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GPC > SEC Filings for GPC > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for GENUINE PARTS CO

Form 10-Q for GENUINE PARTS CO


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and with the audited consolidated financial statements, accompanying notes, related information and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Forward-Looking Statements

Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (SEC) or otherwise release to the public and in materials that we make available on our website, constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.


Senior officers may also make verbal statements to analysts, investors, the media and others that are forward-looking. Forward-looking statements may relate, for example, to future operations, prospects, strategies, financial condition, economic performance (including growth and earnings), industry conditions and demand for our products and services. The Company cautions that its forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements. Actual results or events may differ materially from those indicated as a result of various important factors. Such factors may include, among other things, slowing demand for the Company's products, changes in general economic conditions, including, unemployment, inflation or deflation, high energy costs, uncertain credit markets and other macro-economic conditions, the ability to maintain favorable vendor arrangements and relationships, disruptions in our vendors' operations, competitive product, service and pricing pressures, the Company's ability to successfully implement its business initiatives in each of its four business segments, the Company's ability to successfully integrate its acquired businesses, including GPC Asia Pacific, the uncertainties and costs of litigation, as well as other risks and uncertainties discussed in the Company's Annual Report on Form 10-K for 2012 and from time to time in the Company's subsequent filings with the SEC.

Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward-looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent reports on Forms 10-K, 10-Q, 8-K and other reports to the SEC.

Overview

Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. The Company has a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. During the nine months ended September 30, 2013, business was conducted throughout the United States, Canada, Australasia, Mexico and Puerto Rico from approximately 2,400 locations.

For the three months ended September 30, 2013, we recorded consolidated net income of $173.7 million compared to consolidated net income of $172.9 million, a slight increase from the same three month period in the prior year. For the nine months ended September 30, 2013, we recorded consolidated net income of $534.5 million compared to consolidated net income of $487.8 million in the same period last year, an increase of 10%.

On April 1, 2013, the Company acquired the remaining 70% interest in GPC Asia Pacific, formerly known as the Exego Group, and was required to revalue its original 30% investment, which originated January 1, 2012. This remeasurement, net of certain one-time purchase accounting costs, amounted to a positive pre-tax adjustment of approximately $33 million recorded in the nine month period ended September 30, 2013. In accounting for the adjustment, approximately $21 million in costs were recorded to cost of goods sold and a $54 million gain, net of expenses, was recorded to selling, administrative & other expenses in the Company's income statement. Additionally, the $33 million net adjustment is included in the "Other, net" line on our segment information in Part I, Item 1. Note B. The $33 million net adjustment, combined with a lower tax rate for the remeasurement, favorably impacted diluted earnings per share by $0.21 for the nine months ended September 30, 2013.

Sales

Sales for the third quarter of 2013 were $3.69 billion, an increase of 9% compared to $3.38 billion for the same period in 2012. For the nine months ended September 30, 2013, sales were $10.56 billion, an increase of 7% compared to $9.89 billion in the same period of the prior year.

Sales for the Automotive Parts Group increased 22% in the third quarter of 2013 and 16% for the nine months ended September 30, 2013, as compared to the same periods in the previous year. The increase in this group's revenues was due to the approximately 17% accretive impact of the Company's acquisitions, with the remaining 5% representing core North American sales growth. We expect sales in the Automotive Parts Group to remain strong over the remainder of the year due to the acquisition, continued organic growth and the improving economic conditions in the automotive aftermarket. The Industrial Products Group's sales decreased by 3% and 2% for the three and nine month periods ended September 30, 2013, respectively, as compared to the same period in 2012 primarily as a result of lower sales volume. Although the Industrial market indices, such as Industrial Production and Capacity Utilization, would indicate a relatively stable manufacturing sector overall, customer demand in sectors such as equipment and machinery remains a headwind for our Industrial Group. Customers in this sector have been impacted by the slowdown in the oil and gas and mining and resource industries both domestically and globally. As the Industrial Group transitions through these industry challenges, the Company will rely on internal sales initiatives to show gradually improving revenues in the quarters ahead. Sales for


the Office Products Group decreased by approximately 3% and 2% for the three and nine month periods ended September 30, 2013, respectively, as compared to the same periods in 2012 primarily as a result of lower sales volumes. The industry-wide slowdown in office product consumption, which continues to pressure this segment, reflects the on-going elevated levels of white-collar unemployment. Sales for the Electrical/Electronic Materials Group decreased 5% for the three and nine month periods ended September 30, 2013, as compared to the same period of the previous year, primarily as a result of lower sales volumes. The impact of copper pricing decreased sales by approximately 1% for the three and nine month periods ended September 30, 2013. We expect the industry segments currently pressuring the Electrical/Electronic Materials Group sales volume to remain weak in the near term. However, our focused growth initiatives should enable this group to report gradual revenue improvement in the quarters ahead.

