Currency Translation Offsets Underlying
Sales Growth
Graco Inc. (NYSE: GGG) today announced results for the
second quarter ended June 28, 2019.
Summary
$ in millions except per share amounts
Three Months Ended
Six Months Ended
Jun 28,
Jun 29,
%
Jun 28,
Jun 29,
%
2019
2018
Change
2019
2018
Change
Net Sales
$
428.3
$
424.6
1
%
$
833.2
$
830.9
0
%
Operating Earnings
112.4
113.4
(1
) %
216.9
225.1
(4
) %
Net Earnings
88.1
89.1
(1
) %
174.9
174.7
0
%
Diluted Net Earnings per Common Share
$
0.51
$
0.51
0
%
$
1.02
$
1.00
2
%
Adjusted (non-GAAP): (1)
Net Earnings, adjusted
$
85.9
$
82.7
4
%
$
166.0
$
166.8
(0
) %
Diluted Net Earnings per Common Share,
adjusted
$
0.50
$
0.48
4
%
$
0.97
$
0.96
1
%
(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 underlying growth
in sales compared to last year. At consistent currency rates, sales
for the quarter and year to date increased by 3 percent.
- Gross margin rates for the quarter and year to date decreased
by 1 percentage point from the comparable periods last year.
Changes in currency translation rates accounted for approximately
half of the decrease.
- Total operating expenses decreased in dollars and as a
percentage of sales.
- For the quarter, the effective income tax rate increased 3
percentage points mainly due to a decrease in excess tax benefits
from option exercises. For the year to date, the effective rate
decreased 2 percentage points due to additional net benefits from
U.S. tax reform provisions and other non-recurring benefits from
tax planning activities.
“Softer underlying demand in end markets, particularly in Asia
Pacific, led to modest growth in sales on a constant currency,
organic basis this quarter,” said Patrick J. McHale, Graco's
President and CEO. “With the exception of the Contractor segment,
where new product sales contributed to a rebound in sales and
profitability from the first quarter, revenue performance in the
quarter was below expectations.”
Consolidated Results
Sales for the quarter were up 1 percent from the comparable
period last year, with increases of 3 percent in the Americas (4
percent at consistent translation rates) and 4 percent in EMEA (10
percent at consistent translation rates), offset by a decrease of
10 percent in Asia Pacific (6 percent at consistent translation
rates). Sales for the year to date were up slightly from the
comparable period last year, with increases of 4 percent in the
Americas and 1 percent in EMEA (7 percent at consistent translation
rates), offset by an 11 percent decrease in Asia Pacific (7 percent
at consistent translation rates). Changes in currency translation
rates decreased worldwide sales by approximately $9 million (2
percentage points) for the quarter and $20 million for the year to
date (3 percentage points).
Gross profit margin rates for the quarter and year to date
decreased by 1 percentage point from the comparable periods last
year. Changes in currency translation rates accounted for
approximately half of the decrease. Price changes implemented in
the first quarter had a stronger impact on second quarter gross
margin rate, largely offsetting the adverse impacts of higher
material costs, lower factory volume and product and channel
mix.
Total operating expenses for the quarter and year to date
decreased $2 million (2 percent) and $1 million (1 percent),
respectively, compared to last year. Reductions in volume and
earnings-based expenses more than offset increases in product
development expenses, which increased 8 percent for both the
quarter and the year to date.
Other expense for the quarter and year to date is $3 million and
$4 million lower, respectively, than the comparable periods last
year. The decreases were driven by lower exchange losses on net
assets of foreign operations and reduced market-based pension
costs.
The effective income tax rate for the quarter was 18 percent, up
3 percentage points from the comparable period last year. The
increase was primarily due to a $4 million decrease in excess tax
benefits related to stock option exercises. The effective income
tax rate for the year to date was 16 percent, down 2 percentage
points from the comparable period last year. The decrease was due
to additional net benefits from U.S. tax reform provisions 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
Six Months
Industrial
Process
Contractor
Industrial
Process
Contractor
Net Sales (in millions)
$
188.5
$
85.1
$
154.8
$
377.6
$
172.0
$
283.6
Percentage change from last year
Sales
(1
)%
0
%
4
%
(2
)%
4
%
1
%
Operating earnings
(4
)%
8
%
4
%
(5
)%
10
%
(5
)%
Operating earnings as a percentage of
sales
2019
34
%
22
%
26
%
34
%
22
%
23
%
2018
35
%
20
%
26
%
35
%
21
%
25
%
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months
Six Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
2%
0%
0%
2%
6%
0%
(1)%
5%
EMEA
10%
0%
(5)%
5%
7%
0%
(7)%
0%
Asia Pacific
(6)%
0%
(5)%
(11)%
(10)%
0%
(4)%
(14)%
Consolidated
2%
0%
(3)%
(1)%
1%
0%
(3)%
(2)%
For both the quarter and the year to date, Industrial segment
sales growth in the Americas and EMEA was more than offset by
decreases in Asia Pacific, where end markets softened. Operating
earnings as a percentage of sales decreased as the favorable
effects of pricing and expense leverage were more than offset by
the adverse impacts of currency translation, higher material costs,
lower factory volume and product and channel mix.
