Graco Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 29, 2023; comparisons are with the corresponding 2022 periods. Graco designs, manufactures and markets fluid and coating management equipment across Contractor, Industrial and Process segments. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Net sales | $539.7 million; down 1% | $545.6 million | $1,629.0 million; up 3% | $1,588.5 million |
| Gross profit margin | 52.7% | 47.8% | 52.9% | 49.4% |
| Operating earnings | $163.2 million; up 14% | $143.1 million | $476.9 million; up 13% | $420.2 million |
| Net earnings | $133.1 million; up 15% | $116.2 million | $396.6 million; up 19% | $334.5 million |
| Diluted EPS | $0.77; up 15% | $0.67 | $2.30; up 19% | $1.93 |
Q3 net margin was 24.7%, versus 21.3% a year earlier. Reported results included an $8.6 million gain from reduced contingent consideration and a $7.8 million goodwill impairment charge. Excluding those items and excess tax benefits from stock-option exercises, adjusted Q3 diluted EPS was $0.76, up 15%; nine-month adjusted diluted EPS was $2.24, up 17%. These are company-presented non-GAAP measures.
Segments and revenue trends
- Contractor: Q3 sales fell 7% to $245.3 million; operating margin rose to 30% from 25%. Management cited slower construction-market demand, partly offset by pricing and lower product costs.
- Industrial: Q3 sales rose 1% to $157.1 million; operating margin remained 35%. Americas growth was partly offset by weaker EMEA finishing-system sales.
- Process: Q3 sales increased 10% to $137.3 million; operating margin rose to 31% from 24%. Management attributed the margin improvement mainly to pricing and expense leverage.
For the quarter, sales were flat in the Americas and declined in EMEA and Asia Pacific. Currency translation added approximately $5 million to sales and $2 million to net earnings. Pricing and lower product costs lifted consolidated gross margin by about five percentage points year over year.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $491.4 million, up from $271.6 million, primarily reflecting higher earnings, lower inventory purchases and lower receivables.
- Investing cash use was $146.3 million, including $145.6 million of capital expenditures. Financing cash use was $158.4 million, including $118.7 million of dividends and $75.0 million of long-term debt repayment; share repurchases were $27.1 million.
- Cash and equivalents were $525.8 million at September 29, 2023. The company reported $29.0 million of short-term bank notes and no long-term debt, after repaying $75 million of notes in July.
- Available liquidity was $1.305 billion, comprising cash and $779 million of available committed credit. The revolving facility was increased to $750 million during the period.
Outlook, commentary and risks
Management said results were consistent with expectations for full-year low-single-digit revenue growth on an organic, constant-currency basis. It expected isolated supply-chain disruptions and an inflationary environment to continue through the remainder of 2023, though their impact had eased from the prior year. Pricing actions had generally mitigated higher costs. Planned 2023 capital expenditures were approximately $200 million, including $130 million for facility expansion.
Key disclosed risks include economic and end-market conditions, construction-market demand and possible declines in purchases by a few large Contractor customers; supply interruptions; foreign exchange; international and geopolitical risks; cybersecurity; acquisitions and potential impairments; litigation and regulatory matters; and changes in tax, pension or investment conditions. The company reported no material changes to its previously disclosed risk factors or market-risk disclosures. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the expected full-year low-single-digit organic, constant-currency growth is achieved, particularly given Contractor weakness and slower Process growth in Q3.
- How sustainable the improved gross and segment margins are as pricing, product costs, inflation and supply conditions change.
- The composition and continued availability of reported liquidity, including undrawn credit capacity and cash held outside the U.S. ($267 million).
- The effects of the goodwill impairment and contingent-consideration remeasurement, and the assumptions underlying the company’s adjusted non-GAAP results.
- Progress and spending against the approximately $200 million 2023 capital-expenditure plan, including facility expansions.