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 June 25, 2004
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).
69,283,000 common shares were outstanding as of July 23, 2004.
Page Number
PART I
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Unaudited)(In thousands)
GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands)
(Unaudited)
The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of June 25, 2004, and the related statements of earnings for the thirteen and twenty-six weeks ended June 25, 2004 and June 27, 2003, and cash flows for the twenty-six weeks ended June 25, 2004 and June 27, 2003 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 25, 2004, 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 2003 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.
On February 20, 2004, the Board of Directors declared a three-for-two split of the Company’s common stock. The split was distributed on March 30, 2004 to shareholders of record on March 16, 2004. Share and per share amounts for all periods presented reflect the stock split.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
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):
The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Company has not yet determined the effect of the Act, if any, on the retirement medical plan. Consequently, measures of the accumulated postretirement benefit obligation or net periodic benefit cost do not reflect any effects of the Act on the plan.
Total comprehensive income in 2004 was $30.0 million in the second quarter and $51.9 million year-to-date. In 2003, comprehensive income was $24.5 million for the second quarter and $42.9 million for the six-month period. There have been no significant changes to the components of comprehensive income from those noted on the 2003 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 25, 2004 and June 27, 2003 were as follows (in thousands):
Major components of inventories were as follows (in thousands):
Information related to other intangible assets follows (in thousands):
Amortization of intangibles was $.5 million in the second quarter of 2004 and $1.1 million year-to-date. Estimated annual amortization is as follows: $1.7 million in 2004, $1.1 million in 2005, $.9 million in 2006, $.9 million in 2007, $.4 million in 2008 and $.3 million thereafter.
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 customer warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):
The Company has been named as a defendant in a number of lawsuits alleging bodily injury as a result of exposure to asbestos or silica. None of the suits make any allegations specifically regarding the Company or any of its products. Management does not know why the Company was included in the suits along with hundreds of other defendants. Management does not expect that resolution of these matters will have a material adverse effect on the Company, although the ultimate outcome cannot be determined based on available information.
Increased sales, improved gross margin rates and controlled spending increases resulted in a 23 percent increase in both the quarter and year-to-date net earnings. Stronger foreign currencies versus the U.S. dollar helped to increase second quarter and year-to-date results when compared to 2003. Translated at consistent exchange rates, second quarter and year-to-date net earnings increased by 18 percent and 14 percent, respectively.
The following table sets forth items from the Company’s Consolidated Statements of Earnings as percentages of net sales:
Sales by segment and geographic area were as follows (in thousands):
Industrial/Automotive segment sales increased 15 percent for the quarter and 18 percent year-to date. Translated at consistent exchange rates, sales were up 13 percent for both the quarter and year-to-date. The segment experienced growth in all three geographic regions and across all major product categories. New product introductions also contributed to sales growth, including the ProMix™ II and ProMix Easy units, which were launched in the second quarter.
Contractor segment sales increased 6 percent for the quarter and 7 percent year-to-date. Translated at consistent exchange rates, sales were up 5 percent for both the quarter and year-to-date. Sales increased in all geographic regions, with strong volume increases in Europe and Asia Pacific. In the Americas, sales were higher in the professional paint store channel but decreased in the home center channel. Sales in the professional paint store channel were aided by demand for new products, including the new Ultra® Max II sprayers. In the home center channel, sales were strong in the second quarter of 2003 due to a new product introduction.
Lubrication segment sales were up 3 percent for both the quarter and year-to-date. Translated at consistent exchange rates, sales were up 2 percent for the quarter and 1 percent year-to-date.
Gross margin rate was higher for the quarter and year-to-date. Factors contributing to the improvement include higher production volumes, improved productivity, reduced facility costs, product mix (higher proportion of Industrial / Automotive sales) and favorable currency translation rates.
Operating expenses for the quarter were virtually flat compared to last year. Planned increases in product development spending were substantially offset by decreases in other areas. Year-to-date operating expenses increased by 6 percent but decreased as a percentage of sales. Increases in product development spending, currency translation effects and higher Foundation contributions all contributed to the increase in year-to-date operating expenses. Changes in marketing programs resulted in lower marketing expenses, but terms of certain new programs resulted in costs being recorded as a reduction of sales or as warranty expense.
Year-to-date operations include a pension benefit credit of $.3 million compared to $1.3 million of expense in the same period last year. This change resulted from the increase in pension plan assets due to investment gains and the $20 million voluntary contribution made in 2003. Pension income/expense is allocated based on related salaries and wages, approximately 45 percent to cost of products sold and 55 percent to operating expenses.
Significant uses of cash in the first half of 2004 included $117 million of dividends paid (including $104 million for a one-time special dividend) and $24 million for purchases and retirement of Company common stock.
The Company has announced that it intends to open a manufacturing facility in the Shanghai region of China sometime in the second half of 2005. The leased facility will be approximately 50,000 square feet and will require approximately $4 million in capital equipment and leasehold improvements.
The Company had unused lines of credit available at June 25, 2004 totaling $47 million. Cash balances of $32 million at June 25, 2004, internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs, including its capital expenditure plan.
Management has not been able to identify leading economic indicators that predict future Company results. Management is encouraged by the strong underlying demand for Industrial / Automotive products across all regions and major product categories. The Contractor segment continues to grow, driven by a combination of new product introductions, favorable housing conditions and continued underlying growth in both Europe and Asia. Results indicate that a worldwide economic recovery is underway. Management is forecasting that 2004 will be a year of higher sales and net earnings.
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 2003 for a more comprehensive discussion of these and other risk factors.
Investors should realize that factors other than those identified above and in 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, 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.
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.
The Company is engaged in routine litigation incident to its business, which management believes will not have a material adverse effect on its operations or consolidated financial position. The Company has also been named as a defendant in a number of lawsuits alleging bodily injury as a result of exposure to asbestos, and a number of lawsuits alleging bodily injury as a result of exposure to silica. All of these lawsuits have multiple (most in excess of 100) defendants, and several have multiple plaintiffs. None of the suits make any allegations specifically regarding the Company or any of its products. A substantial portion of the cost and potential liability for these cases is covered by insurance, although the exact extent of insurance coverage cannot be determined at this time because the cases are in the early stages of the litigation process and the allegations are so indefinite. Management does not expect that resolution of these matters will have a material adverse effect on the Company, although the ultimate outcome cannot be determined based on available information.
On February 22, 2002, the Board of Directors authorized a plan for the Company to purchase up to a total of 2,700,000 shares of its outstanding common stock, primarily through open-market transactions. This plan effectively expired upon approval of a new plan on February 20, 2004, authorizing the purchase of up to 3,000,000 shares and expiring on February 28, 2006.
In addition to shares purchased under the plan, 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:
1 All share and per share data reflects the three-for-two stock splits distributed on June 6, 2002 and March 30, 2004.
At the Annual Meeting of Shareholders held on April 23, 2004, five directors were elected to the Board of Directors with the following votes:
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.
Certification of President and Chief Executive Officer, Vice President and Controller, and Vice President and Treasurer pursuant to Section 1350 of Title 18, U.S.C.
The following Current Report on Form 8-K was furnished during the quarter ended June 25, 2004: On April 16, 2004, Graco Inc. furnished a Current Report on Form 8-K to furnish its earnings release for the quarter ended March 26, 2004.
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.