Graco Inc. (NYSE:GGG) today announced results for the
quarter and year ended December 27, 2013.
Summary
$ in millions except per share amounts
Quarter Ended Year Ended
Dec 27, Dec 28, %
Dec 27, Dec 28, %
2013 2012 Change 2013 2012
Change Net Sales $ 271.9 $ 253.7 7 % $ 1,104.0 $ 1,012.5 9 %
Net Earnings 44.7 42.3 6 % 210.8 149.1 41 %
Diluted Net Earnings per Common Share
$ 0.71 $ 0.68 4 % $ 3.36 $ 2.42 39 %
- Cash flow from operations of $243
million was 28 percent higher than last year. The Company applied
$148 million of cash to the reduction of long-term debt and
returned $129 million to investors through dividends and Company
stock repurchases.
- Fourth quarter sales increased in all
regions, including double-digit percentage growth in Asia Pacific.
Sales for the quarter increased in Contractor and Industrial
segments while Lubrication segment sales declined slightly.
- Sales of $1.1 billion for the year were
9 percent higher than last year, led by a double-digit percentage
increase in the Contractor segment and solid growth in the
Industrial segment.
- Gross margin rates remained strong at
54 percent for the quarter and 55 percent for the year.
- General and administrative expenses for
the year decreased $15 million including a $14 million decrease in
acquisition and divestiture costs.
- Other expense (income) included
dividend income received from the Liquid Finishing businesses held
as a cost-method investment. Dividends were $4 million for the
quarter in both 2013 and 2012 and $28 million for the year, up from
$12 million last year.
- The effective income tax rate in 2013
reflected the favorable effects of higher after-tax dividend income
from Liquid Finishing and renewal of the federal R&D
credit.
- Changes in currency translation rates
did not have a significant effect on consolidated operating
results. Favorable effects of rate changes in EMEA offset
unfavorable effects in Asia Pacific.
"Graco reported record sales and earnings for the full year and
in each quarter of 2013, including the fourth quarter," said
Patrick J. McHale, Graco's President and CEO. "Industrial project
activity was surprisingly strong in China in the fourth quarter,
which lifted our Asia Pacific region to a double-digit performance
for the quarter and brought the region back to modest growth for
the full year. Contractor segment sales in the Americas approached
double-digit growth in the fourth quarter, against a difficult
comparison from the prior year. The business executed well
throughout 2013, capturing growth from the U.S. housing recovery to
grow 22 percent for the full year in the Americas and drove
double-digit growth for the segment worldwide. Graco posted fourth
quarter and annual growth in every reportable segment and region in
2013, with the exception of our Lubrication segment, which was down
slightly in the quarter and flat on the year."
Consolidated Results
Sales for the quarter were up 7 percent, including increases of
4 percent in the Americas, 8 percent in EMEA (4 percent at
consistent translation rates) and 14 percent in Asia Pacific (16
percent at consistent translation rates). For the year, sales
increased 9 percent, including increases of 11 percent in the
Americas, 10 percent in EMEA (8 percent at consistent translation
rates) and 3 percent in Asia Pacific (5 percent at consistent
translation rates). The first quarter impact of the Powder
Finishing operations acquired in April 2012 contributed
approximately 3 percentage points of the total sales growth for the
year and accounted for most of the growth in EMEA and Asia
Pacific.
Gross profit margin, expressed as a percentage of sales, was 54
percent for the quarter and 55 percent for the year, consistent
with the comparable periods of last year. For the quarter, realized
price increases offset the unfavorable effects of manufacturing
spending increases and changes in product mix. For the year, the
effects of realized price increases and higher production volume
offset the unfavorable effect of changes in product mix.
Total operating expenses for the quarter increased $3 million.
Decreases in corporate general and administrative expenses
partially offset increases in product development and volume
related increases in selling, marketing and distribution. Operating
expenses for the year increased $2 million, with business
activity-related increases largely offset by decreases in general
and administrative expenses, including a $14 million decrease in
acquisition and divestiture costs.
Other expense (income) included dividends received from the
Liquid Finishing businesses that are held separate from the
Company’s other businesses. Such dividends totaled $4 million in
each of the fourth quarters of 2013 and 2012. Dividends for the
year totaled $28 million in 2013 and $12 million in 2012.
The effective income tax rate for the year was 27 percent, down
from 31 percent last year. The lower rate for 2013 reflected the
effects of higher after-tax dividend income received from the
Liquid Finishing businesses and the federal R&D credit that was
renewed in 2013, effective retroactive to the beginning of 2012.
There was no R&D credit recognized in 2012.
