Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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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
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o |
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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)
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GEORGIA
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58-0254510 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2999 CIRCLE 75 PARKWAY, ATLANTA, GA
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30339 |
(Address of principal executive offices)
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(Zip Code) |
(770) 953-1700
(Registrants 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 issuers classes of common stock,
as of the latest practicable date.
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Class |
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Outstanding at September 30, 2007 |
Common Stock, $1.00 par value per share
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167,900,289 shares |
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2007 |
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2006 |
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(unaudited) |
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(in thousands, except share data) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
330,052 |
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$ |
135,973 |
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Trade accounts receivable, less allowance
for doubtful accounts (2007 - $25,816; 2006 - $13,456) |
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1,334,309 |
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1,227,805 |
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Merchandise inventories, net at lower of cost (substantially
last-in, first-out method) or market |
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2,225,718 |
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2,236,368 |
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Prepaid expenses and other current assets |
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243,296 |
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234,981 |
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TOTAL CURRENT ASSETS |
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4,133,375 |
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3,835,127 |
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Goodwill and intangible assets, less accumulated amortization |
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70,539 |
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62,254 |
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Other assets |
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172,583 |
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170,343 |
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Property, plant and equipment, less allowance
for depreciation (2007 - $622,457; 2006 - $561,139) |
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458,597 |
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429,260 |
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TOTAL ASSETS |
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$ |
4,835,094 |
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$ |
4,496,984 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Trade accounts payable |
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$ |
1,088,201 |
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$ |
910,263 |
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Income taxes payable |
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19,559 |
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37,899 |
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Dividends payable |
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61,318 |
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57,552 |
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Other current liabilities |
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199,529 |
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193,054 |
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TOTAL CURRENT LIABILITIES |
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1,368,607 |
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1,198,768 |
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Long-term debt |
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500,000 |
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500,000 |
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Other long-term liabilities |
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191,750 |
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187,509 |
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Minority interests in subsidiaries |
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64,774 |
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60,716 |
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SHAREHOLDERS EQUITY |
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Stated capital: |
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Preferred Stock, par value $1 per share |
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Authorized 10,000,000 shares None issued |
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-0- |
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-0- |
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Common Stock, par value $1 per share |
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Authorized 450,000,000 shares |
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Issued 2007 167,900,289; 2006 170,530,874 |
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167,900 |
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170,531 |
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Accumulated other comprehensive loss |
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(150,022 |
) |
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(242,534 |
) |
Retained earnings |
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2,692,085 |
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2,621,994 |
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TOTAL SHAREHOLDERS EQUITY |
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2,709,963 |
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2,549,991 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
4,835,094 |
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$ |
4,496,984 |
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See notes to condensed consolidated financial statements.
2
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended Sept. 30, |
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Nine Months Ended Sept. 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(unaudited) |
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(in thousands, except per share data) |
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Net sales |
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$ |
2,797,556 |
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$ |
2,699,641 |
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$ |
8,215,926 |
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$ |
7,914,998 |
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Cost of goods sold |
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1,927,068 |
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1,868,346 |
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5,643,909 |
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5,455,044 |
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Gross profit |
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870,488 |
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831,295 |
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2,572,017 |
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2,459,954 |
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Operating expenses: |
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Selling, administrative & other expenses |
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641,107 |
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614,209 |
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1,894,690 |
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1,827,624 |
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Depreciation and amortization |
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21,994 |
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20,236 |
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64,014 |
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55,491 |
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663,101 |
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634,445 |
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1,958,704 |
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1,883,115 |
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Income before income taxes |
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207,387 |
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196,850 |
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613,313 |
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576,839 |
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Income taxes |
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78,807 |
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75,517 |
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233,059 |
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220,901 |
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Net income |
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$ |
128,580 |
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$ |
121,333 |
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$ |
380,254 |
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$ |
355,938 |
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Basic net income per common share |
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$ |
.76 |
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$ |
.71 |
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$ |
2.24 |
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$ |
2.07 |
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Diluted net income per common share |
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$ |
.76 |
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$ |
.71 |
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$ |
2.23 |
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$ |
2.06 |
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Dividends declared per common share |
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$ |
.365 |
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$ |
.3375 |
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$ |
1.095 |
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$ |
1.0125 |
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Weighted average common shares
outstanding |
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168,819 |
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170,912 |
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169,862 |
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171,950 |
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Dilutive effect of stock options and
non-vested restricted stock
awards |
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1,006 |
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825 |
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1,022 |
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|
897 |
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Weighted average common shares
outstanding assuming dilution |
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169,825 |
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171,737 |
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170,884 |
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172,847 |
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See notes to condensed consolidated financial statements.
