Filed by Bowne Pure Compliance
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
     
o   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)
     
GEORGIA   58-0254510
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
2999 CIRCLE 75 PARKWAY, ATLANTA, GA   30339
(Address of principal executive offices)   (Zip Code)
(770) 953-1700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer þ    Accelerated filer o    Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at September 30, 2007
Common Stock, $1.00 par value per share   167,900,289 shares
 
 

 

 


 

PART 1 — FINANCIAL INFORMATION
Item 1. Financial Statements
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    September 30,     December 31,  
    2007     2006  
    (unaudited)        
    (in thousands, except share data)  
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 330,052     $ 135,973  
Trade accounts receivable, less allowance for doubtful accounts (2007 - $25,816; 2006 - $13,456)
    1,334,309       1,227,805  
Merchandise inventories, net — at lower of cost (substantially last-in, first-out method) or market
    2,225,718       2,236,368  
Prepaid expenses and other current assets
    243,296       234,981  
 
           
TOTAL CURRENT ASSETS
    4,133,375       3,835,127  
Goodwill and intangible assets, less accumulated amortization
    70,539       62,254  
Other assets
    172,583       170,343  
Property, plant and equipment, less allowance for depreciation (2007 - $622,457; 2006 - $561,139)
    458,597       429,260  
 
           
TOTAL ASSETS
  $ 4,835,094     $ 4,496,984  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Trade accounts payable
  $ 1,088,201     $ 910,263  
Income taxes payable
    19,559       37,899  
Dividends payable
    61,318       57,552  
Other current liabilities
    199,529       193,054  
 
           
TOTAL CURRENT LIABILITIES
    1,368,607       1,198,768  
Long-term debt
    500,000       500,000  
Other long-term liabilities
    191,750       187,509  
Minority interests in subsidiaries
    64,774       60,716  
SHAREHOLDERS’ EQUITY
               
Stated capital:
               
Preferred Stock, par value — $1 per share
               
Authorized — 10,000,000 shares — None issued
    -0-       -0-  
Common Stock, par value — $1 per share
               
Authorized — 450,000,000 shares
               
Issued — 2007 — 167,900,289; 2006 — 170,530,874
    167,900       170,531  
Accumulated other comprehensive loss
    (150,022 )     (242,534 )
Retained earnings
    2,692,085       2,621,994  
 
           
TOTAL SHAREHOLDERS’ EQUITY
    2,709,963       2,549,991  
 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 4,835,094     $ 4,496,984  
 
           
See notes to condensed consolidated financial statements.

 

2


 

GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                 
    Three Months Ended Sept. 30,     Nine Months Ended Sept. 30,  
    2007     2006     2007     2006  
    (unaudited)  
    (in thousands, except per share data)  
 
                               
Net sales
  $ 2,797,556     $ 2,699,641     $ 8,215,926     $ 7,914,998  
Cost of goods sold
    1,927,068       1,868,346       5,643,909       5,455,044  
 
                       
Gross profit
    870,488       831,295       2,572,017       2,459,954  
 
                               
Operating expenses:
                               
Selling, administrative & other expenses
    641,107       614,209       1,894,690       1,827,624  
Depreciation and amortization
    21,994       20,236       64,014       55,491  
 
                       
 
    663,101       634,445       1,958,704       1,883,115  
 
                               
Income before income taxes
    207,387       196,850       613,313       576,839  
Income taxes
    78,807       75,517       233,059       220,901  
 
                       
 
                               
Net income
  $ 128,580     $ 121,333     $ 380,254     $ 355,938  
 
                       
 
                               
Basic net income per common share
  $ .76     $ .71     $ 2.24     $ 2.07  
 
                       
 
                               
Diluted net income per common share
  $ .76     $ .71     $ 2.23     $ 2.06  
 
                       
 
                               
Dividends declared per common share
  $ .365     $ .3375     $ 1.095     $ 1.0125  
 
                       
 
                               
Weighted average common shares outstanding
    168,819       170,912       169,862       171,950  
 
                               
Dilutive effect of stock options and non-vested restricted stock awards
    1,006       825       1,022       897  
 
                       
 
                               
Weighted average common shares outstanding — assuming dilution
    169,825       171,737       170,884       172,847  
 
                       
See notes to condensed consolidated financial statements.

