Graco Inc. (NYSE: GGG) — 2019 Form 10-K
Business context and reporting period. Graco designs and manufactures equipment for moving, measuring, controlling, dispensing and spraying fluids and coatings. Its Industrial, Process and Contractor segments sell primarily through distributors worldwide. This filing covers the 52-week fiscal year ended December 27, 2019; fourth-quarter figures are unaudited.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,646.0 million | $1,653.3 million | Down 0.4% |
| Gross profit / margin | $859.8 million / 52.2% | $882.5 million / 53.4% | Margin down 1.2 percentage points |
| Operating earnings / margin | $424.5 million / 25.8% | $436.4 million / 26.4% | Down 2.7% |
| Net earnings | $343.9 million | $341.1 million | Up 0.8% |
| Diluted EPS | $2.00 | $1.97 | Up 1.5% |
| Operating cash flow | $418.7 million | $368.0 million | Up $50.7 million |
| Capital expenditures | $128.0 million | $53.9 million | Up $74.1 million |
Adjusted, non-GAAP net earnings were $325.4 million and adjusted diluted EPS was $1.90, versus $326.1 million and $1.88 in 2018. Reported results include favorable tax items; the company reported a 15.3% effective tax rate, compared with 17.0% in 2018, and an adjusted rate of 19.8% versus 20.6%.
Fourth quarter: Sales were $412.3 million versus $406.4 million a year earlier; net earnings were $84.8 million versus $73.7 million. Diluted EPS was $0.49 versus $0.43.
Segments and regions
- Industrial: Sales of $747.4 million, down 4%; operating earnings of $247.2 million and a 33% operating margin, versus 35%. Weak manufacturing and automotive demand, especially in Asia Pacific, weighed on results.
- Process: Sales of $344.9 million, up 2%; operating earnings of $76.4 million and a 22% margin, versus 20%. Semiconductor and environmental strength was offset by weakness in industrial, vehicle-service and energy markets.
- Contractor: Sales of $553.7 million, up 4%; operating earnings of $128.3 million and a 23% margin, unchanged. Favorable construction conditions and new products supported growth.
- Americas sales rose 4% to $960.8 million; EMEA sales rose 3% to $406.5 million; Asia Pacific sales fell 17% to $278.7 million. U.S. sales were $840.7 million. Customers outside the U.S. generated approximately 49% of sales.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $221.0 million, up from $132.1 million. Working capital was $506.1 million, the current ratio was 2.8, and receivables days were 59.
- Long-term debt, including the current portion, was $164.3 million, down from $266.4 million; current bank notes payable were $7.7 million. The company reported $546 million of unused committed credit and compliance with debt covenants.
- Operating cash flow was $418.7 million. Investing used $155.5 million, including $128.0 million in capital additions and $26.6 million for acquisitions. Financing used $174.1 million, including $106.4 million in dividends and net debt repayments. Share repurchases were $9.5 million in cash-flow reporting.
- The board increased the regular quarterly dividend 9% to $0.175 per share in December 2019. Management estimated 2020 dividends of approximately $117 million and capital expenditures of approximately $80 million, including $40 million for facility expansion.
Changes, outlook and principal risks
- Sales were essentially flat year over year as growth in the Americas and EMEA was offset by a steep decline in Asia Pacific. Lower volume, unfavorable mix and higher material costs pressured gross margin; pricing offset some tariff and input-cost effects. Operating expenses fell 2% as volume- and earnings-based costs declined, partly offset by increased product development spending.
- Management expected challenging Industrial and Process end markets to persist through at least the first half of 2020, while Contractor conditions remained positive. Its 2020 outlook was low-single-digit organic, constant-currency revenue growth. Currency effects were expected to be immaterial for the full year, with a modest unfavorable first-half impact. Backlog was not considered a reliable indicator of future business.
- Key exposures include global economic and industrial demand, construction and automotive cycles, foreign exchange, tariffs and material prices, global sourcing and supply interruption, competition, cybersecurity, intellectual property infringement, regulation, taxes, acquisitions and dependence on major customers. Sherwin-Williams represented over 10% of consolidated sales in 2019, 2018 and 2017.
- Defined-benefit pension funded status worsened to a $145.5 million deficit from $102.0 million, principally reflecting lower discount rates and actuarial losses. Management reported no 2019 goodwill or intangible-asset impairment. Routine legal matters were not expected to have a material adverse effect; the filing says outcomes remain uncertain.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter concerned assumptions, particularly discount rates, used to value U.S. pension obligations.
Important facts for investors to verify
- Reconcile the filing’s inconsistent statements about 2019 currency translation: MD&A says translation reduced sales by approximately $29 million, while the market-risk discussion says it increased sales by approximately $29 million.
- Track whether management’s low-single-digit organic, constant-currency 2020 growth outlook was achieved, especially given Industrial and Process weakness and the sharp 2019 Asia Pacific decline.
- Assess the extent to which material-cost and tariff pressures, lower factory volume and product/channel mix continue to affect gross margin and Industrial profitability.
- Monitor pension funding and sensitivity to discount rates, as well as planned facility spending, cash generation, debt maturities and use of available credit.
- Evaluate customer concentration, including Sherwin-Williams’ greater-than-10% sales contribution, and the risks posed by cyclical end markets and global sourcing.