Genuine Parts Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. It operated across the U.S., Canada, Australasia, Mexico, and Puerto Rico. Figures below are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $3,676 | $3,338 | $6,875 | $6,519 |
| Gross profit | $1,105 | $972 | $2,027 | $1,891 |
| Operating profit | $317 | $292 | $561 | $540 |
| Net income | $216 | $169 | $361 | $315 |
| Diluted EPS | $1.39 | $1.08 | $2.31 | $2.01 |
| Operating margin | 8.6% | 8.7% | 8.2% | 8.3% |
Sales grew 10% in Q2 and 5% year to date; net income increased 28% and 15%, respectively. Cost of goods sold was 69.9% of sales in Q2 (70.9% prior year) and 70.5% year to date (71.0%). Operating expenses were 21.5% of Q2 sales versus 21.1%, and 21.7% year to date versus 21.4%. The Q2 and six-month effective tax rates were 31.3% and 32.8%, respectively, versus 36.9% and 36.5%.
Cash flow and liquidity: First-half operating cash flow was $467 million, compared with $421 million. Investing activities used $647 million, including $596 million for acquisitions and other investing activities; property and equipment purchases were $51 million. Financing activities used $17 million. Cash fell $206 million from year-end to $197 million. The current ratio was 1.5 at June 30, versus 1.9 at December 31, 2012.
Debt: Total debt was approximately $900 million, up $400 million from year-end. This included $400 million drawn on the $850 million revolving credit facility, which matures in September 2017, and $500 million of fixed-rate notes. The notes comprise $250 million due November 2013 at 4.67% and $250 million due November 2016 at 3.35%. The company reported compliance with debt covenants and believed cash from operations and credit lines would fund anticipated operations, including share repurchases, for the foreseeable future.
Business changes and material items
On April 1, 2013, the company acquired the remaining 70% of GPC Asia Pacific for approximately $590 million, net of $70 million cash acquired, and assumed approximately $230 million of debt. Including the fair value of its previously held 30% stake, consideration was approximately $824 million. The preliminary allocation included $538 million of goodwill and $347 million of identifiable intangible assets; valuations were not final. The acquired business contributed approximately $274 million of sales from April 1 through June 30.
The acquisition generated approximately $36 million of one-time pretax favorable purchase-accounting adjustments, or $0.22 per diluted share after tax. This included a $59 million gain from remeasuring the prior investment, offset by inventory-related and other costs; $18 million of acquired inventory step-up was recognized in cost of goods sold. The filing cautions that these items benefited reported earnings.
Automotive sales rose 22% in Q2 and 13% year to date, reflecting acquisitions and core North American growth of approximately 18% and 4%, respectively. Industrial sales declined 1% in both periods; office products fell approximately 3% in Q2 and 2% year to date; electrical/electronic materials declined 4% and 5%. Operating profit and margins weakened in the non-automotive groups amid lower volume and reduced expense leverage. Automotive operating margin was 9.3% in Q2, unchanged year over year.
Cash, receivables, inventory, and payables changed substantially in part due to the acquisition. Inventory increased 8% from year-end, despite planned reductions; payables increased 23%, partly reflecting acquired balances and improved vendor payment terms. Comprehensive income fell to $114 million in Q2 from $164 million, and to $262 million for the half from $338 million, largely due to foreign-currency translation losses, particularly from Australian and Canadian exchange-rate movements.
Outlook, risks, and contingencies
Management expected automotive sales to remain strong for the rest of 2013, supported by the acquisition, organic growth, and improving aftermarket conditions. It cited opportunities for industrial growth and moderate growth in electrical/electronic materials; office-product demand remained pressured. No quantified company-wide earnings or sales guidance was provided.
Risks cited include weaker product demand and economic conditions, vendor disruptions or unfavorable terms, competition, execution of business initiatives, integration of acquisitions, litigation, and foreign-exchange movements. The company guaranteed approximately $249 million of borrowings for independent automotive stores and affiliates, generally maturing over one to six years. It reported covenant compliance and no significant historical guarantee losses; collateral may be available if it must pay. Interim estimates, including inventory and bad-debt reserves, may change at year-end. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $0.22-per-share acquisition accounting benefit.
- Final purchase-price allocation, including acquired intangibles and goodwill, and the ongoing amortization and integration effects of GPC Asia Pacific.
- Performance of the automotive business and whether non-automotive volume weakness and margin pressure persist.
- Debt repayment and liquidity needs, particularly the $250 million note due in November 2013 and the revolving facility balance.
- Foreign-exchange exposure and the potential loss exposure from $249 million of guaranteed borrowings.
- Year-end adjustments to interim inventory, LIFO, bad-debt, returns, and incentive estimates.