Graco Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are to the three months ended March 25, 2016. 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 and liquidity
- Sales: $340.6 million, up 12%. Organic volume and price increased 13%; currency reduced growth by 1%, with no material acquisition contribution to consolidated growth.
- Profitability: Gross profit was $185.3 million, up 15%; gross margin rose to 54.4% from 53.1%. Operating earnings increased 41% to $85.8 million, with operating margin of 25.2% versus 20.0%. Net earnings rose 54% to $60.7 million; diluted EPS was $1.05 versus $0.70. Net margin was 17.8% versus 13.0%.
- Cash flow: Operating cash flow was $50.2 million versus $28.9 million. Capital expenditures were $8.2 million; acquisition spending was $10.0 million. The company repurchased $90.2 million of stock and paid $20.1 million in dividends. Cash increased $24.2 million to $76.6 million.
- Debt and liquidity: Balance-sheet debt included $9.4 million of bank notes, $75.0 million current debt and $302.7 million long-term debt. Current assets were $556.6 million and current liabilities $253.7 million. Of $545 million in credit lines, $459 million was unused. Cash included $8.6 million restricted for self-insurance reserves.
- Dividends: $0.36 per share declared, compared with $0.33 in the prior-year quarter.
Material changes and segment performance
- Growth across all segments and regions, improved gross margin and operating expense leverage drove higher operating and net earnings. Operating expenses were slightly lower in total than a year earlier.
- Industrial sales increased 6% to $156.4 million; operating earnings were $53.7 million and segment margin was 34%, versus 31%.
- Process sales increased 9% to $70.0 million; operating earnings were $13.5 million and segment margin was 19%, versus 11%.
- Contractor sales increased 22% to $114.2 million; operating earnings were $26.0 million and segment margin was 23%, versus 18%. North American paint and home-center channels had strong growth.
- Net sales increased 15% in the Americas, 4% in EMEA and 10% in Asia Pacific. EMEA and Asia Pacific growth was partly offset by unfavorable currency effects.
Outlook, risks and unusual items
- Outlook: Management raised its 2017 forecast from low-single-digit to mid-single-digit organic sales growth worldwide on a constant-currency basis, expecting mid-single-digit growth in each region. First-quarter demand was broad-based and exceeded expectations.
- Accounting and tax: A new share-based compensation accounting standard reduced first-quarter tax expense by $3.7 million, lowered the effective tax rate by 4 percentage points and increased diluted EPS by $0.05. The reported effective tax rate was 26%, versus 31%.
- Other EPS factor: Diluted EPS included an estimated $0.01 benefit from lower intangible amortization following a non-cash impairment charge recorded in Q4 2016.
- Share repurchase: A February accelerated share repurchase involved a $90 million upfront payment and 850,000 shares initially delivered; final shares depend on the stock’s volume-weighted average price during the purchase period.
- Risks: Management cited economic and demand changes, currency movements, international operations and regulation, supply interruptions, cybersecurity, acquisitions and potential impairments, litigation and indemnification claims, and reliance on large Contractor-segment customers. It reported no material changes to previously disclosed risk factors or market-risk disclosures.
- Accounting outlook: The company was assessing the revenue-recognition standard effective in fiscal 2018. Preliminary work indicated no expected material financial-statement impact, but variable consideration and timing of revenue recognition remained under review.
Key facts for investors to verify
- Whether mid-single-digit 2017 organic sales growth and growth across all regions are achieved.
- How much earnings growth persists after the $0.05 EPS benefit from the accounting change and the lower-amortization benefit.
- Whether segment margins, particularly Process and Contractor, are sustainable as product mix and demand change.
- Final shares delivered and effective cost under the accelerated share repurchase, and the company’s subsequent cash, debt and repurchase levels.
- Revenue-standard adoption effects and exposure to the filing’s cited customer, industry, currency, acquisition, supply and litigation risks.