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Text: I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion.
Our conference call slides and our third quarter Form 10-Q are on our website and provide additional information that you may find helpful.
Yesterday, Graco reported third quarter sales of $487 million, an increase of 11% from the third quarter of last year.
The effect of currency translation added two percentage points of growth or approximately $6 million in the quarter.
Reported net earnings were $104 million for the third quarter or $0.59 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises and certain nonrecurring tax adjustments, net earnings were $100 million or $0.57 per diluted share.
Gross margin was down 110 basis points from the third quarter of last year as the favorable effect from realized pricing, increased factory volume and currency translation were not enough to offset the unfavorable gross margin rate impact of higher product costs.
These higher product costs, such as material, labor and freight, decreased our gross profit by $14 million in the quarter with $10 million of this impacting the Contractor segment.
At current cost and volumes, we estimate that on a dollar basis, realized price and increased factory volumes will offset higher product costs for the full year; however, these costs will continue to be decremental to the gross margin rate.
Supply chain constraints, such as logistics capacity and component availability, also had an unfavorable impact on our factory's ability to deliver in the quarter and will likely persist for the remainder of the year.
These challenges were predominantly felt in the Contractor segment as this is our highest volume business.
Operating expenses increased $20 million or 19% in the quarter.
Sales and volume-based expenses increased $9 million, new product spending increased $2 million and changes in currency translation rates increased operating expense by $1 million in the third quarter.
The adjusted tax rate for the quarter was 18%.
Cash flows from operations are $357 million for the year compared to $263 million last year.
This increase is due to the improvement in earnings, partially offset by increases in working capital that reflects the growth in business activity.
Significant uses of cash are dividend payments of $95 million and capital expenditures of $83 million, including $33 million for facility expansion projects.
A few comments as we look forward to the fourth quarter.
Subsequent to the end of the third quarter, Graco entered into an agreement, in which approximately $63 million of pension obligations were transferred to an insurance company through the purchase of an annuity contract.
The annuity contract purchase will be funded with existing plan assets.
This arrangement is part of the company's effort to reduce the overall size and volatility of its pension plan obligations.
We expect to recognize a noncash pre-tax pension settlement charge of approximately $12 million in other nonoperating expense in the fourth quarter.
Based on current exchange rates, the full year favorable effect of currency translation is estimated to be 2% on sales and 4% on earnings, with the most significant impact having occurred in the first half of the year.
Also for the remainder of 2021, we expect unallocated corporate expense to be approximately $26 million to $28 million.
The decrease from prior estimates is due to lower stock compensation expense for the year.
Our full year adjusted tax rate is expected to be 18% to 19%.
Capital expenditures are estimated to be $150 million, including $80 million for facility expansion projects.
Finally, 2021 will be a 53-week year with the extra week occurring in the fourth quarter.
Sales in the third quarter grew high single digits, driven by the continued recovery in both our Industrial and Process segments.
Contractor North America had difficult comparisons from last year's record third quarter.
Contractor demand was solid in Europe and Asia with double-digit gains in both regions.
Heading into the fourth quarter, business remains robust.
For the first three weeks of October, our global orders continued to outpace billings in all three segments.
Normally, we don't talk about backlog since most of our business is book and ship.
However, given the current environment, which is rife with component shortages and logistical disruptions, backlogs are worth mentioning.
At the end of the third quarter, our consolidated backlog was approximately $280 million, which is $25 million higher than what it was at the end of the second quarter, and $121 million higher than our backlog at the end of last year.
Orders are abundant; however, our biggest challenge is getting the materials and components we need and then navigating the logistical challenges inherent in today's environment.
We expect conditions to remain this way for a while, and there is nothing unique to what Graco is experiencing when it comes to these issues.
One more thing before commenting on our segments.
It's anticipated that our planned pricing actions in 2022 will be enough to fully offset current cost pressures.
Our annual pricing cadence has been appreciated by our channel partners and has tangible commercial value in the marketplace.
Now turning to some commentary on our segments.
I'll start with Contractor equipment.
The residential construction and home improvement markets remained strong globally.
On a dollar basis, incoming order rates have been relatively stable and overall demand has exceeded our expectations, given the surge that we experienced last year.
Contractor backlogs are elevated at $46 million, which is up $6 million from June and up $22 million from the same time last year.
The overall pace of business, including out-the-door sales, is robust.
The Industrial segment grew at high teens for the quarter, with year-to-date sales exceeding previous high set in 2018.
We experienced broad-based growth in all major end markets and reportable regions, which is a nice bounce back from what we faced a year ago.
Consistent with our other businesses, the biggest challenge in this segment is getting product out the door.
And user demand is very strong, and we anticipate this to continue for the balance of the year.
Process segment sales grew 21% for the quarter, with year-to-date sales exceeding previous high set in 2019.
Similar to Industrial, broad-based growth continues in all major end markets and reportable regions.
The recovery of both our lubrication and process pump businesses drove sales and earnings growth for the quarter in the segment.
Moving to our outlook.
With demand persisting, we confirm our full year outlook of mid- to high-teen organic revenue growth on a constant currency basis for the full year 2021.
While we expect continued headwinds from raw material costs, logistics, component availability in the fourth quarter, we believe we are positioned to deliver a record year.

user
qtrly diluted net earnings per common share $0.59.
qtrly adjusted diluted net earnings per common share $0.57.
continues to target mid to high teen organic sales growth on a constant currency basis for full-year 2021.

assistant