10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission file number: 1-5690

 

 

GENUINE PARTS COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

GEORGIA   58-0254510

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2999 CIRCLE 75 PARKWAY,

ATLANTA, GA

  30339
(Address of principal executive offices)   (Zip Code)

(770) 953-1700

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at March 31, 2016

Common Stock, $1.00 par value per share   149,623,104 Shares

 

 

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,
2016
    December 31,
2015
 
     (unaudited)        
     (in thousands, except share
and per share data)
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 205,135      $ 211,631   

Trade accounts receivable, less allowance for doubtful accounts (2016 – $12,699; 2015 – $10,693)

     1,981,651        1,822,419   

Merchandise inventories, net – at lower of cost or market

     3,074,641        2,999,966   

Prepaid expenses and other current assets

     508,841        521,300   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     5,770,268        5,555,316   

Goodwill

     877,282        840,582   

Other intangible assets, less accumulated amortization

     535,703        521,213   

Deferred tax assets

     114,917        118,525   

Other assets

     504,153        460,918   

Property, plant and equipment, less accumulated depreciation (2016 – $935,496; 2015 – $902,917)

     648,204        648,217   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 8,450,527      $ 8,144,771   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Trade accounts payable

   $ 2,961,318      $ 2,821,526   

Current portion of debt

     450,000        375,000   

Dividends payable

     98,339        92,595   

Income taxes payable

     46,137        6,762   

Other current liabilities

     656,132        644,771   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     4,211,926        3,940,654   

Long-term debt

     250,000        250,000   

Pension and other post–retirement benefit liabilities

     231,652        284,235   

Deferred tax liabilities

     50,736        50,684   

Other long-term liabilities

     462,501        459,956   

EQUITY:

    

Preferred stock, par value – $1 per share

    

Authorized – 10,000,000 shares – None issued

     -0-        -0-   

Common stock, par value – $1 per share

    

Authorized – 450,000,000 shares – Issued and outstanding – 2016 – 149,623,104 shares; 2015 – 150,081,474 shares

     149,623        150,081   

Additional paid-in capital

     45,044        41,353   

Retained earnings

     3,899,582        3,885,751   

Accumulated other comprehensive loss

     (862,519     (930,618
  

 

 

   

 

 

 

TOTAL PARENT EQUITY

     3,231,730        3,146,567   

Noncontrolling interests in subsidiaries

     11,982        12,675   
  

 

 

   

 

 

 

TOTAL EQUITY

     3,243,712        3,159,242   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 8,450,527      $ 8,144,771   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

     Three Months Ended March 31,  
     2016      2015  
     (unaudited)
(in thousands, except per share data)
 

Net sales

   $ 3,718,267       $ 3,736,051   

Cost of goods sold

     2,613,796         2,623,232   
  

 

 

    

 

 

 

Gross profit

     1,104,471         1,112,819   

Operating expenses:

     

Selling, administrative, and other expenses

     823,172         825,554   

Depreciation and amortization

     34,654         35,884   
  

 

 

    

 

 

 
     857,826         861,438   

Income before income taxes

     246,645         251,381   

Income taxes

     88,620         90,371   
  

 

 

    

 

 

 

Net income

   $ 158,025       $ 161,010   
  

 

 

    

 

 

 

Basic net income per common share

   $ 1.06       $ 1.05   
  

 

 

    

 

 

 

Diluted net income per common share

   $ 1.05       $ 1.05   
  

 

 

    

 

 

 

Dividends declared per common share

   $ 0.6575       $ 0.6150   
  

 

 

    

 

 

 

Weighted average common shares outstanding

     149,593         152,656   

Dilutive effect of stock options and non-vested restricted stock awards

     749         918   
  

 

 

    

 

 

 

Weighted average common shares outstanding – assuming dilution

     150,342         153,574   
  

 

 

    

 

 

 

Comprehensive income

   $ 226,124       $ 53,539   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

3


GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three Months Ended March 31,  
     2016     2015  
     (unaudited)
(in thousands)
 

