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 June 29, 2001
Commission File Number: 001-9249
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GRACO INC.
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(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)
88 - 11th Avenue N.E.
Minneapolis, Minnesota 55413
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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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31,109,237 common shares were outstanding as of July 27, 2001.
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 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-11
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Graco Inc. Stock Incentive Plan, dated May 1, 2001 Exhibit 10.1
Letter Agreement with President and Chief Executive
Officer, dated June 5, 2001 Exhibit 10.2
Executive Long Term Incentive Agreement. Form of agreement
used for award of restricted stock to one executive
officer, dated June 25, 2001 Exhibit 10.3
Key Employee Agreement between the Company and one
executive officer, dated June 25, 2001 Exhibit 10.4
Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to one executive
officer, dated June 25, 2001 Exhibit 10.5
Computation of Net Earnings per Common Share Exhibit 11
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
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Net Sales $130,873 $132,768 $240,687 $254,995
Cost of products sold 66,620 66,666 121,296 126,764
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Gross Profit 64,253 66,102 119,391 128,231
Product development 5,711 4,896 11,998 9,920
Selling, marketing and distribution 20,441 22,360 41,113 46,174
General and administrative 9,597 8,810 17,293 17,454
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Operating Earnings 28,504 30,036 48,987 54,683
Interest expense 355 1,302 805 2,537
Other expense 601 803 814 1,240
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Earnings Before Income Taxes 27,548 27,931 47,368 50,906
Income taxes 9,300 9,600 16,000 17,600
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Net Earnings $ 18,248 $ 18,331 $ 31,368 $ 33,306
========= ========= ========= =========
Basic Net Earnings
Per Common Share $ .59 $ .60 $ 1.02 $ 1.09
========= ========= ========= =========
Diluted Net Earnings
Per Common Share $ .58 $ .59 $ 1.00 $ 1.08
========= ========= ========= =========
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 29, 2001 Dec. 29, 2000
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ASSETS
Current Assets:
Cash and cash equivalents $ 7,215 $ 11,071
Accounts receivable, less allowances
of $4,900 and $4,700 89,555 85,836
Inventories 37,568 33,079
Deferred income taxes 11,286 11,574
Other current assets 2,725 2,182
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Total current assets 148,349 143,742
Property, Plant and Equipment:
Cost 196,546 186,872
Accumulated depreciation (107,403) (102,883)
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89,143 83,989
Other Assets 20,995 10,245
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$258,487 $237,976
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 11,890 $ 15,713
Current portion of long-term debt 1,050 1,310
Trade accounts payable 13,847 12,899
Salaries, wages and commissions 8,715 14,532
Accrued insurance liabilities 11,466 10,622
Income taxes payable 7,505 4,642
Other current liabilities 21,814 22,123
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Total current liabilities 76,287 81,841
Long-term Debt, less current portion 11,500 18,050
Retirement Benefits and Deferred Compensation 27,160 27,230
Shareholders' Equity:
Common stock 31,087 20,274
Additional paid-in capital 50,087 39,954
Retained earnings 63,386 50,233
Other, net (1,020) 394
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Total shareholders' equity 143,540 110,855
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$258,487 $237,976
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Twenty-six Weeks
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June 29, 2001 June 30, 2000
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Cash Flows from Operating Activities:
Net Earnings $31,368 $33,306
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 8,946 7,996
Deferred income taxes 123 (23)
Loss on sale of fixed assets 148 116
Change in:
Accounts receivable (2,520) (7,014)
Inventories (2,013) 697
Trade accounts payable 732 (2,197)
Salaries, wages and commissions (5,716) (1,538)
Retirement benefits and deferred (1,040) (2,035)
compensation
Other accrued liabilities 2,421 674
Other (1,064) (667)
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31,385 29,315
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Cash Flows from Investing Activities:
Property, plant and equipment additions (12,084) (5,932)
Proceeds from sale of property, plant and 105 78
equipment
Acquisition of business, net of cash acquired (15,949) -
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(27,928) (5,854)
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Cash Flows from (for) Financing Activities:
Borrowings on notes payable and lines of credit 106,130 109,026
Payments on notes payable and lines of credit (109,598) (110,496)
Borrowings on long-term debt 21,000 24,090
Payments on long-term debt (27,810) (31,715)
Common stock issued 10,951 6,949
Retirement of common stock (2,025) (18,966)
Cash dividends paid (6,123) (5,703)
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(7,475) (26,815)
Effect of exchange rate changes on cash 162 1,133
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Net increase (decrease) in cash and cash equivalents (3,856) (2,221)
Cash and cash equivalents:
Beginning of year 11,071 6,588
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End of Period $ 7,215 $ 4,367
======== =======
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 June 29, 2001, and the related statements of earnings for
the thirteen and twenty-six weeks ended June 29, 2001 and June 30, 2000,
