Graco Inc. (NYSE: GGG) today announced results for the
quarter and nine months ended September 28, 2012.
Summary
$ in millions except per share amounts
Thirteen Weeks Ended
Thirty-nine Weeks Ended Sep 28, Sep
30, % Sep 28, Sep
30, % 2012 2011
Change 2012 2011 Change
Net Sales $ 256.5 $ 227.3
13 %
$ 758.8 $ 679.7
12 %
Net Earnings 37.1 36.6
2 %
106.9 111.9 (5)% Diluted Net Earnings per Common Share $ 0.60 $
0.60
0 %
$ 1.73 $ 1.82 (5)%
- Sales for the quarter increased 13
percent, all from the addition of Powder Finishing operations.
Year-to-date sales increased 12 percent, with 9 percentage points
from Powder Finishing.
- Changes in currency translation rates
decreased sales by approximately $6 million for the quarter and $14
million year-to-date, and decreased net earnings by approximately
$2 million for the quarter and $5 million year-to-date.
- For the quarter, sales at consistent
translation rates and before acquisitions were up 5 percent in the
Americas, up 4 percent in Europe and down 10 percent in Asia
Pacific. On the same basis, year-to-date sales were up 7 percent in
the Americas, up 3 percent in Europe and down 1 percent in Asia
Pacific.
- On April 2, 2012, the Company completed
the purchase of the finishing businesses of Illinois Tool Works
Inc., including Powder Finishing and Liquid Finishing equipment
operations. Costs and expenses related to the acquisition included:
- Acquisition and divestiture-related
expenses included in operating expenses were $4 million for the
quarter and $15 million year-to-date, compared to $3 million and $6
million for the comparable periods last year, respectively.
- Interest expense increased $2 million
for the quarter and $9 million year-to-date.
- Non-recurring charges totaling $7
million related to inventory that reduced gross margin percentages
for the year-to-date.
- Other expense (income) includes
dividend income of $4 million for the quarter and $8 million
year-to-date, received from the Liquid Finishing business held as a
cost-method investment.
"Worldwide demand held steady in the third quarter as organic
sales grew slightly compared with the previous year,” stated
Patrick J. McHale, Graco's President and Chief Executive Officer.
“We continued to see high variability in demand across products and
geographies. On an organic basis, excluding the recently acquired
Powder Finishing operations, sales in the Americas grew 5 percent,
driven by double-digit growth in the Industrial and Lubrication
segments. Contractor segment sales in the Americas were down 5
percent, negatively impacted by product mix and channel inventory
realignment. On a constant currency basis, Graco's legacy European
sales increased 4 percent, with increases posted in all segments,
led by double-digit growth in Lubrication sales and a 9 percent
increase in Contractor sales. In Asia Pacific, Graco’s legacy sales
declined in every segment as business conditions during the quarter
were more difficult than anticipated. The acquired Powder business
is performing to expectations, and our overall factory performance
was strong during the quarter, contributing to nice gross margin
results. We remain committed to staying the course and executing
our long-term growth initiatives."
Consolidated Results
Sales for the quarter increased 13 percent (15 percent at
consistent currency translation rates), including increases of 11
percent in the Americas, 28 percent in Europe (38 percent at
consistent translation rates) and 4 percent in Asia Pacific.
Year-to-date sales increased 12 percent (13 percent at consistent
translation rates), with increases of 11 percent in the Americas,
17 percent in Europe (24 percent at consistent translation rates)
and 9 percent in Asia Pacific.
Sales for the quarter included $30 million from Powder Finishing
operations acquired at the beginning of April, including $7 million
in the Americas, $16 million in Europe and $7 million in Asia
Pacific. Year-to-date sales included $62 million from Powder
Finishing, including $13 million in the Americas, $32 million in
Europe and $17 million in Asia Pacific. For the quarter, sales at
consistent translation rates and before acquisitions were up 5
percent in the Americas, up 4 percent in Europe and down 10 percent
in Asia Pacific. On the same basis, year-to-date sales were up 7
percent in the Americas, up 3 percent in Europe and down 1 percent
in Asia Pacific.
Gross profit margin, expressed as a percentage of sales, was 55
percent for the quarter and 54 percent year-to-date, down 1
percentage point from the third quarter last year and 2 percentage
points lower than last year-to-date. For the quarter and
year-to-date, the unfavorable effects of currency translation,
higher material costs and lower margin rates on acquired Powder
Finishing operations were offset somewhat by realized price
increases. Non-recurring purchase accounting effects totaling $7
million related to inventory reduced year-to-date gross margin
percentage by approximately 1 percentage point.
Total operating expenses for the quarter increased $14 million,
including $8 million from Powder Finishing operations. Increases in
product development and general and administrative costs were
partially offset by changes in currency translation rates.
Year-to-date operating expenses increased $34 million, including
$16 million from Powder Finishing and a $9 million increase in
acquisition and divestiture expenses.
