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Tickers in this Article: GGG
Graco Inc. (GGG) reported third quarter 2012 earnings per share of 60 cents, which remained flat year over year but increased from 56 cents in the previous quarter. The earnings in the reported quarter missed the Zacks Consensus Estimate of 70 cents per share. Net income came in at $37.1 million, up 1.4% year over year and 7.8% sequentially. Revenues

Net sales came in at $256.5 million, up 12.8% year over year (15% on a constant currency basis), but down 4.4% sequentially. This, however, missed the Zacks Consensus Estimate of $271 million. The annual rise in the sales was mostly driven by the company's improved operations in its Powder Finishing business.

On a segmental basis, the Industrial segment sales ameliorated 24% from the year-earlier quarter to $154.7 million. Revenues from the Contractor segment sales were $74.9 million, down 4% from the year-ago quarter. The Lubrication segment sales climbed up 7% from the year-ago quarter to $26.9 million.

Geographically, sales were up 11% year over year in the Americas on the back of the Industrial and Lubrication segments' sales which were increased by double-digit during the quarter. Sales increased 4% in Asia Pacific carrying the onuses of the company's weak business condition. The European market sales escalated about 28% (38% at consistent translation rates), driven by the improved Lubrication and Contractor segments sales.

Margins

Gross margin came in at 55% in the reported quarter, declining from 56% in the year-ago quarter but up from 52% in the previous quarter. The annual decline occurred owing to non-recurring purchase, increased material costs, negative currency translation and Powder Finishing operations' reduced margin rates, offsetting the price increase during the quarter.

Operating margin came down to 22% from 25% in the previous year quarter but up from 19.6% in the prior quarter. The Powder Finishing operations resulted in a surge in operating expenses of nearly $8 million during the quarter.

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

Cash Flows

Year-to-date net cash provided by operating activities was $132 million versus $109 million in the previous year period.

Outlook

Management anticipates that its businesses in China, India and Western Europe will face a downturn owing to the prevailing uncertain economic condition. However, its business in the Americas would experience a positive growth trend in the upcoming quarter of 2012. Steady housing recovery in U.S. is likely to drive Graco's Contractor equipment business going forward. Furthermore, according to the company, it will strengthen its foothold through its diversified businesses and latest product ranges.

Our Recommendation

Graco currently has a Zacks #2 Rank, which implies a short-term (1-3 months) 'Buy' rating on the stock.

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