Organic Growth and Acquisitions Contribute
to Solid 2015 Performance
Graco Inc. (NYSE: GGG) today announced results for the
quarter and year ended Dec. 25, 2015.
Summary$ in millions except per share amounts
Quarter Ended Year Ended
Dec 25,2015
Dec 26,2014
%Change
Dec 25,2015
Dec 26,2014
%Change
Net Sales $ 325.6 $ 306.0
6 %
$ 1,286.5 $ 1,221.1 5
%
Operating Earnings 76.1 69.5
10 %
302.1 308.9 (2
)%
Net Earnings 53.5 49.0
9 %
345.7 225.6 53
%
Diluted Net Earnings per Common Share
$ 0.94 $ 0.80
18 %
$ 5.86 $ 3.65 61
%
- Sales increased 6 percent for the
quarter and 5 percent for the year. At consistent currency
translation rates, sales increased 10 percent for both the quarter
and the year, including growth from acquired operations of 4
percentage points for the quarter and 6 percentage points for the
year, and organic growth of 6 percentage points for the quarter and
4 percentage points for the year.
- Changes in currency translation rates
reduced sales, operating earnings and net earnings by approximately
$12 million, $7 million and $5 million, respectively, for the
quarter and $58 million, $32 million and $20 million, respectively,
for the year.
- Non-recurring income tax benefits
increased net earnings for the year 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 $1
million ($0.01 per diluted share) for the quarter (from
post-closing adjustments) and $141 million ($2.40 per diluted
share) for the year. Net earnings in 2014 included after-tax Liquid
Finishing investment income of $4 million ($0.05 per diluted share)
for the quarter and $27 million ($0.43 per diluted share) for the
year.
"Graco achieved record performance in 2015 as a result of the
efforts of our employees and channel partners around the world,"
said Patrick J. McHale, Graco's President and CEO. "The fourth
quarter and full year 2015 were Company records for annual and
fourth quarter sales, net income and diluted earnings per share. In
addition, this was the Company's eighteenth consecutive quarter of
record same-quarter sales."
Consolidated Results
Changes in currency translation rates reduced sales by
approximately $12 million for the quarter and $58 million for the
year, and decreased net earnings by approximately $5 million for
the quarter and $20 million for the year.
Sales for the quarter increased 6 percent, with increases in all
segments. Sales from operations acquired within the last 12 months
totaled $13 million for the quarter, contributing 4 percentage
points of growth. Organic sales at consistent translation rates
increased 6 percent, with a 10 percent increase in the Americas,
flat in EMEA and a 1 percent increase in Asia Pacific.
Sales for the year increased 5 percent, including an 11 percent
increase in the Americas, partially offset by a 4 percent decrease
in EMEA. Acquired operations contributed $67 million of incremental
sales, representing 6 percentage points of growth. Organic sales at
consistent translation rates increased 4 percent, driven by a 7
percent increase in the Americas.
Gross profit margin rates for the quarter and year 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.
Total operating expenses for the quarter were flat compared to
the fourth quarter last year and for the year they were $25 million
(7 percent) higher than last year. Expenses of acquired operations
totaled $6 million for the quarter and $27 million for the year.
Spending related to regional and product expansion initiatives
increased expenses for the year by approximately $4 million.
Unallocated corporate expenses for the year increased $5 million,
mostly from increases in pension, stock compensation and central
warehouse costs. Changes in currency translation rates reduced
operating expenses by approximately $3 million for the quarter and
$16 million for the year.
In April, the Company sold the Liquid Finishing business assets
acquired in 2012. Held separate investment income for the year
includes the pre-tax gain on sale of $150 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 $1 million ($0.01 per diluted share) from post-closing
adjustments. Net earnings for the year include after-tax gain and
dividends totaling $141 million ($2.40 per diluted share). Net
earnings in 2014 included after-tax net investment income of $4
million ($0.05 per diluted share) for the quarter and $27 million
($0.43 per diluted share) for the year. No further Liquid Finishing
dividends will be received.
