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GGG > SEC Filings for GGG > Form 10-Q on 24-Apr-2013All Recent SEC Filings

Show all filings for GRACO INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GRACO INC


Quarterly Report



The Company designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and coating materials. Management classifies the Company's business into three reportable segments: Industrial, Contractor and Lubrication. Key strategies include developing and marketing new products, expanding distribution globally, opening new markets with technology and channel expansion and completing strategic acquisitions.

The following Management's Discussion and Analysis reviews significant factors affecting the Company's results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying notes to the financial statements.


On April 2, 2012, the Company completed the purchase of the finishing businesses of ITW. 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, including $32 million of sales and $5 million of operating earnings in the first quarter of 2013.

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 businesses 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 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.

As a cost-method investment, income is recognized based on dividends received from current earnings of Liquid Finishing. Dividends of $4 million received in the first quarter of 2013 are included in other expense (income) on the Consolidated Statements of Earnings. Also in the first quarter of 2013, ITW reimbursed Graco approximately $1 million for payments of pre-

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acquisition tax liabilities paid by Liquid Finishing businesses after the acquisition date. This reimbursement was recorded as a reduction of the cost-method investment on the Consolidated Balance Sheet.

The Company evaluates its cost-method investment for other-than-temporary impairment at each reporting period. As of March 29, 2013, the Company evaluated its investment in Liquid Finishing and determined that there was no impairment.

Consolidated Results

Net sales, net earnings and earnings per share were as follows (in millions
except per share amounts and percentages):

                                                  Thirteen Weeks Ended
                                          Mar 29,         Mar 30,          %
                                           2013            2012          Change

Net Sales                               $     269.0     $     234.1          15%
Net Earnings                            $      52.1     $      35.4          47%
Diluted Net Earnings per Common Share   $      0.84     $      0.58          45%

Sales increased 15 percent from last year, with 14 percentage points of the growth from the addition of Powder Finishing, which contributed $32 million of sales.

Net earnings increased 45 percent over last year, driven by higher sales and strong gross margin rates, a decrease in acquisition-related expenses, investment income from Liquid Finishing businesses held separate and favorable tax provision adjustments.

Changes in currency translation rates did not have a significant effect on first quarter operating results.

The following table presents components of changes in sales:

                                                  Segment                                          Region
                              Industrial        Contractor        Lubrication        Americas        EMEA        Pacific       Total
Volume and Price                    (1) %               8 %              (3) %             4 %        (4) %          1  %         1 %
Acquisitions                         24 %               - %                - %             6 %         30 %          17 %        14 %
Currency                            (1) %               - %                - %             - %          - %         (2) %         - %

Total                                22 %               8 %              (3) %            10 %         26 %          16 %        15 %

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Sales by geographic area were as follows (in millions):

Thirteen Weeks Ended

                 Mar 29,            Mar 30,
                   2013              2012

Americas1      $     138.2       $      126.0
EMEA2                 68.8               54.7
Asia Pacific          62.0               53.4

Consolidated   $     269.0       $      234.1

1 North and South America, including the U.S.

2 Europe, Middle East and Africa

Sales increased 15 percent, including increases of 10 percent in the Americas, 26 percent in EMEA and 16 percent in Asia Pacific.

Sales included $32 million from Powder Finishing operations acquired in April 2012, including $7 million in the Americas, $16 million in EMEA and $9 million in Asia Pacific. Sales from legacy operations (excluding Powder Finishing) were up 4 percent in the Americas, down 4 percent in EMEA and flat in Asia Pacific.

Gross profit margin, expressed as a percentage of sales, was 56 percent, down one-half percentage point from the first quarter last year. The unfavorable effect of lower margin rates from acquired Powder Finishing operations was offset somewhat by realized price increases and manufacturing cost improvements.

Total operating expenses increased by $5 million, but included $9 million from Powder Finishing operations. Acquisition and divestiture costs included in operating expenses decreased by $4 million.

