Graco(GGG) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Graco Inc.'s unaudited consolidated financial statements for the quarter ended July 1, 2022, highlighting an 8% increase in H1 2022 net sales to $1.04 billion, alongside a significant decrease in operating cash flow Consolidated Statements of Earnings For Q2 2022, Net Sales grew 8% to $548.5 million and Net Earnings rose to $117.4 million, with six-month Net Sales increasing to $1.04 billion and a slight rise in Net Earnings Consolidated Earnings Summary (In thousands) | Metric | Three Months Ended July 1, 2022 | Three Months Ended June 25, 2021 | Six Months Ended July 1, 2022 | Six Months Ended June 25, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $548,547 | $507,164 | $1,042,832 | $961,293 | | Gross Profit | $269,060 | $263,824 | $523,535 | $511,158 | | Operating Earnings | $148,680 | $133,843 | $277,043 | $262,129 | | Net Earnings | $117,378 | $110,118 | $218,221 | $215,805 | | Diluted EPS | $0.68 | $0.63 | $1.26 | $1.24 | Consolidated Balance Sheets Total assets decreased slightly to $2.40 billion as of July 1, 2022, driven by reduced cash and cash equivalents, partially offset by increased receivables and inventories, while total shareholders' equity rose Key Balance Sheet Items (In thousands) | Account | July 1, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,276,476 | $1,363,621 | | Cash and cash equivalents | $413,359 | $624,302 | | Inventories | $450,974 | $382,301 | | Total Assets | $2,404,278 | $2,443,198 | | Total Current Liabilities | $424,058 | $506,792 | | Total Shareholders' Equity | $1,757,274 | $1,709,343 | Consolidated Statements of Cash Flows Net cash from operating activities significantly decreased to $135.0 million for H1 2022 due to increased working capital, with substantial cash used in investing and financing for capital expenditures, stock repurchases, and dividends Cash Flow Summary - Six Months Ended (In thousands) | Cash Flow Activity | July 1, 2022 | June 25, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $134,985 | $220,047 | | Net cash used in investing activities | ($114,554) | ($74,193) | | Net cash used in financing activities | ($230,341) | ($40,972) | | Net increase (decrease) in cash | ($210,943) | $103,878 | - Significant uses of cash in the first six months of 2022 included $120.0 million for common stock repurchases, $88.9 million for property, plant and equipment additions, and $71.3 million for cash dividends[19] Notes to Consolidated Financial Statements These notes detail financial statements, including a segment realignment, strong Process segment sales growth, $1.26 diluted EPS for H1, goodwill increase from an acquisition, and an 18% rise in inventories to support demand - Effective January 1, 2022, high performance coatings and foam product offerings were realigned from the Industrial segment to the Contractor segment, with prior year segment information restated to conform[26] Net Sales by Segment - Six Months Ended (In thousands) | Segment | July 1, 2022 | June 25, 2021 | | :--- | :--- | :--- | | Industrial | $302,994 | $274,312 | | Process | $239,507 | $188,605 | | Contractor | $500,331 | $498,376 | | Total | $1,042,832 | $961,293 | Inventories (In thousands) | Date | Total Inventories | | :--- | :--- | | July 1, 2022 | $450,974 | | Dec 31, 2021 | $382,301 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses an 8% sales increase for Q2 and H1 2022, driven by Industrial and Process segments, but highlights headwinds from supply chain constraints, inflation, unfavorable currency, and a 3 percentage point gross profit margin compression Overview The company faces logistical and production constraints, including raw material availability, freight delays, and labor shortages, impacting profitability and demand fulfillment, and has suspended sales to Russia and Belarus, representing about 1.5% of 2021 net sales - The company is facing ongoing logistical and production constraints due to raw material/component availability, freight capacity, shipping delays, and labor shortages, exacerbated by the COVID-19 pandemic and other disruptions[49] - In response to the invasion of Ukraine, the company suspended sales into Russia and Belarus in Q1 2022, with these sales representing approximately 1.5% of 2021 net sales[50] Consolidated Results Consolidated net sales increased 8% for both the quarter and year-to-date, driven by volume and price despite negative currency impacts, while gross profit margin decreased by 3 percentage points due to rising costs outpacing price realization Consolidated Results Summary (In millions) | Metric | Q2 2022 | Q2 2021 | % Change | H1 2022 | H1 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 EPS | $0.68 | $0.63 | 8% | $1.26 | $1.24 | 2% | - Changes in currency translation rates negatively impacted worldwide sales by $15 million (4 percentage points) for the quarter and $23 million (3 percentage points) for the year to date[54] - Gross profit margin rates decreased by 3 percentage points for both the quarter and year-to-date, as realized pricing was insufficient to offset increased product costs from supply chain and inflationary pressures[55][60] Segment Results The Industrial segment sales grew 10% with a 35% operating margin, the Process segment saw strong 28% sales growth with a 25% operating margin, while the Contractor segment's sales were flat, leading to a decreased operating margin - Industrial Segment: Sales increased 10% for the quarter and year-to-date, with operating margin rate increasing due to strong pricing and expense leverage offsetting higher costs[64] - Process Segment: Sales grew 28% for the quarter and 27% year-to-date, with broad-based growth across all product applications, and operating margin increased as higher volume and expense leverage offset cost pressures[65] - Contractor Segment: Sales were flat for the quarter and year-to-date, with growth in the Americas offset by declines in Asia Pacific and EMEA, and operating margin decreased due to higher product costs and unfavorable currency rates[68] Liquidity and Capital Resources Net cash from operations decreased by $85 million to $135 million year-over-year due to increased working capital, with significant cash uses including $120 million in share repurchases, and the company maintains strong liquidity of $929 million - Net cash provided by operating activities decreased to $135 million from $220 million in the prior year, mainly due to increased inventory purchases and higher accounts receivable[69] - As of July 1, 2022, the company had available liquidity of $929 million, comprising $413 million in cash and $516 million in available credit facilities[71] - Capital expenditures for 2022 are projected to be approximately $215 million, with $140 million allocated to facility expansion projects[72] Outlook The company targets high single-digit organic, constant currency sales growth for full-year 2022, despite slowing EMEA markets, and is implementing a second round of global price increases to offset rising commodity and component costs - The company continues to target high single-digit sales growth for full-year 2022 on an organic, constant currency basis[73] - To offset rising commodity and component costs, a second round of global price increases is being implemented starting in August 2022[73] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the company's market risk disclosures since its 2021 Annual Report on Form 10-K - There have been no material changes in market risk disclosures since the 2021 Annual Report on Form 10-K[78] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the fiscal quarter-end, with no material changes to internal control over financial reporting - The President and CEO, along with the CFO and Treasurer, concluded that the company's disclosure controls and procedures are effective as of the end of the quarter[79] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[80] PART II - OTHER INFORMATION Item 1A. Risk Factors This section highlights the adverse business impact of Russia's invasion of Ukraine and related sanctions, leading to suspended sales in the region and exacerbating risks like cybersecurity threats, unfavorable exchange rates, and supply chain disruptions - A key risk factor is the Russian invasion of Ukraine and related sanctions, which have led the company to suspend sales into Russia and Belarus[82] - The conflict could escalate other risks such as increased cybersecurity threats, unfavorable currency exchange rates, further supply chain shortages and inflation, and widespread reductions in end-user demand[82] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its stock repurchase activity, with 178,342 shares repurchased in Q2 2022 under a December 2018 authorization, leaving approximately 16.8 million shares available for future purchases - The Board of Directors authorized the purchase of up to 18 million shares in December 2018, with 16,822,292 shares remaining available for repurchase as of July 1, 2022[84][86] Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2 - April 29, 2022 | 121,461 | $63.90 | | April 30 - May 27, 2022 | 56,881 | $62.50 | | May 28 - July 1, 2022 | 0 | $0.00 | Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications, the Q2 earnings press release, and interactive data files in iXBRL format - Key exhibits filed include CEO/CFO certifications, the Q2 earnings press release, and interactive data files (iXBRL)[88]