Graco Inc. (NYSE: GGG) — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter report; 2021 included 53 weeks versus 52 weeks in 2020. Graco designs and manufactures equipment for moving, measuring, controlling, dispensing and spraying fluids and coatings, with Industrial, Process and Contractor reportable segments.
Financial results
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $1,987.6 million | $1,650.1 million | +20% |
| Gross margin | 52.0% | 51.8% | +0.2 percentage points |
| Operating earnings | $531.3 million | $391.7 million | +36% |
| Operating margin | 26.7% | 23.7% | +3.0 percentage points |
| Net earnings | $439.9 million | $330.5 million | +33% |
| Diluted EPS | $2.52 | $1.92 | +31% |
| Operating cash flow | $456.9 million | $394.0 million | +$62.9 million |
Adjusted net earnings, a non-GAAP measure, were $425.7 million, or $2.44 per diluted share, versus $335.2 million, or $1.95, in 2020. Adjusted net margin was 21.4%, compared with 20.3%. The filing’s adjustments include the 2021 pension settlement loss, 2020 impairment, excess tax benefits from stock-option exercises and certain non-recurring tax benefits.
Sales increased across all regions: Americas $1,150.2 million (+15%), EMEA $464.1 million (+25%) and Asia Pacific $373.3 million (+33%). U.S. sales were $1,004.3 million. Approximately 49% of sales were generated outside the U.S.
Segments
| Segment | 2021 sales | Sales growth | Operating margin |
|---|---|---|---|
| Industrial | $840.3 million | 24% | 35% (vs. 33%) |
| Process | $397.6 million | 22% | 23% (vs. 20%) |
| Contractor | $749.7 million | 16% | 23% (vs. 25%) |
Growth reflected improved end-market activity and strong demand. Industrial and Process margins improved on higher volume, pricing and operating leverage; Contractor margin declined due to higher product costs from supply-chain constraints and inflation.
Cash, debt and liquidity
- Cash and cash equivalents ended the year at $624.3 million, up from $378.9 million.
- Capital expenditures were $133.6 million; acquisitions used $19.4 million. Financing activities used $57.1 million, including $127.1 million of dividends. No shares were repurchased in 2021.
- Total debt was $193.5 million: $43.5 million of bank notes and $150 million of private-placement notes. Cash exceeded reported debt by approximately $430.8 million.
- Available liquidity was $1.149 billion, including $624 million of cash and $525 million of unused committed credit. The current ratio was 2.7, down from 3.2; working capital rose to $856.8 million from $702.4 million.
- The Company reported compliance with all debt covenants. In January 2022 it repaid the $75 million Series B note and paid a $3.5 million prepayment fee.
Material changes, outlook and risks
- Operating environment: Component shortages, limited freight capacity, shipping delays and labor constraints restricted the Company’s ability to meet demand and increased costs. Raw-material, component and freight inflation pressured profitability; management expected these challenges to continue at least through the first half of 2022.
- 2022 outlook: Management forecast high-single-digit organic, constant-currency revenue growth, citing strong demand and broad-based end-market recovery. At January 2022 exchange rates, currency movements were estimated to reduce sales by about 1% and operating earnings by about 3%, assuming 2021 volumes and mix.
- Capital plans: Expected 2022 capital expenditures were approximately $190 million, including $140 million for capacity-expansion projects. Planned dividends were estimated at $143 million. The regular quarterly dividend was raised 12% to $0.21 per share in December 2021.
- Organizational change: Effective January 1, 2022, high-performance coatings and foam products moved from Industrial to Contractor; Oil and Natural Gas was combined with Lubrication within Process. Future segment reporting will reflect the realignment.
- Unusual items: 2021 included a $12 million non-cash pension settlement loss related to transferring approximately $63 million of pension obligations to an insurer. The 2020 comparison included a $35.2 million impairment charge related to the sale of the U.K.-based valve business. No impairment was recorded in 2021.
- Key risks: The filing highlights ongoing COVID-19 uncertainty, supply-chain disruptions and inflation, economic and foreign-exchange exposure, competition, dependence on a few large Contractor customers, and operational, cybersecurity, legal and regulatory risks. Sales to one customer in each of the Contractor and Industrial segments individually exceeded 10% of consolidated sales in 2021.
- Routine legal matters were not expected by management to have a material adverse effect, though outcomes cannot be predicted with certainty. The financial-statement and internal-control audits received unqualified opinions.
Important facts for investors to verify
- Whether supply availability, freight costs and pricing actions improve enough to protect margins while meeting strong demand.
- Whether the high-single-digit 2022 organic growth outlook is achieved, and how currency and the 53-week 2021 comparison affect reported growth.
- How the segment realignment changes comparable segment sales, margins and growth trends; review the Company’s restated historical segment information.
- The sustainability of Contractor profitability given customer concentration and the segment’s 2021 margin decline.
- Debt repayment, planned capacity spending, dividends and any resumed share repurchases or acquisitions, including the effect on cash and liquidity.
- Pension assumptions and funded status, given the $418.1 million pension obligation and sensitivity of estimates to discount rates and asset returns.