Graco Inc. — Q2 2018 Form 10-Q Summary
Reporting period: Quarter and six months ended June 29, 2018; unaudited interim financial statements. Graco designs, manufactures and markets equipment and systems for moving, measuring, controlling, dispensing and spraying fluids and coatings. Its reportable segments are Industrial, Process and Contractor.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $424.6 million (+12%) | $379.5 million | $830.9 million (+15%) | $720.1 million |
| Gross profit margin | 54.1% | 53.9% | 54.4% | 54.2% |
| Operating earnings | $113.4 million (+13%) | $100.4 million | $225.1 million (+20%) | $187.8 million |
| Operating margin | 26.7% | 26.5% | 27.1% | 26.1% |
| Net earnings | $89.1 million (+12%) | $79.8 million | $174.7 million (+24%) | $140.6 million |
| Diluted EPS | $0.51 (+11%) | $0.46 | $1.00 (+23%) | $0.81 |
| Operating cash flow | Not presented by quarter | $170.8 million | $135.7 million |
Net margin was 21.0% in Q2, unchanged year over year, and 21.0% for the first half versus 19.5%. Management also reported non-GAAP adjusted diluted EPS of $0.48 for Q2 and $0.96 for the first half, excluding excess tax benefits from stock-option exercises; comparable 2017 figures were $0.38 and $0.71.
Sales by segment
- Industrial: Q2 sales of $190.5 million (+9%); first-half sales of $385.7 million (+16%). Q2 growth was moderated by timing of finishing-system sales and project activity; acquired operations contributed to growth.
- Process: Q2 sales of $85.1 million (+16%); first-half sales of $165.1 million (+15%). Segment operating margins were 20% in Q2 and 21% year to date, each up 2 percentage points.
- Contractor: Q2 sales of $149.1 million (+14%); first-half sales of $280.2 million (+14%). Operating margins were 26% in Q2 and 25% year to date, modestly improved year over year.
Sales increased across all segments. Currency translation added approximately 3 percentage points to consolidated growth in both the quarter and first half; acquisitions contributed 3 percentage points in each period. First-half geographic growth was strongest in Asia Pacific (+25%), followed by EMEA (+19%) and the Americas (+11%).
Financial position and liquidity
- At June 29, cash and cash equivalents were $109.9 million; restricted cash of $8.7 million was included in other current assets. Current assets were $709.3 million and current liabilities were $267.5 million.
- Long-term debt was $297.3 million and notes payable to banks were $6.5 million, compared with $226.0 million and $6.6 million, respectively, at year-end 2017.
- Credit lines totaled $544 million, of which $466 million was unused. Management expected internal cash generation and unused financing sources to meet 2018 liquidity needs.
- First-half cash flow from operations was $170.8 million. Investing used $38.0 million, including $27.4 million of capital expenditures and $10.5 million for acquisitions. Financing used $127.5 million, including $155.6 million of share repurchases and $44.7 million of dividends, partly offset by net borrowing activity.
Material changes, outlook and risks
- Management maintained its full-year 2018 outlook for mid-to-high single-digit organic sales growth on a constant-currency basis and said it expected another record year of sales and earnings. It cited broad-based demand but anticipated second-half pressure from tariffs, material costs and currency.
- Federal tax reform reduced the effective tax rate by 9 percentage points in both the quarter and first half versus the prior year. Reported effective rates were 15.3% for Q2 and 17.9% year to date; stock-option tax benefits also affected period comparisons. Certain transition-tax accounting remained provisional, with no measurement-period adjustments in the first half.
- Other expense included foreign-currency exchange losses of $3 million for Q2 and $2 million year to date, versus small gains in the comparable prior-year periods. Q2 comprehensive income was $76.1 million versus $91.9 million, with currency translation losses a significant factor.
- On April 30, Graco repurchased 650,770 shares from its CEO for $28.2 million at $43.33 per share, a stated 3% discount to the prior closing price. The purchase was funded with cash and revolving-line borrowings. Total first-half repurchases were $155.6 million.
- After quarter-end, the company made a voluntary $40 million contribution to a U.S. qualified defined-benefit plan, using cash and revolving-line borrowings.
- Management said there were no material changes to the risk factors or market-risk disclosures in its 2017 Form 10-K. Cited risks include economic and end-market conditions, tariffs and other regulatory changes, foreign exchange, supply interruptions, international operations, acquisitions, competition, and dependence on certain large Contractor-segment customers. No material change in internal controls was reported.
- ASC 606 adoption had no material effect on operations or opening retained earnings. The company expected adoption of the lease standard in 2019 to significantly increase reported assets and liabilities, but could not yet estimate the amount or determine whether the balance-sheet effect would be material.
Important facts for investors to verify
- Whether demand supports the maintained organic-growth outlook and whether tariffs, material costs and currency pressure second-half margins.
- How much sales growth reflects underlying volume and pricing versus acquisitions and foreign-exchange translation.
- The effect of increased borrowings, the $40 million pension contribution, and ongoing repurchases on liquidity and capital allocation.
- How tax reform and variable stock-option tax benefits affect comparisons of reported and adjusted earnings.
- The eventual balance-sheet impact of lease-accounting adoption and the resolution of provisional transition-tax estimates.