UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
Commission File Number: 001-9249
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GRACO INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
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(State of incorporation) I.R.S. Employer Identification Number)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
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(Address of principal executive offices) (Zip Code)
(612) 623-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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20,294,457 common shares were outstanding as of April 24, 2000
GRACO INC. AND SUBSIDIARIES
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8-10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Restated Bylaws as amended February 25, 2000. Exhibit 3
Rights Agreement dated February 25, 2000 between the Exhibit 4
Company and Norwest Bank Minnesota, National
Association, as Rights Agent, including as
Exhibit A the form of the Certificate of
Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock. (Incorporated
by reference to Exhibit 4 to the Company's Report
on Form 8-K dated February 25, 2000.)
2000 Corporate and Business Unit Annual Bonus Plan. Exhibit 10
Stock Option Agreement. Form of agreement used under
the Long Term Stock Incentive Plan dated
December 12, 1997. Exhibit 10.1
Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to one
executive officer, dated February 9, 2000. Exhibit 10.2
Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to one
executive officer, dated February 24, 2000. Exhibit 10.3
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended
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March 31, 2000 March 26, 1999
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(In thousands except per share
amounts)
Net Sales $120,227 $103,241
Cost of products sold 58,098 50,384
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Gross Profit 62,129 52,857
Product development 5,024 4,754
Selling, marketing and distribution 23,814 19,305
General and administrative 8,644 9,524
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Operating Profit 24,647 19,274
Interest expense 1,235 1,953
Other (income) expense, net 437 320
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Earnings Before Income Taxes 22,975 17,001
Income taxes 8,000 5,800
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Net Earnings $ 14,975 $ 11,201
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Basic Net Earnings Per Common Share $ .73 $ .56
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Diluted Net Earnings Per Common Share $ .72 $ .54
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, 2000 Dec. 31, 1999
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ASSETS
Current Assets:
Cash and cash equivalents $ 2,834 $ 6,588
Accounts receivable, less allowances
of $4,700 and $4,400 88,011 79,696
Inventories 41,640 37,702
Deferred income taxes 12,096 12,357
Other current assets 1,506 1,646
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Total current assets 146,087 137,989
Property, Plant and Equipment:
Cost 184,764 182,156
Accumulated depreciation (99,068) (95,663)
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85,696 86,493
Other Assets 10,881 11,551
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$242,664 $236,033
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 12,362 $ 14,640
Current portion of long-term debt 1,215 1,215
Trade accounts payable 15,379 13,500
Salaries, wages & commissions 9,424 12,832
Accrued insurance liabilities 11,387 10,332
Income taxes payable 9,035 2,323
Other current liabilities 20,812 23,421
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Total current liabilities 79,614 78,263
Long-term Debt, less current portion 68,430 65,695
Retirement Benefits and Deferred Compensation 28,941 29,135
Shareholders' Equity:
Common stock 20,293 20,416
Additional paid-in capital 37,234 31,755
Retained earnings 7,374 9,279
Other, net 778 1,490
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Total shareholders' equity 65,679 62,940
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$242,664 $236,033
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks
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March 31, 2000 March 26, 1999
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $14,975 $11,201
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,005 3,773
Deferred income taxes 127 (69)
Change in:
Accounts receivable (9,733) (2,204)
Inventories (4,255) (731)
Trade accounts payable 1,941 471
Salaries, wages and commissions (3,283) (4,396)
Retirement benefits and deferred
Compensation 124 380
Other accrued liabilities 5,267 3,573
Other (356) 183
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8,812 12,181
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (2,968) (2,015)
Proceeds from sale of property, plant
and equipment 58 220
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(2,910) (1,795)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable and
lines of credit 47,979 38,992
Payments on notes payable and lines
of credit (49,939) (42,397)
Borrowings on long-term debt 20,000 2,000
Payments on long-term debt (17,265) (10,632)
Common stock issued 6,632 3,579
Retirement of common stock (15,300) -
Cash dividends paid (2,862) (2,212)
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(10,755) (10,670)
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Effect of exchange rate changes on cash 1,099 933
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Net increase (decrease) in cash and cash (3,754) 649
equivalents
Cash and cash equivalents:
Beginning of year 6,588 3,555
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End of Period $ 2,834 $ 4,204
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the
Company) as of March 31, 2000, and the related statements of earnings and
cash flows for the thirteen weeks then ended, have been prepared by the
Company without being audited.
