GRACO INC. 10-Q Summary: Quarter Ended September 27, 2002
Business Context and Reporting Period
This Form 10-Q covers the thirteen and thirty-nine weeks ended September 27, 2002. Graco Inc. operates in three reportable segments: Industrial/Automotive, Contractor, and Lubrication. The company manufactures fluid handling equipment and systems. As of October 25, 2002, there were 47,611,000 common shares outstanding.
Key Financial Metrics
| Metric | Q3 2002 | Q3 2001 | YTD 2002 | YTD 2001 |
|---|---|---|---|---|
| Net Sales | $125.8M | $118.7M | $366.5M | $359.3M |
| Gross Profit | $65.4M | $59.2M | $187.7M | $178.5M |
| Gross Margin | 52.0% | 49.9% | 51.2% | 49.7% |
| Operating Earnings | $30.7M | $25.4M | $86.0M | $74.4M |
| Net Earnings | $20.5M | $16.8M | $57.6M | $48.1M |
| Diluted EPS | $0.42 | $0.35 | $1.19 | $1.02 |
| Cash & Equivalents | $93.8M | $10.4M (End Q3 2001) | $93.8M | $10.4M |
| Operating Cash Flow (YTD) | $73.7M (vs $59.6M YTD 2001) | |||
| Debt (Notes Payable) | $12.6M | $9.5M (Dec 2001) | $12.6M |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6.1% in Q3 and 2.0% year-to-date (YTD) compared to the prior year. The Industrial/Automotive segment saw sales growth for the first time since Q2 2000, driven by the Asia Pacific region (specifically China). The Contractor segment benefited from strong home center channel sales.
- Profitability: Net earnings rose 22% in Q3 and 20% YTD. Gross margins improved due to price increases, favorable exchange rates, and manufacturing cost improvements.
- Liquidity: Cash and cash equivalents surged from $26.5M at year-end 2001 to $93.8M at period-end, driven by strong operating cash flows ($73.7M YTD) and reduced capital expenditures compared to 2001.
- Segment Performance: Industrial/Automotive operating earnings jumped significantly ($14.4M vs $2.5M in Q3 2001). The Lubrication segment sales trailed the prior year due to the absence of large one-time customer sales.
Guidance, Outlook, and Risks
- Outlook: Management expects modest market growth for the remainder of 2002 and into 2003. The Contractor segment is supported by a strong North American housing market, while the Industrial/Automotive segment is positioned for recovery in capital equipment spending.
- Cost Pressures: Management anticipates continued year-over-year cost pressures in insurance and pension expenses for the rest of 2002 and into 2003.
- Restructuring: A $1.4M restructuring charge incurred in Q3 2001 regarding the relocation of German operations was largely paid in Q3 2002, with only $100k remaining in the accrual.
- Risks: Key risks include economic conditions in major world economies, currency fluctuations, political instability, and changes in product demand. The strengthening of the euro had a favorable impact on reported European sales.
Investor Verification Checklist
- Cash Position: Verify the $67M increase in cash and cash equivalents and the reduction in capital expenditures compared to the heavy spending in 2001.
- Segment Mix: Confirm the sustainability of the Industrial/Automotive sales recovery, particularly the reliance on the Asia Pacific/China market.
- Expense Trends: Monitor the impact of rising insurance and pension costs on future operating margins despite current efficiency gains.
- Debt Structure: Note the termination of the revolving credit facility with U.S. Bank National Association and the current reliance on $19M in unused lines of credit.
- Stock Split: Ensure all per-share data is adjusted for the 3-for-2 stock split distributed on June 6, 2002.