Graco Inc. — FY 2014 Form 10-K
Business context and reporting period. Graco designs, manufactures and markets fluid-handling and coating equipment, selling primarily through independent distributors. Its three segments are Industrial, Contractor and Lubrication. This 10-K covers the 52-week fiscal year ended December 26, 2014; quarterly figures below are for Q4. Approximately 53% of 2014 sales were to customers outside the United States.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $1,221.1 million | $1,104.0 million |
| Operating earnings | $308.9 million | $279.8 million |
| Net earnings | $225.6 million | $210.8 million |
| Diluted EPS | $3.65 | $3.36 |
| Gross margin | 54.6% | 55.0% |
| Operating margin | 25.3% | 25.3% |
| Net margin | 18.5% | 19.1% |
| Cash from operations | $241.3 million | $243.1 million |
| Capital expenditures | $30.6 million | $23.3 million |
| Year-end cash | $23.7 million | $19.8 million |
| Long-term debt | $615.0 million | $408.4 million |
Including $5.0 million of current bank notes, total debt was approximately $620.0 million. Working capital was $685 million and the current ratio was 4.9. The company had $200 million of unused committed credit lines at year-end and reported compliance with its debt covenants. Operating cash flow was nearly flat year over year as receivables and inventory rose with business activity. Investing cash use was $216.7 million, including $185.5 million for acquisitions. Financing cash use was $23.6 million; Graco repurchased $195.3 million of shares and paid $66.4 million of dividends.
Q4 2014: Sales were $306.0 million versus $271.9 million in Q4 2013; net earnings were $49.0 million versus $44.7 million; diluted EPS was $0.80 versus $0.71.
Changes versus the prior year
- Sales increased 11%, with reported growth across all three segments and regions. Volume and price contributed 7 percentage points, acquisitions 4 points; currency had no material consolidated sales effect.
- Industrial sales rose 12% to $727 million, including $41 million from acquired operations. Contractor sales rose 10% to $376 million, supported by U.S. housing and construction recovery. Lubrication sales rose 8% to $118 million.
- Operating earnings rose about 10%, while operating margin held at 25.3%. Gross margin declined about 0.4 percentage point, partly due to purchase accounting and lower margins at acquired businesses.
- Acquisitions included QED Environmental Systems and Alco Valves Group. Debt increased by about $207 million, primarily reflecting acquisition financing. Share repurchases rose from $67.8 million to $195.3 million.
Outlook, management commentary and risks
- Management expected mid-single-digit organic sales growth in Q1 and for full-year 2015, with demand supportive of growth across segments and geographies. Acquisitions were expected to add about 5 percentage points to 2015 sales growth and $0.13-$0.15 per share of full-year earnings before purchase accounting and transaction costs.
- At then-current exchange rates, management estimated foreign-currency headwinds of approximately 4% on sales and 10% on earnings in 2015. The company noted geopolitical instability and currency movements as concerns; its typically small backlog is not considered a reliable indicator of future demand.
- Graco agreed to sell the separately held ITW Liquid Finishing assets for $590 million cash, subject to regulatory approval and other customary conditions, with closing expected in the first half of 2015. The assets were carried as a $421.8 million cost-method investment, not consolidated; Graco received $28 million of dividends in 2014. The FTC required divestiture, and Graco disclosed potential exposure to its investment and unquantified operating losses under the hold-separate order.
- After year-end, Graco acquired HiP for $160 million and completed two further acquisitions for approximately $20 million combined. Management expected 2015 capital expenditures of about $35 million and dividends of about $70 million, and planned continued share repurchases.
- Key risks include economic and industrial demand, foreign exchange, acquisition integration and returns, completion and terms of the required divestiture, competition and product innovation, foreign sourcing and supply disruptions, intellectual-property infringement, regulatory and anti-corruption compliance, and reliance of the Contractor segment on a few large customers. Routine legal proceedings were not expected by management to materially affect results or financial position.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management reported effective internal control over financial reporting. A new revenue-recognition standard was scheduled to take effect for Graco in fiscal 2017; the company was evaluating its impact.
Important facts for investors to verify
- Whether the $590 million Liquid Finishing sale closed on schedule, received required approvals, and produced proceeds and any gains, costs or liabilities different from expectations.
- How post-year-end acquisitions performed, how they were financed, and whether expected sales growth and earnings accretion were realized.
- Whether organic growth, segment margins and cash conversion held up, particularly as receivable days increased from 60 to 64 and gross margin eased.
- How foreign-exchange exposure and geopolitical conditions affected 2015 results relative to management’s estimated currency headwinds.
- How debt, share repurchases and dividends evolved after year-end, including the company’s capacity to meet obligations and maintain covenant compliance.