In the opinion of management, these consolidated statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of Graco Inc. and Subsidiaries as of
March 31, 2000, and the results of operations and cash flows for all
periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Therefore, these
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's 1999 Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Major components of inventories were as follows (in thousands):
Mar. 31, 2000 Dec. 31, 1999
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Finished products and components $32,327 $25,748
Products and components in various
stages of completion 22,368 23,560
Raw materials 20,844 21,961
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75,539 71,269
Reduction to LIFO cost (33,899) (33,567)
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$41,640 $37,702
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GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. The Company has three reportable segments; Industrial/Automotive,
Contractor and Lubrication. Assets of the Company are not tracked along
reportable segment lines. Sales and operating profit by segment for the
thirteen weeks ended March 31, 2000 and March 26, 1999 are as follows (in
thousands):
Mar. 31, 2000 Mar. 26,1999
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Net Sales
Industrial/Automotive $ 55,989 $ 50,748
Contractor 53,587 41,694
Lubrication 10,651 10,799
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Total $120,227 $103,241
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Operating Profit
Industrial/Automotive $ 12,507 $ 9,745
Contractor 10,486 8,899
Lubrication 2,316 2,288
Unallocated Corporate expenses (662) (1,658)
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Consolidated Operating Profit $ 24,647 $ 19,274
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4. There have been no changes to the components of comprehensive income from
those noted on the 1999 Form 10K.
5. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will be effective for the
Company in fiscal year 2001. SFAS No. 133 requires that all derivatives
are recognized in the financial statements as either assets or liabilities
measured at fair value and also specifies new methods of accounting for
hedging transactions. The Company has not yet determined the impact of FAS
133, if any.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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Graco's net earnings of $15.0 million for the quarter ended March 31, 2000
increased 34 percent from first quarter 1999 earnings of $11.2 million. Diluted
earnings per share of $0.72 for the quarter were up 33 percent over diluted
earnings per share of $0.54 in the first quarter of 1999. The quarterly
performance was driven by strong sales and gross profit growth partially offset
by increased expenses.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Three Months
(13 weeks) Ended
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March March
31, 2000 26, 1999
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Net Sales 100.0% 100.0%
Cost of products sold 48.3 48.8
Product development 4.2 4.6
Selling, marketing and distribution 19.8 18.7
General and administrative 7.2 9.2
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Operating Profit 20.5 18.7
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Interest expense 1.0 2.0
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Other (income) expense, net 0.4 0.3
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Earnings Before Income Taxes 19.1 16.4
Income taxes 6.6 5.6
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Net Earnings 12.5% 10.8%
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Net Sales
Net sales in the first quarter of $120.2 million were up 16 percent from the
first quarter of 1999. Industrial/Automotive Equipment segment sales were up 10
percent, as sales improved across all Industrial product groups in North
America. Sales for the quarter include $3 million of products from the
acquisition of Bollhoff Verfahrenstechnik in May of 1999. First quarter
Contractor Equipment segment sales were 29 percent higher than last year due to
new product releases and strong demand in North America. Graco introduced its
new Magnum sprayers in the first quarter of 2000. These units are being sold
primarily in the home center channel but are available to customers in the other
sales channels. The initial stocking of approximately 65% of The Home Depot
locations contributed to the sales increase in the quarter. Lubrication
Equipment segment sales decreased 1 percent from the first quarter 1999 to $10.7
million as slightly improved sales in the Americas were offset by lower demand
in Europe and in Asia Pacific.
