Finishes Year with Double-digit Percentage
Annual Sales Growth
Graco Inc. (NYSE: GGG) today announced results for the
fourth quarter and year ended December 29, 2017.
Summary$ in millions except per
share amounts
Three Months Ended Twelve Months Ended
Dec 29,2017
Dec 30,2016
%Change
Dec 29,2017
Dec 30,2016
%Change
Net Sales $ 374.9 $ 349.1 7 % $ 1,474.7 $ 1,329.3 11 % Operating
Earnings 76.2 (106.9 ) 171 % 360.4 113.9 217 % Net Earnings 36.4
(104.2 ) 135 % 252.4 40.7 521 %
Diluted Net Earnings per Common
Share
$ 0.21 $ (0.61 ) 134 % $ 1.45
$ 0.24 504 % Adjusted (non-GAAP)
(1): Operating Earnings, adjusted $ 88.3 $ 85.1 4 % $ 372.5 $ 305.9
22 % Net Earnings, adjusted 59.4 57.2 4 % 249.4 202.1 23 %
Diluted Net Earnings per Common
Share, adjusted
$ 0.34 $ 0.33 3 % $ 1.43 $ 1.18 21 %
(1) Excludes impacts of non-recurring
income tax adjustments, changes in accounting for stock
compensation, and pension restructuring in 2017. Also excludes the
effects of impairment charges recorded in 2016. See Financial
Results Adjusted for Comparability below for a reconciliation of
adjusted non-GAAP financial measures to GAAP.
- Sales for the quarter increased in all
segments and regions. There were 14 weeks in the fiscal fourth
quarter of 2016 compared to 13 weeks in 2017. All segments finished
with double-digit percentage growth for the year.
- Gross margin rates for the quarter and
year remained strong.
- Increases in sales and earnings-based
incentives, spending on growth initiatives and the pension
settlement loss contributed to higher operating expenses in the
fourth quarter of 2017.
- Diluted earnings per share in 2017
include a benefit of $0.09 for the quarter and $0.21 for the year
from a required change in accounting for stock compensation.
- Non-recurring income tax adjustments
reduced diluted earnings per share in 2017 by $0.17 for the quarter
and $0.14 for the year.
- 2016 results included impairment
charges that reduced diluted earnings per share for the quarter and
year by $0.94.
“Outstanding execution throughout 2017 by Graco’s employees,
suppliers, channel partners and end users drove record quarterly
sales in each quarter of 2017 and double-digit growth for the
year,” said Patrick J. McHale, Graco’s President and CEO. “Our
investments in product development, new markets and geographic
expansion are producing nice returns. Contractor segment growth was
particularly strong in the fourth quarter, which resulted in rebate
and growth incentives that pressured gross and operating margins
for the segment as well as an unfavorable mix for the overall
Company in the quarter. The tiers for these incentives are reset at
the beginning of each year based on sales levels achieved in the
prior year and have a history of driving growth, so we are happy to
pay for these programs.”
Consolidated Results
Sales for the quarter increased 7 percent, with increases of 5
percent in the Americas, 11 percent in EMEA (4 percent at
consistent translation rates) and 11 percent in Asia Pacific (9
percent at consistent translation rates). Sales for the year
increased 11 percent, with increases of 9 percent in the Americas,
10 percent in EMEA and 16 percent in Asia Pacific. Changes in
currency translation rates increased sales by approximately $7
million (2 percentage points) for the quarter and did not have a
significant impact on sales for the year.
Gross profit margin rates improved slightly for both the quarter
and the year. Favorable effects from currency translation, higher
production volume and realized pricing were partially offset by the
unfavorable impact of product mix.
The Company restructured its funded U.S. pension plan in 2017.
The restructuring resulted in a $12 million pension settlement loss
that was included in general and administrative expense in the
fourth quarter and reduced diluted earnings per share by $0.04.
Total operating expenses for 2016 included an impairment charge of
$192 million in the fourth quarter.
Total operating expenses for the quarter increased $25 million
(25 percent) compared to the fourth quarter before impairment
charges last year. The increase includes the $12 million pension
settlement loss, $3 million of increases in sales and
earnings-based incentives and $1 million of incremental spending on
growth initiatives. Operating expenses for the year increased $30
million (8 percent), with volume and rate-related increases and the
pension settlement loss accounting for most of the increase.
