QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-5690
__________________________________________
GENUINE PARTS COMPANY
(Exact name of registrant as specified in its charter)
__________________________________________
GA
58-0254510
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2999 WILDWOOD PARKWAY,
ATLANTA,
GA
30339
(Address of principal executive offices)
(Zip Code)
678-934-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of each exchange on which registered
Common Stock, $1.00 par value per share
GPC
New York Stock Exchange
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 142,421,748 shares of common stock outstanding as of October 18, 2021.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. 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 U.S. (“U.S. GAAP”) for complete financial statements. On June 30, 2020, the Company completed the divestiture of its Business Products Group. Refer to the acquisitions, divestitures and discontinued operations footnote for more information. The Company's results of operations for the Business Products Group are reported as discontinued operations and all information related to the discontinued operations has been excluded from the notes to the condensed consolidated financial statements for all periods presented. Net income from discontinued operations for each period includes all costs that are directly attributable to these businesses and excludes certain corporate overhead costs that were previously allocated. Additionally, revenue from freight services provided by the Automotive Parts Group are grossed up and recast in continuing operations in each period because those sales are continuing with the discontinued operations after the divestiture. Except as disclosed herein, there have been no material changes 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,” “we,” “our,” “us,” or “its”) for the year ended December 31, 2020. Accordingly, the unaudited condensed consolidated financial statements and related disclosures herein should be read in conjunction with the Company’s 2020 Annual Report on Form 10-K.
The preparation of interim financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements. Specifically, the Company makes estimates and assumptions in its unaudited condensed consolidated financial statements for inventory adjustments, the accrual of bad debts, credit losses on guaranteed loans, customer sales returns, and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out (“LIFO”) method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation. Reserves for bad debts, credit losses on guaranteed loans and customer sales returns are estimated and accrued on an interim basis based on a consideration of historical experience, current conditions, and reasonable and supportable forecasts. Volume incentives are estimated based upon cumulative and projected purchasing levels. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the interim periods have been made. These adjustments are of a normal recurring nature.
The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results for the year ended December 31, 2021. The Company's results of operations continued to improve in 2021 relative to the same period of 2020 as a result of several positive trends caused by the global response to the coronavirus (“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, the Company's operations remain vulnerable to the continuing negative economic effects caused by the pandemic. The extent to which the pandemic impacts the Company will depend on numerous factors and future developments that the Company cannot predict, including the severity of the virus; the occurrence of additional waves or spikes in infection rates, including the spread of variant strains; the duration of the outbreak; governmental, business or other actions taken in response to the pandemic and the efficacy of these actions, including partial or complete shut downs, travel restrictions, and shelter-in-place orders among other actions; the effectiveness and distribution of COVID-19 vaccines; the ability of the global population to access such vaccines; impacts on customer demand, impacts on the Company's supply chain including the impact of higher shipping-related charges as a result of port slowdowns or congestion, and its ability to attract talent and keep operating locations open.
The Company has evaluated subsequent events through the date the unaudited condensed consolidated financial statements covered by this quarterly report were issued.
The following table presents a summary of the Company's reportable segment financial information from continuing operations:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net sales:
Automotive
$
3,204,534
$
2,960,379
$
9,353,998
$
8,038,863
Industrial
1,614,315
1,409,707
4,713,303
4,246,976
Total net sales
$
4,818,849
$
4,370,086
$
14,067,301
$
12,285,839
Segment profit:
Automotive
$
281,150
$
266,124
$
807,586
$
627,608
Industrial
165,754
125,620
441,459
348,481
Total segment profit
446,904
391,744
1,249,045
976,089
Interest expense, net
(14,167)
(25,221)
(47,853)
(69,965)
Intangible asset amortization
(25,311)
(24,223)
(78,239)
(70,219)
Corporate expense
(47,389)
(33,379)
(130,029)
(117,053)
Other unallocated costs (1)
(61,063)
(11,256)
(138,484)
(565,030)
Income before income taxes from continuing operations
$
298,974
$
297,665
$
854,440
$
153,822
(1)The following table presents a summary of the other unallocated costs:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Other unallocated costs:
Loss on software disposal (2)
$
(61,063)
$
—
$
(61,063)
$
—
Product liability damages award (3)
—
—
(77,421)
—
Goodwill impairment charge (4)
—
—
—
(506,721)
Restructuring costs (5)
—
(10,968)
—
(39,009)
Realized currency loss (6)
—
—
—
(11,356)
Gain on insurance proceeds related to SPR Fire (7)
—
—
—
13,448
Transaction and other costs (8)
—
(288)
—
(21,392)
Total other unallocated costs
$
(61,063)
$
(11,256)
$
(138,484)
$
(565,030)
(2)Adjustment reflects a loss on an internally developed software project that was disposed of due to a change in management strategy related to advances in alternative technologies. Refer to the property, plant and equipment footnote to the condensed consolidated financial statements for more information.
(3)Adjustment reflects damages reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim. Refer to the commitments and contingencies footnote to the condensed consolidated financial statements for more information.
(4)Adjustment reflects the 2020 goodwill impairment charge related to the Company's European reporting unit.
(5)Adjustment reflects restructuring costs related to the execution of certain restructuring actions across the Company's subsidiaries primarily targeted at simplifying the organizational structures and distribution networks implemented by the Company in October 2019 (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.
