Divestiture and Investment Income Add More
Than $100 Million to Net Earnings
Graco Inc. (NYSE: GGG) today announced results for the
quarter and six months ended June 26, 2015.
Summary$ in millions except per
share amounts
Thirteen Weeks Ended Twenty-six Weeks
Ended June 26, June 27, %
June 26, June 27, % 2015
2014 Change 2015 2014 Change
Net Sales $ 335.5 $ 322.5 4
%
$ 641.9 $ 612.5 5
%
Operating Earnings 83.9 85.8 (2 )% 149.1 160.6 (7 )% Net Earnings
172.6 66.2 161
%
241.5 117.0 106
%
Diluted Net Earnings per Common Share $ 2.90 $ 1.07 171
%
$ 4.02 $ 1.88 114
%
- In April, the Company sold the Liquid
Finishing business assets acquired in 2012. Net earnings include
after-tax net gain on the sale and other Liquid Finishing
investment income totaling $110 million ($1.85 per diluted share)
for the quarter and $139 million ($2.32 per diluted share) for the
year-to-date. Net earnings in 2014 included after-tax Liquid
Finishing investment income of $11 million ($0.18 per diluted
share) for the quarter and $15 million ($0.23 per diluted share)
for the year-to-date.
- Non-recurring income tax benefits
increased net earnings by a total of $9 million, or $0.15 per
diluted share for both the quarter and the year-to-date.
- Changes in currency translation rates
reduced sales by approximately $17 million for the quarter and $30
million for the year-to-date, and decreased net earnings by
approximately $6 million for the quarter and $10 million for the
year-to-date.
- Year-to-date sales increased 5 percent,
including 4 percentage points of organic sales growth and 6
percentage points of growth from acquired operations, partially
offset by a decrease of 5 percentage points from currency
translation. Components of the 4 percent increase in sales for the
quarter were approximately the same as for the year-to-date
increase.
- Gross margin rates for the quarter and
year-to-date were lower than the comparable periods last year
mostly due to currency translation.
- Year-to-date operating expenses
increased due to expenses of acquired operations, spending related
to regional expansion and product initiatives, and additional
unallocated corporate expenses.
- Year-to-date operating income as a
percentage of sales decreased to 23 percent, 3 percentage points
lower than the comparable period last year. Half of the decrease as
a percentage of sales was from foreign currency translation, with
the remainder related to acquisitions and increases in unallocated
corporate expenses.
"On a constant currency basis, the Company achieved
low-to-mid-single-digit organic sales growth in all reportable
segments and regions during the second quarter," said Patrick J.
McHale, Graco's President and CEO. "Contractor segment sales growth
moderated to a low single-digit pace in the quarter following
significant outperformance in the first quarter of 2015 and against
a strong comparable from 2014. In the EMEA region, on a constant
currency basis, double-digit organic sales growth in the developed
economies in the second quarter was nearly offset by sales declines
in the emerging markets, namely Russia and the Middle East. The
Asia Pacific region grew at a mid-single-digit pace organically in
the quarter, on a constant currency basis, reflecting increased
shipments in all geographies except Southeast Asia and
Australia."
Consolidated Results
Changes in currency translation rates reduced sales and net
earnings by approximately $17 million and $6 million, respectively,
for the quarter and $30 million and $10 million, respectively for
the year-to-date.
Sales for the quarter increased 4 percent, with increases in the
Americas and Asia Pacific partially offset by a decrease in EMEA.
Sales from operations acquired in the fourth quarter of 2014 and
the first half of 2015 totaled $19 million for the quarter,
contributing 6 percentage points of growth. Organic sales at
consistent translation rates increased 3 percent, with increases of
3 percent in the Americas, 1 percent in EMEA and 5 percent in Asia
Pacific.
Year-to-date sales increased 5 percent, with a double digit
percentage increase in the Americas partially offset by decreases
in EMEA and Asia Pacific. Sales from acquired operations totaled
$34 million, contributing 6 percentage points of growth. Organic
sales at consistent translation rates increased 4 percent,
including a 7 percent increase in the Americas, a slight increase
in EMEA and a 2 percent decrease in Asia Pacific.
Gross profit margin rates for the quarter and year-to-date were
lower than rates in the comparable periods last year due mostly to
changes in currency translation rates. Lower average gross margin
rates of acquired operations (including purchase accounting
effects) decreased overall gross margin rates by approximately
one-half percentage point for both the quarter and the
year-to-date.