 

3


 

GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    Nine Months  
    Ended Sept. 30,  
    2007     2006  
    (unaudited)  
    (in thousands)  
 
               
OPERATING ACTIVITIES:
               
Net income
  $ 380,254     $ 355,938  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    64,014       55,491  
Share-based compensation
    10,750       8,669  
Excess tax benefits from share-based compensation
    (4,176 )     (1,820 )
Other
    3,629       2,674  
Changes in operating assets and liabilities
    154,249       (6,317 )
 
           
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
    608,720       414,635  
 
               
INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (83,781 )     (93,155 )
Other
    (20,316 )     (11,614 )
 
           
 
               
NET CASH USED IN INVESTING ACTIVITIES
    (104,097 )     (104,769 )
 
               
FINANCING ACTIVITIES:
               
Payments on credit facilities, net of proceeds
          (881 )
Stock options exercised
    10,134       6,183  
Excess tax benefits from share-based compensation
    4,176       1,820  
Dividends paid
    (181,925 )     (170,530 )
Purchase of stock
    (152,161 )     (122,549 )
 
           
 
               
NET CASH USED IN FINANCING ACTIVITIES
    (319,776 )     (285,957 )
 
           
 
               
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    9,232       1,574  
 
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
    194,079       25,483  
 
               
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    135,973       188,911  
 
           
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 330,052     $ 214,394  
 
           
See notes to condensed consolidated financial statements.

 

4


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A — 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 United States for complete financial statements. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Genuine Parts Company (the “Company”) for the year ended December 31, 2006. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2006 Annual Report on Form 10-K.
The preparation of interim financial statements requires management to make estimates and assumptions for the amounts reported in the condensed consolidated financial statements. Specifically, the Company makes estimates in its interim consolidated financial statements for the accrual of bad debts, inventory adjustments, discounts and volume incentives earned, among others. Bad debts are accrued based on a percentage of sales, and volume incentives are estimated based upon cumulative and projected purchasing levels. Inventory adjustments are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment. The estimates for interim reporting may change upon final determination at year-end, and such changes may be significant.
In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the interim period have been made. These adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of results for the entire year.
Note B — Segment Information
                                 
    Three Months Ended Sept. 30,     Nine Months Ended Sept. 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
 
                               
Net sales:
                               
Automotive
  $ 1,381,007     $ 1,345,595     $ 4,037,568     $ 3,935,614  
Industrial
    849,631       791,650       2,522,675       2,336,430  
Office products
    460,425       459,093       1,342,932       1,352,277  
Electrical/electronic materials
    111,863       107,356       329,416       306,846  
Other
    (5,370 )     (4,053 )     (16,665 )     (16,169 )
 
                       
Total net sales
  $ 2,797,556     $ 2,699,641     $ 8,215,926     $ 7,914,998  
 
                       
 
                               
Operating profit:
                               
Automotive
  $ 115,023     $ 112,135     $ 325,690     $ 321,390  
Industrial
    69,669       62,031       204,330       178,619  
Office products
    33,183       35,344       119,052       121,563  
Electrical/electronic materials
    7,685       6,059       23,224       17,184  
 
                       
Total operating profit
    225,560       215,569       672,296       638,756  
Interest expense, net
    (4,706 )     (6,708 )     (16,550 )     (20,295 )
Other, net
    (13,467 )     (12,011 )     (42,433 )     (41,622 )
 
                       
Income before income taxes
  $ 207,387     $ 196,850     $ 613,313     $ 576,839  
 
                       
Net sales by segment exclude the effect of certain discounts, incentives and freight billed to customers. The line item “Other” represents the net effect of the discounts, incentives and freight billed to customers, which is reported as a component of net sales in the Company’s condensed consolidated statements of income.

