Genuine Parts Company - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

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 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2005.

174,060,980
(Shares of Common Stock)

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

GENUINE PARTS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

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 should be read in conjunction with the 2004 Annual Report onForm 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 Company’s financial results for the interim period have been made. These adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2005 are not necessarily indicative of results for the entire year.

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

Total comprehensive income was $211,502,000 and $192,555,000 for the six months ended June 30, 2005 and 2004, respectively. The difference between total comprehensive income and net income was due to foreign currency translation adjustments and adjustments to the fair value of derivative instruments, as summarized below:

Total comprehensive income for the three months ended June 30, 2005 and 2004 totaled $106,879,000 and $97,160,000, respectively.

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 No. 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 No. 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. We will adopt Statement 123(R) on January 1, 2006.

Statement 123(R) permits public companies to adopt its requirements using one of two methods:

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 Compensation — Transition 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 Company’s 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 Company’s 2004 Annual Report on Form 10-K.

As more fully disclosed in Note 7 of the notes to the consolidated financial statements in the Company’s 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:

On January 1, 2003, the Company began prospectively accounting for all future stock compensation awards in accordance with Statement 123’s fair value method.

Net periodic pension cost included the following components for the three months ended June 30:

Net periodic pension cost included the following components for the six months ended June 30:

Pension benefits also include amounts related to a supplemental retirement plan.

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, which 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 June 2003, the Company’s construction and lease guarantee facility was amended. Subject to the amendment, FIN 46 did not change the Company’s 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 Company’s potential guarantee obligation at June 30, 2005 is approximately $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 Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is equal to the total borrowings subject to the Company’s guarantee. At June 30, 2005, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $177,270,000. 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and with the audited consolidated financial statements, accompanying notes, related information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2004.

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 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 the risks and uncertainties discussed in Item 1, Business under the caption “Risk Factors” in the Company’s 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 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 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.

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 second quarter and first six months of 2005, business was conducted throughout the United States, Canada, and Mexico from approximately 1,900 locations.

We recorded consolidated net income of $111 million for the three months ended June 30, 2005, compared to consolidated net income of $101 million in the same period last year, an increase of 10%. For the six

months ended June 30, 2005, we recorded consolidated net income of $218 million, an increase of 8% compared to $201 million for the same period in 2004.

To grow sales and earnings, the Company has focused on the introduction of new product lines, sales to new markets and gross margin and cost savings and other initiatives. For the three and six month periods ended June 30, 2005, we believe the market conditions remained strong in the industries we serve, and we continued to focus on our marketing plans and sales initiatives. As a result, we were able to report improved performance for these periods in 2005.

The preparation of the financial statement information contained herein requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue 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 Company’s critical accounting policies which the Company believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Management believes that as of June 30, 2005, there have been no material changes to this information.

Sales for the second quarter of 2005 were $2.5 billion, an increase of 8% over the same period in 2004. For the six months ended June 30, 2005, sales were $4.8 billion compared to $4.5 billion for the same period last year, an increase of 7%. We believe the sales growth 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 6% in the second quarter of 2005, and for the six months ended June 30, 2005 sales increased 5% compared to the same period last year. We believe the demographics for the automotive aftermarket are positive. Motion Industries, the Industrial Products Group, increased sales by 12% in 2005 compared to the second quarter and first six months of 2004. The manufacturing indices for this group remain strong. Sales for the Office Products Group for the second quarter of 2005 increased 8% over the second quarter of 2004, and for the six months ended June 30, 2005 sales increased 7% compared to the same period in 2004. The growing economy and increased employment are positives for this group. Sales for EIS, the Electrical/Electronic Group, were down 2% for the second quarter of 2005 compared to the second quarter of 2004 and unchanged in 2005 compared to the six months ended June 30, 2004. This group’s 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 for the second quarter of 2005 was $1.71 billion, compared to $1.60 billion for the second quarter of 2004. As a percent of sales, cost of goods sold decreased from 69.84% to 69.25% for the three months ended June 30, 2005. For the six months ended June 30, 2005, cost of goods sold was $3.32 billion compared to $3.11 billion last year and as a percent of sales decreased from 69.30% to 68.91%. The decreases in cost of goods sold as a percent of sales for the three and six month periods ended June 30, 2005 reflect the impact of our initiatives to improve gross margins.

Selling, administrative and other expenses of $581.4 million increased to 23.49% of sales for the second quarter of 2005, compared to 23.03% for the same period of the prior year. For the six months ended June

30, 2005, these expenses totaled $1.15 billion and increased to 23.78% of sales compared to 23.44% for the same period in 2004. The increase in these expenses can be primarily attributed to expense increases relating to employee compensation, benefits and insurance.

