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Graco's 2Q Misses Est., Sales Surge

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Graco Inc. (GGG - Free Report) reported second quarter 2012 earnings per share of 56 cents, compared to 61 cents in the year-ago quarter and 58 cents in the previous quarter. The earnings in the reported quarter missed the Zacks Consensus Estimate of 68 cents per share. Net income came in at $34.4 million, down 10% year over year and 2.8% sequentially.


Net sales came in at $268.2 million, up 14% year over year (17% on a constant currency basis), and 14.6% sequentially. This, however, missed the Zacks Consensus Estimate of $283 million. The improved sales across North America provided a boost to the consolidated sales of the company during the quarter.

On a segmental basis, the Industrial segment sales ameliorated 22% from the year-earlier quarter to $158.2 million. Revenues from the Contractor segment sales were $82.1 million, up 2% from the year-ago quarter. The Lubrication segment sales climbed up 13% from the year-ago quarter to $27.9 million.

Geographically, sales were up 12% year over year in the Americas. Sales increased 14% (16% at consistent translation rates) in Asia Pacific on the back of the Contractor segment sales which improved considerably. The European market sales escalated about 19% (29% at consistent translation rates), carrying the onuses of the weakened fiscal conditions and currency translation prevailing in the Western Europe region which were partially offset by the improvement in the business of Eastern Europe region.


Gross margin came in at 52% for the reported quarter, declining from 56% in the year-ago quarter and down from 56.5% in the previous quarter. The annual decline occurred owing to non-recurring purchase and negative currency translation during the quarter.

Operating margin came down to 19.6% from 24.8% in the previous year quarter and also down from 24.8% in the prior quarter. The acquisition expenses and Powder Finishing operations resulted in a surge in operating expenses of nearly $5 million and $8 million, respectively.

The effective tax rate for the reported quarter was 32%, which remains flat year-over-year.

Cash Flows

During the second quarter of 2012, Graco generated $41 million of net cash from operating activities compared with $44 million in the previous year quarter.


Management expects that its all business segments are likely to experience a positive growth trend in the second half of 2012 (on constant currency). Important growth driver averred by management include sales from the Americas region. Furthermore, according to the company the demand for Contractor and Lubrication products in the Asia Pacific region is also likely to surge in the coming quarters. However, Graco remains wary of weaknesses that are expected to arise from the negative currency translation in Europe as it moves through 2012.

Our Recommendation

Graco currently has a Zacks Rank#4 which implies a short-term (1-3 months) ‘Sell’ rating on the stock.

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