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 26, 2008
Commission File Number: 001-09249
GRACO INC.
(Exact name of registrant as specified in its charter)
Minnesota
41-0285640
(State of incorporation)
(I.R.S. Employer Identification Number)
88 - 11th Avenue N.E.
Minneapolis, Minnesota
55413
(Address of principal executive offices)
(Zip Code)
(612) 623-6000
(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
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.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
59,513,000 shares of the Registrant’s Common Stock, $1.00 par value were outstanding as of October 16, 2008.
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
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Item 1A.
Risk Factors
21
Unregistered Sales of Equity Securities and Use of Proceeds
Submission of Matters to a Vote of Security Holders
22
Item 6.
Exhibits
SIGNATURES
EXHIBITS
2
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands except per share amounts)
Thirteen Weeks Ended
Thirty-nine Weeks Ended
Sep 26,
Sep 28,
2008
2007
Net Sales
$ 207,231
$ 207,270
$ 650,581
$ 636,149
Cost of products sold
97,071
96,624
299,805
298,409
Gross Profit
110,160
110,646
350,776
337,740
Product development
9,626
7,087
26,605
22,903
Selling, marketing and distribution
32,420
30,382
102,083
91,562
General and administrative
15,585
14,641
50,142
44,938
Operating Earnings
52,529
58,536
171,946
178,337
Interest expense
1,934
1,034
5,443
Other expense, net
623
39
606
25
Earnings Before Income Taxes
49,972
57,463
165,897
176,378
Income taxes
17,200
18,200
55,100
59,200
Net Earnings
$ 32,772
$ 39,263
$ 110,797
$ 117,178
Basic Net Earnings
per Common Share
$ 0.55
$ 0.61
$ 1.83
$ 1.78
Diluted Net Earnings
$ 0.54
$ 0.60
$ 1.81
$ 1.75
Cash Dividends Declared
$ 0.19
$ .17
$ 0.50
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(In thousands)
Sep 26, 2008
Dec 28, 2007
ASSETS
Current Assets
Cash and cash equivalents
$ 5,250
$ 4,922
Accounts receivable, less allowances of
$6,600 and $6,500
146,820
140,489
Inventories
95,313
74,737
Deferred income taxes
25,609
21,650
Other current assets
5,624
7,034
Total current assets
278,616
248,832
Property, Plant and Equipment
Cost
322,933
306,073
Accumulated depreciation
(176,030)
(165,479)
Property, plant and equipment, net
146,903
140,594
Prepaid Pension
34,264
31,823
Goodwill
87,224
67,204
Other Intangible Assets, net
53,505
41,889
Other Assets
6,884
6,382
Total Assets
$ 607,396
$ 536,724
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to banks
$ 16,519
$ 18,991
Trade accounts payable
24,559
27,379
Salaries, wages and commissions
19,408
20,470
Dividends payable
11,016
11,476
Other current liabilities
48,063
47,561
Total current liabilities
119,565
125,877
Long-term Debt
191,855
107,060
Retirement Benefits and Deferred Compensation
40,428
40,639
Uncertain Tax Positions
1,800
5,400
Deferred Income Taxes
19,257
13,074
Shareholders' Equity
Common stock
59,522
61,964
Additional paid-in-capital
172,107
156,420
Retained earnings
10,111
32,986
Accumulated other comprehensive income (loss)
(7,249)
(6,696)
Total shareholders' equity
234,491
244,674
Total Liabilities and Shareholders' Equity
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
Sep 28, 2007
Cash Flows From Operating Activities
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation and amortization
23,310
20,770
(3,850)
(3,059)
Share-based compensation
7,072
6,297
Excess tax benefit related to share-based
payment arrangements
(2,923)
(4,154)
Change in
Accounts receivable
(4,989)
(7,383)
(16,466)
(907)
(775)
(1,477)
(1,236)
(7,697)
Retirement benefits and deferred compensation
(2,141)
(1,848)
Other accrued liabilities
788
6,150
Other
1,114
(1,589)
Net cash provided by operating activities
110,701
122,281
Cash Flows From Investing Activities
Property, plant and equipment additions
(20,778)
(28,207)
Proceeds from sale of property, plant and equipment
1,633
207
Investment in life insurance
(1,499)
Capitalized software and other intangible asset additions
(1,130)
(43)
Acquisitions of businesses, net of cash acquired
(39,780)
--
Net cash used in investing activities
(61,554)
(29,542)
Cash Flows From Financing Activities
Net borrowings (payments) on short-term lines of credit
(2,779)
(1,704)
Borrowings on long-term line of credit
188,869
85,680
Payments on long-term line of credit
(104,074)
2,923
4,154
Common stock issued
13,528
22,545
Common stock retired
(114,341)
(164,910)
Cash dividends paid
(33,693)
(32,800)
Net cash provided by (used in) financing activities
(49,567)
(87,035)
Effect of exchange rate changes on cash
748
(1,804)
Net increase (decrease) in cash and cash equivalents
328
3,900
4,922
5,871
$ 9,771
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of September 26, 2008 and the related statements of earnings for the thirteen and thirty-nine weeks ended September 26, 2008 and September 28, 2007, and cash flows for the thirty-nine weeks ended September 26, 2008 and September 28, 2007 have been prepared by the Company and have not been audited.
