Graco Reports Record Quarter and Annual Sales and Operating Earnings

Process and Industrial Segments Contribute to 2022 Performance

Graco Inc. (NYSE: GGG) today announced results for the fourth quarter ended December 30, 2022.

Summary

$ in millions except per share amounts

 

 

Three Months Ended

 

Twelve Months Ended

 

Dec 30,

2022

 

Dec 31,

2021

 

%

Change

 

Dec 30,

2022

 

Dec 31,

2021

 

%

Change

Net Sales

$

555.0

 

$

539.6

 

3

%

 

$

2,143.5

 

$

1,987.6

 

8

%

Operating Earnings

 

152.5

 

 

144.6

 

5

%

 

 

572.7

 

 

531.3

 

8

%

Net Earnings

 

126.2

 

 

120.3

 

5

%

 

 

460.6

 

 

439.9

 

5

%

Diluted Net Earnings per Common Share

$

0.74

 

$

0.69

 

7

%

 

$

2.66

 

$

2.52

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted (non-GAAP): (1)

 

 

 

 

 

 

 

 

 

 

 

Net Earnings, adjusted

$

124.3

 

$

115.8

 

7

%

 

$

455.5

 

$

425.7

 

7

%

Diluted Net Earnings per Common Share, adjusted

$

0.73

 

$

0.66

 

11

%

 

$

2.63

 

$

2.44

 

8

%

(1)

Excludes impacts of excess tax benefits from stock option exercises, prior year non-recurring tax provision adjustments and a prior year pension settlement loss. See Financial Results Adjusted for Comparability below for a reconciliation of adjusted non-GAAP financial measures to GAAP.

  • Net sales for the quarter increased 3 percent, including 6 percentage points of organic sales growth and 1 percentage point of sales growth from acquired operations, partially offset by 4 percentage points of currency translation headwinds. There were 14 weeks in the fiscal fourth quarter of 2021 compared to 13 weeks in 2022.
  • The gross profit margin rate declined approximately 2 percentage points for the quarter as strong realized pricing was offset by higher product costs and unfavorable changes in currency translation rates.
  • Total operating expenses decreased 7 percent due to lower sales and earnings-based expenses and changes in currency translation rates.
  • Expense leverage offset the effects of lower gross profit margin rates for the quarter and drove an increase in operating earnings as a percentage of sales.

"Graco reported record results in 2022 with annual growth in all reportable segments and regions on an organic, constant currency basis," said Mark Sheahan, Graco's President and CEO. "While the year was challenging, our people persevered and handled both commercial and operational hurdles in typical Graco fashion. I am proud of the work our teams have done and want to thank our employees, customers and vendors for another year of growth and success."

Consolidated Results

Changes in currency translation rates reduced sales and net earnings by approximately $23 million and $12 million, respectively, for the quarter and $66 million and $31 million, respectively, for the year.

Net sales for the quarter increased 3 percent from the comparable period last year (7 percent at consistent translation rates). Sales increased 5 percent in the Americas, 1 percent in EMEA (up 12 percent at consistent translation rates), and were flat in Asia Pacific (up 10 percent at consistent translation rates). Sales for the year increased 8 percent (12 percent at consistent translation rates). Sales increased 11 percent in the Americas, 10 percent in Asia Pacific (16 percent at consistent translation rates) and decreased 3 percent in EMEA (up 7 percent at consistent translation rates). Sales from acquired operations contributed approximately $3 million (1 percentage point) to the fourth quarter and $11 million (1 percentage point) to the year.

Gross profit margin rates decreased 2 percentage points for the quarter and 3 percentage points for the year from the comparable periods last year. Realized pricing was unable to offset higher product costs and the adverse impacts of changes in currency translation rates.

Total operating expenses for the quarter decreased $10 million (7 percent) compared to the fourth quarter last year. Reductions of $7 million from lower sales and earnings-based expenses and $5 million from the impact of currency translation were partially offset by volume and rate related increases. Operating expenses for the year decreased $18 million compared to last year. Reductions of $16 million from lower sales and earnings-based expenses and $14 million from the impact of currency translation were partially offset by $3 million of allowances for credit losses on customer receivables in Russia and volume and rate related increases.

Other expense decreased $15 million for the quarter and $16 million for the year. Other expense in the fourth quarter of 2021 included a non-cash pension settlement loss of $12 million in connection with the transfer of certain pension obligations to an insurance company.