(6)Adjustment reflects realized currency losses related to divestitures.
(7)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.
(8)Adjustment reflects $8,490 of incremental costs associated with COVID-19 for the nine months ended September 30, 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.
Net sales are disaggregated by geographical region for each of the Company’s reportable segments, as the Company deems this presentation best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table presents disaggregated geographical net sales from contracts with customers by reportable segment:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
North America:
Automotive
$
2,100,250
$
1,934,503
$
6,039,617
$
5,381,566
Industrial
1,493,618
1,295,717
4,362,792
3,937,640
Total North America
$
3,593,868
$
3,230,220
$
10,402,409
$
9,319,206
Australasia:
Automotive
$
374,167
$
355,874
$
1,130,744
$
911,595
Industrial
120,697
113,990
350,511
309,336
Total Australasia
$
494,864
$
469,864
$
1,481,255
$
1,220,931
Europe – Automotive
$
730,117
$
670,002
$
2,183,637
$
1,745,702
Total net sales
$
4,818,849
$
4,370,086
$
14,067,301
$
12,285,839
3. Accumulated Other Comprehensive Loss
The following tables present the changes in accumulated other comprehensive loss (“AOCL”) by component for the nine months ended September 30:
Changes in Accumulated Other Comprehensive Loss by Component
Pension and Other Post-Retirement Benefits
Cash Flow Hedges
Foreign Currency Translation
Total
Beginning balance, January 1, 2021
$
(692,868)
$
(30,007)
$
(313,627)
$
(1,036,502)
Other comprehensive loss before reclassifications
—
—
(75,738)
(75,738)
Amounts reclassified from accumulated other comprehensive loss
27,931
11,223
—
39,154
Other comprehensive income (loss), net of income taxes
Changes in Accumulated Other Comprehensive Loss by Component
Pension and Other Post-Retirement Benefits
Cash Flow Hedges
Foreign Currency Translation
Total
Beginning balance, January 1, 2020
$
(704,415)
$
(20,671)
$
(416,222)
$
(1,141,308)
Other comprehensive loss before reclassifications
—
(21,248)
(48,307)
(69,555)
Amounts reclassified from accumulated other comprehensive loss
24,479
8,456
11,356
44,291
Other comprehensive income (loss), net of income taxes
24,479
(12,792)
(36,951)
(25,264)
Ending balance, September 30, 2020
$
(679,936)
$
(33,463)
$
(453,173)
$
(1,166,572)
The AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote. The nature of the cash flow hedges are discussed in the derivatives and hedging footnote. Generally, tax effects in AOCL are established at the currently enacted tax rate and reclassified to net income (loss) in the same period that the related pre-tax AOCL reclassifications are recognized.
4. Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs and has determined that any recently adopted accounting pronouncements did not have a material impact on the Company's condensed consolidated financial statements and all recent accounting pronouncements not yet adopted are not applicable or are expected to have an immaterial impact on the Company's condensed consolidated financial statements.
5. Property, Plant and Equipment
During the third quarter of 2021, the Company reconsidered its approach to an internally developed software project due to a change in management strategy related to advances in alternative technologies. The Company decided to dispose of the software project as of September 30, 2021. As a result, the Company recognized $61,063 of selling, administrative and other expense related to the disposal of this software.
6. Employee Benefit Plans
Net periodic benefit income from the Company's pension plans included the following components:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Service cost
$
3,043
$
3,012
$
9,185
$
8,919
Interest cost
17,915
20,942
53,783
62,732
Expected return on plan assets
(38,755)
(38,550)
(116,345)
(115,483)
Amortization of prior service cost
172
173
516
519
Amortization of actuarial loss
12,465
11,130
37,430
33,340
Net periodic benefit income
$
(5,160)
$
(3,293)
$
(15,431)
$
(9,973)
Service cost is recorded in selling, administrative and other expenses in the condensed consolidated statements of income (loss) while all other components are recorded within other non-operating (income) expenses. Pension benefits also include amounts related to supplemental retirement plans.
The Company guarantees the borrowings of certain independently controlled automotive parts stores and businesses (“independents”) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (“affiliates”). Presently, the independents are generally consolidated by unaffiliated enterprises that have controlling financial interests through ownership of a majority voting interest in the independents. The Company has no voting interest or equity conversion rights in any of the independents. The Company does not control the independents or the affiliates but receives a fee for the guarantees. The Company has concluded that the independents are variable interest entities, but that the Company is not the primary beneficiary. Specifically, the equity holders of the independents have the power to direct the activities that most significantly impact the entities’ economic performance including, but not limited to, decisions about hiring and terminating personnel, local marketing and promotional initiatives, pricing and selling activities, credit decisions, monitoring and maintaining appropriate inventories, and store hours. Separately, the Company concluded 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 generally equal to the total borrowings subject to the Company’s guarantees. While such borrowings of the independents and affiliates are outstanding, the Company is required to maintain compliance with certain covenants. At September 30, 2021, the Company was in compliance with all such covenants.
