Weakness in Asia Pacific Pushes Sales and
Earnings Down
Graco Inc. (NYSE: GGG) today announced results for the
third quarter ended September 27, 2019.
Summary
$ in millions except per share amounts
Three Months Ended
Nine Months Ended
Sep 27, 2019
Sep 28, 2018
%
Change
Sep 27, 2019
Sep 28, 2018
%
Change
Net Sales
$
400.6
$
415.9
(4
) %
$
1,233.8
$
1,246.9
(1
) %
Operating Earnings
103.4
114.8
(10
) %
320.3
339.9
(6
) %
Net Earnings
84.1
92.7
(9
) %
259.0
267.3
(3
) %
Diluted Net Earnings per Common Share
$
0.49
$
0.54
(9
) %
$
1.51
$
1.54
(2
) %
Adjusted (non-GAAP): (1)
Net Earnings, adjusted
$
77.4
$
85.8
(10
) %
$
243.4
$
252.5
(4
) %
Diluted Net Earnings per Common Share,
adjusted
$
0.45
$
0.50
(10
) %
$
1.42
$
1.45
(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.
- At consistent currency rates, sales growth in the Americas and
EMEA was offset by decreases in Asia Pacific markets.
- Gross margin rates for the quarter and year to date decreased
due to lower factory volume, unfavorable product and channel mix,
and changes in currency translation rates.
- Total operating expenses decreased 3 percent for the quarter
and 1 percent for the year to date.
- The effective income tax rates for the quarter and the year to
date decreased mainly due to a tax rate change in a foreign
jurisdiction.
“Steep declines in our Asia Pacific end markets continued to
have a negative impact on sales for all reported segments,
particularly the Industrial and Process segments,” said Patrick J.
McHale, Graco's President and CEO. “The softer end-market demand
was broad based and driven by both slower economic growth in Asia
Pacific and business uncertainty worldwide. On a positive note, our
Contractor segment saw nice growth in the quarter as new products
continue to be favorably received by professional painting
contractors.”
Consolidated Results
Sales for the quarter decreased 4 percent from the comparable
period last year (2 percent at consistent translation rates). Sales
increased 3 percent in the Americas, were flat in EMEA (up 4
percent at consistent translation rates), and decreased by 26
percent in Asia Pacific (24 percent at consistent translation
rates). Sales for the year to date decreased 1 percent from the
comparable period last year (up 1 percent at consistent translation
rates), with increases of 4 percent in the Americas and 1 percent
in EMEA (6 percent at consistent translation rates), offset by a 16
percent decrease in Asia Pacific (13 percent at consistent
translation rates). Changes in currency translation rates decreased
worldwide sales by approximately $6 million (2 percentage points)
for the quarter and $26 million (2 percentage points) for the year
to date. Sales from acquired operations contributed approximately
$2 million (1 percentage point) of growth to the third quarter, and
did not have a significant impact on year-to-date comparisons.
Gross profit margin rates for the quarter and year to date
decreased from the comparable periods last year driven by lower
factory volume, unfavorable channel and product mix, and changes in
currency translation rates. Price changes implemented in the first
quarter offset the adverse impact of higher material costs.
Total operating expenses for the quarter and year to date
decreased $3 million (3 percent) and $4 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 6 percent for the quarter and
7 percent for the year to date.
Other expense for the year to date was $4 million lower than the
comparable period last year, driven by lower exchange losses on net
assets of foreign operations.
The effective income tax rate was 13 percent for the quarter and
15 percent for the year to date, both down approximately 1
percentage point from the comparable periods last year. The
decrease was driven by a revaluation of deferred taxes pursuant to
a tax rate change in a foreign jurisdiction. The impact of the tax
rate change was partially offset by the effects of decreases in
excess tax benefits related to stock option exercises.
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)
$
175.0
$
84.1
$
141.5
$
552.6
$
256.1
$
425.1
Percentage change from last year
Sales
(11
)%
(1
)%
4
%
(5
)%
3
%
2
%
Operating earnings
(19
)%
2
%
4
%
(10
)%
8
%
(2
)%
Operating earnings as a percentage of
sales
2019
33
%
22
%
24
%
34
%
22
%
24
%
2018
36
%
21
%
24
%
36
%
21
%
25
%
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
(1
)%
0
%
0
%
(1
)%
3
%
0
%
0
%
3
%
EMEA
(1
)%
0
%
(4
)%
(5
)%
4
%
0
%
(5
)%
(1
)%
Asia Pacific
(28
)%
0
%
(1
)%
(29
)%
(16
)%
0
%
(3
)%
(19
)%
Consolidated
(9
)%
0
%
(2
)%
(11
)%
(2
)%
0
%
(3
)%
(5
)%
Continued softness in Asia Pacific end markets led to steep
declines in third quarter Industrial segment sales. For the year to
date, underlying sales growth in the Americas and EMEA was more
than offset by decreases in Asia Pacific. Operating earnings as a
percentage of sales decreased as the favorable effects of pricing
were more than offset by the adverse impacts of currency
translation, higher material costs, lower sales and factory volume,
and product and channel mix.
Components of net sales change by geographic region for the
Process segment were as follows:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
2
%
1
%
0
%
3
%
5
%
0
%
0
%
5
%
EMEA
6
%
10
%
(4
)%
12
%
6
%
3
%
(4
)%
5
%
Asia Pacific
(24
)%
3
%
(2
)%
(23
)%
(6
)%
1
%
(3
)%
(8
)%
Consolidated
(2
)%
2
%
(1
)%
(1
)%
3
%
1
%
(1
)%
3
%
Process segment sales comparisons to last year were also
affected by weakness in Asia Pacific. For the quarter, decreases in
Asia Pacific were largely offset by growth in the Americas and EMEA
and the impact of acquired operations. Year-to-date sales at
consistent translation rates increased in all product applications,
although growth was lower and certain applications had decreases in
the third quarter. Operating margin rates for the quarter and year
to date improved, driven by lower volume and earnings-based
costs.
