Market Overview

Graco Reports Fourth Quarter and Annual Results

Share:

Graco Inc. (NYSE:GGG) today announced results for the quarter and year ended December 27, 2019.

Summary

$ in millions except per share amounts

 

 

Three Months Ended

 

Twelve Months Ended

 

 

Dec 27,

2019

 

Dec 28,

2018

 

%

Change

 

Dec 27,

2019

 

Dec 28,

2018

 

%

Change

Net Sales

 

$

412.3

 

$

406.4

 

1

%

 

$

1,646.0

 

$

1,653.3

 

(0

)%

Operating Earnings

 

 

104.2

 

 

96.6

 

8

%

 

 

424.5

 

 

436.4

 

(3

)%

Net Earnings

 

 

84.8

 

 

73.7

 

15

%

 

 

343.9

 

 

341.1

 

1

%

Diluted Net Earnings per Common Share

 

$

0.49

 

$

0.43

 

14

%

 

$

2.00

 

$

1.97

 

2

%

Adjusted (non-GAAP): (1)

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings, adjusted

 

$

82.0

 

$

73.5

 

12

%

 

$

325.4

 

$

326.1

 

(0

)%

Diluted Net Earnings per Common Share, adjusted

 

$

0.48

 

$

0.43

 

12

%

 

$

1.90

 

$

1.88

 

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.

  • Decreases in Asia Pacific sales offset growth in the Americas and EMEA for both the quarter and the year.
  • Strong sales growth and favorable operating leverage drove up fourth quarter profitability in the Contractor segment.
  • Gross margin rates for the quarter and year decreased due to lower factory volume, unfavorable product and channel mix, and changes in currency translation rates. Strong realized pricing softened the decline in gross margin rates.
  • Total operating expenses decreased 6 percent for the quarter and 2 percent for the year.
  • The effective income tax rate for the quarter decreased due to an increase in excess tax benefits from stock option exercises. The effective rate for the year decreased mainly due to a tax rate change in a foreign jurisdiction.

"Sales in the fourth quarter reflected trends noted in earlier quarters, with the Asia Pacific region continuing to be particularly challenging," said Patrick J. McHale, Graco's President and CEO. "While several end markets and segments were soft in 2019, we were pleased with the performance of our Contractor business and the EMEA region, as each posted solid organic growth. Thanks to the hard work, dedication and outstanding execution of our employees and distributors worldwide, we were able to stick to our playbook. We fully funded our growth strategies, made capital investments exceeding $100 million to expand production and service capabilities, and limited discretionary spending to protect bottom line results."

Consolidated Results

Sales for the quarter increased 1 percent from the comparable period last year (2 percent at consistent translation rates). Sales increased 4 percent in the Americas and 11 percent in EMEA (14 percent at consistent translation rates), and decreased 17 percent in Asia Pacific (16 percent at consistent translation rates). Sales for the year decreased slightly from the comparable period last year (up 1 percent at consistent translation rates), with increases of 4 percent in the Americas and 3 percent in EMEA (8 percent at consistent translation rates), offset by a 17 percent decrease in Asia Pacific (14 percent at consistent translation rates). Changes in currency translation rates decreased worldwide sales by approximately $3 million (1 percentage point) for the quarter and $29 million (1 percentage point) for the year. Sales from acquired operations contributed approximately $4 million (1 percentage point) of growth to the fourth quarter, and did not have a significant impact on full-year comparisons.

Gross profit margin rates for the quarter and year 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 early in the year offset the adverse impact of higher material costs, including tariffs.

Total operating expenses for the quarter and year decreased $7 million (6 percent) and $11 million (2 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.

Other expense for the year decreased $6 million from last year, driven by gains on investments used to fund certain pension liabilities, and by lower exchange losses on net assets of foreign operations.

The effective income tax rate was 16 percent for the quarter and 15 percent for the year, both down approximately 2 percentage points from the comparable periods last year. An increase in excess tax benefits from stock option exercises drove the decrease for the quarter. For the year, revaluation of deferred taxes pursuant to a tax rate change in a foreign jurisdiction and an increase in non-recurring benefits from other tax planning activities drove the decrease.

