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(Exact name of registrant as specified in its charter)
iMinnesota
i41-0285640
(State or
other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i88 - 11th Avenue N.E.
iMinneapolis,
iMinnesota
i55413
(Address of principal executive offices)
(Zip Code)
i(612)
i623-6000
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $1.00 per share
iGGG
iThe
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes
☒
No
☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes
☒
No
☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 27, 2019, and the results of operations and cash flows for all periods presented.
Certain information
and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2018 Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.
2.
i
Segment
Information
The Company has ithree reportable segments: Industrial, Process and Contractor. iSales
and operating earnings by segment were as follows (in thousands):
Weighted
average shares outstanding for basic earnings per share
i166,848
i167,247
i166,383
i167,860
Dilutive
effect of stock options computed using the treasury stock method and the average market price
i4,929
i5,790
i5,178
i6,124
Weighted
average shares outstanding for diluted earnings per share
i171,777
i173,037
i171,561
i173,984
Basic
earnings per share
$
i0.50
$
i0.55
$
i1.56
$
i1.59
Diluted
earnings per share
$
i0.49
$
i0.54
$
i1.51
$
i1.54
/
Stock
options to purchase i802,000 and i435,000
shares were not included in the September 27, 2019 and September 28, 2018 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
4.iShare-Based
Awards
i
Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):
The Company recognized year-to-date share-based compensation of $i23.2 million in 2019 and $i22.0
million in 2018. As of September 27, 2019, there was $i8.2 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of i2.4
years.
i
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:
Under
the Company’s Employee Stock Purchase Plan, the Company issued i398,000 shares in 2019 and i480,000
shares in 2018. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. iThe benefit of the i15
percentdiscount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:
Amounts
related to pension and postretirement medical adjustments are reclassified to non-service components of pension cost that are included within other non-operating expenses.
In February 2018, the Financial Accounting Standards Board ("FASB") issued a new standard related to reclassification of certain tax effects from accumulated other comprehensive income (AOCI). We adopted the new standard in the first quarter of 2018. We elected to reclassify $i15.5
million from accumulated other comprehensive income to retained earnings, representing the amount of "stranded" tax effects resulting from the change in the U.S. federal tax rate and the consequent revaluation of deferred tax assets related to pension and postretirement medical expense.
Amortization
of intangibles for the quarter was $i3.9 million in 2019 and $i3.8 million
in 2018 and for the year to date was $i11.6 million in 2019 and $i11.8
million in 2018. iEstimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
A
liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. iFollowing is a summary of activity in accrued warranty and service liabilities (in thousands):
For certain products or services and customer types, we require payment
before delivery to the customer. We defer revenue when cash payments are received or due in advance of our performance, including amounts which are refundable. This is also the case for services associated with certain product sales. The balance in the deferred revenue and customer advances was $i46.7 million as of September 27, 2019 and $i40.0
million as of December 28, 2018. Net sales for the year to date included $i34.9 million in 2019 and $i21.8
million in 2018 that related to deferred revenue as of the beginning of each period.
10.iFair Value
i
Assets
and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
Contracts
insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance
measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.
Contingent
consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of certain acquired businesses based on future revenues.
Long-term notes payable with fixed interest rates had a carrying amount of $i150 million as of September 27, 2019 and $i225
million as of December 28, 2018, and estimated fair value of $i165 million and $i235
million, respectively. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.
11.iRecent
Accounting Pronouncements
i
Leases
Adoption of New Accounting Standard
The Company adopted ASU No. 2016-02— Leases (Topic 842) as of December 29, 2018,
the beginning of our fiscal year 2019. Using the modified retrospective approach with transition relief, we recorded operating lease assets and liabilities of $i35 million as of December 29, 2018, and made no adjustments to retained earnings. Adoption of the new standard did not materially impact our consolidated net earnings and cash flows.
Practical Expedients and Exemptions
Electing
the package of practical expedients permitted under transition guidance, we did not reassess previous conclusions about whether existing contracts contained a lease, historical lease classification, or initial direct costs. Electing the hindsight practical expedient to determine the lease term for existing leases did not result in any changes to existing lease terms. We elected not to apply recognition requirements to short term leases with terms of twelve months or less across all asset classes. We elected to analyze vehicle assets using the portfolio approach. Lastly, we elected as an accounting policy not to separate the lease and non-lease components in the lease payments across all asset classes.
