SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
GENUINE PARTS COMPANY
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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (the close of the period covered by this report).
174,655,641(Shares of Common Stock)
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATIONItem 1 — Financial Statements
GENUINE PARTS COMPANY and SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
See notes to condensed consolidated financial statements.
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GENUINE PARTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO 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 necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. 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 for the year ended December 31, 2001. Accordingly, the quarterly financial statements and related disclosures should be read in conjunction with the 2001 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, certain inventory adjustments and volume rebates earned. Bad debts are accrued based on a percentage of sales and volume rebates are estimated based upon cumulative and projected purchasing levels. Inventory adjustments are estimated on an interim basis and adjusted in the fourth quarter to reflect year-end valuation and book to physical results. 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 operations of 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, 2002 are not necessarily indicative of results for the entire year.
Note B – Segment Information
For management purposes, net sales by segment excludes 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 are reported as a component of net sales in the Company’s consolidated statements of income.
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Note C – Comprehensive (Loss) Income
Total comprehensive (loss) income was $(135,971,000) and $242,720,000 for the nine month periods ended September 30, 2002 and 2001, respectively. The difference between total comprehensive (loss) income and net (loss) income was due to foreign currency translation adjustments and adjustments to the fair value of derivative instruments, as detailed below:
Note D – New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141 (“SFAS 141”) “Business Combinations,” and Statement No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 141 prospectively prohibits the pooling of interests method of accounting for business combinations initiated after June 30, 2001. Effective January 1, 2002, SFAS 142 requires that goodwill resulting from prior acquisitions no longer be amortized and establishes a new method for testing goodwill for impairment on an annual basis (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). SFAS 142 also requires that an identifiable intangible asset that is determined to have a finite life continue to be amortized and separately tested for impairment using an undiscounted cash flows approach.
Within the reportable segments, the Company identified reporting units as defined in SFAS 142. The reporting units’ goodwill was tested for impairment during the first quarter of 2002 as required by SFAS 142 upon adoption based upon the expected present value of future cash flows approach. As a result of this valuation process as well as the application of the remaining provisions of SFAS 142, the Company recorded a transitional impairment loss of $395.1 million ($2.27 loss per share basic and $2.25 loss per share diluted, as of January 1, 2002). This write-off was reported as a cumulative effect of a change in accounting principle in the Company’s consolidated statement of income as of January 1, 2002. None of this write-off is deductible for tax purposes. For the nine months ended September 30, 2002, additions to goodwill of $14.7 million relate to additional consideration for earnouts on prior acquisitions. The Company also assessed the finite-lived, identifiable intangible assets for impairment under the undiscounted cash flows approach and concluded there was no impairment.
The changes in the carrying amount of goodwill during the period by reportable segment are summarized as follows (in thousands):
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Prior to the adoption of SFAS 142, the Company amortized goodwill over estimated useful lives ranging from 10 years to 40 years. Had the Company accounted for goodwill consistent with the provisions of SFAS 142 in prior periods, the Company’s income from continuing operations and net income would have been affected as follows:
In August 2001, the FASB issued Statement No. 144 (“SFAS 144”) “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of, including segments, and supercedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” Under SFAS No. 144, goodwill will no longer be allocated to long-lived assets, and therefore will no longer be subject to testing for impairment as part of those assets, but will be tested separately under SFAS No. 142. Additionally, SFAS No. 144 broadens the presentation of discontinued operations to include components of an entity rather than being limited to a segment of a business. The Company adopted SFAS 144 as of January 1, 2002. The adoption had no effect on the Company’s financial condition or results of operations.
In June 2002, the FASB issued Statement No. 146 (“SFAS 146”) “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“Issue 94-3”). The principal difference between SFAS 146 and Issue 94-3 relates to SFAS 146’s requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up front. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe this statement will have a material impact on its consolidated financial statements.
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Note E — Facility Consolidation, Impairment, and Other Charges
As more fully disclosed in Note 2 of the Company’s notes to the consolidated financial statements in the 2001 Annual Report on Form 10-K, in the fourth quarter of 2001, Company management approved a plan to close and consolidate certain facilities, terminate certain employees, and exit certain other activities. Following is a summary of the liability for these charges, in thousands:
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the December 31, 2001 and September 30, 2002 consolidated financial statements, accompanying notes, related information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K filed for the year ended December 31, 2001.
Results of Operations
Sales for the quarter were $2.2 billion, an increase of 3% as compared to the third quarter of 2001. Net income was $94 million, an increase of 7% from $88.2 million for the third quarter of 2001. On a per share diluted basis, net income equaled 54 cents, as compared to 51 cents in the third quarter of 2001.
