EXHIBIT 13
SELECTED FINANCIAL DATA
Year ended December 31,
(in thousands, except per share data) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Net sales $8,220,668 $8,369,857 $7,950,822 $6,587,576 $5,981,224
Cost of goods sold(*) 5,699,174 5,764,360 5,436,056 4,468,568 4,049,104
Selling, administrative and other expenses(*) 1,951,559 1,958,747 1,886,699 1,529,891 1,366,520
Facility consolidation and impairment charges(*) 73,922 -- -- -- --
Income before income taxes 496,013 646,750 628,067 589,117 565,600
Income taxes 198,866 261,427 250,445 233,323 223,203
Net income $ 297,147 $ 385,323 $ 377,622 $ 355,794 $ 342,397
Average common shares outstanding during year -
assuming dilution 173,633 175,327 179,238 180,081 180,165
Per common share:
Diluted net income, excluding unusual charges $ 2.08 $ 2.20 $ 2.11 $ 1.98 $ 1.90
Diluted net income 1.71 2.20 2.11 1.98 1.90
Dividends declared 1.14 1.10 1.04 1.00 .96
December 31 closing stock price 36.70 26.19 24.81 33.44 33.94
Long-term debt, less current maturities 835,580 770,581 702,417 588,640 209,490
Shareholders' equity 2,345,123 2,260,806 2,177,517 2,053,332 1,859,468
Total assets $4,206,646 $4,142,114 $3,929,672 $3,600,380 $2,754,363
- ----------------------------------------------------------------------------------------------------------------------
(*) Unusual charges totaled $107.8 million pre-tax in 2001 and $64.4
million after tax. The pre-tax charges include $17.4 million classified
in cost of goods sold and $16.4 million classified in selling,
administrative and other expenses.
MARKET AND DIVIDEND INFORMATION
High and Low Sales Price and Dividends per Share of Common Shares Traded on the
New York Stock Exchange
Sales Price of Common Shares
Quarter 2001 2000
- ---------------------------------------------------------------------------
High Low High Low
First $ 28.45 $ 23.91 $ 25.56 $19.94
Second 31.50 25.28 26.69 20.00
Third 34.56 26.93 22.19 18.25
Fourth 37.94 31.85 26.44 18.63
Dividends Declared Per Share
2001 2000
First $.285 $.275
Second .285 .275
Third .285 .275
Fourth .285 .275
Number of Record Holders of Common Stock: 7,930
16
SEGMENT DATA
Year ended December 31,
(dollars in thousands) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Net Sales:
Automotive $ 4,252,913 $ 4,163,814 $ 4,084,775 $ 3,262,406 $ 3,071,153
Industrial 2,234,241 2,342,686 2,156,134 2,008,789 1,853,270
Office products 1,379,859 1,336,500 1,218,367 1,122,420 1,080,822
Electrical/electronic materials 387,771 557,866 522,411 220,417 --
Other (34,116) (31,009) (30,865) (26,456) (24,021)
- ------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 8,220,668 $ 8,369,857 $ 7,950,822 $ 6,587,576 $ 5,981,224
==============================================================================================================================
Operating profit:
Automotive $ 378,162 $ 381,250 $ 383,830 $ 330,988 $ 315,303
Industrial 172,208 206,193 186,203 176,456 166,367
Office products 141,762 134,343 118,345 113,821 110,793
Electrical/electronic materials 3,229 28,010 23,343 12,030 --
- ------------------------------------------------------------------------------------------------------------------------------
Total operating profit 695,361 749,796 711,721 633,295 592,463
Interest expense (59,416) (63,496) (41,487) (20,096) (13,365)
Corporate expense (27,670) (23,277) (22,283) (19,545) (17,058)
Equity in (loss) income from investees -- -- (3,675) 3,329 6,730
Goodwill and other amortization (14,333) (13,843) (12,708) (5,157) (1,624)
Minority interests (3,077) (2,430) (3,501) (2,709) (1,546)
Unusual Charges (94,852) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 496,013 $ 646,750 $ 628,067 $ 589,117 $ 565,600
==============================================================================================================================
Assets:
Automotive $ 2,219,503 $ 2,099,610 $ 2,034,417 $ 1,966,774 $ 1,623,644
Industrial 867,716 840,585 758,206 671,454 584,356
Office products 538,468 542,406 503,904 442,220 380,804
Electrical/electronic materials 121,721 190,635 174,258 147,074 --
Corporate 17,160 17,443 18,588 18,385 18,611
Goodwill and equity investments 442,078 451,435 440,299 354,473 146,948
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,206,646 $ 4,142,114 $ 3,929,672 $ 3,600,380 $ 2,754,363
==============================================================================================================================
Depreciation and amortization:
Automotive $ 45,094 $ 51,546 $ 51,563 $ 43,637 $ 40,675
Industrial 11,992 11,617 10,926 8,619 6,688
Office products 9,345 9,598 8,814 8,391 7,865
Electrical/electronic materials 4,009 4,391 4,173 1,508 --
Corporate 1,020 1,308 1,783 1,993 2,015
Goodwill and other 14,333 13,843 12,708 5,157 1,624
- ------------------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 85,793 $ 92,303 $ 89,967 $ 69,305 $ 58,867
==============================================================================================================================
Capital expenditures:
Automotive $ 26,766 $ 35,031 $ 57,710 $ 69,154 $ 68,305
Industrial 6,388 20,054 11,275 6,972 13,451
Office products 5,941 9,116 16,085 6,901 6,069
Electrical/electronic materials 2,466 3,183 3,113 4,688 --
Corporate 383 3,745 100 546 2,600
- ------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 41,944 $ 71,129 $ 88,283 $ 88,261 $ 90,425
==============================================================================================================================
Net sales:
United States $ 7,526,631 $ 7,665,498 $ 7,345,707 $ 6,535,020 $ 5,977,012
Canada 629,330 633,715 585,504 79,012 28,233
Mexico 98,823 101,653 50,476 -- --
Other (34,116) (31,009) (30,865) (26,456) (24,021)
- ------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 8,220,668 $ 8,369,857 $ 7,950,822 $ 6,587,576 $ 5,981,224
==============================================================================================================================
Net long-lived assets:
United States $ 579,635 $ 618,818 $ 620,837 $ 545,452 $ 412,344
Canada 182,041 201,895 207,672 187,951 6,495
Mexico 25,534 25,982 25,333 15,338 15,767
- ------------------------------------------------------------------------------------------------------------------------------
Total net long-lived assets $ 787,210 $ 846,695 $ 853,842 $ 748,741 $ 434,606
==============================================================================================================================
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
December 31, 2001
Results of Operations:
Years ended December 31, 2001 and 2000
Net sales in 2001 were $8.2 billion, a decline of 2% as compared to 2000. The
Automotive Parts Group ("Automotive") and Office Products Group ("Office")
increased sales by 2% and 3%, respectively. Price increases for Automotive were
2% in 2001 and 1% in 2000 and, for Office, 2% in 2001 and 1.7% in 2000. The
Industrial Parts Group ("Industrial") and EIS, the Electrical/Electronic Group
("Electrical"), reported sales decreases of 5% and 30%, respectively, resulting
from the economic slowdown in the industrial manufacturing and telecommunication
sectors of the economy. Although Industrial and Electrical each had price
increases of 1% in 2001 and 2% and 1%, respectively, in 2000, the effect of such
increases was more than offset by volume declines.
