GENUINE PARTS COMPANY
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For
the Quarterly Period Ended September 30, 2005
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Commission File
Number 1-5690 |
GENUINE PARTS COMPANY
(Exact name of registrant as specified in its charter)
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GEORGIA
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58-0254510 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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2999 CIRCLE 75 PARKWAY, ATLANTA, GEORGIA
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30339 |
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(Address of principal executive offices)
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(Zip Code) |
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Registrants telephone number, including area code
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(770) 953-1700 |
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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 the filing requirements for at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
September 30, 2005.
173,521,580
(Shares of Common Stock)
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2005 |
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2004 |
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(unaudited) |
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(in thousands) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
339,505 |
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$ |
134,940 |
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Trade accounts receivable, less allowance
for doubtful accounts (2005 $26,153; 2004 $12,793) |
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1,227,836 |
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1,123,900 |
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Merchandise
inventories at lower of cost (substantially last-in,
first-out method) or market |
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2,157,824 |
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2,198,957 |
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Prepaid expenses and other current assets |
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167,958 |
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175,687 |
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TOTAL CURRENT ASSETS |
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3,893,123 |
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3,633,484 |
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Goodwill and other intangible assets, less accumulated amortization |
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62,478 |
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57,672 |
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Other assets |
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430,400 |
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384,703 |
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Total property, plant and equipment, less allowance
for depreciation (2005 $539,844; 2004 $522,227) |
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383,292 |
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379,388 |
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TOTAL ASSETS |
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$ |
4,769,293 |
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$ |
4,455,247 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES
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Trade accounts payable |
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$ |
1,041,335 |
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$ |
856,653 |
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Current portion of long-term debt and other borrowings |
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908 |
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968 |
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Income taxes payable |
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50,994 |
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42,932 |
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Dividends payable |
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54,357 |
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52,495 |
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Other current liabilities |
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183,822 |
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179,667 |
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TOTAL CURRENT LIABILITIES |
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1,331,416 |
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1,132,715 |
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Long-term debt |
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500,000 |
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500,000 |
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Other long-term liabilities |
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109,888 |
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110,078 |
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Deferred income taxes |
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121,160 |
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115,683 |
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Minority interests in subsidiaries |
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56,362 |
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52,394 |
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SHAREHOLDERS EQUITY
Stated capital: |
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SHAREHOLDERS EQUITY
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Stated capital: |
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Preferred Stock, par value $1 per share
Authorized 10,000,000 shares None issued |
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-0- |
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-0- |
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Common Stock, par value $1 per share
Authorized 450,000,000 shares
Issued 2005 173,521,580; 2004 174,964,884 |
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173,522 |
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174,965 |
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Accumulated other comprehensive income |
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42,435 |
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26,478 |
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Additional paid-in capital |
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-0- |
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56,571 |
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Retained earnings |
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2,434,510 |
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2,286,363 |
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TOTAL SHAREHOLDERS EQUITY |
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2,650,467 |
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2,544,377 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
4,769,293 |
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$ |
4,455,247 |
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See notes to condensed consolidated financial statements.
2
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended Sept. 30, |
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Nine Months Ended Sept. 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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(unaudited) |
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(in thousands, except per share data) |
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Net sales |
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$ |
2,555,503 |
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$ |
2,349,283 |
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$ |
7,373,361 |
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$ |
6,843,960 |
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Cost of goods sold |
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1,777,001 |
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1,649,890 |
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5,097,122 |
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4,764,591 |
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Gross margin |
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778,502 |
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699,393 |
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2,276,239 |
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2,079,369 |
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Selling, administrative & other expenses |
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598,403 |
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541,675 |
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1,744,092 |
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1,595,321 |
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Income before income taxes |
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180,099 |
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157,718 |
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532,147 |
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484,048 |
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Income taxes |
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69,223 |
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59,825 |
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203,706 |
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184,810 |
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Net income |
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$ |
110,876 |
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$ |
97,893 |
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$ |
328,441 |
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$ |
299,238 |
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Basic net income per common share |
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$ |
.64 |
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$ |
.56 |
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$ |
1.88 |
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$ |
1.71 |
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Diluted net income per common share |
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$ |
.63 |
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$ |
.56 |
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$ |
1.87 |
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$ |
1.71 |
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Dividends declared per common share |
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$ |
.3125 |
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$ |
.30 |
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$ |
.9375 |
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$ |
.90 |
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Weighted average common shares
outstanding |
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173,929 |
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174,792 |
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174,320 |
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174,648 |
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Dilutive effect of stock options and
non-vested restricted stock
awards |
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956 |
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1,021 |
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968 |
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842 |
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Weighted average common shares
outstanding assuming dilution |
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174,885 |
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175,813 |
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175,288 |
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175,490 |
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See notes to condensed consolidated financial statements.
