Business Context and Reporting Period
Company: Graco Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended September 29, 2006.
Business Overview: Graco Inc. designs, manufactures, and markets fluid handling equipment and components. The company operates through three reportable segments: Industrial, Contractor, and Lubrication.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sep 29, 2006 |
13 Weeks Ended Sep 30, 2005 |
39 Weeks Ended Sep 29, 2006 |
39 Weeks Ended Sep 30, 2005 |
|---|---|---|---|---|
| Net Sales | $202,199 | $176,934 | $613,047 | $546,099 |
| Gross Profit | $106,611 | $94,722 | $326,784 | $282,880 |
| Gross Margin % | 52.7% | 53.5% | 53.3% | 51.8% |
| Operating Earnings | $55,004 | $46,962 | $173,484 | $142,473 |
| Net Earnings | $37,392 | $30,898 | $114,149 | $93,575 |
| Diluted EPS | $0.54 | $0.44 | $1.65 | $1.34 |
| Cash Flow from Operations (39 wks) | $116,989 (2006) vs $110,202 (2005) | |||
| Cash and Equivalents (Sep 29, 2006) | $9,192 | |||
| Notes Payable (Sep 29, 2006) | $22,284 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14.3% for the quarter and 12.3% year-to-date (YTD) compared to the prior year. Growth was driven by all three segments, with the Lubrication segment showing the most significant increase (65% for the quarter) due to the acquisition of Lubriquip, Inc.
- Profitability: Net earnings increased 21.0% for the quarter and 22.0% YTD. Net earnings as a percentage of sales improved to 18.5% for the quarter (from 17.5%) and 18.6% YTD (from 17.1%).
- Operating Expenses: Operating expenses increased $3.8 million for the quarter and $12.9 million YTD. This increase is primarily attributed to the Lubriquip acquisition, share-based compensation (newly recognized under SFAS 123(R)), and charitable foundation contributions.
- Balance Sheet: Total assets increased to $508.6 million from $445.6 million at year-end 2005, driven by acquisitions and inventory build-up. Cash balances decreased from $18.7 million to $9.2 million due to significant capital deployment.
Guidance, Outlook, and Risks
- Outlook: Management expects sales and earnings to be higher in 2006 compared to the prior year. Results for the first nine months were in line with expectations.
- Acquisition Integration: The company acquired Lubriquip, Inc. in July 2006 for approximately $31 million. Plans include closing Lubriquip's existing facilities in 2007 and consolidating operations into a new facility in Minnesota. Estimated costs for this consolidation are approximately $2 million.
- Facility Consolidation: The company is closing its Lakewood, New Jersey, and Vilanova, Spain, facilities. Approximately $2 million of the estimated $4–$5 million in total costs has been incurred to date.
- Capital Allocation: Significant cash uses in the first nine months included $70 million for stock repurchases, $31 million for the Lubriquip acquisition, and $30 million for dividends.
- Liquidity: The company maintains $128 million in unused lines of credit and $9.2 million in cash, providing flexibility for future investments and liquidity needs.
- Risks: Forward-looking statements are subject to risks including economic conditions, currency fluctuations, political instability, and changes in product demand. The company is also evaluating the impact of new accounting standards (SFAS 158 and FIN 48) on future financial reporting.
Key Facts for Investor Verification
- Acquisition Impact: Verify the integration progress and cost synergies of the Lubriquip acquisition, which contributed $6 million in sales but incurred non-cash charges in the quarter.
- Share-Based Compensation: Confirm the ongoing impact of SFAS 123(R) adoption, which added $6.5 million in compensation costs YTD, reducing net income by $4.7 million.
- Inventory Levels: Inventories increased significantly to $75.1 million (from $56.5 million at year-end 2005), representing a use of cash of $14.5 million YTD; monitor for potential obsolescence or margin pressure.
- Stock Repurchases: The company retired $69.8 million of common stock YTD. Verify the remaining authorization under the current buyback program ($5.5 million remaining as of period end).
- Facility Costs: Track the remaining $2–$3 million in estimated costs for the Lakewood and Vilanova facility closures and the new Minnesota facility expansion.