GENUINE PARTS CO 10-Q

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, 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of results for the year ended December 31, 2021. Forward-Looking Statements Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (“SEC”), release to the public, or make available on our website, constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in the future tense and all statements accompanied by words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “position,” “will,” “project,” “intend,” “plan,” “on track,” “anticipate,” “to come,” “may,” “possible,” “assume,” or similar expressions are intended to identify such forward-looking statements. These forward-looking statements include our expected ability to operate and protect our workforce during the COVID-19 pandemic, our strategies for growing our automotive and industrial businesses, the execution and effect of our cost savings initiatives, our efforts and initiatives to help us emerge from the pandemic well-positioned to execute our strategy, our ongoing efforts to maintain compliance and flexibility under our debt covenants, our liquidity position and actions to maximize cash flow to continue to operate during these highly uncertain times and plans for future cost savings. Senior officers may also make verbal statements to analysts, investors, the media and others that are forward-looking. We caution you that all forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements. Actual results or events may differ materially from those indicated as a result of various important factors. Such factors may include, among other things, the extent and duration of the disruption to our business operations caused by the global health crisis associated with the COVID-19 pandemic, including the effects on the financial health of our business partners and customers, on supply chains and our suppliers, on vehicle miles driven as well as other metrics that affect our business, and on access to capital and liquidity provided by the financial and capital markets; our ability to maintain compliance with our debt covenants; our ability to successfully integrate acquired businesses into our operations and to realize the anticipated synergies and benefits; our ability to successfully implement our business initiatives in our two business segments; slowing demand for our products; the ability to maintain favorable supplier arrangements and relationships; disruptions in global supply chains and in our suppliers' operations, including as a result of the impact of COVID-19 on our suppliers and our supply chain; changes in national and international legislation or government regulations or policies, including changes to import tariffs, environmental and social policy, infrastructure programs and privacy legislation, and their impact to us and our suppliers and customers; changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation and the United Kingdom's (“U.K.”) exit from the European Union and the unpredictability of the impact following such exit; changes in tax policies; volatile exchange rates; volatility in oil prices; significant cost increases, such as rising fuel and freight expenses; our ability to successfully attract and retain employees in the current labor market; uncertain credit markets and other macroeconomic conditions; competitive product, service and pricing pressures; failure or weakness in our disclosure controls and procedures and internal controls over financial reporting, including as a result of the work from home environment; the uncertainties and costs of litigation; disruptions caused by a failure or breach of our information systems, as well as other risks and uncertainties discussed in our 2020 Annual Report on Form 10-K and Item 1A, Risk Factors, in this report on Form 10-Q (all of which risks may be amplified by the COVID-19 pandemic) and from time to time in our subsequent filings with the SEC. Forward-looking statements speak only as of the date they are made, and we undertake no duty to update any forward-looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the SEC. Overview Genuine Parts Company is a service organization engaged in the global distribution of automotive and industrial replacement parts. We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. We conduct business in North America, Europe and Australasia from a network of more than 10,000 locations. Our Automotive Parts Group operated in the U.S., Canada, Mexico, France, the U.K., Germany, Poland, the Netherlands, Belgium, Australia and New Zealand as of March 31, 2021, and accounted for 66% of total revenues for the three months ended March 31, 2021. Our Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and 15 Table of Contents Singapore. The Industrial Parts Group accounted for 34% of the Company's total revenues for the three months ended March 31, 2021. At Genuine Parts Company, our mission is to be a world-class service organization and the employer of choice, supplier of choice, valued customer, good corporate citizen and investment of choice. Our strategic financial objectives are intended to align with