The effective income tax rate was 51 percent for the quarter and
27 percent for the 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 $16 million for the quarter
and $36 million for the year, decreasing the effective tax rate for
the quarter and year by 21 and 10 percentage points, respectively.
U.S. federal income tax reform legislation passed at the end of
2017 required a revaluation of net deferred tax assets and
instituted a toll charge on unrepatriated foreign earnings that
increased the tax provision by a total of $36 million, increasing
the effective tax rate by 48 percentage points for the quarter and
10 percentage points for the year. Effects of tax planning and
other non-recurring tax changes decreased the effective rate by 6
percentage points for the quarter and 3 percentage points for the
year.
Segment Results
Management assesses performance of segments by reference to
operating earnings excluding unallocated corporate expenses and
asset impairments. For a reconciliation of segment operating
earnings to consolidated operating earnings, refer to the Segment
Information table included in the financial statement section of
this release. Certain measurements of segment operations are
summarized below:
Three Months Ended Twelve Months Ended Industrial
Process Contractor Industrial Process
Contractor Net Sales (in millions) $ 182.3 $ 77.6 $ 115.0 $ 692.0 $
294.7 $ 488.1 Percentage change from last year Sales 4 % 10 % 11 %
10 % 11 % 13 % Operating earnings 1 % 27 % 3 % 15 % 46 % 24 %
Operating earnings as a percentage of
sales
2017
33 % 17 % 18 % 34 % 18 % 23 %
2016
34 % 15 % 19 % 33 % 13 % 21 %
Components of net sales change by
geographic region for the Industrial segment were as follows:
Three Months Ended Twelve Months Ended
Volumeand Price
Acquisitions Currency Total
Volumeand Price
Acquisitions Currency Total Americas (1)% 0%
1% 0% 6% 0% 0% 6% EMEA (2)% 0% 8% 6% 6% 1% 1% 8% Asia Pacific 10%
0% 2% 12% 18% 1% (1)% 18% Consolidated 1% 1% 2% 4% 9% 1% 0% 10%
Industrial segment sales growth in the
fourth quarter was limited by a decline in sales of finishing
systems compared to a record quarter for finishing systems in the
prior year. Increased spending on product and regional growth
initiatives resulted in a 1 percentage point decrease in operating
margin compared to last year. For the year, higher sales volume,
including strong finishing systems growth, and expense leverage
drove a 1 percentage point increase in operating margin rate.
Components of net sales change by
geographic region for the Process segment were as follows:
Three Months Ended Twelve Months Ended
Volumeand Price
Acquisitions Currency Total
Volumeand Price
Acquisitions Currency Total Americas 4% 1% 0% 5% 10% 0% 0% 10% EMEA
14% 1% 5% 20% 9% 0% (2)% 7% Asia Pacific 15% 1% 2% 18% 17% 0% (1)%
16% Consolidated 7% 1% 2% 10% 11% 0% 0% 11%
The Process segment had solid sales growth
for the quarter in all product applications. For the year, legacy
product applications had double-digit percentage growth while Oil
and Natural Gas sales were flat for the year. Operating margin
rates for this segment increased 2 percentage points for the
quarter and 5 percentage points for the year, driven by 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 Twelve Months Ended
Volumeand Price
Acquisitions Currency
Total
Volumeand Price
Acquisitions Currency Total Americas 10% 0% 0% 10% 12% 0% 0% 12%
EMEA 11% 0% 7% 18% 17% 0% 2% 19% Asia Pacific (2)% 0% 2% 0% 9% 0%
0% 9% Consolidated 9% 0% 2% 11% 12% 0% 1% 13%
Contractor segment sales for the quarter and year increased in
all channels. Increases in volume-based customer incentives,
product launch and promotion costs and changes in product mix drove
the operating margin rate for the quarter 1 percentage point lower
than last year. Contractor segment operating margin rate for the
year increased 2 percentage points compared to last year due to
higher sales volume, improved gross margin rate and favorable
expense leverage.
Outlook
“We are initiating an outlook for the full-year 2018 of mid
single-digit growth on an organic, constant currency basis, with
growth expected in every region and reportable segment,” said
McHale. “Demand levels in the fourth quarter remained solid and
provide a foundation for our full-year outlook. While Industrial
segment sales growth in the fourth quarter was low, bookings were
better than billings and indicative of a capital equipment
environment that remains stable-to-improving.”
