Genuine Parts Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company distributes automotive and industrial replacement parts across North America, Europe and Australasia. Its Business Products Group was divested effective June 30, 2020 and is reported as discontinued operations.
Financial performance
Amounts below are USD millions except per-share data. Comparisons are with the corresponding 2019 periods.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales, continuing operations | $4,370 | $4,525 | $12,286 | $13,242 |
| Gross profit | $1,528 | $1,505 | $4,207 | $4,381 |
| Gross margin | 35.0% | 33.3% | 34.2% | 33.1% |
| Operating expenses | $1,226 | $1,243 | $4,027 | $3,612 |
| Income (loss) from continuing operations | $233 | $212 | $(8) | $567 |
| Net income (loss), including discontinued operations | $228 | $227 | $(200) | $612 |
| Diluted EPS, continuing operations | $1.61 | $1.45 | $(0.06) | $3.87 |
| Diluted EPS, total | $1.57 | $1.56 | $(1.39) | $4.18 |
| Operating cash flow from continuing operations | Not separately stated | Not separately stated | $1,427 | $678 |
- Q3 sales fell 3.4%; management attributed the change to a 1.8% comparable-sales decline and a 4.2% divestiture impact, partly offset by acquisitions and currency/other effects. Sales improved sequentially from Q2.
- Q3 segment profit increased 8.8% to $392 million, with a 9.0% margin versus 8.0%. Automotive sales rose 6.0% and segment profit rose 19.6%; Industrial sales fell 18.6% and segment profit fell 8.7%.
- Operating expenses were 28.1% of sales in Q3 versus 27.5% a year earlier; for the nine months they were 32.8% versus 27.3%, reflecting lower sales leverage and the impairment charge.
- Nine-month results included a $506.7 million goodwill impairment charge for the European reporting unit. The nine-month effective tax rate was 105.4%, primarily reflecting the non-deductible impairment and certain transaction costs.
Cash, debt and liquidity
- Cash and equivalents were $900 million at September 30, up from $277 million at year-end 2019. Total debt was approximately $2.9 billion, down 15.2% from year-end; current and long-term debt totaled about $2.91 billion.
- Nine-month continuing-operations cash flows: $1.43 billion provided by operations, $230 million provided by investing, and $1.03 billion used in financing. Operating cash flow benefited from working-capital management and approximately $500 million of receivables sales.
- Management reported total liquidity of $2.8 billion, comprising $900 million cash and $1.9 billion of revolving-credit availability. Average cost of debt was 2.95%; the company said it was compliant with its debt covenants.
- The May 2020 credit amendments temporarily increased the debt-to-EBITDA covenant ceiling to 4.0x through December 31, 2020, then reverting to 3.5x, and increased borrowing costs. The filing does not provide a current debt-to-EBITDA ratio.
- The receivables program had approximately $500 million outstanding sold at quarter-end, with approximately $1.1 billion of receivables pledged as collateral. Supplier finance obligations of $1.8 billion were reported as accounts payable.
- Nine-month dividends paid were $339 million; the company announced a 4% increase in its 2020 regular dividend and expected to continue ordinary-course dividends. Share repurchases were temporarily suspended.
Changes, outlook and risks
- The Business Products Group divestiture resulted in a nine-month discontinued-operations loss of $192 million, including a $223.5 million divestiture loss; Q3 discontinued operations recorded a $5.4 million loss. The company reported no discontinued-operations sales in Q3.
- Management said sales trends improved as markets reopened, and substantially all operations were open at quarter-end. It cited gross-margin improvement, cost actions and more than $40 million of Q3 savings under its cost plan; permanent savings under the plan exceeded $110 million through nine months, with about $60 million of additional temporary Q3 savings.
- No specific revenue or earnings guidance was provided. Management said the pandemic’s future effects could not be reasonably estimated and that results for the nine months were not necessarily indicative of full-year results.
- Key uncertainties include COVID-19-related demand volatility, supply-chain labor and inventory shortages, customer credit risk, continued operating restrictions, and possible further goodwill impairment. The company warned that pandemic-related impacts and costs could be material.
- Other notable items include $39.0 million of restructuring costs during the first nine months and a $13.4 million insurance recovery gain related to the 2019 S.P. Richards fire. A product-liability case was returned for a new damages trial; the company did not expect a material financial-statement impact based on its defenses, insurance and reserves.
Investor verification priorities
- Track comparable sales, especially the divergent Automotive and Industrial trends, and whether Q3 margin gains persist as demand and product mix change.
- Assess cash-flow quality, including the $500 million receivables-sale benefit, pledged receivables, supplier-finance arrangements and working-capital movements.
- Review leverage and covenant headroom after temporary covenant relief and higher borrowing costs; the filing does not state the period-end leverage ratio.
- Monitor European reporting-unit forecasts and assumptions for any additional goodwill impairment, as well as remaining restructuring costs and divestiture adjustments.
- Follow COVID-19 effects on customer demand, supply availability, credit losses, liquidity and the company’s ability to sustain dividends.