UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017March 31, 2018
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 1-5690
  __________________________________________ 
GENUINE PARTS COMPANY
(Exact name of registrant as specified in its charter)
   __________________________________________ 
GEORGIA 58-0254510
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
2999 WILDWOOD PARKWAY,
ATLANTA, GA
 30339
(Address of principal executive offices) (Zip Code)
678-934-5000
(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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý  Accelerated filer ¨
      
Non-accelerated filer 
o  (Do not check if a smaller reporting company)
  Smaller reporting company ¨
       
Emerging growth company 
o  
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
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 June 30, 2017March 31, 2018
Common Stock, $1.00 par value per share 146,830,997 Shares146,737,803
 


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2017 December 31, 2016March 31, 2018 December 31, 2017
(unaudited)  (unaudited)  
(in thousands, except share
and per share data)		(in thousands, except share
and per share data)
ASSETS      
CURRENT ASSETS:      
Cash and cash equivalents$203,145
 $242,879
$325,973
 $314,899
Trade accounts receivable, less allowance for doubtful accounts (2017 – $16,824; 2016 – $15,557)2,169,970
 1,938,562
Trade accounts receivable, less allowance for doubtful accounts (2018 – $22,166; 2017 – $17,612)2,641,151
 2,421,563
Merchandise inventories, net3,330,189
 3,210,320
3,772,919
 3,771,089
Prepaid expenses and other current assets598,112
 556,670
841,569
 805,342
TOTAL CURRENT ASSETS6,301,416
 5,948,431
7,581,612
 7,312,893
Goodwill1,030,659
 956,153
2,202,634
 2,153,988
Other intangible assets, less accumulated amortization647,089
 618,510
1,415,792
 1,400,392
Deferred tax assets126,299
 132,652
39,830
 40,158
Other assets565,905
 475,530
588,238
 568,248
Property, plant and equipment, less accumulated depreciation (2017 – $1,005,031; 2016 – $960,999)740,776
 728,124
Property, plant and equipment, less accumulated depreciation (2018 – $1,083,696; 2017 – $1,044,353)931,288
 936,702
TOTAL ASSETS$9,412,144
 $8,859,400
$12,759,394
 $12,412,381
LIABILITIES AND EQUITY      
CURRENT LIABILITIES:      
Trade accounts payable$3,302,969
 $3,081,111
$3,773,149
 $3,634,859
Current portion of debt580,000
 325,000
751,614
 694,989
Dividends payable99,109
 97,584
105,649
 99,000
Income taxes payable28,300
 6,354
28,144
 10,736
Other current liabilities790,789
 734,101
1,098,916
 1,034,441
TOTAL CURRENT LIABILITIES4,801,167
 4,244,150
5,757,472
 5,474,025
Long-term debt550,000
 550,000
2,564,111
 2,550,020
Pension and other post–retirement benefit liabilities272,394
 341,510
200,253
 229,868
Deferred tax liabilities48,256
 48,326
184,383
 193,308
Other long-term liabilities438,984
 468,058
491,794
 501,004
EQUITY:      
Preferred stock, par value – $1 per share      
Authorized – 10,000,000 shares; none issued-0-

-0-
-0-

-0-
Common stock, par value – $1 per share      
Authorized – 450,000,000 shares; issued and outstanding – 2017 – 146,830,997 shares; 2016 – 148,410,422 shares146,831
 148,410
Authorized – 450,000,000 shares; issued and outstanding – 2018 – 146,737,803 shares; 2017 – 146,652,615 shares146,738
 146,653
Additional paid-in capital61,609
 56,605
68,127
 68,126
Retained earnings4,001,073
 4,001,734
4,114,472
 4,049,965
Accumulated other comprehensive loss(921,389) (1,013,021)(819,258) (852,592)
TOTAL PARENT EQUITY3,288,124
 3,193,728
3,510,079
 3,412,152
Noncontrolling interests in subsidiaries13,219
 13,628
51,302
 52,004
TOTAL EQUITY3,301,343
 3,207,356
3,561,381
 3,464,156
TOTAL LIABILITIES AND EQUITY$9,412,144
 $8,859,400
$12,759,394
 $12,412,381
See notes to condensed consolidated financial statements.


GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2017 2016 2017 20162018 2017
(unaudited)
(in thousands, except per share data)		(unaudited)
(in thousands, except per share data)
Net sales$4,100,178
 $3,899,638
 $8,005,819
 $7,617,905
$4,586,294
 $3,905,641
Cost of goods sold2,860,466
 2,734,186
 5,610,386
 5,347,982
3,150,487
 2,749,920
Gross profit1,239,712
 1,165,452
 2,395,433
 2,269,923
1,435,807
 1,155,721
Operating expenses:          
Selling, administrative and other expenses903,343
 829,489
 1,777,157
 1,652,661
1,133,771
 877,356
Depreciation and amortization39,232
 35,911
 77,364
 70,565
58,363
 38,132
942,575
 865,400
 1,854,521
 1,723,226
       
Provision for doubtful accounts2,701
 3,128
Total operating expenses1,194,835
 918,616
Non-operating expenses (income):   
Interest expense24,109
 6,779
Other(12,456) (13,449)
Total non-operating expenses (income)11,653
 (6,670)
Income before income taxes297,137
 300,052
 540,912
 546,697
229,319
 243,775
Income taxes107,165
 108,683
 190,780
 197,303
52,743
 83,615
Net income$189,972
 $191,369
 $350,132
 $349,394
$176,576
 $160,160
Basic net income per common share$1.29
 $1.28
 $2.37
 $2.34
$1.20
 $1.08
Diluted net income per common share$1.29
 $1.28
 $2.36
 $2.33
$1.20
 $1.08
Dividends declared per common share$.6750
 $.6575
 $1.350
 $1.315
$0.720
 $0.675
Weighted average common shares outstanding147,079
 149,241
 147,613
 149,417
146,727
 148,154
Dilutive effect of stock options and non-vested restricted stock awards571
 788
 598
 761
595
 634
Weighted average common shares outstanding – assuming dilution147,650
 150,029
 148,211
 150,178
147,322
 148,788
   
Net income$176,576
 $160,160
Other comprehensive income (loss), net of tax:   
Foreign currency translation adjustment42,880
 57,020
Net investment hedge, net of income taxes of 2018 — $6,180(16,710) —
Pension and postretirement benefit adjustments, net of income taxes of 2018 — $2,648; 2017 — $3,5717,164
 5,732
Other comprehensive income, net of tax33,334
 62,752
Comprehensive income$218,852
 $171,723
 $441,764
 $397,847
$209,910
 $222,912
See notes to condensed consolidated financial statements.


