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 30, 2001 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) 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 ------ ------- 30,794,894 common shares were outstanding as of May 3, 2001.
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 2001 Executive Corporate and SBU Bonus Plan Exhibit 10 Non-employee Director Stock Option Plan, as amended and Restated February 23, 2001 Exhibit 10.1 Computation of Net Earnings per Common Share Exhibit 11
PART I GRACO INC. AND SUBSIDIARIES Item I. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> Thirteen Weeks Ended -------------------- March 30, 2001 March 31, 2000 -------------- -------------- (In thousands except per share amounts) <S> <C> <C> Net Sales $109,814 $122,227 Cost of products sold 54,676 60,098 -------------- -------------- Gross Profit 55,138 62,129 Product development 6,287 5,024 Selling, marketing and distribution 20,672 23,814 General and administrative 7,696 8,644 -------------- -------------- Operating Profit 20,483 24,647 Interest expense 450 1,235 Other (income) expense, net 213 437 -------------- -------------- Earnings Before Income Taxes 19,820 22,975 Income taxes 6,700 8,000 -------------- -------------- Net Earnings $ 13,120 $ 14,975 ============== ============== Basic Net Earnings Per Common Share $ .43 $ .49 ============== ============== Diluted Net Earnings Per Common Share $ .42 $ .48 ============== ============== See notes to consolidated financial statements. </TABLE>
GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) <TABLE> March 30, 2001 Dec. 29, 2000 -------------- ------------- ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 4,682 $ 11,071 Accounts receivable, less allowances of $4,800 and $4,700 83,301 85,836 Inventories 41,177 33,079 Deferred income taxes 11,627 11,574 Other current assets 2,565 2,182 -------------- ------------- Total current assets 143,352 143,742 Property, Plant and Equipment: Cost 193,942 186,872 Accumulated depreciation (106,615) (102,883) -------------- ------------- 87,327 83,989 Other Assets 20,840 10,245 -------------- ------------- $251,519 $ 237,976 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 14,241 $ 15,713 Current portion of long-term debt 1,050 1,310 Trade accounts payable 12,742 12,899 Salaries, wages & commissions 7,962 14,532 Accrued insurance liabilities 10,925 10,622 Income taxes payable 10,678 4,642 Other current liabilities 20,026 22,123 -------------- ------------- Total current liabilities 77,624 81,841 Long-term Debt, less current portion 20,500 18,050 Retirement Benefits and Deferred 27,106 27,230 Compensation Shareholders' Equity: Common stock 30,778 20,274 Additional paid-in capital 45,902 39,954 Retained earnings 49,992 50,233 Other, net (383) 394 -------------- ------------- Total shareholders' equity 126,289 110,855 -------------- ------------- $251,519 $ 237,976 ============== ============= </TABLE> See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> Thirteen Weeks -------------- March 30, 2001 March 31, 2000 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands) <S> <C> <C> Net Earnings $13,120 $14,975 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,240 4,005 Deferred income taxes (182) 127 Change in: Accounts receivable 4,065 (9,733) Inventories (5,510) (4,255) Trade accounts payable (358) 1,941 Salaries, wages and commissions (6,569) (3,283) Retirement benefits and deferred compensation 272 124 Other accrued liabilities 2,832 5,267 Other (789) (356) -------------- -------------- 11,121 8,812 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (6,203) (2,968) Proceeds from sale of property, plant and equipment 45 58 Acquisition of business, net of cash acquired (15,949) - -------------- -------------- (22,107) (2,910) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on notes payable and lines of credit 36,274 47,979 Payments on notes payable and lines of credit (37,307) (49,939) Borrowings on long-term debt 23,000 20,000 Payments on long-term debt (20,810) (17,265) Common stock issued 6,320 6,632 Retirement of common stock (177) (15,300) Cash dividends paid (3,044) (2,862) -------------- -------------- 4,256 (10,755) -------------- -------------- Effect of exchange rate changes on cash 341 1,099 -------------- -------------- Net increase (decrease) in cash and cash (6,389) (3,754) equivalents Cash and cash equivalents: Beginning of year 11,071 6,588 -------------- -------------- End of Period $ 4,682 $ 2,834 ============== ============== </TABLE> 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 30, 2001, 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 30, 2001, 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 2000 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. 30, 2001 Dec. 29, 2000 ------------- ------------- Finished products and components $29,675 $26,812 Products and components in various stages of completion 21,961 20,153 Raw materials 22,601 19,259 ------------ ------------- 74,237 66,224 Reduction to LIFO cost (33,060) (33,145) ------------ ------------- $41,177 $33,079 ============ =============
GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. The Company has three reportable segments; Industrial/Automotive, Contractor and Lubrication. The Company does not identify assets by segment. Sales and operating profit by segment for the thirteen weeks ended March 30, 2001 and March 31, 2000 are as follows (in thousands): Mar. 30, 2001 Mar. 31,2000 ------------- ------------ Net Sales Industrial/Automotive $ 47,649 $ 56,831 Contractor 49,901 54,481 Lubrication 12,264 10,915 ------------- ------------ Total $109,814 $122,227 ============= ============ Operating Profit Industrial/Automotive $ 9,394 $ 12,507 Contractor 8,620 10,486 Lubrication 2,956 2,316 Unallocated Corporate Expenses (487) (662) ------------- ------------ Consolidated Operating Profit $ 20,483 $ 24,647 ============= ============ 4. There have been no changes to the components of comprehensive income from those noted in the 2000 Form 10-K. Total comprehensive income for the quarter was $12.4 million in 2001 and $14.2 million in 2000. 5. The adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" on December 30, 2000, resulted in no transition adjustment. See Note A to financial statements included in the Company's 2000 Form 10-K for a description of the Company's use of derivative instruments and hedging activities. 6. On March 19, 2001, the Company purchased ASM Company, Inc. for $16 million cash. Based on management's estimates of value, the purchase price has been allocated to net tangible assets of approximately $5 million and intangible assets totaling approximately $11 million. Intangible assets are included in the other assets caption on the consolidated balance sheets. The purchase price allocation is subject to adjustment upon completion of an independent appraisal. ASM manufactures and markets spray tips, guns, poles and other accessories for the professional painter. ASM had sales of approximately $11 million in 2000.
Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net sales and earnings in the first quarter decreased from last year. The impact of reduced sales on net earnings was mitigated by a reduction of expenses. The increase in product development expense was more than offset by reductions in other operating expenses. The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: Thirteen Weeks Ended -------------------- March 30, 2001 March 31,2000 -------------- ------------- Net Sales 100.0% 100.0% Cost of products sold 49.8 49.2 Product development 5.7 4.1 Selling, marketing and distribution 18.8 19.5 General and administrative 7.0 7.0 -------------- ------------- Operating Profit 18.7 20.2 Interest expense 0.4 1.0 Other (income) expense, net 0.2 0.4 -------------- ------------- Earnings Before Income Taxes 18.1 18.8 Income taxes 6.1 6.5 -------------- ------------- Net Earnings 12.0% 12.3% ============== =============
Net Sales Net sales in the first quarter of 2001 were down 10 percent from first quarter 2000. Economic conditions in North America led to reduced demand and lower sales in the Industrial / Automotive segment (down 16 percent) and the Contractor Equipment segment (down 8 percent). Lubrication Equipment segment sales (up 12 percent) were helped by new products launched last September and large sales to several key customers. Within the Contractor Equipment segment, sales in the home center channel were $9.3 million, up 3 percent from the first quarter of 2000. The Company began selling through the home center channel in January 2000, and most of the sales in the first quarter of 2000 were initial stocking orders. Geographically, sales in the Americas decreased 13 percent. In Europe, sales measured in local currencies increased 2 percent, but decreased 4 percent after unfavorable currency translation. Asia Pacific sales were 3 percent lower than last year, but would have increased 4 percent if translated at consistent exchange rates. Fluctuations in exchange rates adversely impacted consolidated net sales for the quarter by approximately $2 million. Gross Profit Gross profit as a percentage of net sales was 50.2 percent compared to 50.8 percent last year. Gross profit as a percentage of net sales would have decreased only .2 percentage points if sales and cost of products sold were translated at consistent exchange rates. Operating Expenses Product development expense increased 25 percent from the first quarter of 2000, as several new products approached launch dates. Other operating expenses decreased commensurate with reduced sales levels. Selling, marketing and distribution expense decreased 13 percent and decreased as a percentage of sales to 18.8 percent from 19.5 percent. First quarter 2000 included significant spending related to the introduction of new products and entry into the home center channel. General and administrative expenses were down 11 percent due to controls placed on spending, including restrictions on discretionary items, and the impact of reduced sales on incentive bonus provisions. Interest Expense and Other Income (Expense) Interest expense decreased due to reduced debt levels. Liquidity and Capital Resources - ------------------------------- The Company generated $11.1 million of cash flow from operating activities in the first three months of 2000, compared to $8.8 million for the same period last year. Significant uses of cash in 2001 included the acquisition of ASM Company, Inc. and the construction in progress of expanded manufacturing, warehouse and office facilities in Minneapolis. In 2000, the Company utilized cash flow to retire $15.3 million of common stock. The Company plans to expand its Sioux Falls, South Dakota manufacturing facilities to accommodate the move of ASM operations from its current location in California. The Company had unused lines of credit available at March 30, 2001 totaling $90 million. The available credit facilities and internally generated funds provide the Company with the financial flexibility to meet liquidity needs. Outlook - ------- The Company remains cautious about its outlook for 2001, as the North American economy has slowed down considerably from the levels of a year ago. Nonetheless, management remains confident that the Company will continue to post good results in light of the circumstances. Management expects to generate incremental revenues and profits by aggressively implementing growth strategies of developing new products, expanding distribution, entering new markets and pursuing strategic acquisitions. 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 2000.
PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2001 Executive Corporate and SBU Bonus Plan Exhibit 10 Non-employee Director Stock Option Plan, as amended and restated February 23, 2001 Exhibit 10.1 Computation of Net Earnings per Common Share Exhibit 11 (b) Reports on Form 8-K
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: May 1, 2001 By: /s/George Aristides -------------------------------- ----------------------------------- George Aristides Chief Executive Officer Date: May 1, 2001 By: /s/James A. Graner -------------------------------- --------------------------------- James A. Graner Vice President & Controller ("duly authorized officer")