Graco Inc. — FY 2022 Form 10-K Summary
Business context and reporting period
Graco designs and manufactures equipment and systems to move, measure, control, dispense and spray fluids and coatings. It reports Contractor, Industrial and Process segments and sells globally, primarily through third-party distributors. Fiscal 2022 ended December 30, 2022, and comprised 52 weeks; fiscal 2021 comprised 53 weeks. This is an annual filing, not a standalone fourth-quarter report.
Key financial metrics
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net sales | $2,143.5 million | $1,987.6 million |
| Operating earnings | $572.7 million | $531.3 million |
| Net earnings | $460.6 million | $439.9 million |
| Diluted EPS | $2.66 | $2.52 |
| Operating margin | 26.7% | 26.7% |
| Gross margin | 49.3% | 52.0% |
| Operating cash flow | $377.4 million | $456.9 million |
| Capital expenditures | $201.2 million | $133.6 million |
| Cash and cash equivalents, year-end | $339.2 million | $624.3 million |
Sales increased 8% overall: volume and price contributed 11%, acquisitions 1%, and currency translation reduced sales 4%. Adjusted diluted EPS, a non-GAAP measure, was $2.63 versus $2.44. Adjusted net earnings were $455.5 million versus $425.7 million; the company presents adjustments for tax benefits and the prior-year pension settlement loss.
Segment sales and operating earnings: Contractor, $999.1 million and $249.8 million; Industrial, $649.3 million and $231.3 million; Process, $495.1 million and $122.3 million. Contractor sales were nearly flat and its operating margin fell to 25% from 27%. Industrial sales grew 8% and its margin rose to 36% from 33%. Process sales grew 25% and its margin rose to 25% from 23%.
Year-end working capital was $805.7 million, the current ratio was 3.0, receivables days were 57, and LIFO inventory turnover was 2.5. Total debt was approximately $96.0 million, comprising $21.0 million of current notes payable and $75.0 million of long-term debt. Shareholders’ equity was $1,859.7 million. Available liquidity was $884 million, including $339 million cash and $545 million of unused committed credit.
Material changes versus the prior period
- Sales rose 8%, but higher input costs and unfavorable currency translation reduced gross margin by about 3 percentage points. Operating margin held steady through expense reductions and leverage.
- Operating cash flow fell about $79.5 million, principally reflecting working-capital investment. Inventory increased to $476.8 million from $382.3 million.
- Cash used for investing rose to $226.8 million, including $201.2 million of capital additions and $25.3 million for acquisitions.
- Financing activities used $434.4 million, including $233.4 million of share repurchases, $142.1 million of dividends paid and net debt payments. The company repaid $75 million of Series B notes and incurred a $3.5 million prepayment fee.
- Reported effective tax rate increased to 18.6% from 13.5%; the comparable adjusted rates were 19.5% and 18.2%, respectively. The 2021 comparison included non-recurring tax benefits and a $12 million non-cash pension settlement loss.
Outlook, commentary and risks
Management forecast low-single-digit 2023 revenue growth on an organic, constant-currency basis. At January 31, 2023 exchange rates, currency movements were estimated to benefit 2023 sales and net earnings by approximately 1% each, assuming unchanged volumes and mix. Management cited continued product development, expanded distribution, adjacent markets and acquisitions as growth drivers. It also said raw-material and component cost increases should moderate in 2023, while supply-chain challenges were expected to continue; pricing may not fully offset cost pressure.
Supply constraints, freight limitations, shipping delays and labor shortages lengthened lead times and constrained fulfillment in 2022. Currency translation reduced sales by approximately $66 million and net earnings by approximately $31 million. The company suspended sales into Russia and Belarus indefinitely in April 2022; those markets represented approximately 1.5% of 2021 sales, and 2022 included a $3 million allowance for Russian customer credit losses.
Key disclosed risks include weaker global or construction and industrial demand, inflation and supply interruptions, foreign-exchange exposure, geopolitical and trade restrictions, cybersecurity events, competition and intellectual-property claims, reliance on significant Contractor-segment customers, and pension and regulatory risks. Management reported no material expected effect from routine legal proceedings. No goodwill or intangible-asset impairment was recorded in 2022. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions and identified the U.S. pension obligation valuation as a critical audit matter.
Important facts for investors to verify
- Whether pricing and easing input-cost pressures can recover gross margin while supply constraints persist.
- Whether the low-single-digit organic, constant-currency 2023 outlook is consistent with subsequent reported results and demand trends, particularly in construction markets.
- How working-capital needs, planned capital expenditures of approximately $200 million and shareholder distributions affect cash generation and liquidity.
- Exposure to currency movements, Russian and Belarus-related restrictions, and the disclosed large customer concentration.
- Assumptions underlying pension obligations and the continuing effect of pension funding, interest rates and plan-asset performance.