Financial Results Adjusted for Comparability
There were multiple events in the last two years that caused
significant fluctuations in financial results, including impairment
charges recorded in 2016, changes in accounting for tax benefits
related to stock compensation, federal income tax reform and
pension plan restructuring in 2017. Excluding the impacts of those
events presents a more consistent basis for comparison of financial
results. A calculation of the non-GAAP measurements of adjusted
operating earnings, earnings before income taxes, income taxes,
effective income tax rates, net earnings and diluted earnings per
share follows (in millions except per share amounts):
Three Months Ended Twelve Months Ended
Dec 29,2017
Dec 30,2016 Dec 29,2017 Dec 30,2016 Operating
earnings, as reported $ 76.2 $ (106.9 ) $ 360.4 $ 113.9 Pension
settlement loss 12.1 — 12.1 — Impairment —
192.0 — 192.0 Operating
earnings, adjusted $ 88.3 $ 85.1 $ 372.5 $
305.9 Earnings before income taxes $ 73.5 $ (111.0 )
$ 347.1 $ 96.7 Adjustments 12.1 192.0
12.1 192.0 Earnings before income
taxes, adjusted $ 85.6 $ 81.0 $ 359.2 $ 288.7
Income taxes, as reported $ 37.1 $ (6.8 ) $ 94.7 $
56.0 Excess tax benefit from option exercises 15.8 — 36.3 — Income
tax reform (35.6 ) — (35.6 ) — Other non-recurring tax changes 4.5
— 10.0 — Tax effects of adjustments 4.4 30.6
4.4 30.6 Income taxes, adjusted
$ 26.2 $ 23.8 $ 109.8 $ 86.6
Effective income tax rate As reported 51 % 6 % 27 % 58 % Adjusted
31 % 29 % 31 % 30 % Net Earnings, as reported $ 36.4 $
(104.2 ) $ 252.4 $ 40.7 Impairment, net — 161.4 — 161.4 Pension
settlement loss, net 7.7 — 7.7 — Excess tax benefit from option
exercises (15.8 ) — (36.3 ) — Income tax reform 35.6 — 35.6 — Other
non-recurring tax changes (4.5 ) —
(10.0 ) — Net Earnings, adjusted $ 59.4 $ 57.2
$ 249.4 $ 202.1 Weighted Average
Diluted Shares 175.7 171.3 174.3 170.9 Diluted Earnings per Share
As reported $ 0.21 $ (0.61 ) $ 1.45 $ 0.24 Adjusted $ 0.34 $ 0.33 $
1.43 $ 1.18
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 tax rates and interpretation of related tax regulations;
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 a 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 Tuesday,
Jan. 30, 2018, at 11 a.m. ET, 10 a.m. CT, 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 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 Jan. 30, 2018, by
dialing 888-203-1112, Conference ID #1103021, 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 Feb. 3, 2018.
About Graco
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
SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)(In thousands except per share amounts)
Three Months Ended Twelve Months Ended Dec 29,2017
Dec 30,2016 Dec 29,2017 Dec 30,2016 Net Sales $ 374,859 $
349,063 $ 1,474,744 $ 1,329,293 Cost of products sold
174,489 164,359 681,695
621,054 Gross Profit 200,370 184,704 793,049 708,239 Product
development 15,891 15,642 60,106 60,606 Selling, marketing and
distribution 64,550 57,147 233,462 215,253 General and
administrative 43,709 26,771 139,034 126,481 Impairment —
192,020 — 192,020
Operating Earnings (Loss) 76,220 (106,876 ) 360,447 113,879
Interest expense 4,092 4,122 16,202 17,590 Other expense (income),
net (1,395 ) (28 ) (2,849 ) (366 )
Earnings (Loss) Before Income Taxes 73,523 (110,970 ) 347,094
96,655 Income taxes 37,131 (6,757 )
94,682 55,981 Net Earnings (Loss) $ 36,392
$ (104,213 ) $ 252,412 $ 40,674 Net Earnings
(Loss) per Common Share Basic $ 0.22 $ (0.62 ) $ 1.50 $ 0.24
Diluted $ 0.21 $ (0.61 ) $ 1.45 $ 0.24 Weighted Average Number of
Shares Basic 168,924 167,234 167,925 166,850 Diluted 175,738
171,308 174,318 170,876
SEGMENT INFORMATION (Unaudited)(In
thousands)
Three Months Ended Twelve Months Ended Dec 29,2017 Dec