The effective income tax rate was 18 percent for the quarter and 19 percent for the year, up approximately 11 and 6 percentage points, respectively, from the comparable periods last year. Adjusted to exclude non-recurring foreign tax benefits and the impact of excess tax benefits related to stock option exercises (see Financial Results Adjusted for Comparability below), the effective income tax rate was approximately 19 percent for both the quarter and year, 1 percentage point higher than the comparable periods last year due to the unfavorable effects of foreign earnings taxed at higher rates than the U.S.

Segment Results

Management assesses performance of segments by reference to operating earnings excluding unallocated corporate expenses. For a reconciliation of segment operating earnings to consolidated operating earnings, refer to the segment information table included in the financial statement section of this release. Certain measurements of segment operations are summarized below:

 

Three Months

 

Twelve Months

 

Industrial

 

Process

 

Contractor

 

Industrial

 

Process

 

Contractor

Net Sales (in millions)

$

190.2

 

 

$

130.2

 

 

$

234.6

 

 

$

649.3

 

 

$

495.1

 

 

$

999.1

 

Percentage change from last year

 

 

 

 

 

 

 

 

 

 

 

Sales

 

10

%

 

 

15

%

 

 

(7

)%

 

 

8

%

 

 

25

%

 

 

1

%

Operating earnings

 

14

%

 

 

27

%

 

 

(8

)%

 

 

16

%

 

 

34

%

 

 

(6

)%

Operating earnings as a percentage of sales

 

 

 

 

 

 

 

 

 

 

 

2022

 

37

%

 

 

25

%

 

 

25

%

 

 

36

%

 

 

25

%

 

 

25

%

2021

 

35

%

 

 

23

%

 

 

25

%

 

 

33

%

 

 

23

%

 

 

27

%

Components of net sales change by geographic region for the Industrial segment were as follows:

 

Three Months

 

Twelve Months

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

Americas

5%

 

0%

 

(1)%

 

4%

 

13%

 

0%

 

(1)%

 

12%

EMEA

30%

 

0%

 

(13)%

 

17%

 

15%

 

0%

 

(12)%

 

3%

Asia Pacific

20%

 

0%

 

(11)%

 

9%

 

14%

 

0%

 

(6)%

 

8%

Consolidated

17%

 

0%

 

(7)%

 

10%

 

14%

 

0%

 

(6)%

 

8%

The Industrial segment experienced solid growth in all regions for the quarter and year. Increases in finishing system sales drove a double-digit percentage increase in EMEA and Asia Pacific for the quarter. The operating margin rate increased for both the quarter and year as strong realized pricing and expense leverage more than offset higher product costs and the adverse impacts of currency translation.

Components of net sales change by geographic region for the Process segment were as follows:

 

Three Months

 

Twelve Months

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

Americas

17%

 

4%

 

(1)%

 

20%

 

22%

 

3%

 

0%

 

25%

EMEA

23%

 

1%

 

(9)%

 

15%

 

22%

 

1%

 

(8)%

 

15%

Asia Pacific

11%

 

0%

 

(7)%

 

4%

 

34%

 

0%

 

(5)%

 

29%

Consolidated

16%

 

3%

 

(4)%

 

15%

 

25%

 

2%

 

(2)%

 

25%

The Process segment had double-digit sales growth in all product applications for the quarter and year. Acquired operations contributed 3 percentage points of growth to the quarter and 2 percentage points to the year. The operating margin rate for this segment increased 2 percentage points for the quarter and year as increased volume and expense leverage offset higher product costs and the adverse impacts of currency translation.

Components of net sales change by geographic region for the Contractor segment were as follows:

 

Three Months

 

Twelve Months

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

Americas

(1)%

 

0%

 

0%

 

(1)%

 

7%

 

0%

 

(1)%

 

6%

EMEA

(10)%

 

0%

 

(9)%

 

(19)%

 

(6)%

 

1%

 

(9)%

 

(14)%

Asia Pacific

(17)%

 

0%

 

(8)%

 

(25)%

 

0%

 

0%

 

(6)%

 

(6)%

Consolidated

(4)%

 

0%

 

(3)%

 

(7)%

 

4%

 

0%

 

(3)%

 

1%

Contractor segment sales decreased 7 percent for the quarter due to softening demand in all regions. Sales increased 1 percent for the year primarily due to North American construction markets. Price realization and expense leverage offset the impact of higher product costs for the quarter, which resulted in a consistent operating margin rate compared to last year. For the year, the operating margin rate decreased 2 percentage points primarily due to higher product costs and the adverse impacts of currency translation.

