The following tables present the changes in accumulated other comprehensive loss by component for the ninesix months ended SeptemberJune 30:
The accumulated other comprehensive loss components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote.
|
| | | | | | | | |
| | Pension Benefits |
| | 2019 | | 2018 |
Service cost | | $ | 2,379 |
| | $ | 2,612 |
|
Interest cost | | 24,335 |
| | 22,071 |
|
Expected return on plan assets | | (38,507 | ) | | (38,516 | ) |
Amortization of prior service credit | | (17 | ) | | (37 | ) |
Amortization of actuarial loss | | 7,746 |
| | 9,935 |
|
Net periodic benefit income | | $ | (4,064 | ) | | $ | (3,935 | ) |
|
| | | | | | | |
| Pension Benefits |
| 2017 | | 2016 |
| (in thousands) |
Service cost | $ | 2,240 |
| | $ | 2,106 |
|
Interest cost | 24,243 |
| | 26,195 |
|
Expected return on plan assets | (38,061 | ) | | (39,296 | ) |
Amortization of prior service credit | (88 | ) | | (108 | ) |
Amortization of actuarial loss | 9,549 |
| | 7,860 |
|
Net periodic benefit income | $ | (2,117 | ) | | $ | (3,243 | ) |
Net periodic benefit income forfrom the Company's pension plans included the following components for the ninesix months ended SeptemberJune 30:
|
| | | | | | | | |
| | Pension Benefits |
| | 2019 | | 2018 |
Service cost | | $ | 4,769 |
| | $ | 5,266 |
|
Interest cost | | 48,683 |
| | 44,184 |
|
Expected return on plan assets | | (77,034 | ) | | (77,104 | ) |
Amortization of prior service credit | | (34 | ) | | (74 | ) |
Amortization of actuarial loss | | 15,495 |
| | 19,894 |
|
Net periodic benefit income | | $ | (8,121 | ) | | $ | (7,834 | ) |
|
| | | | | | | |
| Pension Benefits |
| 2017 | | 2016 |
| (in thousands) |
Service cost | $ | 6,530 |
| | $ | 6,257 |
|
Interest cost | 72,474 |
| | 78,505 |
|
Expected return on plan assets | (117,475 | ) | | (117,767 | ) |
Amortization of prior service credit | (263 | ) | | (324 | ) |
Amortization of actuarial loss | 28,500 |
| | 23,530 |
|
Net periodic benefit income | $ | (10,234 | ) | | $ | (9,799 | ) |
Service cost is recorded in selling, administrative and other expenses in the condensed consolidated statements of income and comprehensive income while all other components are recorded within other non-operating expenses (income). Pension benefits also include amounts related to a supplemental retirement plan. During the nine months ended September 30, 2017, the Company made a $38.7 million contribution to the pension plan.plans.
Note H –6. Guarantees
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, including a maximum debt to capitalization ratio and certain limitations on additional borrowings. At SeptemberJune 30, 2017,2019, the Company was in compliance with all such covenants.
At SeptemberAs of June 30, 2017,2019, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $554.2 million.$841,319. These loans generally mature over periods from one to six years. In the event that the Company is required to make payments in connection with guaranteed obligations of the independents or the affiliates,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 portion of the amounts paid under the guarantees. When it is deemed probable that the Company will incur a loss in connection with a guarantee, a liability is recorded equal to this estimated loss. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.
As of SeptemberJune 30, 2017,2019, the Company has recognized certain assets and liabilities amounting to $59.0 million$84,000 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.
Note I –7. Fair Value of Financial Instruments
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 and term loan approximate their respective fair values based on the short-term nature of these instruments. At SeptemberAs of June 30, 2017,2019, the carrying valueamount, net of debt issuance costs, and the fair value of fixed rate debt were approximately $550.0 million$1,961,850 and $563.6 million,$2,038,652, respectively. The fair value of fixed rate debt is designated as Level 2 in the fair value hierarchy (i.e., significant observable inputs) and is based primarily on the discounted value of future cash flows using current market interest rates offered for debt of similar credit risk and maturity. The carrying valueamount, net of debt issuance costs, of fixed rate debt of $550.0 million$1,961,850 is included in long-term debt in the accompanying condensed consolidated balance sheets.
8. Credit Facilities
On May 31, 2019, the Company entered into a private placement agreement of €250,000 long-term fixed rate debt. The €250,000 of long-term fixed rate debt includes €50,000, 1.55% Series A Guaranteed Senior Note J –maturing on May 31, 2029, €100,000, 1.74% Series B Guaranteed Senior Note maturing on May 31, 2031 and €100,000, 1.95% Series C Guaranteed Senior Note maturing on May 31, 2034.
On June 30, 2019, the Company entered into a private placement agreement of Australian dollar ("A$") denominated long-term fixed rate debt of A$310,000. The A$310,000 of long-term fixed rate debt includes A$155,000, 3.10% Series A Guaranteed Senior Note maturing on June 30, 2024 and A$155,000, 3.43% Series B Guaranteed Senior Note maturing on June 30, 2026.
All borrowings require the Company to comply with a financial covenant with respect to a maximum debt to EBITDA ratio. At June 30, 2019, the Company was in compliance with all such covenants. For information on the Company's other credit facilities please see the Company's 2018 Annual Report on Form 10-K.
9. 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. This process includes linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. 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 July 2018 and February 2019, the Company entered into interest rate swaps to mitigate variability in forecasted interest payments on $500,000 and $300,000, respectively, of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swaps as qualifying hedging instruments and accounts for these derivatives as cash flow hedges. The fair values of the interest rate cash flow hedges were not material as of June 30, 2019. Gains or losses related to the interest rate cash flow hedges were not material during the three and six months ended June 30, 2019.
