Graco Inc. — Q3 2013 Form 10-Q
Business context and period. Graco designs, manufactures and markets equipment and systems for moving, measuring, controlling, dispensing and spraying fluids and coatings. This unaudited report covers the 13 and 39 weeks ended September 27, 2013, compared with the periods ended September 28, 2012. Reportable segments are Industrial, Contractor and Lubrication.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Year to date 2013 | Year to date 2012 |
|---|---|---|---|---|
| Net sales | $277.0m | $256.5m | $832.1m | $758.8m |
| Gross profit | $150.9m | $139.9m | $460.3m | $411.6m |
| Operating earnings | $69.7m | $56.3m | $216.4m | $166.8m |
| Net earnings | $56.1m | $37.1m | $166.1m | $106.9m |
| Diluted EPS | $0.89 | $0.60 | $2.65 | $1.73 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $181.0m | $132.0m |
- Quarterly sales rose 8%, net earnings 51% and diluted EPS 48%; year-to-date sales rose 10%, net earnings 55% and diluted EPS 53%.
- Gross margin was 54.5% in Q3, flat year over year, and 55% year to date, up 1 percentage point. Operating margin was approximately 25.2% for Q3 and 26.0% year to date, versus approximately 22.0% in both comparable 2012 periods.
- Year-to-date sales growth included about 4 percentage points from the full-year impact of the 2012 Powder Finishing acquisition. Contractor was the leading organic growth driver: segment sales increased 24% in Q3 and 18% year to date. Industrial sales rose 1% and 7%, respectively; Lubrication rose 2% in Q3 and was flat year to date.
- Q3 and year-to-date results benefited from higher sales and strong gross margins, lower acquisition/divestiture expenses, higher Liquid Finishing dividends and lower effective tax rates. Liquid Finishing dividends were $9m for Q3 and $24m year to date, versus $4m and $8m in the comparable 2012 periods. Effective tax rates were 24% for Q3 and 27% year to date.
- Operating cash flow increased to $181.0m year to date, primarily reflecting higher earnings. Receivables and inventories increased with business activity. Investing cash use was $9.9m, compared with $682.8m in 2012, when acquisition and investment-related outflows were substantial.
Financial position and liquidity
- At September 27, 2013, cash was $17.3m; current assets were $794.8m and current liabilities $163.8m. Current assets include a $422.3m investment in businesses held separate, primarily Liquid Finishing.
- Long-term debt was $404.3m, down from $556.5m at year-end 2012; notes payable to banks were $9.5m. Total debt was approximately $413.8m. Shareholders’ equity increased to $601.3m from $454.1m.
- The company reported $502m of credit lines, of which $389m was unused. Management expected internally generated funds and available financing to meet 2013 liquidity needs.
- Cash dividends declared were $0.25 per share for Q3 and $0.75 year to date, compared with $0.23 and $0.68 in 2012.
Outlook, risks and unusual items
- Management expected growth in every region in Q4 2013. It cited the U.S. housing recovery and a marginally favorable U.S. economy as support for Contractor and Industrial growth, while expecting only modest growth amid weak near-term macroeconomic conditions in Asia Pacific and EMEA. No quantified full-year earnings or sales guidance was provided.
- Management highlighted continued priorities of expanding distribution, developing new products, converting users to spray equipment and entering adjacent markets.
- The FTC had not issued its final decision and order on the required divestiture of Liquid Finishing. Graco was marketing the business and required to hold it separate and maintain its viability. The company carried the investment at $422m and reported no impairment. Dividends from the business are expected to end after the investment is sold.
- Other identified risks include economic and demand changes, international currency and political risks, supply interruptions, competition and intellectual-property issues, regulatory or litigation costs, customer concentration in Contractor, construction activity, natural disasters and security breaches. The filing reported no material changes to annual-report risk factors or market-risk disclosures.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. Interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- FTC timing, sale process, required ongoing support and eventual proceeds for Liquid Finishing; assess the significance of the $422m held-separate investment and dividend contribution to earnings.
- How much of reported sales and profit growth reflects underlying demand versus the Powder Finishing acquisition, lower prior-year acquisition costs and favorable tax effects.
- Whether Q4 growth expectations are achieved, particularly in Asia Pacific and EMEA, where management described weaker economic conditions.
- Debt repayment, working-capital growth and the company’s dependence on available credit lines to meet liquidity needs.