GGG Graco Inc

Graco Inc. (NYSE: GGG) today announced results for the quarter and year ended December 30, 2011.

  Summary

$ in millions except per share amounts

    Quarter Ended     Year Ended Dec 30,     Dec 31,     % Dec 30,     Dec 31,     % 2011 2010 Change 2011 2010 Change (13 weeks) (14 weeks) (52 weeks) (53 weeks)   Net Sales $ 215.6 $ 197.3 9 % $ 895.3 $ 744.1 20 % Net Earnings 30.4 27.0 13 % 142.3 102.8 38 % Diluted Net Earnings per Common Share $ 0.50 $ 0.44 14 % $ 2.32 $ 1.69 37 %  

• Sales for the quarter were 9 percent higher than the strong fourth quarter last year, which included 14 weeks, compared to 13 weeks in 2011.
• Sales for the year increased 20 percent from last year.
• Lubrication segment sales for the year topped $100 million and operating earnings more than doubled from the previous year.
• For the year, gross margin rate of 56 percent and return on sales of 16 percent were each 2 percentage points higher than last year.
• General and administrative expenses include $2 million of acquisition-related costs for the quarter and $8 million for the year.

“The increase in our revenues for the full year 2011 was very broad-based, with strong double-digit growth in all geographies and business segments,” said Patrick J. McHale, Graco’s President and Chief Executive Officer. “Although year-over-year growth decelerated somewhat from the third quarter of 2011, Graco reported revenues that were a record for any fourth quarter in the history of the Company. In addition, the extra week in the 2010 comparables belies the underlying growth in the Company’s weekly order rate experienced in the fourth quarter of 2011. When compared to the same period of the prior year, weekly order intake in the fourth quarter continued to grow at a double-digit rate. These strong results were driven by the Company’s continued investment in new products and geographic expansion.”

Consolidated Results

For the quarter, sales were 9 percent higher than last year in the Americas, flat in Europe and 20 percent higher in Asia Pacific. Translation rates did not have a significant impact on the sales increase for the quarter. For the year, sales increased 20 percent (18 percent at consistent translation rates), including increases of 17 percent in the Americas, 19 percent in Europe (14 percent at consistent translation rates) and 32 percent in Asia Pacific (27 percent at consistent translation rates). There were 53 weeks in fiscal 2010, including 14 weeks in the fourth quarter. There were 52 weeks in fiscal 2011, with 13 weeks in the fourth quarter.

Gross profit margin, expressed as a percentage of sales, was 54 percent for the quarter, consistent with last year, and 56 percent for the year, up 2 percentage points. The rate improvement for the year is mainly from higher production volumes, pricing and favorable translation rates, partially offset by higher material costs.

Total operating expenses for the quarter were flat compared to last year and increased $30 million for the year. Half of the increase was in selling, marketing and distribution expenses, including strategic spending to generate and support growth, especially in Asia Pacific. General and administrative expenses for the year increased by $11 million, including $8 million related to the proposed acquisition of ITW’s finishing businesses. Operating expenses as a percentage of sales decreased to 32 percent for the quarter and 31 percent for the year, down 3 and 2 percentage points, respectively, compared to last year.

The effective income tax rate was 30 percent for the quarter and 32 percent for the year, compared to 26 percent and 31 percent for the comparable periods last year. In 2010, the effective rate for the quarter was low because the federal R&D tax credit was not renewed until the fourth quarter and the full-year benefit was reflected in that quarter.

Segment Results

Certain measurements of segment operations are summarized below:

        Quarter Ended Year Ended (13 weeks in 2011, 14 weeks in 2010) (52 weeks in 2011, 53 weeks in 2010) Industrial     Contractor     Lubrication Industrial     Contractor     Lubrication Net sales (in millions) $ 125.2 $ 62.1 $ 28.3 $ 501.8 $ 290.7 $ 102.7 Net sales percentage change from last year 11 % 1 % 26 % 23 % 13 % 32 % Operating earnings as a percentage of net sales

    2011

33 % 10 % 19 % 35 % 17 % 18 %

    2010

31 % 8 % 11 % 31 % 14 % 11 %  

Industrial segment sales increased 11 percent for the quarter, including increases of 7 percent in the Americas, 8 percent in Europe and 20 percent in Asia Pacific. For the year, sales increased 23 percent, including increases of 17 percent in the Americas, 23 percent in Europe (19 percent at consistent translation rates) and 31 percent in Asia Pacific (27 percent at consistent translation rates). Higher sales and the leveraging of expenses led to improvement in operating earnings as a percentage of sales.

