Graco Inc. — FY 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2012 (52 weeks). The filing also reports fourth-quarter results. Graco designs and sells fluid-handling and coating equipment worldwide through three segments: Industrial, Contractor and Lubrication.
Financial performance
- FY 2012: Net sales were $1.012 billion, up 13% from $895.3 million. Net earnings were $149.1 million, up 5%; diluted EPS was $2.42 versus $2.32.
- Operating earnings were $224.7 million, up about 2%, while operating margin declined to 22.2% from 24.5%. Gross margin declined to 54.4% from 55.9%; net margin was 14.7% versus 15.9%.
- Fourth quarter: Sales were $253.7 million versus $215.6 million in Q4 2011; net earnings were $42.3 million versus $30.4 million. Diluted EPS was $0.68 versus $0.50. The filing states that no unusual or infrequently occurring items materially affected the quarter.
- Cash flow and investment: Operating cash flow was $189.7 million, up from $162.0 million. Investing cash outflow was $694.5 million, largely reflecting the acquisition. Capital expenditures were $18.2 million. Cash at year-end was $31.1 million, down from $303.2 million.
- Liquidity and debt: Working capital was $625 million and the current ratio was 5.1. Total debt, including current debt, was $564.6 million versus $308.7 million a year earlier; shareholders’ equity was $454.1 million. The company reported $207 million of unused committed credit lines and compliance with debt covenants.
- Dividends paid were $54.3 million; the annual dividend rate was increased from $0.90 to $1.00 per share. Long-term debt included $300 million of fixed-rate notes and $256.5 million outstanding under the revolving facility.
Changes versus the prior year
- Industrial sales rose 20% to $603.4 million, including $93 million from acquired Powder Finishing operations. Contractor sales rose 3% to $298.8 million; Lubrication sales rose 7% to $110.2 million.
- Powder Finishing contributed substantially to growth, while legacy sales trends were mixed: Industrial legacy sales decreased in Europe and Asia Pacific. Asia Pacific growth was 5% overall, and the filing describes many regional end markets as challenging.
- Acquisition-related purchase accounting, including a $7 million inventory charge, lower acquired-business margins, higher acquisition/divestiture and pension costs, and increased interest expense weighed on earnings and margins. Strong performance in legacy operations partly offset these effects.
- Foreign-currency translation reduced 2012 sales by approximately $15 million and earnings by approximately $5 million relative to 2011.
Acquisition, outlook and risks
- Graco completed the $668 million purchase of ITW finishing businesses in April 2012. Powder Finishing was consolidated in Industrial. The FTC required Liquid Finishing to be held separate pending a required divestiture; its $426.8 million investment was carried at cost and not consolidated. Graco received $12 million of dividends from Liquid Finishing in 2012.
- The proposed FTC order required sale of the Liquid Finishing assets, but a final order had not been issued by the filing date. Graco could be required to fund resources and operating losses to maintain the held-separate businesses; the extent and timing of divestiture and any loss funding remained uncertain.
- Management expected growth in every region in 2013: continued construction recovery and stable U.S. industrial conditions, moderate EMEA growth led by emerging markets, and improving Asia Pacific momentum as the year progressed. It expected modest volume growth and solid factory performance. No specific 2013 revenue or earnings forecast was provided. Long-term targets were 10% revenue growth and 12% consolidated net earnings growth.
- Key risks include global economic and construction conditions, foreign exchange, supply interruptions and commodity costs, competition and new-product execution, dependence of Contractor on a few large customers, international operations, and regulatory and divestiture outcomes. Management noted a shortage of specialized nylon had delayed some deliveries.
- Management and the auditor reported effective internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements. Management did not expect routine legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Progress and final terms of the FTC order and Liquid Finishing divestiture, including proceeds, timing and any required funding.
- Whether Powder Finishing’s margins and integration improve, and how much reported growth reflects acquisitions rather than underlying volume and price.
- Performance of legacy businesses by region, especially weak end markets in Western Europe and Asia Pacific.
- Debt repayment, interest costs, covenant headroom and available liquidity following the acquisition.
- Whether management’s 2013 regional outlook and long-term growth targets are supported by subsequent results.