Outlook

"As we head into 2023, order rates and business tempo will be closely monitored and we are cautiously optimistic that Graco will see sales growth on a full-year basis," said Sheahan. "We are initiating a revenue outlook for the year of low single-digit growth on an organic, constant currency. Our core growth strategies of developing new products, expanding distribution, seeking adjacent markets and pursuing strategic acquisitions will help our growth prospects this year and in the future."

Financial Results Adjusted for Comparability

Excluding the impacts of excess tax benefits from stock option exercises, prior year non-recurring tax provision adjustments and a prior year pension settlement loss presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements of adjusted income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):

 

Three Months Ended

 

Twelve Months Ended

 

Dec 30,

2022

 

Dec 31,

2021

 

Dec 30,

2022

 

Dec 31,

2021

Earnings before income taxes

$

154.0

 

 

$

129.3

 

 

$

565.7

 

 

$

508.5

 

Pension settlement loss

 

 

 

 

12.0

 

 

 

 

 

 

12.0

 

Earnings before income taxes, adjusted

$

154.0

 

 

$

141.3

 

 

$

565.7

 

 

$

520.5

 

 

 

 

 

 

 

 

 

Income taxes, as reported

$

27.8

 

 

$

9.0

 

 

$

105.1

 

 

$

68.6

 

Pension settlement tax effect

 

 

 

 

2.5

 

 

 

 

 

 

2.5

 

Excess tax benefit from option exercises

 

1.9

 

 

 

2.7

 

 

 

5.1

 

 

 

11.5

 

Other non-recurring tax benefit

 

 

 

 

11.3

 

 

 

 

 

 

12.2

 

Income taxes, adjusted

$

29.7

 

 

$

25.5

 

 

$

110.2

 

 

$

94.8

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

 

 

 

 

 

 

As reported

 

18.1

%

 

 

7.0

%

 

 

18.6

%

 

 

13.5

%

Adjusted

 

19.3

%

 

 

18.1

%

 

 

19.5

%

 

 

18.2

%

 

 

 

 

 

 

 

 

Net Earnings, as reported

$

126.2

 

 

$

120.3

 

 

$

460.6

 

 

$

439.9

 

Pension settlement loss, net of tax

 

 

 

 

9.5

 

 

 

 

 

 

9.5

 

Excess tax benefit from option exercises

 

(1.9

)

 

 

(2.7

)

 

 

(5.1

)

 

 

(11.5

)

Other non-recurring tax benefit

 

 

 

 

(11.3

)

 

 

 

 

 

(12.2

)

Net Earnings, adjusted

$

124.3

 

 

$

115.8

 

 

$

455.5

 

 

$

425.7

 

 

 

 

 

 

 

 

 

Weighted Average Diluted Shares

 

171.4

 

 

 

174.9

 

 

 

172.9

 

 

 

174.5

 

Diluted Earnings per Share

 

 

 

 

 

 

 

As reported

$

0.74

 

 

$

0.69

 

 

$

2.66

 

 

$

2.52

 

Adjusted

$

0.73

 

 

$

0.66

 

 

$

2.63

 

 

$

2.44

 

Cautionary Statement Regarding Forward-Looking Statements

The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including our Form 10-K, Form 10-Qs and Form 8-Ks, and other disclosures, including our overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.

Future results could differ materially from those expressed due to the impact of changes in various factors. These risk factors include, but are not limited to: the impact of the COVID-19 pandemic on our business; Russia's invasion of Ukraine, and the sanctions and actions taken against Russia and Belarus in response to the invasion; economic conditions in the United States and other major world economies; our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; changes in currency translation rates; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; catastrophic events; changes in laws and regulations; compliance with anti-corruption and trade laws; changes in tax rates or the adoption of new tax legislation; the possibility of asset impairments if acquired businesses do not meet performance expectations; political instability; results of and costs associated with litigation, administrative proceedings and regulatory reviews incident to our business; our ability to attract, develop and retain qualified personnel; the possibility of decline in purchases from a few large customers of the Contractor segment; variations in activity in the construction, automotive, mining and oil and natural gas industries; and the impact of declines in interest rates, asset values and investment returns on pension costs and required pension contributions. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year 2021 (and most recent Form 10-Q) for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com and the Securities and Exchange Commission’s website at www.sec.gov. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

Conference Call

Graco management will hold a conference call, including slides via webcast, with analysts and institutional investors on Tuesday, January 31, 2023, at 11 a.m. ET, 10 a.m. CT, to discuss Graco’s fourth quarter results.