The effective income tax rate of 27 percent for the quarter was
consistent with the fourth quarter rate last year. Favorable
effects of lower tax rates on foreign earnings were offset by the
effect of post-tax dividends received in the fourth quarter of
2014. The federal R&D credit was reinstated in the fourth
quarter and the Company recognized a full-year benefit of $3
million, consistent with the amount recognized in the fourth
quarter of 2014. The effective income tax rate of 27 percent for
the year was one percentage point lower than 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 effective tax rate
for the year. Higher post-tax dividend income, favorable effects of
lower tax rates on foreign earnings, and an additional
non-recurring tax benefit of $2 million further reduced the
effective tax rate for the year. Those reductions were partially
offset by the tax rate effects of the gain on the sale of the
Liquid Finishing business 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:
Quarter Year Industrial
Process Contractor Industrial
Process Contractor
Net sales (in millions) $ 167.1 $ 69.3 $ 89.1 $ 616.1 $ 273.6 $
396.8
Percentage change from last year
Sales
2
%
11 % 11 % (1 )% 23 % 6 %
Operating earnings
5
%
(6 )% 33 % (1 )% (8 )% 6 %
Operating earnings as a percentage of
sales
2015
34
%
13 % 18 % 33 % 16 % 22 %
2014
34
%
15 % 15 % 33 % 21 % 22 %
Industrial segment sales for the quarter increased 2 percent (7
percent at consistent translation rates). Sales in this segment
increased 10 percent in the Americas, decreased 10 percent in EMEA
(1 percent at consistent translation rates) and increased 4 percent
in Asia Pacific (7 percent at consistent translation rates). Sales
for the year decreased 1 percent, but increased 5 percent at
consistent translation rates. Sales increased 6 percent in the
Americas, decreased 12 percent in EMEA (increased 1 percent at
consistent translation rates) and were flat in Asia Pacific
(increased 4 percent at consistent translation rates). Operating
margin rates for the Industrial segment for the quarter and year
were consistent with last year.
Process segment sales for the quarter increased 11 percent (14
percent at consistent translation rates). Sales in this segment
increased 10 percent in the Americas, 14 percent in EMEA and 9
percent in Asia Pacific. Sales for the year in this segment
increased 23 percent (27 percent at consistent translation rates).
Sales increases came from acquired operations including Alco Valves
(acquired in October 2014), White Knight Fluid Handling and High
Pressure Equipment (both acquired in January 2015). Organic sales
at consistent translation rates were down 2 percent for the quarter
and up 1 percent for the year. 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 11 percent
(15 percent at consistent translation rates), with a 20 percent
increase in the Americas partially offset by decreases in EMEA and
Asia Pacific. Sales for the year in this segment increased 6
percent (9 percent at consistent translation rates). Sales
increased 13 percent in the Americas, decreased 10 percent in EMEA
(increased 2 percent at consistent translation rates) and decreased
14 percent in Asia Pacific (9 percent at consistent translation
rates). Operating margin rate for the quarter was 3 percentage
points higher than the comparable period last year due to volume
leverage. Operating margin rate for the year was consistent with
last year, with the unfavorable impact of currency translation
rates offset by volume-related increases.
In April 2015, the Company sold the Liquid Finishing business
assets acquired in 2012 that were held as a cost-method investment.
