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 six months ended June 30, 2014, business was conducted throughout the United States, Canada, Australia, New Zealand, Mexico and Puerto Rico from approximately 2,600 locations.
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For the three months ended June 30, 2014, the Company recorded consolidated net income of $197.7 million
compared to consolidated net income of $216.4 million, a decrease of 9% from the same three month period in the prior year. For the six months ended June 30, 2014, we recorded consolidated net income of $355.2 million compared to
consolidated net income of $360.7 million in the same period last year, a decrease of 2%.
In association with the April 1, 2013 acquisition of the
remaining 70% interest in GPC Asia Pacific, the Companys initial 30% investment was remeasured and, net of certain one-time purchase accounting adjustments, amounted to a pre-tax income adjustment of approximately $36 million recorded in the
second quarter of 2013. In accounting for the adjustments, 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. The
adjustments recorded in the second quarter of 2013, combined with the lower tax rate for the remeasurement, favorably impacted diluted earnings per share in the second quarter of 2013 by $0.22. Before the one-time adjustments in 2013, net income of
$197.7 million and earnings per share on a diluted basis of $1.28 were both up 9% compared to the same three month period in 2013.
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 second quarter of 2014 were $3.91 billion, an increase of 6% compared to $3.68 billion for the same period in 2013. For the six months ended
June 30, 2014, sales were $7.53 billion, an increase of 10% compared to $6.87 billion in the same period of the prior year.
Sales for the Automotive
Parts Group increased 5% in the second quarter of 2014 and 13% for the six months ended June 30, 2014, as compared to the same periods in the previous year. The increase in this groups revenues for the three months ended June 30,
2014 was due to 7% organic sales growth offset by a negative 2% foreign currency impact associated with the sales from our Australian and Canadian businesses. For the six months ended June 30, 2014, the 13% increase in this groups
revenues was due to the 8% accretive impact of the Companys acquisitions and core sales growth of approximately 7%, offset by an unfavorable foreign currency impact of 2%. In the quarters ahead, we anticipate increased sales growth in the
Automotive Parts Group due primarily to the Companys initiatives to drive organic growth.
The Industrial Products Groups sales increased by
7% and 5% for the three and six month periods ended June 30, 2014, respectively, as compared to the same period in 2013. The sales increase for the three months ended June 30, 2014 reflect an approximate 3% accretive impact from the
Companys acquisitions, with the remaining 4% representing organic sales growth. The sales increase for the six months ended June 30, 2014 reflect an approximate 3% accretive impact from the Companys acquisitions and 3% organic sales
growth, offset by an unfavorable foreign currency impact of 1%. The Industrial Products Group experienced improved demand patterns in the three months ended June 30, 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 increased 4% and 2% for the three and six month periods ended June 30, 2014, as compared to the same periods in 2013, respectively. The increase in this groups revenues for the quarter and six months ended June 30,
2014 is due to the 2% accretive impact of acquisitions, with the additional 2% growth in the three months ended June 30, 2014 representing organic sales growth. We expect internal sales initiatives and acquisitions to support moderate revenue
growth for this group in the quarters ahead despite the industry-wide slowdown in office product consumption.
Sales for the Electrical/Electronic
Materials Group increased 32% and 31% for the three and six month periods ended June 30, 2014, as compared to the same periods of the previous year. The increase in this groups revenues for the quarter and six months ended June 30,
2014 was due to the accretive impact of the Companys acquisitions. 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 basically flat in the Automotive and ElectricalElectronic Materials segments and increased by
approximately 1% in the Industrial Products and Office Products segments for the six month period ended June 30, 2014.
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Cost of Goods Sold/Expenses
Cost of goods sold for the second quarter of 2014 was $2.73 billion, a 6% increase from $2.57 billion for the second quarter of 2013. As a percentage of net
sales, cost of goods sold decreased to 69.8% of net sales for the three month period ended June 30, 2014, as compared to 69.9% for the same period of the prior year. For the six months ended June 30, 2014, cost of goods sold was $5.27
billion, a 9% increase from $4.85 billion for the same period last year, and as a percent of sales decreased to 70.0% compared to 70.5%. The increase in cost of goods sold for the three and six month periods ended June 30, 2014 primarily
relates to the sales increase for those periods as compared to the same three and six month periods of the prior year. The decrease in cost of goods sold as a percentage of net sales primarily relates to the one-time cost recorded to cost of goods
sold in the three month period ended June 30, 2013 associated with the acquisition of the remaining 70% interest in GPC Asia Pacific as previously discussed. In addition, the Company has 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 $869.0 million increased to 22.2% of net sales for the second quarter of 2014 compared to $790.4 million, or 21.5% of sales for
the same period of the prior year. For the six months ended June 30, 2014, these expenses totaled $1.71 billion, or 22.7% of sales, an increase from $1.49 billion, or 21.7% of 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, 2014 reflects the impact of the one-time acquisition gain, net of expenses, recorded to selling, administrative & other expenses in
the three month period ended June 30, 2013, as previously discussed. In addition, the Company has a higher level of operating costs at GPC Asia Pacific due to its 100% owned store-based model. The Companys cost saving initiatives,
including the Companys pension plan freeze effective January 1, 2014, have partially offset these increases. 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 related 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 have served to improve the Companys overall cost structure.
