Item 2.
Managements 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 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, 2013.
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, the uncertainties and costs of litigation, as well as other risks and uncertainties discussed in the Companys Annual Report on
Form 10-K
for 2013 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 three months ended March 31, 2014, business was conducted throughout the United States,
Canada, Australia, New Zealand, Mexico and Puerto Rico from approximately 2,600 locations.
For the three months ended March 31, 2014, we recorded
consolidated net income of $157.5 million compared to consolidated net income of $144.4 million, an increase of 9% from the same three month period in the prior year. The Company continues to focus on a variety of initiatives to facilitate
continued growth including strategic acquisitions, the introduction of new and expanded product lines, geographic expansion, sales to new markets, enhanced customer marketing programs and a variety of gross margin and cost savings initiatives.
Sales
Sales for the first quarter of 2014 were $3.62
billion, an increase of 13% compared to $3.20 billion for the same period in 2013.
Sales for the Automotive Parts Group increased 23% for the three
months ended March 31, 2014, as compared to the same period in the previous year. The increase in this groups revenues was due to the approximately 17% accretive impact of the Companys acquisitions, with the remaining 7%
representing core North American sales growth. Unfavorable foreign exchange rates associated with our Australia and Canadian businesses negatively impacted sales in the three month period ended March 31, 2014 by 1.6%. In the quarters ahead, we
anticipate increased sales growth in the Automotive Parts Group due primarily to organic growth. The Industrial Products Groups sales increased 4% for the three month period ended March 31, 2014, as compared to the same period in 2013.
The increase in this groups revenues was due to the approximately 3% accretive impact of the Companys acquisitions, with the remaining 2% representing organic growth before a 1% unfavorable foreign currency translation effect for the
three month period ended March 31, 2014.
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The Industrial Products Group experienced slightly improved demand patterns in the three months ended March 31, 2014 as compared to the same period in 2013. We expect improved industry
conditions, as well as internal sales initiatives and acquisitions to support growing revenues for this group in the quarters ahead. Sales for the Office Products Group decreased by approximately 1% for the three month period ended March 31,
2014, as compared to the same period in 2013 primarily due to lower sales volumes and partially offset by a small acquisition. Despite the industry-wide slowdown in office product consumption, which continues to pressure this segment, reflects the
on-going elevated levels of white-collar unemployment. We expect internal sales initiatives and acquisitions to support moderate revenue growth for this group in the quarters ahead. Sales for the Electrical/Electronic Materials Group increased 30%
for the three month period ended March 31, 2014, as compared to the same period of the previous year. The increase in this groups revenues was due to the approximately 29% accretive impact of the Companys acquisitions, with the
remaining 1% representing organic growth for the three month period ended March 31, 2014. Our focused growth initiatives should enable this group to report gradual organic revenue improvement and moderately strong revenue increases from their
recently completed acquisitions in the quarters ahead.
Industry pricing was flat in the Automotive segment and increased by less than 1% in each of the
Companys non-automotive businesses during the three month period ended March 31, 2014.
Cost of Goods Sold/Expenses
Cost of goods sold for the first quarter of 2014 was $2.54 billion, a 12% increase from $2.28 billion for the first quarter of 2013. The increase in cost of
goods sold for the first quarter was primarily related to the 13% 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 March 31, 2014, as compared
to 71.2% for the same period of the prior year. The decrease in cost of goods sold as a percentage of net sales primarily relate to a lower cost of goods sold and a higher level of operating costs at the GPC Asia Pacific business due to its 100%
owned store-based model, as compared to the Companys other automotive businesses. The Companys 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 $840.7 million increased to 23.2% of net sales for the first quarter of 2014 compared to $699.6 million, or 21.9% of net sales for
the same period of the prior year. The increase in operating expenses as a percentage of net sales for the first quarter ended March 31, 2014 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, and cost saving initiatives including the Companys pension plan freeze effective January 1, 2014. We continue to focus on effectively managing the costs in our business with ongoing
investments in technology and supply chain initiatives primarily associated with freight and logistics.
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, employee benefits and insurance costs, accounting,
legal and professional services, transportation and delivery costs, travel and advertising. Managements ongoing cost control measures in these areas have served to improve the Companys overall cost structure.
Operating Profit
Operating profit of $282.6 million was
7.8% of net sales for the three months ended March 31, 2014, compared to $243.6 million, or 7.6% of net sales for the same three month period of the previous year. The increase in operating profit as a percentage of net sales for the three
month period ended March 31, 2014 is primarily due to the Companys increased revenues and cost savings including savings from the Companys pension plan freeze effective January 1, 2014.
The Automotive Parts Groups operating profit increased 24%, which correlates with the sales increase of 23% in the first quarter of 2014 and its
operating profit margin increased to 7.9%, as compared to 7.8% for the same three month period of the prior year. The Industrial Products Group had a 5% increase in operating profit in the first quarter of 2014 compared to the first quarter of 2013,
and the operating profit margin for this group in the first quarter of 2014 increased to 7.3% compared to 7.2% in the same period of the previous year. The Office Products Groups operating profit increased 2% in the first quarter of 2014
compared to the same three month period in 2013, and the operating profit margin for this group increased to 8.1% as compared to 7.9% for the same period of 2013. The Electrical/Electronic Materials Group operating profit increased by 49% in the
first quarter, and its operating profit margin increased to 8.6% compared to 7.5% in the first quarter of the previous year.
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Income Taxes
The effective income tax rate increased to 35.5% for the three month period ended March 31, 2014, compared to 35.0% for the same period in 2013. The rate
increase in the three month period ended March 31, 2014 primarily reflects a more favorable non-taxable retirement plan valuation recorded in the three month period ended March 31, 2013.
Net Income
Net income for the three months ended
March 31, 2014 was $157.5 million, an increase of 9%, as compared to $144.4 million for the same three month period of 2013. On a per share diluted basis, net income was $1.02, an increase of 10% as compared to $0.93 for the first quarter of
2013.
Financial Condition
The Companys cash
balance at March 31, 2014 decreased $93.4 million or 47% from December 31, 2013, due to $156.9 million used for acquisitions and other investing activities, $18.4 million invested in the Company via capital expenditures and $22.7 million
for share repurchases.
Accounts receivable increased $163.5 million or 10% from December 31, 2013, which is due to the Companys overall sales
increase and acquisitions. Inventory increased $28.3 million or 1% compared to the inventory balance at December 31, 2013, as inventory from acquisitions was marginally offset by planned inventory reductions. Accounts payable increased $65.7
million or 3% from December 31, 2013, primarily due to acquisitions and more favorable payment terms negotiated with our vendors in the three month period ended March 31, 2014. The Companys debt is discussed below.
Liquidity and Capital Resources
Total debt increased
$135.1 million, or 18%, from December 31, 2013, due to incremental borrowings under the $850 million unsecured revolving line of credit primarily related to the Companys acquisitions. 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 March 31, 2014, $399.8 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 March 31, 2014, compared to December 31,
2013. The fixed rate debt is comprised of two notes of $250.0 million each, due in November 2016 and December 2023, carrying an interest rate of 3.35% and 2.99%, respectively. At March 31, 2014, the Company was in compliance with all covenants
connected with these borrowings.
The ratio of current assets to current liabilities was 1.6 to 1 at March 31, 2014, unchanged from December 31,
2013.
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.