Currency Headwinds, Acquisitions and Growth
Initiatives Reduce Earnings, Offset by Investment Income
Graco Inc. (NYSE: GGG) today announced results for the
first quarter ended March 27, 2015.
Summary$ in millions except per share amounts
Thirteen Weeks Ended March 27, March
28, % 2015 2014 Change
Net Sales $ 306.5 $ 290.0 6
%
Operating Earnings 65.2 74.7 (13 )% Net Earnings 68.8 50.7 36
%
Diluted Net Earnings per Common Share
$ 1.14 $ 0.81 41
%
- Total Company sales increased 6
percent, including 5 percentage points of organic sales growth and
5 percentage points of sales growth from acquired operations,
partially offset by 4 percentage points of currency translation
headwinds.
- Gross margin rate was 2 percentage
points lower than the comparable period last year due to currency
translation (accounting for more than half of the decrease),
purchase accounting and changes in mix.
- Operating income decreased $9½ million
to 21 percent of sales, 5 percentage points lower than the
comparable period last year. The decrease as a percentage of sales
included 2 percentage points from foreign currency headwinds and 1
percentage point related to acquisitions.
- Operating expenses increased $12
million, including $6 million from acquired operations, $2 million
related to regional expansion and product initiatives, $2 million
in Contractor marketing and product launch costs and $2 million
additional unallocated corporate expense (mostly pension, stock
compensation and new central warehouse).
- Dividend income from the Liquid
Finishing businesses increased to $30 million from $4 million
received in the first quarter last year. Subsequent to first
quarter-end, the Company completed the sale of its Liquid Finishing
business assets for $590 million, subject to customary post-closing
adjustments.
"Company sales grew at a mid-single digit pace organically in
the first quarter, on a constant currency basis, consistent with
our outlook," said Patrick J. McHale, Graco's President and CEO.
"Our strongest region remains the Americas, growing at a
double-digit rate in the quarter, led by 27 percent growth in our
Contractor segment. The Contractor business continues to benefit
from the recovery in the U.S. construction market."
"Operating earnings declined in the quarter, reflecting multiple
headwinds," continued McHale. "As expected, unfavorable currency
exchange rates pressured both sales and earnings. During the
quarter, the Contractor segment successfully launched new products,
although associated launch costs held segment incremental margins
in check. In the Industrial segment, sales declines in the EMEA and
Asia Pacific regions resulted in an unfavorable regional sales mix
and decremental margins for the segment. Investment in regional and
product growth initiatives, focused on organic growth in the Oil
& Natural Gas market, continued expansion of our presence in
South & Central America, and a new warehouse in China to
enhance product availability, was a $2 million headwind in the
first quarter."
Consolidated Results
Changes in currency translation rates reduced sales and net
earnings by approximately $13 million and $4 million, respectively,
for the quarter.
Sales increased 6 percent, with a 16 percent increase in the
Americas and decreases of 6 percent in EMEA and 9 percent in Asia
Pacific. Sales from operations acquired in the fourth quarter of
2014 and the first quarter of 2015 totaled $15 million,
contributing 5 percentage points of growth. Organic sales at
consistent translation rates increased 5 percent, with a 12 percent
increase in the Americas, flat in EMEA, and a 10 percent decrease
in Asia Pacific.
Gross profit margin rate was 53 percent, down 2 percentage
points from the comparable period last year. Changes in currency
translation rates accounted for more than half of the decrease.
Effects of purchase accounting totaling approximately $3 million
and changes in mix also contributed to the decrease.
Total operating expenses were $12 million (15 percent) higher
than the comparable period last year. The increase included
expenses of acquired operations totaling $6 million, incremental
spending related to regional expansion and product initiatives of
$2 million, Contractor marketing and new product launch costs of $2
million and additional unallocated corporate expense (mostly
pension, stock compensation and new central warehouse) totaling $2
million.
Held separate investment income, net included dividends received
from the Liquid Finishing businesses that were held separate from
the Company’s other businesses. First quarter dividend income was
$30 million in 2015 and $4 million in 2014.
The effective income tax rate of 22 percent for the quarter was
9 percentage points lower than the comparable period last year,
mostly due to the impact of higher post-tax dividend income.
Change in Financial Reporting Segments
Beginning with the first quarter of 2015 the Company revised the
presentation of its financial reporting segments. Operations of the
Process and the Oil and Natural Gas divisions, historically
included in the Industrial segment, are now aggregated with the
Lubrication division (formerly reported as a separate segment) in
the newly-formed Process segment. This change aligns the types of
products offered and markets served within the segments. Prior year
segment information has been restated to conform to 2015
reporting.
A summary of the Company’s three reportable segments
(Industrial, Process and Contractor) follows.
The Industrial segment includes the Industrial Products and the
Applied Fluid Technologies divisions. The Industrial segment
markets equipment and pre-engineered packages for moving and
applying paints, coatings, sealants, adhesives and other fluids.
Markets served include automotive and vehicle assembly and
components production, wood and metal products, rail, marine,
aerospace, farm, construction, bus, recreational vehicles, and
various other industries.
The Process segment includes the Process, the Oil and Natural
Gas, and the Lubrication divisions. The Process segment markets
pumps, valves, meters and accessories to move and dispense
chemicals, oil and natural gas, water, waste water, petroleum,
food, lubricants and other fluids. Markets served include food and
beverage, dairy, oil and natural gas, pharmaceutical, cosmetics,
electronics, waste water, mining, fast oil change facilities,
service garages, fleet service centers, automobile dealerships and
industrial lubrication applications.