As of September 30, 2021, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $895,636. These loans generally mature over periods from one to six years. The Company regularly monitors the performance of these loans and the ongoing operating results, financial condition and ratings from credit rating agencies of the independents and affiliates that participate in the guarantee programs. In the event that the Company is required to make payments in connection with these guarantees, the Company would obtain and liquidate certain collateral pledged by the independents or affiliates (e.g., accounts receivable and inventory) to recover all or a substantial portion of the amounts paid under the guarantees. The Company recognizes a liability equal to current expected credit losses over the lives of the loans in the guaranteed loan portfolio, based on a consideration of historical experience, current conditions, the nature and expected value of any collateral, and reasonable and supportable forecasts. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the current expected credit loss reserve is not material. As of September 30, 2021, there are no material guaranteed loans for which the borrower is experiencing financial difficulty and recovery is expected to be provided substantially through the operation or sale of the collateral.
As of September 30, 2021, the Company has recognized certain assets and liabilities amounting to $80,000 each for the guarantees related to the independents’ and affiliates’ borrowings. These assets and liabilities are included in other assets and other long-term liabilities in the condensed consolidated balance sheets. The liabilities relate to the Company's noncontingent obligation to stand ready to perform under the guarantee programs and they are distinct from the Company's current expected credit loss reserve.
8. Debt
On September 30, 2021, the Company entered into the first amendment to the Syndicated Facility Agreement (the "Unsecured Revolving Credit Facility"), dated as of October 30, 2020. The interest rates were amended to reduce the applicable rate by 12.5 basis points (resulting in a rate of LIBOR + 112.5 basis points) and the LIBOR floor from 0.5% to 0.0%. The amendment also extended the maturity by one year to September 30, 2026.
9. Accounts Receivable Sales Agreement
The Company has an accounts receivable sales agreement (the “A/R Sales Agreement”) to sell short-term receivables from certain customer trade accounts to an unaffiliated financial institution on a revolving basis. The A/R Sales Agreement has a 3 year term, which the Company intends to renew.
As part of the A/R Sales Agreement, the Company continuously sells designated pools of receivables as they are originated by it and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The assets of the SPE would be first available to satisfy the creditor claims of the unaffiliated financial institution. The Company controls and therefore consolidates the SPE in its condensed consolidated financial statements.
The SPE transferred ownership and control of certain receivables that met certain qualifying conditions to the unaffiliated financial institution in exchange for cash. The Company accounts for transactions with the unaffiliated financial institution as sales of financial assets, with the associated receivables derecognized from the Company's condensed consolidated balance sheet. The remaining receivables held by the SPE were pledged to secure the
collectability of the sold receivables. The amount of receivables pledged as collateral as of September 30, 2021 and December 31, 2020 is approximately $983,000 and $771,000, respectively.
The Company continues to be involved with the receivables transferred by the SPE to the unaffiliated financial institution by providing collection services. As cash is collected on sold receivables, the SPE continuously transfers ownership and control of new qualifying receivables to the unaffiliated financial institution so that the total principal amount outstanding of receivables sold is approximately $800,000 at any point in time (which is the maximum amount allowed under the agreement). The future amount of receivables outstanding as sold could decrease, based on the level of activity and other factors. Total principal amount outstanding of receivables sold is approximately $800,000 as of September 30, 2021 and December 31, 2020, respectively.
The following table summarizes the activity under the A/R Sales Agreement for the following periods:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Receivables sold to the financial institution and derecognized
$
1,884,023
$
1,279,420
$
5,700,895
$
2,181,746
Cash collected on sold receivables
$
1,884,028
$
1,279,430
$
5,700,896
$
1,681,732
Upon entry into the A/R Sales Agreement, the Company received an initial benefit from cash from operations of approximately $800,000 in the year ended December 31, 2020. Continuous cash activity related to the A/R Sales Agreement is reflected in cash from operating activities in the condensed consolidated statement of cash flows. The SPE incurs fees due to the unaffiliated financial institution related to the accounts receivable sales transactions. Those fees, which are immaterial, are recorded within other non-operating (income) expense in the condensed consolidated statements of income (loss). The SPE has a recourse obligation to repurchase from the unaffiliated financial institution any previously sold receivables that are not collected due to the occurrence of certain events, including credit quality deterioration and customer sales returns. The reserve recognized for this recourse obligation as of September 30, 2021 and December 31, 2020 is not material. The servicing liability related to the Company's collection services also is not material, given the high quality of the customers underlying the receivables and the anticipated short collection period.
10. Fair Value of Financial Instruments
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. Additionally, ASC 820, Fair Value Measurements, defines levels within a hierarchy based upon observable and non-observable inputs.
•Level 1. Observable inputs such as quoted prices in active markets;
•Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions
As of September 30, 2021 the fair value of the Company's senior unsecured notes was approximately $2,524,914, which are designated as Level 2 in the fair value hierarchy. Our valuation technique is based primarily on prices and other relevant information generated by observable transactions involving identical or comparable assets or liabilities.
Derivative instruments are recognized in the consolidated balance sheets at fair value and are designated as Level 2 in the fair value hierarchy. They are valued using inputs other than quoted prices, such as foreign exchange rates and yield curves. Refer to the derivatives and hedging footnote for further information.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analyses of goodwill, other intangible assets, and long-lived assets. These involve fair value measurements on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade accounts receivable, trade accounts payable, and borrowings under the line of credit approximate their respective fair values based on the short-term nature of these instruments.
