Sales Growth and Expense Leverage Drove
Earnings Improvement
Prior Year to Date Included Non-Recurring
Gain
Graco Inc. (NYSE: GGG) today announced results for the
quarter and nine months ended September 23, 2016.
Summary
$ in millions except per share amounts
Three Months Ended Nine Months Ended
Sep 23, Sep 25, % Sep 23,
Sep 25, % 2016 2015 Change 2016 2015 Change Net Sales
$ 327.2 $ 319.0 3 % $ 980.2 $ 960.9 2 % Operating Earnings 81.5
76.9 6 % 220.8 226.0
(2
)%
Net Earnings 54.4 50.7 7 % 144.9 292.2
(50
)%
Diluted Net Earnings per Common Share $ 0.95 $ 0.86 10 % $ 2.55 $
4.90
(48
)%
Diluted Net Earnings per Common Share,
adjusted (1)
$ 0.95 $ 0.84 13 % $ 2.55 $ 2.54 0 %
(1) 2015 excludes effect of $2 million for
the quarter and $141 million for the year to date, representing net
investment income from the Liquid Finishing businesses sold in the
second quarter of 2015. See Consolidated Results below for
reconciliation of the adjusted non-GAAP financial measure to
GAAP.
- Sales for the quarter increased 3
percent, including 1 percentage point from acquired operations,
with increases in all regions.
- Net earnings for the quarter increased
7 percent, with improved gross margin rates and favorable expense
leverage.
- Year-to-date net earnings in 2015
included non-recurring income tax benefits totaling $9 million, or
$0.15 per diluted share.
"Solid performance by our Contractor segment was again the
primary driver for Graco's growth in the third quarter, with strong
execution in the Americas and EMEA," said Patrick J. McHale,
Graco's President and CEO. "Industrial segment sales were down
slightly, with strong growth in Asia Pacific offset by declines in
the Americas and EMEA. Oil and gas headwinds in our Process segment
persisted in the quarter, with a year-over-year decline of more
than 20 percent. All other major Process segment product categories
posted growth in the third quarter against an easier comparable and
every Process segment product category grew sequentially from the
second quarter. While macroeconomic conditions worldwide are tepid,
we remain committed to our long-term strategies to drive growth and
sustainable shareholder value."
Consolidated Results
Changes in currency translation rates had no significant effect
on results for the quarter, and decreased year-to-date sales and
net earnings by approximately $9 million and $2 million,
respectively.
Sales for the quarter increased 3 percent, with 2 percent
increases in the Americas and EMEA and a 4 percent increase in Asia
Pacific. Incremental sales from operations acquired within the last
12 months totaled $4 million, contributing 1 percentage point of
growth. Organic sales at consistent translation rates increased 2
percent, with increases in all regions.
Sales for the year to date increased 2 percent, driven by a 6
percent increase in EMEA. Incremental sales from operations
acquired within the last 12 months totaled $15 million,
contributing 2 percentage points of growth. Organic sales at
consistent translation rates increased 1 percent, with increases of
5 percent in EMEA and 2 percent in Asia Pacific.
Gross profit margin rates were slightly higher for the quarter
and flat for the year to date. The favorable effects of realized
pricing and product and channel mix offset the unfavorable impacts
of lower factory volume. Gross margin rate for the year to date
also included the favorable impact of reduced acquisition-related
purchase accounting effects.
Total operating expenses for the quarter were $2 million (2
percent) higher than the third quarter last year, including $2
million of incremental expenses of acquired operations. Unallocated
corporate expenses decreased $3 million, mostly from changes in
market-driven components of pension and stock compensation. Total
operating expenses for the year to date were $16 million (6
percent) higher than the comparable period last year, including $7
million of incremental expenses of acquired operations.
The effective income tax rate for the quarter was 29 percent, 2
percentage points lower than the comparable period last year. The
2016 rate included the impact of the federal R&D credit that
was not available until the fourth quarter of 2015, and the
favorable effect of foreign earnings taxed at lower rates than in
the U.S. The effective rate for the year to date was 30 percent, 3
percentage points higher than the comparable period last year. Last
year's rate included the favorable impact of non-recurring tax
benefits, mostly related to a change in assertion as to
reinvestment of foreign earnings, and the impact of post-tax
dividend income, partially offset by the tax rate effect of the
gain on the sale of the Liquid Finishing assets.
Net earnings in 2015 included net investment income from the
Liquid Finishing businesses sold in the second quarter of 2015.
