Graco Inc. (NYSE: GGG) today announced results for the
quarter and six months ended June 29, 2012.
Summary
$ in millions except per share amounts
Thirteen Weeks Ended
Twenty-six Weeks Ended June 29, July
1, % June 29, July
1, % 2012 2011 Change
2012 2011 Change Net Sales $ 268.2 $
234.7 14 % $ 502.3 $ 452.3 11 % Net Earnings 34.4 38.1 (10 )% 69.7
75.4 (7 )% Diluted Net Earnings per Common Share $ 0.56 $ 0.61 (8
)% $ 1.13 $ 1.22 (7 )%
- On April 2, 2012, the Company completed
the purchase of the finishing businesses of Illinois Tool Works
Inc. (the “Finishing Brands” acquisition), including powder
(“Powder Finishing”) and liquid (“Liquid Finishing”) equipment
operations.
- Sales for the quarter increased 14
percent, including 13 percentage points ($31 million) from the
addition of Powder Finishing operations. Year-to-date sales
increased 11 percent, with 7 percentage points from Powder
Finishing.
- Changes in currency translation rates
decreased sales by approximately $7 million for the quarter and $8
million year-to-date, and decreased net earnings by approximately
$3 million for both the quarter and year-to-date.
- Lubrication segment posted double-digit
percentage growth in sales and operating earnings for both the
quarter and year-to-date.
- Contractor segment operating earnings
increased 9 percent for the quarter and 11 percent year-to-date, on
modest increases in sales (2 percent for both the quarter and
year-to-date).
- Costs and expenses related to the
acquisition of Finishing Brands included:
- Non-recurring charges totaling $7
million related to inventory that reduced gross margin percentages
for both the quarter and year-to-date.
- Acquisition expenses included in
operating expenses were $7 million for the quarter and $11 million
year-to-date, up $5 million and $9 million, respectively, compared
to last year.
- Interest expense increased $4 million
for the quarter and $7 million year-to-date.
- Other expense (income) includes $4
million of dividend income received from the Liquid Finishing
business held as a cost-method investment.
"Across segments and products, business in Europe was soft in
the second quarter," said Patrick J. McHale, Graco's President and
Chief Executive Officer. “On a constant currency basis, European
Industrial and Lubrication saw modest growth while our Contractor
business declined. The developing markets in Eastern Europe
performed well, but that growth was more than offset by negative
economic conditions in Western Europe and currency translation.
Asia Pacific was also challenging in the second quarter, with
significant variability in results between products and countries.
Our Contractor business in Asia grew nicely, while our Industrial
business declined, with particular softness noted in project
activity in China and India. Performance in North America was a
bright spot, with solid growth in all segments. Although the macro
environment was challenging, I am pleased with the efforts of the
worldwide Graco team to push ahead with our key long-term growth
initiatives.”
Acquisition
On April 2, 2012, the Company completed the purchase of the
finishing businesses of Illinois Tool Works Inc., first announced
in April 2011. The acquisition includes Powder Finishing and Liquid
Finishing equipment operations, technologies and brands. Results of
the Powder Finishing business have been included in the Industrial
segment since the date of acquisition.
In December 2011, the United States Federal Trade Commission
(“FTC”) filed a formal complaint to challenge the proposed
acquisition on the grounds that the addition of the Liquid
Finishing business to Graco would be anti-competitive, a position
which Graco denied. In March 2012, the FTC issued an order (the
“Hold Separate Order”) that allowed the acquisition to proceed to
closing on April 2, 2012, subject to certain conditions while it
evaluated a settlement proposal from Graco. Pursuant to the Hold
Separate Order, the Liquid Finishing business was to be held
separate from the rest of Graco’s businesses until the FTC
determined which portions, if any, of the Liquid Finishing business
Graco must divest.
In May 2012, the FTC issued a proposed decision and order (the
“Decision and Order”), subject to a 30-day comment period, which
requires Graco to sell the Liquid Finishing business assets, no
later than 180 days from the date the order becomes final. The FTC
has not yet issued its final Decision and Order.
The Company has retained the services of an investment bank to
help it market the Liquid Finishing business and identify potential
buyers. While it seeks a buyer, Graco must continue to hold the
Liquid Finishing business separate from its other businesses and
maintain them as viable and competitive. In accordance with the
Hold Separate Order, the Liquid Finishing business is managed
independently by experienced Liquid Finishing business managers,
under the supervision of a trustee appointed by the FTC, who
reports directly to the FTC.
