Currency Translation Offsets Underlying
Sales Growth
Graco Inc. (NYSE: GGG) today announced results for the
first quarter ended March 29, 2019.
Summary
$ in millions except per share amounts
Three Months Ended Mar 29, Mar 30, % 2019 2018
Change Net Sales $ 404.9 $ 406.3
(0) %
Operating Earnings 104.5 111.7 (6) % Net Earnings 86.7 85.5
1 %
Diluted Net Earnings per Common Share $ 0.51 $
0.49
4 %
Adjusted (non-GAAP): (1) Net Earnings, adjusted $ 80.1 $
84.1 (5) % Diluted Net Earnings per Common Share, adjusted $ 0.47 $
0.48 (2) % (1) Excludes impacts of excess tax
benefits from stock option exercises and certain non-recurring tax
provision adjustments. See Financial Results Adjusted for
Comparability below for a reconciliation of adjusted non-GAAP
financial measures to GAAP.
- Changes in currency translation rates
offset modest underlying growth in sales compared to last year. At
consistent currency rates, sales increased by 2 percent, driven by
Process segment growth, while sales in other segments were
flat.
- Gross margin rate for the quarter
decreased by 1 percentage point compared to the first quarter last
year. Changes in currency translation rates accounted for
approximately half of the decrease, and the impact of price changes
partially offset the adverse impacts of higher material costs and
product and channel mix.
- Total operating expenses increased
modestly, with increases in new product development and product
launch expenses.
- The effective income tax rate decreased
6 percentage points due to an increase in excess tax benefits from
option exercises and other non-recurring tax benefits.
“On a constant currency basis, the Company achieved low
single-digit organic sales growth. This was below our expectations
but we remain cautiously optimistic regarding the balance of the
year,” said Patrick J. McHale, Graco's President and CEO.
“Price-change implementation is on track, and the full effect of
increases instituted in the first quarter will be realized in
future operating results. In addition, we anticipate the revenue
and profitability for Contractor Americas will improve as new
products released late in the first quarter make their way into the
market in Q2.”
Consolidated Results
Sales for the quarter were down slightly from the comparable
period last year, with increases of 5 percent in the Americas
offset by decreases of 2 percent in EMEA (increase of 5 percent at
consistent translation rates) and 12 percent in Asia Pacific
(decrease of 8 percent at consistent translation rates). In Asia
Pacific, increases in Process and Contractor segment sales
partially offset a decrease in Industrial segment sales. Changes in
currency translation rates decreased worldwide sales by
approximately $11 million (2 percentage points).
Gross profit margin rate for the quarter decreased by 1
percentage point from the comparable period last year. Changes in
currency translation rates accounted for approximately half of the
decrease, and the impact of price changes partially offset the
adverse impacts of higher material costs and product and channel
mix. The full impact of price changes implemented in the first
quarter will be realized as the year progresses.
Total operating expenses for the quarter increased $1 million (1
percent) compared to last year. Product development expense
increased 8 percent as the Company continued to invest to launch
products and drive future sales.
The effective income tax rate was 14 percent for the quarter,
down 6 percentage points from the comparable period last year. The
decrease was primarily due to an increase in excess tax benefits
related to stock option exercises and non-recurring benefits from
other tax planning activities.
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 Industrial Process Contractor Net
Sales (in millions) $ 189.1 $ 86.9 $ 128.9 Percentage change from
last year
Sales
(3 )% 9
%
(2 )%
Operating earnings
(6 )% 13
%
(16 )% Operating earnings as a percentage of sales
2019
34
%
23
%
21
%
2018
35
%
22
%
24
%
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months
Volumeand Price
Acquisitions Currency Total Americas 10% 0%
(1)% 9% EMEA 3% 0% (7)% (4)% Asia Pacific (14)% 0% (4)% (18)%
Consolidated 0% 0% (3)% (3)%
Industrial segment constant-currency sales growth in the
Americas and EMEA was offset by a decrease in Asia Pacific, where
2018 included large system sales that did not repeat in 2019.
Currency translation drove a decrease in operating margin as a
percentage of sales. Gross margin and operating expenses were flat
at consistent currency translation rates.
Components of net sales change by geographic region for the
Process segment were as follows:
Three Months
Volumeand Price
Acquisitions Currency Total Americas 12% 0%
(1)% 11% EMEA 9% 1% (5)% 5% Asia Pacific 6% 0% (4)% 2% Consolidated
10% 0% (1)% 9%
The Process segment had strong sales growth in all product
applications. Gross margin rates were consistent with the
comparable period last year at constant currency translation rates.
