QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
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,
30339
ATLANTA,
GA
(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 140,437,947 shares of common stock outstanding as of July 17, 2023.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.General
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. 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, 2022. Accordingly, the unaudited Condensed Consolidated Financial Statements and related disclosures herein should be read in conjunction with our 2022 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, we make estimates and assumptions in our 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 our financial results for the interim periods have been made. These adjustments are of a normal recurring nature. We have reclassified certain prior period amounts to conform to the current period presentation. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of results for the year ended December 31, 2023. We have evaluated subsequent events through the date the unaudited Condensed Consolidated Financial Statements covered by this quarterly report were issued.
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”). We consider the applicability and impact of all ASUs and any not listed below were assessed and determined to not be applicable or are expected to have an immaterial impact on our Condensed Consolidated Financial Statements.
In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs. This standard requires disclosure of the key terms of outstanding supply chain finance programs and a rollforward of the related amounts due to vendors participating in these programs. The new standard does not affect the recognition, measurement or financial statement presentation of any amounts due. The guidance is effective in the first quarter of 2023, except for the rollforward, which is effective in the first quarter of 2024. For additional information, please refer to the supply chain finance programs section herein.
Derivatives and Hedging
We are exposed to various risks arising from business operations and market conditions, including fluctuations in certain foreign currencies. We use derivative and non-derivative instruments as risk management tools to mitigate the potential impact of foreign exchange rate risks. The objective of using these tools is to reduce fluctuations in our earnings and cash flows associated with changes in these rates. Derivative instruments are recognized in the Condensed 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.
The following table summarizes the classification 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 (in thousands):
June 30, 2023
December 31, 2022
Instrument
Balance Sheet Location
Notional
Balance
Notional
Balance
Net investment hedges:
Forward contracts
Prepaid expenses and other current assets
$
606,950
$
39,731
$
606,950
$
46,670
Forward contract
Other current liabilities
$
106,800
$
4,344
$
106,800
$
3,064
Foreign currency debt
Long-term debt
€
700,000
$
760,480
€
700,000
$
749,280
The tables below present gains and losses related to designated net investment hedges:
Gain (Loss) Recognized in AOCL before Reclassifications
Gain Recognized in Interest Expense for Excluded Components
(in thousands)
2023
2022
2023
2022
Three Months Ended June 30,
Net investment hedges:
Forward contracts
$
(9,212)
$
66,986
$
3,158
$
7,565
Foreign currency debt
2,940
50,190
—
—
Total
$
(6,272)
$
117,176
$
3,158
$
7,565
Gain (Loss) Recognized in AOCL before Reclassifications
Gain Recognized in Interest Expense for Excluded Components
(in thousands)
2023
2022
2023
2022
Six Months Ended June 30,
Net investment hedges:
Forward contracts
$
(14,536)
$
86,380
$
6,317
$
15,130
Foreign currency debt
(11,200)
61,950
—
—
Total
$
(25,736)
$
148,330
$
6,317
$
15,130
Fair Value of Financial Instruments
As of June 30, 2023 the fair value of our senior unsecured notes was approximately $3.0 billion, 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.
Guarantees
We guarantee the borrowings of certain independently controlled automotive parts stores and businesses (“independents”) and certain other affiliates in which we have a noncontrolling equity ownership interest (“affiliates”). While such borrowings of the independents and affiliates are outstanding, we are required to maintain compliance with certain covenants. At June 30, 2023, we were in compliance with all such covenants.
As of June 30, 2023, the total borrowings of the independents and affiliates subject to guarantee by us were approximately $956 million. These loans generally mature over periods from one to six years. We regularly monitor 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 we are required to make payments in connection with these guarantees, we 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. We recognize 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, we have not had significant losses in connection with guarantees of independents’ and affiliates’ borrowings and the
current expected credit loss reserve is not material. As of June 30, 2023, 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 June 30, 2023, we have recognized certain assets and liabilities amounting to $68 million 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 our noncontingent obligation to stand ready to perform under the guarantee programs and they are distinct from our current expected credit loss reserve.