GENUINE PARTS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended June 30,Three Months Ended March 31,
2017 20162018 2017
(unaudited)
(in thousands)		(unaudited)
(in thousands)
OPERATING ACTIVITIES:      
Net income$350,132
 $349,394
$176,576
 $160,160
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization77,364
 70,565
58,363
 38,132
Share-based compensation8,086
 10,002
3,686
 2,717
Excess tax benefits from share-based compensation(2,245) (7,540)(2,517) (1,546)
Changes in operating assets and liabilities(88,053) 108,071
(97,741) (97,643)
NET CASH PROVIDED BY OPERATING ACTIVITIES345,284
 530,492
138,367
 101,820
INVESTING ACTIVITIES:      
Purchases of property, plant and equipment(54,095) (49,711)(31,633) (24,806)
Acquisitions and other investing activities(240,216) (305,435)(38,588) (106,236)
NET CASH USED IN INVESTING ACTIVITIES(294,311) (355,146)(70,221) (131,042)
FINANCING ACTIVITIES:      
Proceeds from debt2,250,000
 1,950,000
1,201,441
 1,005,000
Payments on debt(1,995,000) (1,800,000)(1,153,750) (855,000)
Share-based awards exercised(3,014) (8,627)(4,176) (1,624)
Excess tax benefits from share-based compensation—
 7,540
Dividends paid(197,408) (190,934)(99,000) (97,584)
Purchases of stock(153,508) (119,397)—
 (91,984)
NET CASH USED IN FINANCING ACTIVITIES(98,930) (161,418)(55,485) (41,192)
EFFECT OF EXCHANGE RATE CHANGES ON CASH8,223
 8,068
(1,587) 5,452
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(39,734) 21,996
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS11,074
 (64,962)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD242,879
 211,631
314,899
 242,879
CASH AND CASH EQUIVALENTS AT END OF PERIOD$203,145
 $233,627
$325,973
 $177,917
See notes to condensed consolidated financial statements.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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, 2016.2017. Accordingly, the unaudited interim condensed consolidated financial statements and related disclosures herein should be read in conjunction with the Company’s 20162017 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 and assumptions in its interim condensed consolidated financial statements for inventory adjustments, the accrual of bad debts, customer sales returns, and volume incentives earned, among others. Inventory adjustments (including adjustments for a majority of inventories that are valued under the last-in, first-out (“LIFO”) method) are accrued on an interim basis and adjusted in the fourth quarter based on the annual book to physical inventory adjustment and LIFO valuation, which is performed each year-end. Reserves for bad debts and customer sales returns are estimated and accrued on an interim basis based upon historical experience. Volume incentives are estimated based upon cumulative and projected purchasing levels. The estimates and assumptions 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 periods have been made. These adjustments are of a normal recurring nature. The results of operations for the sixthree month period ended June 30, 2017March 31, 2018 are not necessarily indicative of results for the entire year. The Company has evaluated subsequent events through the date the financial statements covered by this quarterly report were issued. See the subsequent event footnote for additional information.


Note B – Segment Information
 
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in thousands) (in thousands)
Net sales:       
Automotive$2,164,104
 $2,087,978
 $4,162,487
 $4,020,156
Industrial1,252,867
 1,167,395
 2,484,949
 2,320,022
Office products504,401
 481,605
 1,023,406
 958,259
Electrical/electronic materials204,628
 184,508
 389,045
 360,355
Other(25,822) (21,848) (54,068) (40,887)
Total net sales$4,100,178
 $3,899,638
 $8,005,819
 $7,617,905
Operating profit:       
Automotive$207,332
 $203,572
 $359,089
 $357,282
Industrial96,300
 88,263
 186,674
 170,096
Office products30,091
 32,640
 61,210
 66,844
Electrical/electronic materials15,533
 15,987
 29,168
 30,828
Total operating profit349,256
 340,462
 636,141
 625,050
Interest expense, net(6,878) (4,665) (13,052) (9,487)
Other intangible assets amortization(11,434) (9,225) (22,240) (17,985)
Other, net(33,807) (26,520) (59,937) (50,881)
Income before income taxes$297,137
 $300,052
 $540,912
 $546,697
 Three Months Ended March 31,
 2018 2017
Net sales: (1)   
Automotive$2,564,259
 $1,978,446
Industrial (2)1,547,944
 1,428,959
Business products474,091
 498,236
Total net sales$4,586,294
 $3,905,641
Operating profit:   
Automotive$184,706
 $151,757
Industrial (2)112,191
 104,009
Business products21,601
 31,119
Total operating segment profit318,498
 286,885
Interest expense, net(23,307) (6,174)
Intangible asset amortization(21,403) (10,806)
Corporate expense (3)(44,469) (26,130)
Income before income taxes$229,319
 $243,775

Net sales by segment exclude the effect of certain discounts, incentives and freight billed to customers.(1) The line item “Other” represents the net effect of the discounts, incentives, and freight billed to customers whichhas been allocated to their respective segments for the current and prior period.  Previously, the net effect of such items were captured and presented separately in a line item entitled “Other”.
(2) Effective January 1, 2018, the Electrical/electronic Material segment became a division of the Industrial segment. These two reporting segments became a single reporting segment, the Industrial Parts Group. The change in segment reporting is reportedpresented retrospectively.
(3) Includes $13,000 for the three months ended March 31, 2018, in transaction-related costs associated with Alliance Automotive Group ("AAG") and the pending transaction to spin-off the Company's Business Products Group, S.P. Richards, and combine it with Essendant, Inc. ("Essendant").


Net sales is disaggregated by geographical region for each of the Company’s segments, as a componentthe Company deems it best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. Disaggregated geographical net sales by reportable segment are summarized as follows:
 Reportable segments
 Three Months Ended March 31, 2018
 Automotive Industrial Business Products Total
Primary geographical markets:       
North America$1,782,314
 $1,547,944
 $474,091
 $3,804,349
Australasia302,004
 —
 —
 302,004
Europe479,941
 —
 —
 479,941
Total net sales from contracts with customers$2,564,259
 $1,547,944
 $474,091
 $4,586,294

 Reportable segments
 Three Months Ended March 31, 2017
 Automotive Industrial Business Products Total
Primary geographical markets:       
North America$1,703,551
 1,428,959
 498,236
 $3,630,746
Australasia274,895
 —
 —
 274,895
Total net sales from contracts with customers$1,978,446
 $1,428,959
 $498,236
 $3,905,641

Note C – Revenue Recognition

The Company applied Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") using the modified retrospective method effective January 1, 2018. The cumulative effect of initially applying ASU 2014-09 resulted in a reduction to the opening retained earnings balance of $8,000, prior to the tax adjustment, at January 1, 2018 and a related adjustment to other current liabilities as of that date. Revenue for periods prior to January 1, 2018 have not been adjusted and continue to be reported under Revenue Recognition (Topic 605).

The Company primarily recognizes revenue at the point in time transfer of control of products or services to customers occurs in an amount that reflects consideration expected to be received for those products or services. Revenue is recognized net of allowances for returns, variable consideration, and any taxes collected from customers, which are subsequently remitted to governmental authorities. Revenue recognized over time is not significant. The Company may enter into contracts that include multiple combinations of products and services, which are accounted for as separate performance obligations and do not require significant judgment.

Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant.

Product Distribution

The Company generates revenue primarily by distributing products through wholesale and retail channels. For wholesale customers, revenue is recognized when the goods are transferred to customers, title has passed and control of the goods has passed to the customer. Retail revenue is recognized at the point of sale when the goods are transferred to customers and consideration is received. Shipping and handling activities are performed prior to the customer obtaining control of the products. Costs associated with shipping and handling are considered costs to fulfill a contract and are expensed in selling, general, and other costs in the period they are incurred.



Other Revenues and Multiple Performance Obligations

The Company offers software support, product cataloguing, marketing, training and other membership program and support services to its customers. This revenue is recognized as services are provided. Revenue from these services are recognized over a short duration and their impact is not significant. Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price and recognizes revenue upon delivery or as services are rendered.

Variable Consideration

The Company’s condensed consolidated statementsproducts are generally sold with a right of incomereturn and comprehensive income.may include variable consideration in the form of incentives, discounts, credits or rebates. The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.

Contract Balances

There were no material contract assets, contract liabilities or deferred contract costs as of March 31, 2018. Revenue related to unfulfilled performance obligations as of March 31, 2018 is not significant. Costs to obtain customer agreements are included in prepaid expenses and other current assets in the accompanying balance sheets. Liabilities for customer incentives, discounts, or rebates, and other performance obligations are included in other current liabilities in the accompanying balance sheets.



