Genuine Parts Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials, operating in several countries through approximately 2,600 locations.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $3.940B | $3.908B | $7.676B | $7.533B |
| Gross profit | $1.178B | $1.179B | $2.291B | $2.264B |
| Operating profit | $349.4M | $349.8M | $639.8M | $632.4M |
| Net income | $195.4M | $197.7M | $356.4M | $355.2M |
| Diluted EPS | $1.28 | $1.28 | $2.33 | $2.30 |
- Margins: Gross margin was 29.9% in Q2 versus 30.2% a year earlier, and 29.8% for the first half versus 30.0%. Operating margin was 8.9% in Q2, unchanged, and 8.3% for the first half versus 8.4%.
- Cash flow: First-half operating cash flow was $454.1M, up from $367.1M; investing cash use was $117.6M versus $218.8M, and financing cash use was $245.7M versus $193.3M. Cash increased $86.1M to $223.8M.
- Balance sheet and liquidity: At June 30, cash was $223.8M, current assets $5.764B, and current liabilities $3.868B; the current ratio was 1.5:1 versus 1.6:1 at year-end. Total debt was $850M ($350M revolving credit and $500M fixed-rate debt), up $84.5M from December 31. The company reported covenant compliance and believed cash from operations and credit lines would fund foreseeable needs.
- Capital allocation: First-half uses included $181.9M of dividends, $145.2M of share repurchases, $37.5M of capital expenditures, and $80.1M for acquisitions and other investing activities. Dividends declared were $0.615 per share in Q2, up from $0.575.
Changes and segment trends
- Q2 sales rose about 1%, while net income declined 1%; first-half sales rose 2% and net income increased slightly. First-half diluted EPS increased 1%, supported in part by fewer weighted-average shares.
- Automotive sales were flat in both periods; first-half organic growth of about 4% was offset by roughly 4% adverse currency effects. Industrial sales fell 2% in Q2 and rose about 1% for the first half; its Q2 operating profit fell 7% amid weaker demand and lower supplier incentives.
- Office Products sales rose 14% in Q2 and 16% for the first half, reflecting organic growth and acquisitions. Electrical/Electronic Materials sales rose 3.5% in Q2 and 2% for the first half, with acquisitions offsetting weaker organic sales and currency/copper effects.
- Management cited customer mix and lower volume incentives as factors behind gross-margin pressure. First-half comprehensive income fell to $267.1M from $401.5M, principally reflecting a $101.0M foreign-currency translation loss.
Outlook, risks and notable items
- No specific consolidated earnings or revenue guidance was provided. Management anticipated continued underlying automotive growth, a challenging industrial sales environment through the rest of 2015, office-products growth supported by initiatives and acquisitions despite industry weakness, and gradually improving electrical/electronic materials revenue trends.
- On June 19, the company amended its revolving facility, increasing capacity from $850M to $1.2B, retaining an option for a further $350M, and extending maturity to June 2020 with two optional one-year extensions. Interest terms and financial covenants were unchanged.
- Principal stated risks include slowing demand and macroeconomic conditions, foreign exchange exposure, vendor disruptions or unfavorable terms, competition, acquisition integration, litigation, and information-system failures or breaches. Foreign currency, particularly the Australian and Canadian dollars, negatively affected results.
- Guarantees covered approximately $299.4M of borrowings by independent stores and affiliates; $31.0M of related assets and liabilities were recognized. The company reported compliance with guarantee covenants and no significant historical losses. It contributed $38.7M to its pension plan in the first half.
- Interim results rely on estimates, including inventory/LIFO adjustments, bad debts, returns, and volume incentives; year-end adjustments could be significant. Management said first-half results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether automotive organic growth can continue to offset foreign-exchange headwinds, and whether industrial demand stabilizes.
- Whether gross-margin pressure from customer mix and lower incentives persists, and how segment margins evolve.
- Acquisition contributions, integration performance, and the sustainability of office-products growth.
- Debt, revolving-facility availability, share repurchases, and cash generation relative to dividends and acquisition spending.
- The extent of future currency and pension-related effects, and any changes in exposure under the $299.4M guarantee portfolio.