and cash flows for the twenty-six weeks ended June 29, 2001 and June 30,
2000 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
June 29, 2001, 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 2000 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):
June 29, 2001 Dec. 29, 2000
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Finished products and components $27,053 $26,812
Products and components in various stages
of completion 21,508 20,153
Raw materials and purchased components 21,837 19,259
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70,398 66,224
Reduction to LIFO cost (32,830) ( 33,145)
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$37,568 $33,079
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GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Other assets consist of the following (in thousands):
June 29, 2001 Dec. 29, 2000
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Identifiable intangibles, net of accumulated
amortization of $3,828 and $2,761 $ 7,609 $ 5,576
Goodwill, net of accumulated amortization
of $278 and $67 7,993 52
Prepaid pension 4,541 2,976
Other 852 1,641
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$20,995 $10,245
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4. The Company has three reportable segments; Industrial/Automotive,
Contractor and Lubrication. The Company does not identify assets by
segment. Sales and operating profit by segment for the thirteen and
twenty-six weeks ended June 29, 2001 and June 30, 2000 were as follows (in
thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 29, 2001 June 30, 2000 June 29, 2001 June 30,2000
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Net Sales
Industrial/Automotive $ 51,449 $ 55,715 $ 99,098 $112,545
Contractor 66,776 66,036 116,677 120,518
Lubrication 12,648 11,017 24,912 21,932
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Consolidated $130,873 $132,768 $240,687 $254,995
======== ======== ======== ========
Operating Earnings
Industrial/Automotive $ 12,114 $ 13,760 $ 21,507 $ 26,267
Contractor 15,537 14,966 24,157 25,452
Lubrication 3,072 2,409 6,028 4,725
Unallocated Corporate
expenses (2,219) (1,099) (2,705) (1,761)
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Consolidated Operating
Earnings $ 28,504 $ 30,036 $ 48,987 $ 54,683
======== ======== ======== ========
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. There have been no significant changes to the components of comprehensive
income from those noted on the 2000 Form 10-K. Total comprehensive income
in 2001 was $17.6 million in the second quarter and $30.0 million
year-to-date. In 2000, comprehensive income was $18.4 million for the
second quarter and $32.6 million for the six-month period.
6. The adoption of Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" on
December 30, 2000, resulted in no transition adjustment. See Note A to
financial statements included in the Company's 2000 Form 10-K for a
description of the Company's use of derivative instruments and hedging
activities.
7. On March 19, 2001, the Company purchased ASM Company, Inc. ("ASM") for $16
million cash. ASM manufactures and markets spray tips, guns, poles and
other accessories for the professional painter, and had sales of
approximately $11 million in 2000.
The Company used the purchase method to account for the acquisition. Based
on the results of an independent appraisal, the purchase price was
allocated to net tangible assets of $5 million (net of assumed liabilities
totaling $2 million), identifiable intangible assets of $3 million and
goodwill of $8 million. Identifiable intangible assets include patents,
proprietary technologies, trade names, trademarks, customer list and a
non-compete agreement. Intangibles and goodwill are being amortized on a
straight-line basis over useful lives ranging from 2 to 10 years.
8. On July 20, 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets", which will be effective for
the Company in fiscal year 2002. The Company has not yet determined the
impact of SFAS 142 on its financial position and results of operations.
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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For the quarter, lower sales and reduced expenses resulted in net earnings very
close to last year's amount. For the six-month period, net earnings were 6
percent lower on a 6 percent decrease in sales. During the first half of 2001
sales were lower than the same period last year due to reduced demand resulting
from economic weakness and the adverse impacts of foreign currency exchange
rates.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
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Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 50.9 50.2 50.4 49.7
Product development 4.4 3.7 5.0 3.9
Selling, marketing and distribution 15.6 16.9 17.1 18.1
General and administrative 7.3 6.6 7.2 6.8
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Operating Earnings 21.8 22.6 20.3 21.5
Interest expense 0.3 1.0 0.3 1.0
Other (income) expense, net 0.5 0.6 0.3 0.5
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Earnings Before Income Taxes 21.0 21.0 19.7 20.0
Income taxes 7.1 7.2 6.7 6.9
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Net Earnings 13.9% 13.8% 13.0% 13.1%
============= ============= ============= =============
Net Sales
Weak economic conditions in North America led to reduced demand and lower sales
in the Industrial / Automotive segment during the first half of 2001. In the
Contractor segment, a second quarter increase in the paint store channel more
than offset a decrease in home center channel sales, which included more initial
stocking orders in 2000. Sales in the Lubrication segment exceeded 2000 sales
for both the three-month and six-month periods due mostly to large sales to key
customers and increased market share. Price increases have not had a significant
impact on sales during the first half of 2001.