Note CD – Other Comprehensive Income (Loss)
The difference between comprehensive income and net income was due to foreign currency translation adjustments and pension and other post-retirement benefit adjustments, as summarized below.
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in thousands) (in thousands)
Net income$189,972
 $191,369
 $350,132
 $349,394
Other comprehensive income (loss):       
Foreign currency translation23,157
 (24,422) 80,177
 38,944
Pension and other post-retirement benefit adjustments:       
Recognition of prior service credit, net of tax(213) (222) (425) (444)
Recognition of actuarial loss, net of tax5,936
 4,998
 11,880
 9,953
Total other comprehensive income (loss)28,880
 (19,646) 91,632
 48,453
Comprehensive income$218,852
 $171,723
 $441,764
 $397,847
The following tables present the changes in accumulated other comprehensive loss by component for the sixthree months ended June 30:March 31:
 
 2017
 Changes in Accumulated Other
Comprehensive Loss by Component
 Pension and
Other Post-
Retirement
Benefits		 Foreign
Currency
Translation		 Total
 (in thousands)
Beginning balance, January 1$(609,080) $(403,941) $(1,013,021)
Other comprehensive income before reclassifications, net of tax—
 80,177
 80,177
Amounts reclassified from accumulated other comprehensive loss, net of tax11,455
 —
 11,455
Net current period other comprehensive income11,455
 80,177
 91,632
Ending balance, June 30$(597,625) $(323,764) $(921,389)
 2018
 Changes in Accumulated Other
Comprehensive Loss by Component
 Pension and
Other Post-
Retirement
Benefits		 Net Investment Hedge Foreign
Currency
Translation		 Total
Beginning balance, January 1$(568,957) $(17,388) $(266,247) $(852,592)
Other comprehensive (loss) income before reclassifications, net of tax—
 (16,710) 42,880
 26,170
Amounts reclassified from accumulated other comprehensive loss, net of tax7,164
 —
 —
 7,164
Net current period other comprehensive income (loss)7,164
 (16,710) 42,880
 33,334
Ending balance, March 31$(561,793) $(34,098) $(223,367) $(819,258)
2016
Changes in Accumulated Other
Comprehensive Loss by Component		2017
Pension and
Other Post-
Retirement
Benefits		 Foreign
Currency
Translation		 TotalChanges in Accumulated Other
Comprehensive Loss by Component
(in thousands)Pension and
Other Post-
Retirement
Benefits		 Net Investment Hedge Foreign
Currency
Translation		 Total
Beginning balance, January 1$(535,634) $(394,984) $(930,618)$(609,080) $—
 $(403,941) $(1,013,021)
Other comprehensive income before reclassifications, net of tax—
 38,944
 38,944
—
 —
 57,020
 57,020
Amounts reclassified from accumulated other comprehensive loss, net of tax9,509
 —
 9,509
5,732
 —
 —
 5,732
Net current period other comprehensive income9,509
 38,944
 48,453
5,732
 —
 57,020
 62,752
Ending balance, June 30$(526,125) $(356,040) $(882,165)
Ending balance, March 31$(603,348) $—
 $(346,921) $(950,269)
The accumulated other comprehensive loss components related to the pension benefits are included in the computation of net periodic benefit income in the employee benefit plans footnote. The nature of the net investment hedge is discussed in the non-derivative financial instrument footnote.


Note DE – Recent Accounting Pronouncements
Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which will createcreates a single, comprehensive revenue recognition model for recognizing revenue from contracts with customers. The standard iswas effective for interim and annual reporting periods beginning after December 15, 2017 and may be adopted either retrospectively or on a modified retrospective basis. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under previously existing guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others.
The Company has established ASU 2014-09 did not result in a cross-functional implementation team to evaluate and implementsignificant change in the new standard related tojudgment or timing associated with the recognition of revenue from contracts with customers. The Company primarily sells goods and recognizes revenue at point ofthe sale or delivery and this will not change under the new standard. We are completing an analysis of revenue streams at each of the business units and are evaluating the impact the new standard may have on revenue recognition. In addition, the Company is evaluating recently issued guidance on practical expedients as part of the transition decision.
The Company plans to use the modified retrospective adoption method and does not believe there will be a material impact to the Company’s consolidated revenues upon adoption. The Company will continue to evaluate the impacts of the pending adoption of ASU 2014-09 and the preliminary assessments are subject to change.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"), which modifies existing requirements regarding measuring first-in, first-out and average cost inventory at the lower of costproducts or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (“NRV”), and NRV less an approximately normal profit margin. ASU 2015-11 replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory.services. The Company adopted ASU 2015-112014-09 on January 1, 2017 and it did not have a material impact to2018. See the Company's condensed consolidated financial statementsrevenue recognition footnote for the six months ended June 30, 2017 and it will not have a material impact on the annual consolidated financial statements.additional information.


Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, including operating leases, with a term greater than twelve months. Expanded disclosures with additional qualitative and quantitative information will also be required. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The Company is currently evaluatinghas established a cross-functional team to evaluate and implement the impact of ASU 2016-02 on its condensed consolidated financial statements and related disclosures.new standard. As disclosed in the leased properties footnote in the 20162017 Annual Report on Form 10-K, the future minimum payments under noncancelable operating leases are approximately $865.0 million$1,140,000 and the Company does believebelieves the adoption of this standard will have a significant impact on the consolidated balance sheets.
InIncome Tax Reform
As more fully discussed in Note 7 of the Company’s notes to the consolidated financial statements in its 2017 Annual Report on Form 10-K, the Tax Cuts and Jobs Act (the Act) was enacted December 22, 2017. As of March 2016,31, 2018, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09") that changesCompany has not completed the accounting for certain aspectsthe tax effects of share-based compensationthe enactment of the Act; however, the Company has made a reasonable estimate of the effect of the Act on the existing deferred tax balances and of the one-time transition tax. There was no impact on the tax rate as a result of a change in estimate for the three months ended March 31, 2018. In all cases, the Company will continue to employees including forfeitures, employer tax withholding,make and refine the financial statement presentation of excess tax benefits or expense. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based compensation, which prospectively reclassifies cash flows from excess tax benefits of share-based compensation currently disclosed in financing activities to operating activities in the period of adoption. The guidance will increase income tax expense volatility,calculations as well asadditional analysis is completed. Further, the Company's cash flows from operations. estimates may also be affected as regulations and additional guidance become available.
In addition, the Act subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. Given the complexity of the GILTI provisions, the Company didis still evaluating the effects and has not elect to change shares withheld for employment income tax purposes, oryet determined the current methodology of estimating forfeitures upon adoption.new accounting policy. The Company adopted ASU 2016-09 on January 1, 2017 on a prospective basis. The adoption of ASU 2016-09 did not have a material impact to the Company's condensed consolidated financial statements for the six months ended June 30, 2017 and itprovision is not expected to have a material impact on the annualCompany’s consolidated financial statements or related disclosures.
Compensation-Retirement Benefits (Topic 715)
In MarchMarch 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) ("ASU 2017-07"), which requires an entity to report the service cost component of net periodic benefit cost in the same line item as other compensation costs (selling, administrative and other expenses), and the remaining components in non-operating expense in the consolidated statement of income and comprehensive income. This standard iswas effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company will adoptadopted ASU 2017-07, retrospectively, on January 1, 2018 and it isdid not expected to have a material impact on the Company’sCompany's condensed consolidated financial statements or related disclosures.