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

 

Twelve Months

 

 

Industrial

 

Process

 

Contractor

 

Industrial

 

Process

 

Contractor

Net Sales (in millions)

 

$

194.8

 

 

$

88.9

 

 

$

128.6

 

 

$

747.4

 

 

$

344.9

 

 

$

553.7

 

Percentage change from last year

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

(2

)%

 

 

1

%

 

 

8

%

 

 

(4

)%

 

 

2

%

 

 

4

%

Operating earnings

 

 

(6

)%

 

 

25

%

 

 

51

%

 

 

(9

)%

 

 

11

%

 

 

6

%

Operating earnings as a percentage of sales

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

31

%

 

 

22

%

 

 

22

%

 

 

33

%

 

 

22

%

 

 

23

%

2018

 

 

32

%

 

 

18

%

 

 

15

%

 

 

35

%

 

 

20

%

 

 

23

%

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

 

 

Three Months

 

Twelve Months

 

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

Americas

 

3%

 

0%

 

0%

 

3%

 

3%

 

0%

 

0%

 

3%

EMEA

 

16%

 

0%

 

(3)%

 

13%

 

7%

 

0%

 

(5)%

 

2%

Asia Pacific

 

(26)%

 

0%

 

0%

 

(26)%

 

(19)%

 

0%

 

(2)%

 

(21)%

Consolidated

 

(1)%

 

0%

 

(1)%

 

(2)%

 

(2)%

 

0%

 

(2)%

 

(4)%

Continued softness in Asia Pacific end markets caused steep declines in fourth quarter Industrial segment sales. Increases in finishing system sales drove a double-digit percentage increase in EMEA. For the year, 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 for the quarter and year as the favorable effects of pricing were more than offset by the adverse impacts of higher material costs, lower sales and factory volume, product and channel mix, and currency translation.

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

 

 

Three Months

 

Twelve Months

 

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

Americas

 

(4)%

 

1%

 

0%

 

(3)%

 

3%

 

0%

 

0%

 

3%

EMEA

 

(4)%

 

10%

 

(1)%

 

5%

 

3%

 

5%

 

(3)%

 

5%

Asia Pacific

 

(2)%

 

12%

 

(1)%

 

9%

 

(5)%

 

4%

 

(3)%

 

(4)%

Consolidated

 

(4)%

 

5%

 

0%

 

1%

 

1%

 

2%

 

(1)%

 

2%

Process segment sales for the quarter increased slightly, as sales from acquired operations more than offset volume declines in organic businesses. For the year, weakness in Asia Pacific also adversely affected Process segment sales, nearly offsetting increases in the Americas and EMEA. Operating margin rates for the quarter and year 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

 

Twelve Months

 

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

 

Volume

and Price

 

Acquisitions

 

Currency

 

Total

Americas

 

10%

 

0%

 

0%

 

10%

 

5%

 

0%

 

0%

 

5%

EMEA

 

13%

 

0%

 

(3)%

 

10%

 

9%

 

0%

 

(5)%

 

4%

Asia Pacific

 

(4)%

 

0%

 

(2)%

 

(6)%

 

(6)%

 

0%

 

(4)%

 

(10)%

Consolidated

 

9%

 

0%

 

(1)%

 

8%

 

5%

 

0%

 

(1)%

 

4%

Contractor segment sales for the quarter increased by 9 percent at consistent currency translation rates, driving growth for the year to 5 percent, with favorable response to new product offerings and continued strength in construction markets in the Americas and EMEA. Operating margin rate for the quarter increased by 7 percentage points over the comparable quarter last year, driven by strong improvements in gross margin rate and expense leverage. Operating margin rate for the year was consistent with the rate last year.

Outlook

"Heading into 2020, we expect challenging end market conditions to remain in place for at least the first half of the year in our Industrial and Process segments" said McHale. "Our outlook for the Contractor segment remains positive as favorable conditions continue, and demand for our products is solid across major end markets and product categories. As a result, our outlook for 2020 is low single-digit revenue growth on an organic, constant currency basis."

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

 

Twelve Months Ended

 

 

Dec 27,

2019

 

Dec 28,

2018

 

Dec 27,

2019

 

Dec 28,

2018

Earnings before income taxes

 

$

100.5

 

 

$

90.0

 

 

$

405.9

 

 

$

410.8

 

 

 

 

 

 

 

 

 

 

Income taxes, as reported

 

$

15.7

 

 

$

16.3

 

 

$

62.0

 

 

$

69.7

 

Excess tax benefit from option exercises

 

 

2.3

 

 

 

0.2

 

 

 

10.4

 

 

 

10.0

 

Other non-recurring tax benefit

 

 

0.5

 

 

 

 

 

8.1

 

 

 

5.0

 

Income taxes, adjusted

 

$

18.5

 

 

$

16.5

 

 

$

80.5

 

 

$

84.7

 

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

 

 

 

 

 

 

 

As reported

 

 

15.6

%

 

 

18.1

%

 

 

15.3

%

 

 

17.0

%

Adjusted

 

 

18.5

%

 

 

18.4

%

 

 

19.8

%

 

 

20.6

%

 

 

 

 

 

 

 

 

 

Net Earnings, as reported

 

