Graco Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 25, 2015 (52 weeks). The filing is an annual report; fourth-quarter results are also disclosed. Graco designs and manufactures equipment for pumping, metering, mixing and dispensing fluids and coatings, with Industrial, Process and Contractor segments.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $1,286.5 million | $1,221.1 million |
| Operating earnings | $302.1 million | $308.9 million |
| Net earnings | $345.7 million | $225.6 million |
| Diluted EPS | $5.86 | $3.65 |
| Gross margin | 53.2% | 54.6% |
| Operating margin | 23.5% | 25.3% |
| Cash from operations | $189.6 million | $241.3 million |
| Cash and cash equivalents at year-end | $52.3 million | $23.7 million |
| Total debt, including current bank notes | $408.6 million | $620.0 million |
FY2015 sales rose 5% as reported and 10% at consistent exchange rates, comprising 4 percentage points of organic growth and 6 points from acquisitions. Currency translation reduced sales by approximately $58 million and net earnings by $20 million. Operating expenses rose $25 million; acquired operations, expansion spending and corporate costs more than offset lower expenses from currency effects. Operating cash flow fell $51 million, mainly because of transaction costs and taxes related to the Liquid Finishing sale, alongside higher receivables and inventory. Capital expenditures were $41.7 million.
The current ratio was 2.6, down from 4.9, and working capital was $314 million versus $685 million, principally reflecting the sale of the Liquid Finishing investment previously classified as a current asset. The company had $412 million of unused committed credit capacity and was in compliance with debt covenants. Dividends declared were $1.23 per share; the board raised the regular annual rate to $1.32 per share in December.
Segment results and material changes
- Industrial: Sales of $616.1 million, down 1% reported but up 5% at constant currency; operating earnings were $201.7 million, versus $203.9 million.
- Process: Sales of $273.6 million, up 23%, largely due to acquisitions; operating earnings were $43.8 million, down from $47.8 million. Its operating margin declined to 16% from 21%, reflecting currency, acquired-business margins and product-development investment.
- Contractor: Sales of $396.8 million, up 6%; operating earnings were $86.4 million, versus $81.9 million. U.S. construction demand supported growth, while EMEA and Asia Pacific sales declined.
FY2015 net earnings included $141 million after tax ($2.40 per diluted share) from the Liquid Finishing divestiture and related dividends. The business assets were sold in April for $610 million cash; proceeds were principally used to repay debt. Excluding this significant item, reported net earnings and EPS substantially overstate recurring operating performance. Share repurchases totaled 3.9 million shares, with cash outlays of $274.5 million. Acquisitions included HiP and White Knight; two environmental-monitoring businesses were acquired for $49 million after year-end.
Fourth-quarter sales were $325.6 million, compared with $306.0 million in Q4 2014; net earnings were $53.5 million versus $49.0 million, and diluted EPS was $0.94 versus $0.80. The unusually high Q2 2015 earnings reflected the divestiture-related item.
Outlook, risks and contingencies
Management forecast low-single-digit organic constant-currency sales growth in Q1 2016 and low-to-mid-single-digit growth for full-year 2016, while noting macroeconomic and currency uncertainty. At January 2016 exchange rates, currency was expected to reduce 2016 sales by about 2% and net income by about 5%, with the largest impact in the first half. Management also cited long-term targets of 10% revenue growth and 12% consolidated net earnings growth. These are targets, not assured forecasts; backlog is typically small and not considered a reliable indicator.
Key exposures include foreign exchange, economic weakness and demand in construction, automotive, mining, and oil and gas markets; acquisition execution and integration; competition and counterfeit products; supplier disruption; cybersecurity; and potential goodwill impairment. Oil and Natural Gas goodwill was $157 million, with estimated fair value only 14% above carrying value; management warned prolonged or deeper market weakness could lead to impairment. Contractual obligations totaled $677 million, including $393 million of long-term debt, $112 million of purchase obligations, leases, interest and pension/postretirement obligations. Routine legal proceedings were not expected by management to have a material adverse effect, though outcomes remain uncertain. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much ongoing earnings and cash generation remain after excluding the $141 million after-tax divestiture gain and dividend contribution.
- Whether organic growth, particularly in the Americas, can offset currency headwinds and weak oil and gas markets.
- Whether Process segment margins recover as acquired businesses are integrated and product-development spending continues.
- Whether the Oil and Natural Gas reporting unit’s performance supports its goodwill valuation.
- How acquisitions, share repurchases, dividends and capital spending affect leverage and liquidity; confirm post-year-end acquisition funding and integration progress.