A real-time listen-only webcast of the conference call will be broadcast by Nasdaq. Individuals can access the call and view the slides on the Company’s website at www.graco.com. Listeners should go to the website at least 15 minutes prior to the live conference call to install any necessary audio software.

About Graco

Graco Inc. supplies technology and expertise for the management of fluids and coatings in both industrial and commercial applications. It designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and powder materials. A recognized leader in its specialties, Minneapolis-based Graco serves customers around the world in the manufacturing, processing, construction and maintenance industries. For additional information about Graco Inc., please visit us at www.graco.com.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(In thousands except per share amounts)

 

 

Three Months Ended

 

Twelve Months Ended

 

Dec 30,

2022

 

Dec 31,

2021

 

Dec 30,

2022

 

Dec 31,

2021

Net Sales

$

555,045

 

 

$

539,619

 

$

2,143,521

 

 

$

1,987,608

Cost of products sold

 

282,229

 

 

 

265,062

 

 

1,086,082

 

 

 

953,659

Gross Profit

 

272,816

 

 

 

274,557

 

 

1,057,439

 

 

 

1,033,949

Product development

 

21,259

 

 

 

18,912

 

 

80,008

 

 

 

79,651

Selling, marketing and distribution

 

64,491

 

 

 

74,094

 

 

250,948

 

 

 

271,526

General and administrative

 

34,558

 

 

 

36,956

 

 

153,783

 

 

 

151,449

Operating Earnings

 

152,508

 

 

 

144,595

 

 

572,700

 

 

 

531,323

Interest expense

 

1,342

 

 

 

2,759

 

 

9,897

 

 

 

10,215

Other expense (income), net

 

(2,815

)

 

 

12,612

 

 

(2,921

)

 

 

12,643

Earnings Before Income Taxes

 

153,981

 

 

 

129,224

 

 

565,724

 

 

 

508,465

Income taxes

 

27,789

 

 

 

8,992

 

 

105,079

 

 

 

68,599

Net Earnings

$

126,192

 

 

$

120,232

 

$

460,645

 

 

$

439,866

Net Earnings per Common Share

 

 

 

 

 

 

 

Basic

$

0.75

 

 

$

0.71

 

$

2.73

 

 

$

2.59

Diluted

$

0.74

 

 

$

0.69

 

$

2.66

 

 

$

2.52

Weighted Average Number of Shares

 

 

 

 

 

 

 

Basic

 

167,706

 

 

 

170,164

 

 

168,952

 

 

 

169,635

Diluted

 

171,406

 

 

 

174,910

 

 

172,893

 

 

 

174,526

SEGMENT INFORMATION (Unaudited)

(In thousands)

 

 

Three Months Ended

 

Twelve Months Ended

 

Dec 30,

2022

 

Dec 31,

2021

 

Dec 30,

2022

 

Dec 31,

2021

Net Sales

 

 

 

 

 

 

 

Industrial

$

190,171

 

 

$

173,504

 

 

$

649,347

 

 

$

602,376

 

Process

 

130,231

 

 

 

112,836

 

 

 

495,114

 

 

 

397,626

 

Contractor

 

234,643

 

 

 

253,279

 

 

 

999,060

 

 

 

987,606

 

Total

$

555,045

 

 

$

539,619

 

 

$

2,143,521

 

 

$

1,987,608

 

Operating Earnings

 

 

 

 

 

 

 

Industrial

$

69,503

 

 

$

60,977

 

 

$

231,298

 

 

$

199,856

 

Process

 

33,161

 

 

 

26,114

 

 

 

122,344

 

 

 

91,037

 

Contractor

 

57,519

 

 

 

62,838

 

 

 

249,833

 

 

 

266,204

 

Unallocated corporate (expense)

 

(7,675

)

 

 

(5,334

)

 

 

(30,775

)

 

 

(25,774

)

Total

$

152,508

 

 

$

144,595

 

 

$

572,700

 

 

$

531,323

 

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands)

 

 

Dec 30,

2022

 

Dec 31,

2021

ASSETS

 

 

 

Current Assets

 

 

 

Cash and cash equivalents

$

339,196

 

 

$

624,302

 

Accounts receivable, less allowances of $7,000 and $3,900

 

346,010

 

 

 

325,132

 

Inventories

 

476,790

 

 

 

