Genuine Parts Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials through approximately 2,600 locations across the U.S. and several international markets. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $3,921.8 | $3,985.9 | $11,598.3 | $11,519.2 |
| Gross profit | $1,169.2 | $1,183.4 | $3,460.4 | $3,447.2 |
| Operating profit | $348.5 | $339.6 | $988.2 | $972.0 |
| Net income | $188.0 | $190.5 | $544.4 | $545.7 |
| Diluted EPS | $1.24 | $1.24 | $3.56 | $3.53 |
| Operating margin | 8.9% | 8.5% | 8.5% | 8.4% |
- Q3 sales declined about 2%; nine-month sales rose about 1%. Foreign exchange reduced sales by approximately 4% and 3%, respectively.
- Gross margin was 29.8% in Q3 versus 29.7%; for nine months it was 29.8% versus 29.9%. Management attributed the quarterly improvement to margin initiatives, partly offset by lower Industrial Products volume incentives; nine-month pressure reflected mix and lower volume incentives.
- Operating expenses were $868.7 million in Q3 (22.1% of sales) and $2,598.3 million for nine months (22.4% of sales). Operating profit increased in both comparison periods, reflecting margin improvement, cost controls, and operating efficiencies.
- Effective tax rates increased to 37.4% for Q3 and 36.9% for nine months, from 36.1% and 36.0%. Management cited a higher proportion of U.S. earnings and less favorable retirement-plan valuation effects.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $896.0 million, compared with $589.3 million in 2014. Changes in operating assets and liabilities contributed $237.6 million, versus a $70.4 million use in the prior-year period.
- Investing cash outflow was $177.4 million, including $62.0 million of capital expenditures and $115.4 million for acquisitions and other investing activities. Financing cash outflow was $644.2 million, including $275.4 million of dividends and $225.2 million of share repurchases.
- Cash was $199.3 million at September 30, up $61.6 million from year-end 2014. Total debt was approximately $625 million, down about $140.5 million from year-end; it included $125 million under the revolving facility and $500 million of fixed-rate notes.
- The company had a $1.2 billion unsecured revolving facility, with an option to increase capacity by $350 million, maturing in June 2020 subject to extension options. It reported covenant compliance and said cash generation and credit facilities should fund foreseeable operations, including discretionary repurchases.
- Current assets/current liabilities were 1.5x, versus 1.6x at year-end 2014. Accounts receivable increased 5%, inventory decreased 3%, and accounts payable increased 12% from year-end.
- Quarterly dividends declared were $0.615 per share, compared with $0.575; nine-month dividends were $1.845 versus $1.725. Shares outstanding declined to 150.8 million from 153.1 million at year-end.
Segment trends and material changes
- Automotive: Sales declined 2% in Q3 and 1% for nine months, despite approximately 4% organic growth in both periods; currency was a substantial offset. Operating profit rose 5% in Q3 and 2% for nine months.
- Industrial Products: Sales declined 4% in Q3 and about 1% for nine months. Management described moderating demand and expected a challenging remainder of 2015; operating profit declined in both periods.
- Office Products: Sales rose 3% in Q3 and 11% for nine months, with acquisitions contributing to the year-to-date increase. Operating profit increased 9% in both periods.
- Electrical/Electronic Materials: Sales increased 2% in both periods. Acquisitions offset organic declines; operating profit increased 13% in Q3 and 9% year to date.
- Net income was slightly lower year over year in both periods, while diluted EPS increased 1% for nine months, aided in part by fewer weighted-average shares. Comprehensive income fell to $82.9 million for Q3 and $350.0 million for nine months, principally reflecting larger foreign-currency translation losses.
Outlook, risks, and notable items
- No quantified earnings or revenue guidance was provided. Management expected continued underlying Automotive growth, partly offset by foreign exchange; a challenging Industrial Products sales environment through the rest of 2015; and growth support from initiatives and acquisitions in Office Products and Electrical/Electronic Materials.
- Disclosed risks include slowing demand and adverse economic conditions, foreign-exchange movements, vendor relationship or supply disruptions, competition, acquisition integration, litigation, and information-system failures. The Australian dollar, Canadian dollar, and Mexican peso were key currency exposures.
- The company guaranteed approximately $309.7 million of borrowings for independent automotive stores and affiliates. It recorded $34.0 million each in related assets and liabilities and reported no significant historical guarantee losses; maximum exposure is generally tied to guaranteed borrowings.
- The company contributed $38.7 million to its pension plan during the nine months. Interim results rely on estimates, including inventory/LIFO adjustments, bad debts, returns, and volume incentives; management noted year-end adjustments could be significant.
- The company repurchased 949,703 shares under its publicly announced program during Q3 at an average $84.23 per share; approximately 7.0 million authorized shares remained available at quarter-end.
- ASU 2015-02 was not expected to have a material impact. The company was evaluating the impact of the revenue recognition standard, whose effective date had been deferred to periods beginning after December 15, 2017.
Important facts for investors to verify
- Whether foreign-exchange headwinds and Industrial Products demand continue to offset organic growth.
- Whether operating-margin gains and working-capital cash generation are sustainable, particularly given the favorable operating-asset/liability contribution in 2015.
- Exposure and potential recoveries associated with the $309.7 million of guaranteed borrowings, and any changes in covenant compliance.
- Future pension funding needs and the effect of interim inventory, LIFO, and incentive estimates at year-end.
- Acquisition performance, share-repurchase pace, and the eventual effect of the new revenue recognition standard.