Post-closing purchase price adjustments were recorded in the third
and fourth quarters of 2015. The $150 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
fourth quarter of 2015 compared to $4 million in 2014. For the
year, dividend income was $42 million in 2015 and $28 million in
2014. Results excluding Liquid Finishing investment income and
expense 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):
Quarter Ended Year Ended
Dec 25,2015
Dec 26,2014
Dec 25,2015
Dec 26,2014
Net Earnings, as reported $ 53.5 $ 49.0 $ 345.7 $ 225.6 Held
separate investment (income), net (0.9 ) (3.2 ) (191.6 ) (26.0 )
Income tax effect 0.3 (0.3 ) 50.2 (0.8 ) Net
Earnings, adjusted $ 52.9 $ 45.5 $ 204.3 $
198.8 Diluted earnings per share As reported $ 0.94 $
0.80 $ 5.86 $ 3.65 Adjusted $ 0.93 $ 0.75 $ 3.46 $ 3.22
Outlook
"Throughout 2015, we were focused on achieving our full-year
outlook of mid-single digit organic sales growth on a constant
currency basis worldwide, as well as growth in all geographic
regions and reportable segments. With the exception of a small
decline in Asia Pacific, we met our 2015 outlook," said McHale.
"During the fourth quarter of 2015 our incoming orders were similar
to the prior year on an organic constant currency basis, reflecting
a sequential weakening in demand growth. We continue to invest for
long-term growth in our new product development, geographic
expansion and market expansion initiatives. As we enter 2016, we
are cautiously optimistic that our growth initiatives and end
market exposure will help us achieve our outlook of low single
digit organic constant currency growth for the first quarter and
low-to-mid single digit growth for the full year 2016. While
worldwide macroeconomic conditions and currency fluctuations remain
a concern, we will drive for growth in every reportable segment and
geography again in 2016. At current exchange rates, unfavorable
changes in foreign currency translation rates create a full-year
headwind of approximately 2 percent on sales and 5 percent on net
income for 2016, with the largest headwind in the first half."
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 10Qs 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 Tuesday,
Jan. 26, 2016, at 10:00 a.m. CT, 11:00 a.m. ET, to discuss Graco’s
fourth 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 on 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 on Graco’s website, or by
telephone beginning at approximately 1:00 p.m. CT on Jan. 26, 2016,
by dialing 888-203-1112, Conference ID #2790548, 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 Jan. 30, 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)
Quarter Ended Year Ended (in thousands, except per
share amounts) Dec 25, Dec 26, Dec 25, Dec 26, 2015
2014 2015 2014 Net Sales $ 325,557 $ 306,005 $ 1,286,485 $
1,221,130 Cost of products sold 153,805 141,245
601,785 554,394 Gross Profit 171,752 164,760 684,700
666,736 Product development 13,579 13,897 58,559 54,246 Selling,
marketing and distribution 51,931 51,440 201,855 194,751 General
and administrative 30,166 29,958 122,161
108,814 Operating Earnings 76,076 69,465 302,125 308,925
Interest expense 4,190 4,903 17,643 18,733 Held separate investment
(income), net (891 ) (3,194 ) (191,635 ) (25,951 ) Other expense
(income), net (257 ) 715 1,404 1,070 Earnings
Before Income Taxes 73,034 67,041 474,713 315,073 Income taxes
19,490 18,000 129,000 89,500 Net
Earnings $ 53,544 $ 49,041 $ 345,713 $ 225,573
Net Earnings per Common Share Basic $ 0.96 $ 0.83 $
6.00 $ 3.75 Diluted $ 0.94 $ 0.80 $ 5.86 $ 3.65
Weighted Average
Number of Shares Basic 55,898 59,388 57,610 60,148 Diluted
57,257 60,973 59,007 61,745
Segment Information (Unaudited)
(In thousands)
Quarter Ended Year Ended Dec 25, Dec 26, Dec 25, Dec 26,
2015 2014 2015 2014
Net Sales Industrial $ 167,137 $ 163,239