11. Derivatives and Hedging
The Company is exposed to various risks arising from business operations and market conditions, including fluctuations in interest rates and certain foreign currencies. When deemed appropriate, the Company uses derivative and non-derivative instruments as risk management tools to mitigate the potential impact of interest rate and foreign exchange rate risks. The objective of using these tools is to reduce fluctuations in the Company’s earnings and cash flows associated with changes in these rates. Derivative financial instruments are not used for trading or other speculative purposes. The Company has not historically incurred, and does not expect to incur in the future, any losses as a result of counterparty default related to derivative instruments.
The Company formally documents relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative and non-derivative instruments that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When a designated instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively.
Cash Flow Hedges
In 2020, the Company terminated its interest rate swaps and settled the outstanding balances through cash payments totaling $41,000. The remaining amount in AOCL is being amortized to interest expense on a straight-line basis over the remaining life of the previously hedged instrument.
Net Investment Hedges
The Company has designated certain derivative instruments and a portion of its foreign currency denominated debt, a non-derivative financial instrument, as hedges of the foreign currency exchange rate exposure of the Company's Euro-denominated net investment in a European subsidiary. The Company applies the spot method to assess the hedge effectiveness of the derivative instruments and this assessment for each instrument excludes the initial value related to the difference at contract inception between the foreign exchange spot rate and the forward rate (i.e., the forward points). The initial value of this excluded component is recognized as a reduction to interest expense in a systematic and rational manner over the term of the derivative instrument. All other changes in value for the net investment hedges are included in AOCL within foreign currency translation and would only be reclassified to earnings if the European subsidiary were liquidated, or otherwise disposed.
The following table summarizes the location and carrying amounts of the derivative instruments and the foreign currency denominated debt, a non-derivative financial instrument, that are designated and qualify as part of hedging relationships:
September 30, 2021
December 31, 2020
Instrument
Balance Sheet Location
Notional
Balance
Notional
Balance
Net investment hedges:
Forward contracts
Prepaid expenses and other current assets
$
925,810
$
59,397
$
800,000
$
7,668
Forward contracts
Other current liabilities
$
235,180
$
6,306
$
360,990
$
19,442
Foreign currency debt
Long-term debt
€
700,000
$
811,790
€
700,000
$
861,070
The tables below presents gains and losses related to designated cash flow hedges and net investment hedges:
Gain (Loss) Recognized in AOCL Before Reclassifications
Gain Recognized in Interest Expense For Excluded Components
2021
2020
2021
2020
Three Months Ended September 30,
Cash flow hedges:
Interest rate contracts
$
—
$
(277)
$
—
$
—
Net investment hedges:
Forward contracts
20,958
(49,660)
6,574
6,574
Foreign currency debt
21,000
(35,140)
—
—
Total
$
41,958
$
(85,077)
$
6,574
$
6,574
Gain (Loss) Recognized in AOCL Before Reclassifications
Gain Recognized in Interest Expense For Excluded Components
2021
2020
2021
2020
Nine Months Ended September 30,
Cash flow hedges:
Interest rate contracts
$
—
$
(29,107)
$
—
$
—
Net investment hedges:
Forward contracts
45,143
(33,959)
19,722
20,572
Foreign currency debt
49,280
(38,080)
—
—
Total
$
94,423
$
(101,146)
$
19,722
$
20,572
12. Commitments and Contingencies
Legal Matters
As more fully discussed in the Company's notes to the consolidated financial statements in its 2020 Annual Report on Form 10-K, a jury awarded damages in 2017 against the Company in a litigated automotive product liability dispute. On February 19, 2020, the Washington Court of Appeals issued an order entirely reversing the jury’s finding on damages and ordering a new trial on damages. The plaintiffs subsequently appealed this order to the Washington Supreme Court. On July 7, 2020, the Washington Supreme Court indicated that it would consider a further appeal on this matter, and oral arguments occurred on November 10, 2020. On July 8, 2021, the Washington Supreme Court overturned the order of the Washington Court of Appeals and reinstated the trial court's damage award of $77,100 against the Company. The Company recorded an adjustment to increase selling, general and other expenses by approximately $77,421, inclusive of statutory interest and insurance coverage, in the condensed consolidated statements of income (loss) for the nine months ended September 30, 2021. The damage award and statutory interest was fully paid as of September 30, 2021.
Environmental Liabilities
Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed an applied threshold not to exceed $1,000. Applying this threshold, there are no environmental matters to disclose for this period.
13. Acquisitions, Divestitures and Discontinued Operations
Acquisitions
The Company acquired several businesses for approximately $142,669 and $77,393, net of cash acquired, during the nine months ended September 30, 2021 and September 30, 2020, respectively. The measurement period is still open for certain businesses acquired in prior periods, but there have been no significant measurement period adjustments during the three and nine months ended September 30, 2021.
The Company received cash proceeds from divestitures of businesses totaling $16,687 and $382,737 for the nine months ended September 30, 2021 and September 30, 2020, respectively.
Discontinued Operations
Business Products Group
During 2020, the Company completed the divestiture of its Business Products Group as part of its long-term strategic initiative to streamline its operations and optimize its portfolio so that it can drive shareholder value by focusing on its global Automotive and Industrial Parts Groups. This divestiture represented a single plan to exit the Business Products Group segment and was considered a strategic shift that had a major effect on the Company’s operations and financial results. Therefore, the results of operations, financial position and cash flows for the Business Products Group are reported as discontinued operations for all prior periods presented.