 

5


 

Note C — Comprehensive Income
Comprehensive income was $472.8 million and $370.9 million for the nine months ended September 30, 2007 and 2006, respectively. The difference between comprehensive income and net income was due to foreign currency translation adjustments, adjustments to the fair value of derivative instruments and amounts amortized into net periodic benefit cost as required by Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS No. 158”), as summarized below:
                 
    Nine Months Ended Sept. 30,  
    2007     2006  
    (in thousands)  
Net income
  $ 380,254     $ 355,938  
Other comprehensive income:
               
Foreign currency translation
    79,697       14,747  
Derivative instruments, net of tax
    242       242  
Amounts amortized into net periodic benefit cost:
               
Prior service cost, net of tax
    51       N/A  
Actuarial loss, net of tax
    12,522       N/A  
 
           
 
               
Total other comprehensive income
    92,512       14,989  
 
           
 
               
Comprehensive income
  $ 472,766     $ 370,927  
 
           
Comprehensive income for the three months ended September 30, 2007 and 2006 totaled $169.1 million and $121.9 million, respectively.
Note D — Recently Issued Accounting Pronouncements
On September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles in the United States, and expands disclosures about fair value measurements. SFAS No. 157 does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect that SFAS No. 157 will have a significant impact on the Company’s consolidated financial statements.
In June 2007, the FASB issued EITF 06-11, Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 requires tax benefits associated with dividends on share-based payment awards to be recorded as a component of additional paid-in capital. EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The Company does not expect that EITF 06-11 will have a significant impact on the Company’s consolidated financial statements.
Note E — Share-Based Compensation
As more fully discussed in Note 5 of the Company’s notes to the consolidated financial statements in the 2006 Annual Report on Form 10-K, the Company maintains various Long-Term Incentive Plans, which provide for the granting of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalents and other share-based awards. The Company issues new shares upon option exercise under these plans. Most options may be exercised not earlier than twelve months nor later than ten years from the date of grant. At September 30, 2007, total compensation cost related to nonvested awards not yet recognized was approximately $25.5 million, as compared to $23.5 million at September 30, 2006. The weighted-average period over which this compensation cost is expected to be recognized is approximately three years. The aggregate intrinsic value for options and RSUs outstanding at September 30, 2007 was approximately $78.5 million, as compared to approximately $52.0 million at September 30, 2006. At September 30, 2007 the aggregate intrinsic value for options and RSUs vested totaled approximately $50.9 million, as compared to approximately $36.0 million at September 30, 2006. At September 30, 2007, the weighted-average contractual life for outstanding and exercisable options and RSUs was seven and six years, respectively. For the nine months ended September 30, 2007, $10.8 million of share-based compensation cost was recorded, as compared to $8.7 million for the same period in the prior year.

 

6


 

For the nine months ended September 30, 2007, the Company granted approximately 1,272,000 SARs and 95,000 RSUs. SARs represent a right to receive the excess, if any, of the fair market value of one share of common stock on the date of exercise over the grant price. RSUs represent a contingent right to receive one share of the Company’s common stock at a future date provided certain pre-tax profit targets are achieved. The majority of awards vest on a pro-rata basis for periods ranging from one to five years and are expensed accordingly on a straight-line basis.
Note F — Income Taxes
On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN No. 48”), to create a single model to address accounting for uncertainty in tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum threshold that a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 on January 1, 2007. The cumulative effect of adopting FIN No. 48 did not have a material impact on the Company’s financial position or results of operations. The Company’s gross tax effected unrecognized tax benefits as of the date of the adoption was approximately $28 million, of which approximately $14 million, if recognized, would affect the Company’s effective tax rate. In addition, at the date of adoption, the Company had accrued interest and penalties related to the unrecognized tax benefits of approximately $1 million, which is included as a component of the unrecognized tax benefit of $28 million noted above. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. With few exceptions, the Company is no longer subject to United States federal, state and local income tax examinations for years ended before 2004 or subject to non-United States income tax examinations for years ended prior to 2000. The Company does not anticipate total unrecognized tax benefits will significantly change during the year due to the settlement of audits and the expiration of statutes of limitations.
Note G — Employee Benefit Plans
Net periodic pension cost included the following components for the three months ended September 30:
                                 
                    Other Post-retirement  
    Pension Benefits     Benefits  
    2007     2006     2007     2006  
    (in thousands)  
 
