Graco Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended April 1, 2022. The interim financial statements are unaudited. Graco designs, manufactures and markets fluid and coating management systems and reports Contractor, Industrial and Process segments.
Financial performance
| Metric | Q1 2023 | Prior period | Change |
|---|---|---|---|
| Net sales | $529.6 million | $494.3 million | +7% |
| Gross profit / margin | $285.1 million / 53.8% | $254.5 million / 51.5% | Margin +2.3 percentage points |
| Operating earnings / margin | $156.7 million / 29.6% | $128.4 million / 26.0% | Earnings +22% |
| Net earnings | $129.2 million | $100.8 million | +28% |
| Diluted EPS | $0.75 | $0.58 | +29% |
| Adjusted net earnings and diluted EPS (non-GAAP) | $126.6 million / $0.74 | $99.3 million / $0.57 | +27% / +30% |
Improved gross margin reflected realized pricing and favorable product and channel mix, which more than offset higher product costs and unfavorable currency translation. Operating expenses rose 2% in dollars but declined as a share of sales. The reported effective tax rate was 17.9%, versus 18.0%; adjusted rates were 19.5% and 19.2%, respectively. Lower interest expense reflected repayment of private-placement debt in Q1 2022. Currency translation reduced sales by approximately $11 million and net earnings by approximately $6 million; acquired operations contributed approximately $2 million of sales.
Segments and geography
| Segment | Sales | Sales change | Operating margin |
|---|---|---|---|
| Contractor | $246.0 million | +5% | 30%, up 5 percentage points |
| Industrial | $150.2 million | +4% | 35%, down 1 percentage point |
| Process | $133.5 million | +16% | 30%, up 6 percentage points |
Growth was strongest in Process, with sales growth across its product applications. Contractor cited new-product response and improved availability; Industrial growth in the Americas and EMEA was partly offset by weaker Asia Pacific activity. By region, sales rose 13% in the Americas and 2% in EMEA, and declined 6% in Asia Pacific. Consolidated sales growth included 10% volume, no net price contribution, a 3% currency headwind, and a 1% acquisition headwind as presented in the filing’s sales bridge.
Cash flow, balance sheet and liquidity
- Operating cash flow was $90.8 million, up from $31.3 million. The increase primarily reflected higher earnings, lower inventory purchases, and lower salary and incentive payments.
- Investing cash outflow was $38.6 million, including $38.3 million of property, plant and equipment additions. Financing cash flow was positive $3.3 million. Cash increased $56.1 million to $395.3 million.
- Cash and cash equivalents were $395.3 million; short-term bank notes payable were $41.9 million and long-term debt was $75.0 million. The company reported available liquidity of $917 million, including $522 million of available committed credit facilities. $146 million of cash was held outside the United States.
- Total assets were $2.55 billion and shareholders’ equity was $1.99 billion. Current assets were $1.29 billion versus current liabilities of $381.7 million. Inventory was $497.2 million, up from $476.8 million at year-end.
- Cash uses included $39.4 million of dividends and $38.3 million of capital additions. Share repurchases were $7.8 million; proceeds from shares issued were $31.0 million.
Outlook, commentary and risks
Management confirmed its full-year revenue outlook of low-single-digit growth on an organic, constant-currency basis. It described end-market activity and demand trends as solid but said it remained cautious because of macroeconomic uncertainty. No earnings or EPS guidance is provided in the filing.
Management expected isolated supply-chain disruptions and an overall inflationary environment to continue through the remainder of 2023, though their Q1 impact was less significant than a year earlier. Pricing actions had generally mitigated increased costs. Planned 2023 capital expenditures were approximately $200 million, including $130 million for facility expansions; cash and unused financing sources were expected to support capital spending, dividends, repurchases, acquisitions and operations.
The filing reported no material changes to risk factors or market-risk disclosures compared with the 2022 Form 10-K. Risks highlighted include macroeconomic and end-market conditions, supply interruptions, currency movements, international and geopolitical exposures, cybersecurity, litigation and regulatory matters, and execution of growth and acquisition strategies. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether full-year organic, constant-currency revenue growth reaches the low-single-digit outlook, particularly amid weaker Asia Pacific sales and macroeconomic uncertainty.
- Whether pricing and mix continue to offset inflation and supply-chain costs, and whether segment margin trends persist.
- Whether inventory growth, capital expenditure plans and working-capital movements affect operating cash conversion.
- How the company deploys liquidity among facility expansion, dividends, share repurchases and acquisitions, and whether borrowing levels change.
- The effect of currency movements and other disclosed geopolitical, supply, market-demand and operational risks on reported results.