Supply Chain Finance Programs
Several global financial institutions offer voluntary supply chain finance (“SCF”) programs which enable our suppliers (generally those that grant extended terms), at their sole discretion, to sell their receivables from us 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. We 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. Our current payment terms with the majority of our suppliers range from 30 to 360 days. The suppliers sell goods or services, as applicable, to us and they issue the associated invoices to us 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 us or any of our subsidiaries on third-party performance under the SCF program; however, we guarantee 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 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 consolidated statement of cash flows. As of June 30, 2023 and December 31, 2022, the outstanding payment obligations to the financial institutions are $2.9 billion and $3.1 billion, respectively. The amount settled through the SCF program was $2.1 billion and $1.8 billion for the six months ended June 30, 2023 and June 30, 2022 respectively.
Earnings Per Share
We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding. Certain outstanding options are not included in the diluted earnings per share calculation because their inclusion would have been anti-dilutive. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation are not material.
The following table summarizes basic and diluted shares outstanding:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except per share data)
2023
2022
2023
2022
Net income
$
344,494
$
372,529
$
648,451
$
618,367
Weighted average common shares outstanding
140,574
141,581
140,688
141,747
Dilutive effect of stock options and non-vested restricted stock awards
673
723
808
835
Weighted average common shares outstanding – assuming dilution
Beginning in 2023, certain functions, including cybersecurity and the management of our product liability litigation, were transferred to corporate to be streamlined and centrally managed. These costs totaled $15 million and $29 million for the three and six months ended June 30, 2022, of which $9 million and $18 million were allocated to Automotive and $6 million and $11 million were allocated to Industrial based on several factors, including sales volumes and headcount. Beginning in 2023, these costs, which totaled $8 million and $18 million for the three and six months ended June 30, 2023, are no longer allocated to our segments when measuring their operating performance. We have not restated the 2022 comparative segment financial information.
Net sales are disaggregated by geographical region for each of our reportable segments, as we deem 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 June 30,
Six Months Ended June 30,
(in thousands)
2023
2022
2023
2022
North America:
Automotive
$
2,344,701
$
2,302,008
$
4,550,086
$
4,432,881
Industrial
2,128,747
2,021,297
4,259,462
3,931,730
Total North America
$
4,473,448
$
4,323,305
$
8,809,548
$
8,364,611
Australasia:
Automotive
$
407,853
$
398,940
$
814,615
$
777,849
Industrial
131,260
113,623
259,836
222,204
Total Australasia
$
539,113
$
512,563
$
1,074,451
$
1,000,053
Europe – Automotive
$
902,445
$
766,546
$
1,796,125
$
1,532,385
Total net sales
$
5,915,006
$
5,602,414
$
11,680,124
$
10,897,049
3. Accounts Receivable Sales Agreement
Under our accounts receivable sales agreement (the "A/R Sales Agreement"), we continuously sell designated pools of receivables as they are originated by us and certain U.S. subsidiaries to a separate bankruptcy-remote special purpose entity (“SPE”). The A/R Sales Agreement has a three-year term, which we intend to renew.
We continue to be involved with the receivables transferred by the SPE to the unaffiliated financial institutions 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 institutions so that the total principal amount outstanding of receivables sold is approximately $1.0 billion at any point in time (which is the maximum amount allowed under the agreement as amended on January 3, 2022).
The total principal amount outstanding of receivables sold is approximately $1.0 billion as of both June 30, 2023 and December 31, 2022. The amount of receivables pledged as collateral as of June 30, 2023 and December 31, 2022 is approximately $1.4 billion and $1.1 billion, respectively.