Note E – Credit Facilities
In June 2017, See the Company exercised its remaining optional one year extension on the $1.2 billion multi-currency Syndicated Facility (the "Syndicated Facility") amended June 19, 2015, to extend the maturity date from June 2021 to June 2022.
At June 30, 2017, approximately $580.0 million was outstanding under the Syndicated Facility and is included in "Current portion of debt" in the accompanying condensed consolidated balance sheet.employee benefit plans footnote for additional information.
Note F – Share-Based Compensation
As more fully discussed in Note 56 of the Company’s notes to the consolidated financial statements in its 20162017 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. SARs represent a right to receive upon exercise an amount, payable in shares of common stock, equal to the excess, if any, of the fair market value of the Company’s common stock on the date of exercise over the base value of the grant. The terms of such SARs require net settlement in shares of common stock and do not provide for cash settlement. RSUs represent a contingent right to receive one share of the Company’s common stock at a future date. The majority of awards previously granted vest on a pro-rata basis for periods ranging from one to five years and are expensed accordingly on a straight-line basis. The Company issues new shares upon exercise or conversion of awards under these plans. Most awards may be exercised or converted to shares not earlier than twelve months nor later than ten years from the date of grant. At June 30, 2017,March 31, 2018, total compensation cost related to nonvested awards not yet recognized was approximately $42.5 million,$24,201, as compared to $34.6 million$32,812 at December 31, 2016.2017. The weighted-average period over which this compensation cost is expected to be recognized is approximately threetwo years. The aggregate intrinsic value for SARs and RSUs outstanding at June 30, 2017March 31, 2018 was approximately $95.8 million.$64,069. At June 30, 2017,March 31, 2018, the aggregate intrinsic value for SARs and RSUs vested totaled approximately $50.0 million,$32,688, and the weighted-average contractual lives for outstanding and exercisable SARs and RSUs were approximately six and five years, respectively. For the sixthree months ended June 30, 2017, $8.1 millionMarch 31, 2018, $3,686 of share-based compensation cost was recorded, as compared to $10.0 million$2,717 for the same sixthree month period in the prior year.

Options to purchase approximately 2.0 million and 1.7 million1,334,000 shares of common stock were outstanding but excluded from the computation of diluted earnings per share for the three and six month periodsperiod ended June 30, 2017, respectively,March 31, 2018, as compared to approximately 1.5 million and 1.1 million1,279,000 shares for the three and six month periodsperiod ended June 30, 2016, respectively.March 31, 2017. These options were excluded from the computation of diluted net income per common share because the options’ exercise prices were greater than the average market price of the common stock. On April 3, 2017, the Company granted approximately 744,000 SARs and 166,000 RSUs.


Note G – Employee Benefit Plans

Net periodic benefit income for the Company's pension plans included the following components for the three months ended June 30:March 31:
 Pension Benefits
 2018 2017
Service cost$2,654
 $2,157
Interest cost22,113
 24,132
Expected return on plan assets(38,588) (39,733)
Amortization of prior service credit(37) (88)
Amortization of actuarial loss9,959
 9,485
Net periodic benefit income$(3,899) $(4,047)

 Pension Benefits
 2017 2016
 (in thousands)
Service cost$2,133
 $2,124
Interest cost24,099
 26,219
Expected return on plan assets(39,681) (39,333)
Amortization of prior service credit(87) (108)
Amortization of actuarial loss9,466
 7,875
Net periodic benefit income$(4,070) $(3,223)







Net periodic benefitService cost is recorded in selling, administrative and other expenses in the consolidated statements of income for the pension plans included the followingand comprehensive income while all other components for the six months ended June 30:
 Pension Benefits
 2017 2016
 (in thousands)
Service cost$4,290
 $4,151
Interest cost48,231
 52,310
Expected return on plan assets(79,414) (78,471)
Amortization of prior service credit(175) (216)
Amortization of actuarial loss18,951
 15,670
Net periodic benefit income$(8,117) $(6,556)

are recorded within other non-operating expenses (income). Pension benefits also include amounts related to a supplemental retirement plan. During the sixthree months ended June 30, 2017,March 31, 2018, the Company made a $38.7 million$38,700 contribution to the pension plan.
Note H – Guarantees
The Company guarantees the borrowings of certain independently controlled automotive parts stores (“independents”) and certain other affiliates in which the Company has a noncontrolling equity ownership interest (“affiliates”). Presently, the independents are generally consolidated by unaffiliated enterprises that have controlling financial interests through ownership of a majority voting interest in the independents. The Company has no voting interest or equity conversion rights in any of the independents. The Company does not control the independents or the affiliates, but receives a fee for the guarantees. The Company has concluded that the independents are variable interest entities, but that the Company is not the primary beneficiary. Specifically, the equity holders of the independents have the power to direct the activities that most significantly impact the entities’ economic performance including, but not limited to, decisions about hiring and terminating personnel, local marketing and promotional initiatives, pricing and selling activities, credit decisions, monitoring and maintaining appropriate inventories, and store hours. Separately, the Company concluded the affiliates are not variable interest entities. The Company’s maximum exposure to loss as a result of its involvement with these independents and affiliates is generally equal to the total borrowings subject to the Company’s guarantees. While such borrowings of the independents and affiliates are outstanding, the Company is required to maintain compliance with certain covenants, including a maximum debt to capitalization ratio and certain limitations on additional borrowings. At June 30, 2017,March 31, 2018, the Company was in compliance with all such covenants.
At June 30, 2017,March 31, 2018, the total borrowings of the independents and affiliates subject to guarantee by the Company were approximately $499.2 million.$651,293. These loans generally mature over periods from one to six years. In the event that the Company is required to make payments in connection with guaranteed obligations of the independents or the affiliates, 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 guarantees. When it is deemed probable that the Company will incur a loss in connection with a guarantee, a liability is recorded equal to this estimated loss. To date, the Company has had no significant losses in connection with guarantees of independents’ and affiliates’ borrowings.
As of June 30, 2017,March 31, 2018, the Company has recognized certain assets and liabilities amounting to $53.0 million$70,000 each for the guarantees related to the independents’ and affiliates’ borrowings. These assets and liabilities are included in other assets and other long-term liabilities in the condensed consolidated balance sheets.
Note I – Fair Value of Financial Instruments
The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade accounts receivable, trade accounts payable, and borrowings under the line of credit and term loan approximate their respective fair values based on the short-term nature of these instruments. At June 30, 2017,As of March 31, 2018, the carrying value, net of debt issuance costs, and the fair value of fixed rate debt were approximately $550.0 million$1,528,068 and $558.6 million,$1,498,405, respectively. The fair value of fixed rate debt is designated as Level 2 in the fair value hierarchy (i.e., significant observable inputs) and is based primarily on the discounted value of future cash flows using current market interest rates offered for debt of similar credit risk and maturity. The carrying value, net


of debt issuance costs, of fixed rate debt of $550.0 million$1,528,068 is included in long-term debt in the accompanying condensed consolidated balance sheets.sheet.
Note J – Non-derivative Financial Instrument
As of March 31, 2018, the Company had designated €700,000 of the face value of Euro-denominated debt, a non-derivative financial instrument, as a hedge of the foreign currency exchange rate exposure of an equal amount to the Company's euro-denominated net investment in certain European subsidiaries. As of March 31, 2018, the euro-denominated debt has a total carrying value of $862,750, which is included in long-term debt in the Company’s condensed consolidated balance sheet. For the three months ended March 31, 2018, the Company recorded a loss, net of tax, of approximately $16,710 in the net investment hedge section of the accumulated other comprehensive loss in the Company’s condensed consolidated balance sheet and statement of income and comprehensive income. No hedge ineffectiveness was recognized in income.
Note K – Legal Matters
On April 17,As more fully discussed in Note 10 of the Company's notes to the consolidated financial statements in its 2017 Annual Report on Form 10-K, a jury awarded damages against the Company of $81.5 million in a litigated automotive product liability disputedispute. . The Company believes the verdict is not supported by the facts or the law and is contrary to the Company’s role in the automotive


