Genuine Parts Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials across approximately 1,900 locations. Financial statements are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $3.338B | $3.185B | $6.519B | $6.159B |
| Gross profit | $972.3M | $916.1M | $1.891B | $1.765B |
| Operating profit | $291.6M | $264.6M | $539.9M | $476.0M |
| Net income | $168.6M | $151.8M | $314.9M | $278.3M |
| Diluted EPS | $1.08 | $0.96 | $2.01 | $1.76 |
| Dividends declared per share | $0.495 | $0.45 | $0.99 | $0.90 |
- Sales grew 5% in Q2 and 6% in the first half; net income rose 11% and 13%, respectively. Diluted EPS increased 12% and 14%.
- Gross margin improved: cost of goods sold was 70.9% of sales in Q2 versus 71.2%; for the half, 71.0% versus 71.4%. Operating profit was 8.7% of sales in Q2 versus 8.3%, and 8.3% for the half versus 7.7%.
- First-half operating cash flow was $421.3M, compared with $250.0M. Investing used $577.3M, including $525.9M for acquisitions and other investing and $51.4M for capital expenditures. Financing used $197.9M, including $147.2M of dividends and $55.0M of share repurchases. Cash fell $353.5M to $171.6M.
- At June 30, current assets were $4.423B and current liabilities $1.978B; the current ratio was 2.2:1, down from 2.5:1 at year-end 2011. Long-term debt remained $500M, consisting of two fixed-rate $250M notes due November 2013 and November 2016. No amounts were outstanding on the credit facilities at quarter-end.
Material changes and operating trends
- Automotive sales rose 4% in Q2 and 5% in the first half, primarily reflecting Quaker City. Slight pricing deflation and unfavorable Canadian and Mexican exchange rates reduced sales by about 1%. Industrial sales rose 8% and 10%; office products sales declined about 1%; electrical/electronic materials sales rose 9% and 7%, supported by acquisitions.
- Operating expenses declined as a share of sales to 21.1% in Q2 from 21.2%, and to 21.4% for the first half from 21.6%. Management cited $4M of cost savings in Q2 and $14M in the first half, plus improved expense leverage.
- Automotive, industrial, and electrical/electronic segment operating profit improved; office products operating profit declined 2% in Q2 and 1% for the first half.
- Quaker City Motor Parts was acquired May 1 for approximately $330M, net of cash acquired, and contributed results from that date. The company recorded approximately $210M of goodwill and other intangible assets; purchase accounting remained preliminary.
- Effective January 1, the company acquired a 30% equity-method interest in Exego Group for approximately $165.6M. It has an option to acquire the remaining 70% if specified earnings thresholds are met; exercise is not assured.
Outlook, risks, and contingencies
- No consolidated earnings or sales guidance is stated in the provided filing text. Management expected more modest automotive growth amid economic moderation and declining consumer confidence, continued industrial growth, soft office-products market conditions, and continued electrical/electronic growth.
- Management said cash generated from operations and available credit lines should fund anticipated operations, including possible share repurchases, for the foreseeable future. The $350M revolving facility matured in December 2012; a separate $200M facility related to the Quaker City acquisition matured at the earlier of September 15, 2012 or refinancing of the existing facility.
- Key stated risks include weaker product demand and macroeconomic conditions, vendor disruptions or less favorable terms, competition and pricing pressures, execution of business initiatives, acquisition integration, litigation, and foreign-exchange movements. Canadian-dollar exposure was the principal currency risk; currency effects negatively affected sales.
- The company guaranteed borrowings of certain independent stores and affiliates totaling approximately $224M. It was compliant with related covenants and reported no significant historical guarantee losses; accrued guarantee liabilities were described as immaterial.
- Interim results rely on estimates, including inventory/LIFO adjustments, bad-debt accruals, and volume incentives; year-end determinations may cause significant changes. Management cautioned that first-half results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Final purchase accounting, acquired asset values, and ongoing performance of Quaker City; also the terms, thresholds, and potential exercise of the Exego purchase option.
- Cash and working-capital trends following acquisition spending, and refinancing or renewal of the credit facilities approaching their stated maturities.
- Performance of the office-products segment and whether the expected industrial and electrical/electronic growth continues.
- Exposure and any losses under the $224M of guaranteed borrowings, along with pension and other post-retirement obligations.
- Subsequent filings for changes to management’s outlook and the macroeconomic, vendor, competitive, currency, and acquisition-integration risks described here.