The following table summarizes the activity and amounts outstanding under the A/R Sales Agreement for the:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2023
2022
2023
2022
Receivables sold to the financial institution and derecognized
$
2,139,392
$
2,242,273
$
4,304,799
$
4,478,718
Cash collected on sold receivables
$
2,139,393
$
2,242,274
$
4,304,804
$
4,278,729
Continuous cash activity related to the A/R Sales Agreement is reflected in net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The SPE incurs fees due to the unaffiliated financial institutions related to the accounts receivable sales transactions. Those fees, which totaled $15 million and $4 million for the three months ended and $29 million and $7 million for the six months ended June 30, 2023 and 2022, respectively, are recorded within other non-operating expense (income) in the Condensed Consolidated Statements of Income. The SPE has a recourse obligation to repurchase from the unaffiliated financial institutions 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 June 30, 2023 and December 31, 2022 is not material. The servicing liability related to our collection services also is not material, given the high quality of the customers underlying the receivables and the anticipated short collection period.
4. Employee Benefit Plans
Net periodic benefit income from our pension plans included the following components for our pension benefits:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2023
2022
2023
2022
Service cost
$
1,503
$
2,586
$
2,997
$
5,202
Interest cost
26,136
18,849
52,253
37,716
Expected return on plan assets
(41,263)
(37,646)
(82,503)
(75,318)
Amortization of prior service cost
173
172
346
344
Amortization of actuarial loss
2,340
9,275
4,681
18,554
Net periodic benefit income
$
(11,111)
$
(6,764)
$
(22,226)
$
(13,502)
Service cost is recorded in selling, administrative and other expenses in the Condensed Consolidated Statements of Income while all other components are recorded within other non-operating expense (income). Pension benefits also include amounts related to supplemental retirement plans.
5. Acquisitions
We acquired several businesses for approximately $116 million and $1.6 billion, net of cash acquired, during the six months ended June 30, 2023 and 2022, respectively. For each acquisition, we allocate the purchase price to the assets acquired and the liabilities assumed based on their fair values as of their respective acquisition dates. The results of operations for acquired businesses are included in our Condensed Consolidated Statements of Income beginning on their respective acquisition dates.
KDG Acquisition
On January 3, 2022, we, through our wholly-owned subsidiary, Motion Industries, Inc., acquired all of the equity interests in KDG for a purchase price of approximately $1.3 billion in cash, net of cash acquired of approximately $30 million. KDG, which is headquartered in Bloomfield, Connecticut, is a power transmission, automation and fluid power industrial distributor and solutions provider with operations throughout the United States, providing electro-mechanical products, bearings, power transmission, motion control and electrical and fluid power components to maintenance, repair, and operation and original equipment manufacturer customers.
6. Accumulated Other Comprehensive Loss
The following tables present the changes in AOCL by component for the six months ended June 30:
Changes in Accumulated Other Comprehensive Loss by Component
(in thousands)
Pension and Other Post-Retirement Benefits
Cash Flow Hedges
Foreign Currency Translation
Total
Beginning balance, January 1, 2023
$
(506,610)
$
(2,572)
$
(523,360)
$
(1,032,542)
Other comprehensive income before reclassifications
—
2,765
14,287
17,052
Amounts reclassified from accumulated other comprehensive loss
Changes in Accumulated Other Comprehensive Loss by Component
(in thousands)
Pension and Other Post-Retirement Benefits
Cash Flow Hedges
Foreign Currency Translation
Total
Beginning balance, January 1, 2022
$
(463,227)
$
(15,042)
$
(379,470)
$
(857,739)
Other comprehensive loss before reclassifications
—
—
(116,946)
(116,946)
Amounts reclassified from accumulated other comprehensive loss
13,975
7,482
—
21,457
Other comprehensive income (loss), net of income taxes
13,975
7,482
(116,946)
(95,489)
Ending balance, June 30, 2022
$
(449,252)
$
(7,560)
$
(496,416)
$
(953,228)
The AOCL components related to the pension benefits are included in the computation of net periodic benefit income in the Employee Benefit Plans Footnote. Generally, tax effects in AOCL are established at the currently enacted tax rate and reclassified to net income in the same period that the related pre-tax AOCL reclassifications are recognized.
