Withdraws 2020 Revenue Guidance Due to
Economic Uncertainty
Graco Inc. (NYSE: GGG) today announced results for the
first quarter ended March 27, 2020.
Summary
$ in millions except per share amounts
Three Months Ended
Mar 27,
Mar 29,
%
2020
2019
Change
Net Sales
$
373.6
$
404.9
(8) %
Operating Earnings
89.8
104.5
(14) %
Net Earnings
72.8
86.7
(16) %
Diluted Net Earnings per Common Share
$
0.42
$
0.51
(18) %
Adjusted (non-GAAP): (1)
Net Earnings, adjusted
$
65.0
$
80.1
(19) %
Diluted Net Earnings per Common Share,
adjusted
$
0.38
$
0.47
(19) %
(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.
- Sales decreased 8 percent, with double-digit percentage
declines in the Industrial segment and in the EMEA and Asia Pacific
regions.
- Gross margin rate remained relatively strong as favorable
realized pricing mostly offset the adverse impacts of lower factory
volume, unfavorable product and channel mix, and changes in
currency translation rates.
- Total operating expenses decreased 2 percent. Reductions in
volume and earnings-based expenses more than offset a 3 percent
increase in product development expenses.
- Other non-operating expenses increased $5 million due to market
valuation losses on investments held to fund certain retirement
benefits liabilities.
“First quarter sales did not meet our expectations and
deteriorated as the quarter progressed,” said Patrick J. McHale,
Graco's President and CEO.
Consolidated Results
Sales decreased 8 percent from the comparable period last year
(7 percent at consistent translation rates). Sales decreased 3
percent in the Americas, 12 percent in EMEA (10 percent at
consistent translation rates) and 17 percent in Asia Pacific (15
percent at consistent translation rates). Changes in currency
translation rates decreased worldwide sales by approximately $4
million (1 percentage point). Sales from acquired operations
contributed approximately $5 million to the first quarter.
Gross profit margin rate decreased slightly from the comparable
period last year. Strong price realization nearly offset the
adverse impacts of lower factory volume, unfavorable product and
channel mix, and changes in currency translation rates.
Total operating expenses decreased $3 million (2 percent)
compared to last year. Reductions in volume and earnings-based
expenses more than offset increases in product development and
occupancy expenses.
Other expense for the year increased $5 million from last year,
driven by losses on investments used to fund certain retirement
benefits liabilities.
The effective income tax rate was 11 percent, down approximately
3 percentage points from the comparable period last year. The
decrease was due primarily to an increase in excess tax benefits
related to stock option exercises, partially offset by the effect
of non-recurring tax benefits from other tax planning activities
last year.
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)
$
158.7
$
86.1
$
128.8
Percentage change from last year
Sales
(16
)%
(1
)%
0
%
Operating earnings
(23
)%
(10
)%
8
%
Operating earnings as a percentage of
sales
2020
32
%
21
%
22
%
2019
34
%
23
%
21
%
Components of net sales change by geographic region for the
Industrial segment were as follows:
Three Months
Volume
and Price
Acquisitions
Currency
Total
Americas
(8)%
0%
0%
(8)%
EMEA
(19)%
0%
(1)%
(20)%
Asia Pacific
(22)%
0%
(2)%
(24)%
Consolidated
(15)%
0%
(1)%
(16)%
Industrial segment sales declined in all regions with the spread
of worldwide government actions that severely reduced economic
activity in major geographies. Improved gross margin rate in this
segment, from realized pricing and favorable product and channel
mix, offset the adverse impact of changes in translation rates.
Decreases in operating expenses did not keep pace with the drop in
sales volume, driving operating earnings as a percentage of sales
down compared to last year.
Components of net sales change by geographic region for the
Process segment were as follows:
Three Months
Volume
and Price
Acquisitions
Currency
Total
Americas
(6)%
2%
0%
(4)%
EMEA
(7)%
8%
(1)%
0%
Asia Pacific
(3)%
15%
(3)%
9%
Consolidated
(6)%
5%
0%
(1)%
Process segment sales decreased slightly, with sales from
acquired operations nearly offsetting volume declines in organic
businesses. Lower volume, higher product costs, unfavorable channel
and product mix, and lower operating margins of acquired operations
combined to decrease operating earnings as a percentage of
sales.