In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Graco Inc. and Subsidiaries as of September 26, 2008, 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 2007 Annual Report on 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.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Net earnings available to
common shareholders
Weighted average shares
outstanding for basic
earnings per share
59,769
64,797
60,521
65,836
Dilutive effect of stock
options computed using the
treasury stock method and
the average market price
596
921
647
998
outstanding for diluted
60,365
65,718
61,168
66,834
Basic earnings per share
Diluted earnings per share
Stock options to purchase 2,114,000 and 1,043,000 shares were not included in the 2008 and 2007 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
3.
Information on option shares outstanding and option activity for the thirty-nine weeks ended September 26, 2008 is shown below (in thousands, except per share amounts):
Weighted
Average
Option
Exercise
Options
Shares
Price
Exercisable
Outstanding, December 28, 2007
3,779
$ 28.63
2,228
$ 21.41
Granted
779
36.23
Exercised
(412)
16.66
Canceled
(210)
38.94
Outstanding, September 26, 2008
3,936
$ 30.85
2,193
$ 24.94
The aggregate intrinsic value of exercisable option shares was $25.4 million as of September 26, 2008, with a weighted average contractual term of 4.5 years. There were approximately 3.9 million vested share options and share options expected to vest as of September 26, 2008, with an aggregate intrinsic value of $25.4 million, a weighted average exercise price of $30.76 and a weighted average contractual term of 6.4 years.
Information related to options exercised in the first nine months of 2008 and 2007 follows (in thousands):
Cash received
$ 6,864
$ 15,290
Aggregate intrinsic value
8,645
16,625
Tax benefit realized
3,100
6,200
The Company recognized year-to-date share-based compensation of $7.1 million in 2008 and $6.3 million in 2007. As of September 26, 2008, there was $9.8 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.3 years.
7
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:
Expected life in years
6.0
Interest rate
3.2%
4.7%
Volatility
25.0%
26.1%
Dividend yield
2.1%
1.6%
Weighted average fair value per share
$ 8.43
$ 12.01
Under the Company’s Employee Stock Purchase Plan, the Company issued 216,000 shares in 2008 and 202,000 shares in 2007. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:
1.0
1.5%
4.9%
27.1%
24.4%
$ 8.14
$ 9.79
8
Pension Benefits
Service cost
$ 920
$ 1,231
$ 3,724
$ 4,211
Interest cost
2,896
2,855
9,186
8,622
Expected return on assets
(4,536)
(4,496)
(14,236)
(14,096)
Amortization and other
233
204
528
749
Net periodic benefit cost (credit)
$ (487)
$ (206)
$ (798)
$ (514)
Postretirement Medical
$ 168
$ 75
$ 418
$ 375
286
360
1,036
975
Amortization
(13)
(518)
55
$ 441
$ (83)
$ 1,441
$ 1,405
The Company paid $1.5 million in June 2008 and $1.5 million in June 2007 for contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts will be used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company’s insolvency. Cash surrender value of $2.7 million and $1.5 million is included in other assets in the consolidated balance sheet as of September 26, 2008 and December 28, 2007, respectively.
