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