Business context and reporting period
Graco Inc. designs, manufactures and markets fluid and coating management equipment, serving Contractor, Industrial and Process markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; comparisons are against the corresponding 2022 periods.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $559.6M | $548.5M | $1,089.3M | $1,042.8M |
| Operating earnings | $157.1M | $148.7M | $313.7M | $277.0M |
| Net earnings | $134.3M | $117.4M | $263.4M | $218.2M |
| Diluted EPS | $0.78 | $0.68 | $1.53 | $1.26 |
| Gross margin | 52.1% | 49.0% | 52.9% | 50.2% |
| Operating margin | 28.1% | 27.1% | 28.8% | 26.6% |
Q2 sales rose 2%, operating earnings 6%, net earnings 14% and diluted EPS 15%. First-half increases were 4%, 13%, 21% and 21%, respectively. Management’s adjusted diluted EPS, excluding excess tax benefits from stock option exercises, was $0.75 for Q2 and $1.48 year to date, versus $0.68 and $1.25.
For the first half, operating cash flow was $282.3M, compared with $135.0M a year earlier. Capital expenditures were $92.2M; dividends paid were $79.0M. Cash and equivalents were $520.6M at June 30, including $206M held outside the U.S. Available liquidity was $1.28B, including $759M of committed credit availability. Current debt comprised $49.1M of bank notes and $75M of current long-term debt; no long-term debt was reported on the balance sheet. In July, the company prepaid $75M of private-placement notes and incurred a $0.7M fee to be recorded as Q3 interest expense.
Material changes and segment trends
- Gross margin improved about 3 percentage points in both the quarter and first half, primarily from price realization and favorable product and channel mix, which more than offset higher product costs.
- Q2 segment sales: Contractor $255.6M, down 4%; Industrial $163.5M, up 3%; Process $140.5M, up 13%. Process earnings growth and margin expansion were especially strong; its operating margin reached 31%, versus 25% a year earlier.
- Contractor sales weakened amid slower construction activity in the Americas and Asia Pacific. Industrial growth in the Americas and EMEA was partly offset by Asia Pacific weakness.
- Operating expenses rose $14M, or 12%, in Q2, including higher share-based compensation and spending on product development and growth initiatives. The reported tax rate declined, chiefly because of larger excess tax benefits from stock option exercises.
- Other non-operating income benefited from increased interest income and favorable market valuation changes on investments supporting retirement benefits.
Outlook, risks and other notable items
Management said incoming orders were consistent with expectations for low-single-digit full-year organic, constant-currency revenue growth. It expects isolated supply-chain disruptions and an inflationary environment to continue through the rest of 2023; pricing actions had generally mitigated higher costs. Planned 2023 capital expenditures are approximately $200M, including $130M for facility expansions. Management expects cash and available financing to cover operating needs, capital spending, dividends, share repurchases and acquisitions.
Risk factors were unchanged from the 2022 Form 10-K. Identified exposures include economic conditions, supply interruptions, currency movements, international operations and geopolitical events, demand in construction and other end markets, cybersecurity, regulation and litigation, and pension investment performance. Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reports no material change in market risk.
Most important facts for investors to verify
- Whether low-single-digit organic, constant-currency growth expectations remain supported by order trends, particularly given Contractor weakness and Asia Pacific softness.
- Whether margin gains from pricing and mix persist as inflation and supply constraints continue, and whether increased growth spending translates into returns.
- Cash conversion and capital needs: first-half operating cash flow improved substantially, while planned full-year capital spending is approximately $200M.
- Debt and liquidity after the July $75M note prepayment, including the $0.7M fee and revised credit-facility terms.
- How much reported earnings and EPS benefited from excess stock-option tax benefits; adjusted measures remove those benefits and are non-GAAP.