OPERATING ACTIVITIES:

    

Net income

   $ 158,025      $ 161,010   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     34,654        35,884   

Share-based compensation

     4,249        3,316   

Excess tax benefits from share-based compensation

     (5,144     (3,734

Changes in operating assets and liabilities

     (56,739     (73,964
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     135,045        122,512   

INVESTING ACTIVITIES:

    

Purchases of property, plant and equipment

     (11,670     (16,427

Acquisitions and other investing activities

     (73,625     (30,129
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (85,295     (46,556

FINANCING ACTIVITIES:

    

Proceeds from debt

     975,000        779,910   

Payments on debt

     (900,000     (650,000

Share-based awards exercised, net of taxes paid

     (5,586     (3,804

Excess tax benefits from share-based compensation

     5,144        3,734   

Dividends paid

     (92,596     (88,039

Purchases of stock

     (46,431     (84,252
  

 

 

   

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

     (64,469     (42,451

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     8,223        (4,740
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (6,496     28,765   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     211,631        137,730   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 205,135      $ 166,495   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Genuine Parts Company (the “Company”) for the year ended December 31, 2015. Accordingly, the unaudited interim condensed consolidated financial statements and related disclosures herein should be read in conjunction with the Company’s 2015 Annual Report on Form 10-K.

The preparation of interim financial statements requires management to make estimates and assumptions for the amounts reported in the condensed consolidated financial statements. Specifically, the Company makes estimates and assumptions in its interim condensed consolidated financial statements for inventory adjustments, the accrual of bad debts, customer sales returns, and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out (“LIFO”) method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation, which is performed each year-end. Reserves for bad debts and customer sales returns are estimated and accrued on an interim basis based upon historical experience. Volume incentives are estimated based upon cumulative and projected purchasing levels. The estimates and assumptions for interim reporting may change upon final determination at year-end, and such changes may be significant.

In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the interim periods have been made. These adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2016 are not necessarily indicative of results for the entire year. The Company has evaluated subsequent events through the date the financial statements covered by this quarterly report were issued.

Note B – Segment Information

 

     Three Months Ended March 31,  
     2016      2015  
     (in thousands)  

Net sales:

     

Automotive

   $ 1,932,178       $ 1,898,508   

Industrial

     1,152,627         1,181,823   

Office products

     476,654         490,298   

Electrical/electronic materials

     175,847         182,046   

Other

     (19,039      (16,624
  

 

 

    

 

 

 

Total net sales

   $ 3,718,267       $ 3,736,051   
  

 

 

    

 

 

 

Operating profit:

     

Automotive

   $ 153,710       $ 150,641   

Industrial

     81,833         87,769   

Office products

     34,204         36,524   

Electrical/electronic materials

     14,841         15,463   
  

 

 

    

 

 

 

Total operating profit

     284,588         290,397   

Interest expense, net

     (4,822      (5,327

Other intangible assets amortization

     (8,760      (8,604

Other, net

     (24,361      (25,085
  

 

 

    

 

 

 

Income before income taxes

   $ 246,645       $ 251,381   
  

 

 

    

 

 

 

 

5


Net sales by segment exclude the effect of certain discounts, incentives and freight billed to customers. The line item “Other” represents the net effect of the discounts, incentives and freight billed to customers, which is reported as a component of net sales in the Company’s condensed consolidated statements of income and comprehensive income.

Note C – Other Comprehensive Income (Loss)

The difference between comprehensive income and net income was due to foreign currency translation adjustments and pension and other post-retirement benefit adjustments, as summarized below.