In the fourth quarter of 2001, the Company's management approved a plan to close
and consolidate certain Company-operated facilities, terminate certain
employees, and exit certain other activities. The Company also determined that
certain assets were impaired. The income statement effects of the foregoing
Company actions are hereafter collectively referred to as "Unusual Charges."
Following is a summary of the Unusual Charges ($107.8 million pre-tax; $64.4
million, net of tax) and accruals related to continuing liabilities associated
with the Unusual Charges (in thousands):
Remaining
Paid in Liability at
Unusual Charges Total Non-cash 2001 Dec. 31, 2001
- ----------------------------------------------------------------------------------------------
Impairment charges $ 49,400 $ (49,400) $ -- $ --
Facility consolidation
expenses 17,900 (6,900) (300) 10,700
Severance expenses 6,700 -- (100) 6,600
- ----------------------------------------------------------------------------------------------
Facility consolidation
and impairment charges 74,000 (56,300) (400) 17,300
Inventory-related exit
costs--cost of good sold 17,400 (17,400) -- --
Other--selling,
administrative and
other expenses 16,400 (15,800) -- 600
- ----------------------------------------------------------------------------------------------
$ 107,800 $ (89,500) $ (400) $ 17,900
==============================================================================================
Impairment charges are primarily comprised of two separate technology projects:
(1) an abandoned software system implementation in the Office Products Group
totaling approximately $30 million, and (2) an impaired technology-related
venture in the Automotive Group totaling approximately $15 million for which the
Company projects the undiscounted cash flows to be less than the carrying amount
of the related investment. Facility consolidation expenses relate to facility
consolidations in each of the Company's business segments. The Company has
identified certain distribution, branch and retail facilities, which will be
consolidated with related facilities prior to December 31, 2002. The Company has
appropriately accrued the estimated lease obligation from the planned exit date
through the end of the contractual lease term, net of estimated sublease income.
Severance expenses include charges for employees which have been or will be
involuntarily terminated in connection with the Company's facility consolidation
and management termination plans. All employee terminations will be completed
prior to December 31, 2002. Inventory-related exit costs totaling approximately
$17.4 million relate to inventory considered by the Company to be impaired as a
result of the facility consolidations described above and related inventory
rationalization and optimization programs. All inventory-related exit costs have
been classified as cost of sales in the statement of income. Other Unusual
Charges have been classified as a component of selling, administrative, and
other expenses. The Company's management does not believe the facility
consolidations will result in any material decline in net sales, as all such
facilities in the process of closure will be served by other Company-operated
facilities.
Cost of goods sold was 69.3% of net sales in 2001 as compared to 68.9% in
2000. The slight increase in cost of goods sold as a percentage of net sales is
primarily attributable to continued pricing pressures resulting from the
recessionary economic conditions coupled with inventory-related exit costs
discussed above totaling approximately $17.4 million. Selling, administrative
and other expenses of $1.9 billion were flat from 2001 to 2000. At 23.7% of net
sales in 2001, these expenses increased slightly from 23.4% in 2000. Excluding
the effect of the Unusual Charges, selling, administrative, and other expenses
declined by just over 1%, generally consistent with the sales decrease.
Operating profit as a percentage of sales was 8.5% in 2001 as compared to 9.0%
in 2000. These results are reflective of the overall economic conditions in 2001
and the fixed costs inherent in distribution. Automotive operating margins
decreased slightly from 9.2% in 2000 to 8.9% in 2001. Office operating margins
showed slight improvement from 10.1% in 2000 to 10.3% in 2001. The current
economic conditions continued to place the most pressure on the Industrial and
Electrical segment. Industrial margins declined to 7.7% in 2001 from 8.8% in
2000. EIS, with a sales decrease in 2001 of 30%, had an operating margin of 1%
in 2001 and 5% in 2000. The margin decline at EIS is because the operating
expenses associated with EIS' business could not be reduced to the extent of
the sales decline.
18
The effective income tax rate was 40.1% in 2001 as compared to 40.4% in 2000.
Net income in 2001 was $297 million, reflecting a 23% decrease over 2000 net
income. Net income as a percent of net sales was 3.6% in 2001 as compared to
4.6% in 2000. Excluding the effect of Unusual Charges, net income was down 6%
from 2000 and was 4.4% of sales. This decrease in net income is primarily
attributable to the sales decline. In 2001, diluted earnings per share were
$1.71, a 22% decrease from $2.20 reported in 2000. Excluding Unusual Charges,
diluted earnings per share were $2.08, a 5% decrease from 2000.
Years ended December 31, 2000 and 1999
Net sales increased 5% in 2000, and 21% in 1999. Excluding the effect of
acquisitions, sales would have increased approximately 7% in 1999. Cost of
goods sold was 68.9% of net sales in 2000 compared to 68.4% in 1999. Selling,
administrative and other expenses increased 4% in 2000 and decreased to 23.4%
of net sales in 2000 as compared to 23.7% in 1999 due primarily to improved
operating efficiencies. The effective income tax rate was 40.4% in 2000 as
compared to 39.9% in 1999. The increase in the tax rate in 2000 primarily
related to increased non-deductible goodwill amortization and the effect of
international operations. Net income as a percent of net sales was 4.6% in 2000
and 4.7% in 1999. Net income of $385.3 million in 2000 increased 2% over 1999
net income of $377.6 million. Diluted earnings per share were $2.20 in 2000
compared to $2.11 in 1999, an increase of 4%.
Sales for Automotive increased 2% in 2000 and 25% in 1999 (5% excluding
acquisitions). Price increases were 1% in 2000. Automotive's operating profit
decreased 1% in 2000 as compared to 1999. Industrial's operating profits
increased 11% in 2000 as compared to 1999, consistent with a sales increase of
9% in 2000. Industrial price increases were 2% in 2000. The sales increases for
Industrial were primarily volume related, reflective of geographic expansion and
increased market share due to expanded product offerings and new markets. The
Office segment reported sales increases of 10% in 2000 over 1999 and operating
profit increases of 13.5% in the same period. Price increases were 1.7% in 2000.
