Organic Growth and Acquisitions Drive Sales
Increases
Graco Inc. (NYSE:GGG) today announced results for the
quarter and nine months ended September 25, 2015.
Summary
$ in millions except per share amounts
Thirteen Weeks Ended
Thirty-nine Weeks Ended
Sep 25,
Sep 26,
Sep 25,
Sep 26,
2015 2014 % Change 2015
2014 % Change Net Sales $ 319.0 $ 302.6 5
%
$ 960.9 $ 915.1 5
%
Operating Earnings 76.9 78.9 (3
)%
226.0 239.5 (6
)%
Net Earnings 50.7 59.6 (15
)%
292.2 176.5 66
%
Diluted Net Earnings per Common Share
$ 0.86 $ 0.97 (11
)%
$ 4.90 $ 2.85 72
%
- Sales increased 5 percent for both the
quarter and the year-to-date. At consistent translation rates,
sales increased 11 percent for the quarter and 10 percent for the
year-to-date, including growth from acquired operations of 7
percentage points for the quarter and 6 percentage points for the
year-to-date, and 4 percentage points of organic growth for both
the quarter and the year-to-date.
- Changes in currency translation rates
reduced sales by approximately $16 million for the quarter and $46
million for the year-to-date, and decreased net earnings by
approximately $6 million for the quarter and $16 million for the
year-to-date.
- Operating earnings are down mostly due
to the impact of currency translation.
- Non-recurring income tax benefits
increased year-to-date net earnings by a total of $9 million, or
$0.15 per diluted share.
- In April, the Company sold the Liquid
Finishing business assets acquired in 2012. Net earnings include
Liquid Finishing-related after-tax investment income totaling $2
million ($0.02 per diluted share) for the quarter (from
post-closing purchase price adjustments) and $141 million ($2.36
per diluted share) for the year-to-date. Net earnings in 2014
included after-tax Liquid Finishing investment income of $9 million
($0.14 per diluted share) for the quarter and $23 million ($0.38
per diluted share) for the year-to-date.
"Through the third quarter, our expectation of mid-single digit
organic growth on a constant currency basis for the full year 2015
remains intact, with quarterly and year-to-date sales increases at
4 percent," said Patrick J. McHale, Graco's President and CEO.
"Every region of the world achieved constant currency organic sales
growth in the third quarter. The Americas continued its solid
performance, with contributions from both the Contractor and
Industrial segments, while the EMEA and Asia Pacific regions grew
at a low single digit pace. After adjusting for foreign currency
headwinds and acquisitions, the Company's gross margins, operating
margins, and overall profitability were solid."
Consolidated Results
Changes in currency translation rates reduced sales and net
earnings by approximately $16 million and $6 million, respectively,
for the quarter and $46 million and $16 million, respectively for
the year-to-date.
Sales for the quarter increased 5 percent, with increases in all
segments. Sales from operations acquired within the last 12 months
totaled $19 million for the quarter, contributing 7 percentage
points of growth. Organic sales at consistent translation rates
increased 4 percent, with increases of 5 percent in the Americas, 3
percent in EMEA and 3 percent in Asia Pacific.
Year-to-date sales also increased 5 percent, with a 10 percent
increase in the Americas partially offset by a 4 percent decrease
in EMEA. Sales from acquired operations totaled $53 million,
contributing 6 percentage points of growth. Organic sales at
consistent translation rates increased 4 percent, including a 7
percent increase in the Americas and small changes in EMEA
(increase) and Asia Pacific (decrease).
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. Favorable effects of
realized pricing and lower material costs offset the impact of
lower average gross margin rates of acquired operations (including
purchase accounting effects).
Total operating expenses for the quarter were $6 million (7
percent) higher than the third quarter last year. Year-to-date
operating expenses were $24 million (9 percent) higher than last
year. The increases included expenses of acquired operations
totaling $8 million for the quarter and $21 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 $3 million for
the quarter and $6 million year-to-date, mostly from increases in
pension, stock compensation and new central warehouse costs.
Changes in currency translation rates reduced operating expenses by
approximately $4 million for the quarter and $13 million for the
year-to-date.
In April, the Company sold the Liquid Finishing business assets
acquired in 2012. Year-to-date held separate investment income
includes the pre-tax gain on sale of $149 million, net of
transaction and other related expenses, and dividends of $42
million. Net earnings for the quarter include after-tax net gain on
the sale of $2 million ($0.02 per diluted share) from post-closing
purchase price adjustments, and year-to-date after-tax gain and
dividends totaling $141 million ($2.36 per diluted share). Net
earnings in 2014 included after-tax net investment income of $9
million ($0.14 per diluted share) for the quarter and $23 million
($0.38 per diluted share) for the year-to-date. No further Liquid
Finishing dividends will be received.
The effective income tax rate was 31 percent for the quarter, up
from 28 percent last year due to post-tax dividends that reduced
the rate in the third quarter of 2014. The year-to-date effective
income tax rate of 27 percent decreased 2 percentage points
compared to last year. A change in the Company's assertion with
respect to reinvestment of foreign earnings decreased deferred
income taxes related to undistributed foreign earnings by $7
million and reduced the year-to-date effective tax rate compared to
last year. Higher post-tax dividend income and an additional
non-recurring tax benefit of $2 million further reduced the
year-to-date effective tax rate. Those reductions were partially
offset by the tax rate effects of the gain on the sale of the
Liquid Finishing assets.
