Genuine Parts Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. Genuine Parts distributes automotive replacement parts, industrial parts and business products through approximately 3,600 locations in North America, Europe and Australasia.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $19.39 billion | $18.74 billion | +3.5% |
| Gross margin | $6.32 billion; 32.6% of sales | $5.98 billion; 31.9% of sales | Margin +0.7 percentage points |
| Income before taxes | $830.3 million | $1.08 billion | -22.8% |
| Net income | $621.1 million | $810.5 million | -23.4% |
| Diluted EPS | $4.24 | $5.50 | -22.9% |
| Operating cash flow | $892.0 million | $1.15 billion | -22.1% |
| Capital expenditures | $297.9 million | $232.4 million | +$65.4 million |
Management’s non-GAAP adjusted net income was $833.2 million, or $5.69 per diluted share, versus $836.1 million, or $5.68 per share, in 2018. These measures exclude specified restructuring, impairment, divestiture, acquisition and other items and should be considered alongside GAAP results.
At year-end, cash and cash equivalents were $277.0 million, total debt was $3.43 billion (including current maturities), and equity was $3.70 billion. The current ratio was 1.24, compared with 1.28 in 2018. The company reported $1.4 billion outstanding under its syndicated facility and said it complied with debt covenants. Dividends paid were $438.9 million; dividends declared were $3.05 per share.
Segments and changes versus 2018
- Automotive: Sales of $11.0 billion, up 4.4%; comparable sales rose 2.3%. Segment profit fell 2.8%, and segment margin declined to 7.6% from 8.1%. Acquisitions supported growth; currency translation and challenged European conditions weighed on results.
- Industrial: Sales of $6.53 billion, up 3.6%; comparable sales rose 1.7%. Segment profit increased 7.1%, and margin improved to 8.0% from 7.7%. Acquisitions, including Inenco, contributed, while the EIS divestiture reduced reported sales.
- Business Products: Sales of $1.88 billion, down 1.8%; segment profit fell 12.4%, and margin declined to 4.1% from 4.6%. Management cited industry consolidation, competition, lower sales volume from some national accounts and rising costs.
- Consolidated sales growth included approximately 4.6% from acquisitions and 1.7% comparable growth, offset by divestitures and unfavorable currency effects, each reducing sales by approximately 1.4%.
Fourth-quarter results and unusual items
Fourth-quarter sales were $4.71 billion, compared with $4.60 billion a year earlier. Net income was $8.9 million and diluted EPS was $0.06, versus $186.7 million and $1.27 in fourth-quarter 2018. The quarter included significant charges: $154.9 million of restructuring and special termination costs, principally for workforce reductions and facility closures or consolidations, and an $82.0 million goodwill impairment in Business Products. The impairment followed weaker-than-expected segment results, including lower volume from certain national accounts and increased uncertainty about the segment’s long-term outlook.
The company recognized a $38.7 million gain when it remeasured its existing Inenco investment upon acquiring the remaining interest. It also recorded $41.5 million of realized currency and other divestiture losses. These and other specified items are reflected in the company’s non-GAAP reconciliation.
Cash, capital allocation and outlook
- Operating cash flow fell primarily because the increase in accounts payable was smaller than in 2018. Investing cash outflow was $563.2 million; financing cash outflow was $386.0 million.
- Acquisitions and other investing activities used $724.7 million; divestiture proceeds were $434.6 million. The company acquired automotive and industrial businesses, including Hennig, PartsPoint, Axis and the remaining 65% of Inenco, and sold EIS and other non-core operations.
- The 2019 Cost Savings Plan is expected to produce $100 million in annualized operating expense reductions by the end of 2020. Remaining plan costs expected after 2019 were $20.3 million.
- Management estimated 2020 capital expenditures of $300 million to $330 million. It expected automotive growth to continue, while anticipating a relatively slow industrial economy through at least the first half of 2020. No specific consolidated revenue or EPS guidance is provided in the filing.
- The Business Products Group’s Canadian operations were sold effective January 1, 2020.
Risks, contingencies and other disclosures
- Risks include weaker demand or economic conditions, intense competition and e-commerce pressures, supplier disruption and tariffs, acquisition integration, foreign exchange and interest-rate changes, cybersecurity and IT disruption, and evolving trade arrangements including Brexit.
- The filing identifies the emerging coronavirus outbreak as a potential supply-chain risk; the company sourced some products from China and said the impact could not then be reasonably estimated.
- The company reported approximately 1,615 pending product-liability lawsuits and a $146.2 million product-liability accrual. It stated that resolution of pending and reasonably anticipated claims was not expected to materially affect its financial condition or results. A prior $77.1 million damages verdict was reversed in February 2020, with a new trial on damages ordered.
- Guaranteed borrowings of independent stores and affiliates totaled approximately $904.7 million. The company reported no significant losses to date on these guarantees.
- A 2019 fire at the S.P. Richards headquarters and distribution center was expected to be covered by insurance; recovery of related losses remained subject to the insurance process.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls and remediation of a previously identified weakness at Alliance Automotive Group. Controls at certain 2019 acquired businesses, representing 7.9% of year-end assets, were excluded from the company’s control assessment.
Key facts for investors to verify
- Whether the $100 million annualized cost savings target is achieved, and how much implementation cost remains.
- Whether core sales and segment margins improve, particularly in Automotive and Business Products, and whether industrial demand recovers as management expected.
- How acquisition integration, divestitures and foreign currency affect organic growth, debt and cash generation.
- The sensitivity of the Business Products outlook and remaining goodwill to further deterioration in earnings or industry conditions.
- Developments in product-liability claims, including the remanded damages trial, and the adequacy of reserves and insurance recoveries.
- Any supply-chain effects from coronavirus, tariffs or other trade changes, alongside the company’s debt maturities and liquidity needs.