Business Context and Reporting Period
Company: Graco Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended September 26, 2003.
Business Overview: Graco Inc. operates in three reportable segments: Industrial/Automotive, Contractor, and Lubrication. The company manufactures fluid handling equipment and components.
Key Financial Metrics
(In thousands, except per share data)
| Metric | 13 Weeks Ended Sept 26, 2003 |
39 Weeks Ended Sept 26, 2003 |
|---|---|---|
| Net Sales | $133,788 | $399,812 |
| Gross Profit | $71,403 | $210,338 |
| Gross Margin | 53.4% | 52.6% |
| Operating Earnings | $34,034 | $97,414 |
| Net Earnings | $22,711 | $65,368 |
| Diluted EPS | $0.49 | $1.39 |
| Cash and Equivalents | $95,993 | $95,993 (Balance Sheet) |
| Operating Cash Flow (YTD) | N/A | $84,763 |
| Notes Payable | $4,852 | $4,852 (Balance Sheet) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6% in the third quarter and 9% year-to-date compared to 2002. Growth was driven by the acquisition of Sharpe Manufacturing, strong sales in Asia Pacific, and favorable foreign currency translation.
- Earnings Growth: Net earnings rose 11% in the quarter and 14% year-to-date. On a constant currency basis, earnings grew 4% for the quarter and 3% year-to-date.
- Segment Performance:
- Industrial/Automotive: Sales up 9% (quarter) and 12% (YTD), aided by the Sharpe acquisition.
- Contractor: Sales up 4% (quarter) and 8% (YTD). Americas sales were mixed due to inventory purchasing changes at a major home center customer.
- Lubrication: Sales up 10% (quarter) but operating earnings declined due to approximately $1 million in re-work and warranty costs related to the Matrix fluid management system.
- Acquisition: In Q2 2003, the company acquired Sharpe Manufacturing for $13.5 million cash, adding spray gun capabilities to the Industrial/Automotive segment.
- Stock Repurchase: In March 2003, the company repurchased 2.2 million shares for $54.8 million from former CEO David A. Koch.
Outlook, Risks, and Management Commentary
- Outlook: Management expects 2003 to be a year of sales and earnings growth despite soft conditions in the Americas and Europe. Asia (excluding Japan) remains strong due to infrastructure investment.
- Pension Plan: In October 2003, the company made a voluntary $20 million tax-deductible contribution to its defined benefit pension plan to improve funded status and reduce future expenses.
- Liquidity: The company holds $96 million in cash and has $47 million in unused lines of credit. Management states it has sufficient financial flexibility to meet liquidity needs.
- Risks: Key risks include economic conditions in major world economies, currency fluctuations, political instability, and changes in product demand. Management notes no material signs of increased demand for Industrial/Automotive products in the Americas.
Investor Verification Checklist
- Constant Currency Impact: Verify the extent to which reported growth is driven by currency translation versus organic volume growth, as management notes significant currency effects.
- Lubrication Segment Issues: Monitor the resolution of design problems and warranty costs associated with the Matrix fluid management system.
- Contractor Channel Dynamics: Assess the long-term impact of inventory purchasing practice changes at major home center customers in the Americas.
- Pension Expense Volatility: Review future pension expense projections given the recent $20 million contribution and prior year investment losses.
- Sharpe Integration: Evaluate the performance of the newly acquired Sharpe Manufacturing assets within the Industrial/Automotive segment.