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 Thirty-nine
Weeks Industrial Process
Contractor Industrial
Process Contractor Net sales (in
millions) $ 152.2 $ 64.7 $ 102.1 $ 448.9 $ 204.3 $ 307.7
Percentage change from last year
Sales 1 % 23
%
3 % (2 )% 27
%
4 % Operating earnings 3 % (14 )% 3 % (3 )% (9 )% 1 %
Operating earnings as a percentage of
sales
2015
33 % 16
%
24 % 32
%
17
%
23 %
2014
33 % 23
%
23 % 32
%
24
%
24 %
Industrial segment sales for the quarter increased 1 percent (8
percent at consistent translation rates). Sales in this segment
increased 7 percent in the Americas, decreased 6 percent in EMEA
(increased 8 percent at consistent translation rates) and were flat
in Asia Pacific (6 percent increase at consistent translation
rates). Year-to-date sales decreased 2 percent, but increased 4
percent at consistent translation rates. Sales increased 4 percent
in the Americas, decreased 12 percent in EMEA (increased 2 percent
at consistent translation rates) and decreased 1 percent in Asia
Pacific (increased 3 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 23 percent (28
percent at consistent translation rates), including double-digit
percentage increases in all regions. Year-to-date sales in this
segment increased 27 percent (32 percent at consistent translation
rates). Sales increases came 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 at consistent translation rates were down 3
percent for the quarter and up 2 percent for 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 increased 3 percent (6
percent at consistent translation rates), with an 8 percent
increase in the Americas partially offset by decreases in EMEA and
Asia Pacific. Year-to-date sales in this segment increased 4
percent (8 percent at consistent translation rates). Sales
increased 11 percent in the Americas, decreased 13 percent in EMEA
(flat at consistent translation rates) and decreased 14 percent in
Asia Pacific (8 percent at consistent translation rates). Operating
margin rate for the quarter was substantially consistent with the
comparable period last year, with unfavorable effects of foreign
currency translation offset by volume leverage. 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.
Post-closing purchase price adjustments settled in the third
quarter of 2015. The $149 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. There was no dividend income in the third
quarter of 2015 compared to $9 million in 2014. Year-to-date
dividend income was $42 million in 2015 and $24 million in 2014.
Results excluding Liquid Finishing investment income and expense
are a more meaningful 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
Thirty-nine Weeks Ended Sep 25, 2015
Sep 26, 2014 Sep 25, 2015 Sep 26,
2014 Net Earnings, as reported $ 50.7 $ 59.6 $ 292.2 $
176.5 Held separate investment (income), net (2.4 ) (8.5 ) (190.7 )
(22.8 ) Income tax effect 0.8 (0.2 )
49.7 (0.5 ) Net Earnings, adjusted $ 49.1 $ 50.9
$ 151.2 $ 153.2 Diluted earnings per
share As reported $ 0.86 $ 0.97 $ 4.90 $ 2.85 Adjusted $ 0.84 $
0.83 $ 2.54 $ 2.47
Outlook
"We remain focused on achieving mid-single digit organic sales
growth on a constant currency basis worldwide in 2015, as well as
growth in all geographic regions and reportable segments for the
full year 2015," said McHale. "We continue to experience solid
demand in our Contractor Americas business, reflecting the ongoing
recovery in the U.S. residential and non-residential construction
markets. While our worldwide thesis remains intact for the full
year, recent demand trends combined with macroeconomic headwinds
and a continued spotty capital equipment environment in the
emerging markets of EMEA and Asia Pacific may limit growth to the
lower end of our expectations, as evidenced by our 4 percent growth
year-to-date. 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 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 22, 2015, at 10:00 a.m. CT, 11:00 a.m. ET, 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 1:00 p.m. CT on October 22,
2015, by dialing 888-203-1112, Conference ID #263158, 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 26, 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 Thirty-nine
Weeks Ended
(in thousands, except per share
amounts)
Sep 25, Sep 26, Sep 25, Sep 26,
2015 2014 2015 2014 Net Sales $ 318,986 $ 302,614 $ 960,928 $
915,125 Cost of products sold 148,790 136,800
447,980 413,149 Gross Profit
170,196 165,814 512,948 501,976 Product development 14,783 13,785
44,980 40,349 Selling, marketing and distribution 48,374 47,466
149,924 143,311 General and administrative 30,112
25,656 91,995 78,856
Operating Earnings 76,927 78,907 226,049 239,460 Interest expense
4,025 4,566 13,453 13,830 Held separate investment (income), net
(2,388 ) (8,520 ) (190,744 ) (22,757 ) Other expense (income), net
1,389 310 1,661
355 Earnings Before Income Taxes 73,901 82,551 401,679
248,032 Income taxes 23,210 23,000
109,510 71,500 Net Earnings $ 50,691
$ 59,551 $ 292,169 $ 176,532
Net
Earnings per Common Share Basic $ 0.88 $ 0.99 $ 5.02 $ 2.92
Diluted $ 0.86 $ 0.97 $ 4.90 $ 2.85
Weighted Average Number of
Shares Basic 57,325 59,928 58,180 60,401 Diluted 58,664 61,542
59,590 62,003
Segment Information (Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended Sep 25, Sep 26,
Sep 25, Sep 26, 2015 2014 2015 2014
Net Sales Industrial $
152,164 $ 150,481 $ 448,932 $ 459,105 Process 64,710 52,719 204,337
160,579 Contractor 102,112 99,414
307,659 295,441
Total $ 318,986
$ 302,614 $ 960,928 $ 915,125
Operating Earnings Industrial $ 50,822 $ 49,167 $ 144,500 $
149,164 Process 10,437 12,161 34,923 38,376 Contractor 24,135
23,358 70,550 69,897 Unallocated corporate (expense) (8,467
) (5,779 ) (23,924 ) (17,977 )
Total $
76,927 $ 78,907 $ 226,049 $ 239,460
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.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20151021006537/en/
Graco Inc.Financial Contact:Christian Rothe,
612-623-6205orMedia Contact:Bryce Hallowell,
612-623-6679bhallowell@graco.com
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