Sales Growth in All Segments and
Regions
Graco Inc. (NYSE: GGG) today announced results for the
third quarter ended September 28, 2018.
Summary
$ in millions except per share amounts
Three Months Ended Nine Months Ended
Sep 28, Sep 29, % Sep 28,
Sep 29, % 2018 2017 Change 2018 2017 Change Net Sales
$ 415.9 $ 379.8 10 % $ 1,246.9 $ 1,099.9 13 % Operating Earnings
114.8 101.4 13 % 339.9 289.3 17 % Net Earnings 92.7 75.5 23 % 267.3
216.0 24 % Diluted Net Earnings per Common Share $
0.54 $ 0.43 26 % $ 1.54
$ 1.24 24 % Adjusted (non-GAAP):
(1) Net Earnings, adjusted $ 85.8 $ 66.8 29 % $ 252.5 $ 190.0 33 %
Diluted Net Earnings per Common Share, adjusted $ 0.50 $ 0.38 32 %
$ 1.45 $ 1.09 33 % (1) Excludes impacts of excess tax
benefits from stock option exercises and the effects of certain tax
provision adjustments in the third quarter of 2018 and 2017. See
Financial Results Adjusted for Comparability below for a
reconciliation of adjusted non-GAAP financial measures to GAAP.
- Sales for the quarter and year to date
increased in all segments and regions. Effects of currency
translation were not significant for the quarter and contributed 2
percentage points to year-to-date growth. Acquired operations
contributed 3 percentage points of growth to both the quarter and
the year to date.
- Gross margin rate for the quarter was
lower compared to the comparable period last year due to lower
margin rates of acquired operations.
- Expense leverage drove double-digit
percentage increases in operating earnings for the quarter and year
to date. Operating earnings as a percentage of sales increased in
all segments except for Contractor, where changes in channel mix
and spending related to future new product introductions led to a
decrease in operating earnings.
- Other expense increased $2 million for
the quarter and $5 million year to date, mostly due to exchange
losses on net assets of foreign operations.
- The effective income tax rate decreased
by 8 percentage points for the quarter and 4 percentage points for
the year to date, as the net benefits of U.S. federal income tax
reform were partially offset by the impact of decreases in excess
tax benefits from option exercises. Excess tax benefits from option
exercises decreased compared to last year by $1 million for the
quarter and $11 million for the year to date.
“Growth in sales and improved profitability in our Process
segment contributed nicely to our results in the quarter,” said
Patrick J. McHale, Graco's President and CEO. “The Industrial and
Contractor segments also posted solid revenue gains over difficult
comparisons from a year ago. Although planned investments in
product development and unfavorable product mix weighed on
Contractor segment profitability, sales growth in all segments and
regions produced positive leverage in worldwide operating
earnings.”
Consolidated Results
Sales for the quarter increased 10 percent, with increases of 8
percent in the Americas, 9 percent in EMEA and 14 percent in Asia
Pacific (16 percent at consistent translation rates). Sales for the
year to date increased 13 percent (11 percent at consistent
translation rates), with increases of 10 percent in the Americas,
16 percent in EMEA (9 percent at consistent translation rates) and
21 percent in Asia Pacific (18 percent at consistent translation
rates).
Changes in currency translation rates did not have a significant
effect on sales for the quarter. For the year to date, change in
currency translation increased sales by approximately $20 million
(2 percentage points). Acquired operations contributed 3 percentage
points of sales growth for both the quarter and year to date,
including 6 percentage points of growth in EMEA.
Gross profit margin rate for the quarter decreased from the
comparable period last year due to lower margin rates of acquired
operations. The favorable effects of realized pricing and product
and channel mix offset the impact of higher costs, including
tariffs. Gross margin rate for the year to date was the same as the
rate for the comparable period last year. The favorable effects of
currency translation and realized pricing offset the unfavorable
effects of lower margin rates of acquired operations and higher
material costs.
Total operating expenses for the quarter increased $4 million (4
percent) compared to the third quarter last year, including
approximately $1 million (1 percentage point) from acquired
operations. Year-to-date operating expenses increased $29 million
(9 percent) compared to the comparable period last year. The
increase includes $6 million from acquired operations,
approximately $4 million related to currency translation, $4
million of increases directly based on volume and earnings, and $3
million of incremental share-based compensation.
Other expense for the quarter and year to date includes $2
million and $4 million of exchange losses on net assets of foreign
operations, respectively, compared to small gains in the comparable
periods last year.