 

     Three Months Ended March 31,  
     2016      2015  
     (in thousands)  

Net income

   $ 158,025       $ 161,010   

Other comprehensive income (loss):

     

Foreign currency translation

     63,366         (113,309

Pension and other post-retirement benefit adjustments:

     

Recognition of prior service credit, net of tax

     (222      (240

Recognition of actuarial loss, net of tax

     4,955         6,078   

Net actuarial loss, net of tax

     —           —     
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     68,099         (107,471
  

 

 

    

 

 

 

Comprehensive income

   $ 226,124       $ 53,539   
  

 

 

    

 

 

 

The following tables present the changes in accumulated other comprehensive loss by component for the three months ended March 31:

 

     2016  
     Changes in Accumulated Other
Comprehensive Loss by Component
 
     Pension and
Other Post-
Retirement
Benefits
     Foreign
Currency
Translation
     Total  
     (in thousands)  

Beginning balance, January 1

   $ (535,634    $ (394,984    $ (930,618

Other comprehensive income before reclassifications, net of tax

     —           63,366         63,366   

Amounts reclassified from accumulated other comprehensive loss, net of tax

     4,733         —           4,733   
  

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     4,733         63,366         68,099   
  

 

 

    

 

 

    

 

 

 

Ending balance, March 31

   $ (530,901    $ (331,618    $ (862,519
  

 

 

    

 

 

    

 

 

 
     2015  
     Changes in Accumulated Other
Comprehensive Loss by Component
 
     Pension and
Other Post-
Retirement
Benefits
     Foreign
Currency
Translation
     Total  
     (in thousands)  

Beginning balance, January 1

   $ (533,213    $ (186,998    $ (720,211

Other comprehensive loss before reclassifications, net of tax

     —           (113,309      (113,309

Amounts reclassified from accumulated other comprehensive loss, net of tax

     5,838         —           5,838   
  

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income (loss)

     5,838         (113,309      (107,471
  

 

 

    

 

 

    

 

 

 

Ending balance, March 31

   $ (527,375    $ (300,307    $ (827,682
  

 

 

    

 

 

    

 

 

 

 

6


The accumulated other comprehensive loss components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote.

Note D – Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. ASU 2015-02 requires management to reevaluate all legal entities under a revised consolidation model to specifically (i) modify the evaluation of whether limited partnership and similar legal entities are variable interest entities (“VIEs”), (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. ASU 2015-02 is effective for the Company’s interim and annual periods beginning after December 15, 2015. The adoption of ASU 2015-02 did not have a material impact to the Company’s condensed consolidated financial statements for the three months ended March 31, 2016 and will not have a material impact on the annual consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, including operating leases, with a term greater than twelve months. Expanded disclosures with additional qualitative and quantitative information will also be required. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The Company is currently evaluating the impact of ASU No. 2016-02 on its condensed consolidated financial statements and related disclosures.

In March 2016, The FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) that changes the accounting for certain aspects of share-based compensation to employees including forfeitures, employer tax withholding, and the financial statement presentation of excess tax benefits or expense. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based compensation. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2016-09 on its condensed consolidated financial statements.

Note E – Share-Based Compensation

As more fully discussed in Note 5 of the Company’s notes to the consolidated financial statements in its 2015 Annual Report on Form 10-K, the Company maintains various long-term incentive plans, which provide for the granting of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalents and other share-based awards. SARs represent a right to receive upon exercise an amount, payable in shares of common stock, equal to the excess, if any, of the fair market value of the Company’s common stock on the date of exercise over the base value of the grant. The terms of such SARs require net settlement in shares of common stock and do not provide for cash settlement. RSUs represent a contingent right to receive one share of the Company’s common stock at a future date. The majority of awards previously granted vest on a pro-rata basis for periods ranging from one to five years and are expensed accordingly on a straight-line basis. The Company issues new shares upon exercise or conversion of awards under these plans. Most awards may be exercised or converted to shares not earlier than twelve months nor later than ten years from the date of grant. At March 31, 2016, total compensation cost related to nonvested awards not yet recognized was approximately $26.2 million, as compared to $33.0 million at December 31, 2015. The weighted-average period over which this compensation cost is expected to be recognized is approximately three years. The aggregate intrinsic value for SARs and RSUs outstanding at March 31, 2016 was approximately $133.1 million. At March 31, 2016, the aggregate intrinsic value for SARs and RSUs vested totaled approximately $79.1 million, and the weighted-average contractual lives for outstanding and exercisable SARs and RSUs were approximately six and five years, respectively. For the three months ended March 31, 2016, $4.2 million of share-based compensation cost was recorded, as compared to $3.3 million for the same period in the prior year.