Results excluding Liquid Finishing investment income and expense
provide a more consistent base of comparison of ongoing financial
results. A calculation of the non-GAAP measurement of net earnings
excluding investment income and expense follows (in millions except
per share amounts):
Three Months Ended Nine Months Ended
Sep 23,
Sep 25,
Sep 23,
Sep 25,
2016 2015 2016 2015 Net Earnings, as reported $ 54.4 $ 50.7 $ 144.9
$ 292.2 Held separate investment (income), net — (2.4 ) — (190.7 )
Income tax effect — 0.8 — 49.7
Net Earnings, adjusted $ 54.4 $ 49.1 $ 144.9 $ 151.2
Diluted earnings per share As reported $ 0.95 $ 0.86
$ 2.55 $ 4.90 Adjusted $ 0.95 $ 0.84 $ 2.55 $ 2.54
Goodwill Impairment Analysis
In 2016, operating results of our Oil and Natural Gas reporting
unit ("ONG") within the Process segment have fallen short of
expectations due to weakness in oil and natural gas markets. After
considering third quarter operating results and preliminary
projections from our 2017 planning process, we concluded that the
depth and length of industry weakness, and its continuing impact on
ONG results, were greater than previously expected. While
management is committed to long-term profitability in ONG, and
believes its investment in facility improvements, manufacturing
capabilities and commercial resources have positioned the unit to
benefit strongly from a recovery when it occurs, we initiated an
impairment analysis at the end of the third quarter. Preliminary
analysis indicated potential impairment of ONG goodwill as of
September 23, 2016. Due to the amount of time and effort
required to determine the implied fair value of ONG goodwill, we
are unable to provide a reasonable estimate or a range of estimates
for the potential non-cash impairment charge at this time. The
carrying value of ONG goodwill was $147 million and the carrying
value of other identifiable intangible assets of ONG totaled $73
million as of September 23, 2016. The valuation to determine
the amount of impairment will be completed in the fourth
quarter.
Segment Results
Certain measurements of segment operations are summarized
below:
Three Months Ended Nine Months Ended
Industrial Process Contractor
Industrial Process Contractor Net sales
(in millions) $ 150.9 $ 67.1 $ 109.2 $ 455.0 $ 196.1 $ 329.2
Percentage change from last year Sales (1 )% 4 % 7 % 1 % (4 )% 7 %
Operating earnings 0 % 0 % 6 % 2 % (28 )% 2 % Operating earnings as
a percentage of sales
2016
34 % 15 % 23 % 32 % 13 % 22 %
2015
33 % 16 % 24 % 32 % 17 % 23 %
Industrial segment sales for the quarter decreased 1 percent. An
increase of 8 percent in Asia Pacific offset decreases of 4 percent
in the Americas and 3 percent in EMEA. Year-to-date sales increased
1 percent (2 percent at consistent translation rates), including
increases of 5 percent in EMEA (6 percent at consistent translation
rates) and 7 percent in Asia Pacific (8 percent at consistent
translation rates), partially offset by a decrease of 4 percent in
the Americas. Operating margin rates for the Industrial segment
were slightly higher than last year.
Process segment sales for the quarter increased 4 percent (5
percent at consistent translation rates), including increases of 5
percent in the Americas and 4 percent in Asia Pacific. Sales were
flat in EMEA, but increased 7 percent at consistent translation
rates. Year-to-date sales in this segment were down 4 percent (3
percent at consistent translation rates), including decreases of 3
percent in the Americas, 4 percent in EMEA (flat at consistent
translation rates) and 8 percent in Asia Pacific (6 percent at
consistent translation rates). Operating margin rate recovered in
the third quarter with higher sales volume and improved gross
margin rate. For the year to date, operating margin rate decreased
compared to last year due to lower sales volume and unfavorable
expense leverage.
Contractor segment sales for the quarter increased 7 percent,
with increases of 7 percent in the Americas and 20 percent in EMEA,
partially offset by a decrease of 11 percent in Asia Pacific.
Year-to-date sales increased 7 percent, with increases of 6 percent
in the Americas and 17 percent in EMEA, partially offset by a 6
percent decrease in Asia Pacific. Operating margin rates decreased
slightly compared to last year due to unfavorable expense leverage
and product and channel mix.
Outlook
"We are holding to our outlook of low single-digit sales growth
for Graco worldwide for the full year 2016," said McHale. "Our
Industrial segment continues to experience a spotty environment for
capital equipment spending worldwide, with ongoing weakness most
notable in the Americas region. Construction activity remains solid
in the EMEA and Americas regions. While our Process segment saw
modest growth sequentially in the third quarter, we are cautious
about ongoing headwinds. Regionally, we anticipate the Americas
region will finish the full year 2016 flat compared with the prior
year, below our prior outlook of low single-digit growth. In the
EMEA region, we reiterate our low-to-mid single-digit growth
expectations for the full year. Our outlook for the Asia Pacific
region continues to be low single-digit growth for 2016. The fourth
quarter of 2015 was our highest growth quarter of the year, with 6
percent growth on an organic, constant currency basis, providing a
difficult comparable for our last quarter of the year."
