Sales Growth in Contractor Segment
Graco Inc. (NYSE: GGG) today announced results for the
second quarter ended June 26, 2020.
Summary
$ in millions except per share amounts
Three Months Ended
Six Months Ended
Jun 26, 2020
Jun 28, 2019
% Change
Jun 26, 2020
Jun 28, 2019
% Change
Net Sales
$
366.9
$
428.3
(14)
%
$
740.5
$
833.2
(11)
%
Operating Earnings
44.8
112.4
(60)
%
134.6
216.9
(38)
%
Net Earnings
28.8
88.1
(67)
%
101.7
174.9
(42)
%
Diluted Net Earnings per Common Share
$
0.17
$
0.51
(67)
%
$
0.59
$
1.02
(42)
%
Adjusted (non-GAAP): (1)
Net Earnings, adjusted
$
62.3
$
85.9
(27)
%
$
127.5
$
166.0
(23)
%
Diluted Net Earnings per Common Share,
adjusted
$
0.37
$
0.50
(26)
%
$
0.74
$
0.97
(24)
%
(1)
Excludes impacts of impairment, 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.
- Increases in Contractor sales for the quarter and year to date
partially offset the impact of double-digit organic percentage
declines in other segments.
- Changes in product and channel mix, lower factory volume and
changes in currency translation rates drove decreases in gross
margin rates for the quarter and the year to date.
- Earnings for the quarter and year to date included non-cash
impairment charges of $35 million ($34 million, $0.20 per diluted
share, after tax effects) related to a U.K.-based valve business
that was sold in the third quarter.
- Total operating expenses before impairment charges decreased 10
percent for the quarter and 6 percent for the year to date.
Reductions in volume and earnings-based expenses more than offset
increases in product development expenses.
- Other non-operating expenses decreased $2 million for the
quarter and increased $3 million for the year to date mostly due to
market valuation fluctuations on investments held to fund certain
retirement benefits liabilities.
- The effective income tax rate for the quarter was 13 percentage
points higher than the second quarter rate last year primarily due
to non-deductible impairment charges.
“Our factories and distribution centers remained fully
operational during the second quarter,” said Patrick J. McHale,
Graco's President and CEO. “High-risk employees remain at home and
we have dealt with the positive COVID-19 tests that we have
experienced at our various facilities without disruption. I am very
pleased with the resolve our employees have shown, and continue to
show, throughout this pandemic. Their perseverance and
professionalism have kept our factories running and our company
open for business.”
Consolidated Results
Sales for the quarter decreased 14 percent from the comparable
period last year (13 percent at consistent translation rates).
Sales decreased 10 percent in the Americas, 30 percent in EMEA (28
percent at consistent translation rates) and 7 percent in Asia
Pacific (5 percent at consistent translation rates). Sales for the
year to date decreased 11 percent from the comparable period last
year (10 percent at consistent translation rates). Sales decreased
7 percent in the Americas, 21 percent in EMEA (19 percent at
consistent translation rates) and 12 percent in Asia Pacific (10
percent at consistent translation rates). Changes in currency
translation rates decreased worldwide sales by approximately $5
million for the quarter and $9 million for the year to date. Sales
from acquired operations contributed approximately $7 million (2
percentage points) to the second quarter and $12 million (2
percentage points) to the year to date.
Gross profit margin rates for the quarter and year to date
decreased from the comparable periods last year. Strong price
realization was not enough to offset the adverse impacts of
unfavorable product and channel mix (lower high-margin Industrial
sales combined with growth in lower-margin Contractor segment
sales), lower factory volume and changes in currency translation
rates.
In the second quarter, the Company entered into negotiations to
sell its U.K.-based valve business (“Alco”), which has significant
exposure to oil and natural gas markets, and has accumulated
operating losses since acquired in 2014. Alco operations
contributed $7 million of sales for the year to date and are
included within the Company's Process segment. Based on the
negotiations to sell, the Company revalued its investment in Alco,
recording non-cash impairment charges of $35 million, including $24
million of previously unrealized foreign currency translation
losses recorded in accumulated other comprehensive income. The
impact of the impairment on net earnings was $34 million or $0.20
per diluted share. The sale of Alco was completed in the third
quarter, subject to post-closing adjustments.
