Genuine Parts Company — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports quarterly results; Q4 means the three months ended December 31, 2018. Genuine Parts distributes automotive replacement parts, industrial parts and business products through about 3,100 locations worldwide.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $18.735 billion | $16.309 billion |
| Gross margin | $5.984 billion; 31.9% of sales | $4.906 billion; 30.1% of sales |
| Income before taxes | $1.076 billion; 5.7% of sales | $1.009 billion; 6.2% of sales |
| Net income | $810.5 million | $616.8 million |
| Diluted EPS | $5.50 | $4.18 |
| Adjusted net income and diluted EPS (non-GAAP) | $836.1 million; $5.68 | $695.8 million; $4.71 |
| Cash from operating activities | $1.145 billion | $815.0 million |
| Capital expenditures | $232.4 million | $156.8 million |
| Cash and cash equivalents at year-end | $333.5 million | $314.9 million |
| Total debt at year-end | $3.143 billion | $3.245 billion |
| Current ratio | 1.3 | 1.3 |
FY 2018 sales rose 14.9%: acquisitions contributed approximately 11.2% and comparable sales grew approximately 3.6%. Net income increased 31.4%, while pretax margin declined to 5.7% from 6.2%. The lower effective tax rate—24.6%, versus 38.9% in 2017—contributed to the increase in reported earnings. Adjusted results exclude specified transaction and other costs; 2017 adjusted results also exclude the tax-reform transition tax and deferred-tax revaluation.
Q4 2018: Net sales were $4.604 billion, compared with $4.207 billion in Q4 2017. Net income was $186.7 million versus $108.2 million, and diluted EPS was $1.27 versus $0.73.
Segments and changes versus prior period
- Automotive: Sales were $10.527 billion, up 22.6%; comparable sales increased 2.5%. Acquisitions contributed approximately 20%. Operating margin was 8.1%, down from 8.4%.
- Industrial: Sales were $6.299 billion, up 8.5%; comparable sales increased approximately 6.5%. Operating margin improved to 7.7% from 7.6%.
- Business Products: Sales were $1.910 billion, down 0.5%. Operating margin fell to 4.6% from 5.1%, amid lower supplier incentives, higher costs and weaker comparable sales.
Automotive sales growth included the full-year contribution of Alliance Automotive Group (AAG), acquired in November 2017. In 2018, the company completed 23 acquisitions, including 20 automotive and three industrial businesses. EIS was combined with Motion Industries within the Industrial segment, with prior periods recast. The company adopted the new revenue recognition standard in 2018; prior-year periods were not adjusted.
Cash, debt and liquidity
Operating cash flow increased 40.5% to $1.145 billion, supported by earnings and working-capital changes, including higher accounts payable. Investing activities used $496.1 million, including $278.4 million for acquisitions and $232.4 million for capital expenditures. Financing activities used $608.8 million; the company issued no new debt in 2018 and paid down credit facilities. Dividends paid were $416.0 million, and share repurchases totaled $92.0 million.
Management described liquidity as solid and said cash on hand and available short- and long-term funding were sufficient for expected operating needs, debt service, capital expenditures, dividends, repurchases and contemplated acquisitions. The $2.6 billion syndicated facility matures in October 2022; approximately $1.6 billion was outstanding under it at year-end. The company reported compliance with debt covenants. It estimated 2019 capital expenditures of approximately $300 million to $325 million.
Outlook, risks and unusual items
- Management expected automotive aftermarket fundamentals and sales initiatives to support Automotive growth in 2019, and said Industrial was positioned for continued profitable growth and potential margin expansion. Business Products remained focused on growth initiatives, diversification and evaluating opportunities. The filing provides no consolidated numeric sales or EPS guidance.
- SG&A increased 23.9% to $4.615 billion; management cited acquisition-related costs and higher labor, freight, delivery, technology and warehousing expenses. Interest expense rose to $101.9 million from $41.5 million, reflecting higher debt and variable-rate interest costs.
- The company recorded $36.1 million of transaction and other costs in 2018, net of the $12.0 million termination fee from the abandoned proposed Business Products combination with Essendant. It agreed to sell Grupo Auto Todo for approximately $12 million; the business generated about $93 million of 2018 revenue, and the company estimated a roughly $30 million charge upon closing, expected in 2019.
- Significant control issue: Management and Ernst & Young concluded internal control over financial reporting was ineffective at December 31, 2018, due to a material weakness at AAG involving transaction-level and IT controls. AAG represented about 10% of 2018 sales. The financial-statement audit opinion was unqualified; the auditor issued an adverse opinion on internal control. Management reported no material financial-statement errors or restatements identified from the deficiencies and described remediation efforts as ongoing.
- The company disclosed approximately 2,071 product-liability lawsuits. It is appealing a $77.1 million reduced jury verdict from a 2017 automotive product-liability case and said it did not expect a material financial-statement impact based on its defenses, insurance and reserves.
- Guarantees of borrowings by independent stores and affiliates totaled approximately $759.7 million; the company reported no significant historical losses. Other risks include competition and e-commerce, economic and industrial demand, vendor and inventory-return arrangements, cybersecurity, foreign exchange and interest-rate exposure. Brexit effects were uncertain; no material impact had been experienced to date.
Investor verification priorities
- Track remediation and independent testing of AAG’s material weakness, including effects on future reporting and audit conclusions.
- Separate organic performance from acquisition contributions, particularly AAG’s effect on Automotive comparisons and integration costs.
- Assess whether operating-margin pressure, elevated SG&A and higher interest expense persist despite revenue and net-income growth.
- Verify the Grupo Auto Todo sale timing, proceeds and estimated charge, and monitor the appeal and ultimate resolution of the product-liability verdict.
- Review cash-flow quality and working-capital sustainability, debt maturities and covenant headroom, and the planned increase in 2019 capital expenditures.