Sales Growth for the Quarter in All Segments
and Regions
Graco Inc. (NYSE: GGG) today announced results for the
quarter and six months ended June 27, 2014.
Summary
$ in millions except per share amounts
Thirteen Weeks Ended
Twenty-six Weeks Ended June 27, June
28, % June 27,
June 28, % 2014 2013
Change 2014 2013 Change Net
Sales $ 322.5 $ 286.0 13 % $ 612.5 $ 555.1 10 % Operating Earnings
85.8 75.2 14 % 160.6 146.7 9 % Net Earnings 66.2 57.8 15 % 117.0
110.0 6 %
Diluted Net Earnings per Common Share
$ 1.07 $ 0.92 16 % $ 1.88 $ 1.76 7 %
- Sales for the quarter increased in all
reportable segments and regions, with double-digit percentage
growth in Industrial and Contractor segments.
- Gross margin rates were slightly lower
than last year due to changes in product mix and lower margins from
acquired operations.
- Expense leverage offset the effects of
lower gross margin rates on operating earnings.
- In the first 6 months of the year, the
Company used $65 million cash to acquire a business and returned
$127 million to investors through dividends and Company stock
repurchases.
"Demand levels around the world firmed in the second quarter, as
we experienced solid growth in all segments and geographies," said
Patrick J. McHale, Graco's President and CEO. "Contractor segment
sales increased double-digits, led by the continued recovery in the
U.S. construction sector and an improved professional painting
market throughout the EMEA region. The Industrial segment posted
organic sales growth in the mid-single digits in all regions and
showed growth in every product category, reflecting a broad base of
activity levels. Industrial lubrication product demand was the
primary driver of the Lubrication segment's high single-digit sales
growth in the second quarter. Recent acquisitions and strategic
investments in regional and product expansion had a slightly
dilutive impact on operating margins, but we believe returns on
these investments will contribute to Graco's growth in the quarters
and years to come."
Consolidated Results
Sales for the quarter increased 13 percent, including increases
of 15 percent in the Americas, 12 percent in EMEA (8 percent at
consistent translation rates) and 7 percent in Asia Pacific.
Year-to-date sales increased 10 percent, including increases of 15
percent in the Americas and 10 percent in EMEA (6 percent at
consistent translation rates). Sales were flat in Asia Pacific.
Sales from operations acquired in the fourth quarter of 2013 and
the first quarter of 2014 totaled $10 million for the quarter
(contributing 4 percentage points of growth) and $17 million
year-to-date (3 percentage points of growth).
Gross profit margin, expressed as a percentage of sales, was 55
percent for both the quarter and year-to-date, down less than one
percentage point from the comparable periods last year. Changes in
product mix and lower margins in acquired operations contributed to
the decrease in both the quarter and year-to-date. Non-recurring
inventory-related purchase accounting effects of $1 million and
lower margins in acquired operations accounted for nearly half of
the year-to-date decrease.
Total operating expenses for the quarter were $7½ million (9
percent) higher than second quarter last year. Year-to-date
operating expenses were $13 million (8 percent) higher than last
year. Expenses of acquired operations and spending on regional and
product growth initiatives accounted for more than half of the
increase for both the quarter and year-to-date. As a percentage of
sales, total operating expenses for the quarter were 28 percent,
down 1 percentage point from the second quarter last year and
year-to-date operating expenses were down by one-half percentage
point.
Other expense (income) included dividends received from the
Liquid Finishing businesses that are held separate from the
Company’s other businesses. Such dividends totaled $11 million for
the quarter and $15 million year-to-date, consistent with the
comparable periods of last year.
The effective income tax rate of 28 percent for the quarter was
1 percentage point lower than the comparable period last year. The
decrease resulted from higher foreign earnings that are taxed at
lower rates than in the U.S., partially offset by the impact of the
federal R&D credit not being renewed for 2014. The effective
year-to-date income tax rate of 29 percent was 1 percentage point
higher than last year. Last year’s rate included the favorable
impact of the R&D credit that was renewed in 2013 retroactive
to the beginning of 2012. The increase in the effective rate as a
result of the expiration of the R&D credit for 2014 was
partially offset by the impacts of higher foreign earnings taxed at
lower rates than in the U.S. and additional benefit from U.S.
business deductions.
