Graco Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 25, 2021. Figures are unaudited. Graco designs and sells equipment and systems to move, measure, control, dispense and spray fluids and coatings. Its reportable segments are Industrial, Process and Contractor.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $507.2 million | $366.9 million | $961.3 million | $740.5 million |
| Gross margin | 52.0% | 49.8% | 53.2% | 51.5% |
| Operating earnings | $133.8 million | $44.8 million | $262.1 million | $134.6 million |
| Net earnings | $110.1 million | $28.8 million | $215.8 million | $101.7 million |
| Diluted EPS | $0.63 | $0.17 | $1.24 | $0.59 |
- Q2 sales rose 38% year over year; first-half sales increased 30%. Management reported double-digit organic sales growth in all segments and regions. Currency translation added $12 million to Q2 sales and $23 million to first-half sales.
- Gross margin improved about 2 percentage points in both periods. Higher production volume, favorable product and channel mix, and currency effects more than offset higher product costs.
- Q2 operating margin was 26.4%, compared with 12.2% a year earlier; first-half margin was 27.2%, versus 18.2%. Prior-year results included a $35.0 million non-cash impairment charge related to the divestiture of a U.K. valve business. Adjusted comparisons excluding that charge and specified tax benefits showed Q2 diluted EPS of $0.62 versus $0.37, and first-half EPS of $1.20 versus $0.74.
- First-half operating cash flow was $220.0 million, up from $142.6 million. Increased earnings were partly offset by working-capital investment, including higher receivables and inventories. Capital expenditures were $54.8 million, acquisitions $19.3 million, and dividends paid $63.4 million.
- At June 25, cash and equivalents were $482.8 million; total debt comprised $13.1 million of short-term bank notes and $150.0 million of long-term debt. Cash exceeded these borrowings by approximately $319.7 million. Current assets were $1.204 billion and current liabilities $358.7 million. The company reported $586 million unused across credit lines totaling $596 million.
Segments and material changes
- Industrial: Q2 sales of $204.6 million, up 53%; operating margin rose to 34% from 28%, primarily on volume and expense leverage.
- Process: Q2 sales of $97.2 million, up 25%; operating margin increased to 22% from 15%.
- Contractor: Q2 sales of $205.4 million, up 32%; operating margin fell to 24% from 26% as higher material costs, factory spending and sales- and earnings-based expenses offset volume and currency benefits.
- Operating expenses increased 26% in Q2 and 18% year to date, mainly from sales- and earnings-based costs and product development. The Q2 effective tax rate was 16.4%, versus 31.4%; the change primarily reflected prior-year impairment-related tax effects and stock-option tax benefits.
Outlook, risks and other items
- Management initiated full-year 2021 guidance for mid-to-high-teen organic, constant-currency sales growth, with growth expected in every region and segment. Industrial and Process demand was described as strong; Contractor conditions remained favorable, though second-half comparisons were expected to be challenging. No earnings or cash-flow guidance was provided.
- Management said COVID-19 continued to affect operations, supply chains, distribution channels and customers; the duration and financial impact were uncertain, and supply disruptions could constrain the ability to meet demand.
- The company completed a second-quarter acquisition that was not material to consolidated financial statements. It amended its $500 million unsecured revolving credit facility, extending maturity to March 25, 2026, with a $250 million accordion feature and possible one-year extensions subject to lender consent.
- Management reported no material change in risk factors from the 2020 Form 10-K and no material change in market-risk disclosures. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and demand remain consistent with the mid-to-high-teen full-year organic, constant-currency outlook, particularly given difficult Contractor comparisons.
- Whether supply constraints and higher input costs affect fulfillment, gross margin or segment profitability.
- How working-capital investment, especially inventory and receivables growth, develops and converts into cash.
- The sustainability of current margins and earnings after separating operating performance from the prior-year impairment and differing tax benefits.
- Credit-facility availability, covenant compliance, acquisition-related obligations and the company’s future capital allocation, including dividends and potential share repurchases.