Graco Inc. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2023 (52 weeks), compared with the 52-week year ended December 30, 2022. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. Graco designs and sells fluid- and coating-management equipment through Contractor, Industrial and Process segments.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $2,195.6 million | $2,143.5 million | +2% |
| Gross margin | 52.9% | 49.3% | +3.6 percentage points |
| Operating earnings | $646.8 million | $572.7 million | +13% |
| Operating margin | 29.5% | 26.7% | +2.8 percentage points |
| Net earnings | $506.5 million | $460.6 million | +10% |
| Diluted EPS | $2.94 | $2.66 | +11% |
| Operating cash flow | $651.0 million | $377.4 million | +$273.6 million |
Management attributed margin improvement mainly to realized pricing, which more than offset higher product costs and operating expenses. Supply chains stabilized and inflationary effects largely subsided; pricing actions implemented in 2022 and 2023 generally mitigated inflation. Product-development spending was $82.8 million, about 4% of sales.
Segments and regions
- Contractor: Sales of $985.7 million, down 1%; operating earnings were $285.3 million versus $249.9 million. Slower construction activity offset favorable response to new products; pricing drove margin improvement.
- Industrial: Sales of $662.8 million, up 2%; operating earnings were $234.1 million versus $231.3 million. Strength in the Americas was largely offset by weaker finishing-system sales in EMEA and Asia Pacific.
- Process: Sales of $547.1 million, up 11%; operating earnings were $165.3 million versus $122.3 million. Growth across businesses and regions and improved margins reflected favorable end markets, pricing, lower product costs and expense leverage.
- Geography: Americas sales rose 4%, EMEA rose 3% (primarily currency translation), and Asia Pacific fell 4%. U.S. sales were $1,161.6 million; approximately 47% of sales came from customers outside the U.S.
Cash, debt and capital allocation
- Year-end cash and cash equivalents were $538.0 million, up from $339.2 million. Operating cash flow was $651.0 million; capital additions were $184.8 million.
- Working capital was $970.6 million (2022: $805.7 million) and the current ratio was 3.5 (2022: 3.0). Inventory declined to $438.3 million from $476.8 million.
- Debt at year-end was $30.0 million, all current; the $75 million private-placement notes outstanding at 2022 year-end were repaid in 2023. Available liquidity was $1.313 billion, including $775 million of unused committed credit and cash. The company reported compliance with debt covenants.
- Cash dividends paid were $158.3 million and share repurchases were $102.3 million. The board raised the quarterly dividend 9% to $0.255 per share in December 2023. Shareholders’ equity rose to $2.224 billion from $1.860 billion.
Unusual items, outlook and risks
- Reported 2023 results included a $42.1 million non-cash pension settlement loss following transfer of approximately $147 million of pension obligations to an insurer; the transaction was funded from plan assets. Adjusted diluted EPS, excluding specified items, was $3.04 versus $2.63 in 2022. The company also recorded a $7.8 million goodwill impairment and an $8.6 million contingent-consideration fair-value adjustment related to an acquisition. Adjusted figures are non-GAAP measures.
- The reported effective tax rate was 16.8%, versus 18.6%; management cited excess stock-option tax benefits and other non-recurring tax benefits. The adjusted 2023 rate was 19.4%.
- 2024 outlook: Low-single-digit organic revenue growth on a constant-currency basis. Management described demand as generally steady amid macroeconomic uncertainty. Its long-term targets are 10% annual revenue growth and 12% annual consolidated net earnings growth; these are objectives, not 2024 guidance.
- Planned 2024 capital expenditures are approximately $120 million, including $60 million for capacity-expansion projects; planned dividends are estimated at $171 million. Management expects internal cash generation and financing sources to meet anticipated needs.
- Key risks include economic and cyclical end-market weakness, construction demand and reliance on a few large Contractor channel partners, foreign exchange, geopolitical and trade disruption, global sourcing, cybersecurity, competition and counterfeits, acquisitions and impairment, pension assumptions, regulation and litigation. The company suspended sales to Russia and Belarus; those sales had not been material before 2022. Management said routine legal proceedings were not expected to have a material effect. No cybersecurity incidents had materially affected operations, business or financial condition to date.
Most important facts for investors to verify
- Whether 2024 low-single-digit organic growth is supported by actual demand, particularly in construction and China, and how sales trends compare with the 2023 segment and regional mix.
- How much of the 2023 earnings and margin improvement came from pricing, and whether it can persist as costs, volumes and foreign exchange change.
- The reconciliation and recurring impact of the pension settlement, goodwill impairment, contingent-consideration adjustment and tax benefits; compare reported and adjusted results consistently.
- Capital-spending and facility-expansion execution, alongside dividend and repurchase plans, liquidity and debt covenant headroom.
- Exposure to major customers, pension funding and assumptions, acquisition performance, and supply-chain, geopolitical and cybersecurity risks.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 29, 2023.