Contractor segment sales increased 1 percent for the quarter and 13 percent for the year. Sales for the quarter increased 8 percent in the Americas and 5 percent in Asia Pacific (2 percent at consistent translation rates). In Europe, sales decreased 15 percent compared to a strong fourth quarter of 2010 that included initial stocking orders of the new handheld product. For the year, sales increased 13 percent in the Americas, 9 percent in Europe (4 percent at consistent translation rates) and 25 percent in Asia Pacific (18 percent at consistent translation rates). Higher sales and the leveraging of expenses led to improvement in operating earnings as a percentage of sales.

Lubrication segment sales increased 26 percent for the quarter and 32 percent for the year. Sales for the quarter increased 17 percent in both the Americas and Europe, and 59 percent in Asia Pacific. For the year, sales increased 25 percent in the Americas, 38 percent in Europe and 57 percent in Asia Pacific. For both the quarter and the year, higher sales and the leveraging of factory volumes and operating expenses led to improvement in operating earnings as a percentage of sales.

Outlook

“We are planning for growth in all business segments and geographies for the full year 2012, although percentage growth trends will likely be lower, reflecting difficult comparisons to our record-level sales in 2011, continued challenges in the worldwide construction market and the ongoing Eurozone crisis. We will continue to invest in new products and resources to expand Graco’s geographic footprint and broaden the served markets and applications for our products,” said McHale. “While we remain cautious regarding demand trends in Western Europe, we continue to see strong growth in the emerging markets of Europe as well as pockets of strength in certain end-markets, such as automotive, energy, heavy equipment and industrial lubrication. We also see sustained opportunities to grow in the United States, while Asia Pacific remains a bright spot for ongoing double-digit growth in 2012.”

As announced in mid-December, the Federal Trade Commission (FTC) has filed a complaint to challenge Graco's proposed acquisition of the finishing businesses of Illinois Tool Works Inc. (NYSE: ITW). “The decision by the FTC to challenge this acquisition is extremely disappointing,” said McHale. “We strongly believe that this acquisition is pro-competitive and will benefit both end users and our distributor partners. We are confident in our position and will vigorously fight for approval in court.”

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 the acquisition of the finishing businesses of ITW, 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. In addition, risk factors related to the Company’s pending acquisition of the ITW finishing businesses include: whether and when the required regulatory approvals will be obtained, whether and when the closing conditions will be satisfied and whether and when the transaction will close, the ability to close on committed financing on satisfactory terms, the amount of debt that the Company will incur to complete the transaction, completion of purchase price valuation for acquired assets, whether and when the Company will be able to realize the expected financial results and accretive effect of the transaction, how customers, competitors, suppliers and employees will react to the transaction, and economic changes in global markets. Please refer to Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2010 (and most recent Form 10-Q) 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, January 31, 2012, 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 January 31, 2012, by dialing 800-406-7325, Conference ID #4502375, 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, 2012.

