Graco Inc. (GGG) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 26, 2021; unaudited. 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 | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $454.1 million | $373.6 million | +22% |
| Gross profit / margin | $247.3 million / 54.5% | $198.6 million / 53.2% | Margin +1.3 percentage points |
| Operating earnings / margin | $128.3 million / 28.2% | $89.8 million / 24.0% | +43% |
| Net earnings | $105.7 million | $72.8 million | +45% |
| Diluted EPS | $0.61 | $0.42 | +45% |
| Operating cash flow | $101.7 million | $54.2 million | +$47.4 million |
Adjusted net earnings, excluding excess tax benefits from stock-option exercises, were $101.6 million versus $65.0 million; adjusted diluted EPS was $0.58 versus $0.38. Adjusted figures are non-GAAP. The reported effective tax rate was 15.9%, compared with 11.3%; on the company’s adjusted basis it was 19.2% versus 20.8%.
Capital expenditures were $21.4 million. Operating cash flow less capital expenditures was approximately $80.3 million, compared with $35.3 million in Q1 2020. Cash and equivalents were $460.6 million at quarter-end, up from $378.9 million at year-end. Short-term bank notes were $31.7 million and long-term debt was $150.0 million. The company reported $596 million of credit lines, of which $566 million was unused.
Material changes and segment results
- Sales increased across all regions; foreign currency translation contributed 4 percentage points to consolidated growth. Reported consolidated volume and price contributed 19 percentage points, while price was a 1-point headwind.
- Industrial: Sales of $184.7 million, up 16%; operating margin was 35%, versus 32%. Management cited increased worldwide manufacturing activity, currency effects, lower product costs from higher factory volumes and expense leverage.
- Process: Sales of $91.4 million, up 6%; operating margin was 24%, versus 21%. Management described organic growth in most applications; divested operations and favorable currency also affected results.
- Contractor: Sales of $178.0 million, up 38%; operating margin was 27%, versus 22%. Growth was double-digit across channels; higher sales and expense leverage supported margin, partly offset by product and channel mix.
- Operating expenses rose 9%, less than sales growth, mainly reflecting higher sales- and earnings-based expenses. Other non-operating expense fell about $5 million, primarily due to market valuation changes in investments funding retirement-benefit liabilities.
Liquidity, outlook and risks
Cash uses included $31.6 million of dividends and $21.4 million of property, plant and equipment additions. No shares were repurchased in the quarter; management said opportunistic repurchases may occur. The quarterly dividend declared was $0.188 per share.
On March 25, 2021, Graco amended its unsecured revolving credit agreement, extending the $500 million facility maturity from December 2021 to March 2026, with a $250 million accordion feature and potential one-year extensions subject to lender consent. The agreement includes leverage and interest-coverage covenants. A subsequent acquisition after quarter-end was described as immaterial to the consolidated financial statements.
Management said demand was solid across major end markets and product categories, with improved revenue and order rates in Industrial and Process and a positive Contractor outlook. It provided no specific full-year revenue or earnings guidance. Management cautioned that uncertainty in supply chains and demand could affect end markets and geographies for the rest of the year. COVID-19 continued to affect operations, supply chains, distribution and customers; the timing and extent of its financial impact remained uncertain, and supply disruptions could constrain the ability to meet demand.
Other stated risks include economic conditions, customer demand and project timing, currency movements, international operations, supply interruptions, cybersecurity, litigation and regulatory matters, taxes, acquisitions and potential impairments, and exposure to construction, automotive, mining, and oil and gas activity. The filing reported no material change in risk factors from the 2020 Form 10-K, no material change in market-risk disclosures, and effective disclosure controls.
Important facts for investors to verify
- Whether strong sales and margin growth persist, particularly as the prior-year comparison and pandemic-related conditions change.
- Whether supply-chain constraints, input costs, product/channel mix or project timing affect future sales and margins.
- How much reported growth reflects underlying volume and price versus currency translation, especially across segments and regions.
- The sustainability of cash generation and capital allocation, including dividends, potential share repurchases and acquisitions.
- Compliance with the credit facility’s financial covenants and the effects of interest rates and currency movements.
- The reconciliation and comparability of adjusted, non-GAAP earnings and EPS with reported GAAP results.