3
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months |
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Ended September 30, |
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2005 |
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2004 |
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(unaudited) |
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(in thousands) |
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OPERATING ACTIVITIES: |
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Net income |
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$ |
328,441 |
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$ |
299,238 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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51,429 |
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49,775 |
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Other |
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6,706 |
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3,337 |
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Changes in operating assets and liabilities |
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107,251 |
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117,857 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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493,827 |
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470,207 |
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INVESTING ACTIVITIES: |
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Purchase of property, plant and equipment |
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(59,310 |
) |
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(46,550 |
) |
Other |
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11,428 |
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-0- |
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NET CASH USED IN INVESTING ACTIVITIES |
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(47,882 |
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(46,550 |
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FINANCING ACTIVITIES: |
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Payments on credit facilities, net of proceeds |
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(59 |
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(9,559 |
) |
Stock options exercised |
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16,021 |
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31,649 |
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Dividends paid |
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(161,536 |
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(156,150 |
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Purchase of stock |
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(95,806 |
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(20,286 |
) |
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NET CASH USED IN FINANCING ACTIVITIES |
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(241,380 |
) |
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(154,346 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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204,565 |
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269,311 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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134,940 |
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15,393 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
339,505 |
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$ |
284,704 |
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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, 2004.
Accordingly, the quarterly condensed consolidated financial statements and related disclosures
herein should be read in conjunction with the 2004 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 in its interim financial statements for the accrual of
bad debts, inventory adjustments and discounts and volume incentives earned. Bad debts are accrued
based on a percentage of sales, and discounts and volume incentives are estimated based upon
cumulative and projected purchasing levels. Inventory adjustments are accrued on an interim basis
and adjusted in the fourth quarter based on the annual book to physical inventory adjustment. The
estimates 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 statement of the Companys
financial results for the interim period have been made. These adjustments are of a normal
recurring nature. The results of operations for the nine months ended September 30, 2005 are not
necessarily indicative of results for the entire year.
Note B Segment Information
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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(in thousands) |
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(in thousands) |
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Net sales: |
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Automotive |
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$ |
1,329,083 |
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$ |
1,229,943 |
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$ |
3,792,821 |
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$ |
3,575,189 |
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Industrial |
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711,201 |
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636,693 |
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2,100,532 |
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1,874,599 |
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Office products |
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437,799 |
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406,101 |
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1,250,321 |
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1,165,245 |
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Electrical/electronic materials |
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87,041 |
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85,357 |
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255,078 |
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254,263 |
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Other |
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(9,621 |
) |
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(8,811 |
) |
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(25,391 |
) |
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(25,336 |
) |
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Total net sales |
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$ |
2,555,503 |
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$ |
2,349,283 |
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$ |
7,373,361 |
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$ |
6,843,960 |
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Operating profit: |
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Automotive |
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$ |
108,551 |
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$ |
101,942 |
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$ |
314,638 |
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$ |
304,695 |
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Industrial |
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53,680 |
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|
40,851 |
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|
152,288 |
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|
125,149 |
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Office products |
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|
33,638 |
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|
32,203 |
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|
115,276 |
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|
108,651 |
|
Electrical/electronic materials |
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|
4,694 |
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|
3,780 |
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|
12,716 |
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|
11,300 |
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Total operating profit |
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200,563 |
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|
178,776 |
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|
594,918 |
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|
549,795 |
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Interest expense |
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|
(8,159 |
) |
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|
(9,307 |
) |
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(23,369 |
) |
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(29,154 |
) |
Other, net |
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|
(12,305 |
) |
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(11,751 |
) |
|
|
(39,402 |
) |
|
|
(36,593 |
) |
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Income before income taxes |
|
$ |
180,099 |
|
|
$ |
157,718 |
|
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$ |
532,147 |
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$ |
484,048 |
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|
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 Companys
consolidated statements of income.
