Graco Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter ended June 25, 2010 (13 weeks); year-to-date period was 26 weeks. Graco designs, manufactures and markets fluid-handling equipment across Industrial, Contractor and Lubrication segments. Financial statements are unaudited.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $192.1 million | $147.7 million | $356.8 million | $285.6 million |
| Gross profit | $101.9 million | $73.0 million | $191.2 million | $137.3 million |
| Gross margin | 53% | 49.5% | 53.5% | 48% |
| Operating earnings | $39.2 million | $18.4 million | $71.9 million | $24.6 million |
| Net earnings | $24.8 million | $11.6 million | $45.4 million | $14.4 million |
| Diluted EPS | $0.41 | $0.19 | $0.74 | $0.24 |
| Cash dividends declared per share | $0.20 | $0.19 | $0.40 | $0.38 |
For Q2, sales grew 30%, net earnings 113% and diluted EPS 116% year over year. First-half sales increased 25%, net earnings 215% and diluted EPS 208%. The effective first-half tax rate was 35%, versus 32% in 2009; the federal R&D credit had not been renewed for 2010.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $28.0 million, down from $69.5 million a year earlier. Increased receivables used $40.4 million of cash and inventory used $17.7 million, reflecting higher sales and demand.
- Cash and equivalents were $4.9 million at June 25, 2010, compared with $5.4 million at December 25, 2009. Investing activities used $7.5 million; financing activities used $21.1 million.
- At June 25, total debt comprised $13.6 million of bank notes and $80.0 million of long-term debt, versus $98.3 million combined at year-end 2009. The company reduced long-term line borrowings by $6.3 million in the first half.
- Current assets were $243.3 million and current liabilities $126.4 million. The company reported $269 million in credit lines, of which $178 million was unused, and expected internal cash generation and available financing to meet 2010 liquidity needs.
- Dividends paid totaled $24.1 million. The company purchased $10 million of its stock in the first half; $6.5 million of that amount settled in Q3 and was included in accounts payable at June 25.
Drivers and material changes
- Sales increased in all segments and geographic regions. Q2 sales rose 25% in the Americas, 27% in Europe and 53% in Asia Pacific. First-half growth was 17%, 22% and 59%, respectively; currency translation contributed about 2 percentage points to first-half consolidated growth.
- Industrial sales increased to $100.5 million in Q2 from $73.3 million; operating margin improved to 29% from 18%. Higher volume, prior cost reductions and price increases supported earnings.
- Contractor sales increased to $73.8 million from $60.4 million, but operating margin declined to 18% from 20% due to costs and expenses associated with new product introduction. Management said stocking shipments of new products contributed to Q2 sales.
- Lubrication sales increased to $17.8 million from $14.0 million, and the segment returned to a 10% operating margin from a 12% loss margin, helped by higher volume and lower costs.
- Management attributed the gross-margin improvement mainly to higher production volume; price increases, lower material and pension costs, mix and currency also contributed. Operating expenses rose year to date by $7 million, mainly from higher incentive expense, partly offset by lower pension expense.
Outlook, risks and other items
Management expected modest improvement in end markets in the Americas and Europe in the second half of 2010, with activity in Asia Pacific expected to remain strong. It noted that Q2 is generally the Contractor segment’s strongest quarter. No specific full-year revenue or earnings guidance was provided.
Principal stated risks include economic conditions in the U.S. and other major economies, currency fluctuations, political instability, legal and regulatory changes, and shifts in product demand. The company reported no material changes to its market-risk disclosures or previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
The company had $80 million of variable-rate borrowings effectively fixed through interest-rate swaps scheduled to expire in December 2010 and January 2011. First-half net swap payments charged to interest expense were $1.8 million. The filing reports no material contingencies beyond the disclosed warranty, tax, retirement-benefit and derivative items.
Investor facts to verify
- Whether sales growth and improved gross margins persisted beyond the strong Q2 comparison, especially given the substantial first-half working-capital cash use.
- Whether Contractor’s new-product launch costs and sales supported continued segment profitability after its seasonally strong quarter.
- How the expected regional end-market trends and currency movements affected subsequent results.
- Whether the federal R&D tax credit was renewed and how the higher 2010 tax rate affected earnings.
- Debt, available credit, share repurchases and cash conversion after June 25, including settlement of the $6.5 million stock purchase payable.