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 2015 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: our Company’s growth strategies,
which include making acquisitions, investing in new products,
expanding geographically and targeting new industries; economic
conditions in the United States and other major world economies;
changes in currency translation rates; changes in laws and
regulations; compliance with anti-corruption laws; new entrants who
copy our products or infringe on our intellectual property; risks
incident to conducting business internationally; the ability to
meet our customers’ needs and changes in product demand; supply
interruptions or delays; security breaches; 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 as well as
indemnification claims under our asset purchase agreement with
Carlisle Companies Incorporated, Carlisle Fluid Technologies, Inc.,
and Finishing Brands Holdings Inc.; the possibility of decline in
purchases from few large customers of the Contractor segment;
variations in activity in the construction, automotive, mining and
oil and natural gas industries; our ability to attract, develop and
retain qualified personnel; and catastrophic events. Please refer
to Item 1A of our Annual Report on Form 10-K for fiscal year 2015
(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,
October 20, 2016, at 11 a.m. ET, 10 a.m. CT, to discuss Graco’s
third quarter results.
A real-time webcast of the conference call will be broadcast
live over the Internet. Individuals wanting to listen and view
slides can access the call at 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.
For those unable to listen to the live event, a replay will be
available soon after the conference call at Graco’s website, or by
telephone beginning at approximately 2 p.m. ET on October 20, 2016,
by dialing 888-203-1112, Conference ID #5026669, if calling within
the U.S. or Canada. The dial-in number for international
participants is 719-457-0820, with the same Conference ID #. The
replay by telephone will be available through October 24, 2016.
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 or on Twitter
@GracoInc.
GRACO INC. AND SUBSIDIARIES Consolidated Statement
of Earnings
(Unaudited) (In thousands except per share
amounts)
Three Months Ended Nine Months Ended
Sep 23,
Sep 25,
Sep 23,
Sep 25,
2016 2015 2016 2015 Net Sales $ 327,192 $ 318,986 $ 980,230 $
960,928 Cost of products sold 150,594 148,790
456,695 447,980 Gross Profit 176,598
170,196 523,535 512,948 Product development 14,671 14,783 44,964
44,980 Selling, marketing and distribution 49,269 48,374 158,106
149,924 General and administrative 31,194 30,112
99,710 91,995 Operating Earnings
81,464 76,927 220,755 226,049 Interest expense 4,432 4,025 13,468
13,453 Held separate investment (income), net — (2,388 ) — (190,744
) Other expense (income), net 416 1,389
(338 ) 1,661 Earnings Before Income Taxes 76,616
73,901 207,625 401,679 Income taxes 22,228 23,210
62,738 109,510 Net Earnings $
54,388 $ 50,691 $ 144,887 $ 292,169 Net
Earnings per Common Share Basic $ 0.98 $ 0.88 $ 2.61 $ 5.02 Diluted
$ 0.95 $ 0.86 $ 2.55 $ 4.90 Weighted Average Number of Shares Basic
55,684 57,325 55,571 58,180 Diluted 56,969 58,664 56,906 59,590
Segment Information
(Unaudited) (In thousands)
Three Months Ended Nine Months Ended
Sep 23,
Sep 25,
Sep 23,
Sep 25,
2016 2015 2016 2015 Net Sales Industrial $ 150,893 $ 152,164 $
454,978 $ 448,932 Process 67,077 64,710 196,068 204,337 Contractor
109,222 102,112 329,184
307,659 Total $ 327,192 $ 318,986 $
980,230 $ 960,928 Operating Earnings Industrial $
50,573 $ 50,822 $ 147,419 $ 144,500 Process 10,394 10,437 25,305
34,923 Contractor 25,593 24,135 71,700 70,550 Unallocated corporate
(expense) (5,096 ) (8,467 ) (23,669 )
(23,924 ) Total $ 81,464 $ 76,927 $ 220,755 $
226,049
The Consolidated Balance Sheets, Consolidated Statements of Cash
Flows and Management's Discussion and Analysis are available in our
Quarterly Report on Form 10-Q on our website at www.graco.com.
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version on businesswire.com: http://www.businesswire.com/news/home/20161019006344/en/
Graco Inc.Financial Contact:Christian Rothe,
612-623-6205orMedia Contact:Charlotte Boyd,
612-623-6153Charlotte_M_Boyd@graco.com
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