Genuine Parts Company — 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; quarterly figures below include the three months ended December 31. Genuine Parts distributes automotive, industrial, office, and electrical/electronic materials through approximately 1,900 locations in the U.S., Canada, and Mexico. Automotive represented 49% of 2011 sales, industrial 33%, office products 14%, and electrical/electronic materials 4%.
Key financial results
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $12.459 billion | $11.208 billion | +11% |
| Gross profit | $3.606 billion | $3.253 billion | +11% |
| Income before tax | $890.8 million | $761.8 million | +17% |
| Net income | $565.1 million | $475.5 million | +19% |
| Diluted EPS | $3.58 | $3.00 | +19% |
| Operating cash flow | $624.9 million | $678.7 million | -8% |
| Cash at year-end | $525.1 million | $530.0 million | Nearly unchanged |
| Total debt at year-end | $500 million | $500 million | Unchanged |
Gross margin was approximately 28.9%, versus 29.0% in 2010; cost of goods sold rose to 71.1% of sales from 71.0%. SG&A was 20.8% of sales, improving from 21.1%, and net margin was 4.5%, up from 4.2%. The effective tax rate declined to 36.6% from 37.6%.
Current assets were $4.577 billion and current liabilities $1.812 billion; the reported current ratio was 2.5:1. The company had an undrawn $350 million revolving credit facility maturing in December 2012. Debt consisted of $250 million of 4.67% notes due 2013 and $250 million of 3.35% notes due 2016. The weighted average borrowing rate was 4.01%.
In fourth-quarter 2011, sales were $3.014 billion versus $2.808 billion in fourth-quarter 2010; net income was $135.0 million versus $118.7 million, and diluted EPS was $0.86 versus $0.75.
Changes versus prior year and segment performance
- Sales increased in all four segments for a second consecutive year. Automotive sales rose 8% to $6.061 billion; industrial rose 19% to $4.174 billion; office products rose 3% to $1.689 billion; and electrical/electronic materials rose 24% to $557.5 million.
- Industrial and electrical growth included acquisition contributions; the filing attributes approximately 3% of industrial sales growth and 11% of electrical sales growth to 2011 acquisitions. Electrical sales also benefited from copper pricing.
- Segment operating margins increased for automotive (7.7% from 7.5%), industrial (8.1% from 7.3%), and electrical (7.3% from 6.9%). Office margin edged down to 7.9% from 8.0% amid gross-margin pressure.
- Operating cash flow declined despite higher earnings, principally because receivables, inventory, and payables together used $19 million of cash, compared with providing $185 million in 2010. Investing outflow rose to $231.5 million, including higher acquisition spending and capital expenditures.
- Goodwill and other intangible assets increased $70 million to $279.8 million, primarily from acquisitions. Pension and other post-retirement liabilities rose by $234.9 million, largely reflecting changes in plan funded status; pension contributions were $58 million.
Outlook, commentary, and risks
- No quantified 2012 revenue or earnings guidance is provided. Management said it believed cash and available capital sources were sufficient for operations, debt service, capital spending, benefit contributions, dividends, repurchases, and contemplated acquisitions. It expected dividends to continue increasing and expected to remain active in share repurchases, with amounts varying.
- Management credited 2011 performance to favorable market conditions and internal growth initiatives, while noting ongoing competitive pricing pressure and vendor price increases. It cited aging vehicles and manufacturing-sector activity as important demand drivers; office-products conditions remained difficult, partly due to slow white-collar employment recovery.
- Principal risks include economic weakness and reduced customer demand, intense competition and price pressure, vendor disruption or reduced inventory-return privileges, and challenges executing initiatives and integrating acquisitions. Currency movements, particularly the Canadian dollar, affect reported results.
- The company guarantees approximately $217.2 million of borrowings for independent automotive stores and affiliates; it reported no significant historical losses on these guarantees. It also reported approximately 2,100 product-liability lawsuits, while stating it expected resolution in the ordinary course without material effect.
- Unusual and relevant items include $16 million of LIFO liquidation benefits reducing 2011 cost of goods sold, a favorable tax adjustment related to expiration of a statute of limitations, and the January 1, 2012 purchase of a 30% interest in Australia’s Exego Group for approximately $150 million. The Exego investment is a subsequent event, not part of 2011 results; an option to acquire the remaining interest is conditional on earnings thresholds.
Most important facts for investors to verify
- Whether sales and earnings growth persist after accounting for acquisitions, pricing, currency effects, and the deceleration in some segments’ quarterly growth.
- Whether gross-margin pressure from competition, vendor costs, and segment-specific pricing practices offsets operating-expense leverage.
- Why operating cash flow fell 8% while net income rose 19%, and whether working-capital cash use continues.
- The assumptions and sensitivity behind the pension obligations, which increased materially, as well as expected contributions and future pension expense.
- The 2012 refinancing or renewal of the $350 million revolving facility, due in December 2012, and the timing of the $250 million note maturity in 2013.
- The acquisition economics and conditional future commitment associated with Exego, and potential exposure under the $217.2 million of guaranteed borrowings.