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Text: Our conference call slides have been posted on our website and provide additional information that may be helpful.
Sales totaled $374 million this quarter, a decrease of 8% from the first quarter last year.
While acquisitions added one percentage point of revenue growth this quarter, changes in currency translation rates decreased sales by approximately one percentage point.
Net earnings totaled $73 million for the quarter or $0.42 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises, net earnings totaled $65 million or $0.38 per diluted share.
Our gross margin rate was 53.2% in the first quarter, approximately the same as last year.
Favorable realized pricing nearly offset the adverse effects of lower factory volume, unfavorable product and channel mix and changes in currency translation rates.
Operating expenses decreased by $3 million from the first quarter last year as reductions in volume and earnings-based expenses more than offset higher product development and occupancy costs.
Reported income tax rate was 11% for the quarter, approximately three percentage points lower than last year, primarily due to an increase in excess tax benefits related to stock option exercises.
After adjusting for this effect and other nonrecurring tax benefits, our tax rate for the quarter was 20.8%, similar to last year.
e grew $250 million on our $500 million credit facility during the first quarter to increase our cash position and preserve financial flexibility.
The proceeds from the advance are available to be used for working capital, general, corporate or other purposes.
This will add approximately $1 million to quarterly interest expense.
Cash flows from operations totaled $54 million in the first quarter as compared to $51 million last year, slightly above the first quarter last year.
Capital expenditures totaled $19 million in the first quarter.
We also paid cash dividends of $29 million.
For the full year 2020, capital expenditures are expected to be approximately $70 million, including approximately $50 million for facility expansion projects.
During the first quarter, we made share repurchases of approximately $90 million, including $8 million, which had not yet settled at the end of the quarter.
Cash used for repurchases was partially offset by issuances of $37 million.
The purchase of approximately 2.1 million shares in the first quarter will largely eliminate dilution in 2020.
We may make further opportunistic share repurchases going forward.
Due to economic uncertainty, we have withdrawn our revenue guidance for the remainder of 2020.
However, I will take a moment to talk about the effect of lower sales and unabsorbed factory costs in hypothetical terms.
As an example, the sales declined by 20% and factory volumes declined by an equivalent amount, while also maintaining our infrastructure then the unfavorable effect of unabsorbed cost on gross margin rate is expected to be about two to 2.5 percentage points.
If the sales declined by 30% and factory volumes declined by the same amount while maintaining our infrastructure, the unfavorable effect is expected to be about 3.5 or four percentage points on gross margin rate.
Although, factory volumes are challenging, we expect that favorable realized pricing, lower commodity cost in our normal practice of implementing productivity improvement projects will also continue and will favorably contribute to gross margin rate.
With a revenue decline of 8% in the first quarter, we saw a decline in operating earnings of 14% or decremental margins of 47%.
If revenues declined similarly in the next quarter, we would expect a similar decline in profitability.
At a 30% decline in revenue, similar to current booking trends while maintaining our expense base, decremental margins are expected to be around 65%.
Although, our decremental operating margins can be steep during periods of revenue decline, as shown in our historical trends, we are able to remain profitable with our current cost structure even with a substantial reduction in sales.
For final comments, looking forward to the rest of the year.
Based on current exchange rates and the same volume and mix of products and sales by currency in the prior year, the effective exchange is currently expected to be a headwind of approximately 1% on sales and 3% on earnings in 2020.
Unallocated corporate expenses are expected to be approximately $30 million for the full year 2020 and can vary by quarter.
The effective tax rate is expected to be approximately 20% to 21% for the full year, excluding any FX from excess tax benefits related to stock option exercises or other onetime items.
Rather than rehash the reported numbers, I'll try to shed some light on what we saw as Q1 progressed.
Coming into 2020, we had anticipated a difficult start to the year in our Asia Pacific business.
