Strong Sales Growth in All Segments and
Regions
Graco Inc. (NYSE: GGG) today announced results for the
third quarter and nine months ended September 29, 2017.
Summary
$ in millions except per share amounts
Three Months Ended Nine Months Ended
Sep 29, Sep 23, % Sep 29,
Sep 23, % 2017 2016 Change 2017 2016 Change Net Sales
$ 379.8 $ 327.2 16 % $ 1,099.9 $ 980.2 12 % Operating Earnings 99.6
81.5 22 % 284.2 220.8 29 % Net Earnings 75.5 54.4 39 % 216.0 144.9
49 %
Diluted Net Earnings per Common Share
$ 1.30 $ 0.95 37 % $ 3.73 $ 2.55 46 % Diluted Net Earnings per
Common Share, adjusted (1) $ 1.15 $ 0.95 21 % $ 3.28 $ 2.55 29 %
(1)
Excludes the reduction of income taxes resulting from a
required change in accounting for excess tax benefits on stock
option exercises. Also excludes the effect of tax planning benefits
realized in the third quarter of 2017. See Financial Results
Adjusted for Comparability below for a reconciliation of the
adjusted non-GAAP financial measures to GAAP.
- All segments and regions had
double-digit percentage sales growth for the quarter and year to
date.
- Gross margin rate declined slightly in
the third quarter compared to the prior year, with favorable
price-cost dynamics more than offset by the impacts of project
sales and product mix.
- Sales growth and operating expense
leverage drove operating earnings increases of 22 percent for the
quarter and 29 percent for the year to date.
- Diluted earnings per share include
$0.06 for the quarter and $0.36 for the year to date from a
required change in accounting for stock compensation.
- Diluted earnings per share for the
quarter and year to date include $0.09 related to tax planning
benefits that will not recur in 2018.
“For the third consecutive quarter Graco posted double-digit
sales growth on an organic, constant currency basis, achieving new
Company sales records for both the quarter and year to date. This
also marks the third consecutive quarter where we have achieved
growth in every region and reportable segment," said Patrick J.
McHale, Graco's President and CEO. “Overall Company profitability
trends remained solid in the third quarter, similar to the first
half results, reflecting strong operating expense leverage on the
double-digit sales increase.”
Consolidated Results
Sales for the quarter increased 16 percent, with increases of 12
percent in the Americas, 18 percent in EMEA (14 percent at
consistent translation rates) and 27 percent in Asia Pacific (28
percent at consistent translation rates). Sales for the year to
date increased 12 percent, with increases of 11 percent in the
Americas, 10 percent in EMEA (12 percent at consistent translation
rates) and 18 percent in Asia Pacific (20 percent at consistent
translation rates).
Changes in currency translation rates increased sales by
approximately $3 million (1 percentage point) for the quarter and
decreased sales by approximately $6 million (1 percentage point)
for the year to date.
Gross profit margin rate decreased by one-half percentage point
for the quarter and increased one-half percentage point for the
year to date. Favorable effects from higher production volume and
realized pricing were offset in varying degrees for the quarter and
the year to date by the unfavorable impact of product mix.
Total operating expenses for the quarter increased $9 million (9
percent) compared to the third quarter last year. More than half of
the increase was from increases in sales and earnings-based
incentives and unallocated corporate operating expense (mostly from
market-based stock compensation and pension costs). Year-to-date
operating expenses increased $6 million (2 percent). Volume and
rate-related increases were partially offset by a $3 million
decrease in amortization expense and the impact of currency
translation.
The effective income tax rate for the quarter was 22 percent,
down from 29 percent last year. The effective income tax rate for
the year to date was 21 percent, down from 30 percent last year.
Adoption of a new accounting standard, requiring excess tax
benefits related to stock option exercises to be credited to the
income tax provision (formerly credited to equity), reduced the tax
provision by $3.2 million for the quarter and $20.5 million for the
year to date, decreasing the effective tax rate for the quarter and
year to date by 3 and 7 percentage points, respectively. The
effective tax rates for both the quarter and year to date were
further reduced by the impacts of tax planning that will not recur
in 2018 and foreign earnings taxed at lower rates than the U.S.
