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 March 31, 2000 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 - ---------------------------------------- ---------- (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 ------ ------ 20,294,457 common shares were outstanding as of April 24, 2000
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 8-10 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 Restated Bylaws as amended February 25, 2000. Exhibit 3 Rights Agreement dated February 25, 2000 between the Exhibit 4 Company and Norwest Bank Minnesota, National Association, as Rights Agent, including as Exhibit A the form of the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 4 to the Company's Report on Form 8-K dated February 25, 2000.) 2000 Corporate and Business Unit Annual Bonus Plan. Exhibit 10 Stock Option Agreement. Form of agreement used under the Long Term Stock Incentive Plan dated December 12, 1997. Exhibit 10.1 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to one executive officer, dated February 9, 2000. Exhibit 10.2 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to one executive officer, dated February 24, 2000. Exhibit 10.3 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 ---------------------------------- March 31, 2000 March 26, 1999 -------------- -------------- (In thousands except per share amounts) Net Sales $120,227 $103,241 Cost of products sold 58,098 50,384 -------------- -------------- Gross Profit 62,129 52,857 Product development 5,024 4,754 Selling, marketing and distribution 23,814 19,305 General and administrative 8,644 9,524 -------------- -------------- Operating Profit 24,647 19,274 Interest expense 1,235 1,953 Other (income) expense, net 437 320 -------------- -------------- Earnings Before Income Taxes 22,975 17,001 Income taxes 8,000 5,800 -------------- -------------- Net Earnings $ 14,975 $ 11,201 ============== ============== Basic Net Earnings Per Common Share $ .73 $ .56 ============== ============== Diluted Net Earnings Per Common Share $ .72 $ .54 ============== ============== See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 31, 2000 Dec. 31, 1999 -------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 2,834 $ 6,588 Accounts receivable, less allowances of $4,700 and $4,400 88,011 79,696 Inventories 41,640 37,702 Deferred income taxes 12,096 12,357 Other current assets 1,506 1,646 ------------- ------------ Total current assets 146,087 137,989 Property, Plant and Equipment: Cost 184,764 182,156 Accumulated depreciation (99,068) (95,663) ------------- ------------ 85,696 86,493 Other Assets 10,881 11,551 ------------- ------------ $242,664 $236,033 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 12,362 $ 14,640 Current portion of long-term debt 1,215 1,215 Trade accounts payable 15,379 13,500 Salaries, wages & commissions 9,424 12,832 Accrued insurance liabilities 11,387 10,332 Income taxes payable 9,035 2,323 Other current liabilities 20,812 23,421 ------------- ------------ Total current liabilities 79,614 78,263 Long-term Debt, less current portion 68,430 65,695 Retirement Benefits and Deferred Compensation 28,941 29,135 Shareholders' Equity: Common stock 20,293 20,416 Additional paid-in capital 37,234 31,755 Retained earnings 7,374 9,279 Other, net 778 1,490 ------------- ------------ Total shareholders' equity 65,679 62,940 ------------- ------------ $242,664 $236,033 ============= ============ See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Thirteen Weeks ------------------------------ March 31, 2000 March 26, 1999 -------------- ------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $14,975 $11,201 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,005 3,773 Deferred income taxes 127 (69) Change in: Accounts receivable (9,733) (2,204) Inventories (4,255) (731) Trade accounts payable 1,941 471 Salaries, wages and commissions (3,283) (4,396) Retirement benefits and deferred Compensation 124 380 Other accrued liabilities 5,267 3,573 Other (356) 183 ------------- ------------ 8,812 12,181 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (2,968) (2,015) Proceeds from sale of property, plant and equipment 58 220 ------------- ------------ (2,910) (1,795) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on notes payable and lines of credit 47,979 38,992 Payments on notes payable and lines of credit (49,939) (42,397) Borrowings on long-term debt 20,000 2,000 Payments on long-term debt (17,265) (10,632) Common stock issued 6,632 3,579 Retirement of common stock (15,300) - Cash dividends paid (2,862) (2,212) ------------- ------------ (10,755) (10,670) ------------- ------------ Effect of exchange rate changes on cash 1,099 933 ------------- ------------ Net increase (decrease) in cash and cash (3,754) 649 equivalents Cash and cash equivalents: Beginning of year 6,588 3,555 ------------- ------------ End of Period $ 2,834 $ 4,204 ============= ============ 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 March 31, 2000, and the related statements of earnings and cash flows for the thirteen weeks then ended, 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 March 31, 2000, 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 1999 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): Mar. 31, 2000 Dec. 31, 1999 ------------- ------------- Finished products and components $32,327 $25,748 Products and components in various stages of completion 22,368 23,560 Raw materials 20,844 21,961 ------------ ------------- 75,539 71,269 Reduction to LIFO cost (33,899) (33,567) ------------ ------------- $41,640 $37,702 ============ =============
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 tracked along reportable segment lines. Sales and operating profit by segment for the thirteen weeks ended March 31, 2000 and March 26, 1999 are as follows (in thousands): Mar. 31, 2000 Mar. 26,1999 ------------- ------------ Net Sales Industrial/Automotive $ 55,989 $ 50,748 Contractor 53,587 41,694 Lubrication 10,651 10,799 ------------- ------------ Total $120,227 $103,241 ============= ============ Operating Profit Industrial/Automotive $ 12,507 $ 9,745 Contractor 10,486 8,899 Lubrication 2,316 2,288 Unallocated Corporate expenses (662) (1,658) ------------- ------------ Consolidated Operating Profit $ 24,647 $ 19,274 ============= ============ 4. There have been no changes to the components of comprehensive income from those noted on the 1999 Form 10K. 5. 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 fiscal year 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 FAS 133, if any.
Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Graco's net earnings of $15.0 million for the quarter ended March 31, 2000 increased 34 percent from first quarter 1999 earnings of $11.2 million. Diluted earnings per share of $0.72 for the quarter were up 33 percent over diluted earnings per share of $0.54 in the first quarter of 1999. The quarterly performance was driven by strong sales and gross profit growth partially offset by increased expenses. The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: Three Months (13 weeks) Ended -------------------- March March 31, 2000 26, 1999 -------- -------- Net Sales 100.0% 100.0% Cost of products sold 48.3 48.8 Product development 4.2 4.6 Selling, marketing and distribution 19.8 18.7 General and administrative 7.2 9.2 -------- -------- Operating Profit 20.5 18.7 -------- -------- Interest expense 1.0 2.0 -------- -------- Other (income) expense, net 0.4 0.3 -------- -------- Earnings Before Income Taxes 19.1 16.4 Income taxes 6.6 5.6 -------- -------- Net Earnings 12.5% 10.8% ======== ========
Net Sales Net sales in the first quarter of $120.2 million were up 16 percent from the first quarter of 1999. Industrial/Automotive Equipment segment sales were up 10 percent, as sales improved across all Industrial product groups in North America. Sales for the quarter include $3 million of products from the acquisition of Bollhoff Verfahrenstechnik in May of 1999. First quarter Contractor Equipment segment sales were 29 percent higher than last year due to new product releases and strong demand in North America. Graco introduced its new Magnum sprayers in the first quarter of 2000. These units are being sold primarily in the home center channel but are available to customers in the other sales channels. The initial stocking of approximately 65% of The Home Depot locations contributed to the sales increase in the quarter. Lubrication Equipment segment sales decreased 1 percent from the first quarter 1999 to $10.7 million as slightly improved sales in the Americas were offset by lower demand in Europe and in Asia Pacific. Geographically, sales in the Americas increased 18 percent to $88.7 million for the quarter due to strong Contractor and Industrial/Automotive sales. European quarterly sales of $21.3 million were 11 percent higher than last year; translating at consistent exchange rates, sales would have been up 24%. Asia Pacific sales of $10.2 million were 10 percent higher than last year's first quarter as sales improved throughout the region, excluding Japan. Gross Profit Gross profit as a percentage of net sales improved to 51.7 percent in the first quarter, up 0.5 percentage points from the same period last year. The increase was due primarily to higher production levels, improved manufacturing efficiencies and enhanced pricing. The strengthening of the US dollar has decreased gross margins as a greater proportion of the Company's sales are denominated in currencies other than the US dollar than are cost of goods sold. Operating Expenses First quarter operating expenses of $37.5 million increased 12 percent from the first quarter of 1999. Selling, marketing and distribution expenses were up 23 percent and included increased spending related to the introduction of new products in the first quarter of 2000. General and administrative expenses were down 9 percent due in part to reduced information system spending. Product development spending was substantial at $5.0 million and $4.8 in the first quarters of 2000 and 1999. Other Income (Expense) Other expense was $0.4 million and $0.3 million in the first quarter of 2000 and 1999. Income Taxes The effective tax rate increased to 35 percent in the first quarter compared to 34 percent for the same period last year.
Liquidity and Capital Resources - ------------------------------- The Company generated $8.8 million of cash flow from operating activities in the first three months of 2000, compared to $12.2 million for the same period last year. Significant uses of operating cash flow in 2000 included the increase of accounts receivable and inventory in support of higher sales. Cash flow from operations combined with the proceeds of common stock issuances upon the exercise of employee stock options, were used to repurchase 473,400 common shares for $15.3 million. The Company had unused lines of credit available at March 31, 2000 totaling $78 million. The available credit facilities and internally generated funds provide the Company with the financial flexibility to meet liquidity needs. Outlook While the Company is off to a good start in 2000, we remain uncertain about the global industrial growth for 2000. However, we continue to plan for higher sales and earnings per share growth for fiscal 2000. 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 and additional factors identified in Exhibit 99 to the Company's Report on Form 10-K for fiscal year 1999.
PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Restated Bylaws as amended February 25,2000. Exhibit 3 2000 Corporate and Business Unit Annual Bonuses Plan Exhibit 10 Stock Option Agreement. Form of agreement Exhibit 10.1 under the Long Term Stock Incentive Plan dated December 12, 1997. Stock Option Agreement. Form of agreement used for Exhibit 10.2 award of non-incentive stock options to one executive officer dated February 9, 2000. Stock Option Agreement. Form of agreement used for Exhibit 10.3 award of non-incentive stock options to one executive officer dated February 24, 2000. Computation of Net Earnings per Common Share Exhibit 11 Financial Data Schedule (EDGAR filing only) Exhibit 27 (b) Reports on Form 8-K Rights Agreement dated February 25, 2000 between 4 the Exhibit Company and Norwest Bank Minnesota, National Association, as Rights Agent, including as Exhibit A the form of the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 4 to the Company's Report on Form 8-K dated February 25, 2000.)
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: 04/27/2000 By: /s/George Aristides ------------------------------- George Aristides Chief Executive Officer Date: 04/27/2000 By: /s/James A. Graner ------------------------------- James A. Graner Vice President & Controller ("duly authorized officer")