Graco Inc. — FY2013 Form 10-K
Business context and reporting period. Graco designs and sells fluid-handling equipment through three global segments: Industrial, Contractor and Lubrication. This 10-K covers the 52-week fiscal year ended December 27, 2013; the filing also reports quarterly results, including Q4.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,104.0 million | $1,012.5 million |
| Gross profit margin | 55.0% | 54.4% |
| Operating earnings | $279.8 million; 25.3% margin | $224.7 million; 22.2% margin |
| Net earnings | $210.8 million | $149.1 million |
| Diluted EPS | $3.36 | $2.42 |
| Cash from operations | $243.1 million | $189.7 million |
| Total debt at year-end | $418.0 million | $564.6 million |
| Cash at year-end | $19.8 million | $31.1 million |
- Sales grew 9%; reported growth comprised 6% volume and price, 3% acquisitions and approximately no net currency impact. By region, sales rose 11% in the Americas, 10% in EMEA and 3% in Asia Pacific.
- Industrial sales rose 8% to $652.3 million; Contractor rose 15% to $342.5 million; Lubrication declined 1% to $109.1 million. Contractor operating margin improved to 21% from 18%; Industrial was 32% versus 31%; Lubrication was 21% versus 20%.
- Operating earnings increased about 25%, supported by expense leverage and lower acquisition/divestiture costs ($2 million versus $16 million). The effective tax rate fell to 27% from 31%, reflecting Liquid Finishing dividends and the renewed federal R&D credit. These items contributed to the increase in net earnings.
- Working capital was $624 million and the current ratio was 4.7. Cash uses included $148 million net debt repayment, $68 million share repurchases, $61 million dividends, $23 million capital expenditures and $12 million of acquisitions. The company had $355 million of unused committed credit lines and reported compliance with debt covenants.
- Q4 sales were $271.9 million versus $253.7 million in Q4 2012; net earnings were $44.7 million versus $42.3 million, and diluted EPS was $0.71 versus $0.68.
Material changes, outlook and risks
- Management expected growth in every region in 2014: construction recovery was expected to support the Americas, emerging Eastern European markets to support moderate EMEA growth, and Asia Pacific was expected to improve as the year progressed despite weak conditions and difficult first-half comparisons. Management expected solid factory performance with modest volume growth.
- Long-term management targets were 10% revenue growth and 12% consolidated net earnings growth; these are targets, not specific 2014 guidance. Planned 2014 capital expenditures were approximately $25–30 million, with estimated dividends of $67 million. The regular annual dividend rate was raised 10% to $1.10 per share.
- The $650 million 2012 ITW Finishing acquisition remains subject to an unresolved FTC process. Powder Finishing is included in Industrial; Liquid Finishing is held separate and not consolidated. Graco carried its investment at $422.3 million, found no impairment, and received $28 million of dividends in 2013. The FTC had not issued its final order, and the timing, terms and completion of the required divestiture remained uncertain.
- EcoQuip was acquired in 2013; QED Environmental Systems was acquired after fiscal year-end. Management stated the two acquisitions had combined annual revenues of approximately $30 million. Other risks include cyclical demand in industrial, construction and automotive markets; competition and counterfeit products; international, currency and supply-chain exposure; dependence of Contractor on several large customers; and litigation, regulatory, cybersecurity and natural-disaster risks. Routine legal matters were not expected by management to materially affect results.
- Other unusual factors include $7 million of 2012 purchase-accounting inventory charges that reduced the prior-year gross margin, and a $422.3 million held-separate investment whose value and divestiture outcome remain material considerations. Auditors issued unqualified opinions on the financial statements and internal controls; management reported effective financial reporting controls.
Most important facts for investors to verify
- Progress and final terms of the FTC-required Liquid Finishing divestiture, including proceeds, any required funding and potential gain or loss relative to the carrying value.
- How much of reported growth and earnings improvement is sustainable, separating organic volume and price from acquisitions, tax credits and Liquid Finishing dividend income.
- Whether 2014 regional growth expectations and long-term growth targets were achieved, particularly given weak Asia Pacific conditions and subdued Western European markets.
- Debt reduction, covenant headroom, cash generation and planned capital returns, alongside funding needs for acquisitions and pension obligations.