Graco Inc. — 2018 Third-Quarter Form 10-Q
Reporting period: Quarter ended September 28, 2018; year-to-date (YTD) figures cover nine months. Unaudited results. Graco designs, manufactures and markets fluid-management and coating systems across its Industrial, Process and Contractor segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Net sales | $415.9m | $379.8m | $1,246.9m | $1,099.9m |
| Operating earnings | $114.8m | $101.4m | $339.9m | $289.3m |
| Net earnings | $92.7m | $75.5m | $267.3m | $216.0m |
| Diluted EPS | $0.54 | $0.43 | $1.54 | $1.24 |
- Sales increased 10% in Q3 and 13% YTD; management attributed growth to volume and price, acquisitions (3 percentage points in both periods), and, YTD, currency translation (2 percentage points).
- Operating margin was 27.6% in Q3 versus 26.7% and 27.3% YTD versus 26.3%. Gross margin was 53.2% versus 53.7% in Q3; YTD it was 54.0%, unchanged year over year.
- Reported effective tax rates were 14% for Q3 and 17% YTD, down 8 and 4 percentage points, respectively. Adjusted rates excluding specified tax items were approximately 21% in both 2018 periods versus about 31% in 2017, principally reflecting U.S. tax reform.
- Operating cash flow was $254.3m YTD versus $246.1m. Investing cash outflow was $51.7m, including $39.6m of capital expenditures and $10.8m for acquisitions. Financing cash outflow was $179.8m, including $155.6m of share repurchases and $66.8m of dividends.
Financial position and segment trends
- At September 28, cash was $137.6m; current assets were $730.8m and current liabilities $264.2m. Long-term debt was $266.4m and bank notes payable $4.0m. Shareholders’ equity was $796.6m.
- Credit lines totaled $595m, of which $551m was unused. A new $50m revolving agreement expires in September 2020; the existing $500m facility expires in December 2021.
- Industrial sales rose 10% in Q3 and 14% YTD; operating margin was 36% in both periods, up from 35%. Process sales rose 15% in both periods; margin improved to 21% in Q3 and YTD, from 16% and 18%. Contractor sales rose 6% in Q3 and 11% YTD; margin fell 2 percentage points in Q3 to 24% and was flat at 25% YTD.
Changes, outlook and risks
- Management maintained its 2018 outlook for mid-to-high-single-digit organic sales growth on a constant-currency basis and expects another record year of sales and earnings. It noted second-half pressure from tariffs, material costs and currency, while describing demand as broad-based.
- Q3 gross margin declined due to lower margins at acquired operations; pricing and product/channel mix partly offset higher costs, including tariffs. Contractor margin was pressured by channel mix and spending on product development and future launches. Other expense included $2m of foreign-exchange losses in Q3 and $4m YTD.
- The company made a voluntary $40m contribution to a U.S. qualified pension plan in Q3. It repurchased 0.7m shares from its CEO in April for $28.2m; no shares were repurchased during Q3. Management cited planned capacity expansion investments of $100m–$120m over the next two years.
- 2018 acquisitions were described as not material to consolidated financial statements. ASC 606 adoption had no material impact. The company expected lease-standard adoption in 2019 to add right-of-use assets and lease liabilities, but had not determined the balance-sheet amount.
- Risks highlighted include economic and end-market demand changes, tariffs and supply interruptions, currency movements, international and regulatory risks, acquisitions, cybersecurity, litigation, and Contractor-segment reliance on a few large customers. Management reported no material change in disclosed risk factors or market-risk disclosures; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether organic demand, pricing and segment margins support the full-year sales and earnings outlook, particularly amid tariffs and higher material costs.
- How the $100m–$120m capacity investment plan, elevated capital spending and continued opportunistic repurchases affect cash generation and debt.
- Whether acquisition contributions and acquired-operation margins develop as expected, and whether currency or end-market weakness changes reported growth.
- The eventual balance-sheet effect of ASC 842 lease adoption and the company’s progress toward implementation.
- The sustainability of reported earnings growth given lower tax rates, pension contribution tax benefits and other tax adjustments; the filing does not provide a single comparable adjusted earnings measure that removes all such effects.