Divestiture and Investment Income Add More Than $100 Million to Net
Earnings
Graco Inc. (NYSE: GGG) today announced results for the quarter
and six months ended June 26, 2015.
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Summary $ in millions except per share amounts
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
June 26,
|
|
June 27,
|
|
%
|
|
June 26,
|
|
June 27,
|
|
%
|
|
|
2015
|
|
2014
|
|
Change
|
|
2015
|
|
2014
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
335.5
|
|
$
|
322.5
|
|
4
|
%
|
|
$
|
641.9
|
|
$
|
612.5
|
|
5
|
%
|
Operating Earnings
|
|
|
83.9
|
|
|
85.8
|
|
(2
|
)%
|
|
|
149.1
|
|
|
160.6
|
|
(7
|
)%
|
Net Earnings
|
|
|
172.6
|
|
|
66.2
|
|
161
|
%
|
|
|
241.5
|
|
|
117.0
|
|
106
|
%
|
Diluted Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
per Common Share
|
|
$
|
2.90
|
|
$
|
1.07
|
|
171
|
%
|
|
$
|
4.02
|
|
$
|
1.88
|
|
114
|
%
|
|
|
|
|
|
|
|
|
|
|
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-
In April, the Company sold the Liquid Finishing business assets
acquired in 2012. Net earnings include after-tax net gain on the sale
and other Liquid Finishing investment income totaling $110 million
($1.85 per diluted share) for the quarter and $139 million ($2.32 per
diluted share) for the year-to-date. Net earnings in 2014 included
after-tax Liquid Finishing investment income of $11 million ($0.18 per
diluted share) for the quarter and $15 million ($0.23 per diluted
share) for the year-to-date.
-
Non-recurring income tax benefits increased net earnings by a total of
$9 million, or $0.15 per diluted share for both the quarter and the
year-to-date.
-
Changes in currency translation rates reduced sales by approximately
$17 million for the quarter and $30 million for the year-to-date, and
decreased net earnings by approximately $6 million for the quarter and
$10 million for the year-to-date.
-
Year-to-date sales increased 5 percent, including 4 percentage points
of organic sales growth and 6 percentage points of growth from
acquired operations, partially offset by a decrease of 5 percentage
points from currency translation. Components of the 4 percent increase
in sales for the quarter were approximately the same as for the
year-to-date increase.
-
Gross margin rates for the quarter and year-to-date were lower than
the comparable periods last year mostly due to currency translation.
-
Year-to-date operating expenses increased due to expenses of acquired
operations, spending related to regional expansion and product
initiatives, and additional unallocated corporate expenses.
-
Year-to-date operating income as a percentage of sales decreased to 23
percent, 3 percentage points lower than the comparable period last
year. Half of the decrease as a percentage of sales was from foreign
currency translation, with the remainder related to acquisitions and
increases in unallocated corporate expenses.
"On a constant currency basis, the Company achieved
low-to-mid-single-digit organic sales growth in all reportable segments
and regions during the second quarter," said Patrick J. McHale, Graco's
President and CEO. "Contractor segment sales growth moderated to a low
single-digit pace in the quarter following significant outperformance in
the first quarter of 2015 and against a strong comparable from 2014. In
the EMEA region, on a constant currency basis, double-digit organic
sales growth in the developed economies in the second quarter was nearly
offset by sales declines in the emerging markets, namely Russia and the
Middle East. The Asia Pacific region grew at a mid-single-digit pace
organically in the quarter, on a constant currency basis, reflecting
increased shipments in all geographies except Southeast Asia and
Australia."
Consolidated Results
Changes in currency translation rates reduced sales and net earnings by
approximately $17 million and $6 million, respectively, for the quarter
and $30 million and $10 million, respectively for the year-to-date.
Sales for the quarter increased 4 percent, with increases in the
Americas and Asia Pacific partially offset by a decrease in EMEA. Sales
from operations acquired in the fourth quarter of 2014 and the first
half of 2015 totaled $19 million for the quarter, contributing 6
percentage points of growth. Organic sales at consistent translation
rates increased 3 percent, with increases of 3 percent in the Americas,
1 percent in EMEA and 5 percent in Asia Pacific.
Year-to-date sales increased 5 percent, with a double digit percentage
increase in the Americas partially offset by decreases in EMEA and Asia
Pacific. Sales from acquired operations totaled $34 million,
contributing 6 percentage points of growth. Organic sales at consistent
translation rates increased 4 percent, including a 7 percent increase in
the Americas, a slight increase in EMEA and a 2 percent decrease in Asia
Pacific.