 

7


Options to purchase approximately 1.3 million shares of common stock were outstanding but excluded from the computation of diluted earnings per share for the three month period ended March 31, 2016, as compared to approximately 0.6 million shares for the three month period ended March 31, 2015. These options were excluded from the computation of diluted net income per common share because the options’ exercise prices were greater than the average market price of the common stock. On April 1, 2016, the Company granted approximately 722,000 SARs and 170,000 RSUs.

 

8


Note F – Employee Benefit Plans

Net periodic benefit income for the pension plans included the following components for the three months ended March 31:

 

     Pension Benefits  
     2016      2015  
     (in thousands)  

Service cost

   $ 2,027       $ 2,387   

Interest cost

     26,091         24,612   

Expected return on plan assets

     (39,138      (37,647

Amortization of prior service credit

     (108      (141

Amortization of actuarial loss

     7,795         9,613   
  

 

 

    

 

 

 

Net periodic benefit income

   $ (3,333    $ (1,176
  

 

 

    

 

 

 

Pension benefits also include amounts related to a supplemental retirement plan. During the three months ended March 31, 2016, the Company made a $38.7 million contribution to the pension plan.

Note G – Guarantees

The Company guarantees the borrowings of certain independently controlled automotive parts stores (“independents”) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (“affiliates”). Presently, the independents are generally consolidated by unaffiliated enterprises that have controlling financial interests through ownership of a majority voting interest in the independents. The Company has no voting interest or equity conversion rights in any of the independents. The Company does not control the independents or the affiliates, but receives a fee for the guarantees. The Company has concluded that the independents are variable interest entities, but that the Company is not the primary beneficiary. Specifically, the equity holders of the independents have the power to direct the activities that most significantly impact the entities’ economic performance including, but not limited to, decisions about hiring and terminating personnel, local marketing and promotional initiatives, pricing and selling activities, credit decisions, monitoring and maintaining appropriate inventories, and store hours. Separately, the Company concluded the affiliates are not variable interest entities. The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is generally equal to the total borrowings subject to the Company’s guarantees. While such borrowings of the independents and affiliates are outstanding, the Company is required to maintain compliance with certain covenants, including a maximum debt to capitalization ratio and certain limitations on additional borrowings. At March 31, 2016, the Company was in compliance with all such covenants.

At March 31, 2016, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $350.6 million. These loans generally mature over periods from one to six years. In the event that the Company is required to make payments in connection with guaranteed obligations of the independents or the affiliates, the Company would obtain and liquidate certain collateral (e.g., accounts receivable and inventory) to recover all or a portion of the amounts paid under the guarantees. When it is deemed probable that the Company will incur a loss in connection with a guarantee, a liability is recorded equal to this estimated loss. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.

As of March 31, 2016, the Company has recognized certain assets and liabilities amounting to $37.0 million each for the guarantees related to the independents’ and affiliates’ borrowings. These assets and liabilities are included in other assets and other long-term liabilities in the condensed consolidated balance sheets.

Note H – Fair Value of Financial Instruments

The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade accounts receivable, trade accounts payable, and borrowings under the line of credit approximate their respective fair values based on the short-term nature of these instruments. At March 31, 2016, the carrying value and the fair value of fixed rate debt were approximately $500.0 million and $505.5 million, respectively. The fair value of fixed rate debt is designated as Level 2 in the fair value hierarchy (i.e., significant observable inputs) and is based primarily on the discounted value of future cash flows using current market interest rates offered for debt of similar credit risk and maturity. The carrying value of the short-term fixed rate debt of $250.0 million is included in “Current portion of debt”, with the long-term portion of $250.0 million included in “Long-term debt,” in the accompanying condensed consolidated balance sheets.