The Company retains an investment in S.P. Richard's (“SPR”), a business that previously belonged to the Business Products Group, with a carrying value of $69,700, which is included within other assets on the condensed consolidated balance sheets, as of September 30, 2021. The Company maintains an allowance equal to the current expected credit loss based on a consideration of historical experience, current market conditions and reasonable and supportable forecasts related to this investment and other related assets of $17,000.
The Company also remains involved with SPR for a limited period of time through various lease, sublease, freight distribution and transition service agreements. The Company has concluded that SPR is a variable interest entity, but the Company is not the primary beneficiary and therefore the entity is not consolidated. Among other things, the Company does not have any voting rights and does not have the power to direct the activities that most significantly affect SPR's economic performance. For a limited period of time as SPR completes its transition away from the Company’s shared services platform, the Company continues to pay certain payables on SPR’s behalf and at SPR’s direction with full reimbursement from SPR under the terms of a transition services agreement.
The Company’s results of operations for discontinued operations were:
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
Net sales
$
—
$
846,944
Cost of goods sold
—
632,007
Gross profit
—
214,937
Operating expenses
—
179,461
Loss on disposal
3,165
223,483
Loss before income taxes
(3,165)
(188,007)
Income tax expense
2,222
4,062
Net loss from discontinued operations
$
(5,387)
$
(192,069)
14. Income Taxes
The Company's effective income tax rate was 23.5% for the three months ended September 30, 2021, compared to 21.8% for the same three month period in 2020. The effective income tax rate was 24.8% for the nine months ended September 30, 2021, compared to 105.4% for the same period in 2020.
For the three months ended September 30, 2021, the rate increase is primarily due to income mix shifts and statute related adjustments. For the nine months ended September 30, 2021, the rate decrease is primarily due to the non-deductible goodwill impairment charge that occurred in 2020. In addition, during the second quarter of 2021, the United Kingdom enacted legislation raising its corporate tax rate from 19% to 25% effective April 2023. Accordingly, the Company remeasured its deferred tax assets and liabilities as of June 30, 2021.
15. Earnings Per Share
As more fully discussed in the share-based compensation footnote of the Company’s notes to the consolidated financial statements in its 2020 Annual Report on Form 10-K, the Company maintains various long-term incentive plans, which provide for the granting of stock options, stock appreciation rights (“SARs”), restricted stock, restricted
stock units (“RSUs”), performance awards, dividend equivalents and other share-based awards. Certain outstanding options to purchase shares of common stock are not included in the diluted earnings per share calculation. These options are excluded because their inclusion would have been anti-dilutive.
The following table summarizes anti-dilutive shares outstanding:
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 and nine months ended September 30, 2021 are not necessarily indicative of 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 (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.
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.
The Company's Automotive Parts Group operated in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Australia and New Zealand as of September 30, 2021, and accounted for 66% of total revenue for the nine months ended September 30, 2021. Our Industrial Parts Group operated in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore. The Industrial Parts Group accounted for 34% of the Company's total revenue for the nine months ended September 30, 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
During the nine months ended September 30, 2021, our business and results of operations continued to improve relative to the same period of 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, all regions in which we operate continue to experience periodic surges in infection rates. As a result, our business segments continue to face many uncertainties and our operations remain vulnerable to continuing negative effects caused by the pandemic. However, we are encouraged to see the impact of the pandemic subsiding as evidenced by the improving industrial economy, increase in miles driven and overall consumer activity.
As of September 30, 2021, all our operations are open for business. Our supply chain partners have been very supportive and accommodating, despite strains on the supply chain caused by labor shortages, inventory shortages, delays in order fulfillment and increased backlogs. This has allowed us to continue to provide quality customer service. We remain in constant communication with our employees regarding changing conditions and protocol. Based on the length and severity of the pandemic, 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,” and Item 1A, “Risk Factors,” 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 the COVID-19 vaccine distribution and its positive impact on consumer mobility and demand, we are encouraged by the increase in consumer activity during the three and nine months ended September 30, 2021 as
our key markets continue to reopen. In addition, we continue to realize the benefits of our cost savings initiatives to more effectively leverage our cost structure in both our Automotive and Industrial Parts Groups. Both our segments reported improved sales during the three and nine months ended September 30, 2021 when compared to the same prior year periods. The Automotive Parts Group benefited from the broad economic recovery, an increase in customer mobility and miles driven, as well as favorable weather trends. The Industrial Parts Group benefited from the strengthening industrial economy, as evidenced by economic indicators such as the Manufacturing Industrial Production and the Purchasing Managers Index, among others. Additionally, the Industrial Parts Group executed on key operational initiatives, including improved omni-channel capabilities and the expansion of our services and solutions business.
Sales
Sales for the three months ended September 30, 2021 were $4.8 billion, a 10.3% increase as compared to $4.4 billion in the same period of the prior year. The increase in sales is attributable to a 7.6% increase in comparable sales, a 1.8% benefit from acquisitions and a net favorable impact of foreign currency and other of 0.9%. Sales for the nine months ended September 30, 2021 were $14.1 billion, a 14.5% increase as compared to $12.3 billion in the same period of the prior year. The increase in sales is due to a 10.0% comparable sales increase, a 3.2% net favorable impact of foreign currency and other and a 1.3% benefit from acquisitions. The increases in comparable sales is driven primarily by the increased consumer activity as our key markets continue to reopen when compared to the three and nine months ended September 30, 2020. Sales were positively impacted by price inflation of approximately 3% and 2% for the three and nine months ended September 30, 2021, respectively.