                               
Service cost
  $ 13,432     $ 12,599     $ 188     $ 114  
Interest cost
    20,496       18,092       360       332  
Expected return on plan assets
    (27,558 )     (25,275 )            
Amortization of prior service (income) cost
    (83 )     (115 )     93       93  
Amortization of actuarial loss
    6,472       6,567       356       323  
 
                       
Net periodic pension cost
  $ 12,759     $ 11,868     $ 997     $ 862  
 
                       
Net periodic pension cost included the following components for the nine months ended September 30:
                                 
                    Other Post-retirement  
    Pension Benefits     Benefits  
    2007     2006     2007     2006  
    (in thousands)  
 
                               
Service cost
  $ 40,078     $ 37,758     $ 564     $ 342  
Interest cost
    61,162       54,221       1,080       996  
Expected return on plan assets
    (82,160 )     (75,064 )            
Amortization of prior service (income) cost
    (264 )     (351 )     279       279  
Amortization of actuarial loss
    19,367       19,794       1,068       968  
 
                       
Net periodic pension cost
  $ 38,183     $ 36,358     $ 2,991     $ 2,585  
 
                       

 

7


 

Pension benefits also include amounts related to a supplemental retirement plan. During the nine months ended September 30, 2007, the Company contributed $30 million to the pension plan.
Note H — Guarantees
In June 2003, the Company completed an amended and restated master agreement to its $85 million construction and lease agreement (the “Agreement”). The lessor in the Agreement is an independent third-party limited liability company, which has as its sole member a publicly traded corporation. Properties acquired by the lessor are constructed and/or then leased to the Company under operating lease agreements. No additional properties are being added to this Agreement, as the construction term has ended. The Company does not believe the lessor is a variable interest entity, as defined in FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (“FIN No. 46”). In addition, the Company has verified that even if the lessor was determined to be a variable interest entity, the Company would not have to consolidate the lessor nor the assets and liabilities associated with properties leased to the Company. This is because the assets leased under the Agreement do not exceed 50% of the total fair value of the lessor’s assets, excluding any assets that should be excluded from such calculation under FIN No. 46, nor did the lessor finance 95% or more of the leased balance with non-recourse debt, target equity or similar funding. The Agreement has been accounted for as an operating lease under SFAS No. 13, Accounting for Leases and related interpretations. Rent expense related to the Agreement is recorded under selling, administrative and other expenses in our condensed consolidated statements of income and was $3.8 million and $3.6 million for the nine months ended September 30, 2007 and 2006, respectively.
This Agreement, having a term of six years expiring in 2009, contains residual value guarantee provisions and other guarantees that would become due in the event of a default under the operating lease agreement, or at the expiration of the operating lease agreement if the fair value of the leased properties is less than the guaranteed residual value. The maximum amount of the Company’s potential guarantee obligation, representing the residual value guarantee, at September 30, 2007, is approximately $72.6 million. The Company believes the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.
The Company also guarantees the borrowings of certain independently controlled automotive parts stores (“independents”) and certain other affiliates in which the Company has a minority equity ownership interest (“affiliates”). Presently, the independents are generally consolidated by unaffiliated enterprises that have a controlling financial interest through ownership of a majority voting interest in the entity. The Company has no voting interest or other equity conversion rights in any of the independents. The Company does not control the independents or the affiliates, but receives a fee for the guarantee. The Company has concluded that it is not the primary beneficiary with respect to any of the independents and that the affiliates are not variable interest entities. The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is equal to the total borrowings subject to the Company’s guarantee.
At September 30, 2007, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $182.6 million. These loans generally mature over periods from one to ten years. In the event that the Company is required to make payments in connection with guaranteed obligations of the independents or the affiliates, the Company would obtain and liquidate certain collateral (e.g., accounts receivable and inventory) to recover all or a portion of the amounts paid under the guarantee. 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.
Effective January 1, 2003, the Company adopted FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN No. 45”). In accordance with FIN No. 45 and based on available information, the Company has accrued for those guarantees related to the independents’ and affiliates’ borrowings and the construction and lease agreement as of September 30, 2007. These liabilities are not material to the financial position of the Company and are included in other long-term liabilities in the accompanying condensed consolidated balance sheets.
Note I — Subsequent Event
Subsequent to September 30, 2007, the Company entered into a sale-leaseback transaction with a financial institution. In connection with the transaction, the Company sold certain automotive retail store properties and immediately leased the properties back over a lease term of twenty years. The lease will be classified as an operating lease. Net proceeds from the transaction amounted to approximately $56 million. The Company anticipates recognizing a net gain of approximately $20 million, which will be deferred and amortized over the lease term.

