Graco Inc. CEO Discusses Q3 2010 Earnings - Call Transcript

Graco Inc. CEO Discusses Q3 2010 Earnings - Call Transcript
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Graco Inc. (

GGG

)

Q3 2010 Earnings Call

October 21, 2010 01:30 pm ET

Executives

Caroline Chambers - VP & Controller

Pat McHale - President & CEO

Jim Graner - CFO

Analysts

Charles Brady

Terry Darling

Kevin Maczka

Matt Summerville

Christopher Wiggins

Presentation

Operator

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Good morning and welcome to the third quarter 2010 conference call for Graco Inc. If you wish to access the replay for this call, you may do so by dialing 1800-406-7325 within the United States or Canada. The dialing number for international callers is 303-590-3030. The conference ID number is 4370547. The replay will be available through October 24 of 2010.

Graco has additional information available in a PowerPoint slide presentation which is available as part of the webcast player. At the request of the company we will open the conference for questions after the opening remarks from management.

During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purpose of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as the result of various risk factors, including those identified in item 1A of and exhibit 99 to the company's 2009 Annual Report on Form 10-K. This report is available on the Company's website at www.graco.com and the SEC's website at www.sec.gov.

Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. This conference is being recorded today Thursday October 21 of 2010. And I now like to turn the conference to Caroline Chambers, Vice President and Controller, please go ahead.

Caroline Chambers

Good morning everyone. I am here this morning with Pat McHale and Jim Graner. I will provide some comments on the financial highlights of our third quarter and Pat will follow with additional comments.

PowerPoint slides are available to accompany our call and can be accessed on our website. The slides include information of our consolidated financial results and each of the segments.

After our opening comments we will open up the call for your questions.

Net sales were up 29% to a $190 million for the quarter as compared to the prior year. Sales increased in all divisions and regions with strong growth continuing Asia Pacific, and solid growth in both the Americas and Europe.

Operating earnings as a percentage of sales were 23%, up from 18% a year ago with net earnings totaling $30 million. Currency translation has not had a significant effect for the quarter or year-to-date. Changes in Asian currencies and the Canadian dollar continue to largely offset changes in the Euro.

Our gross profit margin as a percentage of sales was 55% as compared to 53% in the third quarter last year. Higher production volume in 2010 has been the primary driver of the improvement in both the quarter and year-to-date rate.

Material cost remains favorable as compared to last year even with some material cost pressures during the third quarter. Although these cost pressures are likely to continue, we expect fourth quarter material cost to remain favorable as compared to last year.

Operating expenses for the quarter increased by $9 million as compared to last year. Continued strong operating results drove incentive and bonuses provisions in the third quarter similar to the second quarter of 2010. For the full year we expect that cost and expenses related to incentive and bonuses to be $20 million higher than last year.

The effective tax rate for the third quarter was 28% and reflects the expiring statute to limitations in recent tax [bar] ruling. The year-to-date tax rate was 32% as compared to 31% last year. We expect the full year tax-rate to be approximately 33%. The federal R&D tax credit has now been renewed for 2010 and no benefit is included in the current rate. In future quarters without changes in tax law we expect to rate a 34% to 35%.

Year-to-date cash flow from operations was $62 million as compared to a $110 million last year. Our working capital investment increased in line with our increasing volumes.

Year-to-date inventories have increased by $27 million with an improvement in turn. We expect that inventories will be level in the fourth quarter.

Accounts receivable have increased by $35 million year-to-date with consistent days of sales outstanding. Primary usage of cash year-to-date have been capital expenditures of $9 million, a voluntary contribution of $10 million to a funded pension plan, dividends of $36 million and share repurchases of $24 million. Long term debt totaled $90 million at the end of quarter, with unused credit lines of a $171 million.

Finally, backlog continues to be strong although down $3 million from the end of quarter two as new product orders and contractors did ship during the third quarter.

With that, I will turn it over to Pat for additional comments.

Pat McHale

Good morning, I will start off by giving some color to our revenue performance during the quarter. I'll begin with Europe.

Sales in Europe were up 22%, 32% at consistent exchange rates versus the third quarter of last year. Sales increased solid double digit in Western Europe, Eastern Europe, the Middle East and Africa.

Contractor equipment sales were strong despite difficult end market conditions in many countries. Of the 30% increase 41% at consistent exchange was driven largely by new product. Our base business in Europe contractor, excluding new products did increase at low double digit rate due primarily to strong growth in Eastern Europe and Russia.

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