Genuine Parts Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Genuine Parts distributes automotive and industrial replacement parts globally. The filing is unaudited.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $5.295 billion | $4.465 billion | +18.6% |
| Gross profit | $1.826 billion | $1.541 billion | +18.5% |
| Gross margin | 34.5% | 34.5% | Flat |
| Operating expenses | $1.496 billion | $1.272 billion | +17.6% |
| Net income | $245.8 million | $217.7 million | +12.9% |
| Diluted EPS | $1.72 | $1.50 | +14.7% |
| Operating cash flow | $398.8 million | $300.9 million | +$97.9 million |
Sales growth comprised 12.3% comparable-sales growth and an 8.1% acquisition benefit, partly offset by a 1.8% unfavorable foreign-currency and other impact. Automotive sales rose 10.9%; Industrial sales rose 33.6%, including a 17.9% benefit from Kaman Distribution Group (KDG). Automotive segment margin improved to 8.1% from 8.0%; Industrial segment margin increased to 9.3% from 8.3%.
Operating expenses declined to 28.3% of sales from 28.5%, which management attributed to sales leverage and cost-control initiatives. Reported net income included $25.9 million of net unusual adjustments: $26.5 million of acquisition-related and other costs, partly offset by $0.6 million of insurance proceeds. Adjusted net income was $265.7 million, or $1.86 per diluted share; these are non-GAAP measures.
Cash, debt and liquidity
- Cash was $610.8 million at quarter-end, down $103.9 million from year-end.
- Operating cash flow was $398.8 million; investing cash outflow was $1.421 billion, primarily reflecting acquisitions; financing cash inflow was $914.0 million.
- Capital expenditures were $78.0 million. Operating cash flow less capital expenditures was approximately $320.8 million, calculated from reported amounts.
- Total debt was approximately $3.508 billion, up from $2.409 billion at December 31, 2021. The company issued $500 million of 1.750% notes due 2025 and $500 million of 2.750% notes due 2032, primarily to repay acquisition-related revolver borrowings. Average debt cost was 2.31%.
- Reported liquidity was $2.0 billion, including $610.8 million cash and $1.4 billion available on the revolving credit facility. The company said cash generation and existing credit lines should fund anticipated operations for the foreseeable future; it reported compliance with debt covenants.
- Current assets were $8.427 billion and current liabilities $7.250 billion. The company’s amended receivables-sale facility had approximately $1.0 billion outstanding at quarter-end.
Material developments, outlook and risks
- KDG was acquired on January 3 for approximately $1.3 billion net cash consideration. Its estimated annual revenue was approximately $1.1 billion. Preliminary purchase accounting included $1.166 billion of intangible assets and goodwill; valuations and other acquisition accounting remained subject to revision.
- Management described both businesses as recovering and expanding despite supply-chain challenges and inflation. It cited continued consumer activity, pricing actions, and industrial-economy expansion. No specific full-year financial guidance was provided in this filing.
- The company increased its 2022 regular quarterly dividend by 10%, to an annual rate of $3.58 per share. It paid $115.9 million in dividends and repurchased $72.9 million of stock during the quarter.
- Key risks include inflation and higher freight and fuel costs, supply-chain disruption, labor availability, demand changes, COVID-19 effects, and geopolitical uncertainty from the Russia-Ukraine conflict. Management also identified acquisition integration and synergy realization, debt-covenant compliance, currency movements, and cyber risks.
- Supplier-finance obligations were $2.7 billion at quarter-end and are included in accounts payable. The company said suppliers choose independently whether to participate and that commercial terms are not affected by participation.
- The company guaranteed approximately $949.7 million of borrowings by independent stores and affiliates; recognized guarantee assets and liabilities were $80.0 million each. Management reported no material litigation exposure and no material changes in market-risk exposure.
Important facts for investors to verify
- How much of reported growth and future Industrial performance is attributable to KDG, and whether the acquisition delivers expected synergies.
- Final KDG purchase-price allocation, including provisional intangible-asset valuations, tax balances, and lease accounting.
- Whether inflation, freight costs, and supply constraints pressure margins despite pricing and sales growth.
- The sustainability of operating cash flow, including the quarter’s $200 million benefit from the receivables-sale arrangement and the $2.7 billion supplier-finance balance.
- Debt levels, covenant headroom, and liquidity following the acquisition and new note issuance.