Hedges of Net Investments in Foreign Operations
In July 2018, concurrent with the cash flow hedge described above, the Company entered into a cross-currency interest rate swap agreement to effectively convert $500,000 of the U.S. dollar-denominated unsecured variable rate debt to fixed-rate Euro-denominated debt. In February 2019, the Company terminated the cross-currency interest rate swap agreement and entered into a forward contract to effectively convert $800,000 of the U.S. dollar-denominated unsecured debt to Euro-denominated debt. No gains or losses were recognized at termination. The risk management objective of these transactions is to manage foreign currency risk relating to a European subsidiary and reduce the variability in the functional currency equivalent cash flows of the unsecured variable rate debt. The Company designated the instruments as qualifying hedging instruments and accounts for these derivatives as a hedge of the foreign currency exchange rate exposure of an equal amount of the Company's Euro-denominated net investment in a European subsidiary. The fair value of the forward currency hedge was not material as of June 30, 2019. Gains or losses related to the cross-currency interest rate swap and the forward contract were not material during the three and six months ended June 30, 2019.
As of June 30, 2019, the Company also had designated €700,000 of the face value of Euro-denominated debt, a non-derivative financial instrument, as a hedge of the foreign currency exchange rate exposure of an equal amount to the Company's Euro-denominated net investment in a European subsidiary. As of June 30, 2019, the Euro-denominated debt had a total carrying amount of $795,900, which is included in long-term debt in the Company’s condensed consolidated balance sheets. For the three months ended June 30, 2019, the Company recorded a loss, net of tax, of approximately $7,716, and for the six months ended June 30, 2019, the Company recorded a gain, net of tax, of approximately $3,730. For the three and six months ended June 30, 2018, the Company recorded a gain, net of tax, of approximately $32,755 and $16,045, respectively. These amounts are recorded in the cash flow and net investment hedges section of accumulated other comprehensive loss in the Company’s condensed consolidated statements of income and comprehensive income.
The Company did not reclassify any gains or losses related to net investment hedges from accumulated other comprehensive loss into earnings during the three or six months ended June 30, 2019. Amounts would only be reclassified into earnings if the European subsidiary were liquidated, or otherwise disposed.
10. Leased Properties
The Company primarily leases real estate for certain retail stores, distribution centers, office space and land. The Company also leases equipment (primarily vehicles).
Most real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term from one to 20 years. The exercise of lease renewal options is at the Company's discretion. The Company evaluates renewal options at lease inception and on an ongoing basis, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
The table below presents the operating lease assets and liabilities recognized on the condensed consolidated balance sheets as of June 30, 2019:
|
| | | | | | |
| | Balance Sheet Line Item | | June 30, 2019 |
Operating lease assets | | Operating lease assets | | $ | 961,975 |
|
| | | | |
Operating lease liabilities: | | | | |
Current operating lease liabilities | | Other current liabilities | | $ | 223,370 |
|
Noncurrent operating lease liabilities | | Operating lease liabilities | | 724,682 |
|
Total operating lease liabilities | | | | $ | 948,052 |
|
The depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term.
The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company's weighted average remaining lease term and weighted average discount rate for operating leases as of June 30, 2019 are:
|
| | |
Weighted average remaining lease term (in years) | | 5.47 |
Weighted average discount rate | | 3.49% |
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the condensed consolidated balance sheets as of June 30, 2019:
|
| | | |
July 1, 2019 through December 31, 2019 | $ | 144,705 |
|
2020 | 263,440 |
|
2021 | 200,553 |
|
2022 | 147,423 |
|
2023 | 101,241 |
|
Thereafter | 219,101 |
|
Total undiscounted future minimum lease payments | 1,076,463 |
|
Less: Difference between undiscounted lease payments and discounted operating lease liabilities | 128,411 |
|
Total operating lease liabilities | $ | 948,052 |
|
Operating lease payments include $22,200 related to options to extend lease terms that are reasonably certain of being exercised.
Operating lease costs were $76,899 and $157,386 for the three and six months ended June 30, 2019, respectively. Operating lease costs are included within selling, administrative and other expenses on the condensed consolidated statements of income and comprehensive income. Short-term lease costs, variable lease costs and sublease income were not material for the periods presented.
Cash paid for amounts included in the measurement of operating lease liabilities were $150,882 for the six months ended June 30, 2019, and this amount is included in operating activities in the condensed consolidated statements of cash flows. Operating lease assets obtained in exchange for new operating lease liabilities were $113,771 for the six months ended June 30, 2019.
11. Legal Matters
On April 17, 2017,As more fully discussed in the legal matter footnote of the Company's notes to the consolidated financial statements in its 2018 Annual Report on Form 10-K, a jury awarded damages against the Company of $81.5 million in a litigated automotive product liability dispute.Through post-trial motions and offsets from previous settlements, the initial verdict has been reduced to $77.1 million. The Company believes the verdict is not supported by the facts or the law and is contrary to the Company’s role in the automotive parts industry.
The Company intends to challenge the verdict through further post-trial motions and on appeal to a higher court. At the time of the filing of these financial statements, based upon the Company’s legal defenses, insurance coverage, and reserves, the Company does not believe this matter will have a material impact to the condensed consolidated financial statements.
Note K –12. Acquisitions and Equity InvestmentsDivestitures
DuringAcquisitions
The Company acquired several businesses for approximately $378,744, net of cash acquired, during the ninesix months ended SeptemberJune 30, 2017,2019. These included Hennig Fahrzeugteile Group, Parts Point Group and several bolt-on acquisitions in the Automotive Parts Group and Axis New England and Axis New York in the Industrial Parts Group.
The Company has recognized the preliminary, estimated fair values of the assets acquired and liabilities assumed at the acquisition dates for these businesses. Additional adjustments may be made to the acquisition accounting during the measurement period primarily related to intangible asset revaluations, tax accounting and leases.
As a subsequent event, in July 2019, the Company acquired certain companiesseveral businesses including the remaining 65% equity investment in Inenco Group ("Inenco"). Inenco is one of Australasia's leading industrial distributors of key product categories such as bearings, power transmission and seals and it generates estimated annual revenues of approximately $400 million. Inenco is a part of the Industrial Parts Group.
Divestitures
Grupo Auto Todo
On March 7, 2019, the Company sold all of the equity investments forof Grupo Auto Todo, a Mexican subsidiary within the Automotive Parts Group. Grupo Auto Todo contributed approximately $266.4 million. The Company recognized and measured the assets and liabilities assumed based on their fair values as$93,000 of their respective acquisition dates. The results of operations revenues for the acquired companies wereyear ended December 31, 2018. The Company
incurred realized currency losses of $27,037 from this transaction during the six months ended June 30, 2019. The realized currency losses are included in the Company’sline item "other" within non-operating expenses (income) on the condensed consolidated statements of income beginningand comprehensive income.
13. Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentations.
14. 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 2018 Annual Report on their respective acquisition dates. TheForm 10-K, the Company recorded approximately $105.4 millionmaintains various long-term incentive plans, which provide for the granting of goodwillstock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalents and other intangible assets associated withshare-based awards. Options to purchase approximately 247 and 135 shares of common stock were outstanding but excluded from the acquisitions. The Company is incomputations of diluted earnings per share for the processthree and six month periods ended June 30, 2019, respectively, as compared to approximately 2,098 and 1,445 for the three and six month periods ended June 30, 2018, respectively. These options were excluded from the computations of analyzingdiluted net income per common share because the estimated values of assets and liabilities acquired and is obtaining third-party valuations of certain tangible and intangible assets. The allocationsoptions’ exercise prices were greater than the average market price of the respective purchase prices are therefore preliminary and subject to revision. Additional disclosure of the Inenco investment is provided below.common stock.
Effective April 3, 2017, the Company acquired a 35% investment in the Inenco Group for approximately $72.1 million from Conbear Holdings Pty Limited ("Conbear"). The equity investment was funded with the Company’s cash on hand. The Inenco Group, which is headquartered in Sydney, Australia, is an industrial distributor of bearings, power transmissions, and seals in Australasia, with annual revenues of approximately $325 million and 161 locations across Australia and New Zealand, as well as an emerging presence in Asia.
The Company and Conbear both have an option to acquire or sell, respectively, the remaining 65% of Inenco at a later date contingent upon certain conditions being satisfied. However, there can be no guarantee that such conditions will be met or, if they are met, whether either company would exercise its option.
On September 22, 2017, the Company entered into a definitive agreement to acquire Alliance Automotive Group (“AAG”). AAG is headquartered in London and is a leading European distributor of vehicle parts, tools and workshop equipment with annual revenues of approximately $1.7 billion. AAG has over 1,800 company-owned stores and affiliated outlets across France, the U.K. and Germany. The acquisition is valued at a total purchase price of approximately $2.0 billion. The Company intends to finance the transaction through a combination of new loan agreements and note issuances. The Company also has available, but does not expect to utilize, a $2.0 billion 364-day unsecured bridge facility. The bridge facility is discussed further in the credit facilities footnote. The Company expects to close on the acquisition in November 2017.
On September 25, 2017, the Company entered into a $1.0 billion foreign currency hedge denominated in Euros to hedge the purchase price for AAG acquisition. The hedge does not qualify for hedge accounting.
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, 2016.2018.
Forward-Looking Statements
Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission (SEC)("SEC") or otherwise release to the public and in materials that we 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. Senior officers may also make verbal statements to analysts, investors, the media and others that are forward-looking. Forward-looking statements may relate, for example, to the financing, timing and completion of the acquisition of Alliance Automotive Group ("AAG") and the anticipated strategic benefits, synergies and benefits of the transaction,other attributes resulting from acquisitions, as well as future operations, prospects, strategies, financial condition, economic performance (including growth and earnings), industry conditions and demand for our products and services.
The Company cautions that its 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 inability to complete the acquisition due to failure to satisfy the customary closing conditions and/or the delay of or inability to obtain all regulatory approvals related to the acquisition, the Company’s ability to successfully integrate AAGacquired companies into the Company, including the challenges associated with the integration of processes to ensure the adequacy of our internal controls in regard to the Alliance Automotive Group business, and to realize the anticipated synergies and benefits,benefits; changes in the European aftermarket,aftermarket; the Company’s ability to successfully implement its business initiatives in each of its fourthree business segments; slowing demand for the Company’s products; changes in national and international legislation or government regulations or policies;policies, including new import tariffs and the unpredictability of additional tariffs and data security policies and requirements; changes in general economic conditions, including unemployment, inflation (including the impact of potential tariffs) or deflation;deflation and the United Kingdom’s referendum to exit from the European Union, commonly known as Brexit; changes in tax policies; volatile exchange rates; high energy costs;volatility in oil prices; significant cost increases, such as rising fuel and freight expenses; labor shortages; uncertain credit markets and other macro-economicmacroeconomic conditions; competitive product, service and pricing pressures; the
ability to maintain favorable vendor arrangements and relationships; disruptions in our vendors’ operations;operations, including the Company’s abilityimpact of tariffs and trade considerations on their operations and output, as required to successfully integrate its acquired businesses;meet product demand; failure or weakness in our disclosure controls and procedures and internal controls over financial reporting; the uncertainties and costs of litigation; disruptions caused by a failure or breach of the Company’s information systems, as well as other risks and uncertainties discussed in the Company’s Annual Report on Form 10-K for 20162018 and from time to time in the Company’s subsequent filings with the SEC.
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its 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 reports on Forms 10-K, 10-Q, 8-K and other reports to the SEC.
Overview
Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts office products and electrical/electronic materials. The Company hasbusiness products. We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. During the ninesix months ended SeptemberJune 30, 2017,2019, business was conducted throughout the United States, Canada, Mexico, Australia, New Zealand, Mexicothe U.K., France, Germany, Poland, the Netherlands, Belgium, and Puerto Rico from approximately 2,670more than 3,100 locations.
Sales for the three months ended SeptemberJune 30, 20172019 were $4.10$4.9 billion, a 4%2.3% increase as compared to $3.94$4.8 billion in the same period of the prior year. For the three months ended SeptemberJune 30, 2017,2019, the Company recorded consolidated net income of $158.4$224.4 million, a decrease of 15%1.1% as compared to consolidated net income of $185.3$227.0 million in the same three month period of the prior year. On a per share diluted basis, net income was $1.53 for the three months ended June 30, 2019, a decrease of 0.6% as compared to $1.54 for the same three month period of 2018. For the ninesix months ended SeptemberJune 30, 20172019, sales were $12.10$9.7 billion, a 4.7%2.8% increase as compared to $11.56$9.4 billion in the same period of the prior year. For the ninesix months ended SeptemberJune 30, 2017,2019, the Company recorded consolidated net income of $508.6$384.7 million compared to consolidated net income of $534.7$403.5 million in the same ninesix month period of the prior year, a decrease of 4.7%. On a per share diluted basis, net income was $2.62, a decrease of 4.4% as compared to $2.74 in the same six month period of 2018.