our mission and drive value for all our stakeholders. Our strategic financial objectives include: (1) top line revenue growth; (2) improved operating margin; (3) a strong balance sheet and cash flows; and (4) effective capital allocation. COVID-19 Pandemic Our business and results of operations improved in the first quarter of 2021 relative to the first quarter of 2020 as a result of several positive trends caused by the global response to the COVID-19 outbreak, which was declared a pandemic in March 2020. In particular, as widespread vaccine distribution continued, we have seen economic recovery in many of the markets where we operate and a significant uptick in consumer mobility. However, some areas continue to experience renewed outbreaks and surges in infection rates. As a result, our business segments continue to face many uncertainties and our operations remain vulnerable to reversal of these trends or other continuing negative effects caused by the pandemic. The extent to which the COVID-19 pandemic impacts us will depend on numerous factors and future developments that we cannot predict, including the severity of the virus; the occurrence of additional waves or spikes in infection rates; the duration of the outbreak; governmental, business or other actions taken in response to the pandemic and the impact of these actions, including partial or complete shutdowns, travel restrictions, and shelter-in-place orders among other actions; the effectiveness and distribution of COVID-19 vaccines; and impacts on our supply chain, our ability to keep operating locations open, and customer demand. As of March 31, 2021, substantially all our operations are open for business. Our supply chain partners have been very supportive, despite strain on the supply chain with respect to labor shortages and certain inventory shortages, delays in order fulfillment and increased backlogs our partners continue to do their part to help our service levels to our customers remain strong. We remain in constant communication with our employees regarding changing conditions and protocol. Based on the length and severity of COVID-19, we may experience continued volatility in customer demand and supply chain disruption. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources. For further information regarding the impact of COVID-19 on our business, please see “Results of Operations,” “Financial Condition,” “Liquidity and Capital Resources,” “Changes in Internal Control over Financial Reporting,” Item 1A, “Risk Factors,” and Item 2, “Issuer Repurchase of Equity Securities” in this report, which are incorporated herein by reference. Key Business Metrics We consider comparable sales to be a key business metric because management has evaluated its results of operations using this metric and we believe that this key indicator provides additional perspective and insights when analyzing the operating performance of our business from period to period and trends in its historical operating results. This metric should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in this report. Comparable Sales Comparable sales refer to period-over-period comparisons of our net sales excluding the impact of acquisitions, foreign currency and other. We consider this metric useful to investors because it provides greater transparency into management’s view and assessment of our core ongoing operations. This is a metric that is widely used by analysts, investors and competitors in our industry, although our calculation of the metric may not be comparable to similar measures disclosed by other companies, because not all companies and analysts calculate this metric in the same manner. Results of Operations Overview As a result of COVID-19 vaccine distribution and its positive impact on consumer mobility and demand, we are encouraged by the increased economic activity globally during the first quarter of 2021. Our Automotive Parts Group reported improved sales and segment profit margin across all regions during the three months ended March 31, 2021 when compared to the same prior year period and also when compared to the same period in 2019. Our Industrial Parts Group experienced continued recovery in their operations with improved sales trends and segment profit margin this quarter when compared to the same period in both 2020 and 2019. We improved our total segment profit margin in the quarter and are generating gross margin gains and realizing the continued benefits of our cost savings initiatives to more effectively leverage our cost structure. We believe our Automotive 16 Table of Contents Parts Group also benefited from improving product availability and colder weather in North America and Europe as compared to the same period in the prior year. In addition, we believe the pandemic-related government stimulus benefited many of our U.S. customers to further drive demand. Our Industrial Parts Group benefited from the strengthening industrial economy, which is evident in indicators such as the Purchasing Managers Index and Industrial Production Index. Sales Sales for the three months ended March 31, 2021 were $4.5 billion, a 