Graco Inc. (NYSE: GGG) — 2020 Form 10-K Summary
Business context and reporting period
Graco designs, manufactures and markets equipment and systems that move, measure, control, dispense and spray fluids and coatings. It sells primarily through independent distributors and reports Industrial, Process and Contractor segments. The fiscal year ended December 25, 2020, and comprised 52 weeks; this 10-K reports the full year, with fourth-quarter data separately disclosed.
Key financial metrics
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net sales | $1,650.1 million | $1,646.0 million | Up 0.2% |
| Gross profit margin | 51.8% | 52.2% | Down 0.4 percentage point |
| Operating earnings | $391.7 million | $424.5 million | Down 7.7%; includes $35.2 million impairment |
| Net earnings | $330.5 million | $343.9 million | Down 3.9% |
| Diluted EPS | $1.92 | $2.00 | Down 4.0% |
| Adjusted net earnings (non-GAAP) | $335.2 million | $325.4 million | Up 3.0% |
| Adjusted diluted EPS (non-GAAP) | $1.95 | $1.90 | Up 2.6% |
| Operating cash flow | $394.0 million | $418.7 million | Down $24.7 million |
| Cash and cash equivalents, year-end | $378.9 million | $221.0 million | Up $157.9 million |
Fourth-quarter 2020 sales were $470.3 million versus $412.3 million in fourth-quarter 2019; net earnings were $114.7 million versus $84.8 million, and diluted EPS was $0.66 versus $0.49.
Working capital was $702.4 million, the current ratio was 3.2, and year-end debt was $172.2 million, including $22.2 million current notes payable and $150.0 million long-term debt. The company reported $548 million unused on committed credit lines and compliance with debt covenants. The quarterly dividend was raised 7% in December to $0.1875 per share.
Material changes versus the prior comparable period
- Sales were nearly flat overall, but segment and regional performance diverged. Contractor sales rose 17% to $646.3 million, while Industrial declined 9% to $677.7 million and Process declined 5% to $326.1 million.
- Contractor growth reflected stronger construction and home-improvement demand. Industrial and Process were affected by pandemic-related disruptions and weaker end markets; Process order rates had not recovered to pre-pandemic levels by year-end.
- Gross margin fell amid mix changes, with lower Industrial sales and higher Contractor sales; pricing partly offset the pressure. Excluding the impairment, operating expenses decreased $7 million as lower selling costs offset higher product-development spending.
- GAAP earnings included a $35.2 million non-cash impairment related to the sale of the U.K. Alco valve business, which reduced net earnings by $34 million, or $0.20 per diluted share. Adjusted earnings exclude this charge and specified tax items.
- Operating cash flow declined, primarily reflecting working-capital increases and a voluntary $20 million pension contribution. Cash rose, while the company repurchased 2.3 million shares for approximately $102 million.
Outlook, commentary and risks
Management expected challenging conditions in Industrial and Process to persist through at least the first half of 2021, while its Contractor outlook remained positive. At January 2021 exchange rates, assuming 2020 volume and mix, currency movements were estimated to benefit 2021 sales by approximately 2% and operating earnings by 6%, with the largest effect in the first half. The company stated that backlog is not a reliable indicator of future business levels. Long-term targets cited were 10% revenue growth and 12% consolidated net earnings growth.
Management said operating cash flow and available liquidity were sufficient to support operations at current order rates and did not expect a significant pandemic-related liquidity impact. Planned 2021 capital expenditures were approximately $115 million, including $80 million for capacity expansion; planned dividends were estimated at $126 million.
- COVID-19 remained a material uncertainty affecting demand, customers’ capital spending, supply chains, distributors, employee operations and sales activity.
- Other disclosed risks include global economic weakness, foreign-exchange and tariff exposure, supply interruptions, competition, dependence on major Contractor customers, pension assumptions, cybersecurity, intellectual-property disputes, regulatory changes and litigation.
- Raw material availability was generally adequate, but isolated pandemic-related supplier disruptions and higher costs for certain materials and tariffs affected production costs.
- Routine legal proceedings were not expected by management to have a material adverse effect. Deloitte issued unqualified opinions on the financial statements and internal controls; the pension obligation discount-rate estimate was identified as a critical audit matter.
Important facts for investors to verify
- Reconcile GAAP and adjusted earnings, especially the Alco impairment, tax benefits and the $0.20-per-share impairment impact.
- Assess whether Contractor demand can remain strong and whether Industrial and Process orders recover as pandemic restrictions and end-market conditions evolve.
- Review the assumptions behind the currency benefit in the 2021 outlook and monitor actual exchange-rate effects.
- Track cash conversion, receivables and inventory, pension funding, planned capacity spending, dividends and share repurchases.
- Confirm the timing and terms of renewal of the $500 million revolving facility due to expire in December 2021, and monitor debt maturities and covenant compliance.