Graco Inc. (NYSE: GGG) today announced results for the
quarter and six months ended June 28, 2013.
Summary
$ in millions except per share amounts
Thirteen Weeks Ended Twenty-six
Weeks Ended Jun 28, Jun 29,
% Jun 28, Jun 29, %
2013 2012 Change 2013 2012
Change Net Sales $ 286.0 $ 268.2 7 % $ 555.1 $ 502.3
11 % Net Earnings 57.8 34.4 68 % 110.0 69.7 58 %
Diluted Net Earnings per Common Share
$ 0.92 $ 0.56 64 % $ 1.76 $ 1.13 56 %
- Contractor segment sales drove the 7
percent sales increase for the quarter.
- Year-to-date sales increased 11
percent, driven by a 6 percentage point increase from the first
quarter impact of the April 2012 acquisition of the Powder
Finishing operations and strong Contractor segment sales.
- Gross margin rates remained strong at
55½ percent for the quarter and year-to-date, up from 52 percent
for the second quarter last year, which included non-recurring
inventory charges related to the acquisition of Powder
Finishing.
- All segments generated double-digit
percentage growth in operating earnings for the quarter.
- Operating expenses included acquisition
and divestiture costs of $1 million, a decrease from the prior year
of $7 million for the quarter and $10 million for the
year-to-date.
- Other expense (income) included
dividend income of $11 million for the quarter and $15 million for
the year-to-date, up from $4 million for the quarter and
year-to-date last year, received from the Liquid Finishing
businesses held as a cost-method investment.
- Changes in currency translation rates
did not have a significant effect on operating results.
- Cash flow from operations remained
strong, with $91 million applied to reduction of long-term debt
since the end of 2012.
"Thanks to the great efforts and dedication of our employees and
distributors around the world, Graco achieved new quarterly records
in the second quarter for both sales and earnings," said Patrick J.
McHale, Graco's President and Chief Executive Officer. "Sales grew
at a double-digit pace in the Americas, driven by 28 percent growth
in our Contractor segment, which benefitted from an initial
stocking of expanded product offerings in the home center channel
and the ongoing recovery in the U.S. housing market. The Industrial
segment in the Americas returned to growth in the second quarter,
reflecting an increase in demand that was broad based throughout
product categories. Macroeconomic conditions remained a headwind in
the second quarter for regions outside of the Americas, however. In
EMEA, sales grew slightly in the second quarter, aided by channel
expansion in our Lubrication segment and stronger demand for
Contractor segment products in emerging markets. In our Asia
Pacific region, sales declined 6 percent in the second quarter,
reflecting ongoing weakness in mining and general industrial
applications."
Consolidated Results
Sales for the quarter increased 7 percent, including increases
of 14 percent in the Americas and 2 percent in EMEA. Sales
decreased 6 percent in Asia Pacific. Year-to-date sales increased
11 percent, including increases of 12 percent in the Americas, 13
percent in EMEA and 4 percent in Asia Pacific. The first quarter
impact of the Powder Finishing operations acquired in April 2012
contributed approximately 6 percentage points of the total
year-to-date growth and accounted for all of the growth in EMEA and
Asia Pacific.
Gross profit margin, expressed as a percentage of sales, was 55½
percent for both the quarter and year-to date, up from 52 percent
and 54 percent for the quarter and year-to-date last year,
respectively. Non-recurring purchase accounting effects totaling $7
million related to inventory reduced last year’s gross margin rate
by approximately 3 percentage points for the quarter and 1½ points
year-to-date.
Total operating expenses for the quarter decreased by $4
million, including a $7 million drop in acquisition and divestiture
costs. Year-to-date operating expenses were $1 million higher than
last year, with higher expenses from acquired operations and other
volume-related increases mostly offset by a $10 million decrease in
acquisition and divestiture costs.
Other expense (income) included dividends of $11 million for the
quarter and $15 million year-to-date received from the Liquid
Finishing businesses that are held separate from the Company’s
other businesses. The Company received the first of such dividends
in the second quarter of 2012, in the amount of $4 million.
