Graco Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 1, 2022; comparisons are with the periods ended June 25, 2021. Figures are unaudited. Graco designs, manufactures and markets fluid- and coating-management equipment, reporting through Industrial, Process and Contractor segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $548.5 million | $507.2 million | $1,042.8 million | $961.3 million |
| Operating earnings | $148.7 million | $133.8 million | $277.0 million | $262.1 million |
| Net earnings | $117.4 million | $110.1 million | $218.2 million | $215.8 million |
| Diluted EPS | $0.68 | $0.63 | $1.26 | $1.24 |
- Sales rose 8% in both the quarter and first half. Currency translation reduced reported sales by $15 million (4 percentage points) in Q2 and $23 million (3 percentage points) year to date; acquisitions contributed about $3 million in Q2 and $5 million year to date.
- Q2 operating earnings increased 11% and net earnings 7%; first-half operating earnings increased 6%, while net earnings increased 1%. Adjusted diluted EPS, a non-GAAP measure, was $0.68 for Q2 and $1.25 for the first half, versus $0.62 and $1.20.
- Gross margin was 49.0% in Q2 and 50.2% year to date, down 3 percentage points from the comparable periods. Higher product costs and unfavorable currency effects outweighed realized pricing. Operating margin was 27.1% in Q2 (26.4% prior year); net margin was 21.4% (21.7% prior year).
- Segments: Q2 Industrial sales increased 10% to $158.3 million and operating margin improved to 35% from 32%; Process sales rose 28% to $124.5 million and margin increased to 25% from 22%. Contractor sales were essentially flat at $265.7 million, while margin declined to 26% from 28%. Contractor’s first-half margin fell to 25% from 29%.
- Cash flow and investment: First-half operating cash flow was $135.0 million, down from $220.0 million. Capital expenditures were $88.9 million, compared with $54.8 million; acquisitions used $25.3 million. Cash and equivalents were $413.4 million, down from $624.3 million at year-end 2021.
- Liquidity and debt: Available liquidity was $929 million, consisting of $413 million in cash and $516 million of committed credit availability. Debt comprised $55.5 million in bank notes payable and $75 million of long-term debt, versus $43.5 million and $150 million, respectively, at year-end 2021. The company paid down $75 million of long-term debt during the half.
- First-half financing uses included $120.0 million of share repurchases and $71.3 million of dividends. Capital expenditures were $89 million; full-year 2022 capital expenditures were expected to be about $215 million, including $140 million for facility expansion.
Material changes, outlook and risks
- Management continued to target high-single-digit full-year 2022 sales growth on an organic, constant-currency basis. It planned a second round of global price increases beginning in August to address rising commodity, component and freight costs.
- Management said demand remained strong in the Americas. EMEA end markets weakened amid macroeconomic conditions, and pandemic-related shutdowns affected Asia Pacific orders. Supply, freight and labor constraints limited the company’s ability to meet demand, particularly in Contractor, and were expected to continue through the remainder of 2022.
- The company suspended sales into Russia and Belarus following Russia’s invasion of Ukraine and related sanctions. Those markets represented about 1.5% of 2021 sales and were not material in the first half of 2022. The filing also records $3 million of credit-loss allowances on Russian customer receivables within the discussion of first-half expenses.
- Other notable items include a $3.5 million fee for prepayment of private-placement debt in Q1 and a non-material business acquisition. The effective tax rate increased year over year, primarily because of lower excess tax benefits from stock-option exercises and higher-tax foreign earnings.
- Key uncertainties include inflation and supply-chain disruption, COVID-19 effects, currency movements, weaker economic conditions, sanctions and geopolitical escalation, and changes in customer demand. Management cautioned that interim results may not indicate full-year results. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the planned price increases offset input-cost inflation and restore gross margins, especially in Contractor.
- Whether supply-chain constraints ease enough to meet demand and convert elevated receivables and inventories into operating cash flow.
- How EMEA conditions, Asia Pacific disruptions, currency movements and Russia-related sanctions affect sales, receivables and earnings.
- Whether the full-year organic, constant-currency sales-growth target and approximately $215 million capital-expenditure plan remain achievable.
- The sustainability of cash returns, including planned dividends and any opportunistic share repurchases, alongside liquidity and debt needs.