Graco Inc. (NYSE: GGG) today announced results for the
quarter and nine months ended September 27, 2013.
Summary
$ in millions except per share amounts
Thirteen Weeks Ended
Thirty-nine Weeks Ended Sep 27, Sep
28, % Sep 27, Sep
28, % 2013 2012
Change 2013 2012 Change Net
Sales $ 277.0 $ 256.5 8 % $ 832.1 $ 758.8 10 % Net Earnings 56.1
37.1 51 % 166.1 106.9 55 %
Diluted Net Earnings per Common Share
$ 0.89 $ 0.60 48 % $ 2.65 $ 1.73 53 %
- Sales for the quarter increased 8
percent over last year, driven by a 24 percent increase in the
Contractor segment, along with modest increases in Industrial and
Lubrication. Year-to-date sales increased 10 percent, including 4
percentage points from the first quarter impact of the Powder
Finishing operations (acquired in April 2012) and strong Contractor
segment sales.
- Gross margin rate for the quarter was
consistent with last year’s third quarter. Year-to-date gross
margin rate was one percentage point higher than last year, which
included non-recurring inventory charges in the second quarter
related to the acquisition of Powder Finishing.
- Acquisition and divestiture costs for
the quarter decreased by $3 million. Year-to-date operating
expenses included acquisition and divestiture costs of $1 million,
a decrease of $14 million compared to the comparable period last
year.
- Other expense (income) included
dividend income received from the Liquid Finishing businesses held
as a cost-method investment. Dividends were $9 million for the
quarter, up from $4 million last year and $24 million year-to-date,
up from $8 million last year.
- Lower effective income tax rates in
2013 reflected the effects of higher after-tax dividend income, the
renewal of the federal R&D credit, additional benefit from
business credits and deductions and foreign earnings taxed at lower
rates than in the United States.
- Changes in currency translation rates
did not have a significant effect on consolidated operating
results. Favorable effects of rate changes in EMEA were offset by
unfavorable effects in Asia Pacific.
- Cash flow from operations remained
strong through the first nine months of 2013, with $152 million
applied to reduction of long-term debt and $74 million returned to
investors through dividends and Company stock repurchases.
"This was the ninth consecutive quarter Graco posted sales that
set a new quarterly record, an achievement that reflects the
commitment of our employees and distributors to executing our
strategic growth initiatives," said Patrick J. McHale, Graco's
President and Chief Executive Officer. "The Company's rates of
growth throughout the world remained diverged in the third quarter
of 2013, with strong year-over-year growth in the Americas,
moderate growth in EMEA and a sales decline in Asia Pacific. Our
overall sales growth for the quarter was strong, as we continue to
benefit from the U.S. housing market recovery."
Consolidated Results
Sales for the quarter increased 8 percent, including increases
of 15 percent in the Americas and 8 percent in EMEA (4 percent at
consistent translation rates). Sales for the quarter decreased 9
percent in Asia Pacific (6 percent at consistent translation
rates). Year-to-date sales increased 10 percent, including
increases of 13 percent in the Americas and 11 percent in EMEA (9
percent at consistent translation rates). Year-to-date sales were
flat in Asia Pacific (up 2 percent at consistent translation
rates). The first quarter impact of the Powder Finishing operations
acquired in April 2012 contributed approximately 4 percentage
points of the total year-to-date growth and accounted for most of
the growth in EMEA (at consistent translation rates).
Gross profit margin, expressed as a percentage of sales, was 54½
percent for the quarter, consistent with the comparable period last
year. Year-to-date gross profit margin rate was 55 percent, up 1
percentage point from last year. Non-recurring inventory-related
purchase accounting effects totaling $7 million reduced last year’s
year-to-date gross margin rate by approximately 1 percentage
point.
Total operating expenses for the quarter and year-to-date were
slightly lower than the comparable periods last year.
Volume-related increases in selling, marketing and distribution
expenses were more than offset by decreases in general and
administrative expenses, including acquisition and divestiture cost
decreases of $3 million for the quarter and $14 million
year-to-date.
Other expense (income) included dividends received from the
Liquid Finishing businesses that are held separate from the
Company’s other businesses. Such dividends totaled $9 million for
the quarter and $24 million year-to-date, up from $4 million for
the quarter and $8 million year-to-date received in the comparable
periods last year.
The effective income tax rates of 24 percent for the quarter and
27 percent year-to-date were lower than the comparable periods last
year. This year’s rates included 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 rates in 2013 also reflected the effect of
higher after-tax dividend income received from the Liquid Finishing
businesses held separate, and the effect of more foreign earnings
that are taxed at lower rates than in the United States. The
effective rate for the quarter also included the impact of
additional benefit from U.S. business credits and deductions.
