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, 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 Companys ability to successfully implement its business initiatives in each of its four business segments, slowing demand for the Companys 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 Companys ability to successfully integrate its acquired businesses, the uncertainties and costs of litigation, disruptions caused by a failure or breach of the Companys information systems, as
well as other risks and uncertainties discussed in the Companys Annual Report on Form 10-K for 2015 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, 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.
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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 groups 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 Companys initiatives to drive organic growth. However, this growth is
anticipated to be partially offset by a negative foreign currency impact.
The Industrial Products Groups 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 groups 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 Companys 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 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, (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 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.
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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 Companys 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 Groups 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 Groups 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 Groups 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 Companys 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 Companys 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 Companys 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 Companys
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 Companys vendors in the three month period ended March 31, 2016. The Companys 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 Companys 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 Companys 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.