9.1% increase compared to $4.1 billion for the same period of the prior year. The increase in sales is attributable to a 4.6% increase in comparable sales, a net favorable impact of foreign currency and other of 3.7%, and a 0.8% benefit from acquisitions. Foreign currency was positively impacted by the strengthening of the Australian dollar, Euro and Canadian dollar as compared to the U.S. dollar. Sales for the Automotive Parts Group increased 14.3% for the three months ended March 31, 2021 compared to the same period in the prior year. This group's revenue increase for the three months ended March 31, 2021 consisted of an approximate 8.3% increase in comparable sales driven by strong demand in all geographical regions, the net impact of favorable foreign currency and other of 5.1%, and a 0.9% benefit from acquisitions. Sales for the Industrial Parts Group increased 0.1% for the three months ended March 31, 2021 compared to the same period in 2020. The increase in this group's revenues reflects the favorable impact of foreign currency of 1.3% and a 0.6% benefit from acquisitions, mostly offset by an approximate 1.8% decrease in comparable sales as compared to the same period in 2020. Cost of Goods Sold and Operating Expenses Cost of goods sold for the three months ended March 31, 2021 was $2.9 billion, an 8.1% increase from $2.7 billion for the same period in 2020. As a percentage of net sales, cost of goods sold was 65.5% for the three months ended March 31, 2021, compared to 66.1% for the same three month period of 2020. Cost of goods sold includes the total cost of merchandise sold, including freight expenses associated with moving merchandise from our suppliers to our distribution centers, retail stores and branches, as well as supplier volume incentives and inventory adjustments. Gross profit as a percentage of net sales may fluctuate based on (i) changes in merchandise costs and related supplier volume incentives or pricing, (ii) variations in product and customer mix, (iii) price changes in response to competitive pressures, (iv) physical inventory and LIFO adjustments, (v) changes in foreign currency exchange rates, and (vi) the impact of tariffs. The increase in costs of goods sold for the three months ended March 31, 2021 are primarily driven by the sales increase as discussed above. Gross margin increased to 34.5% compared to 33.9% for the same three month period of 2020. The gross margin improvements primarily reflect the favorable impact of channel mix shifts, positive product mix, and strategic category management initiatives including pricing and global sourcing actions. In addition, there was minimal impact of price inflation for the three months ended March 31, 2021. We have reported improved year over year gross margin for 14 consecutive quarters. Total operating expenses increased 4.3% to $1.3 billion for the three months ended March 31, 2021 compared to $1.2 billion for the same three month period in 2020. As a percentage of net sales, operating expenses decreased to 28.5% compared to 29.8% in the three month periods ended March 31, 2021 and 2020, respectively. The decrease in operating expenses as a percentage of net sales for the period is primarily related to improved leverage on stronger sales and cost control initiatives. Our operating expenses are substantially comprised of compensation and benefit-related costs for personnel. Other major expense categories include facility occupancy costs for headquarters, distribution centers and retail store/branch operations, transportation and delivery costs, technology and digital costs, accounting, legal and professional services, insurance costs, and travel and advertising. Segment Profit The Automotive Parts Group's segment profit increased 65.3% in the three months ended March 31, 2021 compared to the same period of 2020, and its segment profit margin increased to 8.0% compared to 5.5% for the same period of the previous year. This improvement in segment profit margin reflects the strong operating results in all geographical regions, driven by primarily strong sales trends and the execution of our growth and operating initiatives. The Industrial Parts Group's segment profit increased 10.0% in the three months ended March 31, 2021 compared to the same three month period of 2020, and its segment profit margin increased to 8.3% compared to 7.5% for the same period of the previous year. The improved segment profit margin reflects gross margin expansion and reduced expenses related to our cost control initiatives. Income Taxes Our effective income tax rate was 23.8% for both the three months ended March 31, 2021 and March 31, 2020. 