Graco Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 26, 2014 (13 weeks), with year-to-date results for the 39 weeks ended September 26, 2014. Comparatives are the corresponding 2013 periods. The unaudited statements include normal recurring adjustments. Graco designs, manufactures and markets equipment and systems for moving, measuring, controlling, dispensing and spraying fluids and coatings. Its reportable segments are Industrial, Contractor and Lubrication.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $302.6 million | $277.0 million | $915.1 million | $832.1 million |
| Operating earnings | $78.9 million | $69.7 million | $239.5 million | $216.4 million |
| Net earnings | $59.6 million | $56.1 million | $176.5 million | $166.1 million |
| Diluted earnings per share | $0.97 | $0.89 | $2.85 | $2.65 |
| Operating cash flow | Not separately provided | Not separately provided | $170.4 million | $181.0 million |
- Q3 sales rose 9%, operating earnings 13%, net earnings 6% and diluted EPS 9%. Year-to-date increases were 10%, 11%, 6% and 8%, respectively.
- Gross margin was 55% in Q3, slightly higher year over year; the year-to-date rate was also 55%, slightly lower. Management attributed the year-to-date pressure to acquisition purchase accounting, lower acquired-business margins and product mix.
- Operating expenses increased $6 million, or 7%, in Q3 and $19 million, or 8%, year to date, largely reflecting acquired operations and growth initiatives. Operating expenses as a share of sales declined by half a percentage point for both periods.
- The Q3 effective tax rate was 28%, four percentage points higher than in 2013; the year-to-date rate was 29%, two points higher. Management cited the absence of a renewed 2014 federal R&D credit and favorable credits in 2013.
- Q3 declared dividends were $0.28 per share, versus $0.25; year-to-date dividends were $0.83, versus $0.75.
Segments and sources of growth
- All three segments grew sales in Q3 and year to date. Q3 segment sales were Industrial $174.3 million (up 11%), Contractor $99.4 million (up 7%) and Lubrication $28.9 million (up 6%).
- Industrial growth included $9 million of sales from acquisitions in Q3 and $26 million year to date. The acquired businesses contributed six percentage points to Industrial Q3 growth and five points year to date.
- Q3 geographic sales growth was 12% in the Americas, 4% in EMEA and 7% in Asia Pacific. Year-to-date growth was 14%, 8% and 2%, respectively. Management noted currency-adjusted growth was lower in EMEA.
Cash, debt and liquidity
- Cash and equivalents were $28.7 million at September 26, 2014, compared with $19.8 million at December 27, 2013. Current assets were $844.5 million and current liabilities $159.9 million; current assets included a $421.8 million investment in businesses held separate.
- Long-term debt was $508.8 million, up from $408.4 million at year-end; notes payable to banks were $6.2 million. Net cash provided by operations was $170.4 million, down from $181.0 million. Receivables and inventory rose with business activity, and the increase in receivables was $8 million greater than in the comparable 2013 period.
- Year-to-date cash uses included $141.9 million for share repurchases, $65.2 million for an acquisition, $50.0 million for dividends and $25.3 million for capital expenditures. Net cash used in investing was $91.0 million.
- The revolving credit agreement was extended to June 26, 2019, and its commitment increased to $500 million. At quarter-end, total credit lines were $549 million, with $335 million unused. Management said internal funds and unused financing were expected to meet 2014 liquidity needs.
Outlook, transactions and risks
- Management expected mid-single-digit organic growth in Q4 and double-digit total-company sales growth, including the benefit of three acquisitions closed in the prior year, including Alco Valves. It remained positive on U.S. housing and the U.S. economy, while citing macroeconomic conditions, geopolitical concerns and currency as expected EMEA headwinds. No full-year earnings or EPS forecast is stated in the provided filing text.
- On October 1, 2014, after quarter-end, Graco acquired U.K.-based Alco Valves for £72 million cash, subject to purchase-price adjustments. Alco’s trailing 12-month revenue was approximately £19 million; its results will be included in Industrial.
- Graco agreed to sell the Liquid Finishing business assets for $590 million cash, subject to regulatory approval and customary conditions, with closing expected by Q1 2015. The FTC order effective October 9 required divestiture within 180 days. Completion, timing and terms remained uncertain; the businesses were to be held separate until the sale. Graco expected to use proceeds for debt reduction, share repurchases and strategic acquisitions.
- Liquid Finishing dividends contributed $9 million in Q3 and $24 million year to date to other income; the filing states dividends will cease after the sale. Graco reported no impairment of its investment at September 26.
- Other cited risks include economic and political conditions, international operations and currency, demand changes, supply interruptions, acquisitions and divestiture execution, competition and intellectual property, regulation and litigation, customer concentration in Contractor, construction and automotive activity, cybersecurity and natural disasters. Management reported no material change in market-risk disclosures and concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the $590 million Liquid Finishing sale receives required approvals and closes on time, and the resulting net proceeds and debt reduction.
- Whether Q4 organic and total sales growth meet management’s outlook, particularly amid EMEA and currency headwinds.
- Whether acquisition integration supports Industrial growth without continued pressure on segment margins and cash conversion.
- Whether higher receivables and inventory convert into cash, given year-to-date operating cash flow declined despite earnings growth.
- How the planned use of divestiture proceeds affects debt, repurchases and future acquisitions.