Graco : Reports Second Quarter Results; Sales Growth in Contractor Segment

MINNEAPOLIS- Graco Inc. (NYSE: GGG) today announced results for the second quarter ended June 26, 2020.

Summary

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:

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.

See full release at: https://investors.graco.com/news-releases/news-release-details/graco-reports-second-quarter-results-2

Financial Contact: Mark Sheahan, 612-623-6656

Media Contact: Charlotte Boyd, 612-623-6153

[e-mail]

Source: Graco Inc.

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.

Financial Contact: Mark Sheahan, 612-623-6656

Media Contact: Charlotte Boyd, 612-623-6153

[e-mail]

Source: Graco Inc.

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, 612-623-6656Media Contact: Charlotte Boyd, [e-mail]: Graco Inc.

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