Sales for the Automotive Parts Group increased 8.2% for the three months ended September 30, 2021, as compared to the same period in the prior year. This group's revenue increase for the three months ended September 30, 2021 consisted of an approximate 4.8% increase in comparable sales, a 2.4% benefit from acquisitions and a 1.0% net favorable impact of foreign currency and other. This group's 16.4% revenue increase for the nine months ended September 30, 2021 consisted of an approximate 10.7% increase in comparable sales, a 3.9% net favorable impact from foreign currency and other and a 1.8% benefit from acquisitions.
Sales for the Industrial Parts Group increased 14.5% for the three months ended September 30, 2021, as compared to the same period in 2020. The increase in this group's revenue reflects an approximate 13.4% increase in comparable sales, a 0.8% favorable foreign currency impact and a 0.3% benefit from acquisitions. This group's 11.0% sales increase for the nine months ended September 30, 2021 reflects an 8.9% increase in comparable sales, a 1.5% favorable impact from foreign currency and a 0.6% benefit from acquisitions.
Cost of Goods Sold and Operating Expenses
Cost of goods sold for the three months ended September 30, 2021 was $3.1 billion, a 9.4% increase from $2.8 billion for the same period in 2020. As a percentage of net sales, cost of goods sold was 64.5% for the three months ended September 30, 2021, as compared to 65.0% in the same three month period of 2020. Cost of goods sold for the nine months ended September 30, 2021 was $9.1 billion, a 13.0% increase from $8.1 billion for the same period in 2020. As a percentage of net sales, cost of goods sold was 64.9% for the nine months ended September 30, 2021, as compared to 65.8% in the same period of 2020. The increase in cost of goods sold for the three and nine months ended September 30, 2021 primarily relates to the overall increase in sales volume due to the increased consumer activity as compared to the same three and nine month periods of the prior year.
Gross profit as a percentage of net sales may fluctuate based on, among other things, (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, (vi) changes in inflation or deflation, and (vii) the impact of tariffs. Gross margin improved to 35.5% for the three months ended September 30, 2021 compared to 35.0% in the same period of 2020. Gross margin for the nine months ended September 30, 2021 improved to 35.1% from 34.2% for the same nine month period of 2020. The gross margin improvements primarily reflect the impact of higher levels of supplier incentives on stronger sales and strategic category management initiatives including pricing and global sourcing strategies. We have reported improved year over year gross margin for 16 consecutive quarters.
Total operating expenses increased to $1.4 billion for the three months ended September 30, 2021 as compared to $1.2 billion for the same three month period in 2020. As a percentage of net sales, operating expenses increased to 29.4% as compared to 28.1% in the respective periods. This increase as a percentage of net sales is primarily due to the benefit of temporary COVID-19 related savings initiatives in 2020 and a $61.1 million loss on a software disposal in 2021. For the nine months ended September 30, 2021, operating expenses totaled $4.1 billion as
compared to $4.0 billion for the same nine month period in 2020. As a percentage of net sales, operating expenses improved to 29.3% as compared to 32.8% for the respective periods primarily driven by the non-cash goodwill impairment charge that occurred in 2020.
Our operating expenses are substantially comprised of compensation and benefit-related costs for personnel. Other major expense categories include transportation and delivery costs driven by higher sales, facility occupancy costs, technology and digital costs, insurance costs, legal and professional services, and travel and advertising.
Segment Profit
The Automotive Parts Group’s segment profit increased 5.6% in the three months ended September 30, 2021 as compared to the same period of 2020, and its segment profit margin was 8.8% as compared to 9.0% in the same period of the previous year. Segment profit margin declined primarily due to the benefit of temporary COVID-related savings initiatives in 2020. These items were partially offset by improved leverage from stronger sales, gross margin expansion and incremental cost control initiatives in 2021. For the nine months ended September 30, 2021, the Automotive Parts Group's segment profit increased approximately 28.7% and the segment profit margin improved to 8.6% as compared to 7.8% in the same nine month period of 2020. This improvement in segment profit margin is primarily due to sales gains as a result of the increased consumer activity as our key markets continue to reopen, gross margin improvements, and the leveraging of expenses on higher sales and ongoing cost control initiatives.
The Industrial Parts Group's segment profit increased 31.9% in the three months ended September 30, 2021 as compared to the same three month period of 2020, and the segment profit margin for this group improved to 10.3% compared to 8.9% for the same period of the previous year. Segment profit for the Industrial Parts Group improved 26.7% in the nine months ended September 30, 2021 as compared to the same nine month period of 2020, and the segment profit margin for this group improved to 9.4% compared to 8.2% for the same period of the previous year. The improved segment profit margins for both periods reflect the positive impact of higher sales volumes, gross margin gains and efficiencies in the operating structure of the Industrial Parts Group. Additionally, the Industrial Parts Group benefited from the strengthening industrial economy, which is evident in indicators such as the Purchasing Managers Index and Industrial Production Index.
