Genuine Parts Company — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. Genuine Parts distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials through approximately 2,000 locations in the U.S., Canada, Mexico, and Puerto Rico.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $3,285.6 million | $2,950.6 million | $9,444.7 million | $8,399.9 million |
| Gross profit | $948.5 million | $853.0 million | $2,713.4 million | $2,435.8 million |
| Operating profit | $276.8 million | $232.0 million | $752.8 million | $636.6 million |
| Net income | $151.8 million | $131.8 million | $430.2 million | $356.9 million |
| Diluted EPS | $0.97 | $0.83 | $2.72 | $2.25 |
| Operating margin | 8.4% | 7.9% | 8.0% | 7.6% |
Sales rose 11% in Q3 and 12% year to date; net income increased 15% and 21%, respectively. Gross margin was approximately 28.9% in Q3 versus 28.9% a year earlier, and 28.7% year to date versus 29.0%. Management attributed the year-to-date gross-margin pressure to competitive pricing and changes in customer and product mix. Operating expenses improved to 21.3% of sales in Q3 and 21.5% year to date, helped by cost savings and sales leverage.
Segment trends: Q3 sales grew 9% in Automotive, 18% in Industrial, 3% in Office Products, and 22% in Electrical/Electronic Materials. Industrial and Electrical/Electronic Materials operating profit each grew 33% in Q3; Office Products profit grew 2%, amid soft industry conditions. Acquisitions contributed to Industrial and Electrical/Electronic Materials growth; copper-price increases also lifted Electrical/Electronic Materials sales.
Cash flow and liquidity: Nine-month operating cash flow was $497.4 million, down from $568.4 million, despite higher earnings; changes in operating assets and liabilities contributed only a $2.1 million cash outflow versus $140.3 million of cash inflow in the prior-year period. Investing cash outflow was $169.1 million, including $63.9 million of capital expenditures and $105.1 million for acquisitions. Financing cash outflow was $315.5 million, including $206.2 million of dividends and $113.4 million of share repurchases. Cash was $534.8 million at September 30, up $4.8 million from year-end. The current ratio was 2.1:1, compared with 2.2:1 at December 31, 2010.
Debt: Total fixed-rate debt remained $500 million, with $250 million classified as current and $250 million long-term. The company had no borrowings on its $350 million revolving credit facility. A refinancing agreement was entered into for the $250 million of notes maturing in November 2011; when funded, replacement notes are due in 2016 at 3.35%, versus 6.23% on the maturing notes. Management said cash from operations and existing credit lines should fund anticipated operations, including potential repurchases, for the foreseeable future.
Changes, outlook, and risks
During the first nine months, the company acquired three Industrial Group businesses and one Electrical Group business for approximately $105.1 million; about $75 million was recorded as goodwill and other intangibles, with purchase-price allocations preliminary. It also announced a proposed approximately $150 million purchase of a 30% interest in Australia’s Exego Group, subject to regulatory approval, with an option to acquire the remaining 70% subject to earnings thresholds.
No quantified earnings or sales guidance is provided in the filing. Management cited sales initiatives, new and expanded product lines, acquisitions, cost savings, and expense leverage as growth and margin drivers. Risks include weaker demand and macroeconomic conditions, vendor disruptions or unfavorable terms, competitive pricing, execution of initiatives, litigation, and foreign-exchange movements. The company noted that interim estimates—including inventory/LIFO adjustments, bad debts, and volume incentives—may change at year-end and could be significant. Foreign currency, especially the Canadian dollar, positively affected reported sales during the period.
Other items to note: the Q3 effective tax rate increased to 38.6% from 38.0%, partly due to an unfavorable retirement-asset valuation adjustment; the nine-month rate decreased to 36.8% from 38.0%, reflecting a favorable adjustment related to the expiration of a statute of limitations for certain international taxes. The company contributed $43.0 million to its pension plan in August. It guaranteed approximately $211 million of borrowings by independent stores and affiliates; it reported compliance with related covenants and no significant historical guarantee losses. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
Important facts for investors to verify
- Whether sales and operating-margin gains persist, particularly in Industrial and Electrical/Electronic Materials, and how acquisitions contributed to growth.
- Working-capital and operating cash-flow trends, given lower year-to-date cash generation versus 2010.
- Completion and terms of the November 2011 debt refinancing, and the proposed Exego investment and related option.
- Potential year-end inventory/LIFO and other estimate adjustments, pension costs, and the impact of competitive pricing and product mix on margins.
- Exposure under the approximately $211 million of third-party borrowing guarantees and any changes in credit, currency, or demand conditions.