parts industry. The Company intends to challenge the verdict through post-trial motions and, if necessary, on appeal to a higher court. The awarded damages are before offsets from previous settlements and potential bankruptcy trust claims, which are not currently known as a result of the judicial process, but are expected to reduce the initial awarded damages. At the time of the filing of these financial statements, based upon the Company’s legal defenses, insurance coverage, and reserves, the Company does not believe this matter will have a material impact to the condensed consolidated financial statements; however, this assessment may change as additional facts are known and the judicial process progresses.statements.
Note KL – Acquisitions and Equity Investments
DuringAs more fully discussed in Note 11 of the six months ended June 30,Company's notes to the consolidated financial statements in its 2017 Annual Report on Form 10-K, the Company acquired certain companies and equity investments for approximately $217.9 million. The Company recognized and measuredestimated fair values of the assets acquired and liabilities assumed based on their fair values as part of their respectivethe AAG acquisition dates. The results of operationsin November 2017 are preliminary and subject to revision. For the three months ended March 31, 2018, no significant changes were made to the provisional amounts disclosed for the acquired companies were included inyear ended December 31, 2017.
Note M – Reclassifications
Certain prior period amounts have been reclassified to conform to the Company’scurrent year presentations. Within the condensed consolidated statements of income beginning onand comprehensive income, the Company adopted ASU 2017-07 and adjusted the prior period to include the components of net periodic benefit income other than the service cost component within other non-operating expenses (income). See the employee benefit plans footnote for additional information.
As more fully discussed in the segment information footnote, the Company adjusted prior period net sales to allocate discounts, incentives, and freight billed to customers to their respective acquisition dates.segments and also combined the Industrial and Electrical/electronic Materials segments.
Note N – Subsequent Event
On April 12, 2018, the Company entered into a definitive agreement with Essendant to combine with the Company's Business Products Group in a business combination transaction. The transaction is structured as a Reverse Morris Trust, in which the Company recordedwill separate the Business Products Group into a standalone company and spin off that standalone company to the Company's shareholders, immediately followed by the merger of a subsidiary of Essendant and the spun-off company. The proceeds of the transaction will take the form of Essendant shares to be issued at closing to the Company's shareholders plus one-time cash payments to the Company of approximately $76.7 million$347,000, subject to adjustments at closing. Upon closing, the Company's shareholders will own approximately 51% and Essendant shareholders will own approximately 49% of goodwillthe combined company on a diluted basis, with approximately 80,000,000 diluted shares expected to be outstanding. The spinoff will have no effect on the number of the Company's common shares owned by the Company's shareholders or the number of shares of the Company's common stock outstanding. The transaction is intended to be tax-free to the Company's shareholders for U.S. federal income tax purposes.
The transaction is expected to close before the end of 2018, subject to regulatory and Essendant shareholder approvals and other intangible assets associated with the acquisitions.customary closing conditions. The Company is in the process of analyzing the estimated values of assets and liabilities acquired and is obtaining third-party valuations of certain tangible and intangible assets. The allocations of the respective purchase prices are therefore preliminaryBusiness Products Group will continue to be classified as "held and subject to revision. Additional disclosureused" on the Company's condensed consolidated balance sheet until the closing of the Inenco investment is provided below.
Effective April 3, 2017,transaction.  The spinoff announcement was evaluated and determined not to be an event or a change in circumstance that required a recoverability test or a goodwill impairment assessment.  However, an impairment loss could be recognized by the Company acquired a 35% investment inat the Inenco Group for approximately $72.1 million from Conbear Holdings Pty Limited ("Conbear"). The acquisition was funded withspinoff date if the Company’s cash on handaggregate carrying amount of the Business Products Group's assets and is classified as acquisition and other investing activities on the condensed consolidated statement of cash flows. The Inenco Group, which is headquartered in Sydney, Australia, is an industrial distributor of bearings, power transmissions, and seals in Australasia, with annual revenues of approximately $325 million and 161 locations across Australia and New Zealand, as well as an emerging presence in Asia.
liabilities exceeds its aggregate fair value at that date.  The Company and Conbear both havecannot currently predict whether an option to acquire or sell, respectively, the remaining 65% of Inenco at a later date contingent upon certain conditions being satisfied. However, there can be no guarantee that such conditionsimpairment loss will be met or, if they are met, whether either company would exercise its option.recorded at the spinoff date.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and with the audited consolidated financial statements, accompanying notes, related


information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Forward-Looking Statements

Some statements in this report, as well as in other materials we file with the Securities and Exchange Commission ("SEC")(SEC) or otherwise release to the public and in materials that we make available on our website, constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Senior officers may also make verbal statements to analysts, investors, the media and others that are forward-looking. Forward-looking statements may relate, for example, to the proposed business combination transaction between the Company and Essendant in which the Company will spin-off its Business Products Group and combine this business with Essendant or the acquisition of AAG and the anticipated strategic benefits, synergies and other attributes of these transactions, as well as future operations, prospects, strategies, financial condition, economic performance (including growth and earnings), industry conditions and demand for our products and services. The Company cautions that its forward-looking statements involve risks and uncertainties, and while we believe that our expectations for the future are reasonable in view of currently available information, you are cautioned not to place undue reliance on our forward-looking statements. Actual results or events may differ materially from those indicated as a result of various important factors. Such factors may include, among other things, the Company’s ability to successfully integrate AAG into the Company and to realize the anticipated synergies and benefits; changes in the European aftermarket; the Company's ability to complete the transaction to spin-off its Business Products Group and combine it with Essendant; the Company’s ability to successfully implement its business initiatives in each of its fourthree business segments; slowing demand for the Company’s products; changes in legislation or government regulations or policies; changes in general economic conditions, including unemployment, inflation or deflation; changes in tax policies; volatile exchange rates; high energy costs; uncertain credit markets and other macro-economic conditions; competitive product, service and pricing pressures; the ability to maintain favorable vendor arrangements and relationships; disruptions in our vendors’ operations; the Company’s ability to successfully integrate its other acquired businesses; the uncertainties and costs of litigation; disruptions caused by a failure or breach of the Company’s information systems, as well as other risks and uncertainties discussed in the Company’s Annual Report on Form 10-K for 20162017 and from time to time in the Company’s subsequent filings with the SEC.

Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward-looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent reports on Forms 10-K, 10-Q, 8-K and other reports to the SEC.



Overview
Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts office products and electrical/electronic materials. The Company haselectrical materials, and business products. We have a long tradition of growth dating back to 1928, the year we were founded in Atlanta, Georgia. During the sixthree months ended June 30, 2017,March 31, 2018, business was conducted throughout the United States, Canada, Australia, New Zealand, Mexico, the U.K., France, Germany, Poland, and Puerto Rico from approximately 2,6703,100 locations.

SalesFor the periods presented, the Company is reporting its operations under three business segments: Automotive, Industrial and Business Products. Effective in 2018, EIS, Inc., formerly our Electrical and Electronic business segment, was combined with Motion Industries and is now identified as the Electrical Specialties Group of Motion Industries. As a result, the Industrial business segment is comprised of Motion Industries and EIS, Inc. The combination of these two segments will provide strong economies of scale and greater operating efficiencies, which we intend to leverage. The opportunity to build synergies by sharing talent, physical resources, greater size and scale, and value-added expertise in each respective market channel is highly compelling. We anticipate this combination will create value for both our customers and all our stakeholders.

For the three months ended June 30, 2017March 31, 2018 sales were $4.10$4.59 billion, a 5%17.4% increase as compared to $3.90$3.91 billion in the same period of the prior year. For the three months ended June 30, 2017,March 31, 2018, the Company recorded consolidated net income of $190.0$176.6 million a decrease of 1% as compared to consolidated net income of $191.4$160.2 million in the same three month period of the prior year. For the six months ended June 30, 2017 sales were $8.01 billion,year, an increase of 10.2%. On a 5%per share diluted basis, net income was $1.20, an increase of 11.1% as compared to $7.62 billion$1.08 in the same period of the prior year. For the six months ended June 30, 2017, the Company recorded consolidated net income of $350.1 million, representing a slight increase compared to consolidated net income of $349.4 million in the same sixthree month period of 2017.
On April 12, 2018, the prior year.Company entered into a definitive agreement with Essendant to combine with the Company's Business Products Group in a business combination transaction. The transaction is structured as a Reverse Morris Trust, in which the Company will separate the Business Products Group into a standalone company and spin off that standalone company to the Company's shareholders, immediately followed by the merger of Essendant and the spun-off company. The transaction is expected to close before the end of 2018, subject to regulatory and Essendant shareholder approvals and other customary closing conditions.