7. Commitments and Contingencies
Legal Matters
We are subject to various legal proceedings, many involving routine litigation incidental to the businesses, including approximately 2,200 pending product liability lawsuits resulting from our national distribution of automotive parts and supplies. Many of these involve claims of personal injury allegedly resulting from the use of automotive parts we distributed. The amount accrued for pending and future claims was $208 million as of June 30, 2023, which represents our best estimate of the liability within our calculated range of $182 million to $257 million, discounted using a discount rate of 3.81%. The amount accrued for pending and future claims was $220 million as of December 31, 2022, which represents our best estimate of the liability within our calculated range of $190 million to $270 million, discounted using a discount rate of 3.83%. Our undiscounted product liability was $266 million and $285 million as of June 30, 2023 and December 31, 2022, respectively. There have been no significant developments to the information presented in our 2022 Annual Report on Form 10-K with respect to litigation or commitments and contingencies.
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 we reasonably believe will exceed an applied threshold not to exceed $1 million. Applying this threshold, there are no environmental matters to disclose for this period.
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, 2022. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of results for the year ended December 31, 2023.
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 view of business and economic trends for the remainder of the year and our expectations regarding our ability to capitalize on these business and economic trends and to execute our strategic priorities. 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, changes in general economic conditions, including unemployment, inflation (including the impact of tariffs) or deflation, financial institution disruptions and geopolitical conflicts such as the conflict between Russia and Ukraine; volatility in oil prices; significant cost increases, such as rising fuel and freight expenses; public health emergencies such as 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; 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, our suppliers and customers; changes in tax policies; volatile exchange rates; 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 2022 Annual Report on Form 10-K 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 ("Automotive") operates in the U.S., Canada, Mexico, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia and New Zealand, and accounted for 61% of total revenues for the six months ended June 30, 2023. Our Industrial Parts Group ("Industrial") operates in the U.S., Canada, Mexico, Australia, New Zealand, Indonesia and Singapore, and accounted for 39% of our total revenues for the six months ended June 30, 2023.
We consider a variety of performance and financial measures in assessing our business, and the key performance indicators used to measure our results are Comparable Sales, Gross Profit and Gross Margin, Selling, Administrative and Other Expenses ("SG&A"), Segment Profit and Segment Margin, as well as Net Income and EBITDA along with their adjusted measures. For more information regarding our key performance indicators please reference the 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, 2022.
Results of Operations
Our revenues grew 5.6% compared to the three months ended June 30, 2022, which reflects continued solid overall customer demand as well as the ongoing benefits of our business mix and geographic diversity. Our revenue growth and gross margin expansion, which reflect the benefits of our strategic pricing and sourcing initiatives, helped drive a 60 basis point improvement in total segment margin, led by our Industrial segment, with sales and segment profit up 5.9% and 25.7%, respectively. Our results for the three and six months ended June 30, 2022 includes income of $77 million and $51 million, respectively, which primarily related to the net benefit of a gain on sale of real estate and KDG acquisition costs.
Our results of operations are summarized below for the three months ended June 30, 2023 and 2022.
Our results of operations are summarized below for the six months ended June 30, 2023 and 2022.
