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GRACO INC (GGG)·Q4 2021 Earnings Summary

Executive Summary

  • Record Q4 sales and operating earnings with net sales $539.6M (+15% YoY) and diluted EPS $0.69; adjusted diluted EPS $0.66. All segments and regions grew; the quarter had 14 weeks vs. 13 in Q4 2020 .
  • Gross margin rate weakened by 1ppt YoY due to higher materials, labor and freight; contractor segment bore the brunt. A non-cash pension settlement loss of $12M hit other expense in the quarter; effective tax rate was 7% (adjusted 18%) .
  • Demand exceeded deliveries; consolidated backlog reached approximately $375M at year-end, up ~$95M vs. Q3 and ~$220M vs. last year. Pricing actions are in place and expected to offset cost pressures as backlog converts in 2022 .
  • 2022 outlook initiated at high single-digit organic constant currency sales growth; management expects price realization to contribute ~two-thirds of growth, with improved cadence into Q2/Q3 as pricing benefits flow through. Capex planned at $190M to expand capacity across multiple sites .
  • Stock reaction catalysts: accelerating backlog conversion, price-cost neutralization, and capacity additions; watch for cost headwinds moderation and price realization starting Q2 as key inflection points .

What Went Well and What Went Wrong

What Went Well

  • “We finished the year strong; posting records for quarterly and annual sales and operating earnings in 2021.” Strength was broad-based across segments/regions .
  • Process segment delivered quarterly and annual records; Q4 sales +35% with operating margin at 23%, driven by lubrication, process pump and semiconductor demand .
  • Management initiated 2022 guidance for high single-digit organic growth, noting robust new product pipelines and pricing actions expected to offset inflation: “We believe…position us well to deliver another year of record sales and earnings.” .

What Went Wrong

  • Gross margin rate declined ~1ppt YoY as higher product costs (materials, labor, freight) outweighed favorable mix and pricing; contractor margins down 4ppts in Q4 due to cost pressures .
  • Supply chain/logistics constraints and component shortages (electronics, castings, motors) limited deliveries; orders exceeded shipments, building backlog and deferring revenue recognition .
  • Non-cash pension settlement loss of $12M in Q4 increased other expense; reported effective tax rate 7% reflected non-recurring foreign-related tax benefits, with adjusted tax rate at 18% .

Financial Results

Headline Metrics vs. Prior Year and Prior Quarter

MetricQ4 2020Q3 2021Q4 2021
Net Sales ($USD Millions)$470.3 $487.0 $539.6
Net Earnings ($USD Millions)$114.7 $104.0 $120.2
Diluted EPS (GAAP, $USD)$0.66 $0.59 $0.69
Diluted EPS (Adjusted, $USD)$0.61 $0.57 $0.66

Margin Metrics

MetricQ4 2020Q4 2021
Gross Profit ($USD Thousands)$244,824 $274,557
Net Sales ($USD Thousands)$470,340 $539,619
Gross Margin % (Derived)52.1% (244,824 ÷ 470,340) 50.9% (274,557 ÷ 539,619)
Operating Earnings ($USD Millions)$132.1 $144.6
Effective Tax Rate (Reported)11.4% 7.0%
Effective Tax Rate (Adjusted)18.1% 18.1%

Segment Breakdown (Q4)

SegmentNet Sales Q4 2020 ($USD Thousands)Net Sales Q4 2021 ($USD Thousands)YoY %Operating Margin % Q4 2020Operating Margin % Q4 2021
Industrial$212,904 $239,917 +13% 37% 37%
Process$83,495 $112,836 +35% 22% 23%
Contractor$173,941 $186,866 +7% 23% 19%
Total$470,340 $539,619 +15% ——

KPIs and Operational Details

KPIQ4 2020Q3 2021Q4 2021
Weeks in Quarter13 13 (standard) 14
Consolidated Backlog ($USD Millions, approx.)~$155 (implied from +$220 YoY) ~$280 ~$375
Contractor Backlog ($USD Millions)~$26 (implied from +$38 YoY) $46 $64
Price Cost Headwind (Gross Profit impact, $USD Millions)—$14 (Q3) $16 (Q4)
Contractor Cost Headwind ($USD Millions)—$10 (Q3) $11 (Q4)
Pension Settlement Loss ($USD Millions)——$12
Cash from Operations ($USD Millions, FY)$394.0 —$456.9
Capex ($USD Millions, FY)$71.3 —$133.6

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Organic Sales Growth (constant currency)FY 2021Mid to high-teens ——
Organic Sales Growth (constant currency)FY 2022—High single-digit; ~two-thirds from pricing actions Initiated
Effective Tax RateFY 2021Adjusted 18–19% ——
Effective Tax RateFY 2022—18–19% Maintained vs. 2021
Unallocated Corporate ExpenseFY 2021~$26–$28M ——
Unallocated Corporate ExpenseFY 2022—~$28–$30M Raised
FX ImpactFY 2021+2% sales, +4% earnings full-year ——
FX ImpactFY 2022—-1% sales, -3% earnings (at current rates) Unfavorable vs. 2021
Capital ExpendituresFY 2021~$150M ——
Capital ExpendituresFY 2022—~$190M (facility expansions MN, Sioux Falls, Switzerland, Romania) Raised
Debt/InterestQ1 2022—$75M debt repaid; $3.5M prepayment fee recognized in interest expense New item
Segment RealignmentEffective Jan 1, 2022—HPCF moved from Industrial to Contractor; segment reporting to reflect new structure Announced