$ 616,069 $ 622,343 Process 69,294 62,634 273,631 223,213
Contractor 89,126 80,132 396,785 375,574
Total $ 325,557 $ 306,005 $ 1,286,485
$ 1,221,130
Operating Earnings Industrial $
57,249 $ 54,746 $ 201,749 $ 203,910 Process 8,910 9,454 43,833
47,830 Contractor 15,897 11,995 86,447 81,892 Unallocated corporate
(expense) (5,980 ) (6,730 ) (29,904 ) (24,707 )
Total $
76,076 $ 69,465 $ 302,125 $ 308,925
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
Dec 25, Dec 26, 2015 2014
ASSETS Current
Assets Cash and cash equivalents $ 52,295 $ 23,656 Accounts
receivable, less allowances of $10,400 and $8,100 225,509 214,944
Inventories 202,136 159,797 Investment in businesses held separate
— 421,767 Other current assets 29,077 19,374 Total
current assets 509,017 839,538 Property, Plant and Equipment, net
178,437 161,230 Goodwill 394,488 292,574 Other Intangible Assets,
net 227,987 176,278 Deferred Income Taxes 56,976 48,951 Other
Assets 24,447 26,207 Total Assets $ 1,391,352
$ 1,544,778
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities Notes payable to banks $ 15,901 $ 5,016 Trade
accounts payable 40,505 39,306 Salaries and incentives 44,673
40,775 Dividends payable 18,447 17,790 Other current liabilities
75,090 69,850 Total current liabilities 194,616
172,737 Long-term Debt 392,695 615,000 Retirement Benefits and
Deferred Compensation 137,457 136,812 Deferred Income Taxes 22,303
24,197 Other non-current liabilities 8,730 — Shareholders’ Equity
Common stock 55,766 59,199 Additional paid-in-capital 398,774
384,704 Retained earnings 285,508 252,865 Accumulated other
comprehensive income (loss) (104,497 ) (100,736 ) Total
shareholders’ equity 635,551 596,032 Total
Liabilities and Shareholders’ Equity $ 1,391,352 $ 1,544,778
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Year Ended Dec 25, Dec 26, 2015 2014
Cash Flows
From Operating Activities Net earnings $ 345,713 $ 225,573
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation and amortization 44,607 35,515 Deferred income taxes
(11,585 ) 329 Share-based compensation 19,224 17,249 Excess tax
benefit related to share-based payment arrangements (1,775 ) (6,634
) Gain on sale of business (149,894 ) — Change in Accounts
receivable (18,276 ) (26,557 ) Inventories (34,109 ) (15,079 )
Trade accounts payable 4,305 450 Salaries and incentives (1,385 )
1,520 Retirement benefits and deferred compensation 11,870 5,052
Other accrued liabilities 1,645 6,151 Other (20,701 ) (2,314 ) Net
cash from operating activities 189,639 241,255
Cash Flows From Investing Activities Property, plant and
equipment additions (41,749 ) (30,636 ) Acquisition of businesses,
net of cash acquired (189,017 ) (185,462 ) Investment in businesses
held separate — 530 Proceeds from sale of assets 610,162 —
Investment in restricted assets (9,518 ) — Other 61 (1,163 )
Net cash used in investing activities 369,939 (216,731 )
Cash Flows From Financing Activities Borrowings (payments)
on short-term lines of credit, net 11,216 (4,459 ) Borrowings on
notes and long-term line of credit 720,605 717,845 Payments on
long-term line of credit (942,910 ) (511,215 ) Payments of debt
issuance costs — (890 ) Excess tax benefit related to share-based
payment arrangements 1,775 6,634 Common stock issued 18,835 30,199
Common stock repurchased (274,503 ) (195,326 ) Cash dividends paid
(69,429 ) (66,362 ) Net cash from (used in) financing activities
(534,411 ) (23,574 ) Effect of exchange rate changes on cash 3,472
2,950 Net increase (decrease) in cash and cash
equivalents 28,639 3,900
Cash and Cash Equivalents Beginning
of year 23,656 19,756 End of year $ 52,295 $
23,656
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Graco Inc.Financial Contact:Christian Rothe, 612-623-6205orMedia
Contact:Charlotte Boyd,
612-623-6153Charlotte_M_Boyd@graco.com
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