Sales Growth and Expense Leverage Drove
Earnings Improvement
Graco Inc. (NYSE: GGG) today announced results for the
second quarter ended July 1, 2022.
Summary
$ in millions except per share amounts
Three Months Ended
Six Months Ended
Jul 1, 2022
Jun 25, 2021
%
Change
Jul 1, 2022
Jun 25, 2021
%
Change
Net Sales
$
548.5
$
507.2
8
%
$
1,042.8
$
961.3
8
%
Operating Earnings
148.7
133.8
11
%
277.0
262.1
6
%
Net Earnings
117.4
110.1
7
%
218.2
215.8
1
%
Diluted Net Earnings per Common Share
$
0.68
$
0.63
8
%
$
1.26
$
1.24
2
%
Adjusted (non-GAAP): (1)
Net Earnings, adjusted
$
117.0
$
108.0
8
%
$
216.3
$
209.6
3
%
Diluted Net Earnings per Common Share,
adjusted
$
0.68
$
0.62
10
%
$
1.25
$
1.20
4
%
(1)
Excludes impacts of excess tax benefits
from stock option exercises. See Financial Results Adjusted for
Comparability below for a reconciliation of adjusted non-GAAP
financial measures to GAAP.
- Changes in currency translation rates reduced sales and net
earnings by approximately $15 million and $7 million, respectively,
for the quarter.
- Sales for the quarter increased 8 percent, with double-digit
increases in the Industrial and Process segments.
- The gross profit margin rate decreased as strong realized
pricing was unable to offset continued increases in product
costs.
- Total operating expenses decreased 7 percent primarily due to
decreases in sales and earnings-based expenses. Expense leverage
contributed 4 percentage points of operating margin rate growth for
the quarter.
"The Industrial and Process segments grew double digits on an
organic, constant currency basis in every reportable region driving
record quarterly sales," said Mark Sheahan, Graco's President and
CEO. "While supply chain challenges, logistical constraints and
input cost pressures increased throughout the quarter, these
segments did a good job managing expenses and driving strong
operating performance. Component shortages and cost premiums
continue to impact the Contractor segment, slowing growth and
reducing profitability."
Consolidated Results
Changes in currency translation rates reduced sales and net
earnings by approximately $15 million and $7 million, respectively,
for the quarter and $23 million and $10 million, respectively, for
the year to date.
Net sales for the quarter increased 8 percent from the
comparable period last year (12 percent at consistent translation
rates). Sales increased 12 percent in the Americas, 12 percent in
Asia Pacific (16 percent at consistent translation rates) and
decreased 5 percent in EMEA (up 5 percent at consistent translation
rates). Year to date sales increased 8 percent from the comparable
period last year (11 percent at consistent translation rates).
Sales increased 11 percent in the Americas (12 percent at
consistent translation rates), 16 percent in Asia Pacific (19
percent at consistent translation rates) and decreased 4 percent in
EMEA (up 4 percent at consistent translation rates). Sales from
acquired operations contributed approximately $3 million (1
percentage point) for the quarter and $5 million for the year to
date.
Gross profit margin rates for the quarter and year to date
decreased 3 percentage points from the comparable periods last
year. Realized pricing was unable to offset continued increases in
product costs caused by ongoing supply chain and inflationary
challenges and the adverse impacts of changes in currency
translation rates.
Total operating expenses decreased $10 million (7 percentage
points) for the quarter and $3 million (1 percentage point) for the
year to date mostly due to decreases in sales and earnings-based
expenses. Decreases in operating expenses for the year to date were
partially offset by $3 million (1 percentage point) of allowances
for credit losses on customer receivables in Russia. Changes in
currency translation rates reduced operating expenses by $3 million
(3 percentage points) for the quarter and $5 million (2 percentage
points) for the year to date.
Interest expense for the year to date increased $2 million,
driven by a $3.5 million fee associated with the prepayment of
private placement debt.
The effective income tax rate was 20 percent for the quarter and
19 percent for the year to date, up 4 percentage points and 3
percentage points, respectively, from the comparable periods last
year. The increase was primarily due to decreases in excess tax
benefits from stock option exercises and 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
Six Months
Industrial
Process
Contractor
Industrial
Process
Contractor
Net Sales (in millions)
$
158.3
$
124.5
$
265.7
$
303.0
$
239.5
$
500.3
Percentage change from last year
Sales
10
%
28
%
0
%
10
%
27
%
0
%
Operating earnings
21
%
43
%
(7
) %
22
%
35
%
(12
) %
Operating earnings as a percentage of
sales
2022
35
%
25
%
26
%
36
%
24
%
25
%
2021
32
%
22
%
28
%
32
%
23
%
29
%
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months
Six Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
19%
0%
0%
19%
18%
0%
0%
18%
EMEA
12%
0%
(12)%
0%
13%
0%
(10)%
3%
Asia Pacific
13%
0%
(4)%
9%
12%
0%
(3)%
9%
Consolidated
15%
0%
(5)%
10%
15%
0%
(5)%
10%
For the quarter and year to date, Industrial segment sales
increased double-digits. The operating margin rate increased for
both the quarter and year to date 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
Six Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
25%
4%
0%
29%
22%
3%
0%
25%
EMEA
18%
1%
(7)%
12%
18%
0%
(4)%
14%
Asia Pacific
42%
1%
(5)%
38%
46%
0%
(3)%
43%
Consolidated
27%
3%
(2)%
28%
27%
2%
(2)%
27%
The Process segment had broad-based sales growth in all product
applications for the quarter and year to date. The operating margin
rate for this segment increased 3 percentage points for the quarter
and 1 percentage point for the year to date as increased volume and
expense leverage offset higher product costs, unfavorable product
and channel mix and the adverse impacts of currency
translation.