The effective income tax rate was 14 percent for the quarter and
17 percent for the year to date, down 8 percentage points and 4
percentage points from the comparable periods last year,
respectively. Adjusted to exclude the impacts of excess tax
benefits related to stock option exercises, the benefit from a $40
million contribution to a pension plan in 2018, and the benefits
from certain tax planning activities in 2017 (see Financial Results
Adjusted for Comparability below), the effective income tax rate
was approximately 21 percent for both the quarter and year to date.
The adjusted rate was lower than the 31 percent effective rate for
the comparable periods last year due to the net effects of U.S.
federal income tax reform legislation passed at the end of
2017.
Segment Results
Management assesses performance of segments by reference to
operating earnings excluding unallocated corporate expenses. 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 Nine Months Industrial
Process Contractor Industrial
Process Contractor Net Sales (in millions) $
195.9 $ 84.6 $ 135.5 $ 581.5 $ 249.7 $ 415.7 Percentage change from
last year Sales 10 % 15 % 6 % 14 % 15 % 11 % Operating earnings 14
% 48 % (2 )% 17 % 35 % 10 % Operating earnings as a percentage of
sales
2018
36 % 21 % 24 % 36 % 21 % 25 %
2017
35 % 16 % 26 % 35 % 18 % 25 %
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months Nine Months
Volumeand Price
Acquisitions Currency
Total
Volumeand Price
Acquisitions Currency
Total Americas 5 % 0 % 0 % 5 % 5 % 0 % 1 % 6 % EMEA 2 % 10 % 0 % 12
% 2 % 11 % 7 % 20 % Asia Pacific 9 % 8 % (2 )% 15 % 11 % 7 % 3 % 21
% Consolidated 5 % 5 % 0 % 10 % 6 % 5 % 3 % 14 %
Industrial segment sales growth included $9 million for the
quarter and $27 million for the year to date from acquired
operations. Finishing systems sales and other project activity
increased in the third quarter. Operating margin rates for the
quarter and year to date increased from the comparable periods last
year. Segment operating expenses for the quarter were flat compared
to last year. For the year to date, the favorable effects of
translation and volume more than offset the effects of purchase
accounting and lower operating margins in acquired operations.
Components of net sales change by geographic region for the
Process segment were as follows:
Three Months Nine Months
Volumeand Price
Acquisitions Currency
Total
Volumeand Price
Acquisitions Currency
Total Americas 11 % 1 % 0 % 12 % 13 % 1 % 1 % 15 % EMEA 11 % 0 % 0
% 11 % (1 )% 1 % 5 % 5 % Asia Pacific 32 % 1 % (3 )% 30 % 25 % 1 %
2 % 28 % Consolidated 15 % 1 % (1 )% 15 % 12 % 1 % 2 % 15 %
The Process segment had sales growth in all product
applications. Operating margin rates for this segment improved by 5
percentage points for the quarter and 3 percentage points for the
year to date, driven by higher sales volume, gross margin rate
improvement and expense leverage.
Components of net sales change by geographic region for the
Contractor segment were as follows:
Three Months Nine Months
Volumeand Price
Acquisitions Currency
Total
Volumeand Price
Acquisitions Currency
Total Americas 8 % 2 % (1 )% 9 % 9 % 2 % 0 % 11 % EMEA 1 % 0 % 0 %
1 % 7 % 0 % 7 % 14 % Asia Pacific (9 )% 0 % (3 )% (12 )% 7 % 0 % 2
% 9 % Consolidated 5 % 1 % 0 % 6 % 9 % 1 % 1 % 11 %
Increases in Contractor segment sales were led by double digit
percentage increases in the home center channel in North America. A
lower gross margin rate driven by channel mix, and spending related
to product development and future new product introductions, led to
a 2 percentage point decrease in operating margin rate for the
quarter. Operating margin rates for the year to date were flat
compared to last year. Favorable effects of currency translation
were offset by increases in product development and volume and
earnings-based incentive costs.
Outlook
“With the exception of EMEA, underlying demand in our key end
markets and geographies remains solid, and we confirm our full-year
outlook of mid-to-high single-digit organic sales growth on a
constant currency basis for the full year 2018,” stated McHale.
“While we expect to face headwinds from tariffs, material costs and
currency translation in the fourth quarter, we still believe we are
well positioned to deliver another year of record sales and
earnings in 2018.”