Income Taxes
The Company's effective income tax rate was 23.5% for the three months ended September 30, 2021, compared to 21.8% for the same three month period in 2020. The effective income tax rate was 24.8% for the nine months ended September 30, 2021, compared to 105.4% for the same period in 2020.
For the three months ended September 30, 2021, the rate increase is primarily due to income mix shifts and statute related adjustments. For the nine months ended September 30, 2021, the rate decrease is primarily due to the non-deductible goodwill impairment charge that occurred in 2020, as described below. In addition, during the second quarter of 2021, the United Kingdom enacted legislation raising its corporate tax rate from 19% to 25% effective April 2023. Accordingly, the Company remeasured its deferred tax assets and liabilities as of June 30, 2021.
Net Income (Loss) from Continuing Operations
For the three months ended September 30, 2021, the Company recorded net income from continuing operations of $228.6 million, a decrease of 1.9% as compared to net income from continuing operations of $232.9 million in the same three month period of the prior year. On a per share diluted basis, net income was $1.59, a decrease of 1.2% as compared to net income per diluted share of $1.61 for the same three month period of 2020. This decrease is primarily related to a loss on a software disposal of $61.1 million during the three months ended September 30, 2021.
For the nine months ended September 30, 2021, the Company recorded net income from continuing operations of $642.8 million as compared to net loss from continuing operations of $8.2 million in the same nine month period of the prior year. On a per share diluted basis, net income from continuing operations was $4.44 as compared to net loss per diluted share of $0.06 in the same nine month period of 2020. The increase in income for the nine month period was primarily driven by the goodwill impairment charge of $506.7 million that occurred during the second quarter of 2020. Additionally, we saw higher sales volume as a result of increased consumer activity as our key markets continue to reopen during the nine months ended September 30, 2021 .
Further impacting net income from continuing operations during the three and nine months ended September 30, 2021, the Company incurred $61.1 million and $138.5 million of adjustments, respectively. These adjustments include the aforementioned loss related to a software disposal of $61.1 million and $77.4 million related to damages
reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim. Refer to the property, plant and equipment and commitments and contingencies footnotes to the condensed consolidated financial statements for more information regarding these adjustments. The Company believes these represent costs that do not arise in the ordinary course of the Company's business and therefore impact comparability with prior periods.
During the three and nine months ended September 30, 2020, the Company incurred $11.3 million and $565.0 million of adjustments, respectively. These adjustments include a goodwill impairment charge of $506.7 million related to our European reporting unit and also represents restructuring costs, realized currency losses, insurance proceeds related to the SPR Fire and transaction and other costs and income. Transaction and other costs primarily include incremental costs associated with certain divestitures and COVID-19.
For the three months ended September 30, 2021, the Company's adjusted net income from continuing operations was $270.5 million, an increase of 14.2% as compared to adjusted net income from continuing operations of $236.8 million in the same three month period of the prior year. On a per share basis, adjusted net income from continuing operations was $1.88 for the three months ended September 30, 2021, an increase of 15.3% as compared to $1.63 for the same period of 2020. For the nine months ended September 30, 2021, adjusted net income from continuing operations was $740.8 million, an increase of 36.2% as compared to $544.1 million for the same period of 2020. On a per share diluted basis, adjusted net income from continuing operations was $5.12 for the nine months ended September 30, 2021, an increase of 36.2% as compared to $3.76 for the same period of the prior year. The increased adjusted net income from continuing operations for the three and nine months ended September 30, 2021 reflects the benefits of improved sales volume related to increased consumer activity as our key markets continue to reopen, gross margin improvements, improved expense leverage on sales growth and our ongoing cost control initiatives. Both adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share are 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 (loss) from continuing operations and diluted net income (loss) 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. The Company believes that the presentation of adjusted net income from continuing operations and adjusted diluted net income from continuing operations per common share, which are not calculated in accordance with GAAP, 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. The Company considers these metrics useful to investors because they provide greater transparency into management’s view and assessment of the Company’s 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 the Company’s core operations. The Company does not, nor does it suggest investors should, consider such non-GAAP financial measures, as superior to, in isolation from, or as a substitute for, GAAP financial information.
The table below represents amounts per common share assuming dilution:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share data)
2021
2020
2021
2020
GAAP net income (loss) from continuing operations
$
1.59
$
1.61
$
4.44
$
(0.06)
Adjustments:
Loss on software disposal (1)
0.42
—
0.42
—
Product liability damages award (2)
—
—
0.54
—
Goodwill impairment charge (3)
—
—
—
3.51
Restructuring costs (4)
—
0.07
—
0.26
Realized currency loss (5)
—
—
—
0.08
Gain on insurance proceeds related to SPR Fire (6)
—
—
—
(0.09)
Transaction and other costs (7)
—
—
—
0.15
Total adjustments
0.42
0.07
0.96
3.91
Tax impact of adjustments
(0.13)
(0.05)
(0.28)
(0.09)
Adjusted diluted net income from continuing operations per common share
$
1.88
$
1.63
$
5.12
$
3.76
Weighted average common shares outstanding – assuming dilution
143,589
145,035
144,622
144,528
The table below clarifies where the items that have been adjusted above to improve comparability of the financial information from period to period are presented in the condensed consolidated statements of income (loss).