During the nine months ended September 30, 2002, sales totaled $6.3 billion, which were flat with the same period in 2001. Net income for the nine months, before the cumulative effect of a change in accounting principle related to goodwill, was $277.1 million, an increase of 2%, compared to $272.2 million for the same period in the prior year. On a per share diluted basis, net income for the period, before the cumulative effect of a change in accounting principle related to goodwill, equaled $1.58, as compared to $1.57 reported in 2001.
Sales in the Automotive Parts Group increased approximately 3% for the quarter as compared to 2001 reflecting the strength of our NAPA marketing initiatives in both the commercial and retail sectors. S.P. Richards, our Office Products Group, recorded the strongest gain of the Company’s segments with sales improving by 5% in the third quarter 2002 over third quarter 2001. We believe this was reflective of S.P. Richards sales and marketing efforts more so than industry improvement. In addition, S.P. Richards continues to expand its product offering and customer base, which has enabled them to grow at a stronger rate than the marketplace they serve. EIS, our Electrical/Electronics Group, was down 9% in the third quarter, which is an improvement as compared to the 17% decline reported in the second quarter. EIS continues to be impacted by economic slowdown in the manufacturing and telecommunication sectors of the economy. Motion Industries, our Industrial Group, was up 3% for the quarter as compared to the third quarter 2001, and this is their second consecutive quarter to report an increase. Motion’s sales improvement is attributed to market share gain, and in some cases broadening their product base and their customer base.
Operating profit as a percentage of sales was 8.2% for the quarter ended September 30, 2002 compared to 8.1% for the same quarter in 2001. Operating profit as a percentage of sales was 8.4% for the nine months ended September 30, 2002 compared to 8.5% for the same period in 2001. The slight improvement in operating profit margin for the quarter is reflective of the Company’s continued focus on controlling staffing and related salaries at its Industrial and Office Products segments.
Operating profit for the third quarter ending September 30, 2002 increased 2% for the Automotive Group compared to an increase of 1% for the nine months ended September 30, 2002. Operating profit margin for the Automotive Group was 9.1% for the nine months ended September 30, 2002, a slight decrease from the 9.2% for the same period the prior year. This margin decrease is attributed to increases in salaries, insurance, and other expenses associated with the addition of approximately 90 company-owned stores since year-end. Operating profit for the Industrial Group increased 10% for the quarter and 1% in the nine months, reflecting an increase in operating profit margin for the quarter from 6.4% to 6.8%. This
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improvement in operating expenses and operating margin reflects significant progress in cost control initiatives such as payroll and headcount, as well as a more disciplined focus on other expenses. S. P. Richards, our Office Products Group, showed operating profit improvement in the quarter with a 2% increase, compared to a 2% decrease for the nine months. S.P. Richards had a decrease in their operating profit margin as a percentage of sales for the quarter from 8.6% to 8.4%. The decrease in operating profit margin relates to some deterioration in gross margin due to continued competitive pricing pressures. EIS, our Electrical/Electronic Materials Group, continued to be down for the nine months, although they had a small operating profit for the quarter. EIS had an operating profit margin of 1.4% as a percentage of sales for the quarter ended September 30, 2002 versus a loss in the same period the prior year. EIS’s improvement reflects some improvement in their sales declines related to the economy, as well as their cost reduction efforts in all expense categories.
Cost of goods sold decreased slightly as a percentage of net sales compared to the same quarter of the prior year, due to more efficient supply chain costs and inventory mix. Selling, administrative and other expenses increased slightly for the quarter and the percentage of selling, administrative and other expenses to net sales decreased slightly, reflecting improved operating efficiencies associated with the Company’s cost control and related initiatives.
Cost of goods sold for the nine month period ending September 30, 2002 was flat, as compared to the same period in 2001. Selling, administrative and other expenses decreased slightly for the nine months and the percentage of selling, administrative and other expenses to net sales increased slightly. Selling, administrative, and other costs improved for the nine months in dollars, but not as a percentage of sales, due mostly to the level of fixed costs inherent in distribution. The effective income tax rate decreased from 40% to 39.2% for the nine months, primarily as a result of the decrease in non-deductible goodwill amortization due to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).
Financial Condition
The major balance sheet categories were relatively consistent with the December 31, 2001 balance sheet. Prepaid expenses and other current assets declined primarily due to the collection of accrued receivables in 2002. Goodwill and other intangible assets declined due to the January 1, 2002 adoption of a new accounting principle, as discussed below. Cash at $39.6 million is down $46 million as compared to December 31, 2001, primarily due to a reduction of debt. The change in long-term debt is discussed below.