In the three month period ended March 31, 2018, the Company incurred certain transaction-related costs associated with the $2.0 billion European acquisition of AAG on November 1, 2017 and the pending transaction to spin-off the Company's Business Products Group and combine it with Essendant. Before the impact of these costs, the Company's adjusted net income was $186.5 million, an increase of 16.4%, or $1.27 on an adjsuted per share diluted basis, an increase of 17.6%, in the three month period ended March 31, 2018.
The Company continuesremains committed to focusits key growth initiatives, which include: driving greater share of spend with existing customers; employing an aggressive but disciplined acquisition strategy focused on both geographical in-fill and product line adjacencies; expanding the Company's digital capabilities; and, the further expansion of our U.S. and international store footprint. Such sales initiatives, as well as a variety of initiatives to facilitate continued growth including strategic acquisitions, the introduction of new and expanded product lines, geographic expansion, sales to new markets, enhanced customer marketing programs and a variety ofongoing gross margin and cost savings initiatives.initiatives, are intended to drive long-term sustained revenue and profit growth.

Sales

As noted above, sales forFor the three months ended June 30, 2017March 31, 2018 sales were $4.10$4.59 billion, a 5%17.4% increase as compared to $3.90 billion in the same period of the prior year. The revenue increase for the three months ended June 30, 2017, consisted of an approximate 3.5% contribution from acquisitions and a positive 2% net impact of organic sales, less a 0.5% currency headwind. For the six months ended June 30, 2017 sales were $8.01 billion, a 5% increase as compared to $7.62$3.91 billion in the same period of the prior year whichThis reflects a 1.5%an approximate 2% increase in organic sales, and a 3.5%14% contribution from acquisitions and a1% favorable currency impact, as compared to the same sixthree month period in 2016.2017.

Sales for the Automotive Parts Group increased 4%29.6% in the secondfirst quarter of 2017,2018, as compared to the same period in the prior year. This group’s revenue increase for the three months ended June 30, 2017March 31, 2018 consisted of an approximate 2.5%1.5% increase in organic sales, a 27% benefit from acquisitions and a positive 1.5% net impact of organic sales, less a nominalfavorable currency headwind. This group’s 3.5% sales increase for the six month period ended June 30, 2017 reflects a 1% increase from organic sales growth, an approximate 2% contribution from acquisitions, and a slight currency tailwind from our businesses throughout Australia, Canada and Mexico.impact. We anticipate the Company’s initiatives to drive both organic and acquisitionacquisitive growth will positively benefit the Automotive Parts Group through increased sales in the quarters ahead.

TheSales for the Industrial Products Group’s salesGroup increased by approximately 7%8.3% for the three month period ended June 30, 2017,March 31, 2018, as compared to the same period in 2016.2017. The increase in this group’s revenues reflects aan approximate 5% increase in organic sales, an approximate 2.5%a 3% accretive impact of acquisitions offset byand a slightslightly favorable foreign currency headwind. This group’s 7% sales increase for the six month period ended June 30, 2017 reflects a 4% increase in organic sales and a 3% contribution from acquisitions.impact. The Industrial ProductProducts Group has multiple initiatives in place to continuedrive continued market share expansion through both organic and acquisitionacquisitive sales growth in the quarters ahead.

Sales for the OfficeBusiness Products Group increased approximately 5%decreased 4.8% for the three months ended June 30, 2017, primarilyMarch 31, 2018, due to an 8% accretive impact from acquisitions, which was partially offset by a 3%its decrease in organic sales as compared to the same three month period in 2016. For2017. On April 12, 2018, we entered into a definitive agreement with Essendant to combine with our Business Products Group in a business combination transaction. The transaction is expected to close before the six months ended June 30, 2017,end of 2018, subject to regulatory and Essendant shareholder approvals and other customary closing conditions. Until this group’s revenues increased 7% due to a 10% accretive impact from acquisitions less a 3% decrease in organic sales. We expecttransaction closes, we will remain focused on our internal salescore growth initiatives for this business, including our plans tothe further enhanceenhancement of our Facilities, Breakroom and Safety Products offering, to support revenue growth for this group in the quarters ahead.

Sales for the Electrical/Electronic Materials Group increased 11% for the three months ended June 30, 2017, as compared to the same period in 2016, and reflect an approximate 1% decrease in organic sales, a 1% positive impact of copper pricing, and an approximate 11% accretive impact of the Company’s acquisitions. For the six months ended June 30, 2017, this group’s revenues increased 8%, and reflect an approximate 7% accretive impact of the Company’s acquisitions, a 0.5% increase in organic sales and a 1% positive impact of copper pricing. We expect our focused growth initiatives, including acquisitions, to enable this group to report ongoing revenue growth in the quarters ahead.offering.

For the sixthree month period ended June 30, 2017,March 31, 2018, industry pricing increased 0.1%was flat in the Automotive segment and increased approximately 0.6% in the OfficeBusiness Products segment and increased approximately 1.6%1.3% in the Industrial and Electrical/Electronic Materials segments.segment.


Cost of Goods Sold/Expenses

Cost of goods sold for the three months ended June 30, 2017March 31, 2018 was $2.86$3.15 billion, a 5%14.6% increase from $2.73 billion for the same period in 2016. As a percentage of net sales, cost of goods sold was 69.8% for the three month period ended June 30, 2017, as compared to 70.1% in the same three month period of 2016. Cost of goods sold for the six months ended June 30, 2017 was $5.61 billion, a 5% increase from $5.35$2.75 billion for the same period in the prior year. As a percent of net sales, cost of goods sold was 70.1%68.7% as compared to 70.2%70.4% in the same sixthree month period of 2016.2017. The increase in cost of goods sold for the three and six month periodsperiod ended June 30, 2017March 31, 2018 primarily relates to the sales increase for this period as compared to the same three and six month periodsperiod of the prior year. In addition, the increase includes approximately $6 million in transaction-related costs recorded to cost of goods sold in association with the acquisition of AAG on November 1, 2017. The increase was partially offset by the favorable impact of the lower cost of goods sold model at AAG as well as at certain other acquisitions. The Company’s cost of goods sold includes the total cost of merchandise sold, including freight expenses associated with moving merchandise from our vendors to our distribution centers, retail stores and branches, as well as vendor volume incentives and inventory adjustments. Gross profit as a percentage of net sales may fluctuate based on (i) changes in merchandise costs and related vendor volume incentives or pricing, (ii) variations in product and customer mix, (iii) price changes in response to competitive pressures, (iv) physical inventory and LIFO adjustments, and (v) changes in foreign currency exchange rates.