Six Months Ended June 30,
2023
2022
(in thousands)
$
% of Sales
$
% of Sales
$ Change
% Change
Net sales
$
11,680,124
100.0
%
$
10,897,049
100.0
%
$
783,075
7.2
%
Cost of goods sold
7,531,980
64.5
%
7,110,303
65.2
%
421,677
5.9
%
Gross profit
4,148,144
35.5
%
3,786,746
34.8
%
361,398
9.5
%
Operating expenses:
Selling, administrative and other expenses
3,092,897
26.5
%
2,767,994
25.4
%
324,903
11.7
%
Depreciation and amortization
178,088
1.5
%
173,259
1.6
%
4,829
2.8
%
Provision for doubtful accounts
13,961
0.1
%
7,393
0.1
%
6,568
88.8
%
Total operating expenses
3,284,946
28.1
%
2,948,646
27.1
%
336,300
11.4
%
Non-operating expense (income):
Interest expense, net
33,319
0.3
%
40,098
0.4
%
(6,779)
(16.9)
%
Other
(28,616)
(0.2)
%
(19,281)
(0.2)
%
(9,335)
48.4
%
Total non-operating expense (income)
4,703
—
%
20,817
0.2
%
(16,114)
(77.4)
%
Income before income taxes
858,495
7.4
%
817,283
7.5
%
41,212
5.0
%
Income taxes
210,044
1.8
%
198,916
1.8
%
11,128
5.6
%
Net income
$
648,451
5.6
%
$
618,367
5.7
%
$
30,084
4.9
%
Six Months Ended June 30,
(in thousands, except per share data)
2023
2022
$ Change
% Change
Diluted EPS
$
4.58
$
4.34
$
0.24
5.5
%
Total adjusted EBITDA
$
1,069,902
$
979,823
$
90,079
9.2
%
Automotive segment profit
$
593,767
$
587,126
$
6,641
1.1
%
Industrial segment profit
$
545,359
$
413,825
$
131,534
31.8
%
Total segment profit
$
1,139,126
$
1,000,951
$
138,175
13.8
%
Automotive segment margin
8.3
%
8.7
%
Industrial segment margin
12.1
%
10.0
%
Total segment margin
9.8
%
9.2
%
Net Sales
Our net sales for the three months ended June 30, 2023 increased 5.6% compared to the same period of the prior year. The increase in sales is attributable to a 4.9% increase in comparable sales and a 1.8% benefit from acquisitions, partially offset by a net unfavorable impact of foreign currency and other of 1.1%.
Our net sales for the six months ended June 30, 2023 increased 7.2% compared to the same period of the prior year. The increase in sales is attributable to a 6.8% increase in comparable sales and a 2.1% benefit from acquisitions, partially offset by a net unfavorable impact of foreign currency and other 1.7%.
Solid customer demand in Industrial and our international automotive businesses combined with a favorable pricing environment were the primary drivers of our comparable sales growth. Both segments also experienced the ongoing benefits of strategic pricing initiatives and acquisitions completed in prior periods.
Automotive
Net sales for Automotive were $3.7 billion for the three months ended June 30, 2023, an increase of 5.4%, compared to the same period in the prior year. The increase for the three months ended June 30, 2023 consisted of a 4.3% increase in comparable sales and a 2.6% benefit from acquisitions, offset by a 1.5% unfavorable impact of foreign currency and other.
Net sales for Automotive were $7.2 billion for the six months ended June 30, 2023, an increase of 6.2%, compared to the same period in the prior year. The increase for the six months ended June 30, 2023 consisted of a 5.4% increase in comparable sales and a 3.0% benefit from acquisitions, offset by a 2.2% unfavorable impact of foreign currency and other.
Net sales growth was primarily driven by continued solid demand for automotive parts in Europe and Australasia and a continued favorable pricing environment in all regions due to elevated inflation in product costs. We also continue to benefit from acquisitions, such as our entry into new markets in Spain and Portugal midway through the second quarter of 2022. These benefits were partially offset by the unfavorable impact of foreign exchange rates, primarily related to Australia and Canada.
Industrial
Net sales for Industrial were $2.3 billion, an increase of 5.9% for the three months ended June 30, 2023 compared to the same period in 2022. The increase reflects a 6.0% increase in comparable sales and a 0.6% benefit from acquisitions, slightly offset by a 0.7% unfavorable impact of foreign currency compared to the same period in 2022.
Net sales for Industrial were $4.5 billion, an increase of 8.8% for the six months ended June 30, 2023 compared to the same period in 2022. The increase reflects a 9.0% increase in comparable sales and a 0.6% from acquisitions, slightly offset by a 0.8% unfavorable impact of foreign currency compared to the same period in 2022.