Geographically, sales in the Americas increased 18 percent to $88.7 million for
the quarter due to strong Contractor and Industrial/Automotive sales. European
quarterly sales of $21.3 million were 11 percent higher than last year;
translating at consistent exchange rates, sales would have been up 24%. Asia
Pacific sales of $10.2 million were 10 percent higher than last year's first
quarter as sales improved throughout the region, excluding Japan.
Gross Profit
Gross profit as a percentage of net sales improved to 51.7 percent in the first
quarter, up 0.5 percentage points from the same period last year. The increase
was due primarily to higher production levels, improved manufacturing
efficiencies and enhanced pricing. The strengthening of the US dollar has
decreased gross margins as a greater proportion of the Company's sales are
denominated in currencies other than the US dollar than are cost of goods sold.
Operating Expenses
First quarter operating expenses of $37.5 million increased 12 percent from the
first quarter of 1999. Selling, marketing and distribution expenses were up 23
percent and included increased spending related to the introduction of new
products in the first quarter of 2000. General and administrative expenses were
down 9 percent due in part to reduced information system spending. Product
development spending was substantial at $5.0 million and $4.8 in the first
quarters of 2000 and 1999.
Other Income (Expense)
Other expense was $0.4 million and $0.3 million in the first quarter of 2000 and
1999.
Income Taxes
The effective tax rate increased to 35 percent in the first quarter compared to
34 percent for the same period last year.
Liquidity and Capital Resources
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The Company generated $8.8 million of cash flow from operating activities in the
first three months of 2000, compared to $12.2 million for the same period last
year. Significant uses of operating cash flow in 2000 included the increase of
accounts receivable and inventory in support of higher sales. Cash flow from
operations combined with the proceeds of common stock issuances upon the
exercise of employee stock options, were used to repurchase 473,400 common
shares for $15.3 million. The Company had unused lines of credit available at
March 31, 2000 totaling $78 million. The available credit facilities and
internally generated funds provide the Company with the financial flexibility to
meet liquidity needs.
Outlook
While the Company is off to a good start in 2000, we remain uncertain about the
global industrial growth for 2000. However, we continue to plan for higher sales
and earnings per share growth for fiscal 2000.
SAFE HARBOR CAUTIONARY STATEMENT
The information in this 10-Q contains "forward-looking statements" about the
Company's expectations of the future, which are subject to certain risk factors
that could cause actual results to differ materially from those expectations.
These factors include economic conditions in the United States and other major
world economies, currency exchange fluctuations and additional factors
identified in Exhibit 99 to the Company's Report on Form 10-K for fiscal year
1999.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Restated Bylaws as amended February 25,2000. Exhibit 3
2000 Corporate and Business Unit Annual
Bonuses Plan Exhibit 10
Stock Option Agreement. Form of agreement Exhibit 10.1
under the Long Term Stock Incentive Plan dated
December 12, 1997.
Stock Option Agreement. Form of agreement used for Exhibit 10.2
award of non-incentive stock options to one
executive officer dated February 9, 2000.
Stock Option Agreement. Form of agreement used for Exhibit 10.3
award of non-incentive stock options to one
executive officer dated February 24, 2000.
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
(b) Reports on Form 8-K
Rights Agreement dated February 25, 2000 between 4
the Exhibit Company and Norwest Bank Minnesota,
National Association, as Rights Agent, including
as Exhibit A the form of the Certificate of
Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock. (Incorporated
by reference to Exhibit 4 to the Company's Report
on Form 8-K dated February 25, 2000.)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRACO INC.
Date: 04/27/2000 By: /s/George Aristides
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George Aristides
Chief Executive Officer
Date: 04/27/2000 By: /s/James A. Graner
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James A. Graner
Vice President & Controller
("duly authorized officer")