Napa Auto Parts 2004 Annual Report Download - page 17

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management’s discussion and analysis of financial condition and results of operations
December 31, 2004
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. In
2004, business was conducted throughout the United States,
in Canada and in Mexico from approximately 1,900 locations.
We recorded consolidated net income of $396 million for the
year ended December 31, 2004, up 12% from $354 million in 2003
before the cumulative effect of an accounting change adopted
January 1, 2003. After the cumulative effect adjustment, which
decreased 2003 net income by almost $20 million, net income
for 2004 was up 18% from $334 million in 2003. The benefits of
an improved economic climate combined with our internal initia-
tives allowed us to achieve a record level of sales and earnings
in 2004. All four of our business segments contributed to our
achievement, each with gains in revenues and profits.
Over the three years preceding 2004, the results in all of our
industry groups were affected by the slow economy, especially
in the manufacturing sectors of the U.S. The Company countered
this negative economic impact with the introduction of new product
lines, sales to new markets and cost savings initiatives, among
other things. Our improved results in 2004 proved these efforts
to be successful.
During 2002 and 2003 we recorded certain charges to earnings
as a result of changes in accounting principles relating to goodwill
impairment and cash consideration received from vendors. These
changes had no impact on our operating results and no cash
implications for us. The changes in accounting principles in
2002 and 2003 are discussed further under “Results of Operations”
below. Our results are also dependent on the effect of certain
accounting assumptions and estimates, which are discussed
under “Critical Accounting Estimates” below.
The major December 31, 2004 balance sheet categories, with the
exception of our improved cash position and accounts payable
balance, were relatively consistent with the December 31, 2003
balance sheet categories. The Company’s cash balances increased
$120 million from December 31, 2003, due primarily to improved
operating results, stock option exercises and improved payment
terms with certain vendors. These extended payment terms
as well as increased purchases explain our increase in accounts
payable. Our liquidity and capital resources improved in 2004, as
we reduced our total debt outstanding at December 31, 2004 by
approximately $177 million compared to December 31, 2003.
RESULTS OF OPERATIONS
The Company’s results of operations are summarized for the
three years ended December 31, 2004, 2003 and 2002.
Net Sales
Net sales for the year ended December 31, 2004 totaled $9.1
billion, a record sales level for the Company, and an 8% increase
from 2003. All of the business segments contributed to our sales
growth for the year, as our internal initiatives and improved eco-
nomic conditions in the industries we serve positively impacted
sales volume in each of our four groups. Prices were up approxi-
mately 1% in the Automotive, Office and Electrical segments
in 2004, and pricing in the Industrial segment increased 5% in
2004. Net sales for the year ended December 31, 2003 totaled
$8.45 billion, a 2% increase from 2002. We finished 2003 encour-
aged that our sales were trending in a positive direction, due to
signs of improving economic indicators and our 5% sales increase
in the fourth quarter of 2003 compared to the fourth quarter in
2002. In 2003, prices were down slightly in the Automotive and
Electrical segments, while pricing in the Industrial and Office
segments increased 2% and .6%, respectively.
Automotive Group
Net sales for the Automotive Group (“Automotive”) were $4.7
billion in 2004, an increase of 6% over 2003. This represents
Automotive’s greatest percentage sales growth in several years
and, among the quarters, the first and fourth quarters were
stronger than the second and third quarters. After a strong first
quarter that included an extra billing day, we experienced some
moderation in Automotive sales from June through August, follow-
ing the lower consumer spending figures reported for this peri-
od. Our results showed some improvement in September and
this continued through the final period of 2004. Automotive sales
were $4.5 billion in 2003, an increase of 3% over 2002. In the
fourth quarter of 2003, Automotive sales were stronger than the
previous quarters in 2003, up 6%, and we were encouraged that
this improvement in revenues would carry over into 2004 as it did.
Year ended December 31
(in thousands, except
for per share data) 2004 2003 2002
Net Sales $9,097,267 $8,449,300 $ 8,258,927
Gross Profit 2,829,723 2,622,616 2,554,178
Income before
Cumulative Effect of a
Change in Accounting
Principle 395,552 353,642 367,500
Cumulative Effect of a
Change in Accounting
Principle —(19,541) (395,090)
Net Income (Loss) 395,552 334,101 (27,590)
Diluted Earnings (Loss)
Per Share:
Before Change in
Accounting Principle 2.25 2.03 2.10
After Change in
Accounting Principle 2.25 1.91 (.16)