Graco Inc. — FY 2010 Form 10-K
Business and period: Graco designs and sells fluid-handling equipment through three global segments: Industrial, Contractor and Lubrication. The fiscal year ended December 31, 2010, comprised 53 weeks, compared with 52 weeks in 2009. The filing also reports unaudited fourth-quarter results.
Financial performance
| Metric | FY 2010 | FY 2009 | Change or context |
|---|---|---|---|
| Net sales | $744.1 million | $579.2 million | Up 28% as reported by management |
| Gross profit / margin | $403.4 million / 54.2% | $292.8 million / 50.6% | Margin improved 3.6 percentage points |
| Operating earnings / margin | $153.1 million / 20.6% | $74.5 million / 12.9% | More than doubled |
| Net earnings | $102.8 million | $49.0 million | Up from recession-affected 2009 |
| Diluted EPS | $1.69 | $0.81 | |
| Cash from operations | $101.1 million | $146.5 million | Lower primarily from higher receivables and inventory |
| Capital expenditures | $16.6 million | $11.5 million |
Fourth quarter: Sales were $197.3 million versus $146.3 million in Q4 2009; gross profit was $107.7 million versus $77.3 million; net earnings were $27.0 million versus $17.2 million; diluted EPS was $0.44 versus $0.28. Quarterly figures are unaudited.
Segments: Industrial sales rose 31% to $409.6 million, with operating earnings of $126.3 million. Contractor sales rose 23% to $256.6 million, while operating earnings increased to $37.0 million; its margin remained 14%, reflecting launch and distribution costs. Lubrication sales rose 35% to $77.9 million and the segment returned to profit, with $8.9 million of operating earnings versus a $2.9 million loss.
Liquidity and debt: Year-end cash was $9.6 million. Working capital was $133 million and the current ratio was 2.1, compared with $85 million and 1.8 in 2009. Debt comprised $8.2 million of current bank notes and $70.3 million of long-term debt, down from $98.3 million combined in 2009. The company had $194 million of unused committed credit lines. Dividends paid were $48.1 million and share repurchases were $24.2 million.
Material changes and management commentary
- Sales increased in every segment and region: Americas 24%, Europe 25%, and Asia Pacific 46%. Management attributed the rebound to global industrial recovery and investment in products, distribution and commercial capabilities; 2010 included one additional fiscal week.
- Gross margin recovery reflected higher production and lower unabsorbed manufacturing costs ($12 million versus $26 million in 2009), pricing and product mix, and lower pension costs. Incentive expense rose with earnings and accounted for about two-thirds of the $32 million increase in operating expenses.
- Operating cash flow fell as receivables increased $23 million and inventory increased $33 million alongside sales growth. Inventory turns improved, and management noted that some Contractor inventory was built to support 2011 activity.
- Raw-material prices, including aluminum, nickel, copper, steel, rubber and plastics, increased significantly over 2009. A global electronic-component shortage lengthened lead times.
Outlook, risks and contingencies
- Management expected another year of solid sales and earnings growth in 2011, but provided no specific 2011 numerical forecast. Long-term targets are 10% annual revenue growth and 12% net earnings growth. The company planned continued product development, geographic expansion, acquisitions, additional share repurchases and approximately $30 million in 2011 capital spending.
- Management was positive on industrial and Lubrication demand, particularly in advancing economies, but remained cautious about recovery in residential and commercial construction. Backlog is typically small and is not considered a reliable indicator of future business.
- Key disclosed risks include global economic weakness, foreign-exchange and political risk, commodity costs and overseas supply interruptions, dependence of Contractor on a few large customers, competition and intellectual-property infringement, acquisition execution, and damage to facilities from natural disasters, including Mississippi River flooding exposure at Minneapolis.
- After year-end, Graco reached an agreement in principle for up to $300 million of senior-note financing, with 7-to-15-year maturities and fixed rates of 4% to 5.5%, for general corporate purposes. The filing also describes a subsequent-year financing plan; verify execution and final terms.
- Routine litigation was not expected by management to have a material adverse effect, though outcomes cannot be determined with certainty. The company reported effective disclosure controls and internal controls; the independent auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- How much of the reported growth and earnings recovery reflects the 53rd week, and whether demand and margins persist in subsequent periods.
- Whether working-capital investment converts to cash as sales stabilize, particularly the inventory build and receivables growth.
- Final terms and completion of the proposed senior-note financing, and the intended balance among debt, buybacks, dividends and acquisitions.
- Exposure to rising input costs and electronic-component availability, and the pace of recovery in construction-related markets and advancing economies.
- Assumptions affecting pension obligations and other estimates, including inventory reserves, warranty liabilities, taxes and goodwill or intangible-asset impairment assessments.