Genuine Parts Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results. The company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials across approximately 2,400 locations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $3,685.2 million | $3,375.8 million | $10,560.0 million | $9,894.9 million |
| Gross profit | $1,100.9 million | $976.0 million | $3,127.8 million | $2,867.4 million |
| Operating profit | $300.5 million | $288.8 million | $861.3 million | $828.7 million |
| Net income | $173.7 million | $172.9 million | $534.5 million | $487.8 million |
| Diluted EPS | $1.12 | $1.11 | $3.43 | $3.11 |
- Q3 sales increased 9%; nine-month sales increased 7%. Net income was nearly flat in Q3 and rose 10% for the nine-month period.
- Gross margin improved to 29.9% from 28.9% in Q3 and to 29.6% from 29.0% for nine months. Operating margin declined to 8.2% from 8.6% in Q3 and to 8.2% from 8.4% for nine months.
- Operating cash flow was $837.5 million for nine months, versus $764.8 million. Capital expenditures were $84.1 million; investing cash outflow was $698.3 million, including $614.1 million for acquisitions and other investing activities. Cash declined by $82.2 million to $320.9 million.
- At September 30, current assets were $5,295.5 million and current liabilities $3,454.1 million; the current ratio was 1.5, compared with 1.9 at year-end 2012. Total debt was approximately $833.9 million, up from $500 million at year-end; $333.9 million was outstanding on the revolving credit facility. The company reported compliance with debt covenants.
Changes, acquisition, and segments
- Automotive Parts Group sales increased 22% in Q3 and 16% year to date, including an approximately 17% acquisition contribution and 5% core North American growth. Industrial sales fell 3% and 2%, Office Products fell approximately 3% and 2%, and Electrical/Electronic Materials fell 5% in both periods.
- On April 1, 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. The acquisition expanded the company’s Australasian automotive business; acquired operations contributed approximately $551 million in sales and $0.37 diluted EPS from April through September.
- Acquisition accounting produced a net positive pretax adjustment of approximately $33 million, benefiting nine-month diluted EPS by $0.21. This included a $59 million remeasurement gain on the prior 30% investment, inventory fair-value costs, and other adjustments. Purchase-price allocations remained preliminary; approximately $536 million of goodwill was recorded.
- Higher operating costs associated with GPC Asia Pacific’s company-owned store model and weaker non-automotive sales reduced expense leverage. The lower nine-month effective tax rate, 33.9% versus 36.4%, also reflected the favorable tax treatment of the acquisition gain and a lower Australian tax rate.
Outlook, risks, and other items
- Management expected Automotive Parts sales to remain strong through year-end, citing the acquisition, organic growth, and improving aftermarket conditions. It anticipated gradual revenue improvement in Industrial and Electrical/Electronic Materials, while noting near-term weakness in certain customer sectors; Office Products remained pressured by lower industry demand. No numerical full-year guidance was provided.
- Management said cash generated from operations and existing credit lines should fund anticipated operations, including possible share repurchases, for the foreseeable future. A $250 million note due November 2013 was expected to be refinanced under an August agreement, with a 2023 maturity and 2.99% interest rate upon funding.
- Key cited risks include slower demand and adverse economic conditions, vendor disruptions or less favorable arrangements, competition, execution of segment initiatives, acquisition integration, foreign-exchange movements—particularly the Australian and Canadian dollars—and litigation. The company guaranteed approximately $261 million of borrowings for independent stores and affiliates; it reported no significant guarantee losses to date and compliance with related covenants.
- The company made a $57.2 million pension contribution during the first nine months. Foreign-currency translation, particularly Australian and Canadian dollar movements, contributed to the year-to-date comprehensive income decline despite higher net income. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Automotive growth and expected integration benefits persist, and how much reported growth reflects acquisitions versus organic performance.
- Whether weaker industrial, office-products, and electrical/electronic demand continues to pressure operating margins.
- Final purchase accounting for GPC Asia Pacific, including intangible asset valuations, goodwill, and the recurring versus one-time earnings contribution.
- Debt refinancing completion, leverage and liquidity trends, and the company’s ability to maintain covenant compliance.
- Potential exposure under the $261 million of guarantees, as well as foreign-exchange and pension-related effects.
- Interim results rely on estimates—including inventory, bad-debt, returns, and volume-incentive adjustments—that may change at year-end; the filing cautions that nine-month results are not necessarily indicative of full-year results.