The sales and profit increases in the Office segment resulted from additional
market share, increased merchandising and marketing efforts and new product
offerings. EIS increased sales by 7% in 2000 and operating profits by 20%,
reflecting new product programs and expanded customer bases. Price increases at
EIS were 1% in 2000.
Liquidity and Capital Resources:
The ratio of current assets to current liabilities was 3.4 to 1 at the close of
2001 with current assets amounting to 75% of total assets. Trade accounts
receivable decreased 2% and inventories increased 1%, while working capital
increased 9.6%. The increase in working capital is primarily attributable to
the reduction in the current portion of long-term debt as a result of new
financing arrangements in 2001.
On November 30, 2001, the Company completed a $500 million financing
arrangement with a consortium of financial institutions and insurance companies.
At December 31, 2001, the Company had unsecured Senior Notes outstanding under
this financing arrangement as follows: $250 million, Series A, 5.86% fixed, due
2008; and $250 million, Series B, 6.23% fixed, due 2011. In addition, at
December 31, 2001, the Company had $7 million outstanding on a $200 million
unsecured revolving line of credit, LIBOR plus .55%, due 2003, and the following
unsecured term notes: $50 million, LIBOR plus .25%, due 2005; $50 million, LIBOR
plus .25%, due 2008; and $231 million, LIBOR plus .55%, due 2003; and $27
million in other borrowings. In addition, the Company had the following Canadian
dollar denominated borrowings translated into U.S. dollars at December 31, 2001:
line of credit secured by accounts receivable, $19 million outstanding, banker's
acceptance rate plus .27%; and $8 million in other borrowings. Certain
borrowings contain covenants related to a maximum debt-to-equity ratio, a
minimum fixed-charge coverage ratio, and certain limitations on additional
borrowings. At December 31, 2001, the Company was in compliance with all such
covenants. The weighted average interest rate on the Company's outstanding
borrowings was approximately 5.3% and 6.7% at December 31, 2001 and 2000,
respectively. Total interest expense for all borrowings was $59.4 million and
$63.5 million in 2001 and 2000, respectively.
The Company also has an $85 million construction and lease facility. Properties
acquired by the lessor are constructed and then leased to the Company under
operating lease agreements. The total amount advanced and outstanding under this
facility at December 31, 2001 was approximately $62 million. Since the resulting
leases are operating leases, no debt obligation is recorded on the Company's
balance sheet. This construction and lease facility expires in 2008. Lease
payments fluctuate based upon current interest rates and are generally based
upon LIBOR plus .55%. The lease facility contains residual value guarantee
provisions and guarantees under events of default. Although management
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
believes the likelihood of funding to be remote, the maximum guarantee
obligation under the construction and lease facility is approximately $62
million at December 31, 2001. In addition, the Company guaranteed borrowings of
affiliates totaling approximately $59.7 million and $49.7 million at December
31, 2001 and 2000, respectively.
In August 1999, the Company completed the repurchase of 15 million shares
authorized by the Board of Directors in 1994. The Board authorized the
repurchase of an additional 15 million shares on April 19, 1999. Through
December 31, 2001, approximately 7.4 million shares have been repurchased
under this new authorization.
Existing credit facilities, current financial resources and anticipated funds
from operations are expected to meet requirements for working capital in 2002.
Capital expenditures in 2001 were $42 million, $71 million in 2000 and $88
million in 1999. The reduction represents management's coordinated efforts to
control capital expenditures.
The Company manages its exposure to changes in short-term interest rates,
particularly to reduce the impact on its floating-rate term notes, by entering
into interest rate swap agreements. The counterparties to these contracts are
high credit, quality commercial banks. Consequently, credit risk, which is
inherent in all swaps, has been minimized to a large extent. Interest expense is
adjusted for the differential to be paid or received as interest rates change.
Substantially all floating rate debt has been effectively fixed by interest rate
swap agreements at December 31, 2001. Accordingly, a 1% adverse change in
interest rates would not have a material adverse impact on future earnings and
cash flows of the Company. The fair value of interest rate swap agreements was
approximately $31.6 million as of December 31, 2001.
This amount is included in other accrued expenses in the Company's consolidated
balance sheet. Other than interest rate swaps, the Company does not have any
other derivative instruments. The Company does not enter into derivatives for
speculative or trading purposes.
Critical Accounting Policies
Inventories-- Provisions for Slow Moving and Obsolescence
The Company identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related thereto. Historically, these loss provisions
have not been significant as the vast majority of the Company's inventories are
eligible for return under various vendor return programs. While the Company has
no reason to believe its inventory return privileges will be discontinued in the
future, its risk of loss associated with obsolete or slow moving inventories
would increase if such were to occur.
Allowance for Doubtful Accounts -- Methodology
The Company evaluates the collectibility of accounts receivable based on a
combination of factors. Initially, the Company estimates an allowance for
doubtful accounts as a percentage of net sales based on historical bad debt
experience. This initial estimate is periodically adjusted when the Company
becomes aware of a specific customer's inability to meet its financial
obligations (e.g., bankruptcy filing) or as a result of changes in the overall
aging of accounts receivable. While the Company has a large customer base that
is geographically dispersed, a general economic downturn in any of the industry
segments in which the Company operates could result in higher than expected
defaults, and, therefore, the need to revise estimates for bad debts. For the
years ended December 31, 2001, 2000 and 1999, the Company recorded provisions
for bad debts of $26.5 million, $13.9 million and $14.4 million, respectively.
Evaluation of the Recoverability of Goodwill
The Company has recorded goodwill from prior business combinations amounting to
approximately $442 million at December 31, 2001. Goodwill is presently being
amortized using a straight-line method over 40 years. For the years ended
December 31, 2001, 2000, and 1999, the amount of goodwill amortization included
in the Company's consolidated statements of income was $14.3 million, $13.8
million, and $12.7 million, respectively.
The Company's current accounting policy for evaluating the recoverability of
goodwill is based upon management's estimates of the future undiscounted cash
flows attributable to the acquired business as compared to the carrying value of
the corresponding goodwill and other long-lived assets. Management's estimates
of the undiscounted cash flows are based upon factors such as projected future
sales, price increases, and other uncertain elements requiring significant
judgments. In connection with performing this impairment evaluation at December
31, 2001, the Company did not identify any significant amounts of goodwill
considered to be impaired.
Effective January 1, 2002, the Company will adopt Statement of Financial
Accounting Standard No. 142, "Goodwill and Intangible Assets" ("Statement 142").
Statement 142 requires companies to discontinue the
20
amortization of goodwill and to apply an impairment only approach. This new
approach requires the use of valuation techniques and methodologies
significantly different than the present undiscounted cash flow policy being
followed by the Company.
