Graco CEO Discusses Q4 2011 Results - Earnings Call Transcript

Graco Inc. ( GGG)

Q4 2011 Earnings Conference Call

January 31, 2012 11:00 AM ET

Executives

Caroline Chambers – Vice President and Controller

Pat McHale – President and Chief Executive Officer

Jim Graner – Chief Financial Officer

Analysts

Charlie Brady – BMO Capital Markets

Kevin Maczka – BB&T Capital Markets

John Franzreb – Sidoti & Company

Matt Summerville – KeyBanc

Terry Darling – Goldman Sachs

Mike Halloran – Robert Baird

Liam Burke – Janney Capital Markets

Presentation

Operator

Good morning, and welcome to the fourth quarter and year-end 2011 conference call for Graco Inc. Please note it is not Graco Incorporated. If you wish to access the replay for this call, you may do so by dialing 1-800-406-7325 within the United States or Canada. The dial-in number for international callers is 303-590-3030. The conference ID number is 4502375. The replay will be available through February 4, 2012.

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 up for questions and answers after the opening remarks from the 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 purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of, and Exhibit 99 to, the company’s 2010 Annual Report on Form 10-K and in Item 1A of the company’s most recent quarterly report on Form 10-Q.

These reports are 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.

Later on in today’s presentation, we will have a question-and-answer session, and at that time, instructions will be given. I would now like to turn the conference over to Caroline Chambers, Vice President and Controller. Please go ahead.

Caroline Chambers

Good morning, everyone. I’m here this morning with Pat McHale, Jim Graner, and Christian Rothe. I will provide some comments on the financial highlights of our fourth quarter, and Pat will follow with additional comments. Slides are available to accompany our call and can be accessed on our website. The slides include information about our consolidated financial results and each of the segments. After our opening comments, we will open up the call for your questions.

Sales for the quarter were 9% higher than the strong fourth quarter last year, which included 14 weeks as compared to 13 weeks in 2011. The inflation rates did not have a significant impact in the quarter. Sales for the year increased by 20% or 18% at consistent translation rates, with strong growth in all the segments and regions.

Although the changes in currency translation rates had no effect in the fourth quarter, the full year effect increased earnings by $7 million after-tax. Additional information about effective currency translation on sales for the segments and regions as well as sales by currency are included on page five in the slides that accompany this webcast.

Gross profit margins were 54% for the quarter, consistent with the prior year, and 56% for the year, an improvement of 2 percentage points from the prior year. Material cost increase in the second half of the year largely offset by improved factory efficiencies. Operating expenses in the fourth quarter were flat compared to last year.

For the year, the increase of $30 million from the prior year included additional product development spending, continued development of commercial and support capabilities in developing geographies, and increased general and administrative expenses. Operating expenses also include $8 million in 2011 related to the proposed acquisition of ITW’s finishing businesses.

Interest expense was $4 million for the year and $9 million for the year. The effective tax rate for the quarter was 30% compared to 26% for the quarter last year. In 2010, the effective rate for the quarter was low because the federal R&D tax rate was not renewed until the fourth quarter and the full year effect was included in that quarter. The lower 2011 fourth quarter rate compared to the 2011 annual rate is due to higher estimates for the domestic production deductions in R&D credits as compared to earlier in the year.

Year-to-date cash flow from operations was $162 million compared to $101 million last year. Inventories and accounts receivable leveled off in the second half of 2011 after increases in the first half related to increased business volume. Capital expenditures were $24 million in 2011, and we also paid dividends of $51 million. We repurchased 43 million of company stock during the year.

Cash of $300 million at year-end is held in deposit accounts and money market funds. Long-term debt is $300 million, with an additional $264 million of unused credit lines available at year-end. Our net liability for retirement benefits and deferred compensation increased to $120 million at the end of 2011 as compared to $76 million last year, primarily due to the very low discount rates at year-end.

A few other items to note. We expect to see material cost pressures continue into 2012. Even as some commodities moderate, other materials continue to see upward pressure. We have a robust plan for factory efficiencies that will be implemented during 2012. Factory production levels are expected to be in line with sales growth going forward. Although we expect cost overall to be consistent for the full year 2012, we do and expect an increase of cost of 1% to 2% in the first quarter comparison.

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