Fourth Quarter and Annual Sales Growth in
All Segments and Regions
Graco Inc. (NYSE: GGG) today announced results for the
quarter and year ended December 28, 2018.
Summary$ in millions except per share amounts
Three Months Ended Twelve Months Ended Dec 28,2018
Dec 29,2017
%Change
Dec 28,2018 Dec 29,2017
%Change
Net Sales $ 406.4 $ 374.9 8 % $ 1,653.3 $ 1,474.7 12 % Operating
Earnings 96.6 89.5 8 % 436.4 378.7 15 % Net Earnings 73.7 36.4 103
% 341.1 252.4 35 % Diluted Net Earnings per Common Share $
0.43 $ 0.21 105 % $ 1.97
$ 1.45 36 % Adjusted (non-GAAP): (1)
Net Earnings, adjusted $ 73.5 $ 59.4 24 % $ 326.1 $ 249.4 31 %
Diluted Net Earnings per Common Share, adjusted $ 0.43 $ 0.34 26 %
$ 1.88 $ 1.43 31 %
(1) Excludes impacts of excess tax
benefits from stock option exercises, certain tax provision
adjustments and pension restructuring. See Financial Results
Adjusted for Comparability below for a reconciliation of adjusted
non-GAAP financial measures to GAAP.
- Graco achieved its stated revenue
growth target for the year, as sales for the quarter increased in
all segments and regions. Effects of currency translation reduced
sales growth for the quarter by 2 percentage points and increased
growth for the year by 1 percentage point. Acquired operations
contributed 2 percentage points of growth to the quarter and 3
percentage points to the year.
- Gross margin rate for the quarter
decreased by 2 percentage points compared to the comparable period
last year mostly due to the effects of product mix and higher
material costs.
- Operating expense increased 1 percent
for the quarter and 7 percent for the year. Expenses of acquired
operations accounted for 2 percentage points of the annual
increase.
- Other expense decreased $9 million for
the quarter and $4 million for the year. The fourth quarter last
year included $12 million related to pension plan restructuring.
Exchange losses on net assets of foreign operations increased other
expense by $5 million for the year, and market-based pension cost
increased by $2 million for both the quarter and the year.
- In the fourth quarter, the Company
purchased 2.2 million of its common shares in open market
transactions at an average price under $40 per share. Purchases for
the year totaled $245 million and reduced share count by 5.7
million.
- The effective income tax rate decreased
32 percentage points for the quarter and 10 percentage points for
the year. The effects of U.S. federal income tax reform were
partially offset by the impacts of decreases in excess tax benefits
from option exercises and other non-recurring tax changes.
“2018 was another record setting year, reflecting both the
strong demand from our customers and the outstanding efforts of our
employees, distributors and suppliers,” said Patrick J. McHale,
Graco’s President and CEO. “On an organic, constant currency basis
for the year, we grew our sales 8 percent and operating earnings 11
percent, achieving our stated target of mid-to-high single-digit
revenue growth for the year. This growth occurred in every region
and every segment, demonstrating the solid and consistent
performance by our teams throughout the year.”
Consolidated Results
Sales for the quarter increased 8 percent, with increases of 6
percent in the Americas, 11 percent in EMEA (14 percent at
consistent translation rates) and 13 percent in Asia Pacific (16
percent at consistent translation rates). Sales for the year
increased 12 percent (11 percent at consistent translation rates),
with increases of 9 percent in the Americas, 15 percent in EMEA (11
percent at consistent translation rates) and 19 percent in Asia
Pacific (17 percent at consistent translation rates).
For the quarter, changes in currency translation decreased sales
by approximately $5 million (2 percentage points). For the year,
changes in currency translation increased sales by approximately
$15 million (1 percentage point). Acquired operations contributed 2
percentage points of sales growth for the quarter and 3 percentage
points for the year.
Gross profit margin rate for the quarter decreased from the
comparable period last year due to changes in product mix, factory
spending, tariffs and material costs. Gross margin rate for the
year was slightly lower than the rate for last year. The
unfavorable effects of lower margin rates of acquired operations
and higher factory spending and material costs more than offset the
favorable effects of currency translation and realized pricing.
