Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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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 Managements 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.
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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 Companys
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 Companys ability to successfully implement its business initiatives in each of its four business segments, the Companys
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 Companys Annual Report on Form 10-K for 2012 and from
time to time in the Companys 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 six months ended June 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 June 30, 2013, we recorded
consolidated net income of $216.4 million compared to consolidated net income of $168.6 million in the same period last year, an increase of 28%. For the six months ended June 30, 2013, we recorded consolidated net income of $360.7 million
compared to consolidated net income of $314.9 million in the same period last year, an increase of 15%.
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 $36 million recorded in the three month period ended June 30, 2013. In accounting for the adjustment, approximately $18 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 Companys income statement. Additionally, the $36 million net adjustment is included in the Other, net line on
our segment information in Part I, Item 1. Note B. The $36 million net adjustment, combined with a lower tax rate for the remeasurement, favorably impacted diluted earnings per share by $0.22.
Sales
Sales for the second quarter of
2013 were $3.68 billion, an increase of 10% compared to $3.34 billion for the same period in 2012. For the six months ended June 30, 2013, sales were $6.87 billion, an increase of 5% compared to $6.52 billion in the same period of the prior
year.
Sales for the Automotive Parts Group increased 22% in the second quarter of 2013 and 13% for the six months ended June 30, 2013,
as compared to the same periods in the previous year. The increase in this groups revenues was due to the accretive impact of the Companys acquisitions and core North American sales growth of approximately 18% and 4%, respectively. 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 Groups
sales decreased by 1% for the three and six month periods ended June 30, 2013, as compared to the same period in 2012 primarily as a result of lower sales volume. Price inflation was not a material factor to sales in the three and six month
periods ended June 30, 2013. Industrial market indices, such as Industrial Production
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and Capacity Utilization, moderated slightly in the first six months ended June 30, 2013, but overall the indices remained at consistent levels, indicating relative stability in the
manufacturing sector of the economy served by the Industrial Parts Group. As a result, we expect opportunities for sales growth in our Industrial Products Group in the periods ahead. Sales for the Office Products Group decreased by approximately 3%
and 2% for the three and six month periods ended June 30, 2013, respectively, as compared to the same periods in 2012 primarily as a result of lower sales volumes. Price inflation was not a material factor in the three and six month periods
ended June 30, 2013. 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 4% and 5% for the three and six month periods ended June 30, 2013, as compared to the same period of the previous year, respectively primarily as a result of lower sales volumes and declines in copper pricing. Price inflation was not
a material factor to sales in the three and six month periods ended June 30, 2013. The impact of copper pricing decreased sales by approximately 1% for the three and six month periods ended June 30, 2013. We expect opportunities for
moderate sales growth for this group over the remainder of the year.
Cost of Goods Sold/Expenses
Cost of goods sold for the second quarter of 2013 was $2.57 billion, a 9% increase from $2.37 billion for the second quarter of 2012. The increase in cost
of goods sold for the second quarter was primarily related to the 10% sales increase for the same period and the approximately $18 million in costs which were recorded to Cost of goods sold from the Companys GPC Asia Pacific acquisition, as
previously noted under Overview, and as more fully discussed in Part I, Item 1. Note I. As a percentage of net sales, cost of goods sold decreased to 69.9% of net sales for the three month period ended June 30, 2013, as
compared to 70.9% for the same period of the prior year. For the six months ended June 30, 2013, cost of goods sold was $4.85 billion, a 5% increase from $4.63 billion for the same period last year, and as a percent of net sales decreased to
70.5% compared to 71.0% in the same six month period of 2012. Our cost of sales 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 adjustments.
Total operating expenses of
$790.4 million increased to 21.5% of net sales for the second quarter of 2013 compared to $705.0 million, or 21.1% of net sales for the same period of the prior year. For the six months ended June 30, 2013, these expenses totaled $1.49 billion,
or 21.7% of net sales, an increase from $1.40 billion, or 21.4% of net sales for the same period in the prior year. The increase in operating expenses as a percentage of net sales for the second quarter and six months ended June 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 Companys 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.
Managements ongoing cost control measures in these areas, as well as investments in technology, have served to improve the Companys 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 Companys other
automotive businesses. However, the operating profit margin for GPC Asia Pacific is similar to the Companys other automotive businesses.