In connection with the adoption of Statement 142, the Company's conclusions
about the valuation and recoverability of goodwill may change. The impairment
only approach may result in impairment charges and reductions in the carrying
amount of goodwill on the balance sheet upon adoption. Subsequent to the initial
adoption of Statement 142, the impairment only approach may also have the effect
of increasing the volatility of the Company's earnings if additional goodwill
impairment occurs at a future date.
Consideration Received from Vendors
The Company enters into agreements at the beginning of each year with many of
its vendors providing for inventory purchase rebates and advertising allowances.
Generally, the Company earns inventory purchase rebates upon achieving specified
volume purchasing levels and advertising allowances upon fulfilling its
obligations related to cooperative advertising programs. The Company accrues for
the receipt of inventory purchase rebates as part of its inventory cost based on
cumulative purchases of inventory to date and projected inventory purchases
through the end of the year, and, in the case of advertising allowances, upon
completion of the Company's obligations related thereto. While management
believes the Company will continue to receive such amounts in 2002 and beyond,
there can be no assurance that vendors will continue to provide comparable
amounts of rebates and allowances in the future.
Forward-Looking Statements:
Statements in this report constitute forward-looking statements that are subject
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company cautions that its forward-looking statements involve risks and
uncertainties. The Company undertakes no duty to update its forward-looking
statements, which reflect the Company's beliefs, expectations, and plans as of
the present. Actual results or events may differ materially from those indicated
as a result of various important factors. Such factors include, but are not
limited to, changes in general economic conditions, the growth rate of the
market for the Company's products and services, the ability to maintain
favorable supplier arrangements and relationships, competitive product and
pricing pressures, the effectiveness of the Company's promotional, marketing and
advertising programs, changes in laws and regulations, including changes in
accounting and taxation guidance, the uncertainties of litigation, as well as
other risks and uncertainties discussed from time to time in the Company's
filings with the Securities and Exchange Commission.
Quarterly Results of Operations:
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 certain estimates in its
interim financial statements for the accrual of bad debts, inventory
adjustments, and volume rebates earned. Bad debts are accrued based on a
percentage of sales and volume rebates 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 October 31
book-to-physical inventory adjustment. The methodology and practices used in
deriving estimates for interim reporting typically result in adjustments upon
accurate determination at year-end.
The Unusual Charges discussed above resulted in a decrease in net income in the
fourth quarter of 2001 of $.37 per share. Without the Unusual Charges, diluted
income per share would have been $.51 per share in the quarter ended December
31, 2001. For the quarters ended December 31, 2001 and 2000, year-end
adjustments resulted in increasing net income during the fourth quarter by
approximately $13.5 million and $32.0 million ($.08 per share and $.18 per
share), respectively.
The following is a summary of the quarterly results of operations for the
years ended December 31, 2001 and 2000.
Three Months Ended
----------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------------------------------------------------------
2001 (in thousands except for per share data)
Net Sales $2,054,972 $2,118,976 $2,099,191 $1,947,529
Gross Profit 623,159 642,977 630,312 625,046
Net Income 89,273 94,688 88,216 24,970
Basic and Diluted
Net Income per
Common Share .52 .55 .51 .14
2000
Net Sales $2,070,992 $2,129,377 $2,150,572 $2,018,916
Gross Profit 620,052 649,671 655,797 679,977
Net Income 91,729 96,593 91,729 105,272
Basic and Diluted
Net Income per
Common Share .52 .55 .53 .61
21
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Genuine Parts Company
We have audited the accompanying consolidated balance sheets of Genuine Parts
Company and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31,2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Genuine Parts Company and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
February 4, 2002
Atlanta, Georgia
22
CONSOLIDATED BALANCE SHEETS
December 31,
(dollars in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 85,770 $ 27,738
Trade accounts receivable 1,010,728 1,031,662
Merchandise inventories 1,890,037 1,864,334
Prepaid expenses and other assets 159,677 95,747
- ----------------------------------------------------------------------------------------------------------------
Total Current Assets 3,146,212 3,019,481
Goodwill, less accumulated amortization (2001--$51,134; 2000--$37,680) 442,078 451,435
Other Assets 273,224 275,938
Property, Plant and Equipment:
Land 37,465 40,790
Buildings, less allowance for depreciation (2001--$101,914; 2000--$96,714) 127,639 136,416
Machinery and equipment, less allowance for depreciation
(2001--$341,933; 2000--$340,228) 180,028 218,054
- ----------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 345,132 395,260
- ----------------------------------------------------------------------------------------------------------------
$ 4,206,646 $ 4,142,114
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 644,084 $ 635,499
Current portion of long-term debt and other borrowings 57,190 151,452
Accrued compensation 62,395 58,661
Other accrued expenses 106,099 58,164
Dividends payable 49,413 47,494
Income taxes payable -- 37,043
- ----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 919,181 988,313
Long-Term Debt 835,580 770,581
Deferred Income Taxes 60,985 77,814
Minority Interests in Subsidiaries 45,777 44,600
Shareholders' Equity:
Preferred Stock, par value $1 per share--authorized
10,000,000 shares; none issued -- --
Common Stock, par value $1 per share--authorized
450,000,000 shares; issued 173,473,944 shares
in 2001 and 172,389,688 shares in 2000 173,474 172,390
Accumulated other comprehensive income (46,094) (13,041)
Additional paid-in capital 16,080 --
Retained earnings 2,201,663 2,101,457
- ----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,345,123 2,260,806
- ----------------------------------------------------------------------------------------------------------------
$ 4,206,646 $ 4,142,114
================================================================================================================
See accompanying notes.
23
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
(in thousands, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Net sales $8,220,668 $8,369,857 $7,950,822
Cost of goods sold 5,699,174 5,764,360 5,436,056
- -----------------------------------------------------------------------------------------------------------------------
2,521,494 2,605,497 2,514,766
Selling, administrative and other expenses 1,951,559 1,958,747 1,886,699
Facility consolidation and impairment charges 73,922 -- --
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 496,013 646,750 628,067
Income taxes 198,866 261,427 250,445
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 297,147 $ 385,323 $ 377,622
=======================================================================================================================
Basic net income per common share $ 1.72 $ 2.20 $ 2.11
=======================================================================================================================
Diluted net income per common share $ 1.71 $ 2.20 $ 2.11
=======================================================================================================================
Average common shares outstanding 172,765 175,009 178,746
Dilutive effect of stock options and non-vested restricted stock awards 868 318 492
- -----------------------------------------------------------------------------------------------------------------------
Average common shares outstanding--assuming dilution 173,633 175,327 179,238
=======================================================================================================================
See accompanying notes.
