Genuine Parts Company — Q1 2014 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2014, with comparisons to Q1 2013. 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 international markets.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Net sales | $3,624.9 million | $3,198.8 million; up 13% |
| Gross profit / margin | $1,084.6 million / 29.9% | $921.7 million / 28.8% |
| Operating profit / margin | $282.6 million / 7.8% | $243.6 million / 7.6% |
| Net income | $157.5 million | $144.4 million; up 9% |
| Diluted EPS | $1.02 | $0.93; up 10% |
| Operating cash flow | $59.8 million | $116.4 million |
| Capital expenditures | $18.4 million | $12.9 million |
| Cash and equivalents | $103.5 million at March 31 | $196.9 million at December 31, 2013 |
| Total debt | $899.8 million at March 31 | $764.7 million at December 31, 2013 |
Operating cash flow was reduced by a $133.5 million use of cash from changes in operating assets and liabilities, compared with a $52.6 million use in Q1 2013. Investing activities used $175.2 million, including $156.9 million for acquisitions and other investing activities. Financing activities provided $23.3 million; the company paid $82.8 million in dividends and spent $22.7 million on share purchases.
At March 31, current assets were $5,346.4 million and current liabilities were $3,422.7 million; the reported current ratio was 1.6 to 1. The $399.8 million revolving-credit balance was under an $850 million unsecured facility maturing September 2017, with interest at LIBOR plus a leverage-based margin. Fixed-rate debt was $500 million, consisting of two $250 million notes due in 2016 and 2023. The company reported compliance with borrowing covenants and said existing credit lines and operating cash generation should fund foreseeable needs, including share repurchases.
Material changes and segment results
- Automotive sales rose 23%, reflecting an approximately 17% acquisition contribution and 7% core North American growth; operating profit increased 24%.
- Industrial sales rose 4%: approximately 3% from acquisitions and 2% organic growth, partly offset by 1% unfavorable currency translation. Operating profit increased 5%.
- Office Products sales declined approximately 1%, primarily due to lower volumes; operating profit increased 2%.
- Electrical/Electronic Materials sales rose 30%, largely due to acquisitions; operating profit increased 49%.
- Foreign exchange, principally the Australian and Canadian dollars, reduced sales growth. The filing reports a 1.6% adverse impact for the Automotive group.
Cost of goods sold declined to 70.1% of sales from 71.2%. Total operating expenses rose to 23.2% of sales from 21.9%, reflecting higher costs in the Asia-Pacific store-based business, among other factors. Overall operating margin improved to 7.8% from 7.6%.
Outlook, commentary, and risks
Management anticipated increased Automotive sales growth primarily from organic growth; expected Industrial revenue growth from improving conditions, internal initiatives, and acquisitions; and expected moderate Office Products growth despite industry-wide consumption pressure. For Electrical/Electronic Materials, management expected gradual organic improvement and continued acquisition-driven growth. These are forward-looking expectations, not quantified earnings guidance.
Management cited strategic acquisitions, product-line expansion, geographic expansion, new markets, customer marketing, and margin and cost initiatives as growth priorities. The pension plan freeze effective January 1, 2014 contributed to cost savings. A $38.7 million pension contribution was made during the quarter; pension plans recorded net periodic benefit income of $2.7 million, versus expense of $13.1 million in Q1 2013.
Principal stated risks include weaker demand or economic conditions, vendor and supply disruptions, competitive pricing pressure, execution of business initiatives and acquisition integration, litigation, and foreign-currency movements. The company guarantees certain borrowings of independent automotive stores and affiliates: approximately $262.6 million was subject to guarantees at March 31. The company said its maximum exposure is generally the guaranteed borrowings, that it was covenant-compliant, and that it had incurred no significant guarantee losses to date.
The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. Interim results use estimates, including inventory and LIFO adjustments, bad debts, returns, and volume incentives; management cautioned that year-end determinations may change estimates and that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much future sales and earnings growth depends on acquisitions versus organic demand, particularly in Automotive and Electrical/Electronic Materials.
- Whether operating cash flow recovers after the quarter’s larger working-capital outflow, and how cash generation supports acquisition spending, dividends, and repurchases.
- Revolving-credit borrowings, leverage, covenant headroom, and refinancing needs as debt increased by $135.1 million from year-end.
- Whether Office Products demand and foreign-exchange pressure improve, and whether Asia-Pacific operating costs affect margins as the business expands.
- Potential losses on the $262.6 million of guaranteed borrowings and changes in pension estimates, inventory/LIFO adjustments, or other interim accruals.