Operating Profit
Operating profit of
$317.3 million was 8.6% of net sales for the three months ended June 30, 2013, compared to 8.7% for the same period of the previous year. For the six months ended June 30, 2013, operating profit of $560.8 million decreased to 8.2% of net
sales, compared to $539.9 million or 8.3% of net sales in the same period in 2012. The decrease in operating profit as a percentage of net sales for the three and six month periods ended June 30, 2013 is primarily due to the loss of expense
leverage associated with lower sales growth in the Companys non-automotive related businesses.
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The Automotive Parts Groups operating profit increased 22%, which correlates with the sales increase
of 22% in the second quarter of 2013 and its operating profit margin remained unchanged at 9.3%, as compared to the same three month period of the prior year. For the six months ended June 30, 2013, operating profit increased 15% compared to
the same period of the prior year, and the operating profit margin increased to 8.6% compared to 8.5% for the same period last year. For the six month period ended June 30, 2013, operating profit margin for this group improved due to the
Companys cost savings and improved expense leverage on increased revenues. The Industrial Products Group had a 6% decrease in operating profit in the second quarter of 2013 compared to the second quarter of 2012, and the operating profit
margin for this group in the second quarter of 2013 decreased to 7.9% compared to 8.3% in the same period of the previous year. Operating profit for the Industrial Products Group decreased by 6% for the six month period ended June 30, 2013,
compared to the same period in 2012, and the operating profit margin decreased to 7.5% compared to 7.9% for the same period in 2012. The Office Products Groups operating profit decreased 3% in the second quarter of 2013 compared to the same
three month period in 2012, and the operating profit margin for this group remained unchanged at 7.4% as compared to the same period of 2012. For the six months ended June 30, 2013, the Office Products Groups operating profit decreased 8%
compared to the same period of the prior year and the operating profit margin decreased to 7.7% compared to 8.1% for the same period in 2012. The Electrical/Electronic Materials Group operating profit decreased by 6% in the second quarter, and its
operating profit margin decreased to 8.5% compared to 8.7% in the second quarter of the previous year. Operating profit for this group decreased by 9% for the six month period ended June 30, 2013, compared to the same period in 2012, and the
operating profit margin decreased to 8.0% compared to 8.4% for the same six 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 six month periods ended June 30, 2013.
Income Taxes
The effective income tax rate decreased to 31.3% for the three month period ended June 30, 2013, compared to 36.9% for the same three month period
ended June 30, 2012. The effective income tax rate was 32.8% for the six month period ended June 30, 2013, compared to 36.5% for the same period in 2012. The rate decrease in the three and six month periods ended June 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 June 30, 2013 was $216.4 million, an increase of 28% as compared to $168.6 million for the same three month period of 2012. On a per share diluted basis, net income was $1.39, an increase of 29% as compared to $1.08 for the second
quarter of 2012. Net income for the six months ended June 30, 2013, was $360.7 million, an increase of 15% from $314.9 million recorded in the same period of the previous year. Net income on a per share diluted basis for the six months ended
June 30, 2013, was $2.31, up 15% compared to $2.01 for the same period in 2012.
Financial Condition
The Companys cash balance at June 30, 2013 decreased $206.3 million or 51% from December 31, 2012, due primarily to the Companys
April 1, 2013 GPC Asia Pacific acquisition.
Accounts receivable increased $269.1 million or 18% from December 31, 2012, which is
due to the Companys GPC Asia Pacific acquired receivables and the increase in sales primarily in the Automotive Parts Group during the six month period ended June 30, 2013. Inventory increased $196.6 million or 8% compared to the
inventory balance at December 31, 2012, due to $310.0 million of inventory included in the Companys GPC Asia Pacific acquisition and slightly offset by planned inventory reductions. Accounts payable increased $383.0 million or 23% from
December 31, 2012. This change is primarily due to the Companys GPC Asia Pacific acquisition of $184.6 million, as well as more favorable payment terms, and other payables initiatives negotiated with our vendors in the six month period
ended June 30, 2013. The Companys debt is discussed below.
Liquidity and Capital Resources
Total debt increased $400.1 million, or 80%, 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 Companys leverage ratio. At June 30, 2013, $400.1 million was outstanding
under the line of credit.
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The remaining debt outstanding is at fixed rates of interest and remains unchanged at $500.0 million as of
June 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. At June 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 June 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.