Genuine Parts Company — Q3 2012 Form 10-Q
Business and period: The company distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. This filing covers the quarter and nine months ended September 30, 2012; comparisons are with the same 2011 periods. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $3,375.8 | $3,285.6 | $9,894.9 | $9,444.7 |
| Gross profit | $976.0 | $948.5 | $2,867.4 | $2,713.4 |
| Net income | $172.9 | $151.8 | $487.8 | $430.2 |
| Diluted EPS | $1.11 | $0.97 | $3.11 | $2.72 |
| Operating cash flow | Not presented by quarter | $764.8 | $497.4 |
- Q3 sales rose 3% and net income rose 14%; nine-month sales rose 5% and net income rose 13%. Diluted EPS increased 14% in both comparisons.
- Gross margin was 28.9% in Q3, unchanged year over year; for nine months it was 29.0%, versus 28.7%. Operating expenses were 20.9% of Q3 sales versus 21.3%, and 21.2% for nine months versus 21.5%. Management cited cost savings of approximately $17 million in Q3 and $31 million year to date.
- Segment sales growth in Q3: Automotive 2.5%, Industrial 4.5%, Office Products down approximately 1%, and Electrical/Electronic Materials 5%. Acquisition contributions supported Automotive and Electrical/Electronic Materials growth. Industrial Q3 operating profit declined 3%, mainly due to lower volume incentives; other segments reported higher operating profit.
- Nine-month operating cash flow increased to $764.8 million, including a $205.8 million favorable contribution from changes in operating assets and liabilities, compared with a $2.1 million use in 2011. Investing used $617.0 million, including $545.4 million for acquisitions and other investing activities and $71.6 million for capital expenditures. Financing used $277.7 million, including $224.2 million in dividends and $58.8 million in share repurchases.
Financial position and material changes
- Cash was $398.1 million at September 30, down $126.9 million from year-end 2011. Current assets were $4,664.6 million and current liabilities $2,101.6 million; the current ratio was 2.2, versus 2.5 at December 31, 2011.
- Long-term debt was $500 million, unchanged from year-end, consisting of two $250 million fixed-rate notes due November 2013 and November 2016. No borrowings were outstanding under the new $850 million revolving facility at quarter-end. The facility matures in September 2017, permits an additional $350 million of capacity, and had an initial borrowing margin of LIBOR plus 0.75%. The company reported covenant compliance.
- Accounts receivable increased 10% and inventory 4% from year-end, primarily reflecting sales growth and acquisitions. Goodwill and other intangible assets rose 80%, associated with acquisitions; other assets increased primarily because of the $165.6 million Exego investment.
- Acquisitions included Quaker City Motor Parts for $343 million, net of cash acquired, on May 1; its results were consolidated from that date. The company also acquired a 30% equity-method investment in Australia’s Exego Group for approximately $165.6 million. Quaker City acquisition accounting remained preliminary.
Outlook, risks, and unusual items
- Management expected more modest Automotive growth amid slow economic conditions, continued Industrial sales opportunities, and continued Electrical/Electronic Materials growth for the remainder of the year. Office Products faced soft market conditions and declining sales volume. The company stated that cash from operations and existing credit lines should fund foreseeable operations, including share repurchases, if any. No numerical earnings or sales guidance was provided.
- Management cited macroeconomic and demand uncertainty, competitive and pricing pressures, vendor relationships and disruptions, execution of business initiatives, and integration of acquisitions as risks. Foreign exchange, particularly the Canadian dollar and also the Mexican peso, weighed on sales; management said interest-rate and commodity-price risks were not material.
- Subsequent-event accounting issue: After September 30, the company identified an error in its accounting for potential sales returns of automotive parts. It said the error was not material to the financial statements presented or prior periods, but estimated inventory and customer deposits were understated by $250–$350 million. The proposed correction would increase current assets and liabilities, with an immaterial working-capital effect; estimated retained earnings impact, net of deferred taxes, was $20–$40 million. The adjustments were not recorded in this filing; the company was refining estimates for its 2012 Form 10-K.
- Interim estimates for inventory adjustments, bad debts, and volume incentives may change at year-end. The filing states that such changes may be significant. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Check the 2012 Form 10-K for the final sales-returns correction, including its effects on inventory, customer deposits, deferred taxes, and retained earnings.
- Review final purchase accounting and performance of Quaker City, and whether Exego’s earnings thresholds and the company’s option to acquire the remaining 70% become relevant.
- Track acquisition-adjusted growth and segment margins, especially Automotive’s slower-growth outlook, Industrial volume incentives, and Office Products’ weak sales volume.
- Monitor working-capital movements, cash conversion, the 2013 note maturity, and compliance with the new facility’s maximum-leverage covenant.
- Assess the $231 million of borrowings guaranteed for independent stores and affiliates; the company reported covenant compliance and no significant historical guarantee losses.