 

9


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, 2015.

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, the Company’s ability to successfully implement its business initiatives in each of its four business segments, slowing demand for the Company’s products, changes in general economic conditions, including, unemployment, inflation or deflation, volatile exchange rates, 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 integrate its acquired businesses, the uncertainties and costs of litigation, disruptions caused by a failure or breach of the Company’s information systems, as well as other risks and uncertainties discussed in the Company’s Annual Report on Form 10-K for 2015 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 three months ended March 31, 2016, business was conducted throughout the United States, Canada, Australia, New Zealand, Mexico and Puerto Rico from approximately 2,650 locations.

Sales for the three months ended March 31, 2016 were $3.72 billion, a slight decrease as compared to $3.74 billion in the same period of the prior year. For the three months ended March 31, 2016, the Company recorded consolidated net income of $158.0 million, a decrease of 2% as compared to consolidated net income of $161.0 million in the same three month period of 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.

 

10


Sales

Sales for the three months ended March 31, 2016 were $3.72 billion, a slight decrease as compared to $3.74 billion in the same period of the prior year. For the three month period ended March 31, 2016, foreign currency negatively impacted sales by approximately 1.5%.

Sales for the Automotive Parts Group increased approximately 2% in the first quarter of 2016, as compared to the same period in the prior year. This group’s revenue increase for the three months ended March 31, 2016 consisted of approximately 3.5% organic growth, and a 1% benefit from acquisitions offset by a negative 2.5% impact of foreign currency associated with the sales from our businesses throughout Australia, Canada and Mexico. We anticipate continued underlying sales growth in the Automotive Parts Group associated with the Company’s initiatives to drive organic growth. However, this growth is anticipated to be partially offset by a negative foreign currency impact.

The Industrial Products Group’s sales decreased by 2.5% for the three month period ended March 31, 2016, as compared to the same period in 2015. The decrease in this group’s revenues reflects an approximate 3% decrease in organic sales and a 1% currency headwind, offset by a 1.5% accretive impact of acquisitions. This group continues to experience difficult demand patterns. We anticipate these will persist for at least the next few quarters, although we do have multiple initiatives in place to help us grow our market share and overcome these challenges.

Sales for the Office Products Group decreased 3% for the three months ended March 31, 2016, primarily due to an approximate 4% decrease in organic sales, which was partially offset by a 1% contribution from acquisitions, as compared to the same three month period in 2015. We expect our internal sales initiatives, including ongoing acquisitions, to support revenue growth for this group in the quarters ahead.

Sales for the Electrical/Electronic Materials Group decreased 3% for the three months ended March 31, 2016 as compared to the same period in 2015, and reflects an approximate 6% decrease in organic sales, a 4% accretive impact of the Company’s acquisitions and a 1% negative impact of copper pricing. Our focused growth initiatives, including acquisitions, should enable this group to report gradually improving revenue trends in the quarters ahead.

For the three month period ended March 31, 2016, industry pricing was flat in the Automotive, Industrial and Office Product segments and decreased approximately 1% in the Electrical/Electronic Materials segment.

Cost of Goods Sold/Expenses

Cost of goods sold for the three months ended March 31, 2016 was $2.61 billion, a slight decrease from $2.62 billion for the same period in the prior year, and as a percent of sales increased slightly to 70.3% as compared to 70.2% in the first quarter of the previous year. The decrease in cost of goods sold for the three month period ended March 31, 2016 primarily relates to the sales decline in the quarter, as compared to the same three month period of the previous year. 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, (iv) physical inventory and LIFO adjustments, and (v) changes in foreign currency exchange rates.