Note C Comprehensive Income
Comprehensive income was $344,398,000 and $310,489,000 for the nine months ended September 30, 2005
and 2004, respectively. The difference between comprehensive income and net income was due to
foreign currency translation adjustments and adjustments to the fair value of derivative
instruments, as summarized below:
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|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Net income |
|
$ |
328,441 |
|
|
$ |
299,238 |
|
Other comprehensive income: |
|
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|
|
|
|
|
|
Foreign currency translation |
|
|
12,667 |
|
|
|
9,191 |
|
Derivative instruments, net of taxes |
|
|
3,290 |
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|
|
2,060 |
|
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Total other comprehensive income |
|
|
15,957 |
|
|
|
11,251 |
|
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Comprehensive income |
|
$ |
344,398 |
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$ |
310,489 |
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|
|
Comprehensive income for the three months ended September 30, 2005 and 2004 totaled
$132,896,000 and $117,934,000, respectively.
Note D
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) Staff Position No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 (FSP 109-2), provides guidance under FASB Statement No. 109, Accounting for
Income Taxes (Statement 109), with respect to recording the potential impact of the repatriation
provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises income tax
expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate
the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying Statement 109. The Company has not yet completed evaluating the impact of the
repatriation provisions. Accordingly, as provided for in FSP 109-2, the Company has not adjusted
its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.
On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment
(Statement 123(R)), which is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. The Company will adopt Statement 123(R) on January
1, 2006.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
1. |
|
A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of Statement 123(R) that remain
unvested on the effective date. |
2. |
|
A modified retrospective method which includes the requirements of the modified prospective
method described above, but also permits entities to restate based on the amounts previously
recognized under |
6
|
|
Statement 123 for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year of adoption. |
The Company adopted the fair-value-based method of accounting for share-based payments effective
January 1, 2003 using the prospective transition method described in FASB Statement No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure. Currently, the Company uses the
Black-Scholes formula to estimate the value of stock options granted to employees and expects to
continue to use this acceptable option valuation model upon the required adoption of Statement
123(R) on January 1, 2006. Because Statement 123(R) must be applied not only to new awards but to
previously granted awards that are not fully vested on the effective date, and because the Company
adopted Statement 123 using the prospective transition method (which applied only to awards
granted, modified or settled after the adoption date), compensation cost for some previously
granted awards that were not recognized under Statement 123 will be recognized under Statement
123(R). However, had we adopted Statement 123(R) in prior periods, the impact of that standard
would have approximated the impact of Statement 123 as described in the disclosure of pro forma net
income and earnings per share in Note 7 of the notes to the consolidated financial statements in
the Companys 2004 Annual Report on Form 10-K. Statement 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after adoption as
more fully disclosed in Note 7 of the notes to the consolidated financial statements in the
Companys 2004 Annual Report on Form 10-K.
Note E
Stock Options and Restricted Stock Awards
As more fully disclosed in Note 7 of the notes to the consolidated financial statements in the
Companys 2004 Annual Report on Form 10-K, the following table illustrates the effect on net
income and earnings per share if the fair value based method had been applied to all
outstanding and unvested awards in each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Sept. 30, 2005 |
|
|
Sept. 30, 2004 |
|
|
Sept. 30, 2005 |
|
|
Sept. 30, 2004 |
|
|
|
(in thousands, except per share amounts) |
Net income, as reported |
|
$ |
110,876 |
|
|
$ |
97,893 |
|
|
$ |
328,441 |
|
|
$ |
299,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Stock-based
employee compensation
expense related to
option grants after
January 1, 2003
included in reported
net income, net of
related tax effects |
|
|
1,125 |
|
|
|
470 |
|
|
|
3,008 |
|
|
|
1,052 |
|
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects |
|
|
(1,594 |
) |
|
|
(1,708 |
) |
|
|
(5,013 |
) |
|
|
(3,864 |
) |
|
|
|
Pro forma net income |
|
$ |
110,407 |
|
|
$ |
96,655 |
|
|
$ |
326,436 |
|
|
$ |
296,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
.64 |
|
|
$ |
.56 |
|
|
$ |
1.88 |
|
|
$ |
1.71 |
|
|
|
|
Basic pro forma |
|
$ |
.63 |
|
|
$ |
.55 |
|
|
$ |
1.87 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
.63 |
|
|
$ |
.56 |
|
|
$ |
1.87 |
|
|
$ |
1.71 |
|
|
|
|
Diluted pro forma |
|
$ |
.63 |
|
|
$ |
.55 |
|
|
$ |
1.86 |
|
|
$ |
1.69 |
|
|
|
|
On January 1, 2003, the Company began prospectively accounting for all future stock
compensation awards in accordance with Statement 123s fair value method.
