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GRACO INC (GGG)·Q4 2022 Earnings Summary

Executive Summary

  • Record Q4 sales of $555.0M and diluted EPS of $0.74; full-year 2022 records for net sales ($2.144B) and operating earnings ($572.7M) .
  • Gross margin rate declined ~200 bps YoY in Q4 due to FX and product costs, partly offset by strong price realization; operating expenses down 7% supporting margin resilience .
  • Backlog ended Q4 at $355M, down from Q3’s $440M as project completions and easing supply constraints improved throughput; component shortages persisted but improved vs earlier in 2022 .
  • 2023 outlook initiated: low single-digit organic, constant-currency revenue growth; FX expected to be a modest tailwind (+1ppt); tax rate 19–20%; unallocated corporate expense $31–$34M; capex ~$200M (with ~$130M for facility expansions) .

What Went Well and What Went Wrong

What Went Well

  • Industrial segment posted double-digit growth and record Q4/annual sales and operating earnings; incremental margins were 55% in Q4 and 61% for FY22, driven by finishing systems and sealant/adhesive equipment .
  • Process segment delivered its fifth consecutive quarter of record revenue and operating earnings, with broad-based strength across lubrication, process pumps, and semiconductors; Q4 incremental margins were 48% .
  • Price realization offset cost inflation on a dollar basis; Q4 price/cost was neutral to slightly favorable, and management expects favorable dynamics to continue into 2023 at current costs .

What Went Wrong

  • Gross margin rate declined ~200 bps YoY in Q4, as realized pricing couldn’t fully offset higher product costs and adverse currency translation .
  • Contractor segment sales decreased 7% YoY in Q4 on softening demand across regions; pro-paint availability in EMEA/Asia and the exit from Russia weighed; home center channel weaker than pro .
  • FX headwinds reduced Q4 sales by ~$23M and net earnings by ~$12M; without FX, gross margin would have exceeded 50% in Q4 .

Financial Results

Revenues and EPS vs Prior Periods

MetricQ4 2021Q2 2022Q3 2022Q4 2022
Net Sales ($USD Millions)$539.6 $549.0 $546.0 $555.0
Diluted EPS ($USD)$0.69 $0.68 $0.67 $0.74

Net Earnings vs Prior Periods

MetricQ4 2021Q2 2022Q3 2022Q4 2022
Net Earnings ($USD Millions)$120.2 $117.0 $116.0 $126.2

Profitability and Operating Results (Consolidated)

MetricQ4 2021Q4 2022
Gross Profit ($USD Millions)$274.6 $272.8
Operating Earnings ($USD Millions)$144.6 $152.5
Gross Margin Rate YoY Change (pp)—~-2 pp

Segment Breakdown (Q4 2022 vs Q4 2021)

SegmentNet Sales ($MM) Q4’21Net Sales ($MM) Q4’22YoY Sales ChangeOperating Earnings ($MM) Q4’21Operating Earnings ($MM) Q4’22Op Margin 2021Op Margin 2022
Industrial$173.5 $190.2 +10% $61.0 $69.5 35% 37%
Process$112.8 $130.2 +15% $26.1 $33.2 23% 25%
Contractor$253.3 $234.6 -7% $62.8 $57.5 27% 25%

KPIs and Operational Metrics

KPIQ2 2022Q3 2022Q4 2022
Consolidated Backlog ($USD Millions)$430 $440 $355
FX impact on Sales ($USD Millions)——$(23)
FX impact on Net Earnings ($USD Millions)——$(12)
Adjusted Effective Tax Rate (%)20% 19% ~19%

Non-GAAP Adjustments (Q4 2022)

MetricAs ReportedAdjusted
Net Earnings ($USD Millions)$126.2 $124.3
Diluted EPS ($USD)$0.74 $0.73

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue Growth (Organic, CC)FY 2022High single-digit Low double-digit Raised
Revenue Growth (Organic, CC)FY 2023—Low single-digit New
Segment/Region Growth NarrativeFY 2023“With growth expected in all segments and regions” (slide error) Removed statement; kept low single-digit growth guide Clarified
Effective Tax RateFY 2023—19–20% New
Currency Translation ImpactFY 2023—+1 ppt to sales and earnings (at current rates) New
Unallocated Corporate ExpenseFY 2023—$31–$34M (stock-based comp driven) New
Capital ExpendituresFY 2023—~$200M; ~$130M for facility expansions (MN, SD, CH, RO) New
Pricing Cadence2023Resume normal cadence beginning of year “More normal” price increase in line with 2018/2019; segments staggered Maintained plan