Total operating expenses for the quarter were $6 million (6
percent) higher than the second quarter last year. Year-to-date
operating expenses were $18 million (10 percent) higher than last
year. The increases included expenses of acquired operations
totaling $7 million for the quarter and $13 million for the
year-to-date. Spending related to regional and product expansion
initiatives increased year-to-date expenses by approximately $3
million. Unallocated corporate expenses increased $1 million for
the quarter and $3 million year-to-date, mostly from increases in
pension, stock compensation and new central warehouse.
In April, the Company sold the Liquid Finishing business assets
acquired in 2012. Held separate investment income includes the net
gain on sale of $147 million and dividends of $12 million for the
quarter and $42 million year-to-date. Net earnings include
after-tax net gain on the sale and dividend income totaling $110
million ($1.85 per diluted share) for the quarter and $139 million
($2.32 per diluted share) for the year-to-date. Net earnings in
2014 included after-tax net investment income of $11 million ($0.18
per diluted share) for the quarter and $15 million ($0.23 per
diluted share) for the year-to-date. No further Liquid Finishing
dividends will be received.
The effective income tax rate was 28 percent for the quarter,
consistent with the comparable period last year, and 26 percent for
the year-to-date, down 3 percentage points compared to last year.
In the second quarter, the Company asserted that it will
indefinitely reinvest earnings of foreign subsidiaries to support
expansion of its international business. The change in assertion
decreased deferred income taxes related to undistributed foreign
earnings by $7 million and reduced the effective tax rate compared
to last year. The tax rate effects of the gain on the sale of the
Liquid Finishing assets offset the effects of the foreign earnings
reinvestment assertion. Higher post-tax dividend income and an
additional non-recurring tax benefit of $2 million further reduced
the year-to-date effective tax rate.
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 our Industrial Products and
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 our Process, Oil and Natural Gas,
and 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 Twenty-six Weeks
Industrial Process Contractor
Industrial Process Contractor
Net sales (in millions) $ 153.5 $ 71.9 $ 110.0 $ 296.8 $
139.6 $ 205.5 Percentage change from last year Sales (2 )% 31
%
(1 )% (4 )% 29
%
5
%
Operating earnings 0
%
3
%
(4 )% (6 )% (7 )% 0
%
Operating earnings as a percentage of sales
2015
33
%
19
%
25
%
32
%
18
%
23
%
2014
33
%
25
%
25
%
32
%
24
%
24
%
Industrial segment sales for the quarter decreased 2 percent,
but increased 4 percent at consistent translation rates. Sales in
this segment increased 3 percent in the Americas, decreased 16
percent in EMEA (2 percent at consistent translation rates) and
increased 7 percent in Asia Pacific (12 percent at consistent
translation rates). Year-to-date sales decreased 4 percent, but
increased 2 percent at consistent translation rates. Sales
increased 3 percent in the Americas, decreased 15 percent in EMEA
(1 percent at consistent translation rates) and decreased 2 percent
in Asia Pacific (increased 2 percent at consistent translation
rates). Operating margin rates for the Industrial segment for the
quarter and year-to-date were consistent with last year.
Process segment sales for the quarter increased 31 percent (36
percent at consistent translation rates), including double-digit
percentage increases in all regions. Year-to-date sales in this
segment increased 29 percent (34 percent at consistent translation
rates). Most of the sales increases were from acquired operations
including Alco Valves (acquired fourth quarter of 2014), White
Knight Fluid Handling and High Pressure Equipment (both acquired in
January 2015). Organic sales growth at consistent translation rates
was 4 percent for both the quarter and the year-to-date. Lower
average profit margins of acquired operations, changes in currency
translation rates and incremental investment in oil and natural gas
products led to decreases in operating margin rates for this
segment.
Contractor segment sales for the quarter decreased 1 percent,
but increased 3 percent at consistent translation rates, mostly in
the Americas. Year-to-date sales in this segment increased 5
percent (9 percent at consistent translation rates). Sales
increased 13 percent in the Americas, decreased 12 percent in EMEA
(but increased 2 percent at consistent translation rates) and
decreased 18 percent in Asia Pacific (15 percent at consistent
translation rates). Operating margin rate for the quarter was
consistent with the comparable period last year. Year-to-date
operating margin rate decreased by one percentage point, mostly due
to changes in currency translation rates and additional marketing
spending, including new product launch costs and other
volume-related increases.