Earnings Call Themes & Trends

TopicQ2 2021 (Q-2)Q3 2021 (Q-1)Q4 2021 (Current)Trend
Supply chain/logistics constraintsPersisting; pressures on materials, labor, freight; contractor most exposed Orders > billings; backlog building due to component shortages/logistics Continued constraints (electronics, castings, motors); orders exceeded deliveries Worsened through 2H21; normalization hoped by Q3 2022
Pricing actionsAnnual cadence; price and factory performance expected to offset costs FY21 2022 pricing planned; expected to offset cost pressures 2022 pricing implemented Q1; realization expected mainly from Q2 onward; ~two-thirds of FY22 growth from price Increasing magnitude; realization poised to improve from Q2
Backlog—~$280M end-Q3 (+$121M YoY) ~$375M end-Q4 (+$95M vs. Q3; +$220M YoY) Strong build
Contractor demand/marginsStrong global demand; margins pressured by cost/mix Demand solid; margins down on cost headwinds Rebounded high single-digit sales; price-cost expected neutral in 2022 Demand resilient; margins to stabilize with price realization
Process segment performanceSales +29% QoQ; broad-based recovery Sales +21%; recovery ongoing Sales +35%; operating margin 23%; strong in lubrication, pumps, semis Accelerating
Regional trends (Asia-Pacific)Acceleration; sales exceeding pre-pandemic Very strong, especially in Process Q4 sales +34% overall; various country-specific strengths across divisions Strength sustained
Capex/capacity expansionNew MN facility; robust investment pipeline Capex ~$150M; facility investments ongoing Capex ~$190M; expansions MN, Sioux Falls, Switzerland, Romania Elevated
M&A postureActive market; disciplined on multiples Valuations daunting; ROI discipline New EVP hired to focus M&A; comfortable lever to 2–3x EBITDA for right deal Building organizational focus

Management Commentary

  • “Robust order rates continued in the fourth quarter and we ended the year with record backlog in all three segments.” .
  • “Our price increase for 2022 will be implemented in the first quarter; however, due to the size of our backlog we may not begin to fully realize the impact of the increase until the second quarter.” .
  • “We are initiating revenue guidance for the full-year 2022 of high single-digits on an organic constant currency basis…approximately two-thirds of the growth will come from our pricing actions.” .
  • On cost headwinds: “These higher product costs…decreased our gross profit by $16 million in the quarter, and $40 million for the full-year.” .
  • On Process: “Process segment sales grew 35% for the quarter…quarterly and annual records for revenue and operating earnings.” .

Q&A Highlights

  • Earnings cadence: Expect similar seasonality with pricing turning the price-cost equation starting Q2/Q3; improvement contingent on input cost stability .
  • Pricing actions detail: Higher than normal; varied by division/region; customer feedback generally accepting; targeting ~two-thirds of FY22 growth from price .
  • Backlog normalization: Hoping for more normal pace by around Q3 2022, contingent on electronic component availability .
  • Contractor price-cost: Expected neutral in 2022; offset by pricing actions barring commodity swings .
  • Capital deployment: Aggressive capex across facilities; new EVP to drive more M&A; comfortable to lever 2–3x EBITDA for the right opportunity .

Estimates Context

  • Wall Street consensus (S&P Global) for Q4 2021 EPS and revenue was unavailable due to SPGI API request limit; as a result, we cannot determine beat/miss vs. estimates for this quarter [SPGI API error in tool].
  • Actuals: Revenue $539.6M, diluted EPS $0.69, adjusted diluted EPS $0.66. In absence of consensus figures, investors should focus on backlog growth, price realization timing, and margin trajectory into 2022 .

Key Takeaways for Investors

  • Backlog surge (~$375M) and order strength set up 2022 revenue conversion; watch for supply chain normalization by Q3 to accelerate shipments .
  • Price actions are the core lever; management expects price realization to drive ~two-thirds of FY22 growth and to neutralize cost headwinds, particularly in Contractor .
  • Gross margin pressure (~1ppt YoY) should stabilize as pricing flows through and cost inflation moderates; margin cadence likely improves from Q2 .
  • Elevated capex ($190M) targets capacity and productivity across MN, Sioux Falls, Switzerland, Romania, supporting medium-term growth and margin leverage .
  • Segment mix: Process momentum (23% operating margin; semis, batteries, lubrication strength) can offset Contractor margin variability; Industrial steady at 37% margin .
  • Non-GAAP adjustments matter: Pension settlement loss ($12M) and non-recurring tax benefits lowered reported tax rate; use adjusted EPS/tax rate for comparability (adjusted diluted EPS $0.66; adjusted tax rate 18.1%) .
  • Near-term trading: Sensitivity to component availability headlines and price realization timing; medium-term thesis underpinned by diversified end-market strength, disciplined M&A, and capacity expansion .