Total operating expenses increased to $942.6 million$1.19 billion for the three month period ended June 30, 2017March 31, 2018 as compared to $865.4$918.6 million for the same three month period in 2016.2017. As a percentage of net sales, operating expenses increased to 23.0%26.1% as compared to 22.2%23.5% in the same three month period of the previous year. For the six months ended June 30, 2017, these expenses totaled $1.85 billion, or 23.2% as a percentage of net sales, compared to $1.72 billion, or 22.6% as a percentage of net sales for the same six period in the prior year. The increase in operating expenses as a percentage of net sales for the three and six month periodsperiod ended June 30, 2017March 31, 2018 reflects the Company’s deleveraging of expenses on lower comparable sales in the U.S. Automotive and Business Products segments, as well as customerhigher costs in areas such as payroll, IT, digital, legal, professional and product mix shiftsinsurance, freight and delivery, and acquisition related integration costs. We continueLikewise, the increase includes the impact of the higher operating


expense model at AAG as well as at certain other acquisitions. Finally, the increase includes approximately $7 million in transaction-related costs associated with the acquisition of AAG on November 1, 2017, and the pending transaction to spin-off the Company's Business Products Group, S.P. Richards, and combine it with Essendant, announced on April 12, 2018. The Company continues to focus on effectively managing the costs in our businesses with ongoing investments in technology and supply chain initiatives primarily associated with freight, digital and logistics related functions.

The Company’s operating expenses are substantially comprised of compensation and benefit related costs for personnel. Other major expense categories include facility occupancy costs for headquarters, distribution centers and retail store/branch operations, insurance costs, accounting, legal and professional services, transportation and delivery costs, travel and advertising. Management’s ongoing cost control measures in these areas have served to improve the Company’s overall cost structure. The Company's recent acquisitions have lower costs of goods sold and higher levels of operating costs as compared to the Company's other businesses, however, the operating profit margins remain consistent.
Operating Profit

Operating profit increased to $349.3$318.5 million for the three months ended June 30, 2017,March 31, 2018, compared to $340.5$286.9 million for the same three month period of the prior year.year, an increase of 11.0%. As a percentage of net sales, operating profit was 8.5%,6.9% as compared to 8.7%7.3% in the same three month period of 2016. For the six months ended June 30, 2017, operating profit increased to $636.1 million compared to $625.1 million for the same six month period of the prior year, and as a percentage of net sales, operating profit was 7.9%, as compared to 8.2% in the same six month period of 2016.2017. The decrease in operating profit as a percentage of net sales for the three and six month periodsperiod ended June 30, 2017March 31, 2018 is primarily due to customer and product mix shifts and their impact on our ability to leveragethe deleveraging of fixed costs associated with lower comparable sales growth.growth in the U.S. Automotive and Business products segments, higher expenses in areas such as IT, digital, legal, professional and insurance, freight and delivery and acquisition related costs and lower volume incentives in the Business Products Group. These increases were partially offset by our ongoing cost control initiatives.

The Automotive Parts Group’s operating profit increased 2%21.7% in the three month period ended June 30, 2017,March 31, 2018 as compared to the same period of 2016,2017, and its operating profit margin was 9.6%,7.2% as compared to 9.7%7.7% in the same three month period of the prior year. For the six months ended June 30, 2017, the Automotive Parts Group’s operating profit increased approximately 0.5% and the operating profit margin was 8.6% as compared to 8.9% in the same six month period of 2016.period. The decrease in operating profit margin for the three and six month periodsperiod ended June 30, 2017March 31, 2018 is primarily due to the slow organic sales environment in our U.S. Automotive businesses and its impact on expense leverage which was partially offset by the positive impact of operating profit margin cost control initiatives.as well as higher costs in areas such as payroll, IT, digital, legal, professional and insurance, freight and delivery and acquisition related costs.

The Industrial Products Group’s operating profit increased 9%7.9% in the three month period ended June 30, 2017,March 31 2018 as compared to the same three month period of 2016,2017, and the operating profit margin for this group was 7.7%7.2% compared to 7.6%7.3% for the same period of the previous year. Operating profit for the Industrial Products Group increased by 10% for the six month period ended June 30, 2017, compared to the same period in 2016, and the operating profit margin was 7.5% compared to 7.3% for the same six month period in 2016. The increaseslight decrease in operating profit margin for the three and six month periodsperiod ended June 30, 2017March 31, 2018 is primarily due to increasedthe margin decline in Industrial's Electrical Specialty Group. This was partially offset by the Industrial Group's overall increase in organic sales volume higher volume incentives and theirits positive impact on expense leverage.leverage, as well as improved core gross margin.

The OfficeBusiness Products Group’s operating profit decreased 8%30.6% for the three months ended June 30, 2017,March 31, 2018, compared to the same three month period in 2016,2017, and the operating profit margin for this group was 6.0%4.6% compared to 6.8%6.2% for the same three month period


of 2016. For the six months ended June 30, 2017, the Office Products Group’s operating profit decreased 8% compared to the same period of the prior year, and the operating profit margin was 6.0% compared to 7.0% for the same period in 2016.2017. The decrease in operating profit margin for the three and six month periodsperiod ended June 30, 2017March 31, 2018 is primarily due to the following factors: the impact of lower organic sales volume and its negative impact on expense leverage; rising costs associated with serving a growing number of sales channels;leverage and incremental acquisition related costs. The Company has implemented several initiatives to drive significant cost savings for this group in the quarters ahead.

The Electrical/Electronic Materials Group operating profit decreased 3% for the three months ended June 30, 2017, as compared to the same three month period in 2016, and its operating profit margin was 7.6% compared to 8.7% in the same three month period of the prior year. Operating profit for the Electrical/Electronic Materials Group decreased by approximately 5% for the six month period ended June 30, 2017, compared to the same period in 2016, and the operating profit margin was 7.5% compared to 8.6% for the same six month period in 2016. The decrease in operating profit margin for the three and six month periods ended June 30, 2017 is primarily due to customer and product mix shifts, which partially offset the positive impact of cost savings initiatives.lower volume incentives.
Income Taxes

The effective income tax rate was 36.1%23.0% for the three month periodmonths ended June 30, 2017,March 31, 2018, compared to 36.2%34.3% for the same three month period in 2016.2017. The effective income tax rate was 35.3% fordecrease is primarily due to the six month period ended June 30,Tax Cuts and Jobs Act enacted in December 2017, compared to 36.1% for the same period in 2016. The rate decrease in the three and six month periods ended June 30, 2017 reflects the highera favorable mix of U.S. and foreign earnings, taxed at a lower rate relative to our U.S. operations andincluding AAG acquired in November 2017, as well as an increase in the positive impact of the recognition of excess tax benefits due to the adoption of ASU 2016-09 pertaining to Stock Compensationstock compensation as compared to the same periodsthree month period in 2016.2017.
Net Income

For the three months ended June 30, 2017,March 31, 2018, the Company recorded consolidated net income of $190.0$176.6 million, a decreasean increase of 1%10.2% as compared to consolidated net income of $191.4$160.2 million in the same three month period of the prior year. On a per share diluted basis, net income was $1.29,$1.20, an increase of 1%11.1% as compared to $1.28 for$1.08 in the same three month period of 2016. For2017.
The Company incurred certain transaction-related costs in the six months ended June 30,first quarter associated with the acquisition of AAG on November 1, 2017 and the Company recorded consolidatedpending transaction to spin-off the Company's Business Products Group and combine it with Essendant. Before the impact of these costs, the Company's adjusted net income was $186.5 million, an increase of $350.1 million as compared to consolidated net income of $349.4 million in the same six month period of the prior year. On a16.4%, or $1.27 on an adjusted per share diluted basis, net income was $2.36, an increase of 1% as compared to $2.3317.6%, in the same sixthree month period ended June 30, 2016.March 31, 2018.


