Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d) of theSecurities Exchange Act of 1934
For the quarterly period ended June 27, 2003
Commission File Number:001-9249
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 is an accelerated filer (as defined in Rule 12b-2 of the Act).
45,800,000 common shares were outstanding as of July 25, 2003.
INDEX
Page Number
See notes to consolidated financial statements.
The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of June 27, 2003, and the related statements of earnings for the thirteen and twenty-six weeks ended June 27, 2003 and June 28, 2002, and cash flows for the twenty-six weeks ended June 27, 2003 and June 28, 2002 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 27, 2003, 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 2002 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.
The Company accounts for stock option and purchase plans using the intrinsic value method and has adopted the “disclosure only” provisions of Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” No compensation cost has been recognized for the Employee Stock Purchase Plan and stock options granted under the various stock incentive plans.
Had compensation cost been determined based upon fair value (using the Black-Scholes option-pricing method) at the grant date for awards under these plans, the Company’s net earnings and earnings per share would have been reduced as follows (in thousands, except per share amounts):
Total comprehensive income in 2003 was $24.5 million in the second quarter and $42.9 million year-to-date. In 2002, comprehensive income was $21.5 million for the second quarter and $37.1 million for the six-month period. There have been no significant changes to the components of comprehensive income from those noted on the 2002 Form 10-K .
The Company has three reportable segments; Industrial/Automotive, Contractor and Lubrication. The Company does not identify assets by segment. Sales and operating earnings by segment for the thirteen and twenty-six weeks ended June 27, 2003 and June 28, 2002 were as follows (in thousands):
Major components of inventories were as follows (in thousands):
At the beginning of the second quarter, the Company purchased certain assets and assumed certain liabilities of Sharpe Manufacturing Company for $13.5 million cash. Sharpe manufactures spray guns and related parts and accessories for the automotive refinishing market, where the Company had no previous presence. Sharpe had sales of approximately $11 million in 2002. Results of Sharpe’s operations have been included in the Industrial/Automotive segment since the date of acquisition.
Based on the results of an independent appraisal, the purchase price was allocated as follows (in thousands):
Identifiable intangible assets include Sharpe’s distribution network, non-compete agreements and manufacturing documentation, which are being amortized over a weighted-average estimated useful life of 5 years. Also included in identifiable intangible assets is $5.3 million assigned to the Sharpe brand name, which has an indefinite useful life. Goodwill is expected to be fully deductible for tax purposes.
Components of intangible assets were (in thousands):
Amortization of intangibles was $618,000 in the second quarter of 2003 and $1,029,000 year-to-date. Estimated annual amortization is as follows: $2,200,000 in 2003, $1,700,000 in 2004, $1,100,000 in 2005, $900,000 in 2006 and $900,000 in 2007.
Results of Operations
The following table sets forth items from the Company’s Consolidated Statements of Earnings as percentages of net sales:
Net Sales
Sales by segment and geographic area were as follows (in thousands):
Industrial/Automotive segment sales increased 14 percent for both the quarter and year-to date. Sales measured in local currencies increased 6 percent for both the quarter and year-to-date. Most of the currency translation effect came from Europe, where sales for the quarter were down 4 percent in local currencies but increased by 16 percent when translated to U.S. dollars. Industrial/Automotive sales volume increased in Asia Pacific and sales were up in the Americas primarily due to the Sharpe acquisition.
Contractor segment sales increased 12 percent for the quarter, 10 percent year-to-date (9 percent and 7 percent respectively, measured in local currencies). In the Americas, sales were higher in both the paint store and home center channels. Demand for new and existing products in the paint store channel more than offset the ongoing impacts of poor weather conditions and a weak commercial construction market in the United States. In the home center channel, sales were up for the quarter due to the introduction of a new model, marketing initiatives and more stores carrying the complete line of product. Asia Pacific posted strong volume gains while Europe experienced modest growth.
Lubrication segment sales were down 12 percent for the quarter and were essentially flat year-to-date. Sales in the second quarter last year were influenced by a sales promotion that was not repeated in the second quarter of 2003.
Gross Profit
Higher gross profit margin percentages were mainly due to favorable currency translation rates, which, combined with some pricing effect, more than offset the effects of increased costs.
Operating Expenses
Total operating expenses in the first half of 2003 increased 13 percent from 2002. Much of the increase is from payroll-related costs (salaries, incentives and benefits) and also includes Sharpe operations and higher sales meeting, travel, product introduction and warranty expenses. Changes in exchange rates used to translate expenses incurred in foreign currencies also had the effect of increasing expenses as reported in U.S. dollars. The Company’s contribution to the Graco Foundation, included in general and administrative expense, decreased by $1 million compared to the first six months of 2002.
Year-to-date operations include $.9 million of pension expense related to the Company’s U.S. defined benefit pension plan, compared to a $.5 million credit in the same period last year. This change resulted from recognition of investment losses attributable to pension plan assets. Pension expense/income is allocated to cost of products sold and operating expenses based on salaries and wages.
Liquidity and Capital Resources
In March 2003, the Company repurchased 2.2 million shares of its common stock for $54.8 million from David A. Koch, a former Chairman and Chief Executive Officer of the Company, his wife, and a family trust and family foundation. The Company used available cash balances to fund the repurchase.
In the second quarter of 2003, the Company acquired the operations of Sharpe Manufacturing Company, utilizing available cash of $13.5 million and assuming liabilities totaling $1.6 million.
The Company had unused lines of credit available at June 27, 2003 totaling $56 million. Cash balances of $59 million at June 27, 2003, internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs.
Outlook
Despite ongoing soft conditions in its two largest geographic markets, the Company is on track to make 2003 a year of sales and earnings growth. In North America, demand remains flat for Industrial/Automotive and Lubrication products while the Contractor Equipment Division continues to benefit from a combination of a strong housing market and successful new product launches. Conditions throughout Europe remain weak and management expects that to continue for at least the balance of this year. Contractor business in Europe is a bright spot, growing from new product introductions. Asia, except for Japan, remains strong with higher demand for the Company’s products as companies continue to invest in infrastructure and durable goods output increases. While current economic conditions make growth difficult in most regions of the world, year-to-date results give management confidence that its long-term growth strategies of introducing new products, expanding and enhancing distribution, entering new markets and making strategic acquisitions are paying off.
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, as well as 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 Exhibit 99 to the Company’s Annual Report on Form 10-K for fiscal year 2002 for a more comprehensive discussion of these and other risk factors.
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 pursuant to Exchange Act Rule 13a-15. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer, Vice President and Controller, Vice President and Treasurer, and 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 were no significant changes in the Company’s internal control over financial reporting.
PART II
At the Annual Meeting of Shareholders held on May 6, 2003, Robert G. Bohn and William J. Carroll were elected to the Board of Directors with the following votes:
At the same meeting, the Executive Officer Annual Incentive Bonus Plan was approved, with the following votes:
Also, at the same meeting, the selection of Deloitte & Touche LLP as independent auditors for the current year was approved and ratified, with the following votes:
No other matters were voted on at the meeting.
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.