Graco Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 27, 2020; compared with the three months ended March 29, 2019. Financial statements are unaudited. Graco designs, manufactures and markets fluid and coating management equipment across Industrial, Process and Contractor segments.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $373.6 million | $404.9 million | Down 8% |
| Gross profit / margin | $198.6 million / 53.2% | $216.0 million / 53.4% | Margin down 0.2 percentage points |
| Operating earnings / margin | $89.8 million / 24.0% | $104.5 million / 25.9% | Down 14% |
| Net earnings | $72.8 million | $86.7 million | Down 16% |
| Diluted EPS | $0.42 | $0.51 | Down 18% |
| Operating cash flow | $54.2 million | $50.5 million | Up $3.7 million |
Adjusted net earnings were $65.0 million and adjusted diluted EPS was $0.38, down 19% each year over year. These company-presented non-GAAP measures exclude excess tax benefits from option exercises; the comparable 2019 adjustment also excludes a non-recurring tax benefit. Reported effective tax rate was 11.3%, versus 13.9%; adjusted rates were 20.8% and 20.5%, respectively.
Sales declined across all segments and regions. By segment, Industrial sales were $158.7 million, down 16%; Process sales were $86.1 million, down 1%; and Contractor sales were $128.8 million, essentially flat. Segment operating margins were 32% (down from 34%), 21% (down from 23%) and 22% (up from 21%), respectively. EMEA and Asia Pacific sales fell 12% and 17%; Americas sales fell 3%.
Financial position and liquidity
- Cash and cash equivalents were $456.7 million at quarter-end, compared with $221.0 million at December 27, 2019. Current assets were $1,048.8 million and current liabilities $311.8 million.
- Long-term debt was $400.0 million, up from $164.3 million at year-end; notes payable to banks were $45.7 million, up from $7.7 million. In March, Graco borrowed $250 million under its $500 million revolving credit facility to increase cash and preserve flexibility. The filing reported $300 million of unused credit within total credit lines of $594 million.
- Operating cash flow of $54.2 million was offset in part by $18.9 million of capital expenditures. Financing included $82.2 million of cash spent on share repurchases and $29.3 million of dividends paid.
Material changes, outlook and risks
- COVID-19 began adversely affecting operations, suppliers, distributors and customers in Q1. Graco reported isolated supplier and distributor closures or disruptions, delayed customer projects and capital purchases, and cancelled sales events. Incoming orders had declined approximately 30% since mid-March on an organic, constant-currency basis.
- Management withdrew 2020 revenue guidance because of economic uncertainty. It said liquidity and operating cash flows were sufficient to support operations at then-current order rates, and that it would continue monitoring markets and managing working capital.
- Management attributed the slight gross-margin decline to lower factory volume, unfavorable product and channel mix, and currency effects; pricing largely offset these pressures. Operating expenses fell $3 million, but not enough to offset lower sales. Other expense increased $5 million, primarily from market valuation losses on investments held to fund retirement benefits.
- The reported increase in cash was accompanied by additional borrowing. The company also continued capital returns and stated it may make additional opportunistic share purchases. A non-material business acquisition was completed after quarter-end.
- Key uncertainties include the duration and severity of COVID-19, demand and customer payment capacity, supply-chain and distribution interruptions, operating efficiency and staffing, and access to capital. The filing reported no material change in market-risk disclosures and no material change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent order trends and whether the approximately 30% decline from mid-March continued, improved or worsened.
- COVID-19 effects on segment and regional sales, margins, supply availability and customer collections.
- Cash generation and liquidity relative to revolving-credit borrowings, debt maturities and planned capital returns.
- The sustainability of reported earnings and the effects of stock-option tax benefits and investment valuation losses.
- Any material terms or financial effects of the post-quarter acquisition and the April 2020 amendments to debt agreements listed in the exhibits.