Genuine Parts Company — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. It operated approximately 2,670 locations across the U.S. and other markets.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $4,095.9m | $3,941.7m | $12,101.7m | $11,559.6m |
| Gross profit | $1,226.9m | $1,198.6m | $3,622.3m | $3,468.5m |
| Net income | $158.4m | $185.3m | $508.6m | $534.7m |
| Diluted EPS | $1.08 | $1.24 | $3.44 | $3.56 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $542.4m | $741.4m |
Sales increased 4.0% in Q3 and 4.7% for the nine-month period. Gross margin was 30.0% in Q3 versus 30.4% a year earlier, and 29.9% year to date versus 30.0%. Selling, administrative and other expenses plus depreciation and amortization were 23.9% of sales in Q3 (23.0% prior year) and 23.4% year to date (22.8%). The company reported operating segment profit of $310.3m in Q3, down from $328.0m, and $946.5m year to date, down from $953.1m.
Q3 sales growth included approximately 2% from acquisitions, 1% organic growth and 1% favorable currency. Year-to-date growth included 3.1% from acquisitions, 1.2% organic growth and approximately 0.4% favorable currency. Industrial sales and operating profit grew; Office Products sales declined in Q3 and its operating profit fell; Automotive operating profit declined; Electrical/Electronic Materials sales rose, substantially reflecting acquisitions, while operating profit declined.
Cash, debt and liquidity
Cash was $210.1m at September 30, down $32.8m from year-end 2016. Nine-month investing cash outflow was $386.5m, including $97.2m of property and equipment purchases and $289.4m for acquisitions and other investing activities. Financing cash outflow was $201.7m, including $296.5m in dividends and $171.9m in share repurchases. Total debt was approximately $1.145bn, up $270m from December 31, 2016; $595m was under the revolving facility and $550m was fixed-rate debt. The current ratio was 1.3:1, compared with 1.4:1 at year-end. The company reported covenant compliance, average debt cost of 2.55%, and said cash generated from operations and available credit were expected to fund foreseeable needs.
Developments, outlook and risks
- Q3 and nine-month net income included costs related primarily to the pending Alliance Automotive Group (AAG) acquisition. The company cited approximately $18.5m in transaction costs and reported adjusted net income, before their impact, of $170.0m for Q3 and $520.2m year to date.
- Genuine Parts agreed to acquire AAG, a European vehicle-parts distributor with approximately $1.7bn in annual revenue, for about $2.0bn, including repayment of its debt. Closing was expected in November 2017, subject to conditions and regulatory approvals. Financing was planned through new loans and note issuances; a $2.0bn, 364-day bridge facility was available but the company did not expect to use it. A €1.0bn currency hedge was entered into and did not qualify for hedge accounting.
- Management cited continuing growth initiatives and expected initiatives to support future segment sales. No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management noted risks including weak comparable demand, cost and margin pressure, acquisition execution and integration, AAG closing and regulatory conditions, currency movements, competition, vendor disruptions, litigation and information-system disruptions.
- A jury initially awarded $81.5m against the company in an automotive product-liability case; post-trial motions and settlement offsets reduced the verdict to $77.1m. The company planned to challenge it and stated that, considering its defenses, insurance and reserves, it did not expect a material financial-statement impact.
- The company guaranteed approximately $554.2m of borrowings by independent automotive stores and affiliates. It had recorded $59.0m of related assets and liabilities and reported no significant historical losses on these guarantees.
- Adoption of the new lease standard was expected to significantly affect the balance sheet; disclosed future minimum operating-lease payments were approximately $865m. Revenue-standard adoption was planned using the modified retrospective method, with no material revenue impact expected, subject to continuing evaluation.
Material changes versus prior period
Despite higher sales, net income and diluted EPS declined in both comparison periods. Management attributed weaker profitability to lower comparable-sales leverage, higher IT, freight and delivery costs, lower volume incentives and product mix; acquisition-related costs also affected reported earnings. Operating cash flow fell $199.0m year to date, with changes in operating assets and liabilities contributing a $94.3m use of cash, compared with a $93.5m source in 2016. Debt rose, while share count declined from the prior-year weighted average.
Investor facts to verify
- Whether AAG closed on the expected timetable, its final financing terms, integration progress and realized synergies.
- Whether organic sales and operating margins recover, especially in Automotive and Office Products.
- Future working-capital and operating-cash-flow trends, debt levels and the company’s capacity to fund acquisitions, dividends and repurchases.
- Developments in the $77.1m product-liability verdict, including appeals, insurance coverage and any resulting financial impact.
- The balance-sheet effect of lease-standard adoption and any changes to the company’s preliminary revenue-standard assessment.