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 September 24, 1999
Commission File Number: 001-9249
GRACO INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
- ------------------------ ---------------------------------------
(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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20,415,979 common shares were outstanding as of October 22, 1999.
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 8-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Amendment dated August 31, 1999, to Credit Agreement
Dated June 26, 1998 between the Company and
Wachovia Bank, N.A. Exhibit 4
Retirement and Release Agreement between Clayton R.
Carter and the Company, dated June 26, 1999. Exhibit 10
Separation and Release Agreement between Roger L. King
and the Company, dated August 10, 1999. Exhibit 10.1
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 Twenty Six Weeks Ended
----------------------------- ----------------------------
Sept 24, 1999 Sept 25, 1998 Sept 24, 1999 Sept 25,1998
(In thousands except per share amounts)
Net Sales $ 110,076 $ 106,202 $ 328,020 $ 327,072
Cost of products sold 52,566 52,221 158,034 163,059
------------- ------------- ------------- ------------
Gross Profit 57,510 53,981 169,986 164,013
Product development 4,845 4,369 14,370 13,867
Selling, marketing and distribution 19,049 19,725 57,289 63,922
General and administrative 9,599 9,920 28,729 32,339
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Operating Profit 24,017 19,967 69,598 53,885
Interest expense 1,661 2,569 5,472 2,967
Other (income) expense, net (187) 675 (2,579) 783
------------- ------------- ------------- ------------
Earnings Before Income Taxes 22,543 16,723 66,705 50,135
Income taxes 7,500 5,650 22,500 17,350
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Net Earnings $ 15,043 $ 11,073 $ 44,205 $ 32,785
============= ============= ============= ============
Basic Net Earnings
Per Common Share $ .74 $ .54 $ 2.19 $ 1.38
============= ============= ============= ============
Diluted Net Earnings
Per Common Share $ .72 $ .53 $ 2.12 $ 1.35
============= ============= ============= ============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept 24, 1999 Dec. 25, 1998
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ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 2,082 $ 3,555
Accounts receivable, less allowances
of $4,800 and $4,400 79,081 80,146
Inventories 36,293 34,018
Deferred income taxes 12,769 12,384
Other current assets 1,846 1,217
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Total current assets 132,071 131,320
Property, Plant and Equipment:
Cost 189,191 199,122
Accumulated depreciation (102,478) (102,756)
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86,713 96,366
Other Assets 13,219 6,016
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$ 232,003 $ 233,702
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 4,284 $ 14,560
Current portion of long-term debt 1,715 3,157
Trade accounts payable 10,349 11,965
Salaries, wages & commissions 13,137 14,025
Accrued insurance liabilities 11,153 10,809
Income taxes payable 6,391 5,134
Other current liabilities 22,284 23,316
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Total current liabilities 69,313 82,966
Long-Term Debt, less current portion 82,098 112,582
Retirement Benefits and Deferred Compensation 30,484 28,841
Shareholders' Equity:
Common stock 20,415 20,097
Additional paid-in capital 29,480 23,892
Retained deficit (1,639) (35,878)
Other, net 1,852 1,202
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Total shareholders' equity 50,108 9,313
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$ 232,003 $ 233,702
============= =============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks
------------------------------
Sept 24, 1999 Sept 25, 1998
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CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net Earnings $ 44,205 $ 32,785
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 11,451 10,975
Deferred income taxes (88) (1,052)
(Gain) loss on sale of fixed assets (3,147) 211
Change in:
Accounts receivable 2,534 2,100
Inventories 4,910 3,949
Trade accounts payable (1,554) (1,703)
Salaries, wages and commissions (656) (1,352)
Retirement benefits and deferred
compensation (715) (1,705)
Other accrued liabilities 689 4,507
Other 300 1,906
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57,929 50,621
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (5,947) (8,486)
Proceeds from sale of property, plant
and equipment 9,523 112
Acquisition of business (18,389) -
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(14,813) (8,374)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable and lines of credit 90,243 39,407
Payments on notes payable and lines of credit (100,585) (32,591)
Borrowings on long-term debt 25,001 176,200
Payments on long-term debt (56,821) (41,045)