Under terms of the Hold Separate Order, the Company does not
control the Liquid Finishing business, nor is it able to exert
influence over the Liquid Finishing operations. Consequently, the
Company’s investment in the Liquid Finishing business has been
reflected as a cost-method investment, and its financial results
have not been consolidated with those of the Company. Income is
recognized based on dividends received from current earnings and is
included in other income.
"The Liquid Finishing business continued to perform well in the
second quarter, generating sales of $67 million and EBITDA of $13
million, both of which were increases from the prior year, and
reflect the positive contributions of the Hold Separate management
and employees," stated Mr. McHale. "Once the final Decision and
Order has been issued by the FTC, we will commence a sale process.
The process is expected to be completed within the 180 days allowed
by the order."
Consolidated Results
Sales for the quarter increased 14 percent (17 percent at
consistent currency translation rates), including increases of 12
percent in the Americas, 19 percent in Europe (29 percent at
consistent translation rates) and 14 percent in Asia Pacific (16
percent at consistent translation rates). Year-to-date sales
increased 11 percent (13 percent at consistent translation rates),
with increases of 10 percent in the Americas, 11 percent in Europe
(18 percent at consistent translation rates) and 12 percent in Asia
Pacific.
Sales included $31 million from the Powder Finishing operations
acquired at the beginning of April, including $6 million in the
Americas, $16 million in Europe and $9 million in Asia Pacific.
Sales growth at consistent translation rates and before
acquisitions was 7 percent for the quarter in the Americas and down
slightly in Europe and Asia Pacific. On the same basis, sales
growth was 8 percent year-to-date in the Americas and 3 percent in
both Europe and Asia Pacific.
Gross profit margin, expressed as a percentage of sales, was 52
percent for the quarter and 54 percent year-to-date, down 4
percentage points from the second quarter last year and 3
percentage points lower than last year-to-date. Non-recurring
purchase accounting effects totaling $7 million related to
inventory, reduced the margin rate by approximately 3 percentage
points for the quarter and 1½ points year-to date. Unfavorable
currency translation effects reduced the margin rate by
approximately 1 percentage point for both the quarter and
year-to-date.
Total operating expenses increased $13 million for the quarter
and $20 million year-to-date. Powder Finishing operations accounted
for $8 million of the quarter and year-to-date increases.
Acquisition expenses accounted for another $5 million of the
increase for the quarter and $9 million of the year-to-date
increase.
Interest expense increased $4 million for the quarter and $7
million year-to-date due to higher borrowing levels. Other expense
(income) includes $4 million of dividends received from the Liquid
Finishing businesses that are required to be held separate from the
Company’s other businesses and accounted for as a cost-method
investment.
The effective income tax rates of 32 percent for the quarter and
33 percent for the year-to-date are consistent with the comparable
periods last year. This year’s rate is reduced by the effect of the
investment income from the Liquid Finishing businesses held
separate. Last year’s rate was reduced by the effect of the federal
R&D credit that is not available in 2012.
Segment Results
Certain measurements of segment operations
are summarized below:
Thirteen Weeks Twenty-six
Weeks Industrial Contractor
Lubrication Industrial
Contractor Lubrication Net sales
(in millions) $ 158.2 $ 82.1 $ 27.9 $ 292.3 $ 154.1 $ 55.9
Percentage change from last year Sales 22 % 2 % 13 % 16 % 2 % 13 %
Operating earnings (5 )% 9 % 37 % 1 % 11 % 25 % Operating earnings
as a percentage of net sales
2012
27 % 22 % 20 % 31 % 20 % 21 %
2011
35 % 20 % 16 % 36 % 18 % 19 %
Industrial segment sales increased 22 percent for the quarter
and 16 percent year-to-date, mostly from the addition of Powder
Finishing operations. Without Powder Finishing, sales for the
quarter increased 6 percent in the Americas, decreased 6 percent in
Europe (1 percent increase at consistent translation rates) and
decreased 9 percent in Asia Pacific. On the same basis,
year-to-date sales increased 9 percent in the Americas, were flat
in Europe (6 percent increase at consistent translation rates) and
decreased 1 percent in Asia Pacific. Purchase accounting effects
related to inventory reduced the operating margin for the quarter
by approximately 4 percentage points. Intangibles amortization
charges and changes in currency translation also adversely affected
operating earnings in the Industrial segment.
Contractor segment sales increased 2 percent for both the
quarter and year-to-date, with gains for the quarter of 4 percent
in the Americas and 21 percent in Asia Pacific. Contractor sales
for the quarter were down 12 percent in Europe (5 percent at
consistent translation rates) compared to the second quarter last
year. Year-to-date sales increased 3 percent in the Americas,
decreased 9 percent in Europe (3 percent at consistent translation
rates) and increased 17 percent in Asia Pacific. Product display
and store set costs incurred in 2011 were not repeated in 2012,
leading to reduced selling, marketing and distribution expenses and
improved operating earnings in this segment.