7
Note F
Employee Benefit Plans
Net periodic pension cost included the following components for the three months ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Service cost |
|
$ |
10,469 |
|
|
$ |
8,400 |
|
|
$ |
113 |
|
|
$ |
95 |
|
Interest cost |
|
|
15,907 |
|
|
|
13,833 |
|
|
|
326 |
|
|
|
261 |
|
Expected return on plan assets |
|
|
(21,966 |
) |
|
|
(18,966 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service (income) cost |
|
|
(107 |
) |
|
|
(282 |
) |
|
|
93 |
|
|
|
93 |
|
Amortization of actuarial loss |
|
|
3,868 |
|
|
|
3,207 |
|
|
|
303 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
8,171 |
|
|
$ |
6,192 |
|
|
$ |
835 |
|
|
$ |
667 |
|
|
|
|
Net periodic pension cost included the following components for the nine months ended September
30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Service cost |
|
$ |
31,408 |
|
|
$ |
25,200 |
|
|
$ |
339 |
|
|
$ |
365 |
|
Interest cost |
|
|
47,721 |
|
|
|
41,499 |
|
|
|
978 |
|
|
|
995 |
|
Expected return on plan assets |
|
|
(65,899 |
) |
|
|
(56,884 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service (income) cost |
|
|
(322 |
) |
|
|
(846 |
) |
|
|
279 |
|
|
|
279 |
|
Amortization of actuarial loss |
|
|
11,604 |
|
|
|
9,670 |
|
|
|
909 |
|
|
|
778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
24,512 |
|
|
$ |
18,639 |
|
|
$ |
2,505 |
|
|
$ |
2,417 |
|
|
|
|
Pension benefits also include amounts related to a supplemental retirement plan. In the nine
months ended September 30, 2005, the Company has contributed approximately $60 million into the
pension plan.
Note G
Guarantees
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN 46, as revised in December 2003,
requires certain variable interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired after January
31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 were required to be applied no later than December 31, 2003 for entities
meeting the definition of special-purpose entities, and no later than fiscal periods ending
after March 15, 2004 for all other entities under consideration.
In connection with the adoption of FIN 46, in September 2003, the Companys construction and
lease guarantee facility was amended. Subject to the amendment, FIN 46 did not change the
Companys accounting for the construction and lease guarantee facility. This construction and
lease guarantee facility, expiring in 2008, contains residual value guarantee provisions and other
guarantees which would become due
in the event of a default under the operating lease agreement or at the expiration of the
operating lease agreement if the fair value of the leased properties is less than the
guaranteed residual value. The maximum amount of the Companys potential guarantee obligation
at September 30, 2005 is approximately
8
$83,880,000. The Company believes the likelihood of funding the guarantee obligation under any
provision of the operating lease agreement is remote.
In addition to the construction and guarantee lease facility, the Company has relationships
with entities that are required to be considered for consolidation under FIN 46. Specifically,
the Company guarantees the borrowings of certain independently controlled automotive parts
stores (independents) and certain other affiliates in which the Company has a minority equity
ownership interest (affiliates). Presently, the independents are generally consolidated by
an unaffiliated enterprise that has a controlling financial interest through ownership of a
majority voting interest in the entity. The Company has no voting interest or other equity
conversion rights in any of the independents. The Company does not control the independents or
the affiliates, but receives a fee for the guarantee. The Company has concluded that it is not
the primary beneficiary with respect to any of the independents and that the affiliates are not
variable interest entities. The Companys maximum exposure to loss as a result of its
involvement with these independents and affiliates is equal to the total borrowings subject to
the Companys guarantee. At September 30, 2005, the total borrowings of the independents and
affiliates subject to guarantee by the Company were approximately $175,323,000. These loans
generally mature over periods from one to ten 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 guarantee. To date,
the Company has had no significant losses in connection with guarantees of independents and
affiliates borrowings.
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, 2004.