The following table sets fourth a reconciliation of net income and net income per common share to adjusted net income and adjusted diluted net income per common share to account for the impact of these adjustments. The Company does not, nor does it suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. The Company believes that the presentation of adjusted net income and adjusted net income per common share provides meaningful supplemental information to both management and investors that is indicative of the Company's core operations.
 Three Months Ended March 31,
 2018 2017
 (Unaudited)
 (in thousands, except per share data)
    
GAAP net income$176,576
 $160,160
Diluted net income per common share$1.20
 $1.08
    
Add after-tax adjustments:   
Transaction-related costs9,883
 —
    
Adjusted net income$186,459
 $160,160
Adjusted diluted net income per common share$1.27
 $1.08
Financial Condition
The Company’s cash balance of $203.1$326.0 million at June 30, 2017 decreased $39.7March 31, 2018 increased $11.0 million or 16%3.5% from December 31, 2016.2017. For the sixthree months ended June 30, 2017,March 31, 2018, the Company used $240.2$38.6 million for acquisitions and other investing activities, $197.4$99.0 million for dividends paid to the Company’s shareholders, $54.1and $31.6 million for investments in the Company via capital expenditures and $153.5 million for share repurchases.expenditures. The Company did not repurchase any stock in the first quarter of 2018. These items were partiallyfully offset by the Company’s earnings and net cash provided by operating activities, as well as the Company's debt structure as outlined in liquidity below.

Accounts receivable increased $231.4$219.6 million or 12%9% from December 31, 2016,2017, which is due to the Company’s acquisitions and higher sales volume in the sixthree month period ended June 30, 2017March 31, 2018 as compared to the fourth quarter or 2016.of 2017. Inventory increased $119.9$1.8 million, or approximately 4% compared tovirtually unchanged from the inventory balance at December 31, 2016,2017. Accounts payable increased $138.3 million or 4% from December 31, 2017, primarily due to acquisitions, the impact of foreign exchange and planned increases to support growth. Accounts payable increased $221.9 million or 7% from December 31, 2016, primarily due to increased purchasing volumes and more favorable payment terms negotiated with the Company's vendors in the sixthree month period ended June 30, 2017.March 31, 2018. The Company’s debt is discussed below.
Liquidity and Capital Resources
Total debt of $3.32 billion at June 30, 2017March 31, 2018 increased $255$71 million, or 29%2.2%, from December 31, 2016,2017, primarily related to cash used forfunding the Company’s acquisitions, reinvestment in our businesses and share repurchase program. The Company maintains a $1.20 billion unsecured revolving line of credit with a consortium of financial institutions with an option to increase the borrowing capacity by an additional $350.0 million. The line of credit bears interest at LIBOR plus various margins, which are based on the Company’s leverage ratio. In June 2017, the Company exercised its remaining option to extend the maturity date from June 2021 to June 2022.working capital needs. At June 30, 2017, $580.0 million was outstanding under the line of credit.

As of June 30, 2017, the remaining $550.0 million debt outstanding is at fixed rates of interest and remained unchanged as compared to DecemberMarch 31, 2016. The fixed rate debt is comprised of two notes of $250.0 million each and one note of $50.0 million. One $250.0 million note is due in December 2023 and the other is due in November 2026, and each carry an interest rate of 2.99%.


The remaining $50.0 million Series G Senior Unsecured Note, which was executed in July 2016, carries a 2.39% interest rate and is due in July 2021.

At June 30, 2017,2018, the Company's total average cost of debt was 2.49%2.84% and the Company remained in compliance with all covenants connected with the above borrowings.

The ratio of current assets to current liabilities was 1.3 to 1 at June 30, 2017, as compared to 1.4 to 1March 31, 2018, unchanged from the level at December 31, 2016.
2017. The Company currently believes existing lines of credit and cash generated from operations will be sufficient to fund anticipated operations, including discretionary share repurchases, if any, for the foreseeable future.


Item 3. Quantitative and Qualitative Disclosures about Market Risk
Although the Company does not face material risks related to interest rates and commodity prices, the Company is exposed to changes in foreign currency rates with respect to foreign currency denominated operating revenues and expenses. The Company has translation gains or losses that result from translation of the results of operations of an operating unit’s foreign functional currency into U.S. dollars for consolidated financial statement purposes. The Company’s principal foreign currency exchange exposures are the Euro, British pound, Australian dollar, Canadian dollar and Mexican peso, which are the functional currencies of our operations in Europe, Australia, Canada and Mexico, operations, respectively. As previously noted under “Sales,” foreign currency exchange exposure, particularly in regard to the Australian dollar and Canadian dollar, negativelypositively impacted our results for the three month period ended June 30, 2017, and marginally benefited the Company's results for the six month period ended June 30, 2017.March 31, 2018. There have been no other material changes in market risk from the information provided in the Company’s 20162017 Annual Report on Form10-K.Form 10-K.
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 furnishes under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, 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 20162017 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 20162017 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 ended June 30, 2017:March 31, 2018:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total
Number of
Shares
Purchased
(1)
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
 
Maximum Number of
Shares That May Yet
Be Purchased Under
the Plans or
Programs
April 1, 2017 through
April 30, 2017		122,279 $92.14 97,933 3,112,259
May 1, 2017 through
May 31, 2017		517,793 $91.40 498,743 2,613,516
June 1, 2017 through
June 30, 2017		18,809 $92.58 — 2,613,516
Totals658,881 $91.57 596,676 2,613,516
Period
Total
Number of
Shares
Purchased
(1)
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
 
Maximum Number of
Shares That May Yet
Be Purchased Under
the Plans or
Programs
January 1, 2018 through
January 31, 2018		245,126 $100.04 — 17,371,203
February 1, 2018 through
February 28, 2018		952 $99.75 — 17,371,203
March 1, 2018 through
March 31, 2018		6,650 $89.75 — 17,371,203
Totals252,728 $99.77 — 17,371,203
 
(1)Includes shares surrendered by employees to the Company to satisfy tax withholding obligations in connection with the vesting of shares of restricted stock, the exercise of stock options and/or tax withholding obligations.
(2)On November 17, 2008, and August 21, 2017, the Board of Directors announced that it had authorized the repurchase of 15 million shares.shares and 15 million shares, respectively. The authorization for thisthese repurchase planplans continues until all such shares have been repurchased or the repurchase plan is terminated by action of the Board of Directors. Approximately 2.62.4 million shares authorized in the 2008 plan and 15.0 million shares authorized in 2017 remain available to be repurchased by the Company. There were no other publiclyplans announced plans as of June 30, 2017.March 31, 2018.


Item 6. Exhibits
(a) The following exhibits are filed or furnished as part of this report:
 
Exhibit 2.1
Agreement and Plan of Merger, dated as of April 12, 2018, by and among Genuine Parts Company, Rhino SpinCo, Inc., Essendant Inc. and Elephant Merger Sub Corp. - filed herewith
Exhibit 2.2
Separation Agreement, dated as of April 12, 2018, by and between Genuine Parts Company and Rhino SpinCo, Inc. - filed herewith
Exhibit 3.1 
Amended and Restated Articles of Incorporation of the Company, dated April 23, 2007 (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 23, 2007)
  
Exhibit 3.2 
By-Laws of the Company, as amended and restated November 18, 2013 (incorporated herein by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K dated November 18, 2013)
  
Exhibit 31.1 
Certification pursuant to SEC Rule 13a-14(a) signed by the Chief Executive Officer – filed herewith
  
Exhibit 31.2 
Certification pursuant to SEC Rule 13a-14(a) signed by the Chief Financial Officer – filed herewith
  
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 – furnished herewith
  
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 – furnished herewith
  
Exhibit 101 Interactive data files pursuant to Rule 405 of Regulation S-T:
  (i) the Condensed Consolidated Balance Sheets at June 30, 2017March 31, 2018 and December 31, 2016;2017; (ii) the Condensed Consolidated Statements of Income and Comprehensive Income for the three and six month periods ended June 30, 2017March 31, 2018 and 2016;2017; (iii) the Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2017March 31, 2018 and 2016;2017; and (iv) the Notes to the Condensed Consolidated Financial Statements


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: July 28, 2017April 26, 2018 /s/ Carol B. Yancey
  Carol B. Yancey
  
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and
Accounting Officer)


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