Segment Results
Certain measurements of segment operations are summarized
below:
Three Months Ended Nine Months Ended
Industrial Process Contractor
Industrial Process Contractor Net Sales
(in millions) $ 178.5 $ 73.7 $ 127.7 $ 509.7 $ 217.1 $ 373.1
Percentage change from last year Sales 18 % 10 % 17 % 12 % 11 % 13
% Operating earnings 22 % 16 % 31 % 20 % 54 % 30 % Operating
earnings as a percentage of sales
2017
35 % 16 % 26 % 35 % 18 % 25 %
2016
34 % 15 % 23 % 32 % 13 % 22 %
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months Ended Nine Months Ended
Volumeand Price
Acquisitions Currency
Total
Volumeand Price
Acquisitions Currency
Total Americas 11 % 1 % 0 % 12 % 9 % 0 % 0 % 9 % EMEA 13 % 0 % 5 %
18 % 10 % 0 % (1 )% 9 % Asia Pacific 30 % 1 % (1 )% 30 % 22 % 1 %
(3 )% 20 % Consolidated 17 % 0 % 1 % 18 % 12 % 1 % (1 )% 12 %
Sales increased in all Industrial segment product applications.
Year-to-date operating margin rate for the Industrial segment
increased 3 percentage points compared to last year. Favorable
effects of higher sales volume and expense leverage were partially
offset by the unfavorable effect of currency translation.
Components of net sales change by geographic region for the
Process segment were as follows:
Three Months Ended Nine Months Ended
Volumeand Price
Acquisitions Currency
Total
Volumeand Price
Acquisitions Currency
Total Americas 11 % 0 % 0 % 11 % 12 % 0 % 0 % 12 % EMEA (3 )% 0 % 1
% (2 )% 7 % 0 % (4 )% 3 % Asia Pacific 17 % 0 % 0 % 17 % 17 % 0 %
(1 )% 16 % Consolidated 9 % 0 % 1 % 10 % 12 % 0 % (1 )% 11 %
The Process segment had solid sales growth in legacy product
applications, partially offset by the effects of continued weakness
in Oil and Natural Gas. Year-to-date operating margin rates for
this segment increased 5 percentage points compared to last year
due to higher sales volume, favorable expense leverage and a
decrease in intangible amortization related to the impairment
recorded in the fourth quarter of 2016.
Components of net sales change by geographic region for the
Contractor segment were as follows:
Three Months Ended Nine Months Ended
Volumeand Price
Acquisitions Currency
Total
Volumeand Price
Acquisitions Currency
Total Americas 12 % 0 % 0 % 12 % 12 % 0 % 0 % 12 % EMEA 29 % 0 % 5
% 34 % 20 % 0 % (1 )% 19 % Asia Pacific 30 % 0 % 1 % 31 % 13 % 0 %
0 % 13 % Consolidated 16 % 0 % 1 % 17 % 13 % 0 % 0 % 13 %
Contractor segment sales increased in all channels. Operating
margin rates for both the quarter and the year to date for the
Contractor segment increased 3 percentage points compared to last
year due to higher sales volume, improved gross margin rate and
favorable expense leverage.
Outlook
“Demand levels remained robust and broad based in the third
quarter,” said McHale. “We expect the positive business environment
to continue into 2018, however we do note that our fourth quarter
represents our most difficult comparable of the year. In addition
to the strong fourth quarter last year, we also had 14 weeks
compared to only 13 weeks in this year's fourth quarter. Just given
the math, we anticipate low single-digit organic, constant currency
growth in the fourth quarter. With that outlook we have the
possibility to achieve double-digit sales growth for the full year
2017. I'd like to thank our employees, suppliers, distributor
partners and end customers for their contribution to our strong
2017 results. We will continue to invest in our core growth
strategies as we finish the year, and will be working hard to get
2018 off to a good start."
Financial Results Adjusted for Comparability
Adoption of a new stock compensation accounting standard and
recognition of certain tax planning benefits in 2017 created large
fluctuations in financial results compared to prior periods.