Common stock issued 6,125 4,709
Retirement of common stock (3,468) (190,899)
Cash dividends paid (6,682) (8,491)
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(46,187) (52,710)
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Effect of exchange rate changes on cash 1,598 582
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Net increase in cash and cash equivalents (1,473) (9,881)
Cash and cash equivalents:
Beginning of period 3,555 13,523
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End of period $ 2,082 $ 3,642
============= =============
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 September 24, 1999, and the related statements of earnings for the
thirteen and thirty-nine weeks ended September 24, 1999 and September 25,
1998, and cash flows for the thirty-nine weeks ended September 24, 1999 and
September 25, 1998 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 the Company as of September 24,
1999, 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 1998 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):
Sept 26, 1999 Dec 25, 1998
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Finished products and components $ 32,397 $ 27,764
Products and components in various
stages of completion 20,865 23,024
Raw materials 18,551 18,970
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71,813 69,758
Reduction to LIFO cost (35,520) (35,740)
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$ 36,293 $ 34,018
============= ============
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 identified along
reportable segment lines. Sales and operating profit by segment for the
thirteen and thirty-nine weeks ended September 24, 1999 and September 25,
1998 are as follows (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- -----------------------------
Sept 24,1999 Sept 25,1998 Sept 24, 1999 Sept 25,1998
------------ ------------ ------------- ------------
Net Sales
Industrial/Automotive $ 56,982 $ 55,331 $ 161,677 $ 172,078
Contractor 42,988 39,785 134,402 121,432
Lubrication 10,106 11,086 31,941 33,562
------------ ------------ ------------- ------------
Total $ 110,076 $ 106,202 $ 328,020 $ 327,072
============ ============ ============= ============
Operating Profit
Industrial/Automotive $ 11,846 $ 10,345 $ 34,533 $ 26,969
Contractor 11,038 9,623 33,081 27,503
Lubrication 2,326 2,222 7,291 6,350
Unallocated Corporate
expenses (1,193) (2,223) (5,307) (6,937)
------------ ------------ ------------- ------------
Total $ 24,017 $ 19,967 $ 69,598 $ 53,885
============ ============ ============= ============
4. 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 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 SFAS 133, if
any.
5. The Company formed Graco Verfahrenstechnik (GV) which on June 1, 1999
purchased certain assets and assumed certain liabilities of Bollhoff
Verfahrenstechnik (BV), located in Bielefeld, Germany. BV designed,
manufactured and sold fluid application equipment for industrial and
automotive markets, primarily in Germany, and had 1998 sales of
approximately $20 million.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net earnings of $15.0 million and diluted earnings per share of $0.72 for the
quarter ended September 24, 1999 were up 36 percent from the third quarter of
1998. Reduced expenses and improved sales drove the quarterly performance. For
the nine months ended September 24, 1999, net earnings of $44.2 million are 35
percent higher than the earnings in the same period a year ago while diluted
earning per share of $2.12 are up 57 percent due to improved earnings and the
common stock repurchase in 1998. Year to date net earnings include a
non-recurring after-tax gain of $2.1 million, or $0.10 per diluted share, from
the sale of the Company's Plymouth, Michigan and Los Angeles facilities.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Third Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
September September September September
24, 1999 25, 1998 24, 1999 25, 1998
--------- --------- --------- ---------
Net Sales 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Cost of products sold 47.8 49.2 48.2 49.9
Product development 4.4 4.1 4.4 4.2
Selling, marketing and distribution 17.3 18.6 17.5 19.5
General and administrative 8.7 9.3 8.7 9.9
--------- --------- --------- ---------
Operating Profit 21.8 18.8 21.2 16.5
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Interest expense 1.5 2.5 1.7 1.0
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Other (income) expense, net (0.2) .6 (0.8) .2
--------- --------- --------- ---------
Earnings Before Income Taxes 20.5 15.7 20.3 15.3
Income taxes 6.8 5.3 6.9 5.3
--------- --------- --------- ---------
Net Earnings 13.7% 10.4% 13.4% 10.0%
========= ========= ========= =========
Net Sales
Net sales in the third quarter of $110.1 million were up 4 percent from the
third quarter of 1998. Year-to-date sales of $328.0 million were up slightly
when compared to last year.