Total operating expenses for the quarter increased $1 million (1
percent) compared to the fourth quarter last year, including
approximately $3 million (3 percentage points) from acquired
operations. Operating expenses for the year increased $30 million
(7 percent) compared to last year. The increase includes $8 million
from acquired operations, approximately $3 million related to
currency translation, $5 million of increases directly based on
volume and earnings, and $2 million of incremental share-based
compensation.
Other expense in the fourth quarter of 2017 included a $12
million loss related to the restructuring of the Company's funded
U.S. pension plan. Other expense for 2018 included $3 million of
exchange losses on net assets of foreign operations, compared to $2
million of gains last year. Market-based pension cost included in
other expense increased by $2 million for both the quarter and the
year.
The effective income tax rate was 18 percent for the quarter and
17 percent for the year, down 32 percentage points and 10
percentage points from the comparable periods last year,
respectively. Adjusted to exclude the impacts of excess tax
benefits related to stock option exercises, the 2017 provisions
totaling $36 million related to tax reform legislation, the benefit
from a $40 million contribution to a pension plan in 2018, and the
benefits from other tax planning activities (see Financial Results
Adjusted for Comparability below), the effective income tax rate
was 18.4 percent for the quarter and 20.6 percent for the year,
compared to 31 percent for both of the comparable periods last
year. The adjusted rates were lower in 2018 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 Twelve Months Industrial Process
Contractor Industrial Process Contractor Net
Sales (in millions) $ 199.5 $ 88.3 $ 118.6 $ 781.0 $ 338.0 $ 534.3
Percentage change from last year Sales 9 % 14 % 3 % 13 % 15 % 9 %
Operating earnings 7 % 20 % (11 )% 14 % 31 % 6 % Operating earnings
as a percentage of sales
2018
32 % 18 % 15 % 35 % 20 % 23 %
2017
33 % 17 % 18 % 34 % 18 % 23 %
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months Twelve Months
Volumeand Price
Acquisitions Currency Total
Volumeand Price
Acquisitions Currency Total Americas 4% 0% 0%
4% 5% 0% 0% 5% EMEA 5% 10% (3)% 12% 3% 11% 4% 18% Asia Pacific 13%
6% (3)% 16% 12% 6% 2% 20% Consolidated 7% 4% (2)% 9% 6% 5% 2% 13%
Industrial segment sales growth included $8 million for the
quarter and $35 million for the year from acquired operations.
Increases in finishing systems sales at lower margin rates pushed
operating earnings as a percentage of sales down in the fourth
quarter. Favorable expense leverage in the quarter helped mitigate
the unfavorable effects of product mix and acquired operations on
operating returns. For the year, 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 Twelve Months
Volumeand Price
Acquisitions Currency Total
Volumeand Price
Acquisitions Currency Total Americas 17% 0%
(1)% 16% 14% 1% 0% 15% EMEA 5% 0% (2)% 3% 1% 0% 3% 4% Asia Pacific
19% 0% (3)% 16% 23% 1% 1% 25% Consolidated 15% 0% (1)% 14% 13% 1%
1% 15%
The Process segment had strong sales growth in all product
applications for both the quarter and the year. Operating margin
rates for this segment improved by 1 percentage point for the
quarter and 2 percentage points for the year, driven by higher
sales volume and expense leverage.
Components of net sales change by geographic region for the
Contractor segment were as follows:
Three Months Twelve Months
Volumeand Price
Acquisitions Currency Total
Volumeand Price
Acquisitions Currency Total Americas 1% 0% 0%
1% 8% 1% 0% 9% EMEA 18% 0% (3)% 15% 10% 0% 4% 14% Asia Pacific (5)%
0% (3)% (8)% 4% 0% 1% 5% Consolidated 4% 0% (1)% 3% 8% 1% 0% 9%
Contractor segment sales growth for the quarter flattened in the
Americas against a strong fourth quarter last year, where sales
were up 10 percent over the previous year. A lower gross margin
rate driven by product and channel mix and higher factory spending,
tariffs and material costs led to a 3 percentage point decrease in
operating margin rate for the quarter. Operating margin rates for
the year were flat compared to last year. Favorable effects of
currency translation offset the effects of lower gross margin rate
and increases in product development costs.
Outlook
“Heading into a new year, the business is performing well and
demand levels worldwide remain solid. As a result, we are
initiating a revenue growth outlook for the full-year 2019 of mid
single-digits on an organic, constant currency basis, with growth
expected in every region and reportable segment,” said McHale.