 

8


 

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, 2006.
Forward-Looking Statements
Some statements in this report, as well as in other materials we file with the SEC and in materials that we make available on our website or otherwise release to the public, 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 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 include, but are not limited to, changes in general economic conditions, the growth rate of the market for the Company’s products and services, the ability to maintain favorable supplier arrangements and relationships, competitive product and pricing pressures, including internet related initiatives, the effectiveness of the Company’s promotional, marketing and advertising programs, changes in laws and regulations, including changes in accounting and taxation guidance, the uncertainties of litigation, as well as other risks and uncertainties discussed from time to time in the Company’s 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. You are advised, however, to review any further disclosures we make on related subjects in subsequent Forms 10-K, 10-Q and 8-K 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 has a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. During the nine months ended September 30, 2007, business was conducted throughout the United States, Puerto Rico, Canada and Mexico from approximately 2,000 locations.
We recorded consolidated net income of $380.3 million for the nine months ended September 30, 2007, compared to consolidated net income of $355.9 million in the same period last year, an increase of 7%. During the third quarter of 2007, we continued to focus on initiatives to grow sales and earnings. Such initiatives included new products, product line expansion, the penetration of new markets and a variety of gross margin and cost savings initiatives. For several periods now, our growth initiatives have enabled us to capitalize on the opportunities presented in the markets we serve. As a result, we have reported improved performance for the nine months ended September 30, 2007.
Critical Accounting Estimates
The preparation of the condensed consolidated financial statement information contained herein requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

9


 

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Information with respect to the Company’s critical accounting policies that the Company believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Management believes that as of September 30, 2007, there have been no material changes to this information.
Sales
Sales for the third quarter of 2007 were $2.80 billion, an increase of 4% compared to $2.70 billion for the same period in 2006. The sales growth in the quarter was driven primarily by our internal growth initiatives across all our businesses, as well as by continued favorable economic conditions and positive industry trends in our Industrial and Electrical/Electronic businesses. For the nine months ended September 30, 2007, sales were $8.22 billion compared to $7.91 billion for the same period last year, which was an increase of 4%.
Sales for the Automotive Parts Group increased 3% in the three month and nine month periods ended September 30, 2007 as compared to the same periods in the previous year. We expect our sales and product initiatives in the Automotive Parts Group to continue to provide further growth opportunities for us. The Industrial Products Group increased sales by 7% and 8% in the three and nine month periods ended September 30, 2007, respectively, as compared to the same periods in 2006. The market indices, such as Industrial Production and Capacity Utilization, remain at very favorable levels, which have continued to positively impact sales for the Industrial Products Group. Sales for the Office Products Group for the third quarter of 2007 were flat as compared to the same period in 2006. For the nine months ended September 30, 2007, sales decreased 1% as compared to the nine months ended September 30, 2006. This group has experienced weak market conditions over the nine months ended September 30, 2007, resulting in an industry-wide softening of demand. Sales for the Electrical/Electronic Materials Group increased 4% for the third quarter of 2007 compared to the third quarter of 2006 and 7% for the nine months ended September 30, 2007 as compared to the same period of the prior year. The market indicators for this group indicate continued expansion in the industry, which continues to favorably impact sales for this group.
Cost of Goods Sold/Expenses
Cost of goods sold for the third quarter of 2007 was $1.93 billion compared to $1.87 billion for the third quarter of 2006. As a percent of sales, cost of goods sold decreased from 69.21% to 68.88% for the three months ended September 30, 2007. For the nine months ended September 30, 2007, cost of goods sold was $5.64 billion compared to $5.46 billion for the same period last year and as a percent of sales decreased from 68.92% to 68.69%. The decreases in cost of goods sold as a percent of sales for the three and nine month periods ended September 30, 2007 reflect the impact of our initiatives to improve product and customer mix. The Company has also worked to pass through most of its vendor price increases to its customers. For the nine months ended September 30, 2007, cumulative pricing is up 0.9% in Automotive, 3.9% in Industrial, 2.4% in Office Products and 5.4% in Electrical/Electronic over the same period last year.
Selling, administrative and other expenses of $663.1 million increased to 23.70% of sales for the third quarter of 2007 compared to 23.50% for the same period of the prior year. For the nine months ended September 30, 2007, these expenses totaled $1.96 billion and increased slightly to 23.84% of sales as compared to 23.79% for the same period in 2006. In the three and nine month periods ended September 30, 2007, the Company continues to experience lack of leverage on expenses on relatively weak top line growth in the Automotive and Office Products businesses.
Operating Profit
Operating profit as a percentage of sales was 8.1% for the three months ended September 30, 2007 compared to 8.0% for the same period of the previous year. For the nine months ended September 30, 2007, operating profit as a percentage of sales was 8.2% as compared to 8.1% for the same period of the previous year.