Forward-Looking Statements
Some statements in this report constitute forward-looking statements that are subject to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company
cautions that its forward-looking statements involve risks and uncertainties. The Company
undertakes no duty to update its forward-looking statements, which reflect the Companys
beliefs, expectations, and plans as of the present. Actual results or events may differ
materially from those indicated as a result of various important factors. Such factors include,
but are not limited to, changes in general economic conditions, the growth rate of the market
for the Companys products and services, the ability to maintain favorable supplier arrangements
and relationships, competitive product and pricing pressures, including internet related
initiatives, the effectiveness of the Companys promotional, marketing and advertising programs,
changes in laws and regulations, including changes in accounting and taxation guidance, the
uncertainties of litigation, as well as the risks and uncertainties discussed in Item 1.
Business under the caption Risk Factors in the Companys 2004 Annual Report on Form 10-K and
from time to time in other Company filings with the Securities and Exchange Commission. Readers
are cautioned that other factors not listed here could materially impact the Companys future
earnings, financial position and cash flows. You should not place undue reliance upon
forward-looking statements contained herein and should carefully read the 2004 Annual Report on
Form 10-K and other reports that the Company has filed and will, from time to time, file with
the Securities and Exchange Commission.
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. In the third quarter and first nine months of 2005, business was
conducted throughout the United States, Canada, and Mexico from approximately 1,900 locations.
We recorded consolidated net income of $110.9 million for the three months ended September 30,
2005, compared to consolidated net income of $97.9 million in the same period last year, an
increase of 13%. For
9
the nine months ended September 30, 2005, we recorded consolidated net income of $328.4
million, an increase of 10% compared to $299.2 million for the same period in 2004.
In 2005, the Company has focused on initiatives to grow sales and earnings. These include
product line expansion, the penetration of new markets and a variety of gross margin and cost
savings initiatives. For the three and nine month periods ended September 30, 2005, our growth
initiatives have enabled us to further capitalize on the favorable economic conditions in the
markets we serve. As a result, we have reported improved performance for these periods in
2005.
Our improved performance was achieved in spite of recent destruction caused by Hurricanes
Katrina and Rita. The majority of our employees in the affected areas are back at work. Six
NAPA stores remain closed, along with one Motion Industries branch and the S. P. Richards
distribution center in New Orleans. Fortunately, we have been able to service all of our S. P.
Richards customers through our distribution centers in Houston, Dallas and Birmingham. We
believe that our hurricane-related losses are covered by insurance, other than deductibles. We
do not anticipate that the hurricanes will have a material impact on our financial condition or
results of operations, although it has not been determined at this time what the impact of the
hurricanes will be on the overall economic conditions in our markets and the United States
generally.
Critical Accounting Estimates
The preparation of the financial statement information contained herein requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, net
sales and expenses, and related disclosure of contingent assets and liabilities. Management
bases its estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions
or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made
based on assumptions about matters that are highly uncertain at the time the estimate is made,
and if different estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically, could materially impact the
financial statements. Information with respect to the Companys critical accounting policies
which the Company believes could have the most significant effect on the Companys reported
results and require subjective or complex judgments by management is contained in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations of the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Management
believes that as of September 30, 2005, there have been no material changes to this
information.
Sales
Sales for the third quarter of 2005 were $2.6 billion, an increase of 9% over the same period
in 2004. For the nine months ended September 30, 2005, sales were $7.4 billion compared to
$6.8 billion for the same period last year, an increase of 8%. The sales growth in the quarter
and for the year was driven by our internal growth initiatives across all our businesses, as
well as by continued favorable economic conditions.
Sales for the Automotive Parts Group increased 8% in the third quarter of 2005, and for the
nine months ended September 30, 2005 sales increased 6% compared to the same period last year.
Our initiatives in the Automotive Group are proving successful, and the market conditions in
the automotive aftermarket remain favorable. The Industrial Products Group increased sales by
12% in 2005 compared to the third quarter and first nine months of 2004. The manufacturing
indices for this group reflect continued expansion and remain strong. Sales for the Office
Products Group for the third quarter of 2005 increased 8% over the third quarter of 2004, and
for the nine months ended September 30, 2005 sales increased 7% compared to the same period in
2004. The employment numbers for the service sector continue to expand and fit well with our
initiatives for this group. Sales for the Electrical/Electronic Materials Group increased 2%
for the third quarter of 2005 compared to the third quarter of 2004 and were up slightly in the
nine months of 2005 compared to the same period in 2004. This groups revenues were impacted
by the sale of a division in the electronic side of its business during the first quarter of
2005.
