Graco - 10-Q quarterly report FY2010 Q1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the quarterly period ended March 26, 2010

Commission File Number: 001-09249

(612) 623-6000

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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

60,604,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of April 15, 2010.

The Company designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid materials. Management classifies the Company’s business into three reportable segments: Industrial, Contractor and Lubrication. Key strategies include developing and marketing new products, expanding distribution globally, opening new markets with technology and channel expansion and completing strategic acquisitions.

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying notes to the financial statements.

Net sales, net earnings and earnings per share were as follows (in millions except per share amounts and percentages):

Sales, gross profit margins and net earnings improved significantly compared to last year. Sales increased in all segments and geographic regions. Currency translation had a favorable effect on sales ($5 million) and net earnings ($2 million). Costs of $4 million related to a workforce reduction were included in last year’s results.

Sales by geographic area were as follows (in millions):

¹ North and South America, including the U.S.
² Europe, Africa and Middle East

Sales in Asia Pacific increased 65 percent (55 percent at consistent translation rates), accounting for more than half of the increase in sales. In Europe, sales increased 17 percent (11 percent at consistent translation rates). Sales in the Americas increased 8 percent.

Gross profit margin, expressed as a percentage of sales, was 54 percent, up from 47 percent for the first quarter last year. The increase included approximately 1¹/2 percentage points from the favorable effects of currency translation. Costs related to workforce reductions lowered the 2009 first quarter gross margin rate approximately 2 percentage points. Higher production volume in 2010 contributed approximately 1¹/2 percentage points to the increase in gross margin rate. Lower material and pension costs and price increases also contributed to the increase in 2010 margin rate.

Total operating expenses were down 3 percent. The effect of cost reduction actions in 2008 and 2009 and lower pension expense were partially offset by the effects of currency translation and increases in bad debt expense and incentives.

The effective income tax rate of 34¹/2 percent was 1 percentage point higher in 2010 compared to 2009. The federal R&D credit has not been renewed for 2010, so no credit was included in the 2010 rate.

Certain measurements of segment operations compared to last year are summarized below:

Industrial

Industrial segment sales increased 17 percent in the Americas, 17 percent in Europe (11 percent at consistent translation rates) and 74 percent in Asia Pacific (65 percent at consistent translation rates.)

Higher volume and lower costs and expenses (from actions taken in 2009 and 2008), along with currency translation and price increases, contributed to the improvement in operating earnings as a percentage of sales.

Contractor

Contractor segment sales were flat in the Americas, increased 16 percent in Europe (10 percent at consistent translation rates) and increased 30 percent in Asia Pacific (20 percent at consistent translation rates).

The increase in sales volume along with improved gross margin rate drove the increase in operating earnings. Overall, segment expenses were flat compared to last year, although product development spending increased as work neared completion on a new product release.

Lubrication

Lubrication segment sales were flat in the Americas. From small bases, sales increased 33 percent in Europe (27 percent at consistent translation rates) and 95 percent in Asia Pacific (73 percent at consistent translation rates).

Higher volume and lower costs and expenses (from actions taken in 2009 and 2008), along with currency translation, contributed to the improvement in operating earnings as a percentage of sales.

In the first quarter of 2010, the Company used cash to reduce borrowings under its long-term line of credit by $6 million and paid dividends of $12 million. Significant uses of cash and borrowings in the first quarter of 2009 included $13 million for reduction of borrowings under the long-term line of credit and $11 million for payment of dividends.

Since the end of 2009, inventories increased by $8 million to meet higher demand. Accounts receivable increased by $18 million due to higher sales levels.

At March 26, 2010, the Company had various lines of credit totaling $270 million, of which $178 million was unused. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2010.

Management remains cautious about the short-term base business prospects of the Contractor segment in North America and Western Europe, as the residential construction recovery is still weak and commercial construction markets remain depressed. New product introductions in Contractor may provide some upside to the difficult end-market conditions as the year progresses.

While the improvement in the Lubrication segment is encouraging, a return to historical operating margins will require significant additional volume as the segment continues to invest in growth initiatives.

During the recession, management remained committed to making significant organic growth investments in new product development, international sales people and global distribution channel. While these investments weigh on short-term profitability, especially in the face of significant revenue declines, we are confident that this approach has positioned the Company well to deliver solid long-term shareholder returns.

A forward-looking statement is any statement made in this report and other reports that the Company files periodically with the Securities and Exchange Commission, or in press or earnings releases, analyst briefings and conference calls, which reflects the Company’s current thinking on market trends and the Company’s future financial performance at the time they are made. All forecasts and projections are forward-looking statements.

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 by making cautionary statements concerning any forward-looking statements made by or on behalf of the Company. The Company cannot give any assurance that the results forecasted in any forward-looking statement will actually be achieved. Future results could differ materially from those expressed, due to the impact of changes in various factors. These risk factors include, but are not limited to: economic conditions in the United States and other major world economies, currency fluctuations, political instability, changes in laws and regulations, and changes in product demand. Please refer to Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2009 for a more comprehensive discussion of these and other risk factors.

Investors should realize that factors other than those identified above and in Item 1A and Exhibit 99 might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer, the Chief Financial Officer and Treasurer, the Vice President and Controller, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company’s disclosure obligations under the Exchange Act.

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

On September 18, 2009, the Board of Directors authorized the Company to purchase up to 6,000,000 shares of its outstanding common stock, primarily through open-market transactions. The authorization expires on September 30, 2012.

In addition to shares purchased under the Board authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax withholding on option exercises.

Information on issuer purchases of equity securities follows:

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.