 

10


 

The Automotive Parts Group’s operating profit increased 3% in the third quarter of 2007, and its operating profit margin of 8.3% for the three months ended September 30, 2007 remained unchanged as compared to the same period in the prior year. For the nine months ended September 30, 2007, the group’s operating profit increased 1% and its operating profit margin decreased to 8.1% from 8.2% for the same period last year. The decrease in operating profit margin for this group is primarily due to a challenging sales environment. The Industrial Products Group had a 12% increase in operating profit in the third quarter of 2007, and the operating profit margin for this group increased to 8.2% from 7.8% for the same period of the previous year. Operating profit increased 14% for the nine months ended September 30, 2007 compared to the same 2006 period and the Industrial Products Group’s operating profit margin was up from 7.6% for the same period last year to 8.1% in 2007. The increase in operating profit margin for this group is generally due to gross margin improvement and expense leverage gained from strong sales growth. For the three month period ended September 30, 2007, the Office Products Group’s operating profit decreased 6% and the operating profit margin decreased to 7.2% from 7.7% in the same period of the prior year. The decrease in operating profit margin for this group is due to the loss of expense leverage caused by difficult market conditions and sluggish top line growth. This group’s operating profit margin was 8.9% for the nine months ended September 30, 2007, as compared to 9.0% for the same period in the previous year. The Electrical /Electronic Materials Group increased its operating profit for the third quarter by 27%, and its operating margin increased to 6.9% compared to 5.6% in the third quarter of the previous year. For the nine months ended September 30, 2007, the group increased its operating profit by 35%, and its operating profit margin improved to 7.1% compared to 5.6% for the nine months ended September 30, 2006. The improvement in operating profit and operating margin is due to the strong sales growth.
Income Taxes
The effective income tax rate was 38.0% for both the three and nine month periods ended September 30, 2007 as compared to 38.4% and 38.3% for the three and nine month periods ended September 30, 2006, respectively. The decrease in the rate is primarily due to lower state taxes.
Net Income
Net income for the three months ended September 30, 2007 was $128.6 million, an increase of 6%, as compared to $121.3 million for the third quarter of 2006. On a per share diluted basis, net income was $.76, up 7% compared to $.71 for the third quarter of last year. Net income for the nine months was $380.3 million, an increase of 7% over $355.9 million recorded for the same period in the previous year. Earnings per share on a diluted basis were $2.23, up 8% compared to $2.06 for the same nine month period of the previous year.
Financial Condition
The major balance sheet categories at September 30, 2007 were relatively consistent with the December 31, 2006 balance sheet categories, with the exception of the improved cash position. Cash balances increased $194.1 million from December 31, 2006, due primarily to increased income and improved working capital management. Cash generated from operations of $608.7 million was primarily used to pay dividends of $181.9 million, repurchase approximately $152.2 million of the Company’s stock and invest in the Company via capital expenditures of $83.8 million. Accounts receivable increased $106.5 million or 9%, which is primarily due to the Company’s overall sales increase and acquisitions within our Industrial Parts Group. Inventory decreased $10.6 million compared to December 31, 2006, which reflects the Company’s inventory management initiatives. Prepaid expenses and other current assets increased 4% or $8.3 million compared to December 31, 2006. Other assets increased $2.2 million, up 1% from December 31, 2006. Accounts payable increased $177.9 million or 20% due primarily to increased purchases related to sales growth made in the nine months ended September 30, 2007, compared to December 31, 2006 and increased terms with certain vendors. The Company’s long-term debt is discussed in detail below.
Liquidity and Capital Resources
Total long-term debt, which matures in November 2008 and 2011, is at fixed rates of interest and remained unchanged at $500 million as of September 30, 2007, compared to December 31, 2006.
The ratio of current assets to current liabilities was 3.0 to 1 at September 30, 2007, as compared to 3.2 to 1 at December 31, 2006. The Company believes existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information called for by this item is provided elsewhere herein and in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes in market risk from the information provided under Item 7A in the Company’s Annual Report on Form10-K for the year ended December 31, 2006.