Contractor Equipment segment sales were up 8 percent in the quarter and 11
percent year-to-date as the housing market in the North America has remained
strong. Industrial/Automotive segment sales were up slightly for the quarter but
remained below 1998 on a year-to-date basis primarily due to the Company's exit
from the custom designed systems business. Lubrication Equipment segment sales
were below 1998 in the third quarter due in part to a shift in promotional
activity from the third quarter last year into the fourth quarter of 1999.
Geographically, sales in the America's of $75.0 million were flat for the
quarter when compared to the same period last year. Year-to-date sales were up 3
percent from the first nine months of 1998. European sales of $18.4 million were
12 percent higher than last year's third quarter, and would have been 18 percent
higher with consistent exchange rates. Third quarter sales growth in Europe was
due primarily to Industrial/Automotive sales generated by Graco
Verfahrenstechnik, acquired in June of 1999. Year-to-date sales in Europe were
down 7 percent. Asia Pacific quarterly sales of $11.1 million increased 21
percent from last year (up 11 percent with consistent exchange rates) as
business improved throughout the Asia Pacific region, except in Japan. Sales in
Asia Pacific for the first nine months were up 13 percent from last year and
were up 5 percent with consistent exchange rates.
Gross Profit
Gross profit as a percentage of quarterly and year-to-date sales has risen to
52.2 and 51.8 percent, up 1.4 and 1.7 percentage points from the same periods in
1998. The increases were due primarily to the change in approach to serving the
automotive industry by providing pre-engineered packages rather than custom
designed systems, pricing and cost containment.
Operating Expenses
Third quarter operating expenses of $33.5 million decreased 2 percent from the
third quarter of 1999, despite the addition of GV. Selling, marketing and
distribution expenditures are down 10 percent in the first nine months of 1999,
when compared to the same period last year due primarily to restructuring of the
Company's industrial and automotive businesses in 1998. Year-to-date general and
administrative expenses were 11 percent lower than 1998 due largely to the
results of restructuring the Company's Asia Pacific operations last year and due
to decreased Year 2000 related expenditures.
Interest Expense
Interest expense was $1.6 and $5.5 million for the quarter and first nine months
of 1999, down significantly from the third quarter of 1998 as the Company
continues to pay down the debt related to the repurchase of 5.8 million shares
of the Company's common stock for $190.9 million in July of 1998.
Other Income (Expense)
Other income was $0.2 million in the third quarter of 1999, compared to $0.7
million expense in 1998. The third quarter of 1998 was unfavorably impacted by
the settlement of a lawsuit. Other income for the nine months ended September
24, 1999 included gains on the sale of real estate totaling $3.2 million.
Income Taxes
The third quarter and year-to-date income tax rates were 33 and 34 percent in
1999 versus 34 and 35 percent for the same periods in 1998.
Liquidity and Capital Resources
- -------------------------------
The Company generated $57.9 million of cash from operating activities in the
first nine months of 1999, compared to $50.6 million for the same period last
year. Cash flow from operating activities and $9.5 million received from the
sale of real estate was used to pay $18.6 million for a business acquisition. In
addition, the company made net payments on borrowings (short and long-term debt)
of $42.2 million in the first nine months of 1999. The company had unused lines
of credit available at September 24, 1999 totaling $83.1 million.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to define the applicable year, which could cause
potential failure or miscalculation in date-sensitive software that recognizes
"00" as 1900 rather than 2000.
