Genuine Parts Company — FY 2009 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2009; it is an annual report, not a standalone fourth-quarter filing. Genuine Parts distributes automotive replacement parts, industrial parts, office products, and electrical/electronic materials through approximately 2,000 locations in the U.S., Canada, and Mexico.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $10.058 billion | $11.015 billion |
| Gross profit | $3.010 billion; 29.9% of sales | $3.272 billion; 29.7% of sales |
| Income before taxes | $644.2 million; 6.4% of sales | $768.5 million; 7.0% of sales |
| Net income | $399.6 million; 4.0% of sales | $475.4 million; 4.3% of sales |
| Diluted EPS | $2.50 | $2.92 |
| Cash from operations | $845.3 million | $530.3 million |
| Cash and cash equivalents at year-end | $336.8 million | $67.8 million |
| Total debt at year-end | $500 million | $500 million |
Fourth-quarter 2009 sales were $2.471 billion, versus $2.520 billion in Q4 2008; net income was $99.2 million versus $87.8 million, and diluted EPS was $0.62 versus $0.55. The current ratio was 2.9:1, compared with 3.0:1.
Material changes and segment results
- Full-year sales fell 9% and net income fell 16%, following a 2% sales decline? No: sales increased 2% in 2008, while net income decreased 6%.
- Automotive sales declined 2% to $5.225 billion; segment operating profit was $387.9 million, with operating margin improving to 7.4% from 7.2%.
- Industrial sales declined 18% to $2.886 billion; operating profit fell to $162.4 million and operating margin to 5.6% from 8.4%, reflecting weak manufacturing demand and lower volume incentives.
- Office Products sales declined 5% to $1.639 billion; operating margin fell to 7.7% from 8.3%. Electrical/Electronic Materials sales declined 26% to $345.8 million; operating margin fell to 7.3% from 7.9%.
- Management cited recessionary conditions, reduced consumer spending, lower industrial production, and higher unemployment as pressures across all four groups. Sales trends improved during the second half; the fourth quarter was the strongest sales quarter of 2009 for each segment.
- SG&A fell by $140 million to $2.220 billion, but increased to 22.1% of sales from 21.4% because of weaker expense leverage. Cost-control measures reduced operating costs by approximately $70 million; workforce was reduced 7% before acquisitions.
Cash, debt, and capital allocation
Operating cash flow rose 59% to $845.3 million, primarily reflecting improved working capital, including lower inventory and receivables and higher payables. Investing cash outflow was $264.4 million, including $134.2 million for acquisitions and $72.8 million to purchase properties under a construction-and-lease agreement; capital expenditures were $69.4 million. Financing cash outflow was $330.4 million. Dividends paid were $253.6 million, and share repurchases were $26.0 million, down from $273.0 million in 2008.
Year-end debt comprised two $250 million fixed-rate notes, due in 2011 at 6.23% and 2013 at 4.67%. The company had a $350 million unsecured revolver, with no borrowings outstanding, and reported compliance with debt covenants. Management stated that available capital was sufficient for operations and planned uses. Total equity was $2.629 billion; total assets were $5.005 billion.
Outlook, risks, and unusual items
- Management described the economy as stabilizing but did not expect significant near-term improvement. No specific earnings or revenue guidance was provided. It viewed improving manufacturing indicators in the second half as potentially positive for 2010.
- Key risks include prolonged economic weakness, demand and pricing pressure, intense competition including online competitors, vendor disruption or reduced return privileges, customer credit deterioration, and volatility or impairment among financial counterparties. Foreign-exchange movements, especially the Canadian dollar, adversely affected 2009 results.
- Product-liability litigation included approximately 1,700 lawsuits; the company believed resolution would not materially adversely affect its business or financial condition. It guaranteed approximately $200.9 million of borrowings of independent stores and affiliates; it reported no significant guarantee losses to date.
- Industrial and electrical inventory reductions caused a LIFO liquidation that reduced 2009 cost of goods sold by approximately $22 million. The company acquired eight businesses for approximately $71 million and purchased the remaining noncontrolling interest in Balkamp for approximately $63 million.
- Effective January 1, 2010, changes to the U.S. postretirement plan ended employer-provided medical benefits for future retirees and certain benefits for current pre-65 retirees. The company recorded a $4.3 million noncash pension curtailment gain in 2009.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether sales recovery and manufacturing improvement continued after year-end, particularly in Industrial and Electrical.
- Whether margins can recover after the sharp Industrial decline and ongoing Office weakness, and how much 2009 earnings benefited from the $22 million LIFO liquidation.
- Working-capital sustainability: operating cash flow benefited from working-capital changes, while payables rose 8% year over year.
- Debt maturities in 2011 and 2013, pension funding needs, and the status of $41 million in unrecognized tax benefits and current U.S. and Canadian tax audits.
- Exposure from guaranteed affiliate borrowings, product-liability claims, supplier concentration, and the availability of vendor return programs.