Total operating expenses decreased to $857.8 million for the three month period ended March 31, 2016 as compared to $861.4 million, and as a percentage of net sales remained unchanged at 23.1% in the same three month period of the previous year. We continue to focus on effectively managing the costs in our businesses with ongoing investments in technology and supply chain initiatives primarily associated with freight and logistics.

The Company’s 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. Management’s ongoing cost control measures in these areas have served to improve the Company’s overall cost structure.

 

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Operating Profit

Operating profit decreased to $284.6 million or 7.7% of net sales for the three months ended March 31, 2016, compared to $290.4 million or 7.8% of net sales for the same three month period of the prior year. The decrease in operating profit as a percentage of net sales for the three month period ended March 31, 2016 is primarily due to the Company’s lower sales volume and its impact on supplier incentives in the Industrial Products Group, and expense leverage in that group, as well as the Office Products and Electrical/Electronic Materials Groups.

The Automotive Parts Group’s operating profit increased 2% in the three month period ended March 31, 2016 compared to the same period of 2015, and its operating profit margin increased to 8.0%, as compared to 7.9% in the same three month period of the prior year. The increase in operating profit margin for the three month period ended March 31, 2016 is primarily due to the positive impact of cost control initiatives.

The Industrial Products Group’s operating profit decreased approximately 7% in the three month period ended March 31, 2016 compared to the same three month period of 2015, and the operating profit margin for this group decreased to 7.1% compared to 7.4% for the same period of the previous year. The decrease in operating profit margin for the three month period ended March 31, 2016 is primarily due to lower sales volume and its impact on supplier incentives and expense leverage.

The Office Products Group’s operating profit decreased approximately 6% for the three months ended March 31, 2016 compared to the same three month period in 2015, and the operating profit margin for this group decreased to 7.2% compared to 7.4% for the same three month period of 2015. The decrease in operating profit margin for the three month period ended March 31, 2016 is primarily due to lower expense leverage on decreased revenues.

The Electrical/Electronic Materials Group reported a 4% decrease in operating profit, as compared to the same three month period ended March 31, 2015, and its operating profit margin decreased to 8.4% compared to 8.5% in the same three month period of the prior year. The decrease in operating profit margin for the three month period ended March 31, 2016 is primarily related to lower sales volume and its negative impact on expense leverage.

Income Taxes

The effective income tax rate remained unchanged at 35.9% for the three month period ended March 31, 2016, as compared to the same three month period in 2015.

Net Income

Net income for the three months ended March 31, 2016 was $158.0 million as compared to $161.0 million for the same three month period of 2015. On a per share diluted basis, net income was $1.05, unchanged as compared to the three month period ended March 31, 2015.

Financial Condition

The Company’s cash balance of $205.1 million at March 31, 2016 decreased $6.5 million or 3% from December 31, 2015. For the three months ended March 31, 2016, the Company used $73.6 million for acquisitions and other investing activities, $92.6 million for dividends paid to the Company’s shareholders, $11.7 million for investments in the Company via capital expenditures and $46.4 million for share repurchases. These items were more than offset by the Company’s earnings and net cash provided by operating activities.

Accounts receivable increased $159.2 million or 9% from December 31, 2015, which is due to the Company’s higher sales volume in the three month period ended March 31, 2016 as compared to the fourth quarter of 2015. Inventory increased $74.7 million or approximately 2% compared to the inventory balance at December 31, 2015, as inventory from acquisitions and the impact of foreign exchange was marginally offset by planned inventory reductions. Accounts payable increased $139.8 million or 5% from December 31, 2015, primarily due to acquisitions and more favorable payment terms negotiated with the Company’s vendors in the three month period ended March 31, 2016. The Company’s debt is discussed below.