 

11


 

Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
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 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 Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our 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 quarter:
ISSUER PURCHASES OF EQUITY SECURITIES
                                 
    Total           Total Number of   Maximum Number of
    Number of           Shares Purchased   Shares That May Yet
    Shares   Average   as Part of Publicly   Be Purchased Under
    Purchased   Price Paid   Announced Plans   the Plans or
Period   (1)   Per Share   or Programs (2)   Programs
 
                               
July 1, 2007 through July 31, 2007
    469,255     $ 48.70       455,300       13,798,227  
 
                               
August 1, 2007 through August 31, 2007
    1,523,182     $ 48.16       1,507,901       12,290,326  
 
                               
September 1, 2007 through September 30, 2007
    129,780     $ 48.31       112,350       12,177,976  
 
                               
Totals
    2,122,217     $ 48.29       2,075,551       12,177,976  
(1)   Includes shares surrendered by employees to the Company to satisfy tax withholding obligations in connection with the vesting of shares of restricted stock, the exercise of stock options and/or tax withholding obligations.
 
(2)   On August 21, 2006, the Board of Directors authorized the repurchase of 15 million shares. The repurchase plan was announced August 21, 2006. The authorization for the repurchase plan continues until all such shares have been repurchased or the repurchase plan is terminated by action of the Board of Directors. The Company has repurchased all 15 million shares authorized by the Board of Directors on April 19, 1999, so the 1999 repurchase authorization has expired and is no longer in effect. There were no other share repurchase plans outstanding as of September 30, 2007.

 

12


 

Item 6. Exhibits
  (a)   The following exhibits are filed as part of this report:
     
Exhibit 3.1
  Amended and Restated Articles of Incorporation of the Company, dated April 23, 2007 (incorporated herein by reference from the Company’s Current Report on Form 8-K dated April 23, 2007).
 
   
Exhibit 3.2
  Bylaws of the Company, as amended and restated (incorporated herein by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
 
   
Exhibit 31.1
  Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).
 
   
Exhibit 31.2
  Certification signed by the Chief Financial Officer pursuant to SEC Rule 13a-14(a).
 
   
Exhibit 32.1
  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer.
 
   
Exhibit 32.2
  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.

 

13


 

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.
     
 
  Genuine Parts Company
(Registrant)
 
   
Date: November 5, 2007
  /s/ Jerry W. Nix
 
   
 
  Jerry W. Nix
Vice Chairman and Chief Financial Officer
(Principal Financial and Accounting Officer)

 

14


 

EXHIBIT INDEX
     
Exhibit    
No.   Description
 
   
Exhibit 3.1
  Amended and Restated Articles of Incorporation of the Company, dated April 23, 2007 (incorporated herein by reference from the Company’s Current Report on Form 8-K dated April 23, 2007).
 
   
Exhibit 3.2
  Bylaws of the Company, as amended and restated (incorporated herein by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
 
   
Exhibit 31.1
  Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).
 
   
Exhibit 31.2
  Certification signed by the Chief Financial Officer pursuant to SEC Rule 13a-14(a).
 
   
Exhibit 32.1
  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer.
 
   
Exhibit 32.2
  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.

 

15