17 Table of Contents Net Income from Continuing Operations For the three months ended March 31, 2021, net income from continuing operations was $217.7 million, an increase of 77.9% compared to net income from continuing operations of $122.3 million for the same three month period of the prior year. On a per share diluted basis, net income from continuing operations was $1.50, an increase of 78.6% compared to $0.84 for the same three month period of 2020. During the three months ended March 31, 2020, we incurred $1.8 million of adjustments. These adjustments represent restructuring costs, insurance proceeds related to the SPR Fire, and transaction and other costs. Transaction and other costs primarily include incremental costs associated with certain divestitures and COVID-19. For the three months ended March 31, 2021, net income from continuing operations on an adjusted basis was also $217.7 million, an increase of 86.4% compared to adjusted net income from continuing operations of $116.8 million for the same three month period of the prior year. On a per share basis, net income from continuing operations on an adjusted basis was $1.50 for the three months ended March 31, 2021, an increase of 87.5% compared to $0.80 for the same three month period of 2020. For 2020, adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share are both non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures). The following table sets forth a reconciliation of net income from continuing operations and diluted net income from continuing operations per common share to adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share to account for the impact of these adjustments. We believe that the presentation of adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to both management and investors that is indicative of the Company's core operations. We consider these metrics useful to investors because they provide greater transparency into management’s view and assessment of our ongoing operating performance by removing items management believes are not representative of our continuing operations and may distort our longer-term operating trends. We believe these measures are useful and enhance the comparability of our results from period to period and with our competitors, as well as show ongoing results from operations distinct from items that are infrequent or not associated with our core operations. We do not, nor do we suggest that investors should, consider such non-GAAP financial measures, as superior to, in isolation from, or as a substitute for, GAAP financial information. Three Months Ended March 31, (in thousands) 2021 2020 GAAP net income from continuing operations $ 217,710 $ 122,346 Adjustments: Restructuring costs (1) — 2,982 Gain on insurance proceeds related to SPR Fire (2) — (12,282) Transaction and other costs (3) — 7,549 Total adjustments — (1,751) Tax impact of adjustments — (3,810) Adjusted net income from continuing operations $ 217,710 $ 116,785 18 Table of Contents The table below represent amounts per common share assuming dilution: Three Months Ended March 31, (in thousands, except per share data) 2021 2020 GAAP net income from continuing operations $ 1.50 $ 0.84 Adjustments: Restructuring costs (1) — 0.02 Gain on insurance proceeds related to SPR Fire (2) — (0.08) Transaction and other costs (3) — 0.05 Total adjustments — (0.01) Tax impact of adjustments — (0.03) Adjusted diluted net income from continuing operations per common share $ 1.50 $ 0.80 Weighted average common shares outstanding – assuming dilution 145,300 145,623 The table below clarifies where the adjusted items are presented in the condensed consolidated statements of income. Three Months Ended March 31, (in thousands) 2021 2020 Line item: Selling, administrative and other expenses $ — $ 7,549 Restructuring costs — 2,982 Non-operating (income) expense: Other — (12,282) Total adjustments $ — $ (1,751) ( 1 ) Adjustment reflects restructuring costs related to the execution of the 2019 Cost Savings Plan. The costs are primarily associated with severance and other employee costs, including a voluntary retirement program, and facility and closure costs related to the consolidation of operations. (2) Adjustment reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs related to the S.P. Richards Headquarters and Distribution Center. (3) Adjustment includes $6.0 million of incremental costs associated with COVID-19 for the three months ended March 31, 2020 and costs associated with certain divestitures. COVID-19 related costs include incremental costs incurred relating to fees to cancel marketing events and increased cleaning and sanitization materials, among other things. Financial Condition Our cash balance of $1.1 billion at March 31, 2021 increased $127.8 million, or 12.9%, from December 31, 2020. For the three months ended March 31, 2021, we had net cash provided by operating activities of $300.9 million, net cash used in investing activities of $40.7 million and net cash used in financing activities of $116.0 million. The cash provided by operating activities was up significantly from the prior year, primarily driven by higher net income for the three months ended March 31, 2021 and the effective management of our working capital. The investing activities consisted primarily of $48.4 million for capital expenditures and $19.5 million for acquisitions and other investing activities, partially offset by $27.2 million in proceeds from the sale of property, plant and equipment and divestitures. The financing activities consisted primarily of $114.0 million for dividends paid to the Company’s shareholders. Accounts