Graco Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 30, 2016, a 53-week year; the prior fiscal year had 52 weeks. Graco designs and sells fluid and coating management equipment through three worldwide segments: Industrial, Process, and Contractor.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1,329.3 million | $1,286.5 million |
| Operating earnings | $113.9 million | $302.1 million |
| Net earnings | $40.7 million | $345.7 million |
| Diluted EPS | $0.71 | $5.86 |
| Operating cash flow | $269.1 million | $189.6 million |
| Cash and cash equivalents | $52.4 million | $52.3 million |
| Long-term debt, including current portion | $305.7 million | $392.7 million |
Sales increased 3% as reported and 4% at constant currency, including 3% organic growth and 1% from acquisitions. Gross margin was 53.3%, versus 53.2%. Reported operating margin fell to 8.6% from 23.5%, principally due to a $192.0 million non-cash impairment charge. Excluding that charge, adjusted operating earnings were $305.9 million and adjusted diluted EPS was $3.55, compared with $302.1 million and $3.46, respectively, in 2015. These are company-presented non-GAAP measures.
Working capital was $325.4 million, the current ratio was 2.8, and unused committed credit lines were $504 million. The company was in compliance with debt covenants. It reported $314.6 million of total debt including $8.9 million of bank notes payable; the selected financial data reports $305.7 million of long-term debt including its current portion.
Material changes and segment results
- Industrial: Sales rose 2% to $629.6 million; operating earnings increased to $207.2 million from $201.7 million. Weakness in the Americas was offset by growth in EMEA and Asia Pacific.
- Process: Sales declined 3% to $266.6 million and operating earnings fell to $35.8 million from $43.8 million. Oil and natural gas and mining weakness weighed on results; segment margin fell to 13% from 16%.
- Contractor: Sales rose 9% to $433.1 million and operating earnings increased to $91.8 million from $86.4 million. Growth reflected new products and strong U.S. construction markets; segment margin eased to 21% from 22%.
FY2016 net earnings included a $161 million after-tax impairment loss on the Oil and Natural Gas reporting unit: goodwill was reduced by $147 million and intangible assets by $45 million. In contrast, FY2015 net earnings included $141 million after tax from the sale and dividends of the held-separate Liquid Finishing businesses. These items make reported year-over-year earnings comparisons unusually difficult.
The company acquired two environmental monitoring and landfill-gas businesses in January 2016 for approximately $48 million cash. Operating cash flow increased by $79 million year over year. Investing cash flow was an outflow of $90.9 million, while financing cash flow was an outflow of $178.3 million, including dividends, share repurchases, and net credit-line repayments.
Outlook, risks, and other notable items
- Management forecast low-single-digit organic sales growth at constant currency in 2017, with low-single-digit growth in each geographic region. Contractor was expected to grow at a mid-single-digit rate; Process remained a source of caution.
- At January 2017 exchange rates, currency movements were expected to be a headwind of approximately 1% to sales and 3% to earnings, assuming unchanged volumes and mix. Management noted backlog is small and not a reliable indicator of future business levels.
- Management’s stated long-term growth targets are 10% revenue growth and 12% consolidated net earnings growth; these are targets, not the 2017 forecast.
- Raw-material costs were relatively flat in 2016, but management expected continued cost pressure in 2017 for aluminum, steel, plastics, and copper. Other principal risks include economic and industry cycles, foreign exchange, international operations and regulation, supplier disruption, competition and counterfeits, cybersecurity, acquisitions, and impairment of acquired assets.
- Cash dividends declared were $1.35 per share for 2016. The quarterly dividend was raised to $0.36 in December. A February 2017 accelerated share repurchase agreement provided for an upfront $90 million payment and an initial delivery of 850,000 shares, with final shares dependent on the purchase-period average price.
- Routine litigation and regulatory matters were disclosed; management did not expect their resolution to materially affect operations or consolidated financial position. No unresolved SEC staff comments were reported. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- How much of adjusted earnings growth is sustainable after excluding the 2016 impairment and the 2015 Liquid Finishing gain and dividends.
- Whether Process segment sales and margins recover, particularly given continued oil and natural gas market weakness.
- Whether 2017 organic-growth guidance is achieved and how foreign exchange and input-cost pressures affect sales and margins.
- The final share count and effective price under the February 2017 accelerated repurchase, and the company’s resulting debt and capital-allocation position.
- Whether acquisition returns and goodwill/intangible-asset valuations remain supported by operating performance and assumptions.