Other expense (income) included dividends of $4 million 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 rate of 27 percent was 8 percentage points lower than first quarter 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 effects of the after-tax dividend income received from the Liquid Finishing businesses held separate.

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Segment Results

Certain measurements of segment operations compared to last year are summarized

                                                       Thirteen Weeks Ended
                                                    Mar 29,            Mar 30,
                                                      2013              2012

Net sales (in millions)
Americas                                          $      66.2       $       59.4
EMEA                                                     50.3               36.8
Asia Pacific                                             47.7               37.9

Total                                             $     164.2       $      134.1

Operating earnings as a percentage of net sales           34 %               36 %

Industrial segment sales increased 22 percent, including $32 million from Powder Finishing operations. Sales from legacy operations were down 2 percent, mostly from an 8 percent decrease in EMEA, partially offset by a 3 percent increase in Asia Pacific. Operating margin rate for this segment decreased due to the lower rate earned in the Powder Finishing operations.

                                                        Thirteen Weeks Ended
                                                    Mar 29,             Mar 30,
                                                      2013               2012

Net sales (in millions)
Americas                                          $      51.5        $       46.3
EMEA                                                     16.1                15.9
Asia Pacific                                             10.0                 9.8

Total                                             $      77.6        $       72.0

Operating earnings as a percentage of net sales           21 %                17 %

Contractor segment sales increased 8 percent, mostly in the Americas, where sales were strong in both the paint store and home center channels. Higher sales volume, improved gross margin rate (factory efficiencies and pricing) and expense leverage led to a higher operating margin rate in the Contractor segment.

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                                                        Thirteen Weeks Ended
                                                    Mar 29,             Mar 30,
                                                      2013               2012

Net sales (in millions)
Americas                                          $      20.5        $       20.3
EMEA                                                      2.5                 1.9
Asia Pacific                                              4.2                 5.8

Total                                             $      27.2        $       28.0

Operating earnings as a percentage of net sales           19 %                22 %

Lubrication segment sales decreased 3 percent. Increases in the Americas and EMEA were more than offset by a decrease in Asia Pacific, where several large industrial lubrication transactions in 2012 were not repeated in 2013. Lower volume led to a decrease in operating earnings in the Lubrication segment.

Liquidity and Capital Resources

Net cash provided by operating activities was $39 million in 2013 and $23 million in 2012. The increase mostly reflects the increase in net earnings. Accounts receivable and inventory balances have increased since the end of 2012 due to first quarter increases in business activity.

In May 2012, the FTC issued a proposed decision and order which requires Graco to sell the Liquid Finishing business assets, including 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. The Company believes its investment in the Liquid Finishing businesses, carried at a cost of $426 million, is not impaired.

Under terms of the FTC's hold separate order, the Company is required to provide sufficient resources to maintain the viability, competitiveness and marketability of the Liquid Finishing businesses, including general funds, capital, working capital and reimbursement of losses. To the extent that the Liquid Finishing businesses generate funds in excess of financial resources needed, the Company has access to such funds consistent with practices in place prior to the acquisition. In the first quarter, the Company received $4 million of dividends from current earnings of the Liquid Finishing businesses.

At March 29, 2013, the Company had various lines of credit totaling $484 million, of which $258 million was unused. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2013, including the needs of the Powder Finishing and Liquid Finishing businesses acquired in April 2012.

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We remain focused on achieving year-over-year sales growth in every region of the world in 2013. We believe the recovery in the U.S. housing market should result in double-digit growth in our Contractor Americas business for the year. The general industrial environment in the Americas is stable, despite a disappointing first quarter for our Industrial segment, and should result in low-to-mid single-digit growth for 2013. Challenging macroeconomic conditions in Western Europe and Asia Pacific continue to be a headwind, but our new product development, channel expansion and sales initiatives are expected to drive modest growth in EMEA and Asia Pacific in 2013.


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 for a more comprehensive discussion of these and other risk factors. These reports are available on the Company's website at and the Securities and Exchange Commission's website at 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.

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