Segment Results
Certain measurements of segment operations are summarized
below:
Quarter Ended Year Ended
Industrial Contractor
Lubrication Industrial
Contractor Lubrication Net sales
(in millions) $ 171.8 $ 73.5 $ 26.6 $ 652.3 $ 342.5 $ 109.1
Net sales percentage change from last
year
10 % 5 % (3 )% 8 % 15 % (1 )%
Operating earnings as a percentage of net
sales
2013
32 % 13 % 20 % 32 % 21 % 21 %
2012
30 % 16 % 20 % 31 % 18 % 20 %
Industrial segment sales increased 10 percent for the quarter
and 8 percent for the year. Sales for the quarter increased 3
percent in the Americas, 8 percent in EMEA (4 percent at consistent
translation rates) and 25 percent in Asia Pacific (28 percent at
consistent translation rates). Sales for the year increased 6
percent in the Americas, 12 percent in EMEA (9 percent at
consistent translation rates) and 7 percent in Asia Pacific (10
percent at consistent translation rates). Expense leverage on
higher sales volume drove the 2 percentage point increase in
operating margin rate for the quarter. The effects of purchase
accounting related to inventory reduced the operating margin rate
for the year 2012 by approximately 1 percentage point.
Contractor segment sales increased 5 percent for the quarter and
15 percent for the year. Sales for the quarter increased 8 percent
in the Americas, increased 8 percent in EMEA (4 percent at
consistent translation rates), and decreased 12 percent in Asia
Pacific. For the year, sales increased 22 percent in the Americas,
increased 4 percent in EMEA (2 percent at consistent translation
rates) and decreased 4 percent in Asia Pacific. Expenses in this
segment increased $3 million from the fourth quarter of the prior
year due to increased product development and product launch
activities for new products expected to be released in the first
quarter of 2014. For the year, higher sales and the leveraging of
expenses drove the improvement in operating earnings as a
percentage of sales.
Lubrication segment sales decreased 3 percent (2 percent at
consistent translation rates) for the quarter and 1 percent (flat
at consistent translation rates) for the year. Sales for the
quarter were flat in the Americas and EMEA, and decreased 19
percent in Asia Pacific. For the year, sales were flat in the
Americas, increased 14 percent in EMEA and decreased 13 percent in
Asia Pacific. Operating margin rates were consistent between years
for both the quarter and the year.
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 $68 million
and EBITDA of $15 million in the fourth quarter and $279 million
and $61 million, respectively, for the year.
Outlook
"As stated in the earnings release last quarter, Graco expects
to achieve growth in all segments and regions in 2014," stated Mr.
McHale. "We believe that housing starts in the U.S. will easily
eclipse one million in 2014, which should help drive our Contractor
segment in the Americas to another year of double-digit growth,
albeit at a pace slower than 2013. We expect the macro environment
for Industrial and Lubrication to be generally positive in 2014,
but do expect results to continue to be a bit choppy from quarter
to quarter and between product lines and geographies. We remain
confident in our long-term growth strategies and will work closely
with our distributor partners to deliver good performance in
2014."
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 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 Tuesday,
January 28, 2014, 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 28,
2014, by dialing 800-406-7325, Conference ID #4659630, 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 January 31, 2014.
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.
GRACO INC. AND SUBSIDIARIES Consolidated Statement
of Earnings (Unaudited)
Quarter Ended Year Ended (in thousands, except
per share amounts) Dec 27, Dec 28, Dec 27, Dec 28, 2013 2012 2013
2012
Net Sales $ 271,923 $ 253,678 $ 1,104,024 $ 1,012,456
Cost of products sold 124,724 114,790
496,569 461,926
Gross Profit
147,199 138,888 607,455 550,530 Product development 14,032 12,296
51,428 48,921 Selling, marketing and distribution 45,646 41,720
177,853 163,523 General and administrative 24,192
26,970 98,405 113,409
Operating Earnings 63,329 57,902 279,769 224,677 Interest
expense 4,310 4,992 18,147 19,273 Other expense (income), net
(3,529 ) (5,752 ) (27,200 ) (11,922 )