The declining order rates in the second half of 2019 and continued weakness in core automotive and industrial markets, we anticipated a tough Q1 for Asia Pacific when we issued our annual revenue outlook.
What we haven't fully anticipated in our outlook, of course, was the global impact of the virus.
The broad-based shutdown of businesses in China compounded an already difficult Q1 for us in the region.
Our Industrial segment is about 60% of our revenue in AP and suffered the worst.
From an operations and supplier standpoint, we were able to work through the shutdowns in China without impacting our global ability to build and ship orders.
Our business in the Americas and EMEA was generally in line with our outlook early in the quarter with particular strength in our Contractor segment.
As the virus hit EMEA and then the U.S., we saw our incoming order rate plummet, and while it's bounced around week-to-week, we've been running about 30% below prior years since mid-March.
While there are a few end markets that remain positive, such as semiconductor and sanitary, those exposures for Graco are small.
Nearly all of our major end markets across regions and segments have experienced double-digit declines in recent weeks.
Specific to Contractor Americas, the propane channel outperformed the home centers in Q1, with both channels showing positive out-the-door sales.
From incoming order rate perspective, in recent weeks, the pattern has reversed and home centers have been outperforming the propane channel.
Globally, Graco sales activity has been significantly hindered as access to industrial end users is difficult with stay-at-home orders in place, contractor selling events and other trade shows have been canceled and capital spending is being curtailed across industries.
With the exception of the short China shutdown I already referenced, all our major production and distribution facilities have remained open and fully operational.
When it became clear that the virus is going to be a global problem, we established the goal for every Graco production facility worldwide.
The goal has two elements: one, no Graco employee or person living in their immediate household ends up in the ICU or dead; and two, we keep our operations running.
To this end, we've implemented a number of practices to try to protect those employees with the highest risk of having serious complications from the virus, up to and including sending some high-risk employees home with full pay until we feel comfortable they can return.
For the rest of our employees, we have people working from home, if they can be productive or practicing social distancing, sanitation and good hygiene if they need to be at work.
We've had a few people test positive, and I've been very proud of the reaction of other employees.
They stayed calm and cool and carried on.
None of our high-risk employees have tested positive.
It seems quite clear to me based upon what we know about the virus and consistent with Graco culture that we can manage safety without shutting down.
Despite a significant drop in our bookings, my plan is to keep our payroll intact for the time being.
In addition, we will continue to make investments in our growth strategies, including our 2021 new product plans, our live based capital investments, new market initiatives and acquisitions.
This will pressure our P&L in Q2, and you can expect high decremental margins, as Caroline has outlined for you.
Our balance sheet is solid.
We have a strong team.
And for now, I prefer not to manage the short term to be less worse, but instead prepared to leap forward when conditions improve.
We took a measured approach during the 2008, 2009 crisis, and I believe our investors were amply rewarded over the following decade.
If business conditions do not improve, we will, of course, take appropriate actions.
Our balance sheet and cash flow remains strong.
We borrowed $250 million under our revolving credit facility in order to increase our cash position and preserve our financial flexibility.
We will use the proceeds from borrowings to fund our strategic initiatives, including acquisitions and share buybacks, if good buying opportunities present themselves.
Due to economic uncertainty, we're withdrawing our 2020 revenue guidance for the remainder of the year.
In conclusion, we expect the short term to be difficult with continuing declines in revenue and profitability.
However, we will execute our growth plans and weather the storm.
Our factories are running and employee morale remains high.
Our long-term focus and global distribution channel will position us well to capitalize when our end markets rebound.

user
graco inc - withdraws 2020 revenue guidance due to economic uncertainty.
graco inc qtrly net sales $373.6 million, down 8%.
graco inc qtrly earnings per share $0.42.
graco inc qtrly adjusted earnings per share $0.38.
graco inc - q1 sales did not meet our expectations and deteriorated as quarter progressed.
graco inc - graco is well positioned financially and strategically to operate without making major changes.

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