Operating Profit
Operating profit of $349.8 million
increased to 8.9% of net sales for the three months ended June 30, 2014, compared to $317.3 million or 8.6% of net sales for the same three month period of the prior year. For the six months ended June 30, 2014, operating profit of $632.4
million increased to 8.4% of net sales, compared to $560.8 million or 8.2% of net sales in the same period in 2013. The increase in operating profit as a percentage of net sales for the three and six month periods ended June 30, 2014 is
primarily due to the Companys increased revenues and related expense leverage, as well as cost savings including savings from the Companys pension plan freeze effective January 1, 2014.
The Automotive Parts Groups operating profit increased 11% in the second quarter of 2014 and its operating profit margin increased to 9.8%, as compared
to 9.3% in the same three month period of the prior year. For the six months ended June 30, 2014, operating profit increased 16% compared to the same period of the prior year, and the operating profit margin increased to 8.9% compared to 8.6%
for the same period last year. For the three and six month periods ended June 30, 2014, operating profit margin for this group improved due to cost savings and improved expense leverage on increased revenues. The Industrial Products
Groups operating profit increased 7% in the second quarter of 2014 compared to the second quarter of 2013, and the operating profit margin for this group remained unchanged at 7.9% as compared to the same period of the previous year. Operating
profit for the Industrial Products Group increased by 6% for the six month period ended June 30, 2014, compared to the same period in 2013, and the operating profit margin increased to 7.6% compared to 7.5% for the same period in 2013. The
Office Products Groups operating profit increased 5% in the second quarter of 2014 compared to the same three month period in 2013, and the operating profit margin for this group remained unchanged at 7.4% as compared to the same period of
2013. For the six months ended June 30, 2014, the Office Products Groups operating profit increased 3% compared to the same period of the prior year and the operating profit margin increased to 7.8% compared to 7.7% for the for the same
period in 2013. The Electrical/Electronic Materials Group increased its operating profit by 35% in the second quarter, and its operating profit margin increased to 8.8% compared to 8.5% in the second quarter of the previous year. Operating profit
for the Electrical/Electronic Materials Group increased by 41% for the six month period ended June 30, 2014, compared to the same period in 2013, and the operating profit margin increased to 8.7% compared to 8.0% for the same six month period
in 2013.
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Income Taxes
The effective income tax rate increased to 36.3% for the three month period ended June 30, 2014, compared to 31.3% for the same three month period ended
June 30, 2013. The effective income tax rate was 35.9% for the six month period ended June 30, 2014, compared to 32.8% for the same period in 2013. The rate increase in the three and six month periods ended June 30, 2014 reflects the
favorable tax rate applied to the one-time acquisition gain recorded in the three month period ended June 30, 2013.
Net Income
Net income for the three months ended June 30, 2014 was $197.7 million, a decrease of 9%, as compared to $216.4 million for the same three month period
of 2013. On a per share diluted basis, net income was $1.28, a decrease of 8% as compared to $1.39 for the second quarter of 2013. Net income for the six months ended June 30, 2014, was $355.2 million, a decrease of 2% from $360.7 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, 2014, was $2.30, a slight decrease compared to $2.31 for the same period in 2013. Net income and earnings per share on a
diluted basis for the three and six month periods ended June 30, 2013, include the one-time acquisition gain, net of expenses previously discussed.
Before the one-time adjustments in 2013 as previously discussed, net income of $197.7 million and earnings per share on a diluted basis of $1.28 were both up
9% compared to the same three month period in 2013. Net income for the six month period ended June 30, 2014 of $355.2 million was up 9% and earnings per share on a diluted basis of $2.30 were up 10% as compared to the same six month period of
the previous year excluding the adjustments.
Financial Condition
The Companys cash balance at June 30, 2014 decreased $44.0 million or 22% from December 31, 2013, due to $178.9 million used for acquisitions
and other investing activities, $171.2 million in dividends paid to the Companys shareholders, $39.9 million invested in the Company via capital expenditures and $53.8 million for share repurchases.
Accounts receivable increased $244.4 million or 15% from December 31, 2013, which is due to the Companys overall sales increase and acquisitions.
Inventory increased $41.1 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 $220.0 million or 10% from
December 31, 2013, primarily due to acquisitions and more favorable payment terms negotiated with our vendors in the six month period ended June 30, 2014. The Companys debt is discussed below.
Liquidity and Capital Resources
Total debt increased
$41.7 million, or 5%, from December 31, 2013, due to incremental borrowings under the Companys $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 June 30, 2014, $306.4 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 June 30, 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 June 30, 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 June 30, 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.
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Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which creates a single, comprehensive revenue recognition model for all contracts with customers. The updated standard requires an entity to recognize revenue to reflect the transfer of promised goods or services to
customers at an amount that the entity expects to be entitled to in exchange for those goods and services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and may be adopted
either retrospectively or on a modified retrospective basis whereby the new standard would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment
recorded to beginning retained earnings at the effective date for existing contracts with remaining performance obligations. Early adoption is not permitted. The Company is currently evaluating the impact of ASU 2014-09 on the Companys
consolidated financial statements and related disclosures.