The Contractor segment remains unchanged. The Contractor segment
markets sprayers for architectural coatings for painting, corrosion
control, texture, and line striping.
Segment Results
Certain measurements of segment operations are summarized
below:
Thirteen Weeks Industrial
Process Contractor Net sales (in
millions) $ 143.3 $ 67.7 $ 95.5 Percentage change from last year
Sales
(6)%
28 %
12 %
Operating earnings (13)% (17)%
6 %
Operating earnings as a percentage of sales 2015
30 %
16 %
20 %
2014
32 %
24 %
21 %
Industrial segment sales decreased 6 percent (1 percent at
consistent translation rates). Sales in this segment increased 3
percent in the Americas and decreased 14 percent in EMEA (1 percent
at consistent translation rates) and 11 percent in Asia Pacific (8
percent at consistent translation rates). Operating margin rate for
the Industrial segment decreased 2 percentage points compared to
last year, driven by changes in currency translation rates and
higher expenses relative to sales.
Process segment sales increased 28 percent (32 percent at
consistent translation rates), including double-digit percentage
increases in all regions. Nearly all of the sales increase was from
acquired operations including Alco Valves (acquired fourth quarter
of 2014), White Knight Fluid Handling and High Pressure Equipment
(both acquired in January 2015). Lower profit margins of acquired
operations, changes in currency translation rates and incremental
investment in oil and natural gas products led to the decrease in
operating margin rate for this segment.
Contractor segment sales increased 12 percent (16 percent at
consistent translation rates). Sales increased 27 percent in the
Americas and decreased 15 percent in EMEA (2 percent at consistent
translation rates) and decreased 26 percent in Asia Pacific (23
percent at consistent translation rates). Operating margin rate in
the Contractor segment decreased by one percentage point mostly due
to changes in currency translation rates and $2 million additional
marketing spending, including new product launch costs and other
volume-related increases.
Subsequent Events
In March 2015, the FTC approved the Company’s application to
sell the Liquid Finishing business assets it acquired in 2012. The
sale was completed on April 1, 2015 in a $590 million cash
transaction, subject to customary post-closing adjustments. The
Company used proceeds from the sale to repay approximately $500
million of debt.
The Liquid Finishing business assets were held separate as a
cost-method investment on Graco’s balance sheet, and income was
recognized based on dividends received from current earnings.
Results excluding Liquid Finishing investment income and expense
are a better measure of the Company’s on-going operations and
provide a more consistent base of comparison to future results. A
calculation of the non-GAAP measurement of net earnings excluding
investment income and expense follows (in millions except per share
amounts):
Thirteen Weeks Ended March 27,
March 28, 2015 2014 Net Earnings $ 68.8
$ 50.7 Held separate investment (income), net (29.7 ) (3.8 )
Adjusted Net Earnings $ 39.1 $
46.9 Diluted earnings per share Including investment
income, net $ 1.14 $ 0.81 Excluding investment income, net 0.65
0.75
Outlook
“We remain committed to achieving mid-single digit organic sales
growth, on a constant currency basis, for the full year 2015 as
well as growth in every reportable segment and geography,” stated
McHale. “Continued investments in our long-term growth initiatives
are a priority in 2015, which support our organic sales growth
expectations but will hamper near-term profitability. Ongoing
currency headwinds and geopolitical instability remain a concern.
At current exchange rates, unfavorable changes in foreign currency
translation rates create a full-year headwind of approximately 5
percent on sales and 11 percent on earnings in 2015.”
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 this Form 10-Q and our Form 10-K and Form
8-Ks, and other disclosures, including our 2014 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; political instability;
results of and costs associated with, litigation, administrative
proceedings and regulatory reviews incident to our business; the
possibility of decline in purchases from few large customers of the
Contractor segment; variations in activity in the construction and
automotive industries; and natural disasters. Please refer to Item
1A of our Annual Report on Form 10-K for fiscal year 2014 (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,
April 23, 2015, at 10:00 a.m. CT, 11:00 a.m. ET, to discuss Graco’s
first 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 April 23,
2015, by dialing 888-203-1112, Conference ID #1366681, 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 April 27, 2015.
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/ir.
GRACO INC. AND SUBSIDIARIES Consolidated Statement of
Earnings (Unaudited) Thirteen Weeks Ended
(in thousands, except per share amounts) March 27, March 28, 2015
2014
Net Sales $ 306,453 $ 289,962 Cost of products sold
144,324 130,650
Gross Profit
162,129 159,312 Product development 15,290 13,159 Selling,
marketing and distribution 51,424 46,342 General and administrative
30,184 25,106
Operating Earnings
65,231 74,705 Interest expense 5,303 4,588 Held separate investment
(income), net (29,523 ) (3,675 ) Other expense (income), net
710 247 88,741 73,545 Income taxes
19,900 22,800 $ 68,841 $ 50,745
Net Earnings per Common Share Basic $ 1.17 $ 0.83
Diluted $ 1.14 $ 0.81
Weighted Average Number of
Shares Basic 58,981 60,822 Diluted 60,465 62,438
Segment Information (Unaudited) Thirteen Weeks Ended
March 27, March 28, 2015 2014
Net Sales Industrial $ 143,266
$ 152,046 Process 67,681 53,010 Contractor 95,506
84,906
Total $ 306,453 $ 289,962
Operating Earnings Industrial $ 42,940 $ 49,105
Process 10,498 12,643 Contractor 19,375 18,250 Unallocated
corporate (expense) (7,582 ) (5,293 )
Total $
65,231 $ 74,705
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, 612-623-6679bhallowell@graco.com
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