GGG Graco Inc

Graco Inc. (NYSE: GGG) today announced results for the quarter and year ended December 31, 2010.

Summary

$ in millions except per share amounts

          Quarter Ended           Year Ended Dec 31,         Dec 25,         % Dec 31,         Dec 25,         % 2010 2009 Change 2010 2009 Change   Net Sales $ 197.3 $ 146.3 35 % $ 744.1 $ 579.2 28 % Net Earnings 27.0 17.2 57 % 102.8 49.0 110 % Diluted Net Earnings per Common Share $ 0.44 $ 0.28 57 % $ 1.69 $ 0.81 109 %  

• Sales growth in all segments and regions exceeded 30 percent for the quarter and 20 percent for the year.
• Sales in the Lubrication segment grew 52 percent for the quarter and 35 percent for the year.
• Gross margin rate was 1½ percentage points higher for the quarter and 3½ points higher for the year.
• Operating expenses as a percentage of sales for the quarter were 1 percentage point lower than last year. For the year, operating expenses as a percentage of sales were 4 percentage points lower than last year.
• Return on sales was 14 percent for both the quarter and the year, up from 12 percent for the quarter and 8½ percent for the year in 2009.

“The global industrial recovery, along with our investments in new products, innovative technologies and commercial capabilities to support geographic expansion, led to improved results in 2010,” said Patrick J. McHale, President and Chief Executive Officer. “Sales growth was strong in all divisions and regions, including a 46 percent increase in Asia Pacific.”

Consolidated Results

For the quarter, sales increased 35 percent in the Americas, 33 percent in Europe (42 percent at consistent translation rates), and 37 percent in Asia Pacific (33 percent at consistent translation rates). For the year, sales increased 24 percent in the Americas, 25 percent in Europe (29 percent at consistent translation rates) and 46 percent in Asia Pacific (41 percent at consistent translation rates). There were 53 weeks in our fiscal 2010, including 14 weeks in the fourth quarter. There were 52 weeks in fiscal 2009, with 13 weeks in the fourth quarter. Translation rates did not have a significant impact on the total sales increase of 35 percent for the quarter and 28 percent for the year.

Gross profit margin, expressed as a percentage of sales, was 54½ percent for the quarter and 54 percent for the year. Last year, gross profit margin rate was 53 percent for the quarter and 50½ percent for the year. Improvement in both the quarter and the year is mainly from higher production volumes. Other factors contributing to improvement in the gross margin rate included selling price increases and lower pension costs in 2010, and costs related to workforce reductions that lowered the 2009 rate.

Total operating expenses increased $16 million for the quarter and $32 million for the year due to higher levels of business activity and improved results. Higher incentives expense accounted for approximately half of the increase for the quarter and two-thirds of the increase for the year. Operating expenses as a percentage of sales decreased to 35½ percent from 36½ percent for the quarter and decreased to 33½ percent from 37½ percent for the year.

The effective income tax rate was 26 percent for the quarter and 31 percent for the year, compared to 23½ percent and 29 percent for the comparable periods last year. In both 2010 and 2009, the effective rate for the quarter was lower than the annual rate because the federal R&D tax credit was not renewed until the fourth quarter and no credits were included in the first three quarters. The effect of the federal R&D tax credit in 2010 was lower as a percentage of pre-tax earnings compared to last year.

Segment Results

Certain measurements of segment operations are summarized below:

      Quarter Ended         Year Ended Industrial       Contractor       Lubrication Industrial       Contractor       Lubrication   Net sales (in millions) $ 113.1 $ 61.6 $ 22.6 $ 409.6 $ 256.6 $ 77.9 Net sales percentage change from last year 31 % 36 % 52 % 31 % 23 % 35 % Operating earnings as a percentage of net sales

    2010

31 % 8 % 11 % 31 % 14 % 11 %

    2009

27 % 10 % 3 % 22 % 14 % (5)%  

Industrial segment sales increased 31 percent for both the quarter and the year. Sales growth for the quarter was consistent across regions. For the year, sales increased 49 percent in Asia Pacific (44 percent at consistent translation rates), 26 percent in the Americas and 24 percent in Europe (27 percent at consistent translation rates). Higher sales and the resulting increase in production volume led to improvement in operating earnings as a percentage of sales.