Components of net sales change by geographic region for the
Contractor segment were as follows:
Three Months
Six Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
5%
0%
0%
5%
5%
0%
0%
5%
EMEA
(5)%
0%
(9)%
(14)%
(11)%
2%
(7)%
(16)%
Asia Pacific
(2)%
0%
(5)%
(7)%
6%
0%
(5)%
1%
Consolidated
3%
0%
(3)%
0%
2%
0%
(2)%
0%
Contractor segment sales were flat for the quarter and year to
date as growth in the Americas was mostly offset by decreases in
Asia Pacific due to pandemic-related shutdowns and in EMEA due to
weakened economic conditions. The operating margin rate decreased 2
percentage points for the quarter and 4 percentage points for the
year to date as price realization and lower sales and
earnings-based expenses were unable to offset higher product costs
and unfavorable currency translation rates.
Outlook
"Demand in the Americas remains strong, but end markets in EMEA
slowed during the quarter as a result of unfavorable macroeconomic
conditions, which we expect to continue to impact us for the
remainder of the year," said Sheahan. "Pandemic-related shutdowns
in the Asia Pacific region also affected incoming order rates,
however, once lifted, these rates significantly improved. Commodity
prices and component costs have increased significantly since we
implemented our price increases in January. To offset these
pressures, we are implementing a second round of global price
increases starting in August of this year. While we recognize that
the cadence of these pricing actions is different than what we have
done historically, our actions are not unique given the persistent
inflationary environment that industrial companies are facing. Our
backlog remains elevated and our teams are working hard to both
secure orders and deliver products. We confirm our full-year
outlook of high single-digit organic revenue growth on a constant
currency basis."
Financial Results Adjusted for Comparability
Excluding the impacts of excess tax benefits related to stock
option exercises 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
Six Months Ended
Jul 1, 2022
Jun 25, 2021
Jul 1, 2022
Jun 25, 2021
Earnings before income taxes
$
146.3
$
131.7
$
269.3
$
257.5
Income taxes, as reported
$
29.0
$
21.6
$
51.1
$
41.7
Excess tax benefit from option
exercises
0.4
2.1
1.9
6.2
Income taxes, adjusted
$
29.4
$
23.7
$
53.0
$
47.9
Effective income tax rate
As reported
19.8
%
16.4
%
19.0
%
16.2
%
Adjusted
20.0
%
18.0
%
19.7
%
18.6
%
Net Earnings, as reported
$
117.4
$
110.1
$
218.2
$
215.8
Excess tax benefit from option
exercises
(0.4
)
(2.1
)
(1.9
)
(6.2
)
Net Earnings, adjusted
$
117.0
$
108.0
$
216.3
$
209.6
Weighted Average Diluted Shares
172.7
174.6
173.7
174.2
Diluted Earnings per Share
As reported
$
0.68
$
0.63
$
1.26
$
1.24
Adjusted
$
0.68
$
0.62
$
1.25
$
1.20
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 Thursday,
July 28, 2022, at 11 a.m. ET, 10 a.m. CT, to discuss Graco’s second
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
Six Months Ended
Jul 1, 2022
Jun 25, 2021
Jul 1, 2022
Jun 25, 2021
Net Sales
$
548,547
$
507,164
$
1,042,832
$
961,293
Cost of products sold
279,487
243,340
519,297
450,135
Gross Profit
269,060
263,824
523,535
511,158
Product development
19,967
21,406
39,045
40,977
Selling, marketing and distribution
62,076
69,126
125,071
131,354
General and administrative
38,337
39,449
82,376
76,698
Operating Earnings
148,680
133,843
277,043
262,129
Interest expense
1,726
2,528
7,013
4,956
Other expense, net
607
(434
)
760
(313
)
Earnings Before Income Taxes
146,347
131,749
269,270
257,486
Income taxes
28,969
21,631
51,049
41,681
Net Earnings
$
117,378
$
110,118
$
218,221
$
215,805
Net Earnings per Common Share
Basic
$
0.69
$
0.65
$
1.29
$
1.27
Diluted
$
0.68
$
0.63
$
1.26
$
1.24
Weighted Average Number of Shares
Basic
169,128
169,594
169,469
169,271
Diluted
172,698
174,572
173,688
174,210
SEGMENT INFORMATION
(Unaudited)
(In thousands)
Three Months Ended
Six Months Ended
Jul 1, 2022
Jun 25, 2021
Jul 1, 2022
Jun 25, 2021
Net Sales
Industrial
$
158,325
$
144,448
$
302,994
$
274,312
Process
124,483
97,232
239,507
188,605
Contractor
265,739
265,484
500,331
498,376
Total
$
548,547
$
507,164
$
1,042,832
$
961,293
Operating Earnings
Industrial
$
55,201
$
45,709
$
107,831
$
88,067
Process
31,057
21,676
58,545
43,409
Contractor
68,244
73,656
127,191
144,707
Unallocated corporate (expense)
(5,822
)
(7,198
)
(16,524
)
(14,054
)
Total
$
148,680
$
133,843
$
277,043
$
262,129
View source
version on businesswire.com: https://www.businesswire.com/news/home/20220727005954/en/
Financial Contact: David Lowe, 612-623-6456 Media Contact: David
Ahlers, 612-623-6699 David_M_Ahlers@graco.com
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