% | -0.1 percentage points |
| Net income | $160.3 million | $176.6 million | -9.2% |
| Diluted EPS | $1.09 | $1.20 | -9.2% |
| Operating cash flow | $61.7 million | $138.4 million | Down $76.6 million |
| Capital expenditures | $45.6 million | $31.6 million | |
| Cash and cash equivalents | $356.9 million | $333.5 million at Dec. 31, 2018 | |
| Total debt | $3.422 billion | $3.143 billion at Dec. 31, 2018 | +8.9% |
Cost of goods sold was 68.2% of sales, versus 68.7% a year earlier. Operating expenses rose to 26.7% of sales from 26.1%. The average cost of debt was 2.50%; the company reported compliance with borrowing covenants. Dividends declared were $0.7625 per share, versus $0.72.
Segments and material changes
- Automotive: Sales increased 2.3%; operating profit fell 3.0%, and segment operating margin declined to 6.8% from 7.2%.
- Industrial: Sales increased 5.7%; operating profit rose 7.9%, and margin improved to 7.4% from 7.2%.
- Business Products: Sales increased 1.0%; operating profit declined 1.8%, and margin was 4.4% versus 4.6%.
- Management attributed consolidated sales growth to organic sales, acquisitions and currency movements; it reported approximately 3.3% organic growth, a 2% acquisition benefit and a 2% negative currency impact.
- The company acquired several businesses for approximately $153.2 million, net of cash acquired. On March 7, it sold Grupo Auto Todo, which generated about $93 million of 2018 revenue. The sale resulted in a $27.0 million realized currency loss.
- Q1 2019 included $34.1 million of pretax realized currency losses, transaction and other costs, compared with $13.0 million of transaction and other costs in Q1 2018. Excluding the specified adjustments, management reported adjusted net income of $187.2 million, up 0.4%, and adjusted diluted EPS of $1.28, up 0.8%; these are non-GAAP measures.
Cash, debt, liquidity and other financial items
Operating cash flow fell substantially year over year, while investing activities used $184.0 million, including $138.4 million for acquisitions and other investing activities. Financing activities provided $145.7 million, including $1.350 billion of debt proceeds and $1.092 billion of debt repayments; dividends paid were $105.4 million. Cash increased $23.4 million during the quarter.
At March 31, 2019, current assets were $7.886 billion and current liabilities were $6.545 billion. The balance sheet included $978.9 million of operating lease liabilities following adoption of the new lease standard; prior-year figures were not recast. Management said existing credit lines and operating cash generation should fund anticipated operations, including discretionary share repurchases, for the foreseeable future.
Outlook, commentary and risks
- No specific numerical earnings or revenue guidance was provided. Management emphasized organic and acquisitive growth, digital capabilities, market-share gains, gross-margin improvement and cost control.
- Management cited rising payroll, freight and delivery, IT and cybersecurity costs, and weaker expense leverage in some markets as operating headwinds. Gross margin benefited from supplier negotiations, pricing, product mix and supplier incentives.
- Forward-looking risks include acquisition integration and realization of synergies, European aftermarket conditions and Brexit, tariffs and trade issues, economic and demand changes, foreign exchange, fuel and freight costs, labor availability, competition, vendor relationships, information-system disruptions, internal controls and litigation.
- A previously reported material weakness in controls at the Alliance Automotive Group (AAG) remained unremediated. The company began testing enhanced controls; management said remediation requires effective operation and testing over a sufficient period. No material errors or restatements were identified.
- A jury had awarded damages in an automotive product-liability case. The company said it did not expect a material financial-statement impact based on its defenses, insurance coverage and reserves.
- The company guaranteed approximately $809.8 million of borrowings of independent stores and affiliates. It reported $85.0 million of related assets and liabilities and no significant historical losses on these guarantees.
Key facts for investors to verify
- Whether AAG control remediation is completed and operating effectively, and whether any future findings affect reported results.
- How much of future sales growth comes from organic activity, acquisitions, divestitures and foreign exchange, particularly after the Grupo Auto Todo sale.
- Whether operating cash flow improves and supports acquisitions, capital spending and dividends alongside higher debt.
- The performance and integration of recent acquisitions and the sustainability of segment margins amid rising operating costs.
- Potential exposure from guaranteed borrowings and the product-liability litigation, including any changes to reserves or expected recoveries.