Cost of Goods Sold/Expenses
10
Cost of goods sold for the third quarter of 2005 was $1.78 billion compared to $1.65 billion
for the third quarter of 2004. As a percent of sales, cost of goods sold decreased from 70.23%
to 69.54% for the three months ended September 30, 2005. For the nine months ended September
30, 2005, cost of goods sold was $5.10 billion compared to $4.76 billion last year and as a
percent of sales decreased from 69.62% to 69.13%. The decreases in cost of goods sold as a
percent of sales for the three and nine month periods ended September 30, 2005 partially
reflect the impact of our initiatives to improve gross margins. The Company has also
experienced price increases in its businesses in 2005, and we have worked with our customers to
pass most of these along to them. This is another reason for our decrease in cost of goods
sold as a percent of sales for the third quarter and nine months ended September 30, 2005.
Selling, administrative and other expenses of $598.4 million increased slightly to 23.42% of
sales for the third quarter of 2005 compared to 23.06% for the same period of the prior year.
For the nine months ended September 30, 2005, these expenses totaled $1.74 billion and
increased to 23.65% of sales compared to 23.31% for the same period in 2004. The increase in
these expenses can be primarily attributed to expense increases relating to performance based
employee compensation, including bonuses and stock options, employee benefits, insurance and
legal and professional fees.
Operating Profit
Operating profit as a percentage of sales was 7.8% for the three months ended September 30,
2005 compared to 7.6% for the same period of the previous year. For the nine months ended
September 30, 2005, operating profit as a percentage of sales was 8.1% compared to 8.0% for the
same period of the previous year. The slight increase in operating profit margin for the three
and nine months ended September 30, 2005 can be primarily attributed to the increase in
operating profit margin in the Industrial Group.
The Automotive Parts Groups operating profit increased 6% in the third quarter of 2005, and
its operating profit margin of 8.2% was down slightly for the three months ended September 30,
2005 compared to the third quarter of 2004. For the nine months ended September 30, 2005, the
groups operating profit increased 3% and its operating profit margin decreased to 8.3% from
8.5% for the same period last year. The Industrial Products Group had a 31% increase in
operating profit in the third quarter of 2005, and the operating profit margin for this group
increased to 7.5% from 6.4% for the same period of the previous year. Operating profit
increased 22% for the nine months ended September 30, 2005 compared to the same 2004 period and
its operating profit margin was up from 6.7% for the same period last year to 7.2% in the same
2005 period. For the three month period ended September 30, 2005, the Office Products Groups
operating profit increased 4% and operating profit margin decreased slightly to 7.7%. This
groups operating profit margin was 9.2% for the nine months ended September 30, 2005, which
was down from 9.3% in the same period in the previous year. The Electrical /Electronic
Materials Group increased its operating profit for the third quarter by 24% to $4.7 million
from $3.8 million in the third quarter of 2004, and its operating margin increased to 5.4%
compared to 4.4% in the third quarter of the previous year. For the nine months ended
September 30, 2005, the group increased its operating profit by 13% to $12.7 million from $11.3
million for the same period last year, and its operating profit margin improved to 5.0% from
4.4% as compared to the nine months ended September 30, 2004.
Income Taxes
The effective income tax rate was 38.4% for the three months ended September 30, 2005 compared
to 37.9% for the same period in 2004. The effective income tax rate for the nine months ended
September 30, 2005 was 38.3% compared to 38.2% for the same period in 2004.
Net Income
Net income was $110.9 million, an increase of 13%, compared to $97.9 million for the third
quarter of 2004. On a per share diluted basis, net income was 63 cents, up 13% compared to 56
cents for the third quarter last year. Net income for the nine months was $328.4 million, an
increase of 10% over $299.2 million recorded in
the previous year. Earnings per share on a diluted basis were $1.87, up 9% compared to $1.71
for the same nine month period last year.
Financial Condition
11
The major balance sheet categories at September 30, 2005 were relatively consistent with the
December 31, 2004 balance sheet categories, with the exception of the improved cash position.