Segment Results
Certain measurements of segment operations
are summarized below:
Thirteen Weeks Twenty-six
Weeks Industrial Contractor
Lubrication Industrial
Contractor Lubrication Net sales
(in millions) $ 181.8 $ 111.1 $ 29.7 $ 358.2 $ 196.0 $ 58.3
Percentage change from last year
Sales 14 % 13 % 7 % 11 % 11 % 6 % Operating earnings 12 % 16 % 4 %
6 % 14 % 14 %
Operating earnings as a percentage of
sales
2014
32 % 25 % 23 % 31 % 24 % 23 %
2013
32 % 25 % 24 % 33 % 23 % 21 %
Industrial segment sales for the quarter increased 14 percent,
with increases of 18 percent in the Americas, 12 percent in EMEA (7
percent at consistent translation rates) and 8 percent in Asia
Pacific. Year-to-date sales increased 11 percent with increases in
the Americas and EMEA and a small decrease in Asia Pacific. First
half results included the operations of QED Environmental Systems,
acquired at the beginning of fiscal 2014, and EcoQuip, acquired at
the end of fiscal 2013. Acquired operations contributed $10 million
to sales in this segment for the quarter and $17 million
year-to-date (6 percentage points of growth for the quarter and 5
percentage points for the year-to-date). Year-to-date operating
margin rate for the Industrial segment decreased compared to last
year due to lower margins on acquired operations, including the
impact of non-recurring acquisition-related inventory valuation
adjustments, and other investments in regional and product
expansion.
Contractor segment sales for the quarter increased 13 percent,
including increases of 13 percent in the Americas, 18 percent in
EMEA (14 percent at consistent translation rates) and 1 percent in
Asia Pacific. Year-to-date sales increased 11 percent with strong
increases in the Americas and EMEA. Operating margin rates in the
Contractor segment were slightly higher than the rates for the
comparable periods last year. The favorable effects of higher sales
volume and expense leverage were partially offset by unfavorable
effects of product mix.
Lubrication segment sales increased 7 percent for the quarter
and 6 percent year-to-date, mostly from increases in the Americas.
Higher sales volume, improved gross margin rate and expense
leverage led to a higher year-to-date operating margin rate in the
Lubrication segment.
Acquisition in 2012
On April 2, 2012, the Company completed the purchase of the
finishing businesses of Illinois Tool Works Inc. The acquisition
included Powder Finishing and Liquid Finishing equipment
operations, technologies and brands. Results of the Powder
Finishing business have been included in the Industrial segment
since the date of acquisition.
Pursuant to a March 2012 order, the Liquid Finishing businesses
were to be held separate from the rest of Graco’s businesses while
the United States Federal Trade Commission (“FTC”) considered a
settlement with Graco and determined which portions of the Liquid
Finishing business Graco must divest.
In May 2012, the FTC issued a proposed decision and order which
requires Graco to sell the Liquid Finishing business assets,
including certain business activities related to the development,
manufacture, and sale of products under the Binks®, DeVilbiss®,
Ransburg® and BGK® brand names, no later than 180 days from the
date the order becomes final. The FTC continues to work on
resolving issues related to a proposed final decision and
order.
The Company has retained the services of an investment bank to
help it market the Liquid Finishing businesses and identify
potential buyers. While it seeks a buyer, Graco must continue to
hold the Liquid Finishing business assets separate from its other
businesses and maintain them as viable and competitive.
The Company does not control the Liquid Finishing businesses,
nor is it able to exert influence over those businesses.
Consequently, the Company’s investment in the shares of the Liquid
Finishing businesses has been reflected as a cost-method
investment, and its financial results have not been consolidated
with those of the Company. Income is recognized based on dividends
received from current earnings and is included in other income.
