Graco Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 29, 2019; comparative period ended March 30, 2018. Graco designs, manufactures and markets equipment and systems for moving, measuring, controlling, dispensing and spraying fluids and coatings. Its reportable segments are Industrial, Process and Contractor. Financial statements are unaudited.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $404.9 million | $406.3 million | Down slightly; reported as 0% |
| Gross profit | $216.0 million | $222.4 million | Down 2.9% |
| Gross margin | 53.4% | 54.7% | Down 1.3 percentage points |
| Operating earnings | $104.5 million | $111.7 million | Down 6% |
| Operating margin | 25.8% | 27.5% | Down 1.7 percentage points |
| Net earnings | $86.7 million | $85.5 million | Up 1% |
| Diluted EPS | $0.51 | $0.49 | Up 4% |
| Operating cash flow | $50.5 million | $58.8 million | Down $8.2 million |
Reported net earnings benefited from a lower effective tax rate: 13.9%, versus 20.4% a year earlier, reflecting stock-option tax benefits and other tax-planning benefits. Adjusted for the tax items identified by the company, net earnings were $80.1 million versus $84.1 million, and adjusted diluted EPS was $0.47 versus $0.48. These are non-GAAP measures; reported diluted EPS was $0.51.
Segments and drivers
- Industrial: Sales fell 3% to $189.1 million; operating earnings were $65.2 million versus $69.1 million. Sales weakness in Asia Pacific, including non-repeating large system sales from 2018, offset growth in the Americas and EMEA. Operating margin was 34%, versus 35%.
- Process: Sales rose 9% to $86.9 million; operating earnings increased to $20.0 million from $17.7 million. Growth spanned all regions and applications; operating margin improved to 23% from 22%.
- Contractor: Sales declined 2% to $128.9 million; operating earnings decreased to $26.5 million from $31.4 million. New products planned for early-quarter launch were released late in the quarter; lower factory volume, higher spending and material costs, and unfavorable channel mix pressured margins. Operating margin was 21%, versus 24%.
Americas sales increased 5%; EMEA declined 2% as currency effects offset underlying growth; Asia Pacific declined 12%, including an 8% decrease at consistent translation rates. Currency translation reduced worldwide sales by approximately $11 million and operating earnings by approximately $6 million. Higher material costs and product/channel mix weighed on gross margin; first-quarter price increases were expected to have more effect as the year progressed. Product development expense rose 8% as the company continued investing in product launches.
Balance sheet, cash flow and liquidity
- At March 29, 2019, cash and cash equivalents were $119.7 million, down from $132.1 million at year-end; current assets were $733.5 million and current liabilities $354.0 million.
- Debt included $7.6 million of bank notes, $75.0 million of current long-term debt and $173.7 million of long-term debt. The company identified $75 million of fixed-rate notes due in January 2020 and said potential early retirement was among its planned uses of liquidity.
- Operating cash flow of $50.5 million was below the prior-year $58.8 million, primarily due to changes in accrued liabilities, including income taxes payable. Receivables and inventories increased with business activity.
- Capital expenditures were $30.4 million, acquisitions $5.4 million, and dividends paid $26.4 million. The company had $594 million in credit lines, of which $564 million was unused.
- Operating lease assets and liabilities were recognized following adoption of the new lease standard; lease adoption did not materially affect net earnings or cash flows.
Outlook, risks and notable items
Management continued to target mid-single-digit organic sales growth on a constant-currency basis for full-year 2019, with growth in all reportable segments and regions. It cited planned capacity expansion projects, dividends, possible share repurchases and acquisitions as expected liquidity needs. No shares were repurchased in Q1; the company said it may make opportunistic purchases.
Risks highlighted include currency movements, economic and industry conditions, product demand, supply interruptions, international operations, cybersecurity, regulatory and legal matters, tax changes, acquisition performance, and possible reduced purchases by large Contractor-segment customers. The filing reported no material changes to the risk factors or market-risk disclosures from the 2018 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the full-year mid-single-digit constant-currency organic growth target remains achievable, particularly given Contractor launch timing and Asia Pacific weakness.
- How much reported earnings growth depended on tax benefits: reported EPS increased while adjusted EPS declined.
- Whether gross-margin pressure from materials, mix and factory costs eases as price increases take effect.
- Cash conversion and working-capital trends, alongside planned capital spending and the January 2020 debt maturity.
- Whether the segment and regional trends persist; the filing notes interim results are not necessarily indicative of full-year results.