Gross profit margin rates for the quarter and year-to-date were lower
than rates in the comparable periods last year due mostly to changes in
currency translation rates. Lower average gross margin rates of acquired
operations (including purchase accounting effects) decreased overall
gross margin rates by approximately one-half percentage point for both
the quarter and the year-to-date.
Total operating expenses for the quarter were $6 million (6 percent)
higher than the second quarter last year. Year-to-date operating
expenses were $18 million (10 percent) higher than last year. The
increases included expenses of acquired operations totaling $7 million
for the quarter and $13 million for the year-to-date. Spending related
to regional and product expansion initiatives increased year-to-date
expenses by approximately $3 million. Unallocated corporate expenses
increased $1 million for the quarter and $3 million year-to-date, mostly
from increases in pension, stock compensation and new central warehouse.
In April, the Company sold the Liquid Finishing business assets acquired
in 2012. Held separate investment income includes the net gain on sale
of $147 million and dividends of $12 million for the quarter and $42
million year-to-date. Net earnings include after-tax net gain on the
sale and dividend income totaling $110 million ($1.85 per diluted share)
for the quarter and $139 million ($2.32 per diluted share) for the
year-to-date. Net earnings in 2014 included after-tax net investment
income of $11 million ($0.18 per diluted share) for the quarter and $15
million ($0.23 per diluted share) for the year-to-date. No further
Liquid Finishing dividends will be received.
The effective income tax rate was 28 percent for the quarter, consistent
with the comparable period last year, and 26 percent for the
year-to-date, down 3 percentage points compared to last year. In the
second quarter, the Company asserted that it will indefinitely reinvest
earnings of foreign subsidiaries to support expansion of its
international business. The change in assertion decreased deferred
income taxes related to undistributed foreign earnings by $7 million and
reduced the effective tax rate compared to last year. The tax rate
effects of the gain on the sale of the Liquid Finishing assets offset
the effects of the foreign earnings reinvestment assertion. Higher
post-tax dividend income and an additional non-recurring tax benefit of
$2 million further reduced the year-to-date effective tax rate.
Change in Financial Reporting Segments
Beginning with the first quarter of 2015 the Company revised the
presentation of its financial reporting segments. Operations of the
Process and the Oil and Natural Gas divisions, historically included in
the Industrial segment, are now aggregated with the Lubrication division
(formerly reported as a separate segment) in the newly-formed Process
segment. This change aligns the types of products offered and markets
served within the segments. Prior year segment information has been
restated to conform to 2015 reporting.
A summary of the Company’s three reportable segments (Industrial,
Process and Contractor) follows.
The Industrial segment includes our Industrial Products and Applied
Fluid Technologies divisions. The Industrial segment markets equipment
and pre-engineered packages for moving and applying paints, coatings,
sealants, adhesives and other fluids. Markets served include automotive
and vehicle assembly and components production, wood and metal products,
rail, marine, aerospace, farm, construction, bus, recreational vehicles,
and various other industries.
The Process segment includes our Process, Oil and Natural Gas, and
Lubrication divisions. The Process segment markets pumps, valves, meters
and accessories to move and dispense chemicals, oil and natural gas,
water, waste water, petroleum, food, lubricants and other fluids.
Markets served include food and beverage, dairy, oil and natural gas,
pharmaceutical, cosmetics, electronics, waste water, mining, fast oil
change facilities, service garages, fleet service centers, automobile
dealerships and industrial lubrication applications.
The Contractor segment remains unchanged. The Contractor segment markets
sprayers for architectural coatings for painting, corrosion control,
texture, and line striping.
Segment Results
Certain measurements of segment operations are summarized below:
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|
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|
|
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Thirteen Weeks
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Twenty-six Weeks
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|
|
Industrial
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Process
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Contractor
|
|
Industrial
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Process
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Contractor
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|
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|
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|
Net sales (in millions)
|
|
$
|
153.5
|
|
$
|
71.9
|
|
$
|
110.0
|
|
$
|
296.8
|
|
$
|
139.6
|
|
$
|
205.5
|
Percentage change
|
|
|
|
|
|
|
|
|
|
|
|
|
from last year
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
(2
|
)%
|
|
|
31
|
%
|
|
|
(1
|
)%
|
|
|
(4
|
)%
|
|
|
29
|
%
|
|
|
5
|
%
|
Operating earnings
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
(4
|
)%
|
|
|
(6
|
)%
|
|
|
(7
|
)%
|
|
|
0
|
%
|
Operating earnings as a
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
33
|
%
|
|
|
19
|
%
|
|
|
25
|
%
|
|
|
32
|
%
|
|
|
18
|
%
|
|
|
23
|
%
|
2014
|
|
|
33
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
32
|
%
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment sales for the quarter decreased 2 percent, but
increased 4 percent at consistent translation rates. Sales in this
segment increased 3 percent in the Americas, decreased 16 percent in
EMEA (2 percent at consistent translation rates) and increased 7 percent
in Asia Pacific (12 percent at consistent translation rates).