30,2016 Dec 29,2017 Dec 30,2016 Net Sales Industrial $ 182,259 $
174,603 $ 691,978 $ 629,581 Process 77,568 70,562 294,652 266,630
Contractor 115,032 103,898
488,114 433,082 Total $ 374,859 $
349,063 $ 1,474,744 $ 1,329,293 Operating
Earnings Industrial $ 60,579 $ 59,764 $ 237,700 $ 207,183 Process
13,247 10,445 52,216 35,750 Contractor 20,649 20,137 113,898 91,837
Unallocated corporate (expense) (18,255 ) (5,202 ) (43,367 )
(28,871 ) Impairment — (192,020 ) —
(192,020 ) Total $ 76,220 $ (106,876 ) $
360,447 $ 113,879
GRACO INC. AND
SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Unaudited)(In
thousands)
Dec 29,2017 Dec 30,2016
ASSETS Current Assets Cash
and cash equivalents $ 103,662 $ 52,365 Accounts receivable, less
allowances of $14,000 and $12,700 256,421 218,365 Inventories
239,349 201,609 Other current assets 32,494
31,023 Total current assets 631,926 503,362 Property, Plant
and Equipment, net 204,298 189,596 Goodwill 278,789 259,849 Other
Intangible Assets, net 183,056 178,336 Deferred Income Taxes 50,916
86,653 Other Assets 30,220 25,313 Total
Assets $ 1,379,205 $ 1,243,109
LIABILITIES AND
SHAREHOLDERS’ EQUITY Current Liabilities Notes payable to banks
$ 6,578 $ 8,913 Trade accounts payable 48,748 39,988 Salaries and
incentives 55,884 37,109 Dividends payable 22,260 20,088 Other
current liabilities 100,956 71,887
Total current liabilities 234,426 177,985 Long-term Debt 226,035
305,685 Retirement Benefits and Deferred Compensation 172,411
159,250 Deferred Income Taxes 17,253 17,672 Other Non-current
Liabilities 6,017 8,697 Shareholders’ Equity Common stock 169,319
55,834 Additional paid-in-capital 499,934 453,394 Retained earnings
181,599 206,820 Accumulated other comprehensive income (loss)
(127,789 ) (142,228 ) Total shareholders’ equity
723,063 573,820 Total Liabilities and
Shareholders’ Equity $ 1,379,205 $ 1,243,109
GRACO INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)
Year Ended Dec 29,2017 Dec 30,2016
Cash Flows From
Operating Activities Net Earnings $ 252,412 $ 40,674
Adjustments to reconcile net earnings to net cashprovided by
operating activities Impairment — 192,020 Depreciation and
amortization 45,583 48,290 Deferred income taxes 34,446 (35,561 )
Share-based compensation 23,652 21,134 Change in Accounts
receivable (28,010 ) 4,506 Inventories (32,011 ) (693 ) Trade
accounts payable 4,588 553 Salaries and incentives 11,431 (6,809 )
Retirement benefits and deferred compensation 6,920 10,995 Other
accrued liabilities 23,909 3,298 Other (5,056 )
(2,401 ) Net cash provided by operating activities 337,864
276,006
Cash Flows From Investing
Activities Property, plant and equipment additions (40,194 )
(42,113 ) Acquisition of businesses, net of cash acquired (27,905 )
(48,946 ) Change in restricted assets (12 ) 288 Other (348 )
(164 ) Net cash provided by (used in) investing activities
(68,459 ) (90,935 )
Cash Flows From Financing
Activities Borrowings (payments) on short-term lines of credit,
net (3,026 ) (5,995 ) Borrowings on long-term line of credit
315,920 648,134 Payments on long-term line of credit (395,570 )
(735,144 ) Payments of debt issuance costs — (860 ) Common stock
issued 60,685 35,796 Common stock repurchased (90,160 ) (50,497 )
Taxes paid related to net share settlement of equity awards (24,448
) (3,165 ) Cash dividends paid (80,477 ) (73,434 )
Net cash provided by (used in) financing activities (217,076
) (185,165 ) Effect of exchange rate changes on cash
(1,032 ) 164 Net increase (decrease) in cash and cash
equivalents 51,297 70
Cash and Cash Equivalents Beginning of
year 52,365 52,295 End of year $
103,662 $ 52,365
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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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