Genuine Parts Company — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2014. Genuine Parts distributes automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials, operating across approximately 2,600 locations in the U.S. and several other countries.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $3,985.9 million | $3,685.2 million | $11,519.2 million | $10,560.0 million |
| Gross profit | $1,183.4 million | $1,100.9 million | $3,447.2 million | $3,127.8 million |
| Operating profit | $339.6 million | $300.5 million | $972.0 million | $861.3 million |
| Net income | $190.5 million | $173.7 million | $545.7 million | $534.5 million |
| Diluted EPS | $1.24 | $1.12 | $3.53 | $3.43 |
- Q3 sales rose 8%, net income 10%, and diluted EPS 11%. Nine-month sales increased 9%; reported net income rose 2% and diluted EPS rose 3%.
- Gross margin was 29.7% in Q3 versus 29.9% a year earlier; nine-month gross margin was 29.9% versus 29.6%. Operating margin improved to 8.5% in Q3 from 8.2%, and to 8.4% for the nine months from 8.2%.
- Nine-month operating cash flow was $589.3 million, down from $837.5 million. Investing cash use was $349.1 million, including $275.3 million for acquisitions and other investing activities and $73.8 million for capital expenditures. Financing cash use was $297.9 million, including $259.4 million of dividends and $95.5 million of share repurchases.
- Cash was $135.5 million at September 30, down $61.4 million from year-end 2013. Total debt was approximately $835.4 million, up $70.7 million; this comprised $335.4 million outstanding on the revolving credit line and $500 million of fixed-rate notes. The current ratio was 1.5, versus 1.6 at December 31, 2013.
- Dividends declared were $0.575 per share for Q3 and $1.725 for the nine months, compared with $0.5375 and $1.6125, respectively, in 2013.
Material changes and segment performance
- Sales increased across all four reported segments in Q3: Automotive 4%, Industrial 10%, Office Products 15%, and Electrical/Electronic Materials 35%. Acquisition contributions were significant in some segments; foreign exchange negatively affected Automotive and Industrial sales.
- Management attributed improved operating margins to revenue growth, expense leverage, cost savings and the pension plan freeze effective January 1, 2014.
- Reported 2013 nine-month earnings benefited from a one-time acquisition-related gain associated with the 2013 acquisition of the remaining interest in GPC Asia Pacific. The filing says the gain, net of related adjustments, favorably affected 2013 diluted EPS by $0.22 in Q2; a further $3 million pretax expense adjustment affected Q3 2013 by $0.01 per diluted share. Excluding the 2013 adjustments, management reports 2014 nine-month net income growth of 9% and diluted EPS growth of 10%.
- Comprehensive income was $95.1 million in Q3 2014 versus $192.3 million in Q3 2013, primarily reflecting a $95.0 million foreign-currency translation loss in Q3 2014. Nine-month comprehensive income was $496.5 million versus $454.3 million.
Outlook, risks and other items
- Management expected continued Automotive growth from organic initiatives; continued Industrial growth supported by industry conditions, sales initiatives and acquisitions; and Office Products growth despite an industry-wide slowdown in consumption. Electrical/Electronic Materials was expected to receive acquisition-driven revenue increases and gradual organic improvement. The filing provides no specific consolidated earnings or revenue guidance.
- The company said cash generated from operations and existing credit lines should fund anticipated operations, including share repurchases, for the foreseeable future. It was in compliance with borrowing and guarantee covenants at quarter-end.
- Key stated risks include weaker product demand or adverse macroeconomic conditions, vendor relationship or supply disruptions, competitive pricing pressure, execution of segment initiatives, integration of acquisitions, litigation, and foreign exchange movements, particularly in the Australian and Canadian dollars.
- The company guaranteed approximately $283.3 million of borrowings for independent automotive stores and certain affiliates. Management reported no significant historical losses on these guarantees; accrued guarantee liabilities were not material. The company also noted that interim estimates, including inventory and LIFO adjustments, may change at year-end.
- ASU 2014-09, the new revenue recognition standard, was issued in May 2014, is effective for fiscal years beginning after December 15, 2016, and was under evaluation by the company.
Important facts for investors to verify
- Assess underlying growth against acquisition contributions, foreign-exchange effects and the unusual 2013 GPC Asia Pacific accounting gain.
- Monitor operating cash flow and working-capital movements, particularly receivables, which increased 19% from year-end, and the decline in cash.
- Track revolver borrowings, debt maturities, covenant compliance and the company’s capacity to fund acquisitions, dividends and repurchases.
- Review segment demand, margin trends, acquisition integration and the impact of currency movements and office-products market weakness.
- Consider the potential year-end effect of interim inventory/LIFO estimates and the company’s guaranteed third-party borrowings.