Once the FTC issues its final decision and order, and the Company
completes the sale of its investment, there will be no further
dividends from Liquid Finishing.
The Liquid Finishing businesses generated sales of $69 million
and EBITDA of $15 million in the second quarter of 2014.
Outlook
"After a solid first half of 2014, we are well positioned to
achieve full-year growth in all segments and geographies," stated
Mr. McHale. "Our Contractor segment is poised to continue low
double-digit growth in the Americas, benefitting from the recovery
in the U.S. construction market. Stable macroeconomic conditions in
developed economies and firming demand levels in the emerging
markets of EMEA and China may provide upside to our outlook for
mid-single-digit organic growth for the second half 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, our Form 10-Qs and Form 8-Ks,
and other disclosures, including our 2013 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: changes in laws and regulations;
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; whether we are able to effectively
complete a divestiture of the acquired Liquid Finishing businesses,
which has not been completed and remains subject to FTC approval;
political instability; new entrants who copy our products or
infringe on our intellectual property; supply interruptions or
delays; risks incident to conducting business internationally; the
ability to meet our customers’ needs and changes in product demand;
results of and costs associated with, litigation, administrative
proceedings and regulatory reviews incident to our business;
compliance with anti-corruption laws; the possibility of decline in
purchases from few large customers of the Contractor segment;
variations in activity in the construction and automotive
industries; security breaches and natural disasters. Please refer
to Item 1A of our Annual Report on Form 10-K for fiscal year 2013
(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/ir 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 24, 2014, at 10:00 a.m. CT, 11:00 a.m. ET, to discuss Graco’s
second 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/ir. 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 1:00 p.m. CT on July 24, 2014,
by dialing 888-203-1112, Conference ID #1832522, 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 July 28, 2014.
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
coating 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/ir.
GRACO INC. AND SUBSIDIARIES Consolidated Statement
of Earnings (Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
(in thousands, except per share amounts) June 27, June 28, June 27,
June 28, 2014 2013 2014 2013
Net Sales $ 322,549 $ 286,020 $
612,511 $ 555,066 Cost of products sold 145,699
127,281 276,349 245,683
Gross Profit 176,850 158,739 336,162 309,383 Product
development 13,405 12,467 26,564 24,888 Selling, marketing and
distribution 49,503 44,556 95,845 87,910 General and administrative
28,094 26,499 53,200
49,871
Operating Earnings 85,848 75,217
160,553 146,714 Interest expense 4,676 4,625 9,264 9,387 Other
expense (income), net (10,764 ) (10,851 )
(14,192 ) (15,246 )
Earnings Before Income Taxes
91,936 81,443 165,481 152,573 Income taxes 25,700
23,600 48,500 42,600
Net Earnings $ 66,236 $ 57,843 $ 116,981
$ 109,973
Net Earnings per Common Share Basic
$ 1.10 $ 0.94 $ 1.93 $ 1.80 Diluted $ 1.07 $ 0.92 $ 1.88 $ 1.76
Weighted Average Number of Shares Basic 60,453 61,371 60,637
61,166 Diluted 62,028 62,841 62,233 62,624
Segment
Information (Unaudited) Thirteen Weeks Ended Twenty-six
Weeks Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013
Net Sales Industrial $ 181,763 $ 159,671 $ 358,189 $ 323,846
Contractor 111,121 98,498 196,027 176,126 Lubrication 29,665
27,851 58,295 55,094
Total $ 322,549 $ 286,020 $ 612,511
$ 555,066
Operating Earnings Industrial $
57,563 $ 51,530 $ 112,778 $ 106,749 Contractor 28,289 24,479 46,539
40,911 Lubrication 6,901 6,647 13,434 11,788 Unallocated corporate
(expense) (6,905 ) (7,439 ) (12,198 )
(12,734 )
Total $ 85,848 $ 75,217 $ 160,553
$ 146,714 All figures are subject to audit and
adjustment at the end of the fiscal year.
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/ir.
Graco Inc.Financial Contact:James A. Graner,
612-623-6635orMedia Contact:Bryce Hallowell, 612-623-6679
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