Components of net sales change by geographic region for the
Process segment were as follows:
Three Months
Six Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
1%
0%
0%
1%
6%
0%
0%
6%
EMEA
2%
1%
(4)%
(1)%
6%
0%
(4)%
2%
Asia Pacific
3%
0%
(4)%
(1)%
4%
0%
(4)%
0%
Consolidated
1%
0%
(1)%
0%
6%
0%
(2)%
4%
Process segment sales for the year to date increased in all
product applications, although the rate of growth slowed in the
second quarter. Gross margin rates were consistent with the
comparable periods last year at constant currency translation
rates. Operating margin rate for the quarter for this segment
improved by 2 percentage points, driven by lower volume and
earnings-based costs. For the year to date, higher sales volume and
expense leverage led to a 1 percentage point increase in operating
margin rate.
Components of net sales change by geographic region for the
Contractor segment were as follows:
Three Months
Six Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
6%
0%
0%
6%
2%
0%
0%
2%
EMEA
12%
0%
(5)%
7%
9%
0%
(7)%
2%
Asia Pacific
(17)%
0%
(4)%
(21)%
(5)%
0%
(5)%
(10)%
Consolidated
5%
0%
(1)%
4%
3%
0%
(2)%
1%
Contractor segment sales at consistent currency translation
rates increased by 5 percent, driving year-to-date growth to 3
percent. Operating margin rate for the quarter was consistent with
the rate for the comparable quarter last year. Reductions in volume
and earnings-based costs offset the adverse impacts of currency
translation. Operating margin rate for the year to date was 2
percentage points lower than last year due to changes in currency
translation rates, higher material costs, lower factory volume and
higher factory spending.
Outlook
“Given the slow start to the year, we are lowering our full-year
2019 worldwide outlook to low single-digit organic sales growth on
a constant currency basis,” stated McHale. “While overall economic
conditions are challenging, we continue to pursue our growth
strategies and manage the business for the long term.”
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
the first quarter of 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
Six Months Ended
Jun 28,
Jun 29,
Jun 28,
Jun 29,
2019
2018
2019
2018
Earnings before income taxes
$
107.8
$
105.2
$
208.5
$
212.7
Income taxes, as reported
$
19.7
$
16.1
$
33.6
$
38.0
Excess tax benefit from option
exercises
2.2
6.4
7.4
7.9
Other non-recurring tax benefit
—
—
1.5
—
Income taxes, adjusted
$
21.9
$
22.5
$
42.5
$
45.9
Effective income tax rate
As reported
18.2
%
15.3
%
16.1
%
17.9
%
Adjusted
20.3
%
21.4
%
20.4
%
21.6
%
Net Earnings, as reported
$
88.1
$
89.1
$
174.9
$
174.7
Excess tax benefit from option
exercises
(2.2
)
(6.4
)
(7.4
)
(7.9
)
Other non-recurring tax benefit
—
—
(1.5
)
—
Net Earnings, adjusted
$
85.9
$
82.7
$
166.0
$
166.8
Weighted Average Diluted Shares
172.0
173.3
171.5
174.5
Diluted Earnings per Share
As reported
$
0.51
$
0.51
$
1.02
$
1.00
Adjusted
$
0.50
$
0.48
$
0.97
$
0.96
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,
July 25, 2019, at 11 a.m. ET, 10 a.m. CT, to discuss Graco’s second
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, July
25, 2019, by dialing 888-203-1112, Conference ID #9658513, if
calling within the U.S. or Canada. The dial-in number for
international participants is 719-457-0820, with the same
Conference ID number. The replay by telephone will be available
through 2 p.m. ET on Monday, July 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.
GRACO INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
EARNINGS (Unaudited)
(In thousands except per share
amounts)
Three Months Ended
Six Months Ended
Jun 28,
Jun 29,
Jun 28,
Jun 29,
2019
2018
2019
2018
Net Sales
$
428,328
$
424,570
$
833,198
$
830,918
Cost of products sold
201,374
194,667
390,202
378,594
Gross Profit
226,954
229,903
442,996
452,324
Product development
17,324
16,112
33,893
31,401
Selling, marketing and distribution
60,441
62,949
121,258
125,471
General and administrative
36,828
37,464
70,957
70,378
Operating Earnings
112,361
113,378
216,888
225,074
Interest expense
3,431
3,891
6,966
7,124
Other expense, net
1,119
4,251
1,388
5,286
Earnings Before Income Taxes
107,811
105,236
208,534
212,664
Income taxes
19,674
16,096
33,648
38,014
Net Earnings
$
88,137
$
89,140
$
174,886
$
174,650
Net Earnings (Loss) per Common Share
Basic
$
0.53
$
0.53
$
1.05
$
1.04
Diluted
$
0.51
$
0.51
$
1.02
$
1.00
Weighted Average Number of Shares
Basic
166,684
167,260
166,150
168,166
Diluted
172,047
173,265
171,453
174,457
SEGMENT INFORMATION
(Unaudited)
(In thousands)
Three Months Ended
Six Months Ended
Jun 28,
Jun 29,
Jun 28,
Jun 29,
2019
2018
2019
2018
Net Sales
Industrial
$
188,507
$
190,459
$
377,607
$
385,655
Process
85,064
85,059
171,958
165,094
Contractor
154,757
149,052
283,633
280,169
Total
$
428,328
$
424,570
$
833,198
$
830,918
Operating Earnings
Industrial
$
64,428
$
67,030
$
129,631
$
136,155
Process
18,378
17,065
38,392
34,767
Contractor
40,054
38,382
66,593
69,793
Unallocated corporate (expense)
(10,499
)
(9,099
)
(17,728
)
(15,641
)
Total
$
112,361
$
113,378
$
216,888
$
225,074
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/20190724005791/en/
Financial Contact: Mark Sheahan, 612-623-6656 Media Contact:
Charlotte Boyd, 612-623-6153 Charlotte_M_Boyd@graco.com
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