Market Overview

Graco Reports Record Third Quarter Sales and Earnings

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Strong Sales Growth in All Segments and Regions

Graco Inc. (NYSE:GGG) today announced results for the third
quarter and nine months ended September 29, 2017.

 
Summary

$ in millions except per share amounts

       
Three Months Ended Nine Months Ended
Sep 29,     Sep 23,     % Sep 29,     Sep 23,     %
2017 2016 Change 2017 2016 Change
Net Sales $ 379.8 $ 327.2 16 % $ 1,099.9 $ 980.2 12 %
Operating Earnings 99.6 81.5 22 % 284.2 220.8 29 %
Net Earnings 75.5 54.4 39 % 216.0 144.9 49 %

Diluted Net Earnings per Common Share

$ 1.30 $ 0.95 37 % $ 3.73 $ 2.55 46 %
Diluted Net Earnings per Common Share, adjusted (1) $ 1.15 $ 0.95 21 % $ 3.28 $ 2.55 29 %
 

(1)

  Excludes the reduction of income taxes resulting from a required
change in accounting for excess tax benefits on stock option
exercises. Also excludes the effect of tax planning benefits
realized in the third quarter of 2017. See Financial Results
Adjusted for Comparability below for a reconciliation of the
adjusted non-GAAP financial measures to GAAP.
 
  • All segments and regions had double-digit percentage sales growth for
    the quarter and year to date.
  • Gross margin rate declined slightly in the third quarter compared to
    the prior year, with favorable price-cost dynamics more than offset by
    the impacts of project sales and product mix.
  • Sales growth and operating expense leverage drove operating earnings
    increases of 22 percent for the quarter and 29 percent for the year to
    date.
  • Diluted earnings per share include $0.06 for the quarter and $0.36 for
    the year to date from a required change in accounting for stock
    compensation.
  • Diluted earnings per share for the quarter and year to date include
    $0.09 related to tax planning benefits that will not recur in 2018.

"For the third consecutive quarter Graco posted double-digit sales
growth on an organic, constant currency basis, achieving new Company
sales records for both the quarter and year to date. This also marks the
third consecutive quarter where we have achieved growth in every region
and reportable segment," said Patrick J. McHale, Graco's President and
CEO. "Overall Company profitability trends remained solid in the third
quarter, similar to the first half results, reflecting strong operating
expense leverage on the double-digit sales increase."

Consolidated Results

Sales for the quarter increased 16 percent, with increases of 12 percent
in the Americas, 18 percent in EMEA (14 percent at consistent
translation rates) and 27 percent in Asia Pacific (28 percent at
consistent translation rates). Sales for the year to date increased 12
percent, with increases of 11 percent in the Americas, 10 percent in
EMEA (12 percent at consistent translation rates) and 18 percent in Asia
Pacific (20 percent at consistent translation rates).

Changes in currency translation rates increased sales by approximately
$3 million (1 percentage point) for the quarter and decreased sales by
approximately $6 million (1 percentage point) for the year to date.

Gross profit margin rate decreased by one-half percentage point for the
quarter and increased one-half percentage point for the year to date.
Favorable effects from higher production volume and realized pricing
were offset in varying degrees for the quarter and the year to date by
the unfavorable impact of product mix.

Total operating expenses for the quarter increased $9 million (9
percent) compared to the third quarter last year. More than half of the
increase was from increases in sales and earnings-based incentives and
unallocated corporate operating expense (mostly from market-based stock
compensation and pension costs). Year-to-date operating expenses
increased $6 million (2 percent). Volume and rate-related increases were
partially offset by a $3 million decrease in amortization expense and
the impact of currency translation.

The effective income tax rate for the quarter was 22 percent, down from
29 percent last year. The effective income tax rate for the year to date
was 21 percent, down from 30 percent last year. Adoption of a new
accounting standard, requiring excess tax benefits related to stock
option exercises to be credited to the income tax provision (formerly
credited to equity), reduced the tax provision by $3.2 million for the
quarter and $20.5 million for the year to date, decreasing the effective
tax rate for the quarter and year to date by 3 and 7 percentage points,
respectively. The effective tax rates for both the quarter and year to
date were further reduced by the impacts of tax planning that will not
recur in 2018 and foreign earnings taxed at lower rates than the U.S.