24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Total
---------------------- Paid-In Comprehensive Retained Shareholders'
dollars in thousands Shares Amount Capital Income (Loss) Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 179,505,151 $ 179,505 $ 19,989 $ (3,110) $ 1,856,948 $ 2,053,332
Net income -- -- -- -- 377,622 377,622
Foreign currency translation
adjustment, net of income
taxes of $2,498 -- -- -- (3,747) -- (3,747)
-----------
Comprehensive income 373,875
-----------
Cash dividends declared,
$1.04 per share -- -- -- -- (185,870) (185,870)
Stock options exercised,
including tax benefit 322,003 322 6,168 -- -- 6,490
Purchase of stock (3,863,353) (3,863) (65,663) -- (41,602) (111,128)
Stock issued in connection with
acquisitions 1,311,801 1,312 37,772 -- -- 39,084
Other -- -- 1,734 -- -- 1,734
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 177,275,602 177,276 -- (6,857) 2,007,098 2,177,517
Net income -- -- -- -- 385,323 385,323
Foreign currency translation
adjustment, net of income
taxes of $4,123 -- -- -- (6,184) -- (6,184)
-----------
Comprehensive income 379,139
-----------
Cash dividends declared,
$1.10 per share -- -- -- -- (192,455) (192,455)
Stock options exercised,
including tax benefit 386 -- 8 -- -- 8
Purchase of stock (5,466,029) (5,466) (13,840) -- (98,509) (117,815)
Stock issued in connection
with acquisitions 579,729 580 13,832 -- -- 14,412
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 172,389,688 172,390 -- (13,041) 2,101,457 2,260,806
Net income -- -- -- -- 297,147 297,147
Foreign currency translation
adjustment, net of income
taxes of $8,168 -- -- -- (12,252) -- (12,252)
Changes in fair value of derivative
instruments, net of income
taxes of $13,867 -- -- -- (20,801) -- (20,801)
-----------
Comprehensive income 264,094
-----------
Cash dividends declared,
$1.14 per share -- -- -- -- (196,941) (196,941)
Stock options exercised,
including tax benefit 936,978 937 13,464 -- -- 14,401
Purchase of stock (496,025) (496) (12,162) -- -- (12,658)
Stock issued in connection
with acquisitions 643,303 643 14,778 -- -- 15,421
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 173,473,944 $ 173,474 $ 16,080 $(46,094) $ 2,201,663 $ 2,345,123
==============================================================================================================================
See accompanying notes.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(dollars in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 297,147 $ 385,323 $ 377,622
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 85,793 92,303 89,967
Gain on sale of property, plant and equipment (1,626) (5,674) (4,595)
Deferred income taxes (21,704) (6,714) 12,347
Unusual charges 89,500 -- --
Income applicable to minority interests 3,077 2,430 3,501
Changes in operating assets and liabilities:
Trade accounts receivable 6,974 (14,298) (42,846)
Merchandise inventories (45,063) (84,508) (28,671)
Trade accounts payable 7,354 50,899 12,104
Other, net (88,300) (105,336) (51,662)
- ------------------------------------------------------------------------------------------------------------------------------
36,005 (70,898) (9,855)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 333,152 314,425 367,767
INVESTING ACTIVITIES
Purchases of property, plant and equipment (41,944) (71,129) (88,283)
Proceeds from sale of property, plant and equipment 5,261 10,605 10,254
Acquisition of businesses and other investments, net of cash acquired (16,358) (46,226) (89,272)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (53,041) (106,750) (167,301)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from credit facilities 3,223,466 2,813,820 2,579,675
Payments on credit facilities (3,251,769) (2,731,601) (2,530,429)
Stock options exercised 14,401 8 6,490
Dividends paid (195,022) (189,995) (184,247)
Purchase of stock (12,658) (117,815) (111,128)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (221,582) (225,583) (239,639)
Effect of exchange rate changes on cash (497) (89) (64)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 58,032 (17,997) (39,237)
Cash and cash equivalents at beginning of year 27,738 45,735 84,972
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 85,770 $ 27,738 $ 45,735
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 257,280 $ 252,416 $ 244,250
==============================================================================================================================
Interest $ 60,461 $ 61,750 $ 39,888
==============================================================================================================================
See accompanying notes.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. Summary of Significant Accounting Policies
Business
Genuine Parts Company and all of its majority-owned subsidiaries ("the Company")
is a distributor of automotive replacement parts, industrial replacement parts,
office products and electrical/electronic materials. The Company serves a
diverse customer base through more than 1,800 locations in North America and,
therefore, has limited exposure from credit losses to any particular customer or
industry segment. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Principles of Consolidation
The consolidated financial statements include all of the accounts of the
Company. Income applicable to minority interests is included in other expenses.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition
The Company recognizes revenues from product sales upon shipment to its
customers.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results may
differ from those estimates and the differences could be material.
Foreign Currency Translation
The balance sheets and statements of income of the Company's foreign
subsidiaries have been translated into U.S. dollars at the current and average
exchange rates, respectively. The foreign currency translation adjustment is
included as a component of accumulated other comprehensive income, net of income
taxes.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for a majority of automotive
parts, electrical/electronic materials, and industrial parts, and by the
first-in, first-out (FIFO) method for office products and certain other
inventories. If the FIFO method had been used for all inventories, cost would
have been $173,488,000 and $155,831,000 higher than reported at December 31,
2001 and December 31, 2000, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of prepaid expenses,
amounts due from vendors, income taxes receivable, and deferred income taxes.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of
the net assets acquired in connection with business acquisitions and is
amortized over a period of 40 years (See Recently Issued Accounting
Pronouncements).
Other Assets
Other assets consist primarily of a prepaid pension asset, an investment
accounted for under the cost method, and certain internal-use information
systems in progress.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is determined
principally on a straight-line basis over the following estimated useful life of
each asset: buildings and improvements, 10 to 40 years; machinery and equipment,
5 to 15 years.
Long-Lived Assets
Long-lived assets, including goodwill, are periodically reviewed for impairment
based on an assessment of future operations. The Company records impairment
losses on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount.
Fair Value of Financial Instruments
The carrying amount reflected in the consolidated balance sheets for cash, cash
equivalents, accounts receivable and accounts payable approximate their
respective fair values based on the short-term nature of these instruments. The
fair value of interest rate swap agreements, included in other accrued expenses
in the consolidated balance sheet, was approximately $31,570,000 at December 31,
2001. At December 31, 2001 and 2000, the carrying amount for variable rate
long-term debt approximates fair market value since the interest rates on these
instruments are reset periodically to current market rates. At December 31,
2001, the fair market value of fixed rate long-term debt was approximately
$500,000,000 based primarily on quoted prices for these or similar instruments.
27
Derivative Instruments and Hedging Activities
From time to time, the Company uses interest rate swap agreements to
synthetically manage the interest rate characteristics of a portion of its
outstanding debt and to limit the Company's exposure to rising interest rates.