Industry pricing was not a significant factor in any of the Company's reportable segments for the three and nine month periods ended September 30, 2013.

Cost of Goods Sold/Expenses

Cost of goods sold for the third quarter of 2013 was $2.58 billion, an 8% increase from $2.40 billion for the third quarter of 2012. The increase in cost of goods sold for the third quarter was primarily related to the 9% sales increase for the same period. As a percentage of net sales, cost of goods sold decreased to 70.1% of net sales for the three month period ended September 30, 2013, as compared to 71.1% for the same period of the prior year. For the nine months ended September 30, 2013, cost of goods sold was $7.43 billion, a 6% increase from $7.03 billion for the same period last year, and as a percent of net sales decreased to 70.4% compared to 71.0% in the same nine month period of 2012. The increase in cost of goods sold for the nine months ended September 30, 2013 was primarily related to the 7% sales increase for the same period and the approximately $21 million in costs which were recorded to cost of goods sold from the Company's GPC Asia Pacific acquisition, as previously noted under "Overview," and as more fully discussed in Part I, Item 1. Note I. The Company's cost of goods sold includes the total cost of merchandise sold, including freight expenses associated with moving merchandise from our vendors to our distribution centers and retail stores, vendor income and inventory adjustments. Gross profit as a percentage of net sales may fluctuate based on (i) changes in merchandise costs and related vendor income or vendor pricing, (ii) variations in product and customer mix, (iii) price changes in response to competitive pressures and (iv) physical inventory and LIFO adjustments.

Total operating expenses of $829.2 million increased to 22.5% of net sales for the third quarter of 2013 compared to $704.5 million, or 20.9% of net sales for the same period of the prior year. For the nine months ended September 30, 2013, these expenses totaled $2.32 billion, or 22.0% of net sales, an increase from $2.10 billion, or 21.2% of net sales for the same period in the prior year. The increase in operating expenses as a percentage of net sales for the third quarter and nine months ended September 30, 2013 reflects the impact of higher operating costs at GPC Asia Pacific due to its higher level of operating costs associated with a 100% owned store-based model, as well as a decrease in leverage associated with the sales declines in our non-automotive related businesses. These increases are partially offset by the one-time acquisition gain, net of expenses, of $54 million recorded in operating expenses, as previously noted under "Overview," and as more fully discussed in Part I, Item 1. Note I.

The Company's operating expenses are substantially comprised of compensation and benefit costs for personnel. Other major expense categories include facility occupancy costs for headquarters, distribution center and store operations, insurance costs, accounting, legal and professional services, transportation and delivery costs, travel and advertising. Management's ongoing cost control measures in these areas, as well as investments in technology, have served to improve the Company's cost structure.

It should be noted that the GPC Asia Pacific business has a lower cost of goods sold and a higher level of operating costs due to its 100% owned store-based model, as compared to the Company's other automotive businesses. However, the operating profit margin for GPC Asia Pacific is similar to the Company's other automotive businesses.

Operating Profit

Operating profit of $300.5 million was 8.2% of net sales for the three months ended September 30, 2013, compared to 8.6% for the same period of the previous year. For the nine months ended September 30, 2013, operating profit of $861.3 million decreased to 8.2% of net sales, compared to $828.7 million or 8.4% of net sales in the same period in 2012. The decrease in operating profit as a percentage of net sales for the three and nine month periods ended September 30, 2013 is primarily due to the loss of expense leverage associated with lower sales growth in the Company's non-automotive related businesses.