During the three and six months ended June 30, 2019, the Company incurred pre-tax expenses of $4.1 million and $38.2 million, respectively, from realized currency losses and transaction and other costs primarily related to the Company's acquisition activity and the March 7, 2019 sale of Grupo Auto Todo, a Mexican subsidiary in the Automotive Parts Group. This business contributed approximately $93.0 million of revenues for the year ended December 31, 2018. The three and six months ended June 30, 2018
include $9.1 million and $22.1 million in transaction and other costs primarily related to the AAG acquisition and the attempted spin-off of the Business Products Group.
Before the impact of transaction and other costs, the Company's adjusted net income was $230.3 million, a decrease of 1.4% as compared to adjusted net income of $233.6 million in the same three month period of the prior year. Adjusted net income is a non-GAAP measure (see table below for reconciliation to GAAP net income). On a per share basis, adjusted net income was $1.57 for the three months ended June 30, 2019, a decrease of 1.3% as compared to $1.59 for the same three month period of 2018. Adjusted net income for the six months ended June 30, 2019, which also excludes the impact of realized currency losses, was $417.5 million, a decrease of 0.6% for the same six month period of 2018. On a per share diluted basis, adjusted net income was $2.85 for the six months ended June 30, 2019, which was flat compared to the same six month period of the prior year.
The Company incurred certain transaction costs primarily relatedremains committed to the pending $2.0 billion Europeanits key growth initiatives, which include: driving greater share of spend with existing customers; employing an aggressive but disciplined acquisition of Alliance Automotive Group in the third quarter of 2017. Before the impact of these costs,strategy focused on both geographical in-fill and product line adjacencies; expanding the Company's net income was $170.0 milliondigital capabilities; and $520.2 million in the threefurther expansion of our U.S. and nine month periods ended September 30, 2017.international footprint.
The Company continuesWe continue to execute on these initiatives, and also focus on a variety ofour plans and strategic initiatives to facilitate continued growth including strategic acquisitions,enhance our gross margins, reduce costs and build a highly productive, sustainable and cost-effective structure. We expect our focus in these key areas to improve the introduction of new and expanded product lines, geographic expansion, sales to new markets, enhanced customer marketing programs and a variety of gross margin and cost savings initiatives.Company's operating performance over the long-term.
Sales
Sales
As noted above, sales for the three months ended SeptemberJune 30, 20172019 were $4.10$4.9 billion, a 4%2.3% increase as compared to $3.94$4.8 billion in the same period of the prior year. TheApproximately 1.6% of the revenue increase for the three months ended SeptemberJune 30, 2017, consisted of an approximate 2% contribution2019 represents the growth in comparable sales, while 2.7% came from acquisitions,acquisitions. These items were partially offset by a positive 1% increase in organic sales and a 1% favorable1.5% negative currency impact. In addition, sales were negatively impacted by 0.5% due to the sale of Grupo Auto Todo. For the ninesix months ended SeptemberJune 30, 20172019 sales were $12.10$9.7 billion, a 4.7%2.8% increase as compared to $11.56$9.4 billion in the same period of the prior year, whichyear. This reflects a 1.2%an approximate 2.4% increase in organiccomparable sales, a 3.1%2.4% contribution from acquisitions and an approximate 0.4% favorablea 1.7% unfavorable currency impact, as compared to the same ninesix month period in 2016.
2018. In addition, automotive sales were negatively impacted by 0.3% due to the sale of Grupo Auto Todo.
Sales for the Automotive Parts Group increased 3.6% in1.4% for the third quarter of 2017,three months ended June 30, 2019, as compared to the same period in the prior year. This group’s revenue increase for the three months ended SeptemberJune 30, 20172019 consisted of an approximate 1.4% benefit from acquisitions, a positive 1% net impact of organic1.3% increase in comparable sales and a 1.2% favorable3.5% benefit from acquisitions. These items were partially offset by an unfavorable foreign currency impact.impact of approximately 2.5% and a 0.9% impact from the sale of Grupo Auto Todo. This group’s 3.6% sales1.8% revenue increase for the nine month periodsix months ended SeptemberJune 30, 2017 reflects a 1% increase from organic sales growth,2019 consisted of an approximate 2% contribution from acquisitions,2.2% increase in comparable sales and a 0.6% favorable3.2% benefit from acquisitions. These items were partially offset by an unfavorable foreign currency impact of approximately 2.9% and a 0.7% negative impact from our businesses throughout Australia, Canada and Mexico.the sale of Grupo Auto Todo. We anticipate that the Company’s initiatives to drive both organic and acquisitive growth will positively benefit the Automotive Parts Group through increased sales in the quarters ahead.
TheSales for the Industrial Products Group’s salesParts Group increased by approximately 7.1%4.9% for the three month periodmonths ended SeptemberJune 30, 2017,2019, as compared to the same period in 2016.2018. The increase in this group’s revenues reflects a 4.1%an approximate 3.1% increase in organiccomparable sales, an approximate 2.6% accretive impact ofa 2.1% benefit from acquisitions and a 0.4% favorableslightly unfavorable foreign currency impact. This group’s 7.1%group's 5.3% sales increase for the nine month periodsix months ended SeptemberJune 30, 20172019 reflects a 4.1%3.6% increase in organiccomparable sales, a 2.0% increase from acquisitions and a 3% contribution from acquisitions.slightly unfavorable foreign currency impact. The Industrial ProductParts Group has multiple initiatives in place to drive continued market share expansion through both organic and acquisitive sales growth in the quarters ahead.
We believe these ongoing initiatives, combined with steady economic and industry-specific factors, bode well for Industrial Parts Group's long-term growth prospects.
