Graco Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2019. 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 statements are unaudited.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $428.3 million | $424.6 million | $833.2 million | $830.9 million |
| Gross profit / margin | $227.0 million / 53.0% | $229.9 million / 54.1% | $443.0 million / 53.2% | $452.3 million / 54.4% |
| Operating earnings / margin | $112.4 million / 26.2% | $113.4 million / 26.7% | $216.9 million / 26.0% | $225.1 million / 27.1% |
| Net earnings | $88.1 million | $89.1 million | $174.9 million | $174.7 million |
| Diluted EPS | $0.51 | $0.51 | $1.02 | $1.00 |
| Adjusted net earnings and diluted EPS (non-GAAP) | $85.9 million / $0.50 | $82.7 million / $0.48 | $166.0 million / $0.97 | $166.8 million / $0.96 |
Cash flow and liquidity: First-half operating cash flow was $163.8 million, versus $170.8 million a year earlier. Capital expenditures were $70.2 million, compared with $27.4 million; cash dividends paid were $53.1 million. Cash and equivalents were $180.9 million at June 28, 2019, up from $132.1 million at year-end. The company reported $594 million of credit lines, of which $559 million was unused.
Debt and balance sheet: At June 28, bank notes payable were $7.3 million, current long-term debt was $75.0 million, and long-term debt was $179.1 million. The $75 million current debt was prepaid after quarter-end. Total shareholders’ equity was $926.0 million. Operating lease liabilities were $34.2 million following adoption of the new lease standard.
Material changes and operating trends
- Q2 sales increased 1% year over year; first-half sales were essentially flat. Currency translation reduced sales by about $9 million in Q2 and $20 million year to date. Sales growth in the Americas and EMEA was offset by declines in Asia Pacific.
- Gross margin fell one percentage point in both the quarter and first half. Management attributed about half the decline to currency; higher material costs, lower factory volume and product/channel mix were also pressures. First-quarter pricing had a stronger positive impact on Q2 and largely offset those headwinds.
- Q2 operating earnings declined 1%; first-half operating earnings declined 4%. Lower operating expenses helped, but did not fully offset weaker gross profit and segment pressures. Reported net earnings were nearly flat year to date.
- By segment, Q2 sales were $188.5 million Industrial (down from $190.5 million), $85.1 million Process (flat), and $154.8 million Contractor (up from $149.1 million). First-half Process sales and operating earnings increased; Industrial and Contractor operating earnings declined.
- First-half investing cash outflow was $77.2 million, largely reflecting $70.2 million of capital spending. Financing cash outflow was $39.1 million, including dividends and net debt/credit-line payments. No shares were repurchased in the first half; the company noted possible future opportunistic purchases.
Outlook, commentary and risks
Management lowered its full-year 2019 outlook to low single-digit organic sales growth on a constant-currency basis, citing a slow start to the year and challenging economic conditions. The company said it would continue its long-term growth strategies and manage the business for the long term. It expected internal funds and unused financing capacity to support 2019 capital spending, dividends, possible share repurchases and acquisitions.
Key disclosed risks include foreign-exchange movements, economic conditions and product demand, supply interruptions, international-business and regulatory risks, cybersecurity, competition and intellectual property, acquisitions, litigation, and fluctuations in construction, automotive, mining, and oil and gas markets. Management reported no material change in risk factors from its 2018 Form 10-K, no material change in market-risk disclosures, and effective disclosure controls.
The company adopted lease accounting standard Topic 842 at the start of fiscal 2019; adoption did not materially affect earnings or cash flows. It expected the 2020 credit-loss standard to have no significant effect on earnings or financial condition. The filing reports no material 2019 acquisitions. First-half reported tax rates benefited from stock-option tax benefits and other tax items; adjusted non-GAAP figures exclude specified benefits for comparability.
Important facts for investors to verify
- Whether the lowered low-single-digit constant-currency organic growth outlook is supported by subsequent sales trends, particularly in Asia Pacific.
- Whether pricing can continue to offset currency, material-cost, factory-volume, and mix pressures and stabilize gross margins.
- The cash and debt impact of the post-quarter $75 million debt prepayment, including remaining maturities and borrowing capacity.
- Whether elevated capital expenditures translate into the planned production and distribution capacity, and how they affect operating cash flow.
- The basis and sustainability of the adjusted, non-GAAP earnings measures and the effect of tax benefits on reported comparisons.