Genuine Parts Company — Q3 2016 Form 10-Q
Business context and period: Distributor of automotive and industrial replacement parts, office products, and electrical/electronic materials, operating from approximately 2,650 locations. This filing covers the quarter and nine months ended September 30, 2016; financial figures are unaudited.
Financial results and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $3,941.7m | $3,921.8m | $11,559.6m | $11,598.3m |
| Gross profit / margin | $1,198.6m / 30.4% | $1,169.2m / 29.8% | $3,468.5m / 30.0% | $3,460.4m / 29.8% |
| Operating profit / margin | $328.0m / 8.3% | $348.5m / 8.9% | $953.1m / 8.2% | $988.2m / 8.5% |
| Net income | $185.3m | $188.0m | $534.7m | $544.4m |
| Diluted EPS | $1.24 | $1.24 | $3.56 | $3.56 |
| Cash from operations | — | $741.4m | $896.0m |
- Q3 sales rose 0.5%, while net income declined 1%; nine-month sales declined 0.3% and net income declined 2%. Diluted EPS was unchanged year over year in both periods.
- Nine-month operating cash flow decreased $154.6m. Investing activities used $452.2m, including $365.5m for acquisitions and other investing activities and $86.7m for capital expenditures. Financing activities used $284.2m, including $288.9m of dividends and $143.8m of share purchases.
- Cash was $225.2m at September 30, up $13.5m from year-end 2015. Total debt was $775.0m ($475.0m current and $300.0m long-term), up $150.0m from December 31, 2015. The current ratio was 1.3, versus 1.4 at year-end.
- Dividends declared per share increased to $0.6575 for Q3 from $0.6150; nine-month dividends declared were $1.973 per share versus $1.845.
Segments and material changes
- Automotive: Q3 sales increased 1.5%, supported by acquisitions; organic sales declined 1.5%. Nine-month sales increased approximately 1%. Operating profit fell 2% in Q3 and 1% year to date.
- Industrial: Q3 sales declined 0.7% and nine-month sales declined 1.6%; organic sales were weak. Operating profit declined 5% in Q3 and 4% year to date.
- Office products: Q3 sales rose approximately 5%, with acquisitions offsetting a 6% organic decline. Operating profit declined 17% in Q3 and approximately 10% year to date.
- Electrical/electronic materials: Sales declined 9% in Q3 and 6% year to date; operating profit fell 29% and approximately 17%, respectively.
- Gross margin improved as cost of goods sold fell to 69.6% of sales in Q3 from 70.2%, primarily due to favorable volume incentives and product mix. Operating expenses rose to 23.0% of Q3 sales from 22.1%; management cited lower sales leverage and acquisition integration costs.
- Acquisitions during the first nine months totaled approximately $337.2m. Purchase-price allocations, including $181.6m of goodwill and other intangible assets, remain preliminary.
Outlook, commentary, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management expects difficult industrial demand to persist through the balance of 2016 and near-term weakness in electrical/electronic materials. It expects internal initiatives and acquisitions to support growth or gradual improvement in automotive, office products, and electrical/electronic materials.
- Management believes cash from operations and available credit lines will fund anticipated operations, including discretionary repurchases, for the foreseeable future. It cites growth initiatives, acquisitions, new product lines, geographic expansion, and cost controls as priorities.
- Risks highlighted include weak demand, economic and currency changes, competitive pricing, vendor disruptions or relationships, acquisition integration, litigation, and information-system failures or breaches. Foreign currency negatively affected nine-month sales by approximately 1%; it was neutral in Q3.
- The company guarantees borrowings of certain independent stores and affiliates totaling approximately $392.9m, generally maturing over one to six years. It had recorded $40.0m each in related assets and liabilities and reported no significant historical guarantee losses. The company was compliant with relevant covenants.
- A $250m fixed-rate note was due in November 2016. On October 17, 2016, the company entered an agreement to refinance it with a note due in 2026 at 2.99%. In July, it issued $50m of 2.39% notes due 2021, principally to repay revolving-facility debt.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Interim results include estimates that may change at year-end, including inventory/LIFO, bad-debt, returns, and volume-incentive estimates.
Important facts for investors to verify
- Whether organic sales and operating margins recover, particularly in industrial, office products, and electrical/electronic materials, where Q3 organic demand and profits were weak.
- Acquisition contribution, integration costs, and final purchase-price allocations, including the preliminary goodwill and intangible asset amounts.
- Cash conversion and debt development: operating cash flow declined year over year while acquisitions, dividends, and repurchases required substantial cash; verify refinancing of the November 2016 maturity.
- Potential exposure under the $392.9m of guarantees and continued compliance with borrowing covenants.
- Year-end inventory/LIFO adjustments and the eventual effects of pending accounting standards; the company expected lease accounting adoption to significantly affect its balance sheet.