5.
Total comprehensive income was as follows (in thousands):
Net earnings
Cumulative translation
adjustment
(346)
88
(377)
202
Pension and postretirement
medical liability adjustment
164
64
353
194
Gain (loss) on interest
rate hedge contracts
(211)
(89)
(634)
23
9
107
(40)
Comprehensive income
$ 32,402
$ 39,335
$ 110,246
$ 117,445
Components of accumulated other comprehensive income (loss) were (in thousands):
Pension and postretirement medical liability adjustment
$ (5,449)
$ (5,672)
Gain (loss) on interest rate hedge contracts
(1,471)
(1,072)
Cumulative translation adjustment
(329)
48
Total
$ (7,249)
$ (6,696)
6.
The Company has three reportable segments: Industrial, Contractor and Lubrication. The Company does not track assets by segment. Sales and operating earnings by segment for the thirteen and thirty-nine weeks ended September 26, 2008 and September 28, 2007 were as follows (in thousands):
Industrial
$ 117,685
$ 107,791
$ 365,028
$ 327,137
Contractor
67,751
76,649
215,992
240,631
Lubrication
21,795
22,830
69,561
68,381
Consolidated
$ 35,874
$ 37,597
$ 117,847
$ 111,570
15,226
21,016
49,663
66,662
3,409
2,584
12,333
7,844
Unallocated corporate (expense)
(1,980)
(2,661)
(7,897)
(7,739)
$ 52,529
$ 58,536
$ 171,946
$ 178,337
7.
Major components of inventories were as follows (in thousands):
Finished products and components
$ 53,954
$ 46,677
Products and components in various
stages of completion
31,068
24,805
Raw materials and purchased components
43,977
37,311
128,999
108,793
Reduction to LIFO cost
(33,686)
(34,056)
$ 95,313
$ 74,737
10
8.
Information related to other intangible assets follows (dollars in thousands):
Estimated
Foreign
Life
Original
Accumulated
Currency
Book
(years)
Translation
Value
September 26, 2008
Customer relationships
3 - 8
$ 37,820
$ (11,852)
$ (40)
$ 25,928
Patents, proprietary technology
and product documentation
3 - 15
23,858
(10,373)
(17)
13,468
Trademarks, trade names
and other
3 - 10
4,714
(3,524)
1,199
66,392
(25,749)
(48)
40,595
Not Subject to Amortization:
Brand names
12,910
-
$ 79,302
$ (25,749)
$ (48)
$ 53,505
December 28, 2007
Customer relationships and
distribution network
4 - 8
$ 26,102
$ (11,092)
$ 29
$ 15,039
5 - 15
22,243
(7,720)
16
14,539
4,684
(2,555)
2,151
53,029
(21,367)
67
31,729
10,160
$ 63,189
$ (21,367)
$ 67
$ 41,889
Amortization of intangibles was $2.7 million in the third quarter of 2008 and $7.6 million year-to-date. Estimated annual amortization expense is as follows: $10.1 million in 2008, $9.7 million in 2009, $8.7 million in 2010, $7.7 million in 2011, $7.0 million in 2012 and $5.0 million thereafter.
11
9.
Accrued self-insurance retentions
$ 8,098
$ 7,842
Accrued warranty and service liabilities
7,591
7,084
Accrued trade promotions
5,727
6,480
Payable for employee stock purchases
4,107
5,829
Income taxes payable
3,132
678
19,648
$ 48,063
$ 47,561
A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):
Thirty-nine
Weeks Ended
Year Ended
Balance, beginning of year
$ 7,084
$ 6,675
Charged to expense
4,931
6,053
Margin on parts sales reversed
3,014
3,186
Reductions for claims settled
(7,438)
(8,830)
Balance, end of period
$ 7,591
10.