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) $ 156.7 $ 92.9 $ 27.4 $ 480.5 $ 269.1 $ 82.5
Percentage change from last year
Sales 1 % 24 % 2 % 7 % 18 % (0 )% Operating earnings 5 % 67 % 3 %
13 % 44 % 2 %
Operating earnings as a percentage of net
sales
2013
32 % 23 % 20 % 33 % 23 % 21 %
2012
30 % 17 % 20 % 31 % 19 % 21 %
Industrial segment sales for the quarter increased 1 percent,
with increases of 3 percent in the Americas and 10 percent in EMEA
(6 percent at consistent translation rates), mostly offset by an 11
percent decrease in Asia Pacific (9 percent at consistent
translation rates). Year-to-date sales increased 7 percent, mostly
from Powder Finishing operations acquired in April 2012. Operating
margin rate for the Industrial segment increased compared to last
year, driven by improved gross margin rates. The effects of
purchase accounting related to inventory reduced the 2012
year-to-date operating margin rate by approximately 2 percentage
points.
Contractor segment sales for the quarter increased 24 percent,
including increases of 38 percent in the Americas and 4 percent in
EMEA (flat at consistent translation rates) and a decrease of 8
percent in Asia Pacific. Year-to-date sales were up 18 percent,
driven by increases in the Americas. Higher sales volume and
expense leverage led to higher operating margin rates in the
Contractor segment.
Lubrication segment sales for the quarter increased 2 percent,
mostly from increases in Asia Pacific. Year-to-date sales were
flat, with increases in Europe offset by decreases in Asia Pacific.
Operating margin rates were steady 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 $76 million
and EBITDA of $16 million in the third quarter.
Outlook
"We expect to achieve growth in every region in the fourth
quarter of 2013," said McHale. "The housing recovery and a
marginally favorable economic environment in the U.S. should
continue to provide a tailwind for growth in our Contractor and
Industrial segments in the Americas. We don't see a catalyst to
advance the weak macroeconomic environments in Asia Pacific or EMEA
in the near term, but we expect modest growth in the fourth
quarter. As we finish out 2013 and look toward 2014, Graco's global
team remains focused on our strategic growth initiatives of
expanding our distribution channels, developing innovative new
products, conversion of end users from manual painting techniques
to using spray equipment, and continuing our efforts to expand into
adjacent new markets."
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,
October 24, 2013, 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 24,
2013, by dialing 800-406-7325, Conference ID #4643781, 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 27, 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 Thirty-nine Weeks Ended
(in thousands, except per share amounts) Sep 27, Sep 28, Sep 27,
Sep 28, 2013 2012 2013 2012
Net Sales $ 277,035 $ 256,472 $
832,101 $ 758,778 Cost of products sold 126,162
116,539 371,845 347,136
Gross Profit 150,873 139,933 460,256 411,642 Product
development 12,508 12,485 37,396 36,625 Selling, marketing and
distribution 44,297 41,230 132,207 121,803 General and
administrative 24,342 29,887
74,213 86,439
Operating Earnings 69,726
56,331 216,440 166,775 Interest expense 4,450 5,233 13,837 14,281
Other expense (income), net (8,425 ) (3,233 )
(23,671 ) (6,170 )
Earnings Before Income Taxes
73,701 54,331 226,274 158,664 Income taxes 17,600
17,200 60,200 51,800
Net Earnings $ 56,101 $ 37,131 $ 166,074
$ 106,864
Net Earnings per Common Share
Basic $ 0.91 $ 0.61 $ 2.71 $ 1.77 Diluted $ 0.89 $ 0.60 $ 2.65 $
1.73
Weighted Average Number of Shares Basic 61,333
60,570 61,222 60,369 Diluted 62,996 61,778 62,748 61,640
Segment Information (Unaudited) Thirteen Weeks Ended
Thirty-nine Weeks Ended Sep 27, Sep 28, Sep 27, Sep 28, 2013 2012
2013 2012
Net Sales Industrial $ 156,654 $ 154,704 $ 480,500
$ 447,027 Contractor 92,942 74,851 269,068 228,943 Lubrication
27,439 26,917 82,533
82,808
Total $ 277,035 $ 256,472
$ 832,101 $ 758,778
Operating Earnings
Industrial $ 49,429 $ 47,162 $ 156,178 $ 138,646 Contractor 21,459
12,835 62,370 43,339 Lubrication 5,497 5,356 17,285 16,988
Unallocated corporate (expense) (6,659 ) (9,022 )
(19,393 ) (32,198 )
Total $ 69,726 $
56,331 $ 216,440 $ 166,775
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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