The effective income tax rate of 29 percent for the quarter and
the year-to-date rate of 28 percent were lower than the comparable
periods last year. This year’s rate includes the impact of the
federal R&D credit that was renewed in the first quarter,
effective retroactive to the beginning of 2012. There was no
R&D credit recognized in 2012. The effective rate in 2013 also
reflects the effect of higher after-tax dividend income received
from the Liquid Finishing businesses held separate.
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) $ 159.7 $
98.5 $ 27.9 $ 323.8 $ 176.1 $ 55.1
Percentage change from last year
Sales 1 % 20 % (0 )% 11 % 14 % (1 )% Operating earnings 19 % 36 %
20 % 17 % 34 % 1 %
Operating earnings as a percentage of net
sales
2013
32 % 25 % 24 % 33 % 23 % 21 %
2012
27 % 22 % 20 % 31 % 20 % 21 %
Industrial segment sales for the quarter increased 1 percent,
with a 7 percent increase in the Americas mostly offset by a
decrease in Asia Pacific. Year-to-date sales increased 11 percent,
with 10 percentage points of the increase from Powder Finishing
operations acquired in April 2012. Operating margin rate for the
Industrial segment improved compared to last year, which included
the effects of purchase accounting related to inventory that
reduced the rate for the second quarter of 2012 by approximately 4
percentage points.
Contractor segment sales for the quarter increased 20 percent,
including increases of 28 percent in the Americas, 5 percent in
EMEA and 2 percent in Asia Pacific. Year-to-date sales were up 14
percent, driven by increases in the Americas. Higher sales volume,
improved gross margin rate and expense leverage led to higher
operating margin rates in the Contractor segment.
Lubrication segment sales were flat for the quarter and down 1
percent year-to-date. Increases in the Americas and EMEA were
offset by a decrease in Asia Pacific, where several large
industrial lubrication transactions in 2012 were not repeated in
2013. Improved manufacturing performance and limited spending
increases led to higher operating margin rates in this segment.
Acquisition in 2012
On April 2, 2012, the Company completed the purchase of the
finishing businesses of Illinois Tool Works Inc. The acquisition
included 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.
Pursuant to a March 2012 order, the Liquid Finishing businesses
were to be held separate from the rest of Graco’s businesses while
the United States Federal Trade Commission (“FTC”) considered a
settlement with Graco and determined which portions of the Liquid
Finishing business Graco must divest.
In May 2012, the FTC issued a proposed decision and order which
requires Graco to sell the Liquid Finishing business assets,
including certain business activities related to the development,
manufacture, and sale of products under the Binks®, DeVilbiss®,
Ransburg® and BGK® brand names, 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 businesses and identify
potential buyers. While it seeks a buyer, Graco must continue to
hold the Liquid Finishing business assets separate from its other
businesses and maintain them as viable and competitive.
The Company does not control the Liquid Finishing businesses,
nor is it able to exert influence over those businesses.
Consequently, the Company’s investment in the shares of the Liquid
Finishing businesses 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 businesses generated sales of $71 million
and EBITDA of $16 million in the second quarter.
Outlook
"We are well positioned for the remainder of the year and
believe that our strategies will deliver full-year sales growth in
every region," said McHale. "While macroeconomic conditions in EMEA
and Asia Pacific aren't expected to improve, comparables to the
prior year are somewhat easier in these regions in the second half
of 2013. When combined with our strategic initiatives, we continue
to expect modest full-year growth from the EMEA and Asia Pacific
regions. In the U.S., the continued housing recovery should result
in a sustained tailwind."
Cautionary Statement Regarding Forward-Looking
Statements
The Company desires to take advantage of the “safe harbor”
provisions regarding forward-looking statements of the Private
Securities Litigation Reform Act of 1995 and is filing this
Cautionary Statement in order to do so. From time to time various
forms filed by our Company with the Securities and Exchange
Commission, including our Form 10-K, our Form 10-Qs and Form 8-Ks,
and other disclosures, including our 2012 Overview report, press
releases, earnings releases, analyst briefings, conference calls
and other written documents or oral statements released by our
Company, may contain forward-looking statements. Forward-looking
statements generally use words such as “expect,” “foresee,”
“anticipate,” “believe,” “project,” “should,” “estimate,” “will,”
and similar expressions, and reflect our Company’s expectations
concerning the future. All forecasts and projections are
forward-looking statements. Forward-looking statements are based
upon currently available information, but various risks and
uncertainties may cause our Company’s actual results to differ
materially from those expressed in these statements. The Company
undertakes no obligation to update these statements in light of new
information or future events.
