Graco Inc. — FY2011 Form 10-K
Business context and reporting period. Graco designs and sells fluid-handling equipment through third-party distributors worldwide. Its Industrial, Contractor and Lubrication segments serve manufacturing, construction, processing and maintenance markets. The fiscal year ended December 30, 2011; it comprised 52 weeks, compared with 53 weeks in FY2010. FY2011 results are annual, with fourth-quarter figures noted separately below.
Financial results and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $895.3 million | $744.1 million | +20% |
| Gross profit / margin | $500.2 million / 55.9% | $403.4 million / 54.2% | Margin +1.7 percentage points |
| Operating earnings / margin | $219.5 million / 24.5% | $153.1 million / 20.6% | +43%; margin +3.9 points |
| Net earnings | $142.3 million | $102.8 million | +38% |
| Diluted earnings per share | $2.32 | $1.69 | +37% |
| Operating cash flow | $162.0 million | $101.1 million | +$60.9 million |
- FY2011 gross-margin improvement reflected higher production volumes, pricing and favorable currency translation, partly offset by higher material costs. Operating-expense growth was below sales growth, improving operating leverage.
- Sales grew across every segment: Industrial $501.8 million (+23%), Contractor $290.7 million (+13%) and Lubrication $102.7 million (+32%). By region, sales rose 17% in the Americas, 19% in Europe and 32% in Asia Pacific.
- Foreign currency translation added approximately $17 million to sales and $7 million to net income versus FY2010. FY2010 included one additional week.
- Fourth-quarter 2011 sales were $215.6 million, versus $197.3 million in Q4 2010; net earnings were $30.4 million versus $27.0 million, and diluted EPS was $0.50 versus $0.44.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $303.2 million, compared with $9.6 million a year earlier. The increase principally reflects $300 million of unsecured notes issued during 2011; proceeds were used to repay revolving borrowings and held largely as cash and short-term investments.
- Year-end debt included $300 million of long-term notes and $8.7 million of notes payable to banks. The notes mature from 2018 to 2026 and carry stated interest rates of 4.00% to 5.35%.
- Working capital was $452 million and the current ratio was 4.4, compared with $133 million and 2.1 in FY2010. Unused committed credit lines were $264 million. A $450 million revolving facility intended to help finance the proposed ITW acquisition was conditional on closing and issuance of at least $75 million in additional long-term notes.
- Operating cash flow funded $23.9 million of capital expenditures; the company also paid $50.6 million in dividends and repurchased $43.3 million of shares. The board increased the annual dividend rate to $0.90 per share.
- The defined-benefit pension plan had a $97.3 million funded-status deficit at year-end; postretirement medical benefits were underfunded by $23.4 million. The company was considering a 2012 pension contribution of up to $20 million.
Changes, outlook and risks
- Management planned for growth across segments and geographies in 2012, but expected lower growth rates against record FY2011 sales, continued construction-market weakness and the Eurozone crisis. It cited opportunity in the United States and Asia Pacific, and in automotive, energy, heavy equipment and industrial lubrication markets. Long-term targets were 10% revenue growth and 12% net-earnings growth; these are targets, not FY2012 guidance.
- The proposed $650 million cash acquisition of ITW’s finishing businesses remained unresolved. The FTC challenged the deal in an administrative proceeding and federal court; a trial on the FTC’s injunction motion was scheduled for July 17, 2012. Closing depended on regulatory approval and other conditions, and remedies or divestitures could reduce expected benefits. The agreement allowed termination by either party after April 1, 2012; the filing describes a potential $20 million termination fee under specified circumstances.
- FY2011 included $8 million of ITW transaction costs. Management also cited higher selling and marketing spending, particularly in Asia Pacific, and volatile input costs; specialty-plastics prices rose, while some metals declined from midyear levels. Electronic-component shortages lengthened lead times.
- Other principal risks include global economic weakness, foreign-exchange movements, international operations and sourcing, competitive pressure and intellectual-property infringement, major-customer concentration in the Contractor segment, regulatory changes, and natural-disaster exposure. Management said routine litigation was not expected to materially affect operations or financial position.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor expressed an unqualified opinion on the financial statements and controls.
Key facts for investors to verify
- Check subsequent disclosures for the ITW transaction’s regulatory outcome, termination status, financing conditions, any remedies, and revised expected economics.
- Assess whether sales and margin growth are sustainable after accounting for the 53-week FY2010 comparison, currency benefits, pricing, material costs and production-volume effects.
- Review cash deployment and borrowing needs, including acquisition financing, debt covenants, the pension-funding waiver and planned pension contributions.
- Monitor pension assumptions and funded status, especially the effect of discount rates and investment returns on future expense and contributions.
- Track 2012 demand by region and segment, construction-market conditions, distributor and OEM purchasing, input availability and foreign-exchange exposure.