Genuine Parts Company — Q2 2014 Form 10-Q
Business context and period: The unaudited report covers the quarter and six months ended June 30, 2014. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials across approximately 2,600 locations in the U.S. and several other countries. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $3,908.4 | $3,676.0 | $7,533.3 | $6,874.8 |
| Gross profit | $1,179.2 | $1,105.1 | $2,263.8 | $2,026.9 |
| Operating profit | $349.8 | $317.3 | $632.4 | $560.8 |
| Net income | $197.7 | $216.4 | $355.2 | $360.7 |
| Diluted EPS | $1.28 | $1.39 | $2.30 | $2.31 |
| Operating margin | 8.9% | 8.6% | 8.4% | 8.2% |
- Sales grew 6% in Q2 and 10% year to date. Gross margin was approximately 30.2% in Q2 and 30.0% for the first half, versus 30.1% and 29.5% in 2013.
- Reported net income declined 9% in Q2 and 2% in the first half. Comparisons are affected by a 2013 one-time, pre-tax acquisition-related gain of approximately $36 million from the GPC Asia Pacific transaction; it increased Q2 2013 diluted EPS by $0.22. Excluding those 2013 adjustments, management said Q2 2014 net income and diluted EPS were each up 9%; first-half net income was up 9% and diluted EPS up 10%.
- Operating expenses rose to 22.2% of Q2 sales and 22.7% of first-half sales, partly reflecting the 2013 acquisition gain comparison and GPC Asia Pacific’s store-based cost structure. The effective tax rate was 36.3% in Q2 and 35.9% for the first half, above the prior-year rates of 31.3% and 32.8%, respectively, partly because of the favorable tax treatment of the 2013 gain.
- Segment sales increased year over year in Q2: Automotive 5%, Industrial 7%, Office Products 4%, and Electrical/Electronic Materials 32%. Acquisition contributions were important, particularly for Electrical/Electronic Materials; foreign exchange reduced Automotive and Industrial growth.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $367.1 million, down from $467.1 million. Investing used $218.8 million, including $178.9 million for acquisitions and other investing activities and $39.9 million in capital expenditures. Financing used $193.3 million, including $171.2 million in dividends and $53.8 million in share repurchases. Cash declined $44.0 million to $152.9 million.
- At June 30, current assets were $5,512.4 million and current liabilities $3,506.9 million; the current ratio was 1.6, unchanged from year-end. Receivables rose 15% from December 31, 2013, primarily from higher sales and acquisitions; inventory rose 1%.
- Total debt was approximately $806.4 million, up $41.7 million from year-end: $306.4 million drawn on the $850 million revolving credit line and $500.0 million fixed-rate notes. The revolver matures in September 2017; fixed-rate notes mature in 2016 and 2023. The company reported covenant compliance. Management expected cash from operations and available credit to fund anticipated operations, including potential repurchases, for the foreseeable future.
- Shareholders received declared dividends of $0.575 per share in Q2. The company repurchased $53.8 million of stock during the first half; approximately 10.0 million shares remained authorized for repurchase at June 30.
Outlook, risks and other matters
- Management anticipated further Automotive sales growth from organic initiatives; improving Industrial demand, initiatives, and acquisitions to support growth; moderate Office Products growth despite an industry-wide slowdown; and gradual organic improvement plus acquisition-driven growth in Electrical/Electronic Materials. These are expectations, not quantified full-year guidance.
- Management cited acquisitions, product-line expansion, geographic reach, customer initiatives, and gross-margin and cost-saving programs as growth priorities. It also noted ongoing technology and supply-chain investments and savings from the pension plan freeze effective January 1, 2014.
- Risks identified include weaker product demand or economic conditions, vendor relationship or supply disruptions, competitive pricing, execution of initiatives and acquisitions, litigation, and foreign-exchange exposure—particularly the Australian and Canadian dollars. Management said foreign exchange negatively affected 2014 results. It reported no material interest-rate or commodity-price risk.
- The company guarantees borrowings of certain independent automotive stores and affiliates; guaranteed borrowings totaled approximately $273.3 million at June 30. Maximum exposure is generally the guaranteed debt; accrued guarantee liabilities were described as immaterial, and no significant guarantee losses had occurred to date.
- The company was evaluating the effect of the new revenue-recognition standard, effective for its fiscal years beginning after December 15, 2016; early adoption was not permitted. Interim estimates, including inventory, bad-debt, returns, and incentive accruals, may change at year-end. Management stated interim results are not necessarily indicative of full-year results.
Investor verification points
- Reconcile reported earnings with the 2013 GPC Asia Pacific remeasurement gain and related tax effects when assessing year-over-year growth.
- Review acquisition contributions, organic growth, and currency impacts by segment, particularly the strong acquisition-driven Electrical/Electronic Materials increase.
- Monitor operating cash conversion, working-capital movements, acquisition spending, and the funding of dividends and repurchases.
- Track revolver borrowings, debt maturities, covenant compliance, and the $273.3 million of guaranteed third-party borrowings.
- Assess whether management’s segment outlook and cost savings are achieved, and review subsequent filings for quantified guidance or material changes.