Graco Inc. — Q3 2010 Form 10-Q
Reporting period: Thirteen weeks ended September 24, 2010; year-to-date figures cover 39 weeks. Comparisons are with the corresponding periods ended September 25, 2009. Financial statements are unaudited.
Financial results
| Metric | Q3 2010 | Q3 2009 | First 39 weeks 2010 | First 39 weeks 2009 |
|---|---|---|---|---|
| Net sales | $190.0 million | $147.3 million | $546.8 million | $432.9 million |
| Gross profit | $104.6 million | $78.1 million | $295.8 million | $215.5 million |
| Gross margin | 55% | 53% | 54% | 50% |
| Operating earnings | $43.4 million | $26.2 million | $115.3 million | $50.8 million |
| Net earnings | $30.4 million | $17.3 million | $75.8 million | $31.7 million |
| Diluted earnings per share | $0.50 | $0.29 | $1.25 | $0.53 |
| Operating cash flow | Not separately reported for the quarter | $62.4 million | $110.2 million |
Q3 sales rose 29%, net earnings 76% and diluted EPS 72%; year-to-date sales rose 26%, net earnings 139% and diluted EPS 136%. Higher volume was the main driver of improved gross margins and earnings. Operating expenses rose in dollars, largely due to higher incentive costs, but declined as a share of sales: 32% versus 35% for Q3 and 33% versus 38% year to date.
Cash provided by operations fell year over year despite higher earnings, in part because receivables used $34.8 million and inventories used $26.7 million of cash. Capital spending was $9.4 million year to date. Cash and equivalents were $9.7 million at September 24, 2010, versus $5.4 million at year-end 2009.
Segments and markets
- Industrial: Q3 sales of $99.2 million, up from $78.2 million; operating earnings were $31.2 million versus $20.3 million. Higher volume, expense leverage and pricing improved operating margin.
- Contractor: Q3 sales of $70.4 million versus $55.4 million; operating earnings were $13.8 million versus $11.1 million. New products supported sales growth; new-product costs offset some volume benefits to margins.
- Lubrication: Q3 sales of $20.4 million versus $13.7 million; operating earnings were $2.8 million versus a loss of $0.2 million. Higher volume, cost actions, expense leverage and pricing improved results.
All segments and geographic regions recorded double-digit percentage sales growth in both the quarter and year to date. Q3 sales increased 29% in the Americas, 22% in Europe (32% at consistent exchange rates) and 37% in Asia Pacific (33% at consistent rates). Management said currency translation did not significantly affect consolidated growth.
Financial position, debt and capital allocation
Total assets were $527.1 million, compared with $476.4 million at December 25, 2009. Current assets were $253.7 million and current liabilities $123.3 million. Notes payable to banks were $11.1 million and long-term debt was $90.0 million, for total reported borrowings of $101.1 million. The company reported $270 million of credit lines, of which $171 million was unused, and said internal funds and available financing were expected to meet 2010 liquidity needs.
Year-to-date, Graco paid $36.2 million in dividends, repurchased $24.2 million of common stock and made a voluntary $10 million pension-plan contribution. The quarterly dividend declared was $0.20 per share, versus $0.19 a year earlier.
Outlook, commentary and risks
Management said U.S. and parts of European construction markets were likely to remain difficult in the near term, but was optimistic that the global industrial recovery would continue. It cited product-development investment and expanded international teams, infrastructure and distribution channels as contributors to growth. The filing provides no numerical earnings or sales guidance.
The Q3 effective tax rate was 28%, reflecting expiring statutes of limitations and recent tax rulings; the year-to-date rate was 32% versus 31% a year earlier. The federal research and development tax credit had not been renewed for 2010 and was not included in the 2010 rate. Interest-rate swaps hedged $80 million of variable-rate borrowings, with maturities in December 2010 and January 2011; foreign-currency hedge contracts had $20 million in total notional value.
Management identified economic conditions, currency fluctuations, political instability, legal and regulatory changes, and product demand as risks. The filing reports no material changes to risk factors or market-risk disclosures from the 2009 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the strong sales recovery and margin improvement continued, particularly in Industrial and Lubrication and in Asia Pacific.
- Whether receivables and inventory growth converted into cash; year-to-date operating cash flow declined to $62.4 million from $110.2 million.
- Available borrowing capacity, debt levels and the effects of the near-term expiration of the interest-rate swaps.
- How construction-market weakness, renewal of the federal R&D credit and other stated risks affect results and the effective tax rate.
- Whether management’s qualitative recovery outlook translated into sustained growth; the filing contains no numerical guidance.