3
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months |
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Ended Sept. 30, |
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2007 |
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2006 |
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(unaudited) |
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(in thousands) |
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OPERATING ACTIVITIES: |
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Net income |
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$ |
380,254 |
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$ |
355,938 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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64,014 |
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55,491 |
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Share-based compensation |
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10,750 |
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8,669 |
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Excess tax benefits from share-based compensation |
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(4,176 |
) |
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(1,820 |
) |
Other |
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3,629 |
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2,674 |
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Changes in operating assets and liabilities |
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154,249 |
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(6,317 |
) |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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608,720 |
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414,635 |
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INVESTING ACTIVITIES: |
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Purchases of property, plant and equipment |
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(83,781 |
) |
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(93,155 |
) |
Other |
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(20,316 |
) |
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(11,614 |
) |
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NET CASH USED IN INVESTING ACTIVITIES |
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(104,097 |
) |
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(104,769 |
) |
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FINANCING ACTIVITIES: |
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Payments on credit facilities, net of proceeds |
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(881 |
) |
Stock options exercised |
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10,134 |
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6,183 |
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Excess tax benefits from share-based compensation |
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4,176 |
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1,820 |
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Dividends paid |
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(181,925 |
) |
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(170,530 |
) |
Purchase of stock |
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(152,161 |
) |
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(122,549 |
) |
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NET CASH USED IN FINANCING ACTIVITIES |
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(319,776 |
) |
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(285,957 |
) |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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9,232 |
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1,574 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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194,079 |
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25,483 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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135,973 |
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|
188,911 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
330,052 |
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$ |
214,394 |
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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 Companys
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
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Three Months Ended Sept. 30, |
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Nine Months Ended Sept. 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(in thousands) |
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(in thousands) |
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Net sales: |
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Automotive |
|
$ |
1,381,007 |
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|
$ |
1,345,595 |
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|
$ |
4,037,568 |
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|
$ |
3,935,614 |
|
Industrial |
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|
849,631 |
|
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|
791,650 |
|
|
|
2,522,675 |
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|
2,336,430 |
|
Office products |
|
|
460,425 |
|
|
|
459,093 |
|
|
|
1,342,932 |
|
|
|
1,352,277 |
|
Electrical/electronic materials |
|
|
111,863 |
|
|
|
107,356 |
|
|
|
329,416 |
|
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|
306,846 |
|
Other |
|
|
(5,370 |
) |
|
|
(4,053 |
) |
|
|
(16,665 |
) |
|
|
(16,169 |
) |
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|
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Total net sales |
|
$ |
2,797,556 |
|
|
$ |
2,699,641 |
|
|
$ |
8,215,926 |
|
|
$ |
7,914,998 |
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|
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Operating profit: |
|
|
|
|
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|
|
|
|
|
|
|
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|
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 |
|
|
|
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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 Companys
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 Companys 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 Companys consolidated financial statements.
Note E Share-Based Compensation
As more fully discussed in Note 5 of the Companys 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 Companys 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 Companys financial position or results of operations. The
Companys 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
Companys 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 lessors
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 Companys
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 Companys maximum exposure to loss as a result of its involvement with these independents and
affiliates is equal to the total borrowings subject to the Companys 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, Guarantors 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. Managements 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 Managements
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 Companys
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 Companys 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 Companys 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 Companys critical accounting policies that the Company believes could have
the most significant effect on the Companys reported results and require subjective or complex
judgments by management is contained in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations of the Companys 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 Groups 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 groups 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 Groups 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
Groups 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 groups 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 Companys 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
Companys overall sales increase and acquisitions within our Industrial Parts Group. Inventory
decreased $10.6 million compared to December 31, 2006, which reflects the Companys 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 Companys 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 Companys 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 Companys 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 Companys management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
Companys disclosure controls and procedures. Based on that evaluation, the Companys CEO and
CFO concluded that the Companys 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 SECs rules and forms and that such information is
accumulated and communicated to the Companys management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Companys 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 Companys last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Companys 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 Companys purchases of shares of the
Companys 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 Companys 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 Companys 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 Companys 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 Companys 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