Operating profit as a percentage of sales was 8.1% for the three months ended June 30, 2005 compared to 8.0% for the same period of the previous year. For the six months ended June 30, 2005, operating profit as a percentage of sales was 8.2% compared to 8.3% for the same period of the previous year. The slight decrease in operating profit margin for the six months ended June 30, 2005 can be primarily attributed to the decrease in operating profit margin in the Automotive Group, as well as overall increases in various selling, administrative and other expenses as discussed above.

The Automotive Group’s operating profit increased 1% in the second quarter of 2005, and its operating profit margin of 8.6% was down slightly for the three months ended June 30, 2005 compared to the second quarter of 2004. For the six months ended June 30, 2005, the group’s operating profit increased 2% and its operating profit margin decreased slightly to 8.4% from 8.6% for the same period last year. The Industrial Group had a 32% increase in operating profit in the second quarter of 2005, and the operating profit margin for this group increased to 7.2% from 6.1% for the same period of the previous year. Operating profit increased 17% for the six months ended June 30, 2005 compared to 2004 and its operating profit margin was up from 6.8% for the same period last year to 7.1% in 2005. For the three month period ended June 30, 2005, the Office Products Group’s operating profit increased 9% and operating profit margin increased slightly to 8.9%, and its operating profit margin was 10.0% for the six months ended June 30, 2005, which was down from 10.1% in the same period in the previous year. EIS, the Electrical /Electronic Materials Group, increased its operating profit for the second quarter by 10% to $4.7 million from $4.3 million in the second quarter of 2004 and its operating margin to 5.6% compared to 5.0% in the second quarter of the previous year. For the six months ended June 30, 2005, the group increased its operating profit by 7% to $8.0 million from $7.5 million for the same period last year, and its operating profit margin improved to 4.8% from 4.5% as compared to the six months ended June 30, 2004.

The effective income tax rate was 38.3% for the three months ended June 30, 2005, which is unchanged compared to the same period in 2004. The effective income tax rate for the six months ended June 30, 2005 was 38.2% compared to 38.3% for the same period in 2004. The lower cumulative rate in 2005 is due primarily to lower state income taxes.

Net income was $111.0 million, an increase of 10%, compared to $101.1 million for the second quarter of 2004. On a per share diluted basis, net income was 63 cents, up 9% compared to 58 cents for the second quarter last year. Net income for the six months was $217.6 million, an increase of 8% over $201.3 million recorded in the previous year. Earnings per share on a diluted basis were $1.24, up 8% compared to $1.15 for the same six month period last year.

The major balance sheet categories at June 30, 2005 were relatively consistent with the December 31, 2004 balance sheet categories, with the exception of the improved cash position. Cash balances increased $125.6 million from December 31, 2004, due primarily to stronger income and better working capital management. Accounts receivable increased $101.8 million or 9%, relatively consistent with the Company’s overall sales increase. Inventory decreased $73.6 million or 3% compared to December 31, 2004, which reflects the Company’s planned inventory reduction initiatives. Prepaid expenses and other current assets decreased 13% or $23.1 million primarily due to collected volume incentives compared to December 31, 2004. Other assets increased $18.6 million or 5% from December 31, 2004, due primarily to the Company’s increased annual pension contribution. Accounts payable increased by $118.2 million or 14% due to the Company’s increased purchases, as well as improved payment terms with certain vendors. Accrued expenses decreased by $25.1 million from December 31, 2004, as certain compensation accruals are higher at year-end. The Company’s long-term debt is discussed in detail below.

The current portion of the Company’s total debt remained consistent with the December 31, 2004 balance sheet. Long-term debt remained unchanged at $500 million as of June 30, 2005, compared to December 31, 2004.

The Company manages its exposure to changes in short-term interest rates, particularly to reduce the impact on its lease obligations, by entering into interest rate swap agreements. At June 30, 2005, the Company had a fixed interest rate payment swap agreement with a notional amount of $50 million with a maturity date of 2008. The interest rate swap had a fair value of approximately $4.1 million and $5.6 million as of June 30, 2005 and December 31, 2004, respectively. The decrease in fair value since December 31, 2004 is primarily due to normal settlement of monthly payments due on the swap during the six months ended June 30, 2005. At June 30, 2005, approximately $500 million of the Company’s 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 3.1 to 1 at June 30, 2005. The Company believes existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future.

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 Disclosure of Market Risk

The information called for by this item is provided elsewhere herein and under Item 7A in the Company’s 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 Company’s Annual Report on Form10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures

PART II — OTHER INFORMATION

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

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

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

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 June 30, 2005.

Item 4. Submission of Matters to a Vote of Security Holders

The following individuals’ term of office as a director continued after the Annual Meeting:

Item 6. Exhibits

SIGNATURES