Genuine Parts Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials. Results are unaudited; the company says interim estimates, including inventory and volume-incentive accruals, may change at year-end.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $3,181.3 million | $2,974.2 million |
| Gross profit | $919.1 million | $848.8 million |
| Operating expenses | $690.9 million | $656.8 million |
| Income before income taxes | $228.2 million | $192.0 million |
| Net income | $146.3 million | $126.5 million |
| Diluted EPS | $0.93 | $0.80 |
| Operating cash flow | $172.3 million | $53.4 million |
| Capital expenditures | $16.9 million | $14.5 million |
Sales increased 7%; net income and diluted EPS each rose 16%. Gross margin improved to 28.9% from 28.5%, while operating expenses declined to 21.7% of sales from 22.1%. Management attributed expense leverage partly to approximately $10 million of cost savings. The effective tax rate rose to 35.9% from 34.1%, mainly because Q1 2011 included a favorable international tax adjustment.
Segment sales and operating profit, respectively: Automotive $1,493.5 million and $114.6 million; Industrial $1,121.2 million and $84.3 million; Office Products $426.2 million and $37.5 million; Electrical/Electronic Materials $147.1 million and $12.0 million. Automotive sales grew 6%, Industrial 12%, Office Products declined about 2%, and Electrical/Electronic Materials grew 5%. Consolidated segment operating profit was $248.4 million, up from $211.4 million; it differs from income before taxes, which includes interest expense and other items.
Balance sheet, liquidity, and capital allocation
At March 31, cash was $424.4 million, down $100.6 million from year-end; current assets were $4,601.5 million and current liabilities $1,931.4 million, a 2.4-to-1 current ratio. Long-term debt was $500 million, unchanged, consisting of fixed-rate notes due in November 2013 and November 2016 bearing 4.67% and 3.35%, respectively. No amounts were outstanding on the $350 million revolving credit line at quarter-end. Management said cash and available credit were expected to fund operations for the foreseeable future.
Operating cash flow was $172.3 million; investing used $205.8 million, including $188.9 million for acquisitions and other investing activities; financing used $68.1 million, including $70.0 million of dividends. Cash ended the quarter at $424.4 million versus $465.9 million a year earlier. The declared dividend was $0.495 per share, versus $0.45.
Material changes, outlook, and risks
- The company acquired a 30% interest in Australia-based Exego Group on January 1 for approximately $164.6 million, funded with cash. It has an option to acquire the remaining 70% subject to earnings thresholds; neither achievement of those thresholds nor exercise of the option is assured.
- After quarter-end, on May 1, the company acquired Quaker City Motor Parts for approximately $350 million, funded with cash and short-term borrowings. A $200 million unsecured facility entered April 23 bears interest at LIBOR plus 0.5% and matures no later than September 15, 2012; the existing $350 million revolver expires in December 2012.
- Management expected Automotive and Industrial sales to continue growing, Office Products sales to remain flat or improve slightly, and Electrical/Electronic Materials to continue growing. These are qualitative expectations, not numerical earnings guidance.
- Key stated risks include weaker demand or macroeconomic conditions, vendor disruptions or less favorable arrangements, pricing competition, execution of segment initiatives and acquired-business integration, litigation, and foreign-exchange movements. Currency effects, particularly the Canadian dollar and also the Mexican peso, reduced Q1 sales; interest-rate and commodity-price risks were described as not material.
- The company guaranteed approximately $216.1 million of borrowings by independent automotive stores and affiliates. It was covenant-compliant and reported no significant guarantee losses to date; collateral may be liquidated to recover payments.
- Pension benefit cost increased to $12.9 million from $7.1 million. The company made no pension-plan contribution during Q1. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the post-quarter Quaker City acquisition and short-term financing affect cash, debt, interest expense, and liquidity in subsequent reporting periods.
- Performance of the Exego investment and whether its earnings conditions for a possible additional acquisition are met.
- Whether segment growth expectations and reported cost savings continue, particularly given weaker Office Products volumes and currency exposure.
- Year-end effects of interim estimates for inventory/LIFO adjustments, bad debts, and volume incentives, which management says could be significant.
- Developments in the $216.1 million of guaranteed third-party borrowings and the company’s ability to refinance credit facilities as they mature.