Sales for the OfficeBusiness Products Group decreased 4.7%1.1% for the three months ended SeptemberJune 30, 2017, due to its decrease in organic sales2019, compared to the same three month period in 2016. For the nine months ended September 30, 2017, this group’s revenues increased 2.7%2018, primarily due to a 6.3% accretive impact from acquisitions less an approximate 3.6% decrease in organiccomparable sales. For the six months ended June 30, 2019, this group's revenues were essentially flat compared to the same six month period in 2018. We expect
will remain focused on our internal salescore growth initiatives for this business, including our plans tothe further enhanceenhancement of our Facilities, Breakroom and Safety Products offering, to support revenue growth for this group in the quarters ahead.
Sales for the Electrical/Electronic Materials Group increased 11.6% for the three months ended September 30, 2017, as compared to the same period in 2016, and reflect an approximate 0.6% decrease in organic sales, a 1.5% favorable impact of copper pricing, and an approximate 10.7% accretive impact of the Company’s acquisitions. For the nine months ended September 30, 2017, this group’s revenues increased 9.2%, and reflect an approximate 8% accretive impact from acquisitions, a marginal increase in organic sales and a 1% favorable impact of copper pricing. We expect our growth initiatives, including acquisitions, to enable this group to report ongoing revenue growth in the quarters ahead.
For the nine month period ended September 30, 2017, industry pricing increased 0.3% in the Automotive segment, increased 0.6% in the Office Products segment, increased 1.3% in the Electrical/Electronic Materials segment and increased 1.8% in the Industrial segment.offering.
Cost of Goods Sold/Sold and Operating Expenses
Cost of goods sold for the three months ended SeptemberJune 30, 20172019 was $2.87$3.34 billion, a 5%1.1% increase from $2.74$3.30 billion for the same period in 2016.2018. As a percentage of net sales, cost of goods sold was 70.0%67.6% for the three month periodmonths ended SeptemberJune 30, 2017,2019, as compared to 69.6%68.4% in the same three month period of 2016.2018. Cost of goods sold for the ninesix months ended SeptemberJune 30, 20172019 was $8.48$6.6 billion, a 5%1.8% increase from $8.09$6.5 billion for the same period in the prior year.2018. As a percentpercentage of net sales, cost of goods sold was 70.1%67.9% for the six months ended June 30, 2019, as compared to 70.0%68.6% in the same ninesix month period of 2016.2018. The increase in cost of goods sold for the three and nine month periodssix months ended SeptemberJune 30, 20172019 primarily relates to the sales increase for this periodthese periods as compared to the same three and ninesix month periods of the prior year. The increase for these periods was partially offset by lower cost of goods sold in the Automotive Parts Group and Industrial Parts Group due to favorable global supplier negotiations, more flexible and sophisticated
pricing strategies, a shift in product mix to products that carry a higher gross margin and higher supplier incentives due to improved volumes for these segments. The Company’s cost of goods sold includes the total cost of merchandise sold, including freight expenses associated with moving merchandise from our vendors to our distribution centers, retail stores and branches, as well as vendor volume incentives and inventory adjustments. Gross profit as a percentage of net sales may fluctuate based on (i) changes in merchandise costs and related vendor 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, and (v) changes in foreign currency exchange rates.
rates, and (vi) the impact of tariffs. Tariffs did not have a material impact in the periods presented.
Total operating expenses increased to $980.5 million$1.3 billion for the three month periodmonths ended SeptemberJune 30, 20172019 as compared to $907.2 million$1.2 billion for the same three month period in 2016.2018. As a percentage of net sales, operating expenses increased to 23.9%26.1% as compared to 23.0%25.1% in the same three month period of the previous year. For the ninesix months ended SeptemberJune 30, 2017,2019, these expenses totaled $2.84$2.6 billion, or 23.4%26.4% as a percentage of net sales, compared to $2.63$2.4 billion, or 22.8%25.6% as a percentage of net sales for the same ninesix month period in the prior year.
The increase in operating expenses as a percentage of net sales for the three and nine month periodssix months ended SeptemberJune 30, 20172019 reflects the Company’s deleveragingeffect of expenses on lower comparable sales, as well as higherrising costs in areas such as payroll, freight, IT digital, legal, professional and insurance, freight and delivery, and acquisition related costs.cyber-security. In addition, the increase includes approximately $18.5 million of transaction costs primarily relatedCompany’s ability to leverage its expenses was negatively impacted due to lower comparable sales in certain markets relative to the prior year. The Company's pending $2.0 billion European acquisition of Alliance Automotive Group recordedongoing cost control initiatives partially offset these increases in the three and nine month periods ended September 30, 2017. The Company continues to focus on effectively managing the costs in our businesses with ongoing investments in technology and supply chain initiatives primarily associated with freight, digital and logistics related functions.
operating expenses.
The Company’s operating expenses are substantially comprised of compensation and benefit relatedbenefit-related costs for personnel. Other major expense categories include facility occupancy costs for headquarters, distribution centers and retail store/branch operations, insurance costs, accounting, legal and professional services, technology and digital costs, transportation and delivery costs, travel and advertising. Management’s ongoing cost control measures in these areas have served to improve the Company’s overall cost structure. The Company's recent acquisitions have lower costs of goods sold and higher levels of operating costs as compared to the Company's other businesses,businesses; however, the operating profit margins generally remain consistent.consistent.The Company continues to focus on effectively managing the costs in our businesses with ongoing investments in technology, productivity and supply chain initiatives primarily associated with freight, digital, pricing, data analytics and logistics-related functions.
Operating Profit
Operating profit decreased to $310.3$385.6 million for the three months ended SeptemberJune 30, 2017,2019, compared to $328.0$390.2 million for the same three month period of the prior year.year, a decrease of 1.2%. As a percentage of net sales, operating profit was 7.6%,7.8% as compared to 8.3%8.1% in the same three month period of 2016.2018. For the ninesix months ended SeptemberJune 30, 2017,2019, operating profit decreased to $946.5$707.1 million compared to $953.1$708.7 million for the same ninesix month period of the prior year, and as a percentage of net sales, operating profit was 7.8%,7.3% as compared to 8.2%7.5% in the same ninesix month period of 2016.2018. The decrease in operating profit as a percentagepercent of net sales for the three and nine month periodssix months ended SeptemberJune 30, 20172019 is primarily due to the deleveragingincrease in operating expenses due to the effect of fixedrising costs associated with lower comparable sales growth, higher expenses in areas such as payroll, freight, IT freight and delivery costs, lower volume incentives and a product mix shiftcyber-security. In addition, the Company’s ability to leverage its expenses was negatively impacted due to lower margin products, which wascomparable sales in certain markets relative to the prior year. These increases were partially offset by the positive impactimprovement in gross margin for the second quarter of cost control initiatives.
