Graco Inc (GGG) Q3 2018 Earnings Conference Call Transcript
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Graco Inc (NYSE: GGG)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks

  • Questions and Answers

  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Graco Incorporated Third Quarter 2018 Earnings Conference call. Today's conference is being recorded.

And at this time, I'd like to turn today's call over to Ms. Caroline Chambers. Please go ahead, ma'am.

Caroline M. Chambers -- Executive Vice President, Corporate Controller and Information Systems

Good morning, everyone. I'm here this morning with Pat McHale and Mark Sheahan. Our conference call slides have been posted on our website and provide additional information that you may find helpful.

We saw sales growth this quarter in all segments and regions with an increase of 10% from the prior year, including 3 percentage points of growth from acquisitions. Reported net earnings totaled $93 million in the third quarter or $0.54 per diluted share. After adjusting for the impact of excess tax benefits from stock option exercises and the non-recurring tax benefit related to the $40 million pension contribution made in the third quarter, net earnings totaled $86 million or $0.50 per diluted share.

Unfavorable currency translation reduced operating earnings by approximately $2 million and exchange losses on net assets of foreign operations also increased other expense by $2 million. Overall, a headwind of $4 million on pre-tax earnings this quarter.

Gross margin rates remained strong, though slightly lower than the third quarter last year due to lower margin rates of acquired operations. Pricing continued to offset material price increases this quarter. Channel mix was unfavorable in the Contractor segment. While tariffs did not significantly affect gross margin rates during the third quarter, we expect to see an acceleration of tariff-related cost increases, which could have an effect of 50 basis points to 75 basis points on gross margin rates in the fourth quarter of 2018. There are a lot of moving pieces and we are working closely with our supply chain to minimize the overall tariff costs for Graco.

Looking into 2019, we expect that pricing will fully offset the dollar value of tariffs. The gross margin rates as a percentage of sales could be slightly lower. Our factories are performing well, and our year-in year-out continuous improvement projects will continue to provide opportunities to improve efficiencies and manage costs.

Operating expense increased by $4 million compared to the third quarter of last year, including $1 million from acquired operations. Our as reported tax rate was 14%, down 7.5 percentage points from the third quarter of last year. Adjusted to exclude the impact of excess tax benefits related to stock option exercises and the non-recurring tax benefit related to the third quarter pension contribution, the effective income tax rate was approximately 21% in the third quarter or 10 percentage points lower than last year, primarily due to the net effects of U.S. federal income tax reform.