Graco Inc. — Q1 2024 Form 10-Q
Business and period: Graco designs, manufactures and markets equipment and systems for moving, measuring, controlling, dispensing and spraying fluids and coatings. This unaudited report covers the three months ended March 29, 2024, compared with the three months ended March 31, 2023. Its reportable segments are Contractor, Industrial and Process.
Financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $492.2 million | $529.6 million | -7% |
| Gross profit / margin | $266.2 million / 54.1% | $285.1 million / 53.8% | Margin +0.3 pts |
| Operating earnings / margin | $133.0 million / 27.1% | $156.7 million / 29.6% | Earnings -15% |
| Net earnings | $122.2 million | $129.2 million | -5% |
| Diluted EPS | $0.71 | $0.75 | -5% |
| Adjusted net earnings / diluted EPS | $112.6 million / $0.65 | $126.6 million / $0.74 | -11% / -12% |
| Operating cash flow | $118.9 million | $90.8 million | +$28.1 million |
Gross margin improved slightly as realized price increases more than offset unfavorable product and channel mix. Lower sales volume and higher operating expenses drove the decline in operating earnings. Operating expenses rose about $5 million, including higher corporate costs, primarily share-based compensation, and increased product development spending.
Segments and material changes
- Contractor: Sales fell 6% to $230.0 million; operating margin declined to 29% from 30%. Management cited continued weakness in North American construction, unfavorable mix and higher product development spending.
- Industrial: Sales fell 5% to $142.0 million; operating margin declined to 32% from 35%. Sales decreased in all regions, with a double-digit decline in Asia Pacific; mix and lower expense leverage affected margin.
- Process: Sales fell 10% to $120.2 million; operating margin declined to 29% from 30%. Management cited weakness in semiconductor applications and lower expense leverage.
- By region, sales declined 8% in the Americas and 16% in Asia Pacific, while EMEA increased 2%. Consolidated sales change was attributed to volume; price and acquisitions were flat, with currency having no overall impact.
Cash, liquidity and capital
Cash and cash equivalents were $622.7 million at March 29, 2024, up from $538.0 million at year-end. Available liquidity was $1.398 billion, comprising $623 million of cash (including $167 million held outside the U.S.) and $775 million of available committed credit. Current notes payable to banks were $29.7 million; the balance sheet reports no separate long-term debt line.
Operating cash flow was $118.9 million. Investing activities used $31.6 million, including $37.2 million of property, plant and equipment additions. Financing activities used $1.9 million, including $42.9 million of dividends paid and $45.4 million of common stock issued; no shares were repurchased in the quarter. Management expects 2024 capital expenditures of approximately $120 million, including $70 million for facility expansion projects.
Outlook, risks and other matters
- Management maintained its target of low single-digit 2024 sales growth on an organic, constant-currency basis. Cash and unused financing sources are expected to cover liquidity needs for the next 12 months and beyond, including capital expenditures, dividends, potential repurchases, acquisitions and operations.
- Reported Q1 tax rate was 12.9%, versus 17.9% a year earlier, primarily because of excess tax benefits from stock-option exercises. Adjusted for those benefits, the effective rate was 19.8% versus 19.5%; adjusted net earnings and EPS were lower year over year.
- Other income increased by about $6 million, largely reflecting approximately $4 million of additional interest income. Foreign-currency translation reduced other comprehensive income by $18.7 million.
- The filing identifies demand and global economic activity, currency movements, geopolitical instability, supply sourcing, cybersecurity, competition, cyclical industries, acquisitions, potential goodwill impairment, regulation, taxes and legal proceedings among risks. It reports no material change in risk factors from the 2023 Form 10-K and no material change in market-risk disclosures.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The filing does not identify a material contingency or unusual operating charge for the quarter.
Important facts for investors to verify
- Whether the low-single-digit organic growth target remains achievable given first-quarter volume declines and ongoing weakness in construction, Asia Pacific and semiconductor-related demand.
- Whether gross-margin improvement can persist while sales volumes, segment operating margins and expense leverage remain under pressure.
- How much reported earnings and EPS comparisons are affected by stock-option tax benefits; compare GAAP results with the company’s adjusted measures.
- Whether operating cash flow remains strong after the receivables-related cash benefit, and how planned facility spending and dividends affect cash balances.
- Whether currency movements, international risks and the company’s stated geopolitical, supply-chain and other risk factors materially affect subsequent results.