Segment Results

Certain measurements of segment operations are summarized below:

       
Three Months Ended Nine Months Ended
Industrial     Process     Contractor Industrial     Process     Contractor
Net Sales (in millions) $ 178.5 $ 73.7 $ 127.7 $ 509.7 $ 217.1 $ 373.1
Percentage change from last year
Sales 18 % 10 % 17 % 12 % 11 % 13 %
Operating earnings 22 % 16 % 31 % 20 % 54 % 30 %
Operating earnings as a percentage of sales

    2017

35 % 16 % 26 % 35 % 18 % 25 %

    2016

34 % 15 % 23 % 32 % 13 % 22 %
 

Components of net sales change by geographic region for the Industrial
segment were as follows:

       
Three Months Ended Nine Months Ended

Volume
and Price

    Acquisitions     Currency     Total

Volume
and Price

    Acquisitions     Currency     Total
Americas 11 % 1 % 0 % 12 % 9 % 0 % 0 % 9 %
EMEA 13 % 0 % 5 % 18 % 10 % 0 % (1 )% 9 %
Asia Pacific 30 % 1 % (1 )% 30 % 22 % 1 % (3 )% 20 %
Consolidated 17 % 0 % 1 % 18 % 12 % 1 % (1 )% 12 %
 

Sales increased in all Industrial segment product applications.
Year-to-date operating margin rate for the Industrial segment increased
3 percentage points compared to last year. Favorable effects of higher
sales volume and expense leverage were partially offset by the
unfavorable effect of currency translation.

Components of net sales change by geographic region for the Process
segment were as follows:

       
Three Months Ended Nine Months Ended

Volume
and Price

    Acquisitions     Currency     Total

Volume
and Price

    Acquisitions     Currency     Total
Americas 11 % 0 % 0 % 11 % 12 % 0 % 0 % 12 %
EMEA (3 )% 0 % 1 % (2 )% 7 % 0 % (4 )% 3 %
Asia Pacific 17 % 0 % 0 % 17 % 17 % 0 % (1 )% 16 %
Consolidated 9 % 0 % 1 % 10 % 12 % 0 % (1 )% 11 %
 

The Process segment had solid sales growth in legacy product
applications, partially offset by the effects of continued weakness in
Oil and Natural Gas. Year-to-date operating margin rates for this
segment increased 5 percentage points compared to last year due to
higher sales volume, favorable expense leverage and a decrease in
intangible amortization related to the impairment recorded in the fourth
quarter of 2016.

Components of net sales change by geographic region for the Contractor
segment were as follows:

       
Three Months Ended Nine Months Ended

Volume
and Price

    Acquisitions     Currency     Total

Volume
and Price

    Acquisitions     Currency     Total
Americas 12 % 0 % 0 % 12 % 12 % 0 % 0 % 12 %
EMEA 29 % 0 % 5 % 34 % 20 % 0 % (1 )% 19 %
Asia Pacific 30 % 0 % 1 % 31 % 13 % 0 % 0 % 13 %
Consolidated 16 % 0 % 1 % 17 % 13 % 0 % 0 % 13 %
 

Contractor segment sales increased in all channels. Operating margin
rates for both the quarter and the year to date for the Contractor
segment increased 3 percentage points compared to last year due to
higher sales volume, improved gross margin rate and favorable expense
leverage.

Outlook

"Demand levels remained robust and broad based in the third quarter,"
said McHale. "We expect the positive business environment to continue
into 2018, however we do note that our fourth quarter represents our
most difficult comparable of the year. In addition to the strong fourth
quarter last year, we also had 14 weeks compared to only 13 weeks in
this year's fourth quarter. Just given the math, we anticipate low
single-digit organic, constant currency growth in the fourth quarter.
With that outlook we have the possibility to achieve double-digit sales
growth for the full year 2017. I'd like to thank our employees,
suppliers, distributor partners and end customers for their contribution
to our strong 2017 results. We will continue to invest in our core
growth strategies as we finish the year, and will be working hard to get
2018 off to a good start."