2019 as compared to the same period in 2018.
The Automotive Parts Group’s operating profit decreased 10%6.3% in the three month periodmonths ended SeptemberJune 30, 2017,2019 as compared to the same period of 2016,2018, and its operating profit margin was 8.2%, as compared to 9.4%8.9% in the same three month period of the priorprevious year. For the ninesix months ended SeptemberJune 30, 2017,2019, the Automotive Parts Group’sGroup's operating profit decreased approximately 3%4.8% and the operating profit margin was 8.5%7.6% as compared to 9.1%8.1% in the same ninesix month period of 2016.2018. The decrease in operating profit marginas a percent of sales for the three and nine month periodssix months ended SeptemberJune 30, 20172019 is primarily due to the slow organic sales environment in our U.S. Automotive businessesimpact of rising costs and its impact on expense leverage, higherthe deleveraging of expenses in areas suchthe European automotive business. These decreases were partially offset by the improvement in gross margin for these periods as IT, freight and delivery costs lower volume incentives and a product mix shiftcompared to lower margin products.
the same periods of the previous year.
The Industrial ProductsParts Group’s operating profit increased 10.5%8.9% in the three month periodmonths ended SeptemberJune 30, 2017,2019 as compared to the same three month period of 2016,2018, and the operating profit margin for this group was 7.6%8.1% compared to 7.4%7.8% for the same period of the previous year. Operating profit for the Industrial ProductsParts Group increased by 10%8.4% for the nine month periodsix months ended SeptemberJune 30, 2017,2019, compared to the same period in 2016,2018, and the operating profit margin was 7.5%7.8% compared to 7.3%7.5% for the same ninesix month period in 2016.2018. The increase inimproved operating profit margin forreflects the positive impact of strong sales growth, improved gross margins and the leveraging of expenses in the three and nine month periodssix months ended SeptemberJune 30, 2017 is primarily due2019 as compared to the increasesame periods in organic sales volume2018, driven by a relatively steady industrial economy and its positive impact on expense leverage, as well as improved core gross margin.
the effective execution of Industrial's strategic growth initiatives.
The OfficeBusiness Products Group’s operating profit decreased 21%2.5% for the three months ended SeptemberJune 30, 2017,2019, compared to the same three month period in 2016,2018, and the operating profit margin for this group was 4.7% compared to 5.7% for the same three month period of 2016.remained flat at 4.4%. For the ninesix months ended SeptemberJune 30, 2017,2019, the OfficeBusiness Products Group’sGroup's operating profit decreased 12%2.1% compared to the same period of the prior year,in 2018, and the operating profit margin was 5.6%4.4% compared to 6.5%4.5% for the same period in 2016.2018. The decrease in operating profit margin for the three and nine month periodssix months ended SeptemberJune 30, 20172019 is primarily due to the following factors: the impact of lower organic sales volumeunfavorable shift in customer and its negative impact on expense leverage; lower volume incentives; and, rising costs associated with serving a growing number of sales channels. The Company has implemented several initiatives to drive significant cost savings for this group in the quarters ahead.product mix.
If there are sustained declines in macroeconomic or business conditions in future periods affecting the projected earnings and cash flows at our reporting units, among other things, there can be no assurance that goodwill at one or more reporting units may not be impaired. Nonetheless, as of June 30, 2019, we believe goodwill is recoverable for all our reporting units.
Income Taxes
The Electrical/Electronic Materials Group operating profit decreased 5%Company's effective income tax rate was 25.7% for the three months ended SeptemberJune 30, 2017, as2019, compared to 24.4% for the same three month period in 2016, and its operating profit margin was 6.8% compared to 8.0% in the same three month period of the prior year. Operating profit for the Electrical/Electronic Materials Group decreased by approximately 5% for the nine month period ended September 30, 2017, compared to the same period in 2016, and the operating profit margin was 7.3% compared to 8.4% for the same nine month period in 2016. The decrease in operating profit margin for the three and nine month periods ended September 30, 2017 is primarily due to customer and product mix shifts, which were partially offset by the positive impact of cost savings initiatives.
Income Taxes
2018. The effective income tax rate was 35.7%25.1% for the three month periodsix months ended SeptemberJune 30, 2017,2019, compared to 36.4%23.8% for the same period in 2016.2018. The effectiverate increase is primarily due to differences in income tax rate was 35.4% for the nine month period ended September 30, 2017, compared to 36.2% for the same period in 2016. The rate decreaserates associated with transaction and statute-related adjustments recorded in the three and nine month periods ended September 30, 2017 reflects the higher mix of foreign earnings, taxed at a lower rate relative to our U.S. operations and the positive impact of the recognition of excess tax benefits due to the adoption of ASU 2016-09 pertaining to Stock Compensation as compared to the same periods in 2016.comparable periods.
Net Income
For the three months ended SeptemberJune 30, 2017,2019, the Company recorded consolidated net income of $158.4$224.4 million, a decrease of 15%1.1% as compared to consolidated net income of $185.3$227.0 million in the same three month period of the prior year. On a per share diluted basis, net income was $1.08,$1.53, a decrease of 13%0.6% as compared to $1.24$1.54 for the same three month period of 2016.2018. For the ninesix months ended SeptemberJune 30, 2017,2019, the Company recorded consolidated net income of $508.6$384.7 million, a decrease of 4.7% as compared to consolidated net income of $534.7$403.5 million in the same ninesix month period of the prior year. On a per share diluted basis, net income was $3.44,$2.62, a decrease of 3%4.4% as compared to $3.56$2.74 in the same ninesix month period of 2018.
During the three and six months ended SeptemberJune 30, 2016.
