Graco (GGG) Earnings Surpass Estimates in Q2, Decline Y/Y

Graco Inc. GGG delivered better-than-expected results for the second quarter of 2020. Its earnings and sales surprise was 37% and 12.5%, respectively.

Adjusted earnings in the quarter under review were 37 cents per share, surpassing the Zacks Consensus Estimate of 27 cents. On a year-over-year basis, earnings decreased 26% due to weak revenue generation and a fall in margins.

The quarterly earnings exclude the impact of 20 cents per share of impairment charge (non-cash) incurred in connection with the valve business based in the U.K. Notably, Graco completed the divestment of the business in the ongoing third quarter of 2020.

Revenue Details

In the reported quarter, the company’s net sales were $366.9 million, suggesting a 14.3% decline from the year-ago quarter. Volume and price adversely impacted sales by 15%, while forex woes had an adverse impact of 1%. However, acquisitions contributed 2%.

However, the company’s net sales surpassed the Zacks Consensus Estimate of $326.1 million.

On a geographical basis, quarterly sales generated from the Americas fell 10% to $228 million. In EMEA, sales were $71 million, decreasing 30% year over year (or slipped 28% at a constant-currency rate), while sales from the Asia Pacific were $68 million, declining 7% year over year (or were down 5% at a constant-currency rate).

The company reports revenues under three segments. A brief discussion of the quarterly results is provided below:

The Industrial segment’s revenues totaled $133.3 million, reflecting a 29.3% decrease from the year-ago quarter. Volume and price had an adverse impact of 28% on sales, and forex woes too lowered sales by 1%. The segment’s sales accounted for 36.3% of the company’s net revenues in the quarter.

The Process segment’s sales of $77.8 million were down 8.6% from the year-ago quarter. Acquisitions contributed 8% to sales growth, while volume and price had an adverse impact of 16% in the quarter. Forex woes lowered sales by 1%. The segment’s sales accounted for 21.2% of net revenues in the reported quarter.

The Contractor segment’s revenues inched up 0.7% year over year at $155.9 million. The improvement was driven by a 1% contribution from volume and price. The segment’s sales accounted for 42.5% of net revenues in the reported quarter.

Margin Profile

In the reported quarter, Graco’s cost of sales declined 8.4% year over year to $184.4 million. It represented 50.3% of the quarter’s net sales versus 47% in the year-ago quarter. Gross profit decreased 19.6% year over year to $182.5 million, while margin was down 320 basis points (bps) to 49.8%. The fall in margin was triggered by unfavorable product and channel mix, forex woes and weak factory volume.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) declined 10.3% year over year to $102.8 million. It represented 28% of net sales in the reported quarter versus 26.8% in the year-ago quarter.

Adjusted operating profit decreased 29% year over year to $79.8 million. The results suffered from unfavorable movements in foreign currencies and a fall in volumes. Operating margin, adjusted, decreased 450 bps year over year to 21.8%.

Interest expenses in the reported quarter decreased 5% year over year to $3.3 million. Effective tax rate (adjusted) in the quarter was 19.1%, down 1.2 percentage points from the previous-year quarter.

Balance Sheet & Cash Flow

Exiting the second quarter, Graco had cash and cash equivalents of $432.7 million, suggesting a 5.3% increase from $456.7 million recorded in the last reported quarter. Long-term debt remained stable sequentially at $400 million.

In the first half of 2020, the company generated net cash of $142.6 million from operating activities, reflecting a decline of 13% from the year-ago comparable period. Capital spent on the addition of property, plant and equipment totaled $32.6 million versus $70.2 million in the first half of 2019.

The company distributed dividends worth $58.5 million and repurchased 2.3 million shares for $102.1 million during the first half of 2020.

Outlook

In the near term, Graco seems well-equipped — with operations running globally, efficient management team, sound customer base and focus on keeping the production lines active — to handle the challenges related to the coronavirus outbreak.

However, the company — being wary of the uncertainties caused by the pandemic — did not provide any sales or earnings projections for 2020. On the contrary, it did mention that capital expenditure for the year is now expected to be $80 million (including $50 million for the expansion of facilities), up from $70 million mentioned earlier.

Corporate expenses (unallocated) are estimated to be $30 million (maintained). Unfavorable movements in foreign currencies are estimated to adversely impact earnings by 1% in 2020, while are not expected to hurt sales.

Effective tax rate for the third quarter of 2020 is predicted to be 20-21%.

Graco Inc. Price, Consensus and EPS Surprise

 

Graco Inc. Price, Consensus and EPS Surprise

Graco Inc. price-consensus-eps-surprise-chart | Graco Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $8.7 billion, Graco currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Altra Industrial Motion Corp. AIMC, The Middleby Corporation MIDD and IDEX Corporation IEX. All these companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, earnings surprise for the last reported quarter was 47.73% for Altra Industrial, 12.31% for Middleby and 3.10% for IDEX.

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