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 30, Dec 31, Dec 30, Dec 31, 2011 2010 2011 2010 Net Sales $ 215,594 $ 197,293 $ 895,283 $ 744,065 Cost of products sold   98,581     89,621     395,078     340,620   Gross Profit 117,013 107,672 500,205 403,445 Product development 10,846 9,490 41,554 37,699 Selling, marketing and distribution 37,538 40,816 151,276 135,903 General and administrative   21,241     19,563     87,861     76,702   Operating Earnings 47,388 37,803 219,514 153,141 Interest expense 3,658 1,025 9,131 4,184 Other expense (income), net   6     270     655     417   Earnings Before Income Taxes 43,724 36,508 209,728 148,540 Income taxes   13,300     9,500     67,400     45,700   Net Earnings $ 30,424   $ 27,008   $ 142,328   $ 102,840     Net Earnings per Common Share Basic $ 0.51 $ 0.45 $ 2.36 $ 1.71 Diluted $ 0.50 $ 0.44 $ 2.32 $ 1.69   Weighted Average Number of Shares Basic 59,723 59,944 60,286 60,209 Diluted 60,635 60,700 61,370 60,803     Segment Information (Unaudited)   Quarter Ended Year Ended Dec 30, Dec 31, Dec 30, Dec 31, 2011 2010 2011 2010 Net Sales Industrial $ 125,205 $ 113,080 $ 501,841 $ 409,569 Contractor 62,068 61,647 290,732 256,588 Lubrication   28,321     22,566     102,710     77,908   Total $ 215,594   $ 197,293   $ 895,283   $ 744,065     Operating Earnings Industrial $ 40,698 $ 35,032 $ 173,694 $ 126,266 Contractor 6,342 5,113 50,581 36,952 Lubrication 5,276 2,571 18,928 8,897 Unallocated corporate (expense)   (4,928 )   (4,913 )   (23,689 )   (18,974 ) Total $ 47,388   $ 37,803   $ 219,514   $ 153,141       GRACO INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands)       Dec 30,     Dec 31, 2011 2010 ASSETS Current Assets Cash and cash equivalents $ 303,150 $ 9,591 Accounts receivable, less allowances of $5,500 and $5,600 150,912 124,593 Inventories 105,347 91,620 Deferred income taxes 17,674 18,647 Other current assets   5,887     7,957   Total current assets 582,970 252,408   Property, Plant and Equipment Cost 358,235 344,854 Accumulated depreciation   (219,987 )   (210,669 ) Property, plant and equipment, net 138,248 134,185   Goodwill 93,400 91,740 Other Intangible Assets, net 18,118 28,338 Deferred Income Taxes 29,752 14,696 Other Assets   11,821     9,107   Total Assets $ 874,309   $ 530,474     LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable to banks $ 8,658 $ 8,183 Trade accounts payable 27,402 19,669 Salaries and incentives 32,181 34,907 Dividends payable 13,445 12,610 Other current liabilities   49,596     44,385   Total current liabilities 131,282 119,754   Long-term Debt 300,000 70,255 Retirement Benefits and Deferred Compensation 120,287 76,351   Shareholders' Equity Common stock 59,747 60,048 Additional paid-in-capital 242,007 212,073 Retained earnings 97,467 44,436 Accumulated other comprehensive income (loss)   (76,481 )   (52,443 ) Total shareholders' equity   322,740     264,114   Total Liabilities and Shareholders' Equity $ 874,309   $ 530,474         GRACO INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands)       Year Ended Dec 30,     Dec 31, 2011 2010 Cash Flows From Operating Activities Net Earnings $ 142,328 $ 102,840 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 32,483 33,973 Deferred income taxes (1,814 ) (4,248 ) Share-based compensation 10,994 10,024 Excess tax benefit related to share-based payment arrangements (2,195 ) (1,988 ) Change in Accounts receivable (26,767 ) (23,285 ) Inventories (13,440 ) (32,997 ) Trade accounts payable 5,974 1,670 Salaries and incentives (3,469 ) 20,453 Retirement benefits and deferred compensation 7,228 (1,428 ) Other accrued liabilities 8,148 (18 ) Other   2,574     (3,873 ) Net cash provided by operating activities   162,044     101,123   Cash Flows From Investing Activities Property, plant and equipment additions (23,854 ) (16,620 ) Proceeds from sale of property, plant and equipment 426 257 Acquisition of business (2,139 ) - Investment in life insurance (1,499 ) (1,499 ) Capitalized software and other intangible asset additions   (931 )   (907 ) Net cash used in investing activities   (27,997 )   (18,769 ) Cash Flows From Financing Activities Borrowings on short-term lines of credit 18,221 10,584 Payments on short-term lines of credit (17,724 ) (13,789 ) Borrowings on long-term notes and line of credit 402,175 140,540 Payments on long-term line of credit (172,430 ) (156,545 ) Payments of debt issuance costs (1,131 ) - Excess tax benefit related to share-based payment arrangements 2,195 1,988 Common stock issued 22,231 12,794 Common stock repurchased (43,250 ) (24,218 ) Cash dividends paid   (50,646 )   (48,146 ) Net cash provided by (used in) financing activities   159,641     (76,792 ) Effect of exchange rate changes on cash   (129 )   (1,383 ) Net increase (decrease) in cash and cash equivalents 293,559 4,179 Cash and cash equivalents: Beginning of year   9,591     5,412   End of year $ 303,150   $ 9,591