Earnings Before Income Taxes 62,548 58,662 288,822 217,326
Income taxes 17,800 16,400
78,000 68,200
Net Earnings $ 44,748
$ 42,262 $ 210,822 $ 149,126
Net Earnings per Common Share Basic $ 0.73 $ 0.70 $ 3.44 $
2.47 Diluted $ 0.71 $ 0.68 $ 3.36 $ 2.42
Weighted Average
Number of Shares Basic 61,148 60,697 61,203 60,451 Diluted
62,917 61,920 62,790 61,711
Segment Information
(Unaudited) Quarter Ended Year Ended Dec 27, Dec 28, Dec
27, Dec 28, 2013 2012 2013 2012
Net Sales Industrial $
171,844 $ 156,371 $ 652,344 $ 603,398 Contractor 73,478 69,868
342,546 298,811 Lubrication 26,601 27,439
109,134 110,247
Total $
271,923 $ 253,678 $ 1,104,024 $ 1,012,456
Operating Earnings Industrial $ 55,087 $
47,483 $ 211,265 $ 186,129 Contractor 9,875 10,971 72,245 54,310
Lubrication 5,227 5,547 22,512 22,535 Unallocated Corporate
expenses (6,860 ) (6,099 ) (26,253 )
(38,297 )
Total $ 63,329 $ 57,902 $ 279,769
$ 224,677
GRACO INC. AND
SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In
thousands) Dec 27, Dec 28, 2013 2012
ASSETS Current Assets Cash and cash equivalents $ 19,756 $
31,120 Accounts receivable, less allowances of $6,300 and $6,600
183,293 172,143 Inventories 133,787 121,549 Deferred income taxes
18,827 17,742 Investment in businesses held separate 422,297
426,813 Other current assets 14,633 7,629
Total current assets 792,593 776,996
Property, Plant and Equipment Cost 407,887 389,067 Accumulated
depreciation (256,170 ) (237,523 ) Property, plant
and equipment, net 151,717 151,544 Goodwill 189,967 181,228
Other Intangible Assets, net 147,940 151,773 Deferred Income Taxes
20,366 38,550 Other Assets 24,645 21,643
Total Assets $ 1,327,228 $ 1,321,734
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities
Notes payable to banks $ 9,584 $ 8,133 Trade accounts payable
34,282 28,938 Salaries and incentives 38,939 34,001 Dividends
payable 16,881 15,206 Other current liabilities 69,167
65,393 Total current liabilities 168,853
151,671 Long-term Debt 408,370 556,480 Retirement Benefits
and Deferred Compensation 94,705 137,779 Deferred Income Taxes
20,935 21,690 Shareholders' Equity Common stock 61,003
60,767 Additional paid-in-capital 347,058 287,795 Retained earnings
272,653 189,297 Accumulated other comprehensive income (loss)
(46,349 ) (83,745 ) Total shareholders' equity
634,365 454,114 Total Liabilities and
Shareholders' Equity $ 1,327,228 $ 1,321,734
GRACO INC. AND SUBSIDIARIES Consolidated
Statements of Cash Flows (Unaudited) (In thousands)
Year Ended Dec 27, Dec 28, 2013 2012
Cash
Flows From Operating Activities Net Earnings $ 210,822 $
149,126
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation and amortization 37,316 38,762 Deferred income taxes
(1,715 ) (10,786 ) Share-based compensation 16,545 12,409 Excess
tax benefit related to share-based payment arrangements (8,347 )
(4,217 ) Change in Accounts receivable (11,880 ) (2,752 )
Inventories (10,186 ) 5,941 Trade accounts payable 2,436 (952 )
Salaries and incentives 2,022 (4,251 ) Retirement benefits and
deferred compensation 3,629 3,209 Other accrued liabilities 5,556
3,288 Other (3,143 ) (95 )
Net cash from operating
activities 243,055 189,682
Cash
Flows From Investing Activities Property, plant and equipment
additions (23,319 ) (18,234 ) Acquisition of businesses, net of
cash acquired (11,560 ) (240,068 ) Investment in businesses held
separate 4,516 (426,813 ) Proceeds from sale of assets 1,600 -
Other (2,475 ) (9,405 )
Net cash used in investing
activities (31,238 ) (694,520 )
Cash Flows
From Financing Activities Borrowings (payments) on short-term
lines of credit, net 1,280 (619 ) Borrowings on long-term line of
credit 419,905 649,325 Payments on long-term line of credit
(568,122 ) (392,845 ) Payments of debt issuance costs - (1,921 )
Excess tax benefit related to share-based payment arrangements
8,347 4,217 Common stock issued 41,664 30,194 Common stock
repurchased (67,827 ) (1,378 ) Cash dividends paid (61,139 )
(54,302 )
Net cash provided by (used in) financing
activities (225,892 ) 232,671 Effect of
exchange rate changes on cash 2,711 137
Net increase (decrease) in cash and cash equivalents (11,364 )
(272,030 ) Cash and cash equivalents: Beginning of year
31,120 303,150 End of year $ 19,756 $
31,120
Graco Inc.James A. Graner, 612-623-6635orMedia
Contact:Bryce Hallowell, 612-623-6679
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