GGG Graco Inc

Graco Inc. (NYSE:GGG) today announced third quarter net earnings of $30.9 million on net sales of $176.9 million - increases over the prior year of 7 percent and 19 percent, respectively. Diluted net earnings per share were $0.44 versus $0.41 last year, a 7 percent increase. For the first nine months, Graco reported net earnings of $93.6 million on net sales of $546.1 million - increases over the prior year of 15 percent and 23 percent, respectively. For both the third quarter and on a year-to-date basis, the sales growth rate exceeded the net earnings growth rate as a result of acquisitions. Acquired operations contributed 11 percentage points of sales growth for the quarter and attained breakeven operating results. Year-to-date sales include 11 percentage points of revenue growth from acquired operations. When compared to the third quarter of 2004, worldwide Contractor Equipment Division sales of $75.3 million increased 10 percent. In the Americas, growth came from sales to professional paint stores. In the professional paint channel new product sales and overall business tempo remained robust in the third quarter. In the home center channel, sales were slightly lower than last year's third quarter as a result of changes in inventory stocking practices at Home Depot. Out-the-door sales remain strong at Home Depot and year-to-date sales in both channels are still up double-digits from last year. In addition to the growth in the Americas, Europe continued to impress with another double-digit increase in sales, a continuation of what was experienced in the first half of this year. Third quarter Industrial/Automotive Equipment Division sales of $88.1 million increased 31 percent versus the same period last year. Acquired businesses contributed 24 percentage points of the increase. The remaining 7 percent increase was driven by growth in all three regions including growth in Europe and a double-digit increase in Asia Pacific. Year-to-date sales were up in all of the major product categories. Year-to-date sales are higher in all three regions and overall business tempo remains solid heading into the fourth quarter of the year. Third quarter sales for the Lubrication Equipment Division were $13.6 million, up 3 percent from last year. Revenue gains continued in all three regions despite difficult comparisons to last year's record third quarter results. Lubrication products such as pumps, meters and reels all showed increases over the prior year. Third quarter sales in the Americas increased 17 percent to $117.6 million, with continued growth in all three segments. Acquired businesses contributed 11 percentage points of the increase. In Europe, net sales of $36.4 million were 23 percent higher than the third quarter of 2004. Acquired businesses contributed 10 percentage points of the increase; the remaining increase in Europe was primarily driven by growth in the Contractor Equipment and Industrial/Automotive segments. In Asia Pacific, net sales of $22.9 million were 21 percent higher than the third quarter of 2004. Acquired businesses contributed 11 percentage points of the increase; the remaining increase was primarily driven by robust Industrial/Automotive Equipment business. Graco's gross profit margin, expressed as a percentage of sales, was 53.5 percent for the third quarter, up 190 basis points from the second quarter but below last year's gross profit margin of 55.1 percent. When compared to last year's third quarter, the lower gross profit margin rate can be attributed to the acquisitions. Before the effects of acquisitions, third quarter gross profit rate was higher than last year. Graco's operating profit margin, expressed as a percentage of sales, was 26.5 percent for the third quarter, versus 29 percent last year. Operating expenses, when expressed as a percentage of net sales, increased by 90 basis points from last year's third quarter. The increase in operating expenses as a percentage of sales and the overall decline in operating profit margin from last year can be attributed to the acquisitions. Before the effects of acquisitions, third quarter operating profit margin was higher than last year's. When compared to 2004 results, the U.S. dollar versus foreign currencies helped to increase year-to-date net earnings and net sales. Translated at consistent exchange rates, year-to-date net earnings and net sales increased by 12 percent and 22 percent, respectively. The impact of currency translation rates on the third quarter was negligible. "Graco continues to experience strong growth from our core businesses this year with increases in sales, net earnings and earnings per share," said President and Chief Executive Officer David A. Roberts. "Sales in all three regions and all three divisions continued to grow even before the favorable impacts of currency translations and acquisitions. After a softer than anticipated July, our incoming order rates bounced back in August