Genuine Parts Company (GPC) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Figures below are in millions of dollars except per-share data. The company distributes automotive and industrial replacement parts through more than 10,000 locations. Its Business Products Group was divested in 2020 and is reported as discontinued operations in prior-period comparisons.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $4,783.7 | $3,823.2 | $9,248.5 | $7,915.8 |
| Gross margin | 35.3% | 33.8% | 34.9% | 33.8% |
| Operating expenses as % of sales | 29.9% | 41.4% | 29.2% | 35.4% |
| Income (loss) from continuing operations | $196.5 | $(363.5) | $414.2 | $(241.2) |
| Diluted EPS from continuing operations | $1.36 | $(2.52) | $2.85 | $(1.67) |
| Operating cash flow from continuing operations | Not separately stated for the quarter | $704.4 | $920.7 |
Q2 sales increased 25.1%; comparable sales rose 19.5%. First-half sales increased 16.8%; comparable sales rose 11.8%. Automotive sales grew 28.1% in Q2 and 21.1% in the first half; Industrial sales grew 19.6% and 9.2%, respectively. Management attributed growth to recovering economic activity, increased consumer mobility, higher miles driven, and improving industrial conditions.
Gross margin improved on higher supplier incentives, favorable product and channel mix, and category management actions. Management also cited an approximately 1.5% positive impact from price inflation in Q2; the first-half impact was less than 1%. Segment profit margins improved: Automotive to 9.1% in Q2 and 8.6% in the first half; Industrial to 9.5% and 8.9%, respectively.
GAAP comparisons are significantly affected by the prior-year $506.7 million goodwill impairment, restructuring and other charges, and discontinued-operation losses. Excluding specified items, management reported adjusted diluted EPS from continuing operations of $1.74 for Q2, up 31.8%, and $3.24 for the first half, up 52.8%. These are non-GAAP measures.
Cash, debt, and liquidity
- Cash was $987.4 million at June 30, 2021. First-half operating cash flow was $704.4 million; investing cash outflow was $151.4 million and financing cash outflow was $548.2 million.
- Capital expenditures were $90.0 million and acquisitions and other investing activities were $97.2 million. Financing included $231.6 million of dividends, $184.4 million of share repurchases, and $110.7 million of net debt repayments.
- Total debt was approximately $2.5 billion, down 5.8% from year-end 2020. The company reported $2.5 billion of total liquidity, including $1.5 billion available under its revolving credit facility. Average debt cost was 2.35%; the company reported compliance with debt covenants.
- Accounts receivable rose $343.0 million and inventory rose $172.8 million from year-end, primarily reflecting higher sales and purchasing activity. Accounts payable rose $601.2 million. Supplier finance obligations included in accounts payable were $2.1 billion, versus $1.8 billion at year-end.
- The company had approximately $800 million of receivables sold and outstanding under its receivables sales agreement. It also guaranteed approximately $896.1 million of borrowings by independent stores and affiliates.
Outlook, risks, and unusual items
No quantified earnings or sales guidance is provided in the filing. Management said existing cash and credit facilities were expected to fund operations for the foreseeable future and described the company as positioned to pursue investment, acquisitions, dividends, and repurchases. The annual dividend was increased 3% to $3.26 per share.
Management cited continued COVID-19 uncertainty, renewed outbreaks in parts of Europe and Australasia, supply-chain labor and inventory shortages, order delays and backlogs, and risks to customer demand and staffing. Other highlighted risks include inflation and freight costs, supplier relationships, competition, acquisitions, foreign exchange, litigation, and debt-covenant compliance.
A Washington Supreme Court order on July 8, 2021 reinstated a damages award relating to a 2017 automotive product-liability claim. The company recorded $77.4 million of expense in the quarter ended June 30, including statutory interest and insurance coverage; management excluded the item from adjusted results. The filing states that no environmental matters met its disclosure threshold.
Important facts for investors to verify
- How much of the sales and margin improvement is sustainable as comparisons normalize and pandemic-related conditions change.
- The effect of supply constraints, labor availability, inflation, freight costs, and renewed COVID-19 disruption on sales, margins, and working capital.
- The scale and terms of supplier finance obligations, receivables sales, and guaranteed third-party borrowings, including any changes in exposure or credit quality.
- The final financial and legal implications of the reinstated product-liability damages award.
- Use of non-GAAP adjusted earnings and the adjustments excluded from those measures when comparing performance across periods.