Genuine Parts Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Genuine Parts distributes automotive replacement parts, industrial parts and business products. Its operations were substantially open as businesses deemed essential, with France and New Zealand mostly closed by government mandates. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $4,559.5 | $4,736.8 | Down 3.7% |
| Gross profit | $1,500.8 | $1,508.2 | Down 0.5% |
| Gross margin | 32.9% | 31.8% | Up 1.1 percentage points |
| Segment profit | $276.4 | $321.5 | Down 14.0% |
| Segment profit margin | 6.1% | 6.8% | Down 0.7 percentage points |
| Net income | $136.5 | $160.3 | Down 14.8% |
| Diluted EPS | $0.94 | $1.09 | Down 13.8% |
| Operating cash flow | $74.1 | $61.7 | Up $12.3 |
| Capital expenditures | $45.4 | $45.6 | Approximately flat |
Gross margin improved primarily due to divestitures, acquisitions of higher-gross-margin businesses and favorable product mix, partly offset by lower supplier incentives. Operating expenses rose to $1,311.9 million, or 28.8% of sales versus 26.8%, reflecting costs including freight, insurance, IT and cybersecurity, and weaker expense leverage.
By segment, Automotive sales were $2,581.6 million, down 1.6%, and segment profit declined 20.6%; Industrial sales were $1,509.8 million, down 7.7%, and segment profit declined 5.9%; Business Products sales were $468.1 million, down 2.3%, and segment profit declined 4.8%. Industrial’s segment margin improved to 7.5% from 7.4%; Automotive and Business Products margins declined.
Financial position and liquidity
- Cash and cash equivalents were $354.5 million at March 31, 2020, up $77.5 million from year-end 2019.
- Total debt was approximately $3.6 billion, up $209.2 million, or 6.1%, from December 31, 2019. Debt included $908.9 million current and $2,726.4 million long-term. Average cost of debt was 2.00% at quarter-end.
- Management reported total liquidity of approximately $1.1 billion, comprising $0.4 billion cash and $0.7 billion available under the revolving credit facility. The company said existing credit lines and operating cash flow should fund anticipated operations for the foreseeable future.
- Operating cash flow was $74.1 million; investing activities used $35.5 million; financing activities provided $53.5 million. Financing included $261.2 million net debt proceeds, $110.9 million of dividends paid and $95.7 million of share repurchases.
- Inventory declined $132.3 million from year-end, while receivables increased $70.0 million. The company said collections were meeting expectations and it was monitoring trends.
Material changes, outlook and risks
- Management attributed an approximately 3% sales impact, 0.7 percentage-point segment-margin impact and $0.21-per-share impact to COVID-19 during the quarter. Sales weakened in the final two weeks of March. April daily sales were estimated to be down approximately 25% overall, excluding divestitures: Automotive down 30%, Industrial down 10% and Business Products down 20%.
- Management expected the sales environment to slow further in Q2 but said it could not reasonably estimate the pandemic’s future effect on financial condition, results or cash flows. No formal earnings or revenue guidance was provided.
- Q1 sales declined due to a 4.8% divestiture impact, a 3.5% comparable-sales decline and a slightly negative foreign-currency effect, partly offset by a 5.3% acquisition benefit. The company also recorded $6.0 million of incremental COVID-related costs.
- Adjusted net income, a non-GAAP measure, was $133.4 million, down 28.7%; adjusted diluted EPS was $0.92, down 28.1%. These figures exclude specified insurance gains, transaction and other costs, restructuring costs, and prior-year realized currency losses.
- The company temporarily suspended share repurchases, reduced planned capital spending, limited acquisitions to select bolt-ons, managed inventory and sought to preserve liquidity. Management expected to continue paying dividends; the board declared a $0.79-per-share dividend payable July 1, 2020.
- On May 1, 2020, after quarter-end, the company amended credit agreements. The leverage covenant limit increased from 3.50:1 to 4.00:1 through December 31, 2020, with a subsequent reversion; interest rates increased, and other restrictions and repayment provisions changed. The company was compliant with covenants at March 31.
- Key risks include the duration and severity of COVID-19, customer and supplier disruption, access to capital, covenant compliance, receivable and guarantee losses, higher sourcing costs, and possible goodwill impairment if economic conditions deteriorate. Management concluded European Automotive goodwill was not impaired at March 31; the reporting unit had $1.2 billion of goodwill.
- Other notable items: the company recognized a $12.3 million gain on insurance recoveries for the 2019 S.P. Richards fire and expected further recoveries. A product-liability damages award was reversed by a higher court, which ordered a new damages trial; the plaintiffs appealed, and the company did not expect a material financial-statement impact. Guaranteed borrowings of independent stores and affiliates totaled approximately $939.9 million; the company reported covenant compliance and no material current expected credit-loss reserve.
Important facts for investors to verify
- Subsequent quarterly filings’ actual sales, margins, cash flows and liquidity versus management’s April sales estimates and COVID-19 uncertainty.
- Debt levels, covenant ratios, amended borrowing costs, facility availability and compliance with the May 2020 amendments.
- Whether the dividend continued as expected and whether the share-repurchase suspension remained in effect.
- Insurance recoveries related to the S.P. Richards fire, the product-liability litigation outcome and any changes in guaranteed-loan credit exposure.
- Any goodwill impairment indicators, particularly for European Automotive, and the realized savings and remaining costs under the 2019 Cost Savings Plan.