and September leading to an increase in backlog at the end of the period. Our backlog stands at $39 million at the end of the third quarter, up $4 million from the second quarter and $21 million from the end of last year. Our Industrial/Automotive Equipment division continues to experience growth across all regions before the favorable impact of acquisitions. In the Contractor segment, growth has been driven by a combination of new product introductions, favorable housing conditions in North America and higher sales in Europe. Our sales in the Lubrication Equipment segment have enjoyed solid gains this year. The two recent acquisitions are contributing to our sales and cash flow and we are working diligently to execute our plans for improvements in the profitability of these businesses. As we move forward with our integration efforts to align the acquired companies with Graco's global platform, we are encouraged by the amount of improvements that can be made and the level of commitment we are receiving from employees, customers and distributors. We continue to be optimistic about the remainder of 2005 and our prospects for next year." Cautionary Statement Regarding Forward-Looking Statements A forward-looking statement is any statement made in this earnings release and other reports that the Company files periodically with the Securities and Exchange Commission, as well as in press releases, analyst briefings, conference calls and the Company's Annual Report to shareholders which reflects the Company's current thinking on market trends and the Company's future financial performance at the time they are made. All forecasts and projections are forward-looking statements. The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 by making cautionary statements concerning any forward-looking statements made by or on behalf of the Company. The Company cannot give any assurance that the results forecasted in any forward-looking statement will actually be achieved. 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: economic conditions in the United States and other major world economies, currency fluctuations, political instability, changes in laws and regulations, and changes in product demand. Please refer to Exhibit 99 to the Company's Annual Report on Form 10-K for fiscal year 2004 for a more comprehensive discussion of these and other risk factors. Investors should realize that factors other than those identified above and in Exhibit 99 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. Conference Call A conference call for analysts and institutional investors will be held Monday, October 24, 2005, at 10:30 a.m. ET to discuss Graco's third quarter results. Graco management will host the call. A real-time, listen-only webcast of the conference call will be broadcast live over the Internet. Individuals wanting to listen can access the call at the Company's website at www.graco.com. Listeners should go to the website at least 15 minutes prior to the live conference call to install any necessary audio software. For those unable to listen to the live event, a replay will be available soon after the conference call at Graco's website, or by telephone beginning at approximately 1:00 p.m. ET on October 24, 2005, by dialing 800.405.2236, passcode 11041641, if calling within the U.S. or Canada. The dial-in number for international participants is 303.590.3000, with the same passcode. The replay by telephone will be available through October 27, 2005. Graco Inc. supplies technology and expertise for the management of fluids in both industrial and commercial applications. It designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid materials. A recognized leader in its specialties, Minneapolis-based Graco serves customers around the world in the manufacturing, processing, construction and maintenance industries. For additional information about Graco Inc., please visit us at www.graco.com. -0- *T GRACO INC. AND SUBSIDIARIES Consolidated Statements of Earnings Third Quarter (13 Nine Months (39 weeks) Ended weeks) Ended ------------------- ------------------- (In thousands, except per Sept. 30, Sept. 24, Sept. 30, Sept. 24, share amounts) 2005 2004 2005 2004 --------- --------- --------- --------- Net Sales $176,934 $149,066 $546,099 $444,213 Cost of products sold 82,212 66,946 263,219 203,547 --------- --------- --------- --------- Gross Profit 94,722 82,120 282,880 240,666 Product development 7,031 5,231 19,890 15,798 Selling, marketing and distribution 27,581 24,449 82,260 73,976 General and administrative 13,148 9,195 38,257 29,208 --------- --------- --------- --------- Operating Earnings 46,962 43,245 142,473 121,684 Interest expense 343 115 1,190 384 Other expense, net 121 113 508 277 --------- --------- --------- --------- Earnings before Income Taxes 46,498 43,017 140,775 121,023 Income taxes 15,600 14,200 47,200 39,900 --------- --------- --------- --------- Net Earnings $30,898 $28,817 $93,575 $81,123 ========= ========= ========= ========= Net Earnings per Common Share Basic $0.45 $0.42 $1.36 $1.17 Diluted $0.44 $0.41 $1.34 $1.15 ========= ========= ========= ========= Weighted Average Number of Shares Basic 68,612 69,176 68,881 69,167 Diluted 69,707 70,243 70,006 70,256 ========= ========= ========= ========= All figures are subject to audit and adjustment at the end of the fiscal year. GRACO INC. AND SUBSIDIARIES Segment Information Third Quarter (13 Nine Months (39 weeks) Ended weeks) Ended ------------------- ------------------- (In thousands) Sept. 30, Sept. 24, Sept. 30, Sept. 24, 2005 2004 2005 2004 --------- --------- --------- --------- Net Sales Industrial / Automotive $88,052 $67,305 $269,696 $197,027 Contractor 75,318 68,620 232,665 209,205 Lubrication 13,564 13,141 43,738 37,981 --------- --------- --------- --------- Consolidated $176,934 $149,066 $546,099 $444,213 ========= ========= ========= ========= Operating Earnings Industrial / Automotive $23,618 $22,411 $70,282 $62,886 Contractor 19,370 18,578 60,210 53,874 Lubrication 3,278 3,446 11,524 9,096 Unallocated Corporate 696 (1,190) 457 (4,172) --------- --------- --------- --------- Consolidated $46,962 $43,245 $142,473 $121,684 ========= ========= ========= ========= Segment operating earnings for 2004 have been restated to conform to 2005, which includes amortization of intangibles formerly classified as unallocated corporate. All figures are subject to audit and adjustment at the end of the fiscal year. GRACO INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) Sept. 30, 2005 Dec. 31, 2004 -------------- ------------- ASSETS Current Assets Cash and cash equivalents $14,278 $60,554 Accounts receivable, less allowances of $5,900 and $5,600 119,856 109,080 Inventories 58,705 40,219 Deferred income taxes 15,247 15,631 Other current assets 1,113 1,742 -------------- ------------- Total current assets 209,199 227,226 Property, Plant and Equipment, net 103,309 94,510 Prepaid Pension 29,101 27,556 Goodwill 49,129 9,199 Other Intangible Assets, net 37,098 8,959 Other Assets 4,330 4,264 -------------- ------------- Total Assets $432,166 $371,714 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable to banks $16,170 $6,021 Trade accounts payable 22,531 18,599 Salaries, wages and commissions 20,111 19,804 Dividends payable 8,914 8,990 Other current liabilities 48,410 43,359 -------------- ------------- Total current liabilities $116,136 $96,773 Retirement Benefits and Deferred Compensation 32,888 33,092 Deferred Income Taxes 11,050 11,012 Shareholders' Equity Common stock 68,510 68,979 Additional paid-in capital 109,720 100,180 Retained earnings 96,693 62,773 Accumulated comprehensive income (loss) and other (2,831) (1,095) -------------- ------------- Total shareholders' equity 272,092 230,837 -------------- ------------- Total Liabilities and Shareholders' Equity $432,166 $371,714 ============== ============= All figures are subject to audit and adjustment at the end of the fiscal year. GRACO INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Thirty-Nine Weeks Ended ----------------------- Sept. 30, 2005 Sept. 24, 2004 -------------- -------------- Cash Flows from Operating Activities Net Earnings $93,575 $81,123 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 17,603 13,333 Deferred income taxes (95) (985) Tax benefit related to stock options exercised 1,900 5,500 Change in: Accounts receivable (3,762) (3,740) Inventories 1,783 (10,112) Trade accounts payable (1,385) 2,353 Salaries, wages and commissions (1,187) 800 Retirement benefits and deferred compensation (788) (777) Other accrued liabilities 1,898 7,015 Other 660 (152) -------------- -------------- Net cash from operating activities 110,202 94,358 -------------- -------------- Cash Flows from Investing Activities Property, plant and equipment additions (12,027) (9,184) Proceeds from sale of property, plant and equipment 136 126 Capitalized software and other intangible asset additions (785) (856) Acquisition of businesses, net of cash acquired (102,797) -- -------------- -------------- Net cash used in investing activities (115,473) (9,914) -------------- -------------- Cash Flows from Financing Activities Borrowings on notes payable and lines of credit 75,346 20,943 Payments on notes payable and lines of credit (64,989) (19,186) Common stock issued 9,573 14,075 Common stock retired (35,238) (32,773) Cash dividends paid (26,894) (123,460) -------------- -------------- Net cash used in financing activities (42,202) (140,401) -------------- -------------- Effect of exchange rate changes on cash 1,197 112 -------------- -------------- Net increase (decrease) in cash and cash equivalents (46,276) (55,845) Cash and cash equivalents Beginning of year 60,554 112,118 -------------- -------------- End of period $14,278 $56,273 ============== ============== All figures are subject to audit and adjustment at the end of the fiscal year. *T