The2019, the Company incurred certainexpenses of $4.1 million and $38.2 million, respectively, from realized currency losses and transaction and other costs, before taxes. The realized currency losses and transaction and other costs primarily resulted from acquisition activity and the March 7, 2019 sale of Grupo Auto Todo, a Mexican subsidiary in the Automotive Parts Group that contributed approximately $93.0 million of revenues for the year ended December 31, 2018. The three and six months ended June 30, 2018 included $9.1 million and $22.1 million, respectively, in transaction and other costs primarily related to the pending $2.0 billion EuropeanAAG acquisition and the attempted spin-off of Alliance Automotive Group in the third quarter of 2017. Business Products Group.
Before the impact of theserealized currency losses and transaction and other costs, the Company's adjusted net income was $170.0$230.3 million, or $1.16 ona decrease of 1.4% as compared to adjusted net income of $233.6 million in the same three month period of the prior year. Adjusted net income is a non-GAAP measure (see table below for reconciliation to GAAP net income). On a per share basis, adjusted net income was $1.57 for the three months ended June 30, 2019, a decrease of 1.3% as compared to $1.59 for the same three month period of 2018. Before the transaction and other costs discussed above recorded in the six months ended June 30, 2019, adjusted net income was $417.5 million, a decrease of 0.6% for the same six month period of 2018. On a per share diluted basis, adjusted net income was $2.85 for the six months ended June 30, 2019, which was flat compared to the same six month period of the prior year.
The following table sets forth a reconciliation of net income and $520.2 million, or $3.52 on adiluted net income per common share to adjusted net income and adjusted diluted basis,net income per common share to account for the impact of these adjustments. The Company believes that the presentation of adjusted net income and adjusted net income per common share, which are not calculated in accordance with generally accepted accounting principles in the threeU.S. (“GAAP”), provide meaningful supplemental information to both management and nine month periods ended September 30, 2017.investors that is indicative of the Company's core operations. The Company does not, nor does it suggest investors should consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.
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| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 |
GAAP net income | | $ | 224,430 |
| | $ | 226,972 |
| | $ | 384,680 |
| | $ | 403,548 |
|
Diluted net income per common share | | $ | 1.53 |
| | $ | 1.54 |
| | $ | 2.62 |
| | $ | 2.74 |
|
| | | | | | | | |
Adjustments: | | | | | | | | |
Realized currency losses | | $ | — |
| | $ | — |
| | $ | 27,037 |
| | $ | — |
|
Transaction and other costs | | 4,108 |
| | 9,105 |
| | 11,185 |
| | 22,114 |
|
Tax impact of adjustments | | 1,727 |
| | (2,524 | ) | | (5,423 | ) | | (5,650 | ) |
Adjusted net income | | $ | 230,265 |
| | $ | 233,553 |
| | $ | 417,479 |
| | $ | 420,012 |
|
Adjusted diluted net income per common share | | $ | 1.57 |
| | $ | 1.59 |
| | $ | 2.85 |
| | $ | 2.85 |
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Financial Condition
The Company’s cash balance of $210.1$562.6 million at SeptemberJune 30, 2017 decreased $32.82019 increased $229.0 million, or 14%68.7%, from December 31, 2016.2018. For the ninesix months ended SeptemberJune 30, 2017,2019, the Company had net cash provided by operating activities of $301.4 million, net cash
used $289.4in investing activities of $464.0 million and net cash provided by financing activities of $389.2 million. The investing activities consisted primarily of $357.3 million for acquisitions and other investing activities
$296.5 and $106.7 million for investments in the Company via capital expenditures. The financing activities consisted primarily of $216.7 million for dividends paid to the Company’s shareholders, $97.2 million for investments in the Company via capital expenditures and $171.9 million for share repurchases. These items were partially offset by the Company’s earnings and net cash provided by operating activities, as well as the Company's$613.3 million net proceeds from debt structure as outlined in liquidity below.
that is primarily being used to fund acquisitions.
Accounts receivable increased $217.4$343.2 million, or 11%13.8%, from December 31, 2016,2018, which is primarily due to the Company’s acquisitions of businesses and higher sales volume in the nine month periodsix months ended SeptemberJune 30, 20172019 as compared to the fourth quarter or 2016.of 2018. Inventory increased $143.9$141.4 million, or approximately 4% compared to the inventory balance at December 31, 2016, primarily due to acquisitions3.9%, and the impact of foreign exchange. Accountsaccounts payable increased $194.0$68.8 million, or 6%1.7% from December 31, 2016,2018 due primarily due to more favorable payment terms negotiated with the Company's vendors in the nine month period ended September 30, 2017.acquisitions of businesses. The Company’s debt is discussed below.
Liquidity and Capital Resources
Total debt of $3.9 billion at SeptemberJune 30, 20172019 increased $270$739.2 million, or 31%23.5%, from December 31, 2016,2018. The increase in debt primarily related to fundingreflects additional borrowings associated with the Company’s working capital needs. The Company maintains a $1.20 billion unsecured revolving line of credit with a consortium of financial institutions with an option to increase the borrowing capacity by an additional $350.0 million. The line of credit bears interest at LIBOR plus various margins, which are based on the Company’s leverage ratio. In June 2017, the Company exercised its remaining option to extend the maturity date from June 2021 to June 2022. At September 30, 2017, $595.0 million was outstanding under the line of credit.
As of September 30, 2017, the remaining $550.0 million debt outstanding is at fixed rates of interest and remained unchanged as compared to DecemberCompany's recent acquisitions. On May 31, 2016. The fixed rate debt is comprised of two notes of $250.0 million each and one note of $50.0 million. One $250.0 million note is due in December 2023 and the other is due in November 2026, and each carry an interest rate of 2.99%. The remaining $50.0 million note, which was executed in July 2016, carries a 2.39% interest rate and is due in July 2021.
On September 22, 2017,2019, the Company entered into a definitiveprivate placement agreement to acquire Alliance Automotive Group (“AAG”) for approximately $2.0 billion includingof €250,000 long-term fixed rate debt. The €250,000 of long-term fixed rate debt includes €50,000, 1.55% Series A Guaranteed Senior Note maturing on May 31, 2029, €100,000, 1.74% Series B Guaranteed Senior Note maturing on May 31, 2031 and €100,000, 1.95% Series C Guaranteed Senior Note maturing on May 31, 2034. On June 30, 2019, the repaymentCompany entered into a private placement agreement of AAG’s outstandingA$310,000 long-term fixed rate debt. The A$310,000 of long-term fixed rate debt at closing. The Company intends to finance the transaction through a combination of new loan agreementsincludes A$155,000, 3.10% Series A Guaranteed Senior Note maturing on June 30, 2024 and note issuances. The Company also has available, but does not expect to utilize, a $2.0 billion 364-day unsecured bridge facility bearing interest at LIBOR plus a variable margin. The Company expects to closeA$155,000, 3.43% Series B Guaranteed Senior Note maturing on the acquisition in November 2017.