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2021
2020
2021
2020
Line item:
Cost of goods sold
$
—
$
604
$
—
$
13,495
Selling, administrative and other expenses
61,063
—
138,484
8,213
Goodwill impairment charge
—
—
—
506,721
Restructuring costs
—
10,968
—
39,009
Non-operating (income) expenses: Other
—
(316)
—
(2,408)
Total adjustments
$
61,063
$
11,256
$
138,484
$
565,030
(1)Adjustment reflects a loss on an internally developed software project that was disposed of due to a change in management strategy related to advances in alternative technologies. Refer to the property, plant and equipment footnote to the condensed consolidated financial statements for more information.
(2)Adjustment reflects damages reinstated by the Washington Supreme Court order on July 8, 2021 in connection with a 2017 automotive product liability claim. Refer to the commitments and contingencies footnote to the condensed consolidated financial statements for more information.
(3)Adjustment reflects the 2020 goodwill impairment charge related to the Company's European reporting unit.
(4)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.
(5)Adjustment reflects realized currency losses related to divestitures.
(6)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.
(7)Adjustment reflects $8.5 million of incremental costs associated with COVID-19 for the nine months ended September 30, 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
The Company’s cash balance of $919.1 million at September 30, 2021 decreased $71.1 million, or 7.2%, from December 31, 2020. For the nine months ended September 30, 2021, the Company had net cash provided by operating activities of $1,008.2 million, net cash used in investing activities of $239.9 million and net cash used in financing activities of $818.7 million. The cash provided by operating activities of $1,008.2 million reflects strong earnings and effective working capital management. This amount decreased $419.0 million from $1,427.2 million for the nine months ended September 30, 2020 primarily driven by the $500 million benefit to operating cash flow in 2020 as a result of the Company entering into the A/R Sales Agreement to sell receivables. The investing activities consisted primarily of $142.6 million in acquisitions and other investing activities and $138.2 million in capital expenditures, slightly offset by $40.9 million in proceeds from divestitures and the sale of property, plant and equipment. The financing activities consisted primarily of $349.3 million for dividends paid to the Company’s shareholders, $283.9 million paid for share repurchases and $160.8 million net payments on debt.
Accounts receivable increased $331.3 million, or 21.3%, from December 31, 2020 primarily due to higher sales volumes. Inventory increased $242.1 million, or 6.9%, due to increased economic activity and related product demand. Accounts payable increased $691.0 million, or 16.7%, from December 31, 2020 due to increased purchasing related to sales volume and extended payment terms with certain suppliers. Total debt of $2.4 billion at September 30, 2021 decreased $0.2 billion, or 9.1%, from December 31, 2020.
We continue to negotiate extended payment terms 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 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 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 September 30, 2021 and December 31, 2020, the outstanding payment obligations to the financial institutions are $2.6 billion and $1.8 billion, respectively. The amount settled through the SCF program was $2.3 billion and $1.9 billion for the nine months ended September 30, 2021 and September 30, 2020, respectively.
Liquidity and Capital Resources
We ended the quarter with $2.4 billion of total liquidity (comprising $1.5 billion availability on the Unsecured Revolving Credit Facility, defined below, and $0.9 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.
On September 30, 2021, we entered into the first amendment to the Syndicated Facility Agreement (the "Unsecured Revolving Credit Facility"), dated as of October 30, 2020. The interest rates were amended to reduce the applicable rate by 12.5 basis points (resulting in a rate of LIBOR + 112.5 basis points) and the LIBOR floor from 0.5% to 0.0%. The amendment also extended the maturity by one year to September 30, 2026.
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.
We expect to be able to continue to borrow funds at reasonable rates over the long term. At September 30, 2021, the Company's total average cost of debt was 2.34%, 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.
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 Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or furnishes under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and 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 required disclosure.
Changes in internal control over financial reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the SEC that occurred during the Company’s last quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity and capital resources. Except as set forth herein, there have been no significant developments to the information presented in our 2020 Annual Report on Form 10-K with respect to litigation or commitments and contingencies. Refer to the commitments and contingencies footnote to the condensed consolidated financial statements for more information, which information is incorporated by reference herein.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about the Company’s purchases of shares of the Company’s common stock during the three months ended September 30, 2021:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
July 1, 2021 through July 31, 2021
213,064
$128.09
209,275
12,834,436
August 1, 2021 through August 31, 2021
355,503
$124.53
352,904
12,481,532
September 1, 2021 through September 30, 2021
240,124
$120.78
238,257
12,243,275
Totals
808,691
$124.35
800,436
12,243,275
(1)Includes shares surrendered by employees to the Company to satisfy tax withholding obligations in connection with the vesting of shares of restricted stock, the exercise of stock options and/or tax withholding obligations.
(2)On August 21, 2017, the Board of Directors announced that it had authorized the repurchase of 15.0 million shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. The authorization for the repurchase continues until all such shares have been repurchased or the repurchase program is terminated by action of the Board of Directors. The program may be suspended at any time and does not have an expiration date. Approximately 12.2 million shares authorized remain available to be repurchased by the Company. There were no other repurchase programs announced as of September 30, 2021.
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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 21, 2021
/s/ Carol B. Yancey
Carol B. Yancey
Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
Date: October 21, 2021
/s/ Napoleon B. Rutledge Jr.
Napoleon B. Rutledge Jr.
Senior Vice President and Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer)
