Graco Inc. — Q3 2022 Form 10-Q
Period: Quarter and nine months ended September 30, 2022; unaudited. Comparisons are to the corresponding 2021 periods, except balance-sheet comparisons, which are to December 31, 2021. Graco designs, manufactures and markets equipment and systems for moving, measuring, controlling, dispensing and spraying fluids and coatings. Its reportable segments are Industrial, Process and Contractor.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $545.6 million | $486.7 million | $1,588.5 million | $1,448.0 million |
| Operating earnings | $143.1 million | $124.6 million | $420.2 million | $386.7 million |
| Net earnings | $116.2 million | $103.8 million | $334.5 million | $319.6 million |
| Diluted EPS | $0.67 | $0.59 | $1.93 | $1.83 |
| Gross margin | 47.8% | 51.0% | 49.4% | 52.4% |
| Operating margin | 26.2% | 25.6% | 26.5% | 26.7% |
| Net margin | 21.3% | 21.3% | 21.1% | 22.1% |
Quarterly sales rose 12% and operating earnings 15%; nine-month sales rose 10% and operating earnings 9%. Reported sales growth included currency headwinds of 5 percentage points in Q3 and 3 points year to date, while acquisitions contributed about 1 point in each period. Adjusted diluted EPS, a non-GAAP measure, was $0.66 for Q3 and $1.91 year to date; the company adjusts primarily for excess stock-option tax benefits and specified non-recurring tax adjustments.
Segments
- Industrial: Q3 sales $156.2 million, up about 1%; operating margin 35%, versus 33%. Strength in the Americas and Asia Pacific was partly offset by EMEA weakness.
- Process: Q3 sales $125.4 million, up 30%; operating margin 24%, versus 22%. Growth was broad-based across regions and product applications.
- Contractor: Q3 sales $264.1 million, up 12%; operating margin 25%, unchanged. Improved product availability supported sales; year-to-date margin declined three percentage points to 25%.
Cash flow, balance sheet and capital allocation
- Operating cash flow was $271.6 million for the first nine months, down from $357.2 million. The filing attributes the decline mainly to higher salary and incentive payments, inventory purchases and receivables.
- Investing cash outflow was $173.0 million, including $147.2 million of capital expenditures and $25.3 million for acquisitions. Financing cash outflow was $305.8 million, including $155.2 million of share repurchases, $106.9 million of dividends paid and $75.0 million of long-term debt repayment.
- Cash and equivalents were $414.8 million, down from $624.3 million at year-end. Available liquidity was $941 million, including $526 million of committed credit availability; $275 million of cash was held outside the U.S.
- At September 30, debt consisted of $75.0 million of long-term debt and $42.7 million of notes payable to banks; no current portion of long-term debt was reported. Shareholders’ equity was $1.788 billion.
- Inventory increased to $462.2 million from $382.3 million; accounts receivable rose to $364.1 million from $325.1 million. The company expects 2022 capital expenditures of approximately $230 million, including $130 million for facility expansion, and may make opportunistic share repurchases.
Management commentary, outlook and risks
Management raised its full-year 2022 target to low double-digit sales growth on an organic, constant-currency basis, citing solid worldwide demand despite uncertain macroeconomic conditions. It expects supply-chain and inflation challenges to continue through the remainder of 2022. Limited availability of components, freight and labor, shipping delays, and higher material and transportation costs constrained production and fulfillment and pressured near-term profitability, particularly in Contractor. Pricing was strong but did not offset higher product costs and unfavorable currency effects at the consolidated level.
The company suspended sales into Russia and Belarus in Q1 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 three quarters of 2022; the filing notes restricted sales and collection of receivables, and $3 million of year-to-date credit-loss expense on customer receivables in Russia and elsewhere. Management identifies potential escalation, sanctions, currency movements, demand, supply interruptions, inflation, cybersecurity, international operations and macroeconomic conditions among risks. COVID-19 impacts also remain uncertain.
Other notable items: Q1 debt prepayment included a $3.5 million fee, contributing to year-to-date interest expense of $8.6 million. Foreign-currency translation reduced nine-month comprehensive income by $29.8 million. A non-material business acquisition was completed in Q1. The company reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the raised organic, constant-currency growth target is achieved, and how exchange rates affect reported sales and earnings.
- Whether component, freight and labor constraints ease, and whether price increases can offset product-cost inflation without further margin pressure.
- How sales, margins and availability develop in Contractor, and whether weakness in EMEA persists.
- Whether inventory and receivables convert to cash; operating cash flow fell despite higher earnings.
- Capital spending, share repurchases, dividends and debt levels relative to cash generation and the stated liquidity position.
- Further impacts from Russia-related restrictions, including customer collections, and any escalation of geopolitical or supply-chain risks.