Graco Inc. — 2017 Form 10-K Summary
Business context and reporting period
Graco designs, manufactures and sells equipment for moving, measuring, controlling, dispensing and spraying fluids and coatings. Its fiscal year ended December 29, 2017, and comprised 52 weeks; 2016 comprised 53 weeks. The business reports through Industrial, Process and Contractor segments. Approximately half of 2017 sales were to customers outside the United States.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,474.7 million | $1,329.3 million |
| Gross margin | 53.8% | 53.3% |
| Operating earnings | $360.4 million | $113.9 million |
| Net earnings | $252.4 million | $40.7 million |
| Diluted EPS | $1.45 | $0.24 |
| Operating cash flow | $337.9 million | $276.0 million |
Sales increased 11%, with volume and price contributing 11%; currency was approximately neutral. Adjusted non-GAAP operating earnings were $372.5 million and adjusted net earnings were $249.4 million, or $1.43 per diluted share. Adjusted figures exclude specified unusual items and are not GAAP measures. Operating margin was 24.4%, versus 8.6% in 2016, which included a significant impairment.
Industrial sales were $692.0 million and operating margin was 34%; Process sales were $294.7 million and margin was 18%; Contractor sales were $488.1 million and margin was 23%. All three segments reported higher sales than in 2016.
At year-end, cash and cash equivalents were $103.7 million, working capital was $397.5 million, and the current ratio was 2.7. Long-term debt was $226.0 million and current bank notes were $6.6 million. The company had $512 million of unused committed credit capacity and reported compliance with debt covenants. Capital expenditures were $40.2 million; dividends paid were $80.5 million and share repurchases were $90.2 million.
Material changes and unusual items
- Reported 2017 net earnings included a $12.1 million pension settlement loss and the effects of tax accounting changes. The new stock-compensation accounting treatment reduced tax expense by $36.3 million; the Tax Act increased tax expense by $35.6 million, comprising deferred-tax revaluation and transition-tax charges.
- 2016 results included a $192.0 million non-cash impairment charge related to the Oil and Natural Gas reporting unit, reducing net earnings by $161.4 million after tax. No impairment was recorded in 2017.
- Fourth-quarter 2017 sales were $374.9 million and net earnings were $36.4 million ($0.21 diluted EPS). Fourth-quarter 2016 reported a $104.2 million net loss, primarily reflecting the after-tax impairment. Fourth-quarter 2017 earnings also included approximately $36 million in Tax Act charges.
- The company increased its quarterly dividend by 10% in December 2017. It also completed a three-for-one stock split in December; per-share figures in the filing reflect the split.
Outlook, risks and contingencies
Management expected mid-single-digit 2018 sales growth on an organic, constant-currency basis, with growth in every region and reportable segment. At January 2018 exchange rates, currency was estimated to provide a tailwind of approximately 3% to sales and 7% to earnings, assuming unchanged volumes and mix. Management’s stated long-term targets are 10% revenue growth and 12% consolidated net earnings growth. The company cautioned that its typically small backlog is not a reliable indicator of future business.
Management cited solid demand and stable-to-improving capital-equipment conditions, while noting that fourth-quarter Industrial sales growth was low. Risks include global economic and industrial activity, foreign exchange, raw-material cost and supply interruptions, competition and intellectual-property infringement, acquisition execution, cybersecurity, tax-law interpretation, and exposure to construction, automotive, mining, and oil and gas markets. One customer represented more than 10% of consolidated sales in each of 2015–2017. Routine legal matters were not expected by management to have a material effect. The filing reports unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Assess underlying earnings growth using GAAP results alongside management’s non-GAAP adjustments, including the pension loss and tax-related items.
- Review the sustainability of 2017’s broad-based sales growth and margin improvement, particularly in Process and Industrial.
- Monitor the Tax Act’s final effects; the company recorded provisional estimates and noted that later guidance or analysis could change them.
- Track pension funded status, assumptions and future contributions; year-end pension benefits were underfunded by $139.4 million.
- Evaluate customer concentration, raw-material cost pressures, foreign-exchange sensitivity and the execution of the 2018 outlook.