The examination of the Company’s U.S. income tax returns for 2004 and 2005 was completed in the first quarter of 2008. Completion of the examination resulted in a payment of approximately $1 million and reductions of uncertain tax positions totaling approximately $4 million. The settlement of the examination decreased the Company’s effective tax rate for the year-to-date to 33 percent.
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2002.
12
11.
In February 2008, the Company acquired GlasCraft Inc. for approximately $35 million cash. GlasCraft has an office and manufacturing facility in Indianapolis, Indiana and had sales of approximately $18 million in 2007. It designs, manufactures and sells spray systems for the composites manufacturing industry and high performance dispense systems for the polyurethane foam and polyurea coatings industries. The products, brands, distribution channels and engineering capabilities of GlasCraft expand and complement the Company’s Industrial Equipment business.
The purchase price was allocated based on estimated fair values as follows (in thousands):
Accounts receivable and prepaid expenses
$ 2,200
3,700
700
Property, plant and equipment
Identifiable intangible assets
17,700
Total purchase price
43,200
Current liabilities assumed
(1,000)
(6,900)
Net assets acquired
$ 35,300
Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):
Product documentation (5 years)
$ 900
Customer relationships (6 years)
14,100
Proprietary technology (3 years)
500
15,500
Brand name (indefinite useful life)
2,700
Total identifiable intangible assets
$18,200
None of the goodwill or identifiable intangible assets is expected to be deductible for tax purposes.
In fiscal September, the Company acquired the assets of Lubrication Scientifics, Inc. (LubeSci) for approximately $5 million cash. LubeSci designed and manufactured automated lubrication equipment used in industrial markets and had sales of approximately $3 million in 2007.
The purchase price has not been finalized and is subject to final determination of acquired asset and liability balances. The preliminary purchase price was allocated based on estimated fair values as follows (in thousands):
13
Inventories and other current assets
$ 500
600
900
2,500
$ 4,500
Customer relationships (5 years)
$ 600
Proprietary technology (5 years)
300
Total (5 years)
Goodwill and identifiable intangible assets are expected to be deductible for tax purposes.
12.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements.” This statement establishes a consistent framework for measuring fair value and expands disclosures on fair value measurements. SFAS No. 157 was effective for the Company starting in fiscal 2008 with respect to financial assets and liabilities. The impact of the initial adoption of SFAS No. 157 in 2008 had no impact on the consolidated financial statements.
The Company uses significant other observable inputs to value the derivative instruments used to hedge interest rate volatility and net monetary positions. The fair market value of such instruments follows (in thousands):
$ (2,334)
$ (1,700)
Gain (loss) on foreign currency forward contracts
324
(282)
$ (2,010)
$ (1,982)
With respect to non-financial assets and liabilities, SFAS No. 157 is effective for the Company starting in fiscal 2009. The Company has not determined the impact, if any, the adoption of this statement as it pertains to non-financial assets and liabilities will have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This statement expands disclosures but does not change accounting for derivative instruments and hedging activities. The statement is effective for the Company starting in fiscal 2009.
13.
In October, the Company acquired the Airlessco® assets of Durotech Co. for approximately $15 million cash. Airlessco® is a line of spray-painting equipment that complements the Company’s Contractor Equipment business.
14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 development of new products, expansion of distribution, new market penetration and completion of 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.
Results of Operations
Net sales, net earnings and earnings per share were as follows (in millions except per share amounts and percentages):
%
Change
$ 207.2
$ 207.3
(0)%
$ 650.6
$ 636.1
2 %
$ 32.8
$ 39.3
(17)%
$ 110.8
$ 117.2
(5)%
(10)%
3 %
Foreign currency translation rates had a favorable impact on sales and net earnings. Translated at consistent exchange rates, sales for the quarter and year-to-date were 2 percent and 1 percent lower than last year, respectively, and net earnings decreased 20 percent for the quarter and 12 percent year-to-date.
Sales include $9 million from GlasCraft operations since the date of acquisition, with $3.5 million in the third quarter.
Deteriorating economic conditions in the U.S. and other parts of the world affected sales growth. Strategic investments in product and market development, along with rising costs of doing business, continued to apply pressure on earnings.