Sales by geographic area were as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 29, 2001 June 30, 2000 June 29, 2001 June 30,2000
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Americas $ 97,095 $ 98,749 $ 76,088 $189,042
Europe 20,857 21,432 41,579 42,996
Asia Pacific 12,921 12,587 23,020 22,957
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Consolidated $130,873 $132,768 $240,687 $254,995
============= ============= ============= ============
Changes in foreign exchange rates have adversely impacted sales in 2001.
Translated at consistent exchange rates, sales would have been about 2 percent
higher for the both the quarter and year-to-date. For the six-month period,
Europe would have shown a 3 percent increase in sales compared to last year and
Asia Pacific region would have shown a 7 percent increase over prior year sales.
Gross Profit
Gross profit as a percentage of quarterly net sales dropped to 49.1 percent from
49.8 percent. For the six-month period, gross profit percentage decreased to
49.6 percent from 50.3 percent. The decrease was due mostly to the negative
impact of changes in exchange rates.
Operating Expenses
Total operating expenses for the quarter and year-to-date were lower than last
year. Product development expenses were up due to spending for significant new
product launches in the first part of the year. The Company has taken actions to
reduce the running rate of product development expense. Selling, marketing and
distribution expenses were down from prior year due in part to lower sales-based
incentives. In addition, the first half of last year included costs related to
the launch of Contractor products in the home center channel. General and
administrative expenses are up due mostly to the acquisition of ASM.
Interest Expense and Other Expense
Interest expense decreased due to reduced debt levels.
Liquidity and Capital Resources
- -------------------------------
The Company generated $31 million of cash flow from operating activities in the
first six months of 2001, compared to $29 million for the same period last year.
Significant uses of cash in 2001 include the construction of expanded
manufacturing, warehouse and office facilities in Minneapolis and the
acquisition of ASM.
The Company plans to move ASM operations from their current location in
California to expanded facilities in Sioux Falls, South Dakota. Estimated
incremental costs associated with the move, that would not benefit continuing
activities, were recognized as liabilities assumed in the acquisition and
included in the allocation of acquisition cost. Additional costs associated with
the move, that will benefit continuing operations, will be expensed as incurred.
The Company also plans to restructure the operations of its German subsidiary,
Graco Verfahrenstechnik (GV), including termination of approximately 50
employees, consolidation of product lines, termination of leases, and relocation
of operations to other Company facilities in Belgium and the U.S. No expense has
been recognized in connection with this plan because the amount of benefits to
be paid to terminating employees has not been established.
The Company estimates the costs of relocating ASM and GV will total
approximately $4 million, of which $1.5 million will be a restructuring charge
in the third quarter, with the remainder charged to operations as incurred over
the next twelve months. These moves are expected to enhance operating profit
beginning in the second half of 2002.
The Company had unused lines of credit available at June 29, 2001 totaling $67
million. The available credit facilities and internally generated funds provide
the Company with the financial flexibility to meet liquidity needs.
Outlook
The Company is concerned about the weak North American economy and an economic
slowdown in Europe. While internal sales growth will be challenged in difficult
economic conditions, the Company remains committed to maintaining a high level
of profitability through efficient manufacturing processes and cost containment.
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
2000.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 1, 2001, William G. Van Dyke,
Mark H. Rauenhorst and J. Kevin Gilligan were elected to the Office of Director
with the following votes:
FOR WITHHELD
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William G. Van Dyke 27,817,805 457,062
Mark H. Rauenhorst 27,807,475 467,392
J. Kevin Gilligan 27,805,087 469,778
At the same meeting, the following matters were also voted upon with the votes
as indicated:
The adoption of the Graco Inc. Stock Incentive Plan was approved, with the
following votes:
FOR AGAINST ABSTENTIONS BROKER NON-VOTE
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19,118,308 9,007,784 142,025 6,750
The selection of Deloitte & Touche LLP as independent auditors for the current
year was approved and ratified, with the following votes:
FOR AGAINST ABSTENTIONS BROKER NON-VOTE
- --- ------- ----------- ---------------
27,844,282 354,013 76,572 0
No other matters were voted on at the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
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10.1 Graco Inc. Stock Incentive Plan, dated May 1, 2001
10.2 Letter Agreement with President and Chief Executive Officer,dated
June 5, 2001
10.3 Executive Long Term Incentive Agreement. Form of agreement used
for award of restricted stock to one executive officer, dated
June 25, 2001
10.4 Key Employee Agreement between the Company and one executive
officer, dated June 25, 2001
10.5 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to one executive officer, dated
June 25, 2001
11 Computation of Net Earnings per Common Share
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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: July 31, 2001 By: /s/David A. Roberts
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David A. Roberts
Chief Executive Officer
Date: July 31, 2001 By: /s/James A. Graner
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James A. Graner
Vice President & Controller
("duly authorized officer")