Financial Results Adjusted for Comparability
Multiple events in the last two years caused significant
fluctuations in financial results. The restructuring of the
Company's funded U.S. pension plan resulted in a $12 million
settlement loss in 2017. 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 together increased income taxes by a total of $36
million in 2017. Excess tax benefits related to stock option
exercises reduced income taxes by $10 million in 2018 and $36
million in 2017. Other benefits from tax planning activities
further reduced income taxes in 2018 and 2017.
Excluding the impacts of those items presents a more consistent
basis for comparison of financial results. A calculation of the
non-GAAP measurements of adjusted 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 28,2018
Dec 29,2017
Dec 28,2018 Dec 29,2017 Earnings before income taxes $ 90.0
$ 73.5 $ 410.8 $ 347.1 Pension settlement loss —
12.1 — 12.1 Earnings
before income taxes, adjusted $ 90.0 $ 85.6 $ 410.8
$ 359.2 Income taxes, as reported $ 16.3 $
37.1 $ 69.7 $ 94.7 Excess tax benefit from option exercises 0.2
15.8 10.0 36.3 Income tax reform — (35.6 ) — (35.6 ) Other
non-recurring tax changes — 4.5 5.0 10.0 Tax effects of adjustments
— 4.4 — 4.4
Income taxes, adjusted $ 16.5 $ 26.2 $ 84.7 $
109.8 Effective income tax rate As reported 18.1 %
50.5 % 17.0 % 27.3 % Adjusted 18.4 % 30.7 % 20.6 % 30.6 %
Net Earnings, as reported $ 73.7 $ 36.4 $ 341.1 $ 252.4 Pension
settlement loss, net — 7.7 — 7.7 Excess tax benefit from option
exercises (0.2 ) (15.8 ) (10.0 ) (36.3 ) Income tax reform — 35.6 —
35.6 Other non-recurring tax changes — (4.5 )
(5.0 ) (10.0 ) Net Earnings, adjusted $ 73.5 $
59.4 $ 326.1 $ 249.4 Weighted Average
Diluted Shares 170.9 175.7 173.2 174.3 Diluted Earnings per Share
As reported $ 0.43 $ 0.21 $ 1.97 $ 1.45 Adjusted $ 0.43 $ 0.34 $
1.88 $ 1.43
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 Tuesday,
Jan. 29, 2019, 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 Tuesday, Jan. 29,
2019, by dialing 888-203-1112, Conference ID #5631887, 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 2 p.m. ET Saturday,
Feb. 2, 2019.
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 28,2018
Dec 29,2017 Dec 28,2018 Dec 29,2017 Net Sales $
406,438 $ 374,859 $ 1,653,292 $ 1,474,744 Cost of products sold
197,682 174,092 770,753
679,542 Gross Profit 208,756 200,767 882,539 795,202
Product development 15,989 15,744 63,124 59,217 Selling, marketing
and distribution 62,732 64,011 245,473 231,364 General and
administrative 33,461 31,547
137,515 125,876 Operating Earnings 96,574
89,465 436,427 378,745 Interest expense 3,678 4,092 14,385 16,202
Other expense, net 2,851 11,850
11,276 15,449 Earnings Before Income Taxes
90,045 73,523 410,766 347,094 Income taxes 16,322
37,131 69,712 94,682 Net
Earnings $ 73,723 $ 36,392 $ 341,054 $ 252,412
Net Earnings (Loss) per Common Share Basic $ 0.44 $ 0.22 $
2.04 $ 1.50 Diluted $ 0.43 $ 0.21 $ 1.97 $ 1.45 Weighted Average
Number of Shares Basic 165,875 168,924 167,364 167,925 Diluted
170,899 175,738 173,213 174,318
SEGMENT INFORMATION (Unaudited)(In
thousands)
Three Months Ended Twelve Months Ended Dec 28,2018 Dec
29,2017 Dec 28,2018 Dec 29,2017 Net Sales Industrial $ 199,519 $
182,259 $ 781,029 $ 691,978 Process 88,303 77,568 337,953 294,652
Contractor 118,616 115,032
534,310 488,114 Total $ 406,438 $
374,859 $ 1,653,292 $ 1,474,744 Operating
Earnings Industrial $ 64,580 $ 60,579 $ 271,307 $ 237,700 Process
15,885 13,247 68,514 52,216 Contractor 18,373 20,649 120,905
113,898 Unallocated corporate (expense) (2,264 )