Year-to-date sales decreased 4 percent, but increased 2 percent at
consistent translation rates. Sales increased 3 percent in the Americas,
decreased 15 percent in EMEA (1 percent at consistent translation rates)
and decreased 2 percent in Asia Pacific (increased 2 percent at
consistent translation rates). Operating margin rates for the Industrial
segment for the quarter and year-to-date were consistent with last year.
Process segment sales for the quarter increased 31 percent (36 percent
at consistent translation rates), including double-digit percentage
increases in all regions. Year-to-date sales in this segment increased
29 percent (34 percent at consistent translation rates). Most of the
sales increases were from acquired operations including Alco Valves
(acquired fourth quarter of 2014), White Knight Fluid Handling and High
Pressure Equipment (both acquired in January 2015). Organic sales growth
at consistent translation rates was 4 percent for both the quarter and
the year-to-date. Lower average profit margins of acquired operations,
changes in currency translation rates and incremental investment in oil
and natural gas products led to decreases in operating margin rates for
this segment.
Contractor segment sales for the quarter decreased 1 percent, but
increased 3 percent at consistent translation rates, mostly in the
Americas. Year-to-date sales in this segment increased 5 percent (9
percent at consistent translation rates). Sales increased 13 percent in
the Americas, decreased 12 percent in EMEA (but increased 2 percent at
consistent translation rates) and decreased 18 percent in Asia Pacific
(15 percent at consistent translation rates). Operating margin rate for
the quarter was consistent with the comparable period last year.
Year-to-date operating margin rate decreased by one percentage point,
mostly due to changes in currency translation rates and additional
marketing spending, including new product launch costs and other
volume-related increases.
In April 2015, the Company sold the Liquid Finishing assets acquired in
2012 that were held as a cost-method investment. The $147 million
pre-tax gain on the sale, net of transaction and other related expenses,
was included in investment income in the Company’s consolidated
statements of earnings. Prior to the sale, income was recognized on
dividends received from after-tax earnings of Liquid Finishing and also
included in investment income. Dividend income for the quarter totaled
$12 million in 2015 and $11 million in 2014. Year-to-date dividend
income was $42 million in 2015 and $15 million in 2014. Results
excluding Liquid Finishing investment income and expense are a better
measure of the Company’s on-going operations and provide a more
consistent base of comparison to future results. A calculation of the
non-GAAP measurement of net earnings excluding investment income and
expense follows (in millions except per share amounts):
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
June 26,
|
|
June 27,
|
|
June 26,
|
|
June 27,
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
Net Earnings, as reported
|
|
$
|
172.6
|
|
|
$
|
66.2
|
|
|
$
|
241.5
|
|
|
$
|
117.0
|
|
Held separate investment (income), net
|
|
|
(158.8
|
)
|
|
|
(10.6
|
)
|
|
|
(188.4
|
)
|
|
|
(14.2
|
)
|
Income tax effect
|
|
|
49.1
|
|
|
|
(0.2
|
)
|
|
|
48.9
|
|
|
|
(0.3
|
)
|
Net Earnings, adjusted
|
|
$
|
62.9
|
|
|
$
|
55.4
|
|
|
$
|
102.0
|
|
|
$
|
102.5
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.90
|
|
|
$
|
1.07
|
|
|
$
|
4.02
|
|
|
$
|
1.88
|
|
Adjusted
|
|
|
1.05
|
|
|
|
0.89
|
|
|
|
1.70
|
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outlook
"The Company continues to target mid-single-digit organic sales growth,
on a constant currency basis, and growth in all reportable segments and
regions for the full-year 2015," said McHale. "The Americas remains our
strongest performing region and we are optimistic Contractor Americas
will perform in the second half. Currency uncertainty and geopolitical
instability continue to generate volatility and present challenges for
EMEA and Asia Pacific growth. At current exchange rates, unfavorable
changes in foreign currency translation rates create a full-year
headwind of approximately 5 percent on sales and 11 percent on earnings
in 2015.”
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 this Form 10-Q
and our Form 10-K and Form 8-Ks, and other disclosures, including our
2014 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 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; 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 and automotive
industries; and natural disasters. Please refer to Item 1A of our Annual
Report on Form 10-K for fiscal year 2014 (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/ir
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,
2015, at 10:00 a.m. CT, 11:00 a.m. ET, 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/ir.