The Company designates at inception that interest rate swap agreements hedge
risks associated with future variable interest payments and monitors each swap
agreement to determine if it remains an effective hedge. The effectiveness of
the derivative as a hedge is based on a high correlation between changes in the
value of the underlying hedged item. Ineffectiveness related to the Company's
derivative transactions is not material. The Company records amounts to be
received or paid as a result of interest swap agreements as an adjustment to
interest expense. All of the Company's interest rate swaps are designated as
cash flow hedges. Gains or losses on terminations or redesignation of interest
rate swap agreements are deferred and amortized as an adjustment to interest
expense of the related debt instrument over the remaining term of the original
contract life of the agreements. The Company does not enter into derivatives for
speculative or trading purposes.
Shipping and Handling Costs
Shipping and handling costs are classified as selling, administrative and other
expenses in the accompanying consolidated statements of income and totaled
approximately $198,000,000, $200,000,000 and $180,000,000 in the years ended
December 31, 2001, 2000, and 1999, respectively.
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. The
computation of diluted net income per common share includes the dilutive effect
of stock options and non-vested restricted stock awards. Options to purchase
3,485,000, 4,325,000 and 4,265,000, shares of common stock at prices ranging
from $23 to $35 per share were outstanding at December 31, 2001, 2000 and 1999
respectively, but were not included in the computation of diluted net income per
common share because the options' exercise price was greater than the average
market price of the common shares. The dilutive effect of options to purchase
748,312 shares of common stock at an average exercise price of approximately $7
per share issued in connection with a 1998 acquisition have been included in the
computation of diluted net income per common share since the date of the
acquisition.
Recently Issued Accounting Pronouncements
On January 1, 2001, the Company adopted Statements of Financial Accounting
Standards Nos. 133, 137, and 138 (collectively "SFAS 133"), pertaining to the
accounting for derivative instruments and hedging activities. SFAS 133 requires
the Company to recognize all derivative instruments in the balance sheet at fair
value. Upon adoption of SFAS 133, the Company recorded a charge to other
comprehensive income of $6,226,000, net of income taxes, resulting from a
cumulative effect of a change in accounting principle. Any subsequent gains or
losses arising from these swaps have also been deferred in stockholders' equity
(as a component of accumulated other comprehensive income (loss)). These
deferred gains and losses are recognized in the Company's Consolidated
Statements of Income in the period in which the related interest payments being
hedged are recognized in expense. No significant amounts were reclassified from
accumulated other comprehensive income (loss) to earnings during 2001.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations." This
statement eliminates the pooling of interests method of accounting for all
business combinations initiated after June 30, 2001, and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. The Company had no significant business combinations
after June 30, 2001.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets." This statement changes the
accounting for goodwill from an amortization method to an impairment only
approach. Application of the non-amortization provisions of this statement is
expected to result in an increase in net income of approximately $12,300,000
($0.07 per share) in 2002. During fiscal 2002, the Company will perform
impairment tests for goodwill as required by this Statement. If the results of
these tests indicate any impairment of goodwill, the Company will record such
amount as a cumulative effect of a change in accounting principle as of January
1, 2002.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets". This statement supercedes Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The Company will adopt SFAS 144 as of January 1,
2002, but does not believe the statement will have a material effect on its
consolidated financial statements.
28
2. Facility Consolidation, Impairment, and Other Charges
Prior to December 31, 2001, the Company's management approved a plan to close
and consolidate certain facilities, terminate certain employees, and exit
certain other activities. The Company also determined certain assets were
impaired. The income statement effects of the foregoing Company actions are
hereafter collectively referred to as the "Unusual Charges." Following is a
summary of the Unusual Charges and the related accruals for continuing
liabilities associated with the Unusual Charges (in thousands):
Paid in Remaining
Unusual Charges Total Non-cash 2001 Liability
- ------------------------------------------------------------------------------------------------
Impairment charges $ 49,400 $(49,400) $ -- $ --
Facility consolidation
expenses 17,900 (6,900) (300) 10,700
Severance expenses 6,700 -- (100) 6,600
Inventory-related exit costs 17,400 (17,400) -- --
Other 16,400 (15,800) -- 600
- ------------------------------------------------------------------------------------------------
$ 107,800 $(89,500) $ (400) $17,900
================================================================================================
Impairment charges are primarily comprised of two separate technology projects:
(1) an abandoned software system implementation of the Company's office products
segment totaling approximately $30,000,000, and (2) an impaired
technology-related venture of the Company's automotive segment totaling
approximately $15,000,000 for which the Company projects the undiscounted cash
flows to be less than the carrying amount of the related investment. Facility
consolidation expenses relate to facility consolidations in each of the
Company's business segments. The Company has identified certain distribution,
branch and retail facilities to be closed prior to December 31, 2002. The
Company has appropriately accrued the estimated lease obligation from the
planned exit date through the end of the contractual lease term, net of any
estimated sublease income. The Company's management does not believe the
facility consolidations will result in any material decline in net sales as all
such facilities in the process of closure will be served by other
Company-operated facilities.
Severance expenses include charges associated with payments owed to employees
who have been or will be involuntarily terminated in connection with the
Company's facility consolidation. All terminations will occur prior to December
31, 2002. Inventory-related exit costs relate to inventory considered by the
Company to be impaired as a result of the facility consolidations described
above and related inventory rationalization and optimization programs. All
inventory-related exit costs have been classified as cost of goods sold in the
accompanying consolidated statement of income. Other Unusual Charges have been
classified as a component of selling, administrative and other expenses.
3. Credit Facilities
Amounts outstanding under the Company's credit facilities consist of the
following:
December 31
(In Thousands) 2001 2000
- --------------------------------------------------------------------------------
U.S. dollar denominated borrowings:
Unsecured revolving line of credit,
$200,000,000, Libor plus .55%,
due December 2003 $ 7,000 $175,000
Unsecured 364 day line of credit,
$200,000,000, Libor plus .55% -- 119,000
Unsecured revolving line of credit,
$100,000,000, Banker's Acceptance
rate, due February 2001 -- 98,249
Unsecured term notes:
November 30, 2001, Series A
Senior Notes, $250,000,000, 5.86%
fixed, due November 30, 2008 250,000 --
November 30, 2001 Series B
Senior Notes, $250,000,000, 6.23%
fixed, due November 30, 2011 250,000 --
December 27, 1996, Libor plus
.25%, due December 2001 -- 50,000
October 31, 1997, 5.98% fixed until
October 2001, then the higher of 5.98%
or Libor plus .25% -- 50,000
July 1, 1998, Libor plus .25%, due July 2005 50,000 50,000
October 1, 1998, Libor plus
.25%, due October 2008 50,000 50,000
December 1, 1998, Libor plus
.55%, due December 2003 231,367 231,367
Other borrowings 27,375 43,742
Canadian dollar denominated borrowings
translated into U.S. dollars:
Unsecured revolving lines of credit,
CND$25,000,000, Banker's Acceptance
rate plus .55%, due October 2002 8,041 8,540
Unsecured revolving lines of credit,
CND$100,000,000, Banker's Acceptance
rate plus .55%, due January 2004 141 6,770
Line of credit, CND$65,000,000, secured
by accounts receivable, Banker's Acceptance
rate plus .27%, cancelable on 30 days
notice or due March 2003 18,846 39,365
- --------------------------------------------------------------------------------
892,770 922,033
Current portion of long-term debt
and other borrowings 57,190 151,452
- --------------------------------------------------------------------------------
$835,580 $770,581
================================================================================
The principal amount of the Company's borrowings subject to variable rates
before interest rate swap agreements totaled approximately $378,892,000 and
$758,463,000 at December 31, 2001 and 2000, respectively. The weighted
average interest rate on the Company's outstanding borrowings was approximately
5.30% and 6.70% at December 31, 2001 and 2000, respectively.
