Business context and reporting period
Genuine Parts Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. It distributes automotive and industrial replacement parts, office products, and electrical/electronic materials across approximately 2,000 locations in the U.S., Puerto Rico, Canada, and Mexico.
Financial results and key metrics
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2009 period.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $2,847.2 | $2,535.0 | $5,449.3 | $4,979.5 |
| Gross profit | $822.3 | $744.9 | $1,582.8 | $1,477.1 |
| Operating profit | $223.5 | $188.0 | $404.7 | $353.9 |
| Income before taxes | $200.8 | $166.1 | $362.9 | $310.7 |
| Net income | $124.5 | $103.6 | $225.1 | $192.8 |
| Diluted EPS | $0.78 | $0.65 | $1.42 | $1.21 |
Sales increased 12% in Q2 and 9% in the first half; net income and diluted EPS rose 20% and 17%, respectively, in both periods. Operating margin improved to 7.9% in Q2 from 7.4%, and to 7.4% for the first half from 7.1%. Gross margin declined: cost of goods sold rose to 71.1% of sales in Q2 from 70.6%, and to 71.0% for the first half from 70.3%. Selling, administrative and other expenses improved to 21.0% of Q2 sales from 21.9%, and to 21.6% for the first half from 22.5%. The effective tax rate was 38.0% for both 2010 periods.
Cash flow, balance sheet, and liquidity
For the first half, operating cash flow was $354.6 million versus $488.8 million in 2009; investing used $95.6 million versus $144.4 million, and financing used $187.5 million versus $175.9 million. Cash increased $75.1 million to $411.9 million from year-end 2009. Operating cash flow included $80.4 million from changes in operating assets and liabilities, compared with $244.7 million in the prior-year period.
At June 30, 2010, current assets were $4,210.5 million and current liabilities $1,575.4 million; the current ratio was 2.7:1, down from 2.9:1 at December 31, 2009. Long-term debt was $500 million, unchanged, at fixed rates and maturing in 2011 and 2013. No borrowings were outstanding on the $350 million revolving credit facility, which matures in December 2012. Management said cash from operations and existing credit lines should fund anticipated operations, including voluntary repurchases, for the foreseeable future.
First-half uses included $27.9 million of capital expenditures, $67.7 million for acquisitions, $128.6 million of dividends, and $63.1 million to repurchase approximately 1.6 million shares. The quarterly issuer-purchase table reports 1.33 million shares bought under publicly announced plans and 1.43 million total shares purchased, including employee share surrenders.
Material changes and management commentary
- Automotive sales increased 7% in both reported periods; currency and acquisitions contributed to growth. Automotive operating margin edged down, reflecting prior-year pricing actions, partly offset by cost savings.
- Industrial sales rose 26% in Q2 and 17% in the first half. Operating profit increased 91% and 66%, respectively, supported by sales initiatives, acquisitions, incentives, cost savings, and improved expense leverage.
- Office Products sales declined 1% in both periods amid soft market conditions; operating profit declined 10% in Q2 and 7% in the first half.
- Electrical/Electronic Materials sales rose 32% in Q2 and 24% in the first half, with contributions from internal initiatives, higher copper prices, acquisitions, and improving industrial markets.
- Management attributed consolidated operating-margin improvement to cost-reduction efforts and expense leverage from sales growth. Competitive pricing in Automotive and Office Products pressured gross margin.
- Two Industrial and Electrical Group acquisitions cost approximately $68 million; approximately $33 million of goodwill and other intangibles was recorded. Purchase-price allocation remains preliminary and subject to revision.
Outlook, risks, and unusual items
Management expected continued Automotive sales growth for the rest of 2010 and said Office Products sales trends appeared to have stabilized, though its market remained soft. The filing gives no quantitative earnings or revenue guidance. Forward-looking risks include economic and market demand, supplier relationships, competition and pricing, capital and credit markets, promotional effectiveness, legal and regulatory changes, and litigation.
The Company guarantees borrowings of certain independent automotive stores and affiliates; guaranteed borrowings totaled approximately $251 million at June 30, 2010, representing its stated maximum exposure. Loans generally mature in one to six years; the Company reported covenant compliance and no significant guarantee losses to date. A liability had been accrued, but was not material. Q2’s effective tax rate included an unfavorable nondeductible retirement-asset valuation adjustment. Pension benefit cost also rose materially year over year; no pension-plan contribution was made in the first half. Interim inventory and other estimates may change at year-end, and the filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales gains and improved operating leverage persist, particularly in Industrial and Electrical/Electronic Materials, and whether Automotive pricing pressure continues.
- Cash conversion and working-capital trends, given lower operating cash flow versus the prior-year first half.
- Final purchase-price allocations and subsequent performance of the two acquisitions.
- Exposure and collateral recovery related to the $251 million of guaranteed borrowings, as well as covenant compliance.
- Full-year effects of interim accounting estimates, pension costs, and the retirement-asset tax adjustment; the filing provides no numeric full-year guidance.