Graco Misses Estimate Marginally

Graco Inc. ( GGG - Snapshot Report ) posted a net income of $30.4 million in its final quarter of 2011, up 12.6% year over year but down 16.9% sequentially. Diluted EPS came in at 50 cents per share compared to 44 cents per share in the year-ago quarter, marginally missing the Zacks Consensus Estimate of 51 cents per share.

For FY11, diluted EPS came in at $2.32, which again failed to meet the Zacks Consensus Estimate of $2.38.

Revenues

Net sales came in at $215.6 million, up 9% year over year, but down 5.2% sequentially. This, however, did not meet the Zacks Consensus Estimate of $223 million. Management stated that even though considerable sequential softness in sales was observed this quarter, the company achieved record fourth quarter yields, mainly due to product innovations and geographic diversities across all regions.

On a segmental basis, the Industrial segment sales improved 11% from the year-earlier quarter to $125.2 million. Revenues from the Contractor segment sales were $62.1 million, up 1% from the year-ago quarter. The Lubrication segment sales soared 26% from the year-ago quarter to $28.3 million.

Geographically, sales were up 9% from the year-ago quarter in the Americas, 20% from the year-ago quarter in Asia Pacific and remained somewhat the same from the year-ago quarter in Europe. Foreign currency translations proved ineffective to sales in the fourth quarter of 2011.

In 2011, net sales increased 20% year over year to reach a whopping $895.3 million. Full year sales increased 17% in the Americas, 19% in Europe (14% currency translation rates) and 32% in Asia Pacific (27% currency translation rates).

Margins

Gross margin came in at 54% for the December quarter, down from 56% in the previous quarter and remaining the same as the year-ago quarter.

Operating margin moved up to 22.0% from 19.2% in the year-ago quarter but dropped from 25.0% in the previous quarter.

In 2011, gross margin was 55.9% compared to 54.2% in the previous year, whereas operating margin came at 24.5% compared to 20.6% at the end of 2010. This was primarily attributable to efficient production gains, favorable pricing and positive currency translation effects.

Balance Sheet and Cash Flows

Graco ended the quarter with cash and cash equivalents of $303.2 million, rising from $274.8 million at the end of the previous quarter. As of December 30, 2011, long-term debt came in at $300 million, consistent with the previous quarter end.

In 2011, Graco generated $162.0 million of net cash from operating activities and used $23.9 million for capital expenditures.

Outlook

The company remains both solicitous and cautious about demand trends being clouded by the European financial crisis. Moreover, Graco expects that 2012 growth trends will be lower due to difficult comparisons on a year-ago basis and existing pressures of the global construction markets. However, the company is sanguine about growth from emerging markets of Asia Pacific and also relies heavily on favorable results emanating from the U.S. economy.

One ongoing challenge persists still for Graco as it battles to gain approval from the Federal Trade Commission (FTC) for its acquisition of Illinois Tool Works (ITW).

Remaining perspicacious about new products and application developments and global proliferation strategies, Graco expects its end-markets such as automotive, energy, heavy equipment and industrial lubrication to ameliorate business commendably in the coming quarters.