29
On November 30, 2001, the Company completed a $500,000,000 financing with a
consortium of financial institutions and insurance companies ("the Notes"). The
proceeds of the Notes were primarily used to repay certain variable rate
borrowings.
Certain borrowings contain covenants related to a maximum debt-to-equity ratio,
a minimum fixed-charge coverage ratio, and certain limitations on additional
borrowings. At December 31, 2001, the Company was in compliance with all such
covenants. The Company guaranteed borrowings of affiliates totaling
approximately $59,743,000 and $49,738,000 at December 31, 2001 and 2000,
respectively. Total interest expense for all borrowings was $59,416,000 in 2001,
$63,496,000 in 2000 and $41,487,000 in 1999.
Approximate maturities under the Company's credit facilities are as follows (in
thousands):
2002 $ 57,190
2003 231,973
2004 238
2005 53,055
2006 --
Subsequent to 2006 550,314
------------------------------------------
$892,770
==========================================
4. Shareholders' Equity
The Company has a Shareholder Protection Rights Agreement which includes the
distribution of rights to common shareholders under certain defined
circumstances. The rights entitle the holder, upon occurrence of certain events,
to purchase additional stock of the Company. The rights will be exercisable only
if a person, group or company acquires 20% or more of the Company's common stock
or commences a tender offer that would result in ownership of 20% or more of the
common stock. The Company is entitled to redeem each right for one cent.
5. Leased Properties
The Company leases land, buildings and equipment. Certain land and building
leases have renewal options generally for periods ranging from two to ten years.
In addition, certain properties occupied under operating leases contain normal
purchase options. The Company also has an $85,000,000 construction and lease
facility. Properties acquired by the lessor are constructed and then leased to
the Company under operating lease agreements. The total amount advanced and
outstanding under this facility at December 31, 2001 was approximately
$62,000,000. Since the resulting leases are operating leases, no debt obligation
is recorded on the Company's balance sheet. Future minimum payments, by year and
in the aggregate, under the non-cancellable operating leases with initial or
remaining terms of one year or more consisted of the following at December 31,
2001 (in thousands):
2002 $ 95,208
2003 71,908
2004 51,873
2005 37,356
2006 25,230
Subsequent to 2006 85,636
------------------------------------------
$367,211
==========================================
Rental expense for operating leases was $112,470,000 in 2001, $106,689,000 in
2000 and $100,546,000 in 1999. Certain operating leases expiring in 2008 contain
residual value guarantee provisions and other guarantees in the event of a
default. At December 31, 2001, the maximum amount the Company may be liable for
under such guarantees is approximately $62,000,000.
6. Stock Options and Restricted Stock Awards
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, no compensation expense is
recognized if the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant.
In 1999, the Company authorized the grant of options of up to 9,000,000 shares
of common stock. In accordance with stock option plans approved by shareholders,
options are granted to key personnel for the purchase of the Company's stock at
prices not less than the fair market value of the shares on the dates of grant.
Most options may be exercised not earlier than twelve months nor later than ten
years from the date of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 determined as if the Company had accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2001, 2000 and 1999, respectively: risk-free
interest rates of 5.0%, 5.9% and 5.5%; dividend yield of 3.8%, 5.0% and 3.5%;
volatility factor of the expected market price of the Company's common stock of
.05, .06 and .07, and an expected life of the option of 5 years, 6 years and 7
years.
30
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except per share amounts):
2001 2000 1999
- ----------------------------------------------------------------
Pro forma net income $296,376 $384,015 $374,801
Pro forma basic
net income per
common share $ 1.72 $ 2.19 $ 2.10
Pro forma diluted
net income per
common share $ 1.71 $ 2.19 $ 2.09
A summary of the Company's stock option activity and related information are as
follows:
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 7,513 $ 26 5,388 $28 3,827 $26
Granted 30 33 2,412 21 2,046 32
Exercised (1,049) 14 (8) 22 (430) 23
Forfeited 338 32 (279) 27 (55) 33
------- ------ ------
Outstanding at end of year 6,156 $ 28 7,513 $26 5,388 $28
======= ====== ======
Exercisable at end of year 4,477 $ 29 3,760 $28 2,715 $27
======= ====== ======
Weighted-average fair value of options
granted during the year $ 2.04 $ 1.36 $ 3.78
======= ====== ======
Shares available for future grants 6,910 6,602 8,735
======= ====== ======
Exercise prices for options outstanding as of December 31, 2001 ranged from
approximately $21 to $35, except for 198,936 options granted in connection with
a 1998 acquisition for which the exercise price is approximately $18. The
weighted-average remaining contractual life of those options is approximately 6
years.
In 1999, the Company entered into restricted stock agreements with two officers
which provide for the award of up to 150,000 and 75,000 shares, respectively,
during the period 1999 through 2003 based on the Company achieving certain
increases in net income per common share and stock price levels. Through
December 31, 2001, the two officers have earned 15,000 and 7,500 shares,
respectively. The Company recognizes compensation expense equal to the fair
market value of the stock on the award date over the remaining vesting period
which expires in 2009.
7. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
(In Thousands) 2001 2000
- ----------------------------------------------------------------------
Deferred tax assets related to:
Expenses not yet deducted
for tax purposes $ 117,745 $ 69,271
Deferred tax liabilities related to:
Employee and retiree benefits 89,937 80,989
Inventory 33,591 37,144
Property and equipment 22,077 28,480
Other 6,848 10,179
- ----------------------------------------------------------------------
152,453 156,792
Net deferred tax liability 34,708 87,521
Current portion of deferred
tax (asset) liability (26,277) 9,707
- ----------------------------------------------------------------------
Non-current deferred
tax liability $ 60,985 $ 77,814
======================================================================
31
The components of income tax expense are as follows:
(In Thousands) 2001 2000 1999
- -------------------------------------------------------------
Current:
Federal $ 188,040 $ 223,452 $200,188
State 32,530 44,689 37,910
Deferred (21,704) (6,714) 12,347
- -------------------------------------------------------------
$ 198,866 $ 261,427 $250,445
=============================================================
The reasons for the difference between total tax expense and the amount computed
by applying the statutory Federal income tax rate to income before income taxes
are as follows:
(In Thousands) 2001 2000 1999
- ----------------------------------------------------------------------
Statutory rate applied
to pre-tax income $173,605 $226,363 $219,824
Plus state income
taxes, net of
Federal tax benefit 19,064 28,322 24,641
Other 6,197 6,742 5,980
- ----------------------------------------------------------------------
$198,866 $261,427 $250,445
======================================================================
8. Employee Benefit Plans
The Company's noncontributory defined benefit pension plan covers substantially
all of its employees. The benefits are based on an average of the employees'
compensation during five of their last ten years of credited service. The
Company's funding policy is to contribute amounts deductible for income tax
purposes. Contributions are intended to provide not only for benefits attributed
for service to date but also for those expected to be earned in the future.
Pension benefits also include amounts related to a supplemental retirement plan.
Pension Benefits Other Postretirement Benefits
(In Thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
CHANGES IN BENEFIT OBLIGATION
Net benefit obligation at beginning of year $ 573,170 $ 574,496 $ 10,537 $ 420
Service cost 19,935 18,859 177 88
Interest cost 44,525 41,363 816 672
Plan participants' contributions -- -- 2,395 1,793
Plan amendments 1,756 427 -- 7,134
Actuarial loss (gain) 44,242 (42,865) 1,588 3,940
Acquisitions/divestitures -- -- -- 22
Gross benefits paid (21,096) (19,110) (4,744) (3,532)
- -----------------------------------------------------------------------------------------------------------------------------
Net benefit obligation at end of year $ 662,532 $ 573,170 $ 10,769 $ 10,537
=============================================================================================================================
CHANGES IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 702,282 $ 672,699 $ -- $ --
Actual return on plan assets 25,332 39,189 -- --
Employer contributions 640 9,504 2,349 1,739
Plan participants' contribution -- -- 2,395 1,793
Gross benefits paid (21,096) (19,110) (4,744) (3,532)
- -----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 707,158 $ 702,282 $ -- $ --
=============================================================================================================================
The following table sets forth the funded status of the plans and the amount
recognized in the consolidated balance sheets at December 31.
Pension Benefits Other Postretirement Benefits
(In Thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Funded status at end of year $ 44,626 $ 129,112 $(10,769) $(10,537)
Unrecognized net actuarial loss 148,128 57,582 2,839 1,326
Unrecognized prior service (income) cost (6,702) (11,328) 5,980 6,568
Unrecognized net transition obligation -- 260 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of year $ 186,052 $ 175,626 $ (1,950) $ (2,643)
=============================================================================================================================
Net periodic pension (income) cost included the following components:
Pension Benefits Other Postretirement Benefits
(In Thousands) 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Service cost $ 19,935 $ 18,859 $ 21,564 $ 177 $ 88 $(118)
Interest cost 44,525 41,363 40,332 816 672 11
Expected return on plan assets (72,167) (69,154) (64,146) -- -- --
Amortization of unrecognized transition obligation 260 260 260 -- -- --
Amortization of prior service (cost) income (2,871) (2,911) (2,840) 588 588 --
Amortization of actuarial loss (gain) 531 50 499 74 -- (237)
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic pension (income) cost $ (9,787) $(11,533) $ (4,331) $1,655 $1,348 $(344)
==============================================================================================================================
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The assumptions used in accounting for the defined benefit plans and
postretirement plan are as follows:
Pension Benefits Other Postretirement Benefits
(In Thousands) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Weighted-average discount rate 7.35% 7.63% 7.35% 7.63%
Rate of increase in future compensation levels 4.15% 4.15% -- --
Expected long-term rate of return on assets 9.85% 10.00% -- --
Health care cost trend on covered charges -- -- 7.00% 7.50%
The expected long-term rate of return on assets for measuring the pension
expense or income for the year ending December 31, 2002 will be approximately
9.45%.
The effect of a one percentage point change in the 2001
assumed health care cost trend is as follows:
(In Thousands) Decrease Increase
- -------------------------------------------------------------------------
Total service and interest cost components
on net periodic postretirement health
care benefit cost $(2,015) $3,072
Accumulated postretirement benefit
obligation for health care benefits (202) 328
At December 31, 2001, the Company-sponsored pension plan held approximately
1,606,920 shares of common stock of the Company with a market value of
approximately $58,974,000. Dividend payments received by the plan on Company
stock totaled approximately $1,780,000 and $1,498,000 in 2001 and 2000,
respectively. Fees paid during the year for services rendered by
parties-in-interest were based on customary and reasonable rates for such
services.
The Company has a defined contribution plan which covers substantially all of
its domestic employees. The Company's contributions are determined based on 20%
of the first 6% of the covered employee's salary. Total plan expense was
approximately $6,529,000 in 2001, $5,751,000 in 2000 and $5,165,000 in 1999.
9. Segment Data
The segment data for the past five years presented on page 17 is an integral
part of these financial statements.
The Company's automotive segment distributes replacement parts (other than body
parts) for substantially all makes and models of automobiles, trucks and buses.
The Company's industrial segment distributes a wide variety of industrial
bearings, mechanical and fluid power transmission equipment, including hydraulic
and pneumatic products, material handling components, and related parts and
supplies.
The Company's office products segment distributes a wide variety of office
products, computer supplies, office furniture and business electronics.
The Company's electrical/electronic materials segment distributes a wide
variety of electrical/electronic materials, including insulating and conductive
materials for use in electronic and electrical apparatus.
Inter-segment sales are not significant. Operating profit for each industry
segment is calculated as net sales less operating expenses excluding general
corporate expenses, interest expense, equity in income from investees, goodwill
and other amortization and minority interests. Net property, plant and
equipment by country relate directly to the Company's operations in the
respective country. Corporate assets are principally cash, cash equivalents and
headquarters' facilities and equipment.
For the year ended December 31, 2001, Unusual Charges discussed in Note 2
totaling approximately $12,900,000 have been classified as a reduction to
operating profit of the office products segment for management reporting
purposes. In connection with a 2000 management reporting change, certain
corporate expenses were reclassified to the automotive segment for all years
presented. Additionally, for management purposes, net sales by segment excludes
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 are reported as a component of net sales in
the Company's consolidated statements of income.
33