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 June 29, 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 ------ ------- 31,109,237 common shares were outstanding as of July 27, 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 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 Graco Inc. Stock Incentive Plan, dated May 1, 2001 Exhibit 10.1 Letter Agreement with President and Chief Executive Officer, dated June 5, 2001 Exhibit 10.2 Executive Long Term Incentive Agreement. Form of agreement used for award of restricted stock to one executive officer, dated June 25, 2001 Exhibit 10.3 Key Employee Agreement between the Company and one executive officer, dated June 25, 2001 Exhibit 10.4 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to one executive officer, dated June 25, 2001 Exhibit 10.5 Computation of Net Earnings per Common Share Exhibit 11
PART I GRACO INC. AND SUBSIDIARIES Item I. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except per share amounts) (Unaudited) <TABLE> Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net Sales $130,873 $132,768 $240,687 $254,995 Cost of products sold 66,620 66,666 121,296 126,764 --------- --------- --------- --------- Gross Profit 64,253 66,102 119,391 128,231 Product development 5,711 4,896 11,998 9,920 Selling, marketing and distribution 20,441 22,360 41,113 46,174 General and administrative 9,597 8,810 17,293 17,454 --------- --------- --------- --------- Operating Earnings 28,504 30,036 48,987 54,683 Interest expense 355 1,302 805 2,537 Other expense 601 803 814 1,240 --------- --------- --------- --------- Earnings Before Income Taxes 27,548 27,931 47,368 50,906 Income taxes 9,300 9,600 16,000 17,600 --------- --------- --------- --------- Net Earnings $ 18,248 $ 18,331 $ 31,368 $ 33,306 ========= ========= ========= ========= Basic Net Earnings Per Common Share $ .59 $ .60 $ 1.02 $ 1.09 ========= ========= ========= ========= Diluted Net Earnings Per Common Share $ .58 $ .59 $ 1.00 $ 1.08 ========= ========= ========= ========= </TABLE> See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) <TABLE> June 29, 2001 Dec. 29, 2000 ------------- ------------- ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 7,215 $ 11,071 Accounts receivable, less allowances of $4,900 and $4,700 89,555 85,836 Inventories 37,568 33,079 Deferred income taxes 11,286 11,574 Other current assets 2,725 2,182 -------- -------- Total current assets 148,349 143,742 Property, Plant and Equipment: Cost 196,546 186,872 Accumulated depreciation (107,403) (102,883) -------- -------- 89,143 83,989 Other Assets 20,995 10,245 -------- -------- $258,487 $237,976 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 11,890 $ 15,713 Current portion of long-term debt 1,050 1,310 Trade accounts payable 13,847 12,899 Salaries, wages and commissions 8,715 14,532 Accrued insurance liabilities 11,466 10,622 Income taxes payable 7,505 4,642 Other current liabilities 21,814 22,123 -------- -------- Total current liabilities 76,287 81,841 Long-term Debt, less current portion 11,500 18,050 Retirement Benefits and Deferred Compensation 27,160 27,230 Shareholders' Equity: Common stock 31,087 20,274 Additional paid-in capital 50,087 39,954 Retained earnings 63,386 50,233 Other, net (1,020) 394 -------- -------- Total shareholders' equity 143,540 110,855 -------- -------- $258,487 $237,976 ======== ======== </TABLE> See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> Twenty-six Weeks ---------------- June 29, 2001 June 30, 2000 ------------- ------------- Cash Flows from Operating Activities: <S> <C> <C> Net Earnings $31,368 $33,306 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 8,946 7,996 Deferred income taxes 123 (23) Loss on sale of fixed assets 148 116 Change in: Accounts receivable (2,520) (7,014) Inventories (2,013) 697 Trade accounts payable 732 (2,197) Salaries, wages and commissions (5,716) (1,538) Retirement benefits and deferred (1,040) (2,035) compensation Other accrued liabilities 2,421 674 Other (1,064) (667) ------- ------- 31,385 29,315 ------- ------- Cash Flows from Investing Activities: Property, plant and equipment additions (12,084) (5,932) Proceeds from sale of property, plant and 105 78 equipment Acquisition of business, net of cash acquired (15,949) - ------- ------- (27,928) (5,854) ------- ------- Cash Flows from (for) Financing Activities: Borrowings on notes payable and lines of credit 106,130 109,026 Payments on notes payable and lines of credit (109,598) (110,496) Borrowings on long-term debt 21,000 24,090 Payments on long-term debt (27,810) (31,715) Common stock issued 10,951 6,949 Retirement of common stock (2,025) (18,966) Cash dividends paid (6,123) (5,703) ------- ------- (7,475) (26,815) Effect of exchange rate changes on cash 162 1,133 ------- ------- Net increase (decrease) in cash and cash equivalents (3,856) (2,221) Cash and cash equivalents: Beginning of year 11,071 6,588 ------- ------- End of Period $ 7,215 $ 4,367 ======== ======= </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 June 29, 2001, and the related statements of earnings for the thirteen and twenty-six weeks ended June 29, 2001 and June 30, 2000, and cash flows for the twenty-six weeks ended June 29, 2001 and June 30, 2000 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 29, 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): June 29, 2001 Dec. 29, 2000 ------------- ------------- Finished products and components $27,053 $26,812 Products and components in various stages of completion 21,508 20,153 Raw materials and purchased components 21,837 19,259 ------------ ------------ 70,398 66,224 Reduction to LIFO cost (32,830) ( 33,145) ------------ ------------ $37,568 $33,079 ============= =============
GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Other assets consist of the following (in thousands): June 29, 2001 Dec. 29, 2000 ------------- ------------- Identifiable intangibles, net of accumulated amortization of $3,828 and $2,761 $ 7,609 $ 5,576 Goodwill, net of accumulated amortization of $278 and $67 7,993 52 Prepaid pension 4,541 2,976 Other 852 1,641 ------------- ------------- $20,995 $10,245 ============= ============= 4. 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 and twenty-six weeks ended June 29, 2001 and June 30, 2000 were as follows (in thousands): <TABLE> Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- June 29, 2001 June 30, 2000 June 29, 2001 June 30,2000 ------------- ------------- ------------- ------------ Net Sales <S> <C> <C> <C> <C> Industrial/Automotive $ 51,449 $ 55,715 $ 99,098 $112,545 Contractor 66,776 66,036 116,677 120,518 Lubrication 12,648 11,017 24,912 21,932 -------- -------- -------- -------- Consolidated $130,873 $132,768 $240,687 $254,995 ======== ======== ======== ======== Operating Earnings Industrial/Automotive $ 12,114 $ 13,760 $ 21,507 $ 26,267 Contractor 15,537 14,966 24,157 25,452 Lubrication 3,072 2,409 6,028 4,725 Unallocated Corporate expenses (2,219) (1,099) (2,705) (1,761) -------- -------- -------- -------- Consolidated Operating Earnings $ 28,504 $ 30,036 $ 48,987 $ 54,683 ======== ======== ======== ======== </TABLE>
GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. There have been no significant changes to the components of comprehensive income from those noted on the 2000 Form 10-K. Total comprehensive income in 2001 was $17.6 million in the second quarter and $30.0 million year-to-date. In 2000, comprehensive income was $18.4 million for the second quarter and $32.6 million for the six-month period. 6. The adoption of Statement of Financial Accounting Standards (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. 7. On March 19, 2001, the Company purchased ASM Company, Inc. ("ASM") for $16 million cash. ASM manufactures and markets spray tips, guns, poles and other accessories for the professional painter, and had sales of approximately $11 million in 2000. The Company used the purchase method to account for the acquisition. Based on the results of an independent appraisal, the purchase price was allocated to net tangible assets of $5 million (net of assumed liabilities totaling $2 million), identifiable intangible assets of $3 million and goodwill of $8 million. Identifiable intangible assets include patents, proprietary technologies, trade names, trademarks, customer list and a non-compete agreement. Intangibles and goodwill are being amortized on a straight-line basis over useful lives ranging from 2 to 10 years. 8. On July 20, 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets", which will be effective for the Company in fiscal year 2002. The Company has not yet determined the impact of SFAS 142 on its financial position and results of operations.
Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- For the quarter, lower sales and reduced expenses resulted in net earnings very close to last year's amount. For the six-month period, net earnings were 6 percent lower on a 6 percent decrease in sales. During the first half of 2001 sales were lower than the same period last year due to reduced demand resulting from economic weakness and the adverse impacts of foreign currency exchange rates. The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: <TABLE> Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net Sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 50.9 50.2 50.4 49.7 Product development 4.4 3.7 5.0 3.9 Selling, marketing and distribution 15.6 16.9 17.1 18.1 General and administrative 7.3 6.6 7.2 6.8 ------------- ------------- ------------- ------------- Operating Earnings 21.8 22.6 20.3 21.5 Interest expense 0.3 1.0 0.3 1.0 Other (income) expense, net 0.5 0.6 0.3 0.5 ------------- ------------- ------------- ------------- Earnings Before Income Taxes 21.0 21.0 19.7 20.0 Income taxes 7.1 7.2 6.7 6.9 ------------- ------------- ------------- ------------- Net Earnings 13.9% 13.8% 13.0% 13.1% ============= ============= ============= ============= </TABLE>
Net Sales Weak economic conditions in North America led to reduced demand and lower sales in the Industrial / Automotive segment during the first half of 2001. In the Contractor segment, a second quarter increase in the paint store channel more than offset a decrease in home center channel sales, which included more initial stocking orders in 2000. Sales in the Lubrication segment exceeded 2000 sales for both the three-month and six-month periods due mostly to large sales to key customers and increased market share. Price increases have not had a significant impact on sales during the first half of 2001. Sales by geographic area were as follows: <TABLE> Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- June 29, 2001 June 30, 2000 June 29, 2001 June 30,2000 ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> Americas $ 97,095 $ 98,749 $ 76,088 $189,042 Europe 20,857 21,432 41,579 42,996 Asia Pacific 12,921 12,587 23,020 22,957 ------------- ------------- ------------- ------------ Consolidated $130,873 $132,768 $240,687 $254,995 ============= ============= ============= ============ </TABLE> Changes in foreign exchange rates have adversely impacted sales in 2001. Translated at consistent exchange rates, sales would have been about 2 percent higher for the both the quarter and year-to-date. For the six-month period, Europe would have shown a 3 percent increase in sales compared to last year and Asia Pacific region would have shown a 7 percent increase over prior year sales. Gross Profit Gross profit as a percentage of quarterly net sales dropped to 49.1 percent from 49.8 percent. For the six-month period, gross profit percentage decreased to 49.6 percent from 50.3 percent. The decrease was due mostly to the negative impact of changes in exchange rates. Operating Expenses Total operating expenses for the quarter and year-to-date were lower than last year. Product development expenses were up due to spending for significant new product launches in the first part of the year. The Company has taken actions to reduce the running rate of product development expense. Selling, marketing and distribution expenses were down from prior year due in part to lower sales-based incentives. In addition, the first half of last year included costs related to the launch of Contractor products in the home center channel. General and administrative expenses are up due mostly to the acquisition of ASM. Interest Expense and Other Expense Interest expense decreased due to reduced debt levels.
Liquidity and Capital Resources - ------------------------------- The Company generated $31 million of cash flow from operating activities in the first six months of 2001, compared to $29 million for the same period last year. Significant uses of cash in 2001 include the construction of expanded manufacturing, warehouse and office facilities in Minneapolis and the acquisition of ASM. The Company plans to move ASM operations from their current location in California to expanded facilities in Sioux Falls, South Dakota. Estimated incremental costs associated with the move, that would not benefit continuing activities, were recognized as liabilities assumed in the acquisition and included in the allocation of acquisition cost. Additional costs associated with the move, that will benefit continuing operations, will be expensed as incurred. The Company also plans to restructure the operations of its German subsidiary, Graco Verfahrenstechnik (GV), including termination of approximately 50 employees, consolidation of product lines, termination of leases, and relocation of operations to other Company facilities in Belgium and the U.S. No expense has been recognized in connection with this plan because the amount of benefits to be paid to terminating employees has not been established. The Company estimates the costs of relocating ASM and GV will total approximately $4 million, of which $1.5 million will be a restructuring charge in the third quarter, with the remainder charged to operations as incurred over the next twelve months. These moves are expected to enhance operating profit beginning in the second half of 2002. The Company had unused lines of credit available at June 29, 2001 totaling $67 million. The available credit facilities and internally generated funds provide the Company with the financial flexibility to meet liquidity needs. Outlook The Company is concerned about the weak North American economy and an economic slowdown in Europe. While internal sales growth will be challenged in difficult economic conditions, the Company remains committed to maintaining a high level of profitability through efficient manufacturing processes and cost containment. 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 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders held on May 1, 2001, William G. Van Dyke, Mark H. Rauenhorst and J. Kevin Gilligan were elected to the Office of Director with the following votes: FOR WITHHELD --- -------- William G. Van Dyke 27,817,805 457,062 Mark H. Rauenhorst 27,807,475 467,392 J. Kevin Gilligan 27,805,087 469,778 At the same meeting, the following matters were also voted upon with the votes as indicated: The adoption of the Graco Inc. Stock Incentive Plan was approved, with the following votes: FOR AGAINST ABSTENTIONS BROKER NON-VOTE - --- ------- ----------- --------------- 19,118,308 9,007,784 142,025 6,750 The selection of Deloitte & Touche LLP as independent auditors for the current year was approved and ratified, with the following votes: FOR AGAINST ABSTENTIONS BROKER NON-VOTE - --- ------- ----------- --------------- 27,844,282 354,013 76,572 0 No other matters were voted on at the meeting.
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 10.1 Graco Inc. Stock Incentive Plan, dated May 1, 2001 10.2 Letter Agreement with President and Chief Executive Officer,dated June 5, 2001 10.3 Executive Long Term Incentive Agreement. Form of agreement used for award of restricted stock to one executive officer, dated June 25, 2001 10.4 Key Employee Agreement between the Company and one executive officer, dated June 25, 2001 10.5 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to one executive officer, dated June 25, 2001 11 Computation of Net Earnings per Common Share (b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
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: July 31, 2001 By: /s/David A. Roberts ------------- ------------------- David A. Roberts Chief Executive Officer Date: July 31, 2001 By: /s/James A. Graner ------------- ------------------ James A. Graner Vice President & Controller ("duly authorized officer")