382,301

 

Other current assets

 

43,624

 

 

 

31,886

 

Total current assets

 

1,205,620

 

 

 

1,363,621

 

Property, Plant and Equipment, net

 

607,609

 

 

 

451,061

 

Goodwill

 

368,171

 

 

 

356,255

 

Other Intangible Assets, net

 

137,507

 

 

 

149,740

 

Operating Lease Assets

 

29,785

 

 

 

30,046

 

Deferred Income Taxes

 

57,090

 

 

 

55,786

 

Other Assets

 

33,118

 

 

 

36,689

 

Total Assets

$

2,438,900

 

 

$

2,443,198

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

Current Liabilities

 

 

 

Notes payable to banks

$

20,974

 

 

$

43,489

 

Current portion of long term debt

 

 

 

 

75,000

 

Trade accounts payable

 

84,218

 

 

 

78,432

 

Salaries and incentives

 

63,969

 

 

 

82,941

 

Dividends payable

 

39,963

 

 

 

35,771

 

Other current liabilities

 

190,793

 

 

 

191,159

 

Total current liabilities

 

399,917

 

 

 

506,792

 

Long-term Debt

 

75,000

 

 

 

75,000

 

Retirement Benefits and Deferred Compensation

 

61,672

 

 

 

106,897

 

Operating Lease Liabilities

 

21,057

 

 

 

23,527

 

Deferred Income Taxes

 

9,443

 

 

 

10,661

 

Other Non-current Liabilities

 

12,159

 

 

 

10,978

 

Shareholders’ Equity

 

 

 

Common stock

 

167,702

 

 

 

170,308

 

Additional paid-in-capital

 

784,477

 

 

 

742,288

 

Retained earnings

 

976,851

 

 

 

876,916

 

Accumulated other comprehensive income (loss)

 

(69,378

)

 

 

(80,169

)

Total shareholders’ equity

 

1,859,652

 

 

 

1,709,343

 

Total Liabilities and Shareholders’ Equity

$

2,438,900

 

 

$

2,443,198

 

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

Year Ended

 

Dec 30,

2022

 

Dec 31,

2021

Cash Flows From Operating Activities

 

 

 

Net Earnings

$

460,645

 

 

$

439,866

 

Adjustments to reconcile net earnings to net cash

provided by operating activities

 

 

 

Depreciation and amortization

 

65,997

 

 

 

59,325

 

Deferred income taxes

 

(9,997

)

 

 

(46,572

)

Share-based compensation

 

24,695

 

 

 

24,931

 

Change in

 

 

 

Accounts receivable

 

(29,944

)

 

 

(13,801

)

Inventories

 

(95,691

)

 

 

(97,780

)

Trade accounts payable

 

4,195

 

 

 

12,397

 

Salaries and incentives

 

(18,442

)

 

 

29,089

 

Retirement benefits and deferred compensation

 

(18,674

)

 

 

1,219

 

Other accrued liabilities

 

(4,191

)

 

 

51,342

 

Other

 

(1,199

)

 

 

(3,120

)

Net cash provided by operating activities

 

377,394

 

 

 

456,896

 

Cash Flows From Investing Activities

 

 

 

Property, plant and equipment additions

 

(201,161

)

 

 

(133,566

)

Acquisition of businesses, net of cash acquired

 

(25,296

)

 

 

(19,386

)

Other

 

(362

)

 

 

(347

)

Net cash used in investing activities

 

(226,819

)

 

 

(153,299

)

Cash Flows From Financing Activities

 

 

 

Borrowings on short-term lines of credit, net

 

(18,252

)

 

 

20,497

 

Payments on long-term debt

 

(75,000

)

 

 

(70

)

Payments of debt issuance costs

 

 

 

 

(1,422

)

Common stock issued

 

35,619

 

 

 

50,963

 

Common stock repurchased

 

(233,426

)

 

 

 

Taxes paid related to net share settlement of equity awards

 

(1,219

)

 

 

 

Cash dividends paid

 

(142,125

)

 

 

(127,110

)

Net cash used in financing activities

 

(434,403

)

 

 

(57,142

)

Effect of exchange rate changes on cash

 

(1,278

)

 

 

(1,062

)

Net increase (decrease) in cash and cash equivalents

 

(285,106

)

 

 

245,393

 

Cash and Cash Equivalents

 

 

 

Beginning of year

 

624,302

 

 

 

378,909

 

End of year

$

339,196

 

 

$

624,302

 

 

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