Components of net sales change by geographic region for the
Contractor segment were as follows:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
6
%
0
%
0
%
6
%
4
%
0
%
(1
)%
3
%
EMEA
8
%
0
%
(4
)%
4
%
8
%
0
%
(5
)%
3
%
Asia Pacific
(10
)%
0
%
(4
)%
(14
)%
(7
)%
0
%
(4
)%
(11
)%
Consolidated
5
%
0
%
(1
)%
4
%
4
%
0
%
(2
)%
2
%
Contractor segment sales at consistent currency translation
rates increased by 5 percent, driving year-to-date growth to 4
percent. The portion of Contractor sales in Asia Pacific is lower
than other reporting segments, so weakness in that region had less
impact on Contractor results. 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 higher material costs and unfavorable product and
channel mix. Operating margin rate for the year to date was 1
percentage point lower than last year due to changes in currency
translation rates, higher material costs, lower factory volume and
higher factory spending.
Outlook
“Given the sharp decline in Asia Pacific and slowing in our
Industrial and Process businesses in the Americas, we are lowering
our full-year 2019 worldwide outlook to flat revenue on a constant
currency organic basis,” said McHale. “Despite this downward change
in outlook, we intend to fully fund our growth initiatives while
remaining diligent on discretionary spending in this current
cycle.”
Financial Results Adjusted for Comparability
Excluding the impacts of excess tax benefits related to stock
option exercises and certain tax provision adjustments 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
Nine Months Ended
Sep 27, 2019
Sep 28, 2018
Sep 27, 2019
Sep 28, 2018
Earnings before income taxes
$
96.8
$
108.1
$
305.3
$
320.7
Income taxes, as reported
$
12.7
$
15.4
$
46.3
$
53.4
Excess tax benefit from option
exercises
0.7
1.9
8.1
9.8
Other non-recurring tax benefit
6.0
5.0
7.5
5.0
Income taxes, adjusted
$
19.4
$
22.3
$
61.9
$
68.2
Effective income tax rate
As reported
13.1
%
14.2
%
15.2
%
16.6
%
Adjusted
20.0
%
20.6
%
20.3
%
21.2
%
Net Earnings, as reported
$
84.1
$
92.7
$
259.0
$
267.3
Excess tax benefit from option
exercises
(0.7
)
(1.9
)
(8.1
)
(9.8
)
Other non-recurring tax benefit
(6.0
)
(5.0
)
(7.5
)
(5.0
)
Net Earnings, adjusted
$
77.4
$
85.8
$
243.4
$
252.5
Weighted Average Diluted Shares
171.8
173.0
171.6
174.0
Diluted Earnings per Share
As reported
$
0.49
$
0.54
$
1.51
$
1.54
Adjusted
$
0.45
$
0.50
$
1.42
$
1.45
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,
Oct. 24, 2019, 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 Thursday, Oct.
24, 2019, by dialing 888-203-1112, Conference ID #9444495, 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, Oct. 28, 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
Nine Months Ended
Sep 27, 2019
Sep 28, 2018
Sep 27, 2019
Sep 28, 2018
Net Sales
$
400,555
$
415,936
$
1,233,753
$
1,246,854
Cost of products sold
193,176
194,477
583,378
573,071
Gross Profit
207,379
221,459
650,375
673,783
Product development
16,723
15,734
50,616
47,135
Selling, marketing and distribution
55,538
57,270
176,796
182,741
General and administrative
31,719
33,676
102,676
104,054
Operating Earnings
103,399
114,779
320,287
339,853
Interest expense
3,618
3,583
10,584
10,707
Other expense, net
2,972
3,139
4,360
8,425
Earnings Before Income Taxes
96,809
108,057
305,343
320,721
Income taxes
12,677
15,376
46,325
53,390
Net Earnings
$
84,132
$
92,681
$
259,018
$
267,331
Net Earnings per Common Share
Basic
$
0.50
$
0.55
$
1.56
$
1.59
Diluted
$
0.49
$
0.54
$
1.51
$
1.54
Weighted Average Number of Shares
Basic
166,848
167,247
166,383
167,860
Diluted
171,777
173,037
171,561
173,984
SEGMENT INFORMATION
(Unaudited)
(In thousands)
Three Months Ended
Nine Months Ended
Sep 27, 2019
Sep 28, 2018
Sep 27, 2019
Sep 28, 2018
Net Sales
Industrial
$
175,016
$
195,855
$
552,623
$
581,510
Process
84,090
84,556
256,048
249,650
Contractor
141,449
135,525
425,082
415,694
Total
$
400,555
$
415,936
$
1,233,753
$
1,246,854
Operating Earnings
Industrial
$
57,023
$
70,572
$
186,654
$
206,727
Process
18,194
17,862
56,586
52,629
Contractor
34,005
32,739
100,598
102,532
Unallocated corporate (expense)
(5,823
)
(6,394
)
(23,551
)
(22,035
)
Total
$
103,399
$
114,779
$
320,287
$
339,853
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/20191023005761/en/
Financial Contact: Mark Sheahan, 612-623-6656
Media Contact: Charlotte Boyd, 612-623-6153
Charlotte_M_Boyd@graco.com
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