The Automotive Parts Group's operating profit increased 20%, which correlates with the sales increase of 22% in the third quarter of 2013 and its operating profit margin decreased to 8.9%, as compared to 9.1% for the same three month period of the prior year. For the nine months ended September 30, 2013, operating profit increased 17% compared to the same period of the prior year, and the operating profit margin increased to 8.8% compared to 8.7% for the same period last year. For the nine month period ended September 30, 2013, operating profit margin for this group improved due to the Company's cost savings and improved expense leverage on increased revenues. The Industrial Products Group had a 16% decrease in operating profit in the third quarter of 2013 compared to the third quarter of 2012, and the operating profit margin for this group in the third quarter of 2013 decreased to 7.2% compared to 8.3% in the same period of the previous year. Operating profit for the Industrial Products Group decreased by 10% for the nine month period ended September 30, 2013, compared to the same period in 2012, and the operating profit margin decreased to 7.4% compared to 8.1% for the same period in 2012. The Office Products Group's operating profit decreased 6% in the third quarter of 2013 compared to the same three month period in 2012, and the operating profit margin for this group decreased to 6.5% as compared to 6.7% for the same period of 2012. For the nine months ended September 30, 2013, the Office Products Group's operating profit decreased 7% compared to the same period of the prior year and the operating profit margin decreased to 7.3% compared to 7.6% for the same period in 2012. The Electrical/Electronic Materials Group operating profit decreased by 7% in the third quarter, and its operating profit margin decreased to 8.8% compared to 9.0% in the third quarter of the previous year. Operating profit for this group decreased by 8% for the nine month period ended September 30, 2013, compared to the same period in 2012, and the operating profit margin decreased to 8.3% compared to 8.6% for the same nine month period in 2012. The decrease in operating profit margin for each of the Industrial, Office Products and Electrical/Electronic Materials Groups is a result of the loss of expense leverage due to lower sales volume in the three and nine month periods ended September 30, 2013.

Income Taxes

The effective income tax rate decreased to 36.1% for the three month period ended September 30, 2013, compared to 36.3% for the same three month period ended September 30, 2012. The effective income tax rate was 33.9% for the nine month period ended September 30, 2013, compared to 36.4% for the same period in 2012. The rate decrease in the nine month period ended September 30, 2013 reflects the favorable tax rate applied to the one-time acquisition gain recorded in the period, as well as the favorable impact of a lower Australian tax rate applied to the pre-tax earnings of GPC Asia Pacific.

Net Income

Net income for the three months ended September 30, 2013 was $173.7 million, a slight increase as compared to $172.9 million for the same three month period of 2012. On a per share diluted basis, net income was $1.12, an increase of 1% as compared to $1.11 for the third quarter of 2012. Net income for the nine months ended September 30, 2013, was $534.5 million, an increase of 10% from $487.8 million recorded in the same period of the previous year. Net income on a per share diluted basis for the nine months ended September 30, 2013, was $3.43, up 10% compared to $3.11 for the same period in 2012.

Financial Condition

The Company's cash balance at September 30, 2013 decreased $82.2 million or 20% from December 31, 2012, due primarily to the Company's April 1, 2013 GPC Asia Pacific acquisition.

Accounts receivable increased $269.5 million or 18% from December 31, 2012, which is due to the Company's GPC Asia Pacific acquired receivables and the increase in sales primarily in the Automotive Parts Group during the nine month period ended September 30, 2013. Inventory increased $229.5 million or 9% compared to the inventory balance at December 31, 2012, due to $305.6 million of inventory included in the Company's GPC Asia Pacific acquisition and marginally offset by planned inventory reductions. Accounts payable increased $531.3 million or 32% from December 31, 2012. This change is partly due to $131.8 million of accounts payable included in the Company's GPC Asia Pacific acquisition, as well as more favorable payment terms, and other payables initiatives negotiated with our vendors in the nine month period ended September 30, 2013. The Company's debt is discussed below.

Liquidity and Capital Resources

Total debt increased $333.9 million, or 67%, from December 31, 2012, due to incremental borrowings under the $850 million unsecured revolving line of credit for the GPC Asia Pacific acquisition. The line of credit matures in September 2017 and bears interest at LIBOR plus various margins, which is based on the Company's leverage ratio. At September 30, 2013, $333.9 million was outstanding under the line of credit.


The remaining debt outstanding is at fixed rates of interest and remains unchanged at $500.0 million as of September 30, 2013, compared to December 31, 2012. The fixed rate debt is comprised of two notes of $250.0 million each, due in November 2013 and November 2016, carrying an interest rate of 4.67% and 3.35%, respectively. On August 19, 2013, the Company entered into an agreement which would fund the note maturing in November 2013 totaling $250 million. Upon funding, this note will be due in 2023 and carry an interest rate of 2.99%. At September 30, 2013, the Company was in compliance with all covenants connected with these borrowings.

The ratio of current assets to current liabilities was 1.5 to 1 at September 30, 2013, as compared to 1.9 to 1 at December 31, 2012.

The Company currently believes existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations, including share repurchases, if any, for the foreseeable future.

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