Purchases and retirement of approximately 3.1 million shares of Company common stock, including approximately 0.9 million shares in the third quarter, had a positive impact on earnings per share.
Consolidated Results
Sales by geographic area were as follows (in millions):
Americas 1
$ 112.8
$ 124.4
$ 360.5
$ 386.4
Europe 2
57.8
53.1
189.4
161.1
Asia Pacific
36.6
29.8
100.7
88.6
1 North and South America, including the U.S.
2 Europe, Africa and Middle East
Growth in Europe and Asia Pacific offset decreases in contractor and lubrication sales in the Americas. In Europe, sales for the quarter and year-to-date were 9 percent and 18 percent higher than last year, respectively. Translated at consistent exchange rates, sales in Europe increased 2 percent for the quarter and 7 percent year-to-date. Sales in Asia Pacific increased by 23 percent for the quarter and 14 percent year-to-date.
Gross profit margin, expressed as a percentage of sales, was 53.2 percent for the quarter, close to last year’s percentage of 53.4 percent. Changes in geographic and product sales mix in Europe affected the margin rate for the quarter. Year-to-date gross profit margin percentage was 53.9 percent, up from 53.1 percent last year. Favorable currency translation rates added 1.1 percentage points to the year-do-date gross profit margin rate. The effects of higher material and other costs on gross margin rate have been offset by the impact of pricing and manufacturing efficiencies.
Operating expenses are up 11 percent for the quarter and 12 percent for the year-to-date. The effects of currency translation contributed approximately 2 percentage points of the increase for the quarter and 3 percentage points year-to-date. Operating expenses in 2008 include $1.5 million for the quarter from acquired GlasCraft operations and $4 million year-to-date. Continued strategic investments in product and market development also contributed to the increase in operating expenses, including expenses related to the introduction of new product lines in the home center channel, new product development teams and additional sales and marketing personnel in developing countries. Compared to last year, product development expense was up $2.5 million for the quarter and $3.7 million year-to-date.
Year-to-date interest expense is $3.5 million higher than last year due to borrowings used for the purchase and retirement of Company shares and for business acquisitions. Graco repurchased approximately 3.1 million shares of its common stock for $114 million in the first nine months of 2008.
The Company’s effective tax rate for the third quarter was 34 percent, up from 32 percent last year. The lower rate in 2007 resulted from expiring statutes of limitations and a higher than expected benefit upon filing of prior year tax returns. The completion of the examination of the Company’s income tax returns in the first quarter of 2008 resulted in a lower year-to-date effective tax rate compared to last year.
Segment Results
Certain measurements of segment operations compared to last year are summarized below:
Net sales (in millions)
Americas
$ 54.1
$ 51.6
$ 169.0
$ 156.7
Europe
36.4
34.7
122.2
104.0
27.2
21.5
73.8
66.4
$ 117.7
$ 107.8
$ 365.0
$ 327.1
Operating earnings as a
percentage of net sales
30%
35%
32%
34%
Strong sales in Asia Pacific (up 27 percent) drove the increase in Industrial segment sales for the quarter. Sales in this segment were 5 percent higher in the Americas and in Europe, although the increase in Europe came from currency translation. Year-to-date sales in this segment are up 18 percent in Europe (approximately 11 percentage points from currency translation), 11 percent in Asia Pacific and 8 percent in the Americas. Most of the sales growth in this segment came from high performance coatings and foam products.
Operating earnings in this segment were affected by selling and product development initiatives and costs and expenses resulting from acquisition and integration related activities. The move of GlasCraft operations from Indiana to the Company’s facilities in Ohio, South Dakota and Minnesota will be completed in the fourth quarter.
$ 41.7
$ 53.5
$ 135.5
$ 171.2
19.4
16.6
61.3
52.1
6.7
6.6
19.2
17.3
$ 67.8
$ 76.7
$ 216.0
$ 240.6
22%
27%
23%
28%
In the Contractor segment, sales growth in Europe lessened the impact of continued softness in both the North American paint store and home center channels. Sales for the quarter in this segment were up 16 percent in Europe (including 6 percentage points from currency translation), flat in Asia Pacific and down 22 percent in the Americas. Year-to-date increases in Europe (18 percent increase, including 11 percentage points from currency translation) and in
17
Asia Pacific (11 percent increase, including 2 percentage points from currency translation) were not enough to offset the 21 percent decrease in the Americas.