Interest expense increased $2 million for the quarter and $9
million year-to-date due to higher borrowing levels. Other expense
(income) includes dividends of $4 million for the quarter and $8
million year-to-date, 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
Thirty-nine Weeks Industrial
Contractor Lubrication
Industrial Contractor
Lubrication Net sales (in millions) $ 154.7 $ 74.9 $
26.9 $ 447.0 $ 228.9 $ 82.8 Percentage change
from last year Sales
24 %
(4)%
7 %
19 %
0 %
11 %
Operating earnings
11 %
(23)%
22 %
4 %
(2)%
24 %
Operating earnings as a percentage of net sales
2012
30 %
17 %
20 %
31 %
19 %
21 %
2011
34 %
21 %
17 %
35 %
19 %
18 %
Industrial segment sales increased 24 percent for the quarter
and 19 percent year-to-date, mostly from the addition of Powder
Finishing operations. Without the increase from Powder Finishing
operations, sales for the quarter increased 12 percent in the
Americas, decreased 7 percent in Europe (1 percent increase at
consistent translation rates) and decreased 12 percent in Asia
Pacific. On the same basis, year-to-date sales increased 10 percent
in the Americas, decreased 2 percent in Europe (4 percent increase
at consistent translation rates) and decreased 5 percent in Asia
Pacific. Powder Finishing operations contributed to segment
operating earnings in the third quarter, but at a lower rate on
sales, which drove the decrease in the operating margin rate for
this segment.
Contractor segment sales decreased 4 percent for the quarter and
were flat year-to-date. Sales for the quarter decreased 5 percent
in both the Americas and in Asia Pacific and increased 1 percent in
Europe (9 percent at consistent translation rates). Year-to-date
sales increased 1 percent in the Americas, decreased 6 percent in
Europe (increased 1 percent at consistent translation rates) and
increased 8 percent in Asia Pacific. Lower sales volume, product
mix and higher marketing and general spending led to lower third
quarter operating earnings in the Contractor segment. Year-to-date
operating earnings as a percentage of sales are consistent with
last year.
Lubrication segment sales increased 7 percent for the quarter
and 11 percent year-to-date. Sales for the quarter increased 13
percent in the Americas, 8 percent in Europe (15 percent at
consistent translation rates) and decreased 11 percent in Asia
Pacific. Year-to-date sales increased 15 percent in the Americas,
decreased 2 percent in Europe (3 percent increase at consistent
translation rates) and increased 4 percent in Asia Pacific. Higher
volume and leveraging of expenses led to improved operating
earnings in the Lubrication segment.
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”) 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. The sale process is expected to be completed
within the 180 days allowed by the Decision and Order.
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 generated sales of $70 million and
EBITDA of $15 million in the third quarter, both of which were
increases from the previous quarter and the comparable period in
the prior year.
Outlook
"We are expecting macroeconomic crosscurrents to continue into
the fourth quarter, with favorable conditions in the Americas and
challenges in China, India and Western Europe," stated McHale. "The
investments we have made during the past few years to broaden our
geographic coverage and diversify our product portfolio give us
opportunities to outperform our end markets, while the nascent
housing recovery in the U.S. should be a positive for our
Contractor equipment business. We will forge ahead with new product
development, expansion of our distribution channel, conversion of
end users from manual painting to using equipment, and continue our
efforts to expand into adjacent new markets."
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 finishing businesses from ITW and proposed
divestiture of the Liquid Finishing equipment operations 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,
October 25, 2012, at 11:00 a.m. ET, to discuss Graco’s third
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 October 25,
2012, by dialing 800-406-7325, Conference ID #4568468, 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 October 28, 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 Thirty-nine Weeks
Ended (in thousands, except per share amounts) Sep 28, Sep 30, Sep
28, Sep 30, 2012 2011 2012 2011
Net Sales $ 256,472 $
227,347 $ 758,778 $ 679,689 Cost of products sold 116,539
100,998 347,136 296,497
Gross Profit 139,933 126,349 411,642 383,192 Product
development 12,485 10,423 36,625 30,708 Selling, marketing and
distribution 41,230 36,673 121,803 113,738 General and
administrative 29,887 22,451
86,439 66,620
Operating Earnings 56,331
56,802 166,775 172,126 Interest expense 5,233 3,125 14,281 5,473
Other expense (income), net (3,233 ) 325
(6,170 ) 649
Earnings Before Income
Taxes 54,331 53,352 158,664 166,004 Income taxes 17,200
16,800 51,800 54,100
Net Earnings $ 37,131 $ 36,552 $ 106,864
$ 111,904
Net Earnings per Common Share Basic
$ 0.61 $ 0.60 $ 1.77 $ 1.85 Diluted $ 0.60 $ 0.60 $ 1.73 $ 1.82
Weighted Average Number of Shares Basic 60,570 60,430 60,369
60,474 Diluted 61,778 61,415 61,640 61,615
Segment
Information (Unaudited) Thirteen Weeks Ended Thirty-nine
Weeks Ended Sep 28, Sep 30, Sep 28, Sep 30, 2012 2011 2012 2011
Net Sales Industrial $ 154,704 $ 124,502 $ 447,027 $ 376,636
Contractor 74,851 77,757 228,943 228,664 Lubrication 26,917
25,088 82,808 74,389
Total $ 256,472 $ 227,347 $ 758,778
$ 679,689
Operating Earnings Industrial $
47,162 $ 42,632 $ 138,646 $ 132,996 Contractor 12,835 16,700 43,339
44,239 Lubrication 5,356 4,380 16,988 13,652 Unallocated corporate
(expense) (9,022 ) (6,910 ) (32,198 )
(18,761 )
Total $ 56,331 $ 56,802 $ 166,775
$ 172,126
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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