Business Context and Reporting Period
Company: Graco Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended September 25, 2009.
Business Overview: Graco designs, manufactures, and markets systems and equipment to move, measure, control, dispense, and spray fluid materials. Operations are classified into three segments: Industrial, Contractor, and Lubrication.
Key Financial Metrics
(In thousands, except per share data)
| Metric | 13 Weeks Ended Sep 25, 2009 | 39 Weeks Ended Sep 25, 2009 |
|---|---|---|
| Net Sales | $147,308 | $432,900 |
| Gross Profit | $78,141 | $215,477 |
| Gross Margin | 53.0% | 49.8% |
| Operating Earnings | $26,187 | $50,762 |
| Net Earnings | $17,336 | $31,738 |
| Diluted EPS | $0.29 | $0.53 |
| Cash and Equivalents | $5,064 | $5,064 (End of Period) |
| Long-Term Debt | $107,364 | $107,364 |
| Operating Cash Flow (39 wks) | $110,161 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 29% for the quarter and 33% year-to-date compared to 2008, driven by weak global economic conditions affecting all segments and regions.
- Earnings Impact: Net earnings fell 47% for the quarter and 71% year-to-date. Diluted EPS dropped from $0.54 to $0.29 for the quarter.
- Margin Compression: Gross profit margins held steady at 53% for the quarter but declined year-to-date to 50% (from 54% in 2008) due to lower production volumes, unfavorable currency translation, and increased pension costs.
- Debt Reduction: Long-term debt decreased significantly from $180,000 (Dec 2008) to $107,364 (Sep 2009) as the company used cash to pay down borrowings.
- Inventory Management: Inventories were reduced by $31 million since the end of 2008, contributing to positive operating cash flow.
Outlook, Risks, and Management Commentary
- Management Outlook: Management notes improved profitability in the last two quarters due to cost control and production efficiency. While cautious about near-term sales growth, the company expects to continue investing in product development and international expansion.
- Segment Performance:
- Industrial: Sales down 32% (quarter) and 36% (YTD). Operating margin declined to 26% (quarter) from 30%.
- Contractor: Sales down 13% (quarter) and 20% (YTD). Operating margin declined to 20% (quarter) from 22%.
- Lubrication: Sales down 35% (quarter) and 37% (YTD). The segment reported an operating loss of $167k for the quarter and $3.3M loss YTD.
- Liquidity: The company maintains $282 million in lines of credit with $162 million unused. Internally generated funds are expected to meet liquidity needs.
- Risks: Primary risks include global economic conditions, currency fluctuations, and changes in product demand. No material changes to risk factors were reported from the 2008 10-K.
- Unusual Items: The company recorded $5 million in workforce reduction costs year-to-date (mostly Q1). A $15 million voluntary contribution was made to the pension plan in Q3. An impairment charge of $0.5 million was recorded on brand names.
Investor Verification Checklist
- Revenue Trajectory: Verify if the 29-33% sales decline is stabilizing or accelerating in subsequent quarters.
- Lubrication Segment Turnaround: Assess the path to profitability for the Lubrication segment, which posted operating losses for the quarter and year-to-date.
- Debt Service: Confirm the sustainability of the dividend policy ($0.19/share quarterly) given the reduced earnings base, despite strong operating cash flow.
- Inventory Levels: Monitor if the $31 million inventory reduction aligns with sales volume to prevent future write-downs.
- Foreign Exchange Exposure: Evaluate the impact of currency translation, which negatively affected sales by $14 million and earnings by $5 million year-to-date.