(5,010 ) (24,299 ) (25,069 ) Total $ 96,574 $
89,465 $ 436,427 $ 378,745
GRACO INC. AND
SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Unaudited)(In
thousands)
Dec 28,2018 Dec 29,2017
ASSETS Current Assets Cash
and cash equivalents $ 132,118 $ 103,662 Accounts receivable, less
allowances of $5,300 and $4,300 274,608 266,080 Inventories 283,982
239,349 Other current assets 32,508 34,247
Total current assets 723,216 643,338 Property, Plant and
Equipment, net 229,295 204,298 Goodwill 293,846 278,789 Other
Intangible Assets, net 166,310 183,056 Deferred Income Taxes 32,055
50,916 Other Assets 28,019 30,220 Total
Assets $ 1,472,741 $ 1,390,617
LIABILITIES AND
SHAREHOLDERS’ EQUITY Current Liabilities Notes payable to banks
$ 11,083 $ 6,578 Trade accounts payable 56,902 48,748 Salaries and
incentives 62,297 55,884 Dividends payable 26,480 22,260 Other
current liabilities 143,041 112,368
Total current liabilities 299,803 245,838 Long-term Debt 266,391
226,035 Retirement Benefits and Deferred Compensation 133,388
172,411 Deferred Income Taxes 16,586 17,253 Other Non-current
Liabilities 4,700 6,017 Shareholders’ Equity Common stock 165,171
169,319 Additional paid-in-capital 510,825 499,934 Retained
earnings 220,734 181,599 Accumulated other comprehensive income
(loss) (144,857 ) (127,789 ) Total shareholders’
equity 751,873 723,063 Total
Liabilities and Shareholders’ Equity $ 1,472,741 $ 1,390,617
GRACO INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)
Year Ended Dec 28,2018 Dec 29,2017
Cash Flows From
Operating Activities Net Earnings $ 341,054 $ 252,412
Adjustments to reconcile net earnings to net cashprovided by
operating activities Depreciation and amortization 47,754 45,583
Deferred income taxes 15,405 34,446 Share-based compensation 25,565
23,652 Change in Accounts receivable (12,402 ) (37,669 )
Inventories (30,719 ) (32,011 ) Trade accounts payable
(1,976
) 4,588 Salaries and incentives 2,336 11,431 Retirement benefits
and deferred compensation (27,237 ) 6,920 Other accrued liabilities
7,517 35,321 Other 688 (6,808 ) Net cash
provided by operating activities
367,985
337,865
Cash Flows From Investing
Activities Property, plant and equipment additions (53,854 )
(40,194 ) Acquisition of businesses, net of cash acquired (10,769 )
(27,905 ) Other (1,624 ) (348 ) Net cash provided by
(used in) investing activities (66,247 ) (68,447 )
Cash Flows From Financing Activities Borrowings (payments)
on short-term lines of credit, net 4,931 (3,026 ) Borrowings on
long-term lines of credit 620,746 315,920 Payments on long-term
debt and lines of credit (583,212 ) (395,570 ) Common stock issued
24,634 60,685 Common stock repurchased
(244,814
) (90,160 ) Taxes paid related to net share settlement of equity
awards (16,151 ) (24,448 ) Cash dividends paid (88,845 )
(80,477 ) Net cash provided by (used in) financing
activities
(282,711
) (217,076 ) Effect of exchange rate changes on cash
187 (1,032 ) Net increase (decrease) in cash and cash
equivalents 19,214 51,310
Cash, Cash Equivalents and Restricted
Cash Beginning of year 112,904 61,594
End of year $ 132,118 $ 112,904
Reconciliation to Consolidated Balance Sheets Cash and cash
equivalents $ 132,118 $ 103,662 Restricted cash included in other
current assets — 9,242 Cash, cash
equivalents and restricted cash $ 132,118 $ 112,904
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190128005704/en/
Financial Contact: Mark Sheahan, 612-623-6656Media Contact:
Charlotte Boyd,
612-623-6153Charlotte_M_Boyd@graco.com
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