Contractor segment sales increased 36 percent for the quarter and 23 percent for the year. Sales for the quarter increased 35 percent in the Americas, 42 percent in Europe (52 percent at consistent translation rates) and 28 percent in Asia Pacific (24 percent at consistent translation rates). For the year, sales increased 22 percent in the Americas and 24 percent in both Europe and Asia Pacific (29 percent in Europe and 18 percent in Asia Pacific at consistent translation rates). Operating margin percentages in this segment were held down by costs and expenses related to new product introductions and expanding distribution.

Lubrication segment sales increased 52 percent for the quarter and 35 percent for the year. Sales for the quarter increased 43 percent in the Americas, 63 percent in Europe and 92 percent in Asia Pacific. For the year, sales increased 23 percent in the Americas, 56 percent in Europe and doubled in Asia Pacific. Sales of industrial lubrication products contributed significantly to the strong growth for the segment. For both the quarter and the year, higher sales and the resulting increase in production volume led to improved operating earnings as a percentage of sales.

Outlook

“We expect to build on momentum created in 2010, ” said Patrick J. McHale, President and Chief Executive Officer. “In 2011, we intend to expand our capital resources, make additional share repurchases and continue to evaluate acquisition prospects. We will continue to pursue our growth strategies including product development, international expansion, entering new markets and strategic acquisitions.”

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 it is made. All forecasts and projections are forward-looking statements. The Company undertakes no obligation to update these statements in light of new information or future events.

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 Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2009 (and most recent Form 10-Q, if applicable) 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.

Conference Call

Graco management will hold a conference call, including slides via webcast, with analysts and institutional investors on Tuesday, February 1, 2011, at 11:00 a.m. ET, to discuss Graco’s fourth quarter and year-end results.

A real-time Webcast of the conference call will be broadcast live over the Internet. Individuals wanting to listen and view slides 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 2:00 p.m. ET on February 1, 2011, by dialing 800.406.7325, Conference ID #4399746, if calling within the U.S. or Canada. The dial-in number for international participants is 303.590.3030, with the same Conference ID #. The replay by telephone will be available through February 4, 2011.

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.

  GRACO INC. AND SUBSIDIARIES Consolidated Statement of Earnings (Unaudited)                         Quarter Ended Year Ended Dec 31, Dec 25, Dec 31, Dec 25, 2010   2009   2010   2009   Net Sales $ 197,293 $ 146,312 $ 744,065 $ 579,212 Cost of products sold   89,621     68,973     340,620     286,396   Gross Profit 107,672 77,339 403,445 292,816 Product development 9,490 8,954 37,699 37,538 Selling, marketing and distribution 40,816 28,736 135,903 115,550 General and administrative   19,563     15,944     76,702     65,261   Operating Earnings 37,803 23,705 153,141 74,467 Interest expense 1,025 1,119 4,184 4,854 Other expense, net   270     57     417     946   Earnings Before Income Taxes 36,508 22,529 148,540 68,667 Income taxes   9,500     5,300     45,700     19,700   Net Earnings $ 27,008   $ 17,229   $ 102,840   $ 48,967     Net Earnings per Common Share Basic $ 0.45 $ 0.29 $ 1.71 $ 0.82 Diluted $ 0.44 $ 0.28 $ 1.69 $ 0.81   Weighted Average Number of Shares Basic 59,944 59,980 60,209 59,865 Diluted 60,700 60,518 60,803 60,229   Segment Information (Unaudited)   Quarter Ended Year Ended Dec 31, Dec 25, Dec 31, Dec 25, 2010 2009 2010 2009 Net Sales Industrial