Accounting Policy
The
Company owns most of the assets used in its operations, but leases certain buildings and land, vehicles, office equipment and other rental assets. The Company determines if an arrangement is a lease at inception. All of the Company's current lease arrangements are classified as operating leases. The Company historically has not entered into financing leases. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease expense is recognized by amortizing the amount recorded as an asset on a straight-line basis over the lease term.
/
In
determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments.
As of September 27, 2019, the weighted average remaining lease term was i5.8
years and the weighted average discount rate used to determine the operating lease liability was i4.0%. For the nine months ended September 27, 2019, expense related to operating leases was $i8.6
million, operating lease payments included in operating cash flows totaled $i8.2 million, and non-cash additions to operating lease assets totaled $i2.2
million.
As of September 27, 2019, future maturities of operating lease liabilities were as follows (in thousands):
Operating
Leases
2019
$
i2,870
2020
i9,063
2021
i6,840
2022
i5,497
2023
i3,955
2024
i1,808
Thereafter
i7,481
Total
lease payments
$
i37,514
Present value adjustment
(i4,786
)
Operating
lease liabilities
$
i32,728
/
i
Aggregate
annual rental commitments under operating leases with noncancelable terms of more than one year at December 28, 2018 were reported under previous lease accounting standards as follows (in thousands):
Total
2019
$
i11,613
2020
i8,759
2021
i6,745
2022
i5,102
2023
i3,721
Thereafter
i2,340
Total
$
i38,280
/
Credit
Losses
In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. The Company expects no significant impact on earnings or financial condition from the adoption of the new standard. The Company is continuing to evaluate the effects of the new standard on related disclosures and accounting systems.
The Company 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 coating materials. Management classifies the Company’s business into three reportable segments: Industrial, Process and Contractor. Key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end-user markets, expanding distribution globally and completing strategic acquisitions that provide additional channel and technologies.
The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying
notes to the financial statements.
Consolidated Results
A summary of financial results follows (in millions except per share amounts):
Diluted
Net Earnings per Common Share, adjusted (1)
$
0.45
$
0.50
(10
)%
$
1.42
$
1.45
(2
)%
(1)
See below for a reconciliation of adjusted non-GAAP financial measures to GAAP.
Changes in currency translation rates decreased worldwide sales by approximately $6 million (2 percentage points) for the quarter and $26 million (2 percentage points) for the year to date. At consistent translation rates, sales increases in the Americas and EMEA were more than offset by decreases in Asia Pacific. Gross margin rates decreased from the comparable periods last year, and operating expenses decreased both in dollars and as a percentage of sales.
North, South and Central America, including the United States
(2)
Europe, Middle East and Africa
The following table presents the components of net sales change by geographic region:
Three
Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
3%
0%
0%
3%
4%
0%
0%
4%
EMEA
2%
2%
(4)%
0%
5%
1%
(5)%
1%
Asia
Pacific
(25)%
1%
(2)%
(26)%
(13)%
0%
(3)%
(16)%
Consolidated
(3)%
1%
(2)%
(4)%
1%
0%
(2)%
(1)%
Gross
Profit
Gross profit margin rates for the quarter and year to date 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 in the first quarter offset the adverse impact of higher material costs.
Operating Expenses
Total operating expenses for the quarter and year to date decreased $3 million (3 percent) and $4 million (1 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 to date.
Other expense for the year to date was $4 million lower than the comparable period last year, driven by lower exchange losses on net assets of foreign operations.
Income Taxes
The effective income tax rate was 13 percent for the quarter and 15 percent for the year to date, both down approximately 1 percentage point from the comparable periods last year. The decrease was driven by a revaluation of deferred taxes pursuant to a tax rate change in a foreign jurisdiction. The impact of the tax rate change was partially offset by the effects of decreases in excess tax benefits related to stock option exercises.
Financial
Results Adjusted for Comparability
Excluding the impact of 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):
The following table presents the components of net sales
change by geographic region for the Industrial segment:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume
and Price
Acquisitions
Currency
Total
Americas
(1)%
0%
0%
(1)%
3%
0%
0%
3%
EMEA
(1)%
0%
(4)%
(5)%
4%
0%
(5)%
(1)%
Asia
Pacific
(28)%
0%
(1)%
(29)%
(16)%
0%
(3)%
(19)%
Segment
Total
(9)%
0%
(2)%
(11)%
(2)%
0%
(3)%
(5)%
Continued
softness in Asia Pacific end markets led to steep declines in third quarter Industrial segment sales. For the year to date, 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 as the favorable effects of pricing were more than offset by the adverse impacts of currency translation, higher material costs, lower sales and factory volume, and product and channel mix.
