GENUINE PARTS CO annual report, FY2016

Genuine Parts Company — 2016 Form 10-K

Business and period. The filing covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results. Genuine Parts distributes automotive replacement parts, industrial parts, office products, and electrical/electronic materials through approximately 2,670 locations across North America and Australasia. The figures below are in U.S. dollars.

Financial performance

Metric20162015Change
Net sales$15.340 billion$15.280 billion+0.4%
Gross profit$4.600 billion$4.556 billion+1.0%
Income before taxes$1.074 billion$1.124 billion-4%
Net income$687 million$706 million-3%
Diluted EPS$4.59$4.63-1%
Net cash from operations$946 million$1.159 billion-18%
  • Gross margin was 30.0%, versus 29.8%; net income was 4.5% of sales, versus 4.6%. SG&A rose to 22.0% of sales from 21.4%, reflecting acquisition costs and reduced expense leverage amid weak comparable sales.
  • By segment, sales were: Automotive $8.112 billion (+1%); Industrial $4.634 billion (essentially flat); Office Products $1.969 billion (+2%); and Electrical/Electronic Materials $716 million (-5%). Reported segment operating margins were 8.8%, 7.3%, 5.9%, and 8.5%, respectively.
  • Fourth-quarter sales were $3.780 billion, up about 2.7% year over year; net income was $153 million, down about 5.4%, and diluted EPS was $1.02 versus $1.07.
  • Cash and equivalents were $243 million at year-end, versus $212 million. Current assets to current liabilities were 1.4:1. Total debt increased to $875 million from $625 million; current maturities were $325 million and long-term debt was $550 million.
  • Investing cash outflow was $594 million, including $462 million for acquisitions and other investing; capital expenditures were $161 million. Dividends paid were $387 million and share repurchases were $181 million.

Changes, outlook, and risks

  • Acquisitions materially supported sales: 19 businesses were acquired during 2016, and acquired operations contributed approximately 2.4% to consolidated sales growth, offsetting lower sales volume, currency headwinds, and modest product deflation. Acquired businesses contributed about $350 million of 2016 sales.
  • Management cited challenging U.S. comparable sales and weaker industrial/manufacturing demand for pressure on earnings and cost leverage. Office Products margins fell to 5.9% from 7.3%, while Automotive and Electrical/Electronic margins also declined.
  • Management expected automotive fundamentals and sales initiatives to support 2017 growth; it anticipated improving industrial conditions and further improvement at EIS, and planned further Office Products diversification into Facilities, Breakroom and Safety. These are expectations, not quantified earnings guidance.
  • Management estimated 2017 capital expenditures of $145–$165 million and defined-benefit plan contributions of about $48 million. It expected increasing dividends to continue and anticipated ongoing share repurchases, with amounts varying.
  • The company said cash and available financing were sufficient for operations and planned uses. Its $1.2 billion revolving facility had $325 million drawn at year-end and matures in 2021; the company reported compliance with debt covenants. Debt rose primarily in connection with acquisitions.
  • Key risks include persistent competition and pricing pressure, demand weakness across end markets, acquisition execution and integration, vendor concentration or loss of supplier incentives/return privileges, cybersecurity and systems disruption, foreign-exchange exposure, and changes to trade policy. A 10% currency shift was estimated to affect translated sales by about $262 million.
  • The company disclosed approximately 2,420 product-liability lawsuits and $431 million of guaranteed borrowings for independent stores and affiliates. Management did not expect pending or reasonably anticipated litigation to materially affect the company; it had incurred no significant losses on the guarantees to date. Operating lease commitments totaled approximately $865 million.
  • Unusual or significant accounting matters include 2016 LIFO inventory liquidations that reduced cost of goods sold by approximately $6 million, and a $73 million pension/post-retirement adjustment within other comprehensive loss. Management expected the forthcoming lease accounting standard to significantly affect reported balance-sheet amounts.

Important facts for investors to verify

  • Whether underlying comparable sales and volumes improve, separating organic performance from acquisition contributions, currency, and pricing effects.
  • Whether acquired businesses integrate successfully and generate expected growth and margins, particularly given higher debt and acquisition-related expenses.
  • Whether Office Products can recover margin amid lower supplier incentives and declining core office-supplies volume, and whether industrial and EIS demand improves.
  • Cash conversion and working-capital trends: operating cash flow declined 18%, while receivables and inventory increased; assess the sustainability of supplier payment-term benefits.
  • Debt maturities and financing capacity, plus lease, pension, and $431 million guarantee exposures; assess sensitivity to currency movements and any supplier changes.
  • The filing reports unqualified audit opinions on the financial statements and internal controls; review subsequent filings for updates to outlook, risks, and the expected impact of new accounting standards.