GGG Misses on Bottom Line

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Graco Inc. (GGG) reported first quarter 2012 earnings per share of 58 cents, missing the Zacks Consensus Estimate of 62 cents.  This compares with 61 cents in the previous year quarter and 50 cents in the last quarter. Net income came in at $35.4 million, down 5% year over year but up 16.5% sequentially.

Revenues

Net sales came in at $234.1 million, up 7.5% year over year and 8.6% sequentially. This, however, marginally missed the Zacks Consensus Estimate of $235 million. Growth was substantial in all three major segments. Moreover, improved sales across all geographic regions provided an added boost to the consolidated sales of the company during the quarter.

On a segmental basis, the Industrial segment sales improved 9% from the year-earlier quarter to $134.1 million. Revenues from the Contractor segment sales were $72.0 million, up 3% from the year-ago quarter. The Lubrication segment sales soared 14% from the year-ago quarter to $28.0 million.

Geographically, sales were up 9% year over year in the Americas, attributable to ameliorated sales across the Lubrication and Industrial segments and pain channel revenues accruing from North America. Sales increased 10% (8% at consistent translation rates) in Asia Pacific on the backs of Lubrication and Contractor segment sales which surged considerably. The European market sales escalated about 3% (6% at consistent translation rates), carrying the onuses of the weakened fiscal clouds of the region which was partially offset by rise in the Industrial segment demand.

Margins

Gross margin came in at 56.5% for the reported quarter, down from 57.2% in the year-ago quarter but up from 54% in the previous quarter. The annual decline occurred owing to increased material expenses during the quarter which was only marginally offset by productivity gains.

Operating margin declined to 24.8% from 26.2% in the previous year period but up from 22.0% in the previous quarter. The acquisition of the finishing businesses of Illinois Tool Works Inc. (ITW) resulted in a surge in operating expenses of nearly $4 million during the quarter which was the main cause for the downfall in operating margin.

Effective tax rate for the reported quarter was higher than the prior-year period, coming in at 34.5%.

Balance Sheet and Cash Flows

Graco ended the quarter with cash and cash equivalents of $326.8 million, rising from $303.2 million at the end of the December quarter of 2011.  As of March 30, 2012, long-term debt came in at $300 million, in line with the previous quarter end.

During the first quarter of 2012, Graco generated $23.5 million of net cash from operating activities compared with $14.2 million in the previous year quarter and used $6.5 million for capital expenditures.

Outlook

Graco remains wary of weaknesses that are expected to arise from the construction markets as it moves through 2012. Furthermore, the Western European sectors do not look favorable for the time being. However, important growth drivers averred by management include sales from the Americas and Asia Pacific region. Also, product innovations lined up to bolster performance in 2012.

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