$

84.8

 

 

$

73.7

 

 

$

343.9

 

 

$

341.1

 

Excess tax benefit from option exercises

 

 

(2.3

)

 

 

(0.2

)

 

 

(10.4

)

 

 

(10.0

)

Other non-recurring tax benefit

 

 

(0.5

)

 

 

 

 

(8.1

)

 

 

(5.0

)

Net Earnings, adjusted

 

$

82.0

 

 

$

73.5

 

 

$

325.4

 

 

$

326.1

 

 

 

 

 

 

 

 

 

 

Weighted Average Diluted Shares

 

 

171.8

 

 

 

170.9

 

 

 

171.6

 

 

 

173.2

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

As reported

 

$

0.49

 

 

$

0.43

 

 

$

2.00

 

 

$

1.97

 

Adjusted

 

$

0.48

 

 

$

0.43

 

 

$

1.90

 

 

$

1.88

 

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: 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 Tuesday, Jan. 28, 2020, at 11 a.m. ET, 10 a.m. CT, to discuss Graco's fourth 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 Tuesday, Jan. 28, 2020, by dialing 888-203-1112, Conference ID #8157037, 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 Saturday, Feb. 1, 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

 

Twelve Months Ended

 

 

Dec 27,

2019

 

Dec 28,

2018

 

Dec 27,

2019

 

Dec 28,

2018

Net Sales

 

$

412,292

 

$

406,438

 

$

1,646,045

 

$

1,653,292

Cost of products sold

 

 

202,911

 

 

197,682

 

 

786,289

 

 

770,753

Gross Profit

 

 

209,381

 

 

208,756

 

 

859,756

 

 

882,539

Product development

 

 

16,941

 

 

15,989

 

 

67,557

 

 

63,124

Selling, marketing and distribution

 

 

57,529

 

 

62,732

 

 

234,325

 

 

245,473

General and administrative

 

 

30,742

 

 

33,461

 

 

133,418

 

 

137,515

Operating Earnings

 

 

104,169

 

 

96,574

 

 

424,456

 

 

436,427

Interest expense

 

 

2,526

 

 

3,678

 

 

13,110

 

 

14,385

Other expense, net

 

 

1,109

 

 

2,851

 

 

5,469

 

 

11,276

Earnings Before Income Taxes

 

 

100,534

 

 

90,045

 

 

405,877

 

 

410,766

Income taxes

 

 

15,699

 

 

16,322

 

 

62,024

 

 

69,712

Net Earnings

 

$

84,835

 

$

73,723

 

$

343,853

 

$

341,054

Net Earnings per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

0.51

 

$

0.44

 

$

2.06

 

$

2.04

Diluted

 

$

0.49

 

$

0.43

 

$

2.00

 

$

1.97

Weighted Average Number of Shares

 

 

 

 

 

 

 

 

Basic

 

 

166,911

 

 

165,875

 

 

166,515

 

 

167,364

Diluted

 

 

171,814

 

 

170,899

 

 

171,624

 

 

173,213

SEGMENT INFORMATION (Unaudited)

(In thousands)

   

 

 

Three Months Ended

 

Twelve Months Ended

 

 

Dec 27,

2019

 

Dec 28,

2018

 

Dec 27,

2019

 

Dec 28,

2018

Net Sales

 

 

 

 

 

 

 

 

Industrial

 

$

194,773

 

 

$

199,519

 

 

$

747,396

 

 

$

781,029

 

Process

 

 

88,882

 

 

 

88,303

 

 

 

344,930

 

 

 

337,953

 

Contractor

 

 

128,637

 

 

 

118,616

 

 

 

553,719

 

 

 

534,310

 

Total

 

$

412,292

 

 

$

406,438

 

 

$

1,646,045

 

 

$

1,653,292

 

Operating Earnings

 

 

 

 

 

 

 

 

Industrial

 

$

60,562

 

 

$

64,580

 

 

$

247,216

 

 

$

271,307

 

Process

 

 

19,781

 

 

 

15,885

 

 

 

76,367

 

 

 

68,514

 

Contractor

 

 

27,684

 

 

 

18,373

 

 

 

128,282

 

 

 

120,905

 

Unallocated corporate (expense)

 

 

(3,858

)

 

 

(2,264

)

 

 

(27,409

)

 

 

(24,299

)

Total

 

$

104,169

 

 

$

96,574

 

 

$

424,456

 

 

$

436,427

 

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands)

   

 

 

Dec 27,

2019

 

Dec 28,

2018

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

 

$

220,973

 

 

$

132,118

 

Accounts receivable, less allowances of $5,300 and $5,300

 

 

267,345

 

 

 

274,608

 