The decrease in sales without a corresponding decrease in expenses had a large impact on the operating earnings of this segment. Strategic spending in this segment was for developing products for new markets and the launch and production of new paint sprayer units in the home center channel.
$ 17.0
$ 19.3
$ 56.1
$ 58.4
2.1
1.8
5.8
5.1
2.7
1.7
7.7
4.9
$ 21.8
$ 22.8
$ 69.6
$ 68.4
16%
11%
18%
In the Lubrication segment, third quarter sales increases in Europe and Asia Pacific were not enough to offset a decrease in the Americas. Year-to-date, the increases in Europe and Asia Pacific offset the decrease in the Americas.
Improvement in year-to-date operating profitability is related to the integration and consolidation of Lubrication operations completed in 2007, although segment profitability has also been affected by a sales decline in the higher-margin vehicle services products.
Management intends to integrate all LubeSci operations (acquired in fiscal September) into the Company’s facility in Anoka, MN.
Liquidity and Capital Resources
In the first nine months of 2008, the Company used cash and borrowings under its long-term line of credit to purchase and retire $114 million of Company shares. Other significant uses of cash included $40 million for business acquisitions, $34 million for payment of dividends and $21 million for capital additions. Significant uses of cash in the first nine months of 2007 included $165 million for purchases and retirement of Company common stock, $33 million for payment of dividends and $28 million for capital additions.
The increase in inventories since the end of 2007 reflects the acquisition of GlasCraft operations, the higher level of business activity in Europe and Asia Pacific, and a buildup to improve service levels and facilitate integration activities.
At September 26, 2008, the Company had various lines of credit totaling $303 million, of which $98 million was unused. Internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs.
18
Outlook
The renewal of R&D tax credits will have a favorable impact, estimated at approximately $1.5 million, on the Company’s provision for income taxes and effective tax rate for the fourth quarter.
While economic conditions have made it difficult to see progress, management continues to implement strategies for business growth. The addition of the Airlessco® product line in October complements the Company’s contractor business and the LubeSci acquisition in late August expands its presence in the industrial lubrication business. The strength of the Company’s Industrial and international business thus far has softened the effect on financial results. As difficult economic conditions spread to other parts of the world, management will monitor and manage the business accordingly. The Company’s strong financial condition and cash flow enable management to continue making long-term investments in key growth strategies including new product development, expanding distribution, entering new markets and pursuing strategic acquisitions.
SAFE HARBOR CAUTIONARY STATEMENT
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 2007 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.
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There have been no material changes related to market risk from the disclosures made in the Company’s 2007 Annual Report on Form 10-K.
Evaluation of disclosure controls and procedures
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.
Changes in internal controls
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.
There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2007 Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
On September 28, 2007, the Board of Directors authorized the Company to purchase up to 7,000,000 shares of its outstanding common stock, primarily through open-market transactions. This authorization expires on September 30, 2009.
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:
Maximum
Number of
Number
Shares that
of Shares
May Yet Be
Purchased
as Part of
Under the
Publicly
Plans or
Announced
Programs
Paid per
(at end of
Period
Share
period)
Jun 28, 2008 – Jul 25, 2008
408,566
$ 37.95
3,542,234
Jul 26, 2008 – Aug 22, 2008
399,000
$ 37.40
3,143,234
Aug 23, 2008 – Sep 26, 2008
60,000
$ 37.24
3,083,234
None.
31.1
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a).
32
Certification of the President and Chief Executive Officer and the Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C.
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.
Date:
October 22, 2008
By:
/s/Patrick J. McHale
Patrick J. McHale
President and Chief Executive Officer
(Principal Executive Officer)
/s/James A. Graner
James A. Graner
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/Caroline M. Chambers
Caroline M. Chambers
Vice President and Controller
(Principal Accounting Officer)