Financial Results Adjusted for Comparability
Excluding the impacts of tax benefits related to stock option
exercises and the effects of certain tax provision adjustments
presents a more consistent basis for comparison of financial
results. A calculation of the non-GAAP measurements of adjusted
income taxes, effective income tax rates, net earnings and diluted
earnings per share follows (in millions except per share
amounts):
Three Months Ended Nine Months Ended
Sep 28, Sep 29, Sep 28, Sep 29, 2018
2017 2018 2017 Earnings before income taxes $ 108.1 $ 96.4
$ 320.7 $ 273.6 Income taxes, as
reported $ 15.4 $ 20.9 $ 53.4 $ 57.6 Excess tax benefit from option
exercises 1.9 3.2 9.8 20.5 Tax provision adjustments 5.0
5.5 5.0 5.5 Income
taxes, adjusted $ 22.3 $ 29.6 $ 68.2 $ 83.6
Effective income tax rate As reported 14.2 % 21.7 %
16.6 % 21.0 % Adjusted 20.6 % 30.8 % 21.2 % 30.5 % Net
Earnings, as reported $ 92.7 $ 75.5 $ 267.3 $ 216.0 Excess tax
benefit from option exercises (1.9 ) (3.2 ) (9.8 ) (20.5 ) Tax
provision adjustments (5.0 ) (5.5 ) (5.0 )
(5.5 ) Net Earnings, adjusted $ 85.8 $ 66.8 $
252.5 $ 190.0 Weighted Average Diluted Shares
173.0 174.6 174.0 173.8 Diluted Earnings per Share As reported $
0.54 $ 0.43 $ 1.54 $ 1.24 Adjusted $ 0.50 $ 0.38 $ 1.45 $ 1.09
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 2017 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 or the adoption of new tax legislation;
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; 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 2017 (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 25, 2018, 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 25, 2018,
by dialing 888-203-1112, Conference ID #7187523, 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 29, 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 SUBSIDIARIES CONSOLIDATED
STATEMENTS OF EARNINGS (Unaudited)
(In thousands except per share
amounts)
Three Months Ended Nine Months Ended
Sep 28, Sep 29, Sep 28, Sep 29, 2018
2017 2018 2017 Net Sales $ 415,936 $ 379,812 $ 1,246,854 $
1,099,885 Cost of products sold 194,477 175,732
573,071 505,450 Gross Profit 221,459 204,080 673,783
594,435 Product development 15,734 14,552 47,135 43,473 Selling,
marketing and distribution 57,270 57,381 182,741 167,353 General
and administrative 33,676 30,712 104,054
94,329 Operating Earnings 114,779 101,435 339,853 289,280
Interest expense 3,583 3,901 10,707 12,110 Other expense, net
3,139 1,142 8,425 3,599 Earnings Before
Income Taxes 108,057 96,392 320,721 273,571 Income taxes
15,376 20,932 53,390 57,551 Net Earnings $
92,681 $ 75,460 $ 267,331 $ 216,020 Net Earnings (Loss) per Common
Share Basic $ 0.55 $ 0.45 $ 1.59 $ 1.29 Diluted $ 0.54 $ 0.43 $
1.54 $ 1.24 Weighted Average Number of Shares Basic 167,247 168,069
167,860 167,592 Diluted 173,037 174,613 173,984 173,844
SEGMENT INFORMATION (Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
Sep 28, Sep 29, Sep 28, Sep 29, 2018
2017 2018 2017 Net Sales Industrial $ 195,855 $ 178,461 $ 581,510 $
509,719 Process 84,556 73,656 249,650 217,084 Contractor
135,525 127,695 415,694
373,082 Total $ 415,936 $ 379,812 $ 1,246,854
$ 1,099,885 Operating Earnings Industrial $ 70,572 $
61,790 $ 206,727 $ 177,121 Process 17,862 12,088 52,629 38,969
Contractor 32,739 33,471 102,532 93,249 Unallocated corporate
(expense) (6,394 ) (5,914 ) (22,035 )
(20,059 ) Total $ 114,779 $ 101,435 $ 339,853
$ 289,280
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: https://www.businesswire.com/news/home/20181024005811/en/
Graco Inc.Financial Contact:Mark Sheahan,
612-623-6656orMedia Contact:Charlotte Boyd,
612-623-6153Charlotte_M_Boyd@graco.com
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