Total operating expenses before impairment charges decreased $12
million (10 percent) for the quarter and $14 million (6 percent)
for the year to date compared to last year. Reductions in volume
and earnings-based expenses more than offset increases in product
development, which increased 4 percent for the quarter and 3
percent for the year to date, as the Company continued its
development initiatives.
Other non-operating expenses decreased $2 million for the
quarter and increased $3 million for the year to date mostly due to
market valuation fluctuations on investments held to fund certain
retirement benefits liabilities.
The effective income tax rate for the quarter was 31 percent, up
13 percentage points from the comparable period last year,
primarily due to non-deductible impairment charges. The effective
income tax rate for the year to date was 18 percent, up 2
percentage points from the comparable period last year. The
year-to-date increase from the non-deductible impairment charges
was partially offset by the favorable impact of an increase 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
Six Months
Industrial
Process
Contractor
Industrial
Process
Contractor
Net Sales (in millions)
$
133.3
$
77.8
$
155.8
$
292.0
$
163.8
$
284.7
Percentage change from last year
Sales
(29)
%
(9)
%
1
%
(23)
%
(5)
%
0
%
Operating earnings
(43)
%
(36)
%
3
%
(33)
%
(22)
%
5
%
Operating earnings as a percentage of
sales
2020
28
%
15
%
26
%
30
%
18
%
24
%
2019
34
%
22
%
26
%
34
%
22
%
23
%
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
(27)%
0%
(1)%
(28)%
(17)%
0%
(1)%
(18)%
EMEA
(40)%
0%
(1)%
(41)%
(29)%
0%
(2)%
(31)%
Asia Pacific
(16)%
0%
(2)%
(18)%
(19)%
0%
(2)%
(21)%
Consolidated
(28)%
0%
(1)%
(29)%
(22)%
0%
(1)%
(23)%
Industrial segment sales for the quarter and year to date
declined in all regions with worldwide government actions that
severely reduced economic activity in major geographies. While
gross margin rates in this segment remained relatively strong,
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
Six Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
(20)%
4%
0%
(16)%
(13)%
3%
0%
(10)%
EMEA
(17)%
11%
(2)%
(8)%
(11)%
9%
(2)%
(4)%
Asia Pacific
1%
20%
(3)%
18%
(1)%
18%
(3)%
14%
Consolidated
(16)%
8%
(1)%
(9)%
(11)%
7%
(1)%
(5)%
Acquired operations in the Process segment contributed sales of
$7 million for the quarter and $12 million for the year to date.
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 for both the
quarter and the year to date.
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
5%
0%
(1)%
4%
3%
0%
0%
3%
EMEA
(15)%
0%
(2)%
(17)%
(6)%
0%
(2)%
(8)%
Asia Pacific
9%
0%
(4)%
5%
(3)%
0%
(4)%
(7)%
Consolidated
1%
0%
0%
1%
1%
0%
(1)%
0%
Contractor segment sales increased by 1 percent at consistent
currency translation rates for both the quarter and the year to
date. Favorable response to new product offerings and continued
stability in construction markets in the Americas drove the
increase. Operating margin rate was steady for the quarter and
increased by 1 percentage point for the year to date, as the
favorable effects of strong realized pricing and expense leverage
offset unfavorable effects of product and channel mix and higher
factory spending.
Outlook
“While weak economic conditions affected our business in the
second quarter, we remain committed to our long-term strategy,”
said McHale. “Our initiatives for 2021 and beyond have continued as
usual. We will use this difficult period to strengthen our
competitive position, expand our product offering, build our global
channel and enter new market spaces. These initiatives may put
pressure on our short-term financial results, but will position us
to capitalize when market conditions normalize. We also recognize
that the timing and shape of a recovery is highly uncertain. We
will remain agile and have contingency plans in place to
appropriately respond to conditions as they unfold.”