Earnings Call Themes & Trends

TopicQ2 2022 (Q-2)Q3 2022 (Q-1)Q4 2022 (Current)Trend
Supply chain/componentsBottlenecks in electronics, motors, castings; backlog $430M; throughput improving Backlog $440M; component availability challenging; contractor backorders high Backlog $355M; supply chains improved vs early 2022; shortages persist Improving
Pricing actionsInterim price increase announced for August; resume normal cadence in 2023 Two price increases implemented; ~2/3 of revenue growth tied to pricing Price/cost neutral to favorable in Q4; normal price increase planned Favorable
FX headwindsFull-year FX expected to reduce sales by 3% and earnings by 7% Significant FX headwind; EPS -$0.05 impact in Q3 Q4 FX reduced sales by $23M and earnings by $12M Moderating into 2023
Contractor end-market mixNA positive; EMEA/APAC declines; home center caution Pro strong; home center weaker; mix skewing higher-end pro Pro healthy; home center weaker; EMEA pro availability constrained Mixed; pro > home center
Industrial segmentSixth consecutive quarter of double-digit growth Strong across geographies; high incremental margins Records for Q4/year; growth from finishing, sealant/adhesives; strong incremental margins Strong
Semiconductor (Process)Strong demand; environmental and semiconductor products contributing Process >20% growth streak; broad-based strength including semis Large backlogs; benefits from fab investments and adjacencies Strong
EMEA macro/energyCautious outlook; geopolitical uncertainty Europe resilient despite Russia exit; energy concerns Milder winter; energy price declines; improving macro backdrop Improving
Backlog trajectory$430M; down $15M q/q $440M; elevated across segments $355M; down on project completions and throughput Decreasing

Management Commentary

  • “Sales in the fourth quarter were up mid-single-digits, resulting in quarterly and annual records for both revenue and operating earnings… We achieved these records in each quarter of 2022.” — Mark Sheahan, President & CEO .
  • “The Process segment grew sales 16% for the quarter… This is the fifth consecutive quarter that process has set these records.” — Mark Sheahan .
  • “During the quarter, our pricing actions more than offset increased cost… At current costs, we expect a favorable price cost dynamic to continue as we move into 2023.” — Kathy Schoenrock .
  • “Graco reported record results in 2022… our people persevered and handled both commercial and operational hurdles in typical Graco fashion.” — Mark Sheahan (press release) .

Q&A Highlights

  • Contractor dynamics: Pro channel remains strong with quick paybacks on new equipment; home center demand weaker post-stimulus and amid higher rates .
  • Pricing cadence: 2023 price increase expected to be “more normal” and staggered by segment/region; Q4 price/cost was neutral to slightly favorable .
  • Gross margins: Currency headwind depressed Q4 gross margin; “if currency were neutral, we would have been above 50%” .
  • Segment outlook: Process supported by backlog (semiconductor) and product launches; Industrial strong in sealant/adhesives and powder equipment .
  • EMEA and energy: Milder winter and lower energy prices improving backdrop; Europe’s industrial activity stabilizing .

Estimates Context

  • Wall Street consensus (S&P Global) retrieval was unavailable at the time of analysis due to data access limits; therefore, comparisons to consensus for Q4 2022 cannot be presented.
  • Actuals: Revenue $555.0M and diluted EPS $0.74; Adjusted EPS $0.73 .
  • Implication: In absence of consensus, investor focus should center on YoY/seq trends, margin dynamics, FX normalization, and 2023 growth/tax/expense guidance .

Key Takeaways for Investors

  • Price realization and cost control underpin margin resilience; as FX headwinds ease, gross margin should recover toward 50%+ barring new cost shocks .
  • Mix shift toward higher-margin pro contractor and strength in Industrial/Process provide a near-term buffer against home center softness and macro uncertainty .
  • Backlog normalization and easing supply constraints support improved shipment cadence and potential working capital release through 2023 .
  • 2023 guide (low single-digit organic CC growth) is conservative; FX tailwind (+1ppt), disciplined opex, and capex investments position GGG for steady EPS progression within its niche markets .
  • Watch semiconductors: fab investments and adjacencies (heaters/fittings) sustain Process strength; any capex cuts could modestly temper growth but backlog provides visibility .
  • Monitor EMEA energy/pricing: improving backdrop reduces risk to Industrial demand; any reversal in energy prices or FX could reintroduce margin pressure .
  • M&A optionality and proactive pipeline building may augment growth and leverage GGG’s manufacturing/channel strengths over the medium term .

Appendix: Additional Data Points

  • Q4 FX impacts: Sales -$23M; Net earnings -$12M .
  • Q4 opex: Down $10M (~7%) YoY; leverage offset lower gross margin rate .
  • Full-year cash from operations: $377.4M; capex $201.2M; share repurchases $233.4M; dividends paid $142.1M .
  • Segment opex margin rates: Industrial 37% vs 35% prior year; Process 25% vs 23%; Contractor 25% vs 27% .