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 1:00 p.m. CT on July 23, 2015, by dialing
888-203-1112, Conference ID #7932377, 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 July 27, 2015.
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 Statement of Earnings (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
(in thousands, except per share amounts)
|
|
June 26,
|
|
June 27,
|
|
June 26,
|
|
June 27,
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
Net Sales
|
|
$
|
335,489
|
|
|
$
|
322,549
|
|
|
$
|
641,942
|
|
|
$
|
612,511
|
|
Cost of products sold
|
|
|
154,866
|
|
|
|
145,699
|
|
|
|
299,190
|
|
|
|
276,349
|
|
Gross Profit
|
|
|
180,623
|
|
|
|
176,850
|
|
|
|
342,752
|
|
|
|
336,162
|
|
Product development
|
|
|
14,907
|
|
|
|
13,405
|
|
|
|
30,197
|
|
|
|
26,564
|
|
Selling, marketing and distribution
|
|
|
50,126
|
|
|
|
49,503
|
|
|
|
101,550
|
|
|
|
95,845
|
|
General and administrative
|
|
|
31,699
|
|
|
|
28,094
|
|
|
|
61,883
|
|
|
|
53,200
|
|
Operating Earnings
|
|
|
83,891
|
|
|
|
85,848
|
|
|
|
149,122
|
|
|
|
160,553
|
|
Interest expense
|
|
|
4,125
|
|
|
|
4,676
|
|
|
|
9,428
|
|
|
|
9,264
|
|
Held separate investment (income), net
|
|
|
(158,833
|
)
|
|
|
(10,562
|
)
|
|
|
(188,356
|
)
|
|
|
(14,237
|
)
|
Other expense (income), net
|
|
|
(438
|
)
|
|
|
(202
|
)
|
|
|
272
|
|
|
|
45
|
|
|
|
|
239,037
|
|
|
|
91,936
|
|
|
|
327,778
|
|
|
|
165,481
|
|
Income taxes
|
|
|
66,400
|
|
|
|
25,700
|
|
|
|
86,300
|
|
|
|
48,500
|
|
|
|
$
|
172,637
|
|
|
|
66,236
|
|
|
$
|
241,478
|
|
|
$
|
116,981
|
|
|
|
|
|
|
|
|
|
|
Net Earnings per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.96
|
|
|
$
|
1.10
|
|
|
$
|
4.12
|
|
|
$
|
1.93
|
|
Diluted
|
|
$
|
2.90
|
|
|
$
|
1.07
|
|
|
$
|
4.02
|
|
|
$
|
1.88
|
|
Weighted Average Number of Shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,235
|
|
|
|
60,453
|
|
|
|
58,608
|
|
|
|
60,637
|
|
Diluted
|
|
|
59,622
|
|
|
|
62,028
|
|
|
|
60,044
|
|
|
|
62,233
|
|
|
|
|
|
|
|
|
|
|
Segment Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
June 26,
|
|
June 27,
|
|
June 26,
|
|
June 27,
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
Net Sales
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
153,502
|
|
|
$
|
156,578
|
|
|
$
|
296,768
|
|
|
$
|
308,624
|
|
Process
|
|
|
71,946
|
|
|
|
54,850
|
|
|
|
139,627
|
|
|
|
107,860
|
|
Contractor
|
|
|
110,041
|
|
|
|
111,121
|
|
|
|
205,547
|
|
|
|
196,027
|
|
Total
|
|
$
|
335,489
|
|
|
$
|
322,549
|
|
|
$
|
641,942
|
|
|
$
|
612,511
|
|
Operating Earnings
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
50,738
|
|
|
$
|
50,892
|
|
|
$
|
93,678
|
|
|
$
|
99,997
|
|
Process
|
|
|
13,988
|
|
|
|
13,572
|
|
|
|
24,486
|
|
|
|
26,215
|
|
Contractor
|
|
|
27,040
|
|
|
|
28,289
|
|
|
|
46,415
|
|
|
|
46,539
|
|
Unallocated corporate (expense)
|
|
|
(7,875
|
)
|
|
|
(6,905
|
)
|
|
|
(15,457
|
)
|
|
|
(12,198
|
)
|
Total
|
|
$
|
83,891
|
|
|
$
|
85,848
|
|
|
$
|
149,122
|
|
|
$
|
160,553
|
|
|
|
|
|
|
|
|
|
|
All figures are subject to audit and adjustment at the end of the
fiscal year.
|
|
|
|
|
|
|
|
|
|
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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