Excluding the excess tax benefits on exercised stock options and
other tax planning benefits recognized as reductions of income
taxes in 2017 presents a more consistent comparison of financial
results. A calculation of the non-GAAP measurements of adjusted
income taxes, net earnings and diluted earnings per share follows
(in millions except per share amounts):
Three Months Ended Nine Months Ended
Sep 29, Sep 23, Sep 29, Sep 23, 2017
2016 2017 2016 Income taxes, as reported $ 20.9 $ 22.2 $ 57.6 $
62.7 Excess tax benefit from option exercises 3.2 — 20.5 — Tax
planning benefit 5.5 — 5.5 — Income
taxes, adjusted $ 29.6 $ 22.2 $ 83.6 $ 62.7
Effective income tax rate As reported 22 % 29 % 21 %
30 % Adjusted 31 % 29 % 31 % 30 % Net Earnings, as reported
$ 75.5 $ 54.4 $ 216.0 $ 144.9 Excess tax benefit from option
exercises (3.2 ) — (20.5 ) — Tax planning benefit (5.5 ) —
(5.5 ) — Net Earnings, adjusted $ 66.8 $ 54.4
$ 190.0 $ 144.9 Weighted Average Diluted
Shares 58.2 57.0 57.9 56.9 Diluted Earnings per Share As reported $
1.30 $ 0.95 $ 3.73 $ 2.55 Adjusted $ 1.15 $ 0.95 $ 3.28 $ 2.55
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, Form 10-Qs and Form 8-Ks, and
other disclosures, including our 2016 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 and trade 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; the
possibility of asset impairments if acquired businesses do not meet
performance expectations; 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, automotive, mining and
oil and natural gas industries; our ability to attract, develop and
retain qualified personnel; and catastrophic events. Please refer
to Item 1A of our Annual Report on Form 10-K for fiscal year 2016
(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 26, 2017, at 11 a.m. ET, 10 a.m. CT, 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 2 p.m. ET on October 27, 2017,
by dialing 888-203-1112, Conference ID #9177064, 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 30, 2017.
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
STATEMENTS OF EARNINGS (Unaudited)
(In thousands except per share
amounts)
Three Months Ended Nine Months Ended
Sep 29, Sep 23, Sep 29, Sep 23, 2017
2016 2017 2016 Net Sales $ 379,812 $ 327,192 $ 1,099,885 $ 980,230
Cost of products sold 176,347 150,594 507,206
456,695 Gross Profit 203,465 176,598 592,679 523,535 Product
development 14,815 14,671 44,215 44,964 Selling, marketing and
distribution 57,941 49,269 168,912 158,106 General and
administrative 31,072 31,194 95,325 99,710
Operating Earnings 99,637 81,464 284,227 220,755 Interest
expense 3,901 4,432 12,110 13,468 Other expense (income), net (656
) 416 (1,454 ) (338 ) Earnings Before Income Taxes 96,392
76,616 273,571 207,625 Income taxes 20,932 22,228
57,551 62,738 Net Earnings $ 75,460 $ 54,388
$ 216,020 $ 144,887 Net Earnings per Common
Share Basic $ 1.35 $ 0.98 $ 3.87 $ 2.61 Diluted $ 1.30 $ 0.95 $
3.73 $ 2.55 Weighted Average Number of Shares Basic 56,023 55,684
55,864 55,571 Diluted 58,204 56,969 57,948 56,906
SEGMENT INFORMATION (Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
Sep 29, Sep 23, Sep 29, Sep 23, 2017
2016 2017 2016 Net Sales Industrial $ 178,461 $ 150,893 $ 509,719 $
454,978 Process 73,656 67,077 217,084 196,068 Contractor 127,695
109,222 373,082 329,184 Total $ 379,812
$ 327,192 $ 1,099,885 $ 980,230
Operating Earnings Industrial $ 61,790 $ 50,573 $ 177,121 $ 147,419
Process 12,088 10,394 38,969 25,305 Contractor 33,471 25,593 93,249
71,700 Unallocated corporate (expense) (7,712 ) (5,096 ) (25,112 )
(23,669 ) Total $ 99,637 $ 81,464 $ 284,227 $
220,755
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/20171025006243/en/
Graco Inc.Financial Contact:Christian Rothe,
612-623-6205orMedia Contact:Charlotte Boyd,
612-623-6153Charlotte_M_Boyd@graco.com
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