$

113,080 $ 86,127 $ 409,569 $ 312,935 Contractor 61,647 45,331 256,588 208,544 Lubrication   22,566     14,854     77,908     57,733   Total $ 197,293   $ 146,312   $ 744,065   $ 579,212     Operating Earnings Industrial $ 35,032 $ 23,048 $ 126,266 $ 68,310 Contractor 5,113 4,532 36,952 28,952 Lubrication 2,571 441 8,897 (2,907 ) Unallocated corporate (expense)   (4,913 )   (4,316 )   (18,974 )   (19,888 ) Total $ 37,803   $ 23,705   $ 153,141   $ 74,467       GRACO INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands)         Dec 31,         Dec 25, 2010 2009 ASSETS Current Assets Cash and cash equivalents $ 9,591 $ 5,412 Accounts receivable, less allowances of $5,600 and $6,500 124,593 100,824 Inventories 91,620 58,658 Deferred income taxes 18,647 20,380 Other current assets   7,957     3,719   Total current assets 252,408 188,993   Property, Plant and Equipment Cost 344,854 334,440 Accumulated depreciation   (210,669 )   (195,387 ) Property, plant and equipment, net 134,185 139,053   Goodwill 91,740 91,740 Other Intangible Assets, net 28,338 40,170 Deferred Income Taxes 14,696 8,372 Other Assets   9,107     8,106   Total Assets $ 530,474   $ 476,434     LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable to banks $ 8,183 $ 12,028 Trade accounts payable 19,669 17,983 Salaries and incentives 34,907 14,428 Dividends payable 12,610 12,003 Other current liabilities   44,385     47,373   Total current liabilities 119,754 103,815   Long-term debt 70,255 86,260 Retirement Benefits and Deferred Compensation 76,351 73,705 Uncertain Tax Positions - 3,000   Shareholders' Equity Common stock 60,048 59,999 Additional paid-in-capital 212,073 190,261 Retained earnings 44,436 11,121 Accumulated other comprehensive income (loss)   (52,443 )   (51,727 ) Total shareholders' equity   264,114     209,654   Total Liabilities and Shareholders' Equity $ 530,474   $ 476,434       GRACO INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands)       Year Ended Dec 31,         Dec 25, 2010 2009 Cash Flows From Operating Activities Net Earnings $ 102,840 $ 48,967 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 33,973 35,140 Deferred income taxes (4,248 ) (69 ) Share-based compensation 10,024 9,369 Excess tax benefit related to share-based payment arrangements (1,988 ) (375 ) Change in Accounts receivable (23,285 ) 28,420 Inventories (32,997 ) 32,663 Trade accounts payable 1,670 (701 ) Salaries and incentives 20,453 (2,893 ) Retirement benefits and deferred compensation (1,428 ) (848 ) Other accrued liabilities (18 ) (2,838 ) Other   (3,873 )   (303 ) Net cash provided by operating activities   101,123     146,532   Cash Flows From Investing Activities Property, plant and equipment additions (16,620 ) (11,463 ) Proceeds from sale of property, plant and equipment 257 770 Investment in life insurance (1,499 ) (1,499 ) Capitalized software and other intangible asset additions   (907 )   (602 ) Net cash used in investing activities   (18,769 )   (12,794 ) Cash Flows From Financing Activities Borrowings on short-term lines of credit 10,584 10,824 Payments on short-term lines of credit (13,789 ) (17,209 ) Borrowings on long-term line of credit

140,540

270,715

Payments on long-term line of credit

(156,545

)

(364,455

) Excess tax benefit related to share-based payment arrangements 1,988 375 Common stock issued 12,794 6,571 Common stock repurchased (24,218 ) (187 ) Cash dividends paid   (48,146 )   (45,444 ) Net cash provided by (used in) financing activities   (76,792 )   (138,810 ) Effect of exchange rate changes on cash   (1,383 )   (1,635 ) Net increase (decrease) in cash and cash equivalents 4,179 (6,707 ) Cash and cash equivalents: Beginning of year   5,412     12,119   End of year $ 9,591   $ 5,412