Graco Reports Record Annual Sales and Earnings

  Graco Reports Record Annual Sales and Earnings

Business Wire

MINNEAPOLIS -- January 27, 2014

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          $ 271.9     $ 253.7     7   %      $ 1,104.0     $ 1,012.5     9   %
Sales
Net            44.7        42.3      6   %        210.8         149.1       41  %
Earnings
Diluted
Net
Earnings     $ 0.71      $ 0.68      4   %      $ 3.36        $ 2.42        39  %
per
Common
Share
                                                                            

  *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            $  171.8       $  73.5        $  26.6         $  652.3       $  342.5       $  109.1
millions)
Net sales
percentage
change            10    %        5     %        (3    )%        8     %        15    %        (1    )%
from last
year
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         Dec 27,         Dec 28,         Dec 27,           Dec 28,
share amounts)
                   2013            2012            2013              2012
Net Sales          $ 271,923       $ 253,678       $ 1,104,024       $ 1,012,456
Cost of             124,724       114,790       496,569         461,926   
products sold
Gross Profit         147,199         138,888         607,455           550,530
Product              14,032          12,296          51,428            48,921
development
Selling,
marketing and        45,646          41,720          177,853           163,523
distribution
General and         24,192        26,970        98,405          113,409   
administrative
Operating            63,329          57,902          279,769           224,677
Earnings
Interest             4,310           4,992           18,147            19,273
expense
Other expense       (3,529  )      (5,752  )      (27,200   )      (11,922   )
(income), net
Earnings
Before Income        62,548          58,662          288,822           217,326
Taxes
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           (6,860  )      (6,099  )      (26,253   )      (38,297   )
expenses
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          183,293           172,143
$6,300 and $6,600
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                 94,705            137,779
Compensation
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          (46,349   )      (83,745   )
(loss)
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          (8,347   )       (4,217   )
payment arrangements
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                   3,629            3,209
compensation
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             (11,560  )       (240,068 )
acquired
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       1,280            (619     )
credit, net
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          8,347            4,217
payment arrangements
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          (225,892 )      232,671  
activities
Effect of exchange rate changes on cash           2,711          137      
Net increase (decrease) in cash and cash           (11,364  )       (272,030 )
equivalents
Cash and cash equivalents:
Beginning of year                                 31,120         303,150  
End of year                                      $ 19,756        $ 31,120   
                                                                             

Contact:

Graco Inc.
James A. Graner, 612-623-6635
or
Media Contact:
Bryce Hallowell, 612-623-6679
 
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