receivable increased $252.7 million, or 16.2%, from December 31, 2020 primarily due to higher sales volume in March of 2021. Inventory increased $94.4 million, or 2.7%, due to increased economic activity globally and related product demand. Accounts payable increased $351.3 million, or 8.5% from December 31, 2020 partly due to extended payment terms with certain suppliers. Total debt of $2.6 billion at March 31, 2021 decreased $0.1 billion, or 2.2%, from December 31, 2020. We continue to negotiate extended payment dates with our suppliers. Our current payment terms with the majority of our suppliers range from 30 to 360 days. Several global financial institutions offer voluntary supply chain finance (“SCF”) programs which enable our suppliers, at their sole discretion, to sell their receivables from the Company to these financial 19 Table of Contents institutions on a non-recourse basis at a rate that takes advantage of our credit rating and may be beneficial to them. The SCF program is primarily available to suppliers of goods and services included in cost of goods sold in our condensed consolidated statements of comprehensive income (loss). The Company and our suppliers agree on commercial terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. The suppliers sell goods or services, as applicable, to the Company and they issue the associated invoices to the Company based on the agreed-upon contractual terms. Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, they want to sell to the financial institutions. In turn, we direct payment to the financial institutions, rather than the suppliers, for the invoices sold to the financial institutions. No guarantees are provided by the Company or any of our subsidiaries on third-party performance under the SCF program; however, the Company guarantees the payment by our subsidiaries to the financial institutions participating in the SCF program for the applicable invoices. We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program. Accordingly, amounts due to our suppliers that elected to participate in the SCF program are included in the line item accounts payable in our condensed consolidated balance sheets. All activity related to amounts due to suppliers that elected to participate in the SCF program is reflected in cash flows from operating activities in our condensed consolidated statements of cash flows. As of March 31, 2021 and December 31, 2020, the outstanding payment obligations to the financial institutions are $1.9 billion and $1.8 billion, respectively. The amount settled through the SCF program was $577 million and $629 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Liquidity and Capital Resources We ended the quarter with $2.6 billion of total liquidity (comprising $1.5 billion availability on the revolving credit facility and $1.1 billion of cash and cash equivalents). From time to time, we may enter into other credit facilities or financing arrangements to provide additional liquidity and to manage against foreign currency risk. We currently believe that the existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future. We have a strong cash position and solid financial strength to pursue strategic growth opportunities through disciplined, strategic capital deployment. Our key priorities include the reinvestment in our businesses through capital expenditures, mergers and acquisitions, the dividend and share repurchases. We have plans for additional investments in our businesses to drive growth, improve efficiencies and productivity, and drive shareholder value. On February 16, 2021, we announced a 3% increase in the regular quarterly cash dividend for 2021. The Board of Directors increased the cash dividend payable to an annual rate of $3.26 per share compared with the previous dividend of $3.16 per share. GPC has paid a cash dividend every year since going public in 1948, and 2021 marks the 65th consecutive year of increased dividends paid to shareholders. In addition, we qualify and are taking advantage of certain employer payroll tax credits and the deferral of certain tax payments that are allowed under the U.S. Coronavirus Aid, Relief, and Economic Security Act. We expect to be able to continue to borrow funds at reasonable rates over the long term. At March 31, 2021, the Company's total average cost of debt was 2.65%, and the Company remained in compliance with all covenants connected with its borrowings, such covenants include, among others, a financial covenant to maintain a certain leverage ratio of consolidated debt to consolidated adjusted EBITDA under our credit facility. Any failure to comply with our debt covenants or restrictions could result in a default under our financing arrangements or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could create cross defaults under other debt arrangements and have a material adverse effect on our business, financial condition, results of operations and cash flows. Item 3. Quantitative and Qualitative Disclosures about Market Risk For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our 2020 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2020.