GRACO INC. 10-Q Summary: Quarter Ended March 28, 2003
Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended March 28, 2003. Graco Inc. operates in three reportable segments: Industrial/Automotive, Contractor, and Lubrication. The company manufactures fluid handling equipment and components. As of April 25, 2003, there were 45,660,000 common shares outstanding.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Net Sales | $119,660,000 | $107,857,000 |
| Gross Profit | $63,003,000 | $55,163,000 |
| Gross Margin | 52.7% | 51.1% |
| Operating Earnings | $27,121,000 | $23,493,000 |
| Net Earnings | $18,194,000 | $15,546,000 |
| Diluted EPS | $0.38 | $0.32 |
| Cash and Equivalents (End of Period) | $58,169,000 | $44,226,000 |
| Notes Payable to Banks | $8,149,000 | $13,204,000 |
| Operating Cash Flow | $17,466,000 | $12,358,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11% year-over-year. Sales grew 7% in local currencies, with the remainder driven by favorable currency translation, particularly in Europe and Asia Pacific.
- Segment Performance:
- Industrial/Automotive: Sales up 14% ($52.4M vs $46.1M); Operating earnings up 19%.
- Contractor: Sales up 7% ($54.8M vs $51.1M); Operating earnings slightly down 1%.
- Lubrication: Sales up 17% ($12.4M vs $10.6M); Operating earnings up 32%.
- Profitability: Gross margin expanded to 52.7% from 51.1%, primarily due to currency effects where sales (denominated in foreign currencies) benefited more from the weak dollar than costs (incurred largely in USD).
- Expenses: Operating expenses increased due to higher spending on sales personnel, marketing, and travel to support growth, contrasting with the restricted spending in Q1 2002 following September 11.
- Cash Position: Cash and cash equivalents decreased from $103.3M to $58.2M during the quarter, primarily due to a $54.8M stock repurchase and $13M acquisition.
Outlook, Risks, and Unusual Items
- Acquisition: On March 31, 2003, Graco purchased assets of Sharpe Manufacturing Company for approximately $13 million cash. Sharpe manufactures spray guns for the automotive refinishing market.
- Stock Repurchase: The company repurchased 2.2 million shares for $54.8 million from David A. Koch and related entities in March 2003.
- Outlook: Management anticipates modest underlying growth in major industrialized countries for 2003 but aims to exceed this through new products, distribution initiatives, and strategic acquisitions.
- Risks: Forward-looking statements are subject to risks including economic conditions, currency fluctuations, political instability, and changes in product demand.
- Controls: Management concluded that disclosure controls and procedures are effective as of the evaluation date.
Investor Verification Checklist
- Verify the impact of currency translation on reported sales growth versus organic local currency growth.
- Confirm the integration progress and financial contribution of the Sharpe Manufacturing acquisition.
- Monitor the sustainability of gross margin expansion given the reliance on favorable exchange rates.
- Review the remaining capacity on the $55 million unused line of credit.
- Assess the impact of the $54.8M stock repurchase on future liquidity and capital allocation strategy.