During the first quarter of 2002, the Company completed its transitional impairment testing as required by SFAS 142. As a result, a non-cash charge of $395.1 million was recorded as of January 1 representing the cumulative effect of a change in accounting principle. Most of the goodwill written down is in connection with acquisitions made in 1998 and 1999 where the discounted cash flows was estimated to be less than the carrying amount of the goodwill recorded. The breakdown of this impairment by reportable segment is summarized as follows, in thousands:
In addition, the adoption of the non-amortization provisions of SFAS 142 resulted in a decrease in amortization expense of $9 million, or $.05 per share, for the nine month period ended September 30, 2002.
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In 2001, the Company’s management approved a plan to close and consolidate certain facilities, terminate certain employees, and exit certain other activities. Following is a summary of the liability for these charges (in thousands):
There have been no material changes to the Company’s plans or estimates at December 31, 2001, and no additional charges were recorded in the nine month period ended September 30, 2002 related to management’s plan. In addition, the Company has not experienced any significant declines in net sales as a result of the facility consolidations completed through September 30, 2002, and none are anticipated. The Company anticipates that all significant activities associated with the plan will be completed by December 31, 2002.
Liquidity and Capital Resources
The Company’s long-term debt decreased by approximately $160.3 million in the nine months ended September 30, 2002. The decline in borrowings is primarily attributable to cash generated from operating activities of $304.3 million and $35.5 million in cash generated from stock option exercises. In addition, the Company had minimal stock repurchases in the nine months ended September 30, 2002.
The following table shows the Company’s approximate obligations and commitments to make future payments under contractual obligations as of September 30, 2002 (in thousands):
The Company has certain commercial commitments related to affiliate borrowing guarantees, standby letters of credit, and residual values under operating leases. The Company believes the likelihood of any significant amounts being funded in connection with these commitments to be remote. The following table shows the Company’s approximate commercial commitments as of September 30, 2002 (in thousands):
The Company manages its exposure to changes in short-term interest rates, particularly to reduce the impact on its floating-rate term notes, by entering into interest rate swap agreements. The Company has interest rate swaps with fair values of approximately $31.6 million and $15.3 million outstanding as of December 31, 2001 and September 30, 2002, respectively. The decrease in fair values since December 31, 2001 is primarily due to normal settlement of monthly payments due on swaps during the nine months ending September 30, 2002 as well as the early termination of certain swaps, offset by increases in the fair value of the liability on outstanding swaps during the period.
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The following table shows the activity of the interest rate swap agreements for the period from December 31, 2001 to September 30, 2002 (in thousands):
The Company’s exposure to future declines in interest rates associated with fixed rate interest rate swap agreements has been reduced significantly since December 31, 2001. At December 31, 2001, the Company had fixed interest rate payment swap agreements outstanding in the notional amount of approximately $600 million. At September 30, 2002, the notional amount of these outstanding interest swap agreements was approximately $100 million, comprised of two $50 million notional swaps with maturity dates of 2005 and 2008. Other swaps having various maturity dates are not significant as of September 30, 2002. In addition, at September 30, 2002, approximately $500 million of the Company’s total borrowings, which mature in approximately six and nine years, are at fixed rates of interest.
The ratio of current assets to current liabilities is 3.3 to 1 and the Company’s cash position is good. The Company believes existing lines of credit and cash generated from operations will be sufficient to fund future operations.
Item 3.
Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided elsewhere herein and under Item 2 in the Company’s Form 10-K for the year ended December 31, 2001.
Forward-Looking Statements:
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 Company’s 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 Company’s 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 Company’s promotional, marketing and advertising programs, changes in laws and regulations, including changes in accounting and taxation guidance, the uncertainties of litigation, as well as other risks and uncertainties discussed from time to time in the Company’s filings with the Securities and Exchange Commission. Readers are cautioned that other factors not listed here could materially impact the Company’s future earnings, financial position and cash flows. You should not place undue reliance upon forward-looking statements contained herein, and should carefully read other reports that the Company will, from time to time, file with the Securities and Exchange Commission.
Item 4.
Controls and Procedures
Within the 90-day period prior to the date of 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 design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and
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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 disclosure. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date that Company management conducted its evaluation.
PART II — OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K
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.
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CERTIFICATIONS
I, Larry L. Prince, certify that:
Date: November 8, 2002
/s/ Larry L. Prince
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I, Jerry W. Nix, certify that:
/s/ Jerry W. Nix
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