Cash balances increased $204.6 million from December 31, 2004, due primarily to stronger income
and better working capital management. Accounts receivable increased $103.9 million or 9%,
relatively consistent with the Companys overall sales increase. Inventory decreased $41.1
million or 2% compared to December 31, 2004, which reflects the Companys planned inventory
reduction initiatives. Prepaid expenses and other current assets decreased 4% or $7.7 million
compared to December 31, 2004, primarily due to collected volume incentives. Other assets
increased $45.7 million or 12% from December 31, 2004, due primarily to the Companys increased
annual pension contribution. Accounts payable increased by $184.7 million or 22% due to the
Companys increased purchases, as well as improved payment terms with certain vendors. The
Companys long-term debt is discussed in detail below.
Liquidity and Capital Resources
The current portion of the Companys total debt remained consistent with the December 31, 2004
balance sheet. Long-term debt remained unchanged at $500 million as of September 30, 2005,
compared to December 31, 2004.
At September 30, 2005, approximately $500 million of the Companys total borrowings, which
mature in approximately three and six years, are at fixed rates of interest.
The ratio of current assets to current liabilities was 2.9 to 1 at September 30, 2005, compared
to 3.2 to 1 at December 31, 2004. The Company believes existing lines of credit and cash
generated from operations will be sufficient to fund anticipated operations for the foreseeable
future.
Contractual Obligations
There have been no material changes to obligations and/or commitments since year-end. Purchase
orders or contracts for the purchase of inventory and other goods and services are not included
in our estimates. We are not able to determine the aggregate amount of such purchase orders
that represent contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. Our purchase orders are based on our current
distribution needs and are fulfilled by our vendors within short time horizons. The Company
does not have significant agreements for the purchase of inventory or other goods specifying
minimum quantities or set prices that exceed our expected requirements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information called for by this item is provided elsewhere herein and in Item 7A.
Quantitative and Qualitative Disclosures about Market Risk in the Companys Annual Report on
Form 10-K for the year ended December 31, 2004. There have been no material changes in market
risk from the information provided under Item 7A in the Companys Annual Report on Form10-K for
the year ended December 31, 2004.
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 Companys management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Companys disclosure controls and procedures. Based on that evaluation,
the Companys management, including the CEO and CFO, concluded that the Companys disclosure
controls and procedures were effective to provide reasonable assurance that information
required to be disclosed in the Companys reports under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such information is accumulated
and
communicated to the Companys management, including the CEO and CFO, as appropriate, to allow
timely decisions regarding disclosure.
There have been no changes in the Companys internal control over financial reporting
identified in connection with the evaluation described in the immediately preceding paragraph
that occurred during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial
reporting.
12
PART II OTHER INFORMATION
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 Companys purchases of shares of the
Companys common stock during the quarter:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares That May Yet |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Be Purchased Under |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
the Plans or |
Period |
|
Shares Purchased |
|
Per Share |
|
Programs |
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2005
through July 31,
2005 |
|
|
90,798 |
|
|
$ |
41.75 |
|
|
|
90,798 |
|
|
|
4,483,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2005
through August 31,
2005 |
|
|
314,400 |
|
|
$ |
44.61 |
|
|
|
314,400 |
|
|
|
4,168,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1, 2005
through September
30, 2005 |
|
|
369,100 |
|
|
$ |
43.50 |
|
|
|
369,100 |
|
|
|
3,799,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
774,298 |
|
|
$ |
43.75 |
|
|
|
774,298 |
|
|
|
3,799,832 |
|
On April 19, 1999, the Board of Directors authorized the repurchase of 15 million shares, and
such repurchase plan was announced April 20, 1999. 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. There were no other share repurchase plans outstanding as of
September 30, 2005.
Item 6. Exhibits
(a) The following exhibits are filed as part of this report:
|
|
|
Exhibit 3.1
|
|
Restated Articles of Incorporation of the Company dated November 15, 2004 (incorporated herein by reference from
the Companys Current Report on Form 8-K dated November 16, 2004). |
|
|
|
Exhibit 3.2
|
|
Bylaws of the Company, as amended (incorporated herein by reference from the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2000). |
|
|
|
Exhibit 31.1
|
|
Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a). |
|
|
|
Exhibit 31.2
|
|
Certification signed by the Chief Financial Officer pursuant to SEC Rule 13a-14(a). |
|
|
|
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. |
|
|
|
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. |
13
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 October 28, 2005
|
|
/s/ Jerry W. Nix |
|
|
|
|
|
|
|
|
|
Jerry W. Nix |
|
|
|
|
Executive Vice President Finance and |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting Officer) |
|
|
14