Graco Surpasses Estimates

Despite continued softness in Europe and Asia, Graco Inc. ( GGG - Snapshot Report ) reported stellar fourth quarter 2012 results with earnings of $42.3 million or 68 cents per share compared to $30.4 million or 50 cents per share in the year-ago quarter. The year-over-year increase in earnings was primarily attributable to the accretive acquisition of the Gema Powder Finishing business and superior execution of operational plans at the factory level. The earnings in the reported quarter were well ahead of the Zacks Consensus Estimate of 60 cents.

For full year 2012, the company reported earnings of $149.1 million or $2.42 per share compared to $142.3 million or $2.32 per share in the previous year. Full-year earnings surpassed the Zacks Consensus Estimate by 7 cents.

Net sales for fourth quarter 2012 came in at $253.7 million, up 17.7% year over year and ahead of the Zacks Consensus Estimate of $251 million. Quarterly sales increased 39% in Europe and 20% in the Americas, but dipped 5% in Asia Pacific. For full year 2012, net sales surged 13.1% year over year to $1,012.5 million as all the geographic regions as well as the operating segments recorded growth.

Gross margin came in at 55% in the reported quarter, marginally up from 54% in the year-ago quarter, as solid operational performance in legacy businesses offset the lower margin rates on acquired Powder Finishing operations.

Segment Results

The Industrial segment witnessed a 25% rise in net sales to $156.4 million, driven by the Powder Finishing operations. On a geographic region basis, sales increased 10% in the Americas, and decreased 7% and 2% in Asia Pacific and Europe, respectively.

Net sales for the Contractor segment increased 13% year over year to $69.9 million, largely due to a strong performance in the Americas (up 25%), partially offset by disappointing performance in Europe (down 4%) and Asia Pacific (down 6%).

During the quarter, the Lubrication segment recorded a 3% decline in net sales to $27.4 million as sales decreased 39% in Asia Pacific, partially offset by an 8% increase in the Americas and a 16% increase in Europe.

Balance Sheet and Cash Flow

Cash and cash equivalents at year-end 2012 were $31.1 million versus $303.1 million in the previous year. Long-term debt increased to $556.5 million in 2012 from $300 million in 2011. At year-end 2012, net cash provided by operating activities surged to $189.7 million from $162.0 million in the prior-year period.

Outlook

For full year 2013, management anticipates growth across all geographic regions. In the Americas, the company expects to benefit from the continued recovery in construction market, particularly in its Contractor and Industrial segments. A modest increase is also expected in Europe driven by the emerging markets in Eastern Europe. Asia Pacific is expected to witness a gradual improvement over the year to record relatively moderate growth. Furthermore, with steady volume increase and solid factory-level performance, Graco expects to register comparatively healthy growth in both the top and bottom line in 2013.

However, the company needs to be wary of stiff competition in the market from other leading players like Altra Holdings, Inc. ( AIMC - Snapshot Report ) , Metso Corp. ( MXCYY ) , and Atlas Copco AB ( ATLKY ) , each carrying a Zacks Rank #1 (Strong Buy). Graco currently has a Zacks Rank #3 (Hold).