Operating margin rates for this segment improved by 1 percentage
point, 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
Volumeand Price
Acquisitions Currency Total Americas (2)% 0%
0% (2)% EMEA 5% 0% (7)% (2)% Asia Pacific 9% 0% (5)% 4%
Consolidated 0% 0% (2)% (2)%
Contractor segment sales decreased by 2 percent (but were flat
at consistent translation rates) against tough comparisons from
2018 (up 15 percent over 2017). Segment sales in 2019 were lower
than planned as new products scheduled for launch early in the
first quarter were released for sale late in the quarter. At
consistent currency translation rates, segment gross margin rate
decreased 2 percentage points due to lower factory volume, higher
factory spending, higher material costs and unfavorable channel
mix. The segment limited operating expenses to an increase of 1
percent.
Outlook
“The Company continues to target mid single-digit organic sales
growth on a constant currency basis, and growth in all reportable
segments and regions for the full-year 2019,” said McHale.
Financial Results Adjusted for Comparability
Excess tax benefits related to stock option exercises in 2019
and 2018, and additional benefit from tax planning activities in
2019 reduced income taxes. Excluding the impacts of those items
presents a more consistent basis for comparison of financial
results. A calculation of the non-GAAP measurements of income
taxes, effective income tax rates, net earnings and diluted
earnings per share follows (in millions except per share
amounts):
Three Months Ended Mar 29, Mar 30, 2019 2018 Earnings
before income taxes $ 100.7 $ 107.4 Income
taxes, as reported $ 14.0 $ 21.9 Excess tax benefit from option
exercises 5.1 1.4 Other non-recurring tax benefit 1.5 —
Income taxes, adjusted $ 20.6 $ 23.3
Effective income tax rate As reported 13.9 % 20.4 % Adjusted 20.5 %
21.7 % Net Earnings, as reported $ 86.7 $ 85.5 Excess tax
benefit from option exercises (5.1 ) (1.4 ) Other non-recurring tax
benefit (1.5 ) — Net Earnings, adjusted $ 80.1 $ 84.1
Weighted Average Diluted Shares 170.9 175.6 Diluted
Earnings per Share As reported $ 0.51 $ 0.49 Adjusted $ 0.47 $ 0.48
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 2018 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; changes in
currency translation rates; economic conditions in the United
States and other major world economies; the ability to meet our
customers’ needs and changes in product demand; supply
interruptions or delays; security breaches; new entrants who copy
our products or infringe on our intellectual property; risks
incident to conducting business internationally; catastrophic
events; changes in laws and regulations; compliance with
anti-corruption and trade laws; changes in tax rates or the
adoption of new tax legislation; 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; our ability to
attract, develop and retain qualified personnel; the possibility of
decline in purchases from a few large customers of the Contractor
segment; and variations in activity in the construction,
automotive, mining and oil and natural gas industries. Please refer
to Item 1A of our Annual Report on Form 10-K for fiscal year 2018
(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,
April 25, 2019, at 11 a.m. ET, 10 a.m. CT, to discuss Graco’s first
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 Thursday, April
25, 2019, by dialing 888-203-1112, Conference ID #3050476, 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 Monday, April 29, 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 SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands except per share
amounts)
Three Months Ended Mar 29, Mar 30, 2019 2018 Net
Sales $ 404,870 $ 406,348 Cost of products sold 188,828
183,927 Gross Profit 216,042 222,421 Product development
16,569 15,289 Selling, marketing and distribution 60,817 62,522
General and administrative 34,129 32,914 Operating
Earnings 104,527 111,696 Interest expense 3,535 3,233 Other
expense, net 269 1,035 Earnings Before Income Taxes
100,723 107,428 Income taxes 13,974 21,918 Net
Earnings $ 86,749 $ 85,510 Net Earnings (Loss) per
Common Share Basic $ 0.52 $ 0.51 Diluted $ 0.51 $ 0.49 Weighted
Average Number of Shares Basic 165,616 169,073 Diluted 170,859
175,649
SEGMENT INFORMATION (Unaudited)
(In thousands)
Three Months Ended Mar 29, Mar 30, 2019 2018 Net Sales
Industrial $ 189,100 $ 195,196 Process 86,894 80,035 Contractor
128,876 131,117 Total $ 404,870 $ 406,348
Operating Earnings Industrial $ 65,203 $ 69,125 Process
20,014 17,702 Contractor 26,539 31,411 Unallocated corporate
(expense) (7,229 ) (6,542 ) Total $ 104,527 $ 111,696
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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190424005999/en/
Financial Contact: Mark Sheahan, 612-623-6656Media Contact:
Charlotte Boyd,
612-623-6153Charlotte_M_Boyd@graco.com
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