Genuine Parts Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Genuine Parts distributes automotive and industrial replacement parts across North America, Europe and Australasia. The Business Products Group was divested in 2020 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $4.82 billion (+10.3%) | $4.37 billion | $14.07 billion (+14.5%) | $12.29 billion |
| Gross margin | 35.5% | 35.0% | 35.1% | 34.2% |
| Operating expenses / sales | 29.4% | 28.1% | 29.3% | 32.8% |
| Continuing-operations net income | $228.6 million | $232.9 million | $642.8 million | $(8.2) million |
| Diluted continuing-operations EPS | $1.59 | $1.61 | $4.44 | $(0.06) |
Q3 sales growth reflected 7.6% comparable-sales growth, 1.8% from acquisitions and 0.9% from foreign currency and other. Nine-month growth reflected 10.0% comparable-sales growth, 1.3% from acquisitions and 3.2% from currency and other. Management said price inflation contributed approximately 3% to Q3 sales and 2% to nine-month sales.
Automotive sales grew 8.2% in Q3 and 16.4% year to date; Industrial sales grew 14.5% and 11.0%, respectively. Q3 segment profit margins were 8.8% for Automotive (9.0% prior year) and 10.3% for Industrial (8.9%). Year-to-date margins were 8.6% and 9.4%, respectively, versus 7.8% and 8.2%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1.01 billion, down from $1.43 billion. The prior-year comparison benefited from approximately $500 million of initial cash impact from the receivables sales agreement.
- Investing cash outflow was $239.9 million, including $142.6 million for acquisitions and other investing activities and $138.2 million of capital expenditures. Financing cash outflow was $818.7 million, including $349.3 million of dividends, $283.9 million of share repurchases and net debt repayments.
- Cash was $919.1 million at September 30, down $71.1 million from year-end 2020. Long-term debt was $2.43 billion, versus $2.52 billion at year-end; no current debt was reported. Management reported total liquidity of $2.4 billion, including $1.5 billion available under its revolver. Average debt cost was 2.34% and the company reported covenant compliance.
- Accounts receivable rose 21.3% and inventory rose 6.9% from year-end, primarily with higher sales and demand; accounts payable increased 16.7%, reflecting purchasing volume and extended supplier terms.
- Outstanding obligations to financial institutions under the voluntary supplier-finance program were $2.6 billion, up from $1.8 billion at year-end. The company classifies these obligations in accounts payable and the related cash flows as operating activities. The receivables sales program had approximately $800 million outstanding at quarter-end.
Changes, unusual items and outlook
- Q3 GAAP continuing-operations income and diluted EPS declined slightly year over year, primarily because of a $61.1 million software-project disposal charge. The project was abandoned after a strategy change tied to advances in alternative technologies.
- Nine-month 2021 results included a $77.4 million charge for a reinstated automotive product-liability damages award; it was fully paid by September 30. Adjusted diluted EPS, a non-GAAP measure, was $1.88 for Q3 (+15.3%) and $5.12 year to date (+36.2%). Adjusted results exclude specified items, including the 2021 charges and the 2020 goodwill impairment and restructuring costs.
- The large year-to-date improvement in GAAP earnings versus 2020 also reflects the prior-year $506.7 million goodwill impairment and discontinued-operation losses. These items limit direct comparability.
- Management cited market reopening, higher consumer mobility and miles driven, stronger industrial conditions, gross-margin gains and cost-control initiatives. It provided no specific numerical earnings or sales guidance in this filing, but said cash and credit availability should fund anticipated operations for the foreseeable future.
- The revolver amendment reduced the applicable rate to LIBOR + 112.5 basis points, removed the 0.5% LIBOR floor and extended maturity to September 30, 2026. The company also reported a 3% increase in its 2021 regular dividend rate.
Management cautioned that COVID-19 effects remain uncertain, including possible demand volatility, supply-chain and inventory disruption, port delays and higher shipping costs, and labor availability. Other cited risks include inflation and freight expense, supplier relationships, competition, foreign exchange, acquisitions, litigation, information-system disruptions and debt-covenant compliance. Management said market-risk exposure had not changed materially since year-end and disclosure controls were effective.
Important facts for investors to verify
- How much reported sales growth reflects underlying volume versus price inflation, currency and acquisitions, and whether margin gains persist.
- The recurring cash-flow impact and terms of the $2.6 billion supplier-finance obligations and the $800 million receivables sales balance.
- The future effects of pandemic-related supply constraints, freight and labor costs, and inventory availability.
- The status and potential exposure of legal matters, guaranteed borrowings of approximately $895.6 million, and the retained SPR investment of $69.7 million with a $17.0 million allowance.
- How non-GAAP adjusted earnings reconcile to GAAP results and how the software disposal and product-liability charge affect comparisons.