Graco Inc. (NYSE: GGG) — Q1 2022 Form 10-Q
Reporting period: Three months ended April 1, 2022, compared with the three months ended March 26, 2021. Financial statements are unaudited. Graco supplies fluid and coatings management systems and reports Industrial, Process and Contractor segments.
Financial performance
| Metric | Q1 2022 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $494.3 million | $454.1 million | +9% |
| Gross profit | $254.5 million | $247.3 million | +3% |
| Gross margin | 51.5% | 54.5% | Down 3 percentage points |
| Operating earnings | $128.4 million | $128.3 million | Approximately flat |
| Operating margin | 26.0% | 28.2% | Down 2.2 percentage points |
| Net earnings | $100.8 million | $105.7 million | Down 5% |
| Diluted EPS | $0.58 | $0.61 | Down 5% |
| Operating cash flow | $31.3 million | $101.7 million | Down $70.3 million |
Sales growth reflected volume and price, partly offset by a 2-percentage-point currency headwind; acquired operations contributed about 1 percentage point. Higher product costs and currency effects pressured gross margin, as pricing had not yet fully offset cost inflation. Reported earnings included excess tax benefits from stock-option exercises; adjusted diluted EPS, excluding those benefits, was $0.57 versus $0.58.
Segment sales and operating margins: Industrial sales were $144.7 million, up 11%, with margin rising to 36% from 33%; Process sales were $115.0 million, up 26%, with margin at 24%, unchanged; Contractor sales were $234.6 million, up 1%, with margin declining to 25% from 31%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $380.5 million at April 1, 2022, down from $624.3 million at year-end. Working-capital outflows included $53.0 million for inventories and $35.3 million for salaries and incentives.
- Management reported available liquidity of $908 million, including $380 million of cash and $528 million of committed credit availability.
- Debt totaled $115.2 million: $40.2 million of bank notes payable and $75.0 million of long-term debt. The company repaid $75 million of long-term debt during the quarter.
- Investing cash outflows included $47.1 million of capital expenditures and $25.0 million for a business acquisition described as immaterial to consolidated financial statements. Financing outflows included $108.7 million of share repurchases and $35.8 million of dividends.
- Shareholders’ equity was $1.69 billion at quarter-end, compared with $1.71 billion at December 31, 2021.
Management outlook, risks and unusual items
- For full-year 2022, management targeted high-single-digit sales growth on an organic, constant-currency basis. It cited solid underlying demand and a strong start-of-Q2 backlog, while cautioning that backlog is not a reliable indicator of long-term business levels.
- Management expected supply-chain constraints, component and freight disruptions, labor shortages, and inflation to continue at least through the first half of 2022. These factors had constrained the ability to meet demand, particularly in Contractor, and pressured near-term profitability.
- Planned 2022 capital expenditures were approximately $190 million, including $140 million for facility expansion. Management said cash and available financing were expected to support operating needs, planned dividends, repurchases, capital spending and acquisitions.
- Graco suspended sales into Russia and Belarus following the invasion of Ukraine and related sanctions. Those markets represented about 1.5% of 2021 sales and were not material in Q1 2022. The company also recorded approximately $3 million of additional credit-loss allowances related to customer receivables in Russia and Belarus.
- Interest expense included a $3.5 million fee for prepayment of private-placement debt. The reported effective tax rate was 18.0%, compared with 15.9% a year earlier; the adjusted rate was 19.2% in both periods.
- Other principal uncertainties include COVID-19 effects, geopolitical developments and sanctions, supply interruptions and inflation, foreign-exchange movements, end-market demand, and the possibility of further customer credit losses.
Important facts for investors to verify
- Whether price increases and easing supply constraints recover gross and Contractor segment margins.
- Whether full-year organic, constant-currency sales growth reaches management’s high-single-digit target, particularly amid EMEA uncertainty.
- How working-capital needs, especially inventory, affect operating cash flow and liquidity.
- Any further Russia/Belarus receivable losses, sanctions-related effects, or broader effects from the Ukraine conflict.
- Execution and funding of the planned capital expenditures, dividends, share repurchases and acquisitions.