Financial Results Adjusted for Comparability

Adoption of a new stock compensation accounting standard and recognition
of certain tax planning benefits in 2017 created large fluctuations in
financial results compared to prior periods. Excluding the excess tax
benefits on exercised stock options and other tax planning benefits
recognized as reductions of income taxes in 2017 presents a more
consistent comparison of financial results. A calculation of the
non-GAAP measurements of adjusted income taxes, net earnings and diluted
earnings per share follows (in millions except per share amounts):

       
Three Months Ended Nine Months Ended
Sep 29,     Sep 23, Sep 29,     Sep 23,
2017 2016 2017 2016
Income taxes, as reported $ 20.9 $ 22.2 $ 57.6 $ 62.7
Excess tax benefit from option exercises 3.2 20.5
Tax planning benefit 5.5     5.5    
Income taxes, adjusted $ 29.6   $ 22.2   $ 83.6   $ 62.7  
 
Effective income tax rate
As reported 22 % 29 % 21 % 30 %
Adjusted 31 % 29 % 31 % 30 %
 
Net Earnings, as reported $ 75.5 $ 54.4 $ 216.0 $ 144.9
Excess tax benefit from option exercises (3.2 ) (20.5 )
Tax planning benefit (5.5 )   (5.5 )  
Net Earnings, adjusted $ 66.8   $ 54.4   $ 190.0   $ 144.9  
 
Weighted Average Diluted Shares 58.2 57.0 57.9 56.9
Diluted Earnings per Share
As reported $ 1.30 $ 0.95 $ 3.73 $ 2.55
Adjusted $ 1.15 $ 0.95 $ 3.28 $ 2.55
 

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 2016
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; economic conditions in the United States
and other major world economies; changes in currency translation rates;
changes in laws and regulations; compliance with anti-corruption and
trade laws; new entrants who copy our products or infringe on our
intellectual property; risks incident to conducting business
internationally; the ability to meet our customers' needs and changes in
product demand; supply interruptions or delays; security breaches; 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 as well as indemnification claims under
our asset purchase agreement with Carlisle Companies Incorporated,
Carlisle Fluid Technologies, Inc., and Finishing Brands Holdings Inc.;
the possibility of decline in purchases from few large customers of the
Contractor segment; variations in activity in the construction,
automotive, mining and oil and natural gas industries; our ability to
attract, develop and retain qualified personnel; and catastrophic
events. Please refer to Item 1A of our Annual Report on Form 10-K for
fiscal year 2016 (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, October
26, 2017, 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 October 27, 2017, by dialing
888-203-1112, Conference ID #9177064, 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 October 30, 2017.

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 Nine Months Ended
Sep 29,     Sep 23, Sep 29,     Sep 23,
2017 2016 2017 2016
Net Sales $ 379,812 $ 327,192 $ 1,099,885 $ 980,230
Cost of products sold 176,347   150,594   507,206   456,695  
Gross Profit 203,465 176,598 592,679 523,535
Product development 14,815 14,671 44,215 44,964
Selling, marketing and distribution 57,941 49,269 168,912 158,106
General and administrative 31,072   31,194   95,325   99,710  
Operating Earnings 99,637 81,464 284,227 220,755
Interest expense 3,901 4,432 12,110 13,468
Other expense (income), net (656 ) 416   (1,454 ) (338 )
Earnings Before Income Taxes 96,392 76,616 273,571 207,625
Income taxes 20,932   22,228   57,551   62,738  
Net Earnings $ 75,460   $ 54,388   $ 216,020   $ 144,887  
Net Earnings per Common Share
Basic $ 1.35 $ 0.98 $ 3.87 $ 2.61
Diluted $ 1.30 $ 0.95 $ 3.73 $ 2.55
Weighted Average Number of Shares
Basic 56,023 55,684 55,864 55,571
Diluted 58,204 56,969 57,948 56,906
 
 
SEGMENT INFORMATION (Unaudited)

(In thousands)

       
Three Months Ended Nine Months Ended
Sep 29,     Sep 23, Sep 29,     Sep 23,
2017 2016 2017 2016
Net Sales
Industrial $ 178,461 $ 150,893 $ 509,719 $ 454,978
Process 73,656 67,077 217,084 196,068
Contractor 127,695   109,222   373,082   329,184  
Total $ 379,812   $ 327,192   $ 1,099,885   $ 980,230  
Operating Earnings
Industrial $ 61,790 $ 50,573 $ 177,121 $ 147,419
Process 12,088 10,394 38,969 25,305
Contractor 33,471 25,593 93,249 71,700
Unallocated corporate (expense) (7,712 ) (5,096 ) (25,112 ) (23,669 )
Total $ 99,637   $ 81,464   $ 284,227   $ 220,755  
 

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.

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