Lubrication segment sales increased 13 percent for both the
quarter and year-to-date, with 19 percent growth for the quarter in
the Americas. Sales for the quarter were flat in Europe (6 percent
increase at consistent translation rates) and in Asia Pacific.
Year-to-date, sales increased 16 percent in the Americas, decreased
7 percent in Europe (3 percent at consistent translation rates) and
increased 12 percent in Asia Pacific. Higher volume and leveraging
of expenses led to improved operating earnings in the Lubrication
segment.
Outlook
"We are optimistic that all of our business segments will show
organic growth in the second half of 2012 on a constant currency
basis, despite headwinds from Western Europe, China and India,"
said Mr. McHale. "We expect the demand environment in the Americas
to remain favorable in all business segments in the second half. In
Europe, continued unfavorable currency translation rates may drive
year-over-year growth rates into negative territory. Growth in the
developing economies of Asia Pacific, along with continued demand
for Contractor and Lubrication products in the region, is expected
to more than offset continued softness in industrial project
activity in China. We remain focused on executing our core
strategies to deliver long-term shareholder returns."
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 Overview 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 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
acquisition of the ITW finishing businesses include: whether and
when the required regulatory approvals will be obtained, 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 react to the transaction,
economic changes in global markets, the extent of the acquired
businesses required to be divested, whether the Company will be
able to find a suitable purchaser(s) and structure the divestiture
on acceptable terms, and whether the Company will be able to
complete a divestiture in a time frame that is satisfactory to the
Federal Trade Commission. Please refer to Item 1A of, and Exhibit
99 to, the Company’s Annual Report on Form 10-K for fiscal year
2011 (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/ir 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 Thursday,
July 26, 2012, at 11:00 a.m. ET, to discuss Graco’s second quarter
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/ir. 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 July 26, 2012,
by dialing 800-406-7325, Conference ID #4548978, 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 July 30, 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/ir.
GRACO INC. AND SUBSIDIARIES Consolidated
Statement of Earnings (Unaudited)
Thirteen Weeks Ended Twenty-six Weeks
Ended (in thousands, except per share amounts) June 29, July 1,
June 29, July 1, 2012 2011 2012 2011
Net Sales $ 268,184 $
234,663 $ 502,306 $ 452,342 Cost of products sold 128,654
102,217 230,597 195,499
Gross Profit 139,530 132,446 271,709 256,843 Product
development 12,502 10,354 24,140 20,285 Selling, marketing and
distribution 42,547 39,582 80,573 77,065 General and administrative
32,006 24,255 56,552
44,169
Operating Earnings 52,475 58,255
110,444 115,324 Interest expense 5,359 1,732 9,048 2,348 Other
expense (income), net (3,236 ) 324
(2,937 ) 324
Earnings Before Income Taxes
50,352 56,199 104,333 112,652 Income taxes 16,000
18,100 34,600 37,300
Net
Earnings $ 34,352 $ 38,099 $ 69,733 $
75,352
Net Earnings per Common Share Basic $ 0.57 $
0.63 $ 1.16 $ 1.25 Diluted $ 0.56 $ 0.61 $ 1.13 $ 1.22
Weighted
Average Number of Shares Basic 60,484 60,721 60,268 60,496
Diluted 61,803 62,070 61,571 61,715
Segment Information
(Unaudited) Thirteen Weeks Ended Twenty-six Weeks Ended
June 29, July 1, June 29, July 1, 2012 2011 2012 2011
Net
Sales Industrial $ 158,220 $ 129,304 $ 292,323 $ 252,134
Contractor 82,106 80,702 154,092 150,907 Lubrication 27,858
24,657 55,891 49,301
Total $ 268,184 $ 234,663 $ 502,306
$ 452,342
Operating Earnings Industrial $
43,171 $ 45,339 $ 91,484 $ 90,364 Contractor 17,965 16,424 30,504
27,539 Lubrication 5,543 4,045 11,632 9,272 Unallocated corporate
(expense) (14,204 ) (7,553 ) (23,176 )
(11,851 )
Total $ 52,475 $ 58,255 $ 110,444
$ 115,324
All figures are subject to audit and adjustment at the end of
the fiscal year.
The consolidated Balance Sheets, Consolidated Statements of Cash
Flows and Management's Discussion and Analysis are available in our
Quarterly Report on Form 10-Q on our website at
www.graco.com/ir.
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