In April 2015, the Company sold the Liquid Finishing assets
acquired in 2012 that were held as a cost-method investment. The
$147 million pre-tax gain on the sale, net of transaction and other
related expenses, was included in investment income in the
Company’s consolidated statements of earnings. Prior to the sale,
income was recognized on dividends received from after-tax earnings
of Liquid Finishing and also included in investment income.
Dividend income for the quarter totaled $12 million in 2015 and $11
million in 2014. Year-to-date dividend income was $42 million in
2015 and $15 million in 2014. 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 Twenty-six Weeks
Ended June 26, June 27, June 26,
June 27, 2015 2014 2015
2014 Net Earnings, as reported $ 172.6 $ 66.2 $ 241.5
$ 117.0 Held separate investment (income), net (158.8 ) (10.6 )
(188.4 ) (14.2 ) Income tax effect 49.1 (0.2 )
48.9 (0.3 ) Net Earnings, adjusted $ 62.9
$ 55.4 $ 102.0 $ 102.5 Diluted
earnings per share As reported $ 2.90 $ 1.07 $ 4.02 $ 1.88 Adjusted
1.05 0.89 1.70 1.65
Outlook
"The Company continues to target mid-single-digit organic sales
growth, on a constant currency basis, and growth in all reportable
segments and regions for the full-year 2015," said McHale. "The
Americas remains our strongest performing region and we are
optimistic Contractor Americas will perform in the second half.
Currency uncertainty and geopolitical instability continue to
generate volatility and present challenges for EMEA and Asia
Pacific growth. 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 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 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,
July 23, 2015, 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 23, 2015,
by dialing 888-203-1112, Conference ID #7932377, 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 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.
GRACO INC. AND SUBSIDIARIES Consolidated Statement
of Earnings (Unaudited) Thirteen
Weeks Ended Twenty-six Weeks Ended (in thousands, except per share
amounts) June 26, June 27, June 26, June 27, 2015 2014 2015 2014
Net Sales $ 335,489 $ 322,549 $ 641,942 $ 612,511 Cost of
products sold 154,866 145,699
299,190 276,349
Gross Profit 180,623
176,850 342,752 336,162 Product development 14,907 13,405 30,197
26,564 Selling, marketing and distribution 50,126 49,503 101,550
95,845 General and administrative 31,699
28,094 61,883 53,200
Operating Earnings 83,891 85,848 149,122 160,553 Interest
expense 4,125 4,676 9,428 9,264 Held separate investment (income),
net (158,833 ) (10,562 ) (188,356 ) (14,237 ) Other expense
(income), net (438 ) (202 ) 272
45 239,037 91,936 327,778 165,481 Income taxes 66,400
25,700 86,300 48,500
$ 172,637 66,236 $ 241,478 $
116,981
Net Earnings per Common Share Basic $
2.96 $ 1.10 $ 4.12 $ 1.93 Diluted $ 2.90 $ 1.07 $ 4.02 $ 1.88
Weighted Average Number of Shares Basic 58,235 60,453 58,608
60,637 Diluted 59,622 62,028 60,044 62,233
Segment
Information (Unaudited) Thirteen Weeks Ended Twenty-six
Weeks Ended June 26, June 27, June 26, June 27, 2015 2014 2015 2014
Net Sales Industrial $ 153,502 $ 156,578 $ 296,768 $ 308,624
Process 71,946 54,850 139,627 107,860 Contractor 110,041
111,121 205,547 196,027
Total $ 335,489 $ 322,549 $ 641,942
$ 612,511
Operating Earnings Industrial $
50,738 $ 50,892 $ 93,678 $ 99,997 Process 13,988 13,572 24,486
26,215 Contractor 27,040 28,289 46,415 46,539 Unallocated corporate
(expense) (7,875 ) (6,905 ) (15,457 )
(12,198 )
Total $ 83,891 $ 85,848 $ 149,122
$ 160,553 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.
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version on businesswire.com: http://www.businesswire.com/news/home/20150722006310/en/
Graco Inc.Financial Contact:James A. Graner, 612-623-6635orMedia
Contact:Bryce Hallowell, 612-623-6679bhallowell@graco.com
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