Our growth in comparable sales reflects the positive impact of our ongoing sales and pricing initiatives and continued solid growth in many of the industry segments we serve. All industries in North America improved over the prior year period and many experienced double-digit growth, with the largest impact in food products, iron and steel, and pulp and paper. We attribute part of our sales growth to the diversification of our products and service offerings, and ongoing benefits from the KDG acquisition, including enhanced capabilities in industrial solutions, such as automation and robotic solutions, fluid power and conveyance.
Gross Profit and Gross Margin
Gross profit for the three months ended June 30, 2023, increased $174 million, or approximately 8.9%, compared to the same period in the prior year. Gross margin increased 110 basis points to 36.1% for the three months ended June 30, 2023. Gross profit for the six months ended June 30, 2023 increased $361 million or 9.5% compared to the same period in prior year. Gross margin increased 70 basis points to 35.5% for the six months ended June 30, 2023.
Gross profit increases for the quarter and for the year-to-date periods were primarily driven by the increases in net sales and expanded gross margins. Gross margin improvements for the periods reflect the positive contributions of our strategic pricing and sourcing initiatives.
Operating Expenses
SG&A expenses represent 26.7% of sales for the three months ended June 30, 2023, an increase of 240 basis points from 24.3% in the second quarter of 2022. SG&A expenses represent 26.5% for the six months ended June 30, 2023, an increase of 110 basis points from 25.4% in the first half of 2022. SG&A expenses as a percentage of sales for the three and six months ended June 30, 2022 include income of $77 million and $51 million, respectively, which primarily related to the net benefit of a gain on sale of real estate offset by KDG acquisition costs. Excluding those effects, SG&A expense as a percent of sales increased 100 basis points and 60 basis points for the three and six month periods ended June 30, 2023, respectively. The increases are primarily driven by increased personnel costs due to wage inflation, and global investments in information technology to support our ongoing strategic initiatives.
Segment Profit
Beginning in 2023, certain functions, including cybersecurity and the management of our product liability litigation, were transferred to corporate to be streamlined and centrally managed. These costs totaled $15 million and $29 million for the three and six months ended June 30, 2022, of which $9 million and $18 million were allocated to Automotive and $6 million and $11 million were allocated to Industrial based on several factors, including sales volumes and headcount. Beginning in 2023, these costs, which totaled $8 million and $18 million for the three and six months ended June 30, 2023, are no longer allocated to our segments when measuring their operating performance. We have not restated the 2022 comparative segment profit financial information.
Automotive segment profit for the three months ended June 30, 2023, increased 2.1% compared to the same period in 2022. Automotive segment margin decreased 30 basis points to 9.0% for the three months ended June 30, 2023. For the six months ended June 30, 2023, Automotive segment profit increased 1.1% compared to the same period in the prior year, and Automotive segment margin decreased 40 basis points to 8.3% for the same period in 2022. Global Automotive segment profit was negatively impacted by lower than expected sales in the U.S. combined with higher wages and investments in information technology.
Industrial
Industrial segment profit increased 25.7% and 31.8% for the three and six months ended June 30, 2023 compared to the same periods in 2022. For the three and six months ended June 30, 2023, Industrial segment margin increased 190 basis points and 210 basis points to 12.5% and 12.1%, respectively, when compared to the same periods in the previous year. The improved Industrial segment margin is primarily due to strong sales growth and our continued focus on leveraging expenses and executing supply chain initiatives as well as other strategic initiatives in areas such as category management and pricing.
Income Taxes
Our effective income tax rate for the three month period ended June 30, 2023 was 24.1% compared to 24.2% for the same period in 2022. The rate decrease is primarily due to excess tax stock compensation benefits.
Our effective income tax rate for the six months ended June 30, 2023 was 24.5% compared to 24.3% for the same period in 2022. The rate increase for the six month period is primarily related to one-time adjustments reducing the 2022 comparative rate. The full year estimated effective tax rate is expected to be between 24.4% and 24.8%.
