Genuine Parts Company — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Genuine Parts distributes automotive, industrial, office, and electrical/electronic products through approximately 2,000 locations, primarily in North America.
Financial performance
- Revenue: $11.208 billion, up 11% from $10.058 billion in 2009. Growth reflected stronger markets, company initiatives, acquisitions, and favorable currency effects.
- Profit: Net income was $475.5 million, up 19%; diluted EPS was $3.00, up 20% from $2.50. Pretax income rose 18% to $761.8 million.
- Margins: Gross profit was $3.253 billion; gross margin was approximately 29.0%, versus 29.9% in 2009. Cost of goods sold increased to 71.0% of sales from 70.1%, reflecting Automotive pricing adjustments and Office competitive pricing. SG&A was 21.1% of sales versus 22.1%. Net margin was approximately 4.2% versus 4.0%.
- Cash flow: Operating cash flow was $678.7 million, down 20% from $845.3 million, primarily due to less working-capital cash generation and higher pension contributions. Investing cash outflow was $172.3 million; financing cash outflow was $320.6 million. Capital expenditures were $85.4 million.
- Liquidity and debt: Cash was $530.0 million, up from $336.8 million. Total debt remained $500 million: $250 million due November 2011 and $250 million due November 2013. The $350 million revolving credit facility was undrawn. The current ratio was 2.2:1, or 2.6:1 excluding current debt. Management said available cash and financing were sufficient for expected needs; debt covenants were met.
- Returns and balance sheet: Dividends declared were $1.64 per share, up from $1.60. The Company repurchased about 1.8 million shares for $75 million. Total assets were $5.465 billion and equity was $2.803 billion.
Segments and changes versus 2009
- Automotive: Sales of $5.608 billion, up 7%; operating profit of $421.1 million and reported operating margin of 7.5%, versus 7.4%. Sales growth accelerated to 9% in Q4.
- Industrial: Sales of $3.522 billion, up 22%, including approximately 5% growth from acquisitions; operating profit rose to $255.6 million from $162.4 million and margin improved to 7.3% from 5.6%.
- Office products: Sales of $1.642 billion, roughly flat; operating profit rose to $131.7 million and margin to 8.0% from 7.7%. Q4 sales increased 3%, the segment’s first positive comparison since Q2 2007.
- Electrical/electronic materials: Sales of $449.8 million, up 30%, including approximately 9% acquisition-related growth; operating profit rose to $30.9 million, but margin declined to 6.9% from 7.3%, partly due to copper-price effects.
- The recovery followed 2009, when consolidated sales fell 9% and net income fell 16%. Industrial and Electrical rebounded with manufacturing activity; Office remained affected by weak business spending and unemployment.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management described improving economic conditions and ongoing sales, cost-control, and acquisition initiatives, and expected dividend increases to continue. Share repurchases were expected to remain active but vary by year.
- Key business risks include weaker consumer or industrial demand, competition and price pressure, vendor disruption or reduced purchase incentives/return privileges, execution and integration of initiatives and acquisitions, and foreign-currency movements. A 10% currency shift was estimated to affect translated sales by approximately $140 million.
- Approximately 1,900 product-liability lawsuits were pending, many involving alleged personal injury from distributed automotive products. The Company believed resolution would not materially affect its business or financial position. It also guaranteed approximately $200.9 million of borrowings by independent stores and affiliates; no significant guarantee losses had occurred.
- 2010 LIFO inventory liquidations reduced cost of goods sold by approximately $25 million. The Company made $91 million of pension contributions in 2010 and expected a $52 million contribution in 2011. Four businesses were acquired in 2010 for approximately $90.6 million; purchase-price allocations were preliminary.
- Management and the external auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether the 2010 sales and earnings recovery is sustained, particularly in Industrial and Electrical, and how much reflects acquisitions and currency.
- How gross-margin pressure, including competitive pricing and the $25 million LIFO liquidation benefit, affects future profitability.
- The refinancing or repayment plan for the $250 million note due November 2011 and the Company’s liquidity after that maturity.
- Actual pension funding needs compared with the expected $52 million 2011 contribution, and sensitivity to discount-rate and asset-return assumptions.
- Final acquisition purchase accounting and integration results, alongside exposure from store guarantees and product-liability litigation.