Genuine Parts Company — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials through approximately 2,000 locations in the United States, Puerto Rico, Canada, and Mexico.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $2,950.6 million | $2,606.8 million | $8,399.9 million | $7,586.3 million |
| Gross profit | $853.0 million | $765.2 million | $2,435.8 million | $2,242.3 million |
| Income before taxes | $212.5 million | $170.7 million | $575.4 million | $481.4 million |
| Net income | $131.8 million | $107.6 million | $356.9 million | $300.4 million |
| Diluted EPS | $0.83 | $0.67 | $2.25 | $1.88 |
- Sales grew 13% in Q3 and 11% year to date; net income rose 22% and 19%, respectively. Diluted EPS increased 24% in Q3 and 20% year to date.
- Gross margin was approximately 28.9% in Q3 and 29.0% year to date, versus 29.4% and 29.6% in the comparable 2009 periods. Management attributed the decline primarily to automotive pricing actions and competitive office-products pricing.
- Operating margin improved to 7.9% in Q3 from 6.8%, and to 7.6% year to date from 7.0%. Management cited cost savings and improved expense leverage.
- Segment trends: Q3 sales rose 7% in Automotive, 29% in Industrial, and 31% in Electrical/Electronic Materials; Office Products sales were slightly lower. Industrial operating profit doubled, while Office Products operating profit was flat. Electrical/Electronic Materials profit rose, but margin fell under pressure from higher copper prices.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $568.4 million, down from $766.5 million. Changes in operating assets and liabilities contributed $140.3 million, compared with $390.0 million in 2009.
- Investing cash use was $142.0 million, including $58.9 million of capital expenditures and $83.1 million for acquisitions and other items. Financing cash use was $254.1 million, including $193.3 million of dividends and $69.4 million of share repurchases.
- Cash increased to $531.7 million from $336.8 million at year-end 2009. Total assets were $5.41 billion. Receivables rose 17% from year-end, primarily reflecting higher sales and acquisitions; inventory declined 1%.
- Debt was unchanged at $500 million, fixed-rate, with maturities in 2011 and 2013. The company had no borrowings on its $350 million revolving credit facility, which matures in December 2012. Current ratio was 2.6:1, down from 2.9:1 at year-end.
- The company declared dividends of $0.41 per share in Q3, compared with $0.40 a year earlier. Nine-month dividends declared were $1.23 per share.
Management outlook, risks, and notable items
- Management expected continued Automotive sales growth through the remainder of 2010. It noted improving industrial-market conditions and stabilized, but still soft, Office Products trends. No specific consolidated earnings or sales guidance was provided.
- Management said existing credit lines and operating cash generation should fund anticipated operations, including share repurchases, for the foreseeable future.
- Three Industrial and Electrical Group companies were acquired for approximately $88 million during the first nine months. Approximately $38 million of goodwill and intangible assets was recorded; purchase-price allocations remained preliminary.
- The company guaranteed approximately $251.4 million of borrowings for independent automotive parts stores and affiliates. It reported compliance with related covenants and no significant historical guarantee losses; collateral may be used to recover amounts paid.
- Pension and post-retirement liabilities were $239.3 million at September 30. Nine-month pension benefit cost rose to $16.4 million from $6.7 million, and the company contributed $27 million to its pension plan.
- Management identified risks including economic conditions, demand, supplier relationships, competition and pricing, financial markets, promotional effectiveness, regulation, and litigation. Interim estimates, including bad-debt and inventory adjustments, may change at year-end.
- Disclosure controls were reported effective, with no material quarterly change identified in internal control over financial reporting.
Important facts for investors to verify
- Whether sales momentum and operating-margin improvement continue, particularly in Automotive and Industrial, and whether Office Products remains weak.
- Whether gross-margin pressure from competitive pricing and copper costs persists, and how acquisition contributions affect reported growth and margins.
- Why operating cash flow fell year over year and whether working-capital trends, especially receivables and payables, remain favorable.
- The final purchase-price allocations for the acquisitions and any subsequent changes to goodwill or intangible assets.
- The potential exposure and collateral recovery under the $251.4 million of guarantees, alongside the company’s $500 million debt maturities.
- Year-end inventory and LIFO adjustments, pension-related costs, and other interim estimates that management said could change materially.