Process Segment
The following table presents net sales and operating earnings as a percentage of sales for the Process segment
The following table presents the components of net sales change by geographic region for the Process segment:
Three Months
Nine Months
Volume
and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
2%
1%
0%
3%
5%
0%
0%
5%
EMEA
6%
10%
(4)%
12%
6%
3%
(4)%
5%
Asia
Pacific
(24)%
3%
(2)%
(23)%
(6)%
1%
(3)%
(8)%
Segment
Total
(2)%
2%
(1)%
(1)%
3%
1%
(1)%
3%
Process
segment sales comparisons to last year were also affected by weakness in Asia Pacific. For the quarter, decreases in Asia Pacific were largely offset by growth in the Americas and EMEA and the impact of acquired operations. Year-to-date sales at consistent translation rates increased in all product applications, although growth was lower and certain applications had decreases in the third quarter. Operating margin rates for the quarter and year to date improved, driven by lower volume and earnings-based costs.
Contractor Segment
The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment
The following table presents the components of net sales
change by geographic region for the Contractor segment:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume
and Price
Acquisitions
Currency
Total
Americas
6%
0%
0%
6%
4%
0%
(1)%
3%
EMEA
8%
0%
(4)%
4%
8%
0%
(5)%
3%
Asia
Pacific
(10)%
0%
(4)%
(14)%
(7)%
0%
(4)%
(11)%
Segment
Total
5%
0%
(1)%
4%
4%
0%
(2)%
2%
Contractor
segment sales for the quarter, at consistent currency translation rates, increased by 5 percent, driving year-to-date growth to 4 percent. The portion of Contractor sales in Asia Pacific is lower than other reporting segments, so weakness in that region had less impact on Contractor results. Operating margin rate for the quarter was consistent with the rate for the comparable quarter last year. Reductions in volume and earnings-based costs offset the adverse impacts of higher material costs and unfavorable product and channel mix. Operating margin rate for the year to date was 1 percentage point lower than last year due to changes in currency translation rates, higher material costs, lower factory volume and higher factory spending.
Liquidity and Capital Resources
Net
cash provided by operating activities totaled $299 million in the first nine months of 2019, $45 million higher than the comparable period of 2018. The 2018 period included a $40 million cash contribution to one of the Company's U.S. qualified defined benefit retirement plans. Significant uses of cash in 2019 included property, plant and equipment additions of $102 million, dividend payments of $80 million, prepayment of $75 million of private placement debt that was due in 2020, and business acquisitions totaling $19 million. Proceeds from shares issued in the first nine months of 2019
totaled
$36 million, partially offset by $5 million of payments for shares repurchased. The Company may make additional opportunistic share purchases going forward.
In 2018, other significant uses of cash included share repurchases of $156 million, cash dividends of $67 million, and property, plant and equipment additions of $40 million.
At September 27, 2019, the Company had various lines of credit totaling $594 million, of which $548 million was unused. Internally generated funds and unused financing sources are expected to provide the
Company with the flexibility to meet its liquidity needs in 2019, including its capital expenditure plan (including several building projects to expand production and distribution capacity), planned dividends, share repurchases, and acquisitions.
Outlook
Given the sharp decline in Asia Pacific and slowing in our Industrial and Process businesses in the Americas, we are lowering our full-year 2019 worldwide outlook to flat revenue on a constant currency organic basis. Despite this downward change in outlook, we intend to fully fund our growth initiatives while remaining diligent on discretionary spending in this current cycle.
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 2018 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 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes related to market risk from the disclosures made in the
Company’s 2018 Annual Report on Form 10-K.
Item 4.Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the
Company’s President and Chief Executive Officer and the Chief Financial Officer and Treasurer. Based upon that evaluation, the Company's President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective.
Changes in internal controls
During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the
Company’s internal control over financial reporting.
There have been no material changes to the
Company’s risk factors from those disclosed in the Company’s 2018 Annual Report on Form 10-K.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On April 24, 2015, the Board of Directors authorized the Company to purchase up to 18,000,000 shares
of its outstanding common stock, primarily through open-market transactions. There were approximately 3.3 million shares remaining under the authorization on December 7, 2018, when the board of Directors authorized the purchase of up to an additional 18 million shares. The authorizations are for an indefinite period of time or until terminated by the Board.
In addition to shares purchased under the Board authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax due upon exercise of options or vesting of restricted stock.
Information on issuer purchases of equity securities
follows:
Period
Total Number
of Shares Purchased
Average Price
Paid per Share
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