Components of net sales change by geographic region for the
Contractor segment were as follows:
Three Months
Volume
and Price
Acquisitions
Currency
Total
Americas
2%
0%
(1)%
1%
EMEA
3%
0%
(2)%
1%
Asia Pacific
(14)%
0%
(4)%
(18)%
Consolidated
1%
0%
(1)%
0%
Contractor segment sales increased by 1 percent at consistent
currency translation rates, with favorable response to new product
offerings and continued stability in construction markets in the
Americas and EMEA. This segment saw a marked reduction in orders
during the latter part of March that offset solid revenue gains
earlier in the quarter. Operating margin rate increased by 1
percentage point, driven by strong realized pricing, favorable
product and channel mix, and expense leverage.
Outlook
“Due to economic uncertainty, we are withdrawing our 2020
revenue guidance for the remainder of the year,” said McHale.
“While the current environment presents unforeseen challenges, for
now our playbook remains the same. In the short term, Graco is well
positioned financially and strategically to operate without making
major changes that would adversely impact our key stakeholders. We
will continue to monitor what is happening in our end markets and
may adjust our approach if warranted by facts. We are confident
that our loyal customer base, strong management team and business
model position us well for the long term. I want to recognize the
hard work and dedication of our employees, who have kept our
factories running and our company open for business.”
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 adjusted income taxes,
effective income tax rates, net earnings and diluted earnings per
share follows (in millions except per share amounts):
Three Months Ended
Mar 27,
Mar 29,
2020
2019
Earnings before income taxes
$
82.1
$
100.7
Income taxes, as reported
$
9.3
$
14.0
Excess tax benefit from option
exercises
7.8
5.1
Other non-recurring tax benefit
—
1.5
Income taxes, adjusted
$
17.1
$
20.6
Effective income tax rate
As reported
11.3
%
13.9
%
Adjusted
20.8
%
20.5
%
Net Earnings, as reported
$
72.8
$
86.7
Excess tax benefit from option
exercises
(7.8
)
(5.1
)
Other non-recurring tax benefit
—
(1.5
)
Net Earnings, adjusted
$
65.0
$
80.1
Weighted Average Diluted Shares
172.6
170.9
Diluted Earnings per Share
As reported
$
0.42
$
0.51
Adjusted
$
0.38
$
0.47
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 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: the impact of the COVID-19
pandemic on our business; economic conditions in the United States
and other major world economies; our Company’s growth strategies,
which include making acquisitions, investing in new products,
expanding geographically and targeting new industries; changes in
currency translation rates; 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 2019
(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 23, 2020, 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
23, 2020, by dialing 888-203-1112, Conference ID #6655137, if
calling within the U.S. or Canada. The dial-in number for
international participants is +1 786-789-4797, with the same
Conference ID number. The replay by telephone will be available
through 2 p.m. ET on Monday, April 27, 2020.
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
Mar 27,
Mar 29,
2020
2019
Net Sales
$
373,567
$
404,870
Cost of products sold
174,936
188,828
Gross Profit
198,631
216,042
Product development
17,081
16,569
Selling, marketing and distribution
57,388
60,817
General and administrative
34,350
34,129
Operating Earnings
89,812
104,527
Interest expense
2,486
3,535
Other expense, net
5,223
269
Earnings Before Income Taxes
82,103
100,723
Income taxes
9,285
13,974
Net Earnings
$
72,818
$
86,749
Net Earnings per Common Share
Basic
$
0.43
$
0.52
Diluted
$
0.42
$
0.51
Weighted Average Number of Shares
Basic
167,977
165,616
Diluted
172,642
170,859
SEGMENT INFORMATION
(Unaudited)
(In thousands)
Three Months Ended
Mar 27,
Mar 29,
2020
2019
Net Sales
Industrial
$
158,684
$
189,100
Process
86,078
86,894
Contractor
128,805
128,876
Total
$
373,567
$
404,870
Operating Earnings
Industrial
$
50,233
$
65,203
Process
18,111
20,014
Contractor
28,630
26,539
Unallocated corporate (expense)
(7,162
)
(7,229
)
Total
$
89,812
$
104,527
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/20200422005914/en/
Financial Contact: Mark Sheahan, 612-623-6656 Media Contact:
Charlotte Boyd, 612-623-6153 Charlotte_M_Boyd@graco.com
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