Net Income
For the three months ended June 30, 2023, net income was $344 million, a decrease of 7.5% compared to net income of $373 million for the same three month period in the prior year. On a per share diluted basis, net income was $2.44, a decrease of 6.9% compared to $2.62 for the same period in 2022. Our results for the three months ended June 30, 2022 include income of $77 million, which primarily related to the net benefit of a gain on sale of real estate and KDG acquisition costs. Excluding these amounts, on an adjusted basis, net income increased 10.0% compared to $313 million for the same period in the prior year. On an adjusted per share diluted basis, net income increased 10.9% compared to $2.20 for the same period in 2022.
For the six months ended June 30, 2023, net income was $648 million, an increase of 4.9% compared to net income of $618 million for the same six month period in the prior year. On a per share diluted basis, net income was $4.58, an increase of 5.5% compared to $4.34 for the same period in 2022. Our results for the six months ended June 30, 2022 include income of $51 million, which primarily related to the net benefit of a gain on sale of real estate and KDG acquisition costs. Excluding these amounts, on an adjusted basis, net income increased 12.0% compared to $579 million for the same period in the prior year. On an adjusted per share diluted basis, net income increased 12.8% compared to $4.06 for the same period in 2022.
For the three months ended June 30, 2023, adjusted EBITDA was $561 million, an increase of 7.8% from $521 million for the same three month period in the prior year. For the six months ended June 30, 2023, adjusted EBITDA was $1.1 billion, an increase of 9.2% from $980 million for the same six month period in the prior year.
The growth in these metrics in all periods presented reflects the strong operating results, primarily in our Industrial segment, driven by solid sales growth and the continued execution of our strategic pricing and other initiatives, as discussed more fully in the commentary above.
Non-GAAP Financial Measures
Adjusted net income, adjusted diluted EPS and adjusted EBITDA are non-GAAP measures (see table below for reconciliations to the most directly comparable GAAP measures).
The following tables set forth reconciliations of net income and diluted EPS to adjusted net income and adjusted diluted EPS, respectively, to account for the impact of adjustments. We also include a reconciliation from segment profit to segment EBITDA and adjusted EBITDA. We believe that the presentation of adjusted net income, adjusted diluted EPS, and adjusted EBITDA, 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 our 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. In the case of adjusted EBITDA by Segment, we believe this additional metric is useful to investors as it provides further insight into the performance of our segments. We believe the non-GAAP metrics included herein also enhance the comparability of our results from period to period and with our competitors, as well as to 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 investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2023
2022
2023
2022
GAAP net income
$
344,494
$
372,529
$
648,451
$
618,367
Adjustments:
Gain on sale of real estate (1)
—
(102,803)
—
(102,803)
Gain on insurance proceeds (2)
—
(873)
—
(1,507)
Transaction and other costs (3)
—
26,944
—
53,493
Total adjustments
—
(76,732)
—
(50,817)
Tax impact of adjustments
—
17,291
—
11,187
Adjusted net income
$
344,494
$
313,088
$
648,451
$
578,737
The table below represent amounts per common share assuming dilution:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except per share data)
2023
2022
2023
2022
GAAP diluted earnings per share
$
2.44
$
2.62
$
4.58
$
4.34
Adjustments:
Gain on sale of real estate (1)
—
(0.72)
—
(0.72)
Gain on insurance proceeds (2)
—
(0.01)
—
(0.02)
Transaction and other costs (3)
—
0.19
—
0.38
Total adjustments
—
(0.54)
—
(0.36)
Tax impact of adjustments
—
0.12
—
0.08
Adjusted diluted earnings per share
$
2.44
$
2.20
$
4.58
$
4.06
Weighted average common shares outstanding – assuming dilution
141,247
142,304
141,496
142,582
(1) Adjustment reflects a gain on the sale of real estate that had been leased to S.P. Richards.