Inventories

 

 

273,233

 

 

 

283,982

 

Other current assets

 

 

29,917

 

 

 

32,508

 

Total current assets

 

 

791,468

 

 

 

723,216

 

Property, Plant and Equipment, net

 

 

325,546

 

 

 

229,295

 

Goodwill

 

 

307,663

 

 

 

293,846

 

Other Intangible Assets, net

 

 

162,623

 

 

 

166,310

 

Operating Lease Assets

 

 

29,891

 

 

Deferred Income Taxes

 

 

39,327

 

 

 

32,055

 

Other Assets

 

 

35,692

 

 

 

28,019

 

Total Assets

 

$

1,692,210

 

 

$

1,472,741

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

Current Liabilities

 

 

 

 

Notes payable to banks

 

$

7,732

 

 

$

11,083

 

Trade accounts payable

 

 

54,117

 

 

 

56,902

 

Salaries and incentives

 

 

51,301

 

 

 

62,297

 

Dividends payable

 

 

29,235

 

 

 

26,480

 

Other current liabilities

 

 

142,937

 

 

 

143,041

 

Total current liabilities

 

 

285,322

 

 

 

299,803

 

Long-term Debt

 

 

164,298

 

 

 

266,391

 

Retirement Benefits and Deferred Compensation

 

 

182,707

 

 

 

133,388

 

Operating Lease Liabilities

 

 

24,176

 

 

 

Deferred Income Taxes

 

 

10,776

 

 

 

16,586

 

Other Non-current Liabilities

 

 

 

 

4,700

 

Shareholders' Equity

 

 

 

 

Common stock

 

 

167,287

 

 

 

165,171

 

Additional paid-in-capital

 

 

578,440

 

 

 

510,825

 

Retained earnings

 

 

448,991

 

 

 

220,734

 

Accumulated other comprehensive income (loss)

 

 

(169,787

)

 

 

(144,857

)

Total shareholders' equity

 

 

1,024,931

 

 

 

751,873

 

Total Liabilities and Shareholders' Equity

 

$

1,692,210

 

 

$

1,472,741

 

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

   

 

 

Year Ended

 

 

Dec 27,

2019

 

Dec 28,

2018

Cash Flows From Operating Activities

 

 

 

 

Net Earnings

 

$

343,853

 

 

$

341,054

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

Depreciation and amortization

 

 

48,911

 

 

 

47,754

 

Deferred income taxes

 

 

(6,411

)

 

 

15,405

 

Share-based compensation

 

 

26,669

 

 

 

25,565

 

Change in

 

 

 

 

Accounts receivable

 

 

8,934

 

 

 

(12,402

)

Inventories

 

 

12,435

 

 

 

(30,719

)

Trade accounts payable

 

 

(539

)

 

 

(1,976

)

Salaries and incentives

 

 

(14,069

)

 

 

2,336

 

Retirement benefits and deferred compensation

 

 

13,264

 

 

 

(27,237

)

Other accrued liabilities

 

 

(11,510

)

 

 

7,517

 

Other

 

 

(2,803

)

 

 

688

 

Net cash provided by operating activities

 

 

418,734

 

 

 

367,985

 

Cash Flows From Investing Activities

 

 

 

 

Property, plant and equipment additions

 

 

(127,953

)

 

 

(53,854

)

Acquisition of businesses, net of cash acquired

 

 

(26,577

)

 

 

(10,769

)

Other

 

 

(939

)

 

 

(1,624

)

Net cash provided by (used in) investing activities

 

 

(155,469

)

 

 

(66,247

)

Cash Flows From Financing Activities

 

 

 

 

Borrowings (payments) on short-term lines of credit, net

 

 

(3,341

)

 

 

4,931

 

Borrowings on long-term lines of credit

 

 

105,423

 

 

 

620,746

 

Payments on long-term debt and lines of credit

 

 

(207,191

)

 

 

(583,212

)

Common stock issued

 

 

48,250

 

 

 

24,634

 

Common stock repurchased

 

 

(9,482

)

 

 

(244,814

)

Taxes paid related to net share settlement of equity awards

 

 

(1,268

)

 

 

(16,151

)

Cash dividends paid

 

 

(106,443

)

 

 

(88,845

)

Net cash provided by (used in) financing activities

 

 

(174,052

)

 

 

(282,711

)

Effect of exchange rate changes on cash

 

 

(358

)

 

 

187

 

Net increase (decrease) in cash and cash equivalents

 

 

88,855

 

 

 

19,214

 

Cash and Cash Equivalents

 

 

 

 

Beginning of year

 

 

132,118

 

 

 

112,904

 

End of year

 

$

220,973

 

 

$

132,118

 

 

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