The Company has nearly completed its program, begun in 1996, to ensure that all
information technology systems and non-information technology (non-IT) systems
will be Year 2000 compliant. The assessment phase of the Year 2000 Project
determined that the Company needed to modify or upgrade most of its mainframe
applications, operating systems, network hardware and software and desktop
hardware and software. In addition, many non-IT systems required upgrading or
replacement in order to ensure proper functioning beyond the year 1999.
The mainframe modification phase involving the conversion of core business
applications was completed in July 1998 and the operating systems' upgrades were
completed in November 1998. Testing of all mission critical mainframe
applications and databases was completed in June 1999. The network and desktop
upgrades, involving the replacement of certain hardware and software, was
substantially complete in September 1999.
The Company has incurred costs totaling approximately $6.2 million, including
$1.4 million in 1999, and estimates an additional $0.3 million will be spent in
the remainder of 1999 to resolve Year 2000 issues. These costs are charged to
expense as incurred and include software license fees and cost of persons
assigned to the project. Existing resources were redeployed and other projects
delayed to accommodate Year 2000 related projects. These delays are not expected
to have a material adverse impact on future results of operations or financial
condition.
Business continuation plans for critical business processes and applications
have been developed. These plans include adequate staffing on-site during the
Year 2000 date change to quickly repair any errant applications. In addition in
the event of any problems, the Company will follow its current computer outage
business continuation plans until such problems are corrected.
Approximately 300 non-IT applications were identified at the Company. Non-IT
applications are primarily microprocessors and other electronic controls
embedded in non-computer equipment used by the Company. All business critical,
and substantially all non-business critical non-IT applications were compliant
as of September 1999. Conversion of the remaining non-IT applications will
continue through the remainder of 1999.
The Company has a very limited number of products with embedded controls and
does not believe there are any Year 2000 compatibility issues with these
products. The Company has very few customers whose loss of business would be
material to the Company. It is not aware of any Year 2000 issues with these
customers that would have a material adverse impact on the Company's results.
The Company had discussions with, and sent questionnaires to, its suppliers to
assess their Year 2000 readiness. The Company is not aware of any Year 2000
issues with its suppliers that would have a material impact on the Company's
results.
Management believes that sufficient resources have been allocated and project
plans are in place to avoid any adverse material impact on operations or
operating results. However, there can be no guarantee that the Company's systems
were successfully converted and that Year 2000 problems will not have an adverse
effect on the Company. The Year 2000 efforts of third parties are not within the
Company's control and their failure to respond to Year 2000 issues successfully
could result in business disruption and increased operating costs to the
Company. At the present time, it is not possible to determine whether any such
events are likely to occur, or to quantify any potential impact they may have on
the Company's future results of operations and financial condition.
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the company's disclosures under the
heading: "SAFE HARBOR CAUTIONARY STATEMENT" below.
Outlook
- -------
The company is optimistic that sales growth will continue for the remainder of
the year while maintaining gross profit percentages.
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, the results of the efforts of
the Company, its suppliers and customers to avoid any adverse effect as a result
of the Year 2000 issue, and additional factors identified in Exhibit 99 to the
Company's Report on Form 10-K for fiscal year 1998.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Amendment dated August 31, 1999, to Credit
Agreement dated June 26, 1998 between the Company
and Wachovia Bank, N.A. Exhibit 4
Retirement and Release Agreement between Clayton R.
Carter and the Company dated June 26, 1999. Exhibit 10
Separation and Release Agreement between Roger L.
King and the Company, dated August 10, 1999. Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
(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: October 27, 1999 By: /s/James A. Earnshaw
---------------- -----------------------------------------
James A. Earnshaw
President & Chief Executive Officer
Date: October 27, 1999 By: /s/James A. Graner
---------------- -----------------------------------------
James A. Graner
Vice President & Controller
(duly authorized officer)