Genuine Parts Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. It operated through approximately 2,670 locations across the U.S. and several international markets.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with Q1 2016 for income and cash flow measures, and December 31, 2016 for balance-sheet measures.
| Metric | Q1 2017 / March 31, 2017 | Comparable period |
|---|---|---|
| Net sales | $3,905.6 | $3,718.3; up 5% |
| Gross profit / gross margin | $1,155.7 / 29.6% | $1,104.5 / 29.7% |
| Operating profit / operating margin | $286.9 / 7.3% | $284.6 / 7.7% |
| Income before taxes | $243.8 | $246.6 |
| Net income | $160.2 | $158.0; up 1% |
| Diluted EPS | $1.08 | $1.05; up 3% |
| Operating cash flow | $101.8 | $135.0 |
| Cash and cash equivalents | $177.9 | $242.9 at year-end |
| Total debt | $1,025.0 | $875.0 at year-end |
| Current ratio | 1.4 to 1 | Unchanged from year-end |
Cost of goods sold was 70.4% of sales versus 70.3% a year earlier. Operating expenses were $911.9 million, or 23.3% of sales, compared with $857.8 million, or 23.1%. The effective tax rate declined to 34.3% from 35.9%. Dividends declared were $0.675 per share versus $0.658.
Operating cash flow was lower mainly in the context of a larger use of cash from changes in operating assets and liabilities ($97.6 million use versus $56.7 million). Investing used $131.0 million, including $106.2 million for acquisitions and other investing activities and $24.8 million of capital spending. Financing used $41.2 million, including $97.6 million of dividends and $92.0 million of share purchases, partly offset by net debt proceeds. Cash decreased by $65.0 million during the quarter.
At March 31, current assets were $6,194.1 million and current liabilities were $4,579.8 million. Debt consisted of $475.0 million outstanding under the revolving credit line and $550.0 million of fixed-rate notes. The company had a $1.20 billion unsecured revolving facility, with a potential additional $350.0 million of capacity, and reported compliance with borrowing covenants.
Changes, segments, and management commentary
Consolidated sales growth included approximately 4% from acquisitions and 1% from foreign currency. Management cited slightly deflationary automotive pricing; pricing in the other groups rose less than 0.5%.
| Business group | Sales change | Operating profit change |
|---|---|---|
| Automotive | Up 3% | Down 1%; margin 7.6% versus 8.0% |
| Industrial | Up approximately 7% | Up 10%; margin 7.3% versus 7.1% |
| Office Products | Up approximately 9% | Down 9%; margin 6.0% versus 7.2% |
| Electrical/Electronic Materials | Up 5% | Down 8%; margin 7.4% versus 8.4% |
Management attributed weaker consolidated operating margin to sales-channel growth, customer and product mix, fixed-cost leverage, and acquisition integration costs. Automotive faced a weak U.S. organic sales environment; Office Products had lower organic sales and incremental acquisition costs; Electrical/Electronic Materials was affected by mix. Industrial benefited from sales volume and expense leverage. Management highlighted cost controls, technology and supply-chain investments, growth initiatives, and acquisitions.
Outlook, risks, contingencies, and unusual items
- No specific full-year numerical guidance was provided. Management said growth initiatives and acquisitions were expected to support sales in the quarters ahead and cited cost-saving initiatives, including for Office Products, to improve margins.
- On April 3, 2017, the company acquired a 35% interest in Australia-based Inenco Group for approximately $70 million. Funds had been placed in escrow by March 31 and were recorded in prepaid expenses and other current assets. Options concerning the remaining 65% are conditional; exercise is not assured.
- On April 17, 2017, a jury awarded $81.5 million in damages against the company in an automotive product-liability dispute. The company planned post-trial motions and, if needed, an appeal. Offsets from settlements and potential bankruptcy trust claims were not yet known. Management did not believe the matter would have a material financial-statement impact based on its defenses, insurance, and reserves, but said that assessment could change.
- The company guarantees certain borrowings of independent automotive parts stores and affiliates. Guaranteed borrowings totaled approximately $447.7 million; recognized guarantee-related assets and liabilities were $44.0 million each. The company reported covenant compliance and no significant guarantee losses to date.
- Foreign exchange, especially the Australian and Canadian dollars, positively affected reported results. The company identified risks including demand, economic conditions, competition, vendor relationships, acquisition integration, litigation, and information-system disruptions.
- Adoption of the lease standard was expected to have a significant balance-sheet impact; disclosed future minimum operating-lease payments were approximately $865 million. Management did not expect a material revenue impact from the forthcoming revenue-recognition standard.
Key facts for investors to verify
- Whether sales growth translates into stronger organic growth, particularly in Automotive and Office Products, and whether consolidated margins recover.
- Cash conversion and working-capital trends, given the decline in operating cash flow and the quarter’s acquisition, capital-spending, dividend, and repurchase outflows.
- Debt and liquidity after the $150 million quarter-over-quarter debt increase, and continued compliance with credit covenants.
- Developments in the $81.5 million jury award, including post-trial proceedings, potential offsets, insurance, and any change to management’s assessment.
- Inenco integration and performance, and whether either party exercises its conditional option regarding the remaining ownership interest.
- The balance-sheet effect of lease-standard adoption and any changes to the company’s preliminary assessment of other accounting standards.