June 30, 2026.
At SeptemberJune 30, 2017,2019, the Company's total average cost of debt was 2.55%2.5% and the Company remained in compliance with all covenants connected with the aboveits borrowings.
The ratio of current assets to current liabilities was 1.3 to 1 at September 30, 2017, as compared to 1.4 to 1 at December 31, 2016.The Company currently believes existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations, including discretionary share repurchases, if any, for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Although the Company does not face material risks relatedFor quantitative and qualitative disclosures about market risk, refer to interest rates“Quantitative and commodity prices, the Company is exposed to changesQualitative Disclosures About Market Risk” in foreign currency rates with respect to foreign currency denominated operating revenues and expenses. The Company has translation gains or losses that result from translationItem 7A of the results of operations of an operating unit’s foreign functional currency into U.S. dollars for consolidated financial statement purposes. The Company’s principal foreign currency exchange exposures are the Australian dollar, Canadian dollar and Mexican peso, which are the functional currenciesPart II of our Australia, Canada and Mexico operations, respectively. As previously noted under “Sales,” foreign currency exchange exposure, particularly in regard to the Australian dollar and Canadian dollar, positively impacted our results for the three and nine month periods ended September 30, 2017. There have been no other material changes in market risk from the information provided in the Company’s 2016 Annual Report on Form10-K.Form 10-K for the fiscal year ended December 31, 2018. Our exposure to market risk has not changed materially since December 31, 2018.
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)("CEO") and Chief Financial Officer (CFO)("CFO"), of the effectiveness of the Company’s disclosure controls and procedures.procedures, as such term is defined in SEC Rule 13a-15(e). 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, asconcluded that due to a previously reported material weakness, the Company’s internal control over financial reporting was not effective. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, AAG, the Company's European automotive subsidiary that generated approximately 10% of the Company's total net sales in 2018, did not adequately identify, design and maintain internal controls at the transaction level that mitigate the risk of material misstatement in financial reporting processes nor did it maintain appropriate information technology controls. Refer to allow timely decisions regarding required disclosure.Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for more information.
There were no material errors in the financial results or balances identified as a result of the control deficiencies, and there were no restatements of prior period financial statements and no changes in previously released financial results were required as a result of these control deficiencies.
Remediation efforts to address material weakness
As previously described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, the Company began implementing a remediation plan to address the material weakness mentioned above. Management will continue to enhance the risk assessment process and design and implementation of internal control over financial reporting at AAG. This includes initiation of compensating controls and enhanced and revised design of existing financial reporting controls, information technology applications and procedures at AAG. During the six months ended June 30, 2019, the Company continued testing those enhanced controls and procedures. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in internal control over financial reporting
During the six months ended June 30, 2019, the Company adopted ASU 2016-02 and centralized the Company's lease accounting system and processes effective January 1, 2019. This implementation resulted in a material change to the Company's internal
control over financial reporting as of that date. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal control over financial reporting for the fiscal year ending December 31, 2019.
Other than with respect to the remediation efforts described above and changes related to the adoption of ASU 2016-02, 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 fiscal quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
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 20162018 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 20162018 Annual Report on Form 10-K are not the only risks facing our Company. 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
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about the Company’s purchases of shares of the Company’s common stock during the quarterthree months ended SeptemberJune 30, 2017:
2019:
ISSUER PURCHASES OF EQUITY SECURITIES
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| | | | | | | |
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, 2017 through July 31, 2017 | — | | — | | — | | 2,613,516 |
August 1, 2017 through August 31, 2017 | 228,082 | | $81.68 | | 225,000 | | 17,388,516 |
September 1, 2017 through September 30, 2017 | 19,785 | | $92.60 | | — | | 17,388,516 |
Totals | 247,867 | | $82.55 | | 225,000 | | 17,388,516 |
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| | | | | | | | |
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, 2019 through April 30, 2019 | | 12,082 | | $108.39 | | — | | 16,420,143 |
May 1, 2019 through May 31, 2019 | | 395 | | $102.02 | | — | | 16,420,143 |
June 1, 2019 through June 30, 2019 | | 27,150 | | $102.74 | | — | | 16,420,143 |
Totals | | 39,627 | | $104.46 | | — | | 16,420,143 |
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(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 November 17, 2008 and August 21, 2017, the Board of Directors announced that it had authorized the repurchase of 1515.0 million shares and 1515.0 million shares, respectively. The authorization for these repurchase plans continues until all such shares have been repurchased or the repurchase plan is terminated by action of the Board of Directors. Approximately 2.41.4 million shares authorized in the 2008 plan and 15.0 million shares authorized in 2017 remain available to be repurchased by the Company. There were no other plans announced as of SeptemberJune 30, 2017.2019. |
Item 6. Exhibits
(a) The following exhibits are filed or furnished as part of this report:
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Exhibit 2.1
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Exhibit 3.1 | | |
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Exhibit 3.2 | | |
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Exhibit 10.1
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Exhibit 31.1 | | |
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Exhibit 31.2 | | |
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Exhibit 32.132 | | |
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Exhibit 32.2101.INS | | inline XBRL document. |
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Exhibit 101101.SCH | | Interactive data files pursuant to Rule 405 of Regulation S-T:XBRL Taxonomy Extension Schema Document |
| | (i) the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016; (ii) the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine month periods ended September 30, 2017 and 2016; (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (iv) the Notes to the Condensed Consolidated Financial Statements |
Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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Exhibit 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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Exhibit 101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document |
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Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | Genuine Parts Company (Registrant) |
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Date: October 26, 2017July 19, 2019 | | /s/ Carol B. Yancey |
| | Carol B. Yancey |
| | Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) |