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: changes in laws and regulations;
economic conditions in the United States and other major world
economies; whether we are able to locate, complete and effectively
integrate acquisitions; whether we are able to effectively and
timely complete a divestiture of the acquired Liquid Finishing
businesses, which has not been completed and remains subject to FTC
approval; risks incident to conducting business internationally,
including currency fluctuations and political instability; supply
interruptions or delays; the ability to meet our customers’ needs,
and changes in product demand; new entrants who copy our products
or infringe on our intellectual property; results of and costs
associated with, litigation, administrative proceedings and
regulatory reviews incident to our business; compliance with
anti-corruption laws; the possibility of decline in purchases from
few large customers of the Contractor segment; fluctuations in new
construction and remodeling activity; natural disasters; and
security breaches. Please refer to Item 1A of our Annual Report on
Form 10-K for fiscal year 2012 (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. Shareholders, potential investors and other
readers are urged to consider these factors in evaluating
forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements.
Investors should realize that factors other than those
identified above and in Item 1A 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
Graco management will hold a conference call, including slides
via webcast, with analysts and institutional investors on Thursday,
July 25, 2013, 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 25, 2013,
by dialing 800-406-7325, Conference ID #4627991, 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 28, 2013.
Graco Inc. supplies technology and expertise for the management
of fluids and coatings in both industrial and commercial
applications. It designs, manufactures and markets systems and
equipment to move, measure, control, dispense and spray fluid and
coating 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) Jun 28, Jun 29, Jun
28, Jun 29, 2013 2012 2013 2012
Net Sales $ 286,020 $
268,184 $ 555,066 $ 502,306 Cost of products sold 127,281
128,654 245,683 230,597
Gross Profit 158,739 139,530 309,383 271,709 Product
development 12,467 12,502 24,888 24,140 Selling, marketing and
distribution 44,556 42,547 87,910 80,573 General and administrative
26,499 32,006 49,871
56,552
Operating Earnings 75,217 52,475
146,714 110,444 Interest expense 4,625 5,359 9,387 9,048 Other
expense (income), net (10,851 ) (3,236 )
(15,246 ) (2,937 )
Earnings Before Income Taxes
81,443 50,352 152,573 104,333 Income taxes 23,600
16,000 42,600 34,600
Net Earnings $ 57,843 $ 34,352 $ 109,973
$ 69,733
Net Earnings per Common Share
Basic $ 0.94 $ 0.57 $ 1.80 $ 1.16 Diluted $ 0.92 $ 0.56 $ 1.76 $
1.13
Weighted Average Number of Shares Basic 61,371
60,484 61,166 60,268 Diluted 62,841 61,803 62,624 61,571
Segment Information (Unaudited) Thirteen Weeks Ended
Twenty-six Weeks Ended Jun 28, Jun 29, Jun 28, Jun 29, 2013 2012
2013 2012
Net Sales Industrial $ 159,671 $ 158,220 $ 323,846
$ 292,323 Contractor 98,498 82,106 176,126 154,092 Lubrication
27,851 27,858 55,094
55,891
Total $ 286,020 $ 268,184
$ 555,066 $ 502,306
Operating Earnings
Industrial $ 51,530 $ 43,171 $ 106,749 $ 91,484 Contractor 24,479
17,965 40,911 30,504 Lubrication 6,647 5,543 11,788 11,632
Unallocated corporate (expense) (7,439 ) (14,204 )
(12,734 ) (23,176 )
Total $ 75,217 $
52,475 $ 146,714 $ 110,444
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.
Graco Inc.Financial Contact:James A. Graner,
612-623-6635orMedia Contact:Bryce Hallowell, 612-623-6679
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