(2) Adjustment reflects insurance recoveries in excess of losses incurred on inventory, property, plant and equipment and other fire-related costs.
(3) Adjustment primarily reflects costs associated with the January 3, 2022 acquisition of Kaman Distribution Group.
(2) These represent costs for certain functions, including cybersecurity and product liability litigation that were transferred to Corporate beginning in 2023 to be streamlined and centrally managed. We presented the 2022 comparative period to reflect how management manages these costs in 2023 and going forward.
Financial Condition
Our cash balance was $530 million as of June 30, 2023, a decrease of $123 million from December 31, 2022. For the six months ended June 30, 2023, we had net cash provided by operating activities of $457 million, net cash used in investing activities of $226 million and net cash used in financing activities of $358 million.
The cash provided by operating activities decreased $334 million compared to the prior year period. The six months ended June 30, 2022 received a $200 million benefit because we increased the facility limit of our A/R Sales Agreement. The remaining decrease is due to other net working capital changes primarily due to an increase of approximately 2 days in our day sales outstanding as a result of challenging economic conditions.
We had $226 million in net cash used for investing activities, primarily for capital expenditures and acquisitions, and other investing activities of $311 million, partially offset by $80 million related to cash proceeds from the sale of our remaining investment in S.P. Richards and other investments. The financing activities consisted primarily of $260 million for dividends paid to our shareholders and $135 million of stock repurchases. Total debt of $3.4 billion at June 30, 2023 increased $75 million, or 2.3%, from December 31, 2022.
Liquidity and Capital Resources
We ended the quarter with $2.0 billion of total liquidity (comprising $1.4 billion availability on the revolving credit facility and $530 million 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 our ongoing operating activities and our anticipated cash commitments for investing and financing activities, such as capital expenditures and potential acquisitions, future debt obligations, and dividends.
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.
We expect to be able to continue to borrow funds at reasonable rates over the long term. At June 30, 2023, our total average cost of debt was 2.39%, and we remain in compliance with all covenants connected with our borrowings.
On March 14, 2023, we entered into a second amendment to our syndicated facility agreement dated October 30, 2020 to replace the benchmark rate, the 1-month London Inter Bank Offered Rate, with the 1-month Secured Overnight Financing Rate for borrowings denominated in U.S. Dollar.
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.
On February 21, 2023, we announced a 6% increase in the regular quarterly cash dividend for 2023. Our Board of Directors increased the cash dividend payable to an annual rate of $3.80 per share compared with the prior year dividend of $3.58 per share. We have paid a cash dividend every year since going public in 1948, and 2023 marks the 67th consecutive year of increased dividends paid to shareholders.
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 2022 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2022.
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 our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our 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 us in the reports that we file or furnish 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 our 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 our 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 our last quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information with respect to our legal proceedings may be found in the Commitments and Contingencies Footnote in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
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 2022 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 purchases of shares of our common stock during the three months ended June 30, 2023:
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
April 1, 2023 through April 30, 2023
86,072
$165.86
82,652
9,799,340
May 1, 2023 through May 31, 2023
427,874
$159.30
295,677
9,503,663
June 1, 2023 through June 30, 2023
54,975
$155.40
51,244
9,452,419
Totals
568,921
$159.92
429,573
9,452,419
(1)Includes shares surrendered by employees to satisfy tax withholding obligations in connection with the vesting of shares of restricted stock, the exercise of share appreciation rights and/or tax withholding obligations.
(2)On August 21, 2017, the Board of Directors announced that it had authorized the repurchase of 15 million shares. The authorization for the repurchase continues until all such shares have been repurchased or the repurchase plan is terminated by action of the Board of Directors. Approximately 9.5 million shares authorized remain available to be repurchased. There were no other repurchase plans announced as of June 30, 2023.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended June 30, 2023, none of the Company’s directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
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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: July 20, 2023
/s/ Bert Nappier
Bert Nappier
Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)
