Genuine Parts Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Genuine Parts distributes automotive replacement parts, industrial parts and business products through more than 3,100 locations. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net sales | $4,934.3 | $4,822.1 | $9,671.1 | $9,408.4 |
| Gross profit | $1,598.6 | $1,521.6 | $3,106.7 | $2,957.4 |
| Operating profit | $385.6 | $390.2 | $707.1 | $708.7 |
| Net income | $224.4 | $227.0 | $384.7 | $403.5 |
| Diluted EPS | $1.53 | $1.54 | $2.62 | $2.74 |
| Operating margin | 7.8% | 8.1% | 7.3% | 7.5% |
| Gross margin | 32.4% | 31.6% | 32.1% | 31.4% |
Sales growth drivers: Q2 sales rose 2.3%: comparable sales contributed 1.6%, acquisitions 2.7%, while currency and the Grupo Auto Todo sale reduced growth by 1.5% and 0.5%, respectively. H1 sales rose 2.8%, with comparable sales up 2.4% and acquisitions contributing 2.4%, offset by 1.7% unfavorable currency and a 0.3% impact from the divestiture.
Segments: Q2 Automotive sales increased 1.4%, but operating profit fell 6.3% and margin declined to 8.2% from 8.9%. Industrial sales rose 4.9%; operating profit increased 8.9% and margin improved to 8.1% from 7.8%. Business Products sales declined 1.1%; operating profit fell 2.5%, with a 4.4% margin. H1 sales growth was 1.8% in Automotive and 5.3% in Industrial; Business Products was essentially flat.
Cash flow, balance sheet and capital
- H1 operating cash flow was $301.4, down from $455.1. Investing cash outflow was $464.0, including $357.3 for acquisitions and other investing activity and $106.7 of capital expenditures. Financing provided $389.2, including $613.3 of net debt proceeds; dividends paid were $216.7.
- Cash was $562.6 at June 30, up $229.0 from year-end. Total debt was approximately $3.9 billion, up $739.2, primarily reflecting acquisition-related borrowing. Current debt was $1,011.3 and long-term debt $2,871.1.
- Management reported an average debt cost of 2.5%, covenant compliance, and expected existing credit lines and operating cash generation to fund anticipated operations, including discretionary repurchases, for the foreseeable future. No material change in market-risk exposure was reported.
- Current assets were $8,184.7 and current liabilities $6,498.2. The filing does not provide a stated current ratio or a separate assessment of liquidity adequacy beyond management's commentary.
- Dividends declared were $0.7625 per share in Q2 and $1.5250 for H1. H1 diluted EPS includes acquisition, transaction and divestiture-related items; adjusted diluted EPS was $1.57 for Q2 and $2.85 for H1, both non-GAAP measures.
Material changes and notable items
- Gross margin improved, reflecting supplier negotiations, pricing, product mix and supplier incentives. This was more than offset at the operating-profit level by higher payroll, freight, IT and cybersecurity costs and weaker expense leverage in some markets. Operating expenses rose to 26.1% of sales in Q2 from 25.1%, and to 26.4% for H1 from 25.6%.
- Net income declined 1.1% in Q2 and 4.7% in H1; diluted EPS declined 0.6% and 4.4%, respectively. H1 included $27.0 of realized currency losses on the sale of Grupo Auto Todo and $11.2 of transaction and other costs. Management's adjusted net income excludes these and other specified costs.
- The company acquired businesses for approximately $378.7, net of cash acquired, during H1, including Hennig Fahrzeugteile Group, Parts Point Group and bolt-on acquisitions. In July 2019, it acquired several businesses, including the remaining 65% investment in Inenco; the company estimated Inenco annual revenue at approximately $400.
- New fixed-rate private placements included €250 million of euro debt and A$310 million of Australian-dollar debt, with maturities from 2024 through 2034. Acquisition activity also increased goodwill and intangible assets.
- Adoption of lease accounting in 2019 added $962.0 of operating lease assets and $948.1 of lease liabilities at June 30; prior-year balance-sheet figures were not recast. Management said the standard did not materially affect net income or liquidity and did not affect debt-covenant compliance.
Outlook, risks and contingencies
No quantified full-year earnings or sales guidance is stated in the provided filing text. Management described growth priorities as increasing customer share, disciplined acquisitions, digital capabilities and geographic expansion, alongside margin improvement and cost control. It expressed a positive long-term view of Industrial Parts based on its initiatives and a relatively steady industrial economy, and anticipated that growth initiatives would benefit Automotive in coming quarters.
Risks cited include acquisition integration and realization of synergies, the European aftermarket and Brexit, slower demand, tariffs and other policy changes, foreign exchange, fuel and freight costs, labor availability, competition, vendor relationships, cybersecurity and information-system disruption, litigation, and macroeconomic conditions. Tariffs did not materially affect the reported periods. Management stated that goodwill was recoverable at June 30, 2019, while warning sustained deterioration in conditions could lead to impairment.
A previously reported material weakness in internal control over financial reporting remained unremediated. The issue concerns Alliance Automotive Group's transaction-level financial reporting and IT controls; remediation work and testing continued. Management reported no material errors or restatements arising from the deficiencies. Separately, a jury had awarded damages against the company in an automotive product-liability case; management did not expect a material financial-statement impact based on its defenses, insurance and reserves. Guarantees of certain independent stores' and affiliates' borrowings covered approximately $841.3; the company reported compliance with related covenants and no significant historical losses.
Important facts for investors to verify
- Whether Alliance Automotive Group control remediation is completed and independently tested, and whether any deficiencies affect future reporting.
- Acquisition integration, purchase accounting and the performance of acquired businesses, including the July 2019 Inenco transaction.
- Debt growth, refinancing and covenant headroom, together with the company's ability to generate cash after acquisitions, capital spending and dividends.
- Whether higher operating costs and weaker Automotive profitability persist, and whether gross-margin improvements can offset them.
- Potential exposure from the product-liability litigation and the $841.3 of guaranteed third-party borrowings.