 

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Liquidity and Capital Resources

Total debt increased $75.0 million, or 12%, from December 31, 2015, primarily related to cash used for the Company’s share repurchase program and acquisitions. The Company maintains a $1.2 billion unsecured revolving line of credit with a consortium of financial institutions with an option to increase the borrowing capacity by an additional $350.0 million. The line of credit bears interest at LIBOR plus various margins, which are based on the Company’s leverage ratio and is scheduled to mature in June 2020 with two optional one year extensions. At March 31, 2016, $200.0 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, 2016, compared to December 31, 2015. The fixed rate debt is comprised of two notes of $250.0 million each, one reflected in the current portion of debt, due in November 2016 carrying an interest rate of 3.35% and the other in long-term debt, due in December 2023 carrying an interest rate of 2.99%. At March 31, 2016, the Company was in compliance with all covenants connected with these borrowings.

The ratio of current assets to current liabilities was 1.4 to 1 at March 31, 2016 and remained unchanged as compared to December 31, 2015.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Although the Company does not face material risks related to interest rates and commodity prices, the Company is exposed to changes in foreign currency rates with respect to foreign currency denominated operating revenues and expenses. The Company has translation gains or losses that result from translation of the results of operations of an operating unit’s foreign functional currency into U.S. dollars for consolidated financial statement purposes. The Company’s principal foreign currency exchange exposures are the Australian dollar, Canadian dollar and Mexican peso, which are the functional currencies of our Australia, Canada and Mexico operations, respectively. As previously noted under “Sales,” foreign currency exchange exposure, particularly in regard to the Australian dollar and Canadian dollar, negatively impacted our results for the three month period ended March 31, 2016. There have been no other material changes in market risk from the information provided in the Company’s 2015 Annual Report on Form 10-K.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or furnishes under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the SEC that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2015 Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about the Company’s purchases of shares of the Company’s common stock during the quarter:

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total
Number of
Shares
Purchased
(1)
     Average
Price Paid
Per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
     Maximum Number of
Shares That May Yet
Be Purchased Under
the Plans or
Programs
 

January 1, 2016 through January 31, 2016

     587,658       $ 80.60         570,323         5,701,674   

February 1, 2016 through February 29, 2016

     104,331       $ 91.22         3,200         5,698,474   

March 1, 2016 through March 31, 2016

     165,593       $ 96.69         2,060         5,696,414   

Totals

     857,582       $ 85.00         575,583         5,696,414   

 

(1) Includes shares surrendered by employees to the Company to satisfy tax withholding obligations in connection with the vesting of shares of restricted stock, the exercise of stock options and/or tax withholding obligations.
(2) On November 17, 2008, the Board of Directors announced that it had authorized the repurchase of 15 million shares. The authorization for this repurchase plan continues until all such shares have been repurchased or the repurchase plan is terminated by action of the Board of Directors. Approximately 5.7 million shares authorized in the 2008 plan remain available to be repurchased by the Company. There were no other publicly announced plans as of March 31, 2016.

 

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Item 6. Exhibits

 

(a) The following exhibits are filed or furnished as part of this report:

 

Exhibit 3.1    Amended and Restated Articles of Incorporation of the Company, dated April 23, 2007 (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 23, 2007)
Exhibit 3.2    By-Laws of the Company, as amended and restated November 18, 2013 (incorporated herein by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K dated November 18, 2013)
Exhibit 31.1    Certification pursuant to SEC Rule 13a-14(a) signed by the Chief Executive Officer – filed herewith
Exhibit 31.2    Certification pursuant to SEC Rule 13a-14(a) signed by the Chief Financial Officer – filed herewith
Exhibit 32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer – furnished herewith
Exhibit 32.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer – furnished herewith
Exhibit 101    Interactive data files pursuant to Rule 405 of Regulation S-T:
   (i) the Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015; (ii) the Condensed Consolidated Statements of Income and Comprehensive Income for the three month periods ended March 31, 2016 and 2015; (iii) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015; and (iv) the Notes to the Condensed Consolidated Financial Statements

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     

Genuine Parts Company

(Registrant)

Date: April 29, 2016       /s/ Carol B. Yancey
      Carol B. Yancey
     

Executive Vice President and Chief Financial Officer

(Duly Authorized Officer and Principal Financial and

Accounting Officer)

 

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