Genuine Parts Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, amounts are in millions. The Business Products Group was divested effective June 30, 2020 and is reported as discontinued operations; continuing results reflect the Automotive and Industrial Parts Groups.
Business context and financial performance
Genuine Parts distributes automotive replacement and industrial parts across North America, Europe and Australasia. The quarter was affected by COVID-19-related demand declines and restrictions. Management reported sales improved sequentially during Q2 as markets reopened; substantially all operations were open at quarter-end.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Continuing net sales | $3,823.2 | $4,457.9 | $7,915.8 | $8,717.1 |
| Gross profit | $1,290.5 | $1,482.7 | $2,678.7 | $2,875.5 |
| Gross margin | 33.8% | 33.3% | 33.8% | 33.0% |
| Segment profit | $327.8 | $365.1 | $584.3 | $665.7 |
| Segment profit margin | 8.6% | 8.2% | 7.4% | 7.6% |
| Continuing net income (loss) | $(363.5) | $209.5 | $(241.2) | $355.2 |
| Diluted EPS from continuing operations | $(2.52) | $1.43 | $(1.67) | $2.42 |
Q2 continuing sales declined 14.2%; comparable sales fell 13.7%, with divestitures reducing sales 4.1%, partly offset by a 4.2% acquisition benefit. Automotive sales fell 10.1% and Industrial sales fell 21.1%. For the first half, sales declined 9.2%, including a 9.0% comparable-sales decrease.
Cash flow, debt and liquidity
- Six-month operating cash flow from continuing operations was $920.7, versus $248.0 a year earlier. Management attributed cash generation partly to working-capital management and approximately $500 of operating cash flow from the receivables sales agreement.
- Continuing investing activities provided $299.8, including $382.7 of business divestiture proceeds; capital expenditures were $74.4. Continuing financing activities used $527.4, including $197.2 of net debt repayments, $225.3 of dividends and $95.7 of share repurchases.
- Cash was $983.8 at June 30, up from $277.0 at year-end 2019. Total debt was approximately $3.2 billion, down 6.1% from year-end. The company reported $2.6 billion of total liquidity, including $1.6 billion available under its revolving facility. Average debt cost was 2.85%.
- Current and long-term debt totaled approximately $3,217; accounts payable were $3,745. Supplier-finance participants had sold $1.8 billion of outstanding company payment obligations to financial institutions at June 30, unchanged from year-end.
Material changes, unusual items and outlook
- A $506.7 goodwill impairment charge was recorded for the European reporting unit amid COVID-19-related market uncertainty and lower projected revenue and operating margins. The filing warns that further impairment could result if assumptions or business conditions worsen.
- Q2 discontinued operations recorded a $200.9 net loss, including a $216.1 loss on disposal; first-half discontinued operations recorded a $186.7 net loss. The divestiture of the Business Products Group is part of a strategic shift toward the Automotive and Industrial businesses. Post-transaction working-capital adjustments may result in further cash payments or receipts.
- Management’s non-GAAP adjusted diluted EPS from continuing operations was $1.32 for Q2, down from $1.47, and $2.12 for the first half, down from $2.63. These figures exclude impairment, restructuring, currency, insurance and transaction-related items; they are not substitutes for GAAP results.
- Restructuring costs were $28.0 in the first half, with $6.9 of additional costs expected. The 2019 Cost Savings Plan generated $70 of expense reductions through June, including $40 in Q2. Management also cited approximately $200 of Q2 savings from combined cost-reduction measures, including about $40 of temporary foreign-government subsidies.
- No formal earnings or sales guidance was provided. Management said it believes liquidity is sufficient for the disruption and expects existing credit lines and operating cash generation to fund operations for the foreseeable future. The company expects to continue ordinary-course dividends, reduced planned capital spending, temporarily suspended future share repurchases and limited acquisitions to selected bolt-ons.
- Credit agreements were amended in May: the debt-to-EBITDA covenant limit rose from 3.50x to 4.00x through December 31, 2020, then reverts; borrowing rates also increased. The company reported covenant compliance at quarter-end.
- COVID-19 risks include renewed demand disruption, supply-chain interruption, customer and supplier financial stress, added operating costs and uncertainty around liquidity and credit markets. A product-liability case remains pending; management did not expect a material impact based on defenses, insurance and reserves. The company also expects further insurance recoveries relating to the 2019 S.P. Richards fire.
Important facts for investors to verify
- Whether sales recovery after Q2 continued, particularly in European Automotive and Industrial operations, and whether COVID-19 or renewed restrictions affected demand and supply.
- Whether European reporting-unit forecasts and valuation assumptions support the remaining goodwill balance, and whether further impairment indicators emerge.
- The final cash and earnings effects of Business Products Group divestitures and related working-capital adjustments.
- How much operating cash flow depends on receivables sales, whether the agreement is renewed, and how supplier-finance balances and payment terms evolve.
- Compliance with amended debt covenants, borrowing costs, available revolver capacity and the company’s ability to sustain dividends and liquidity.
- The composition and recurring nature of management’s non-GAAP adjustments and reported cost savings, including temporary government subsidies.