Financial Results Adjusted for Comparability
Excluding the impacts of impairment charges, 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 operating earnings, 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
Six Months Ended
Jun 26, 2020
Jun 28, 2019
Jun 26, 2020
Jun 28, 2019
Operating earnings, as reported
$
44.8
$
112.4
$
134.6
$
216.9
Impairment
35.0
—
35.0
—
Operating earnings, adjusted
$
79.8
$
112.4
$
169.6
$
216.9
Earnings before income taxes, as
reported
$
42.0
$
107.8
$
124.1
$
208.5
Impairment
35.0
—
35.0
—
Earnings before income taxes, adjusted
$
77.0
$
107.8
$
159.1
$
208.5
Income taxes, as reported
$
13.2
$
19.7
$
22.5
$
33.6
Excess tax benefit from option
exercises
0.3
2.2
8.0
7.4
Impairment tax benefit
1.2
—
1.2
—
Other non-recurring tax benefit
—
—
—
1.5
Income taxes, adjusted
$
14.7
$
21.9
$
31.7
$
42.5
Effective income tax rate
As reported
31.4
%
18.2
%
18.1
%
16.1
%
Adjusted
19.1
%
20.3
%
19.9
%
20.4
%
Net Earnings, as reported
$
28.8
$
88.1
$
101.7
$
174.9
Impairment, net
33.8
—
33.8
—
Excess tax benefit from option
exercises
(0.3
)
(2.2
)
(8.0
)
(7.4
)
Other non-recurring tax benefit
—
—
—
(1.5
)
Net Earnings, adjusted
$
62.3
$
85.9
$
127.5
$
166.0
Weighted Average Diluted Shares
170.5
172.0
171.6
171.5
Diluted Earnings per Share
As reported
$
0.17
$
0.51
$
0.59
$
1.02
Adjusted
$
0.37
$
0.50
$
0.74
$
0.97
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,
July 23, 2020, 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
23, 2020, by dialing 888-203-1112, Conference ID #3676995, 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 1 p.m. ET on Monday, July 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
Six Months Ended
Jun 26, 2020
Jun 28, 2019
Jun 26, 2020
Jun 28, 2019
Net Sales
$
366,892
$
428,328
$
740,459
$
833,198
Cost of products sold
184,363
201,374
359,299
390,202
Gross Profit
182,529
226,954
381,160
442,996
Product development
17,948
17,324
35,029
33,893
Selling, marketing and distribution
48,831
60,441
106,219
121,258
General and administrative
36,015
36,828
70,365
70,957
Impairment
34,962
—
34,962
—
Operating Earnings
44,773
112,361
134,585
216,888
Interest expense
3,258
3,431
5,744
6,966
Other expense (income), net
(510
)
1,119
4,713
1,388
Earnings Before Income Taxes
42,025
107,811
124,128
208,534
Income taxes
13,193
19,674
22,478
33,648
Net Earnings
$
28,832
$
88,137
$
101,650
$
174,886
Net Earnings per Common Share
Basic
$
0.17
$
0.53
$
0.61
$
1.05
Diluted
$
0.17
$
0.51
$
0.59
$
1.02
Weighted Average Number of Shares
Basic
166,663
166,684
167,320
166,150
Diluted
170,549
172,047
171,596
171,453
SEGMENT INFORMATION
(Unaudited)
(In thousands)
Three Months Ended
Six Months Ended
Jun 26, 2020
Jun 28, 2019
Jun 26, 2020
Jun 28, 2019
Net Sales
Industrial
$
133,287
$
188,507
$
291,971
$
377,607
Process
77,759
85,064
163,837
171,958
Contractor
155,846
154,757
284,651
283,633
Total
$
366,892
$
428,328
$
740,459
$
833,198
Operating Earnings
Industrial
$
37,001
$
64,428
$
87,234
$
129,631
Process
11,672
18,378
29,783
38,392
Contractor
41,109
40,054
69,739
66,593
Unallocated corporate (expense)
(10,047
)
(10,499
)
(17,209
)
(17,728
)
Impairment
(34,962
)
—
(34,962
)
—
Total
$
44,773
$
112,361
$
134,585
$
216,888
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/20200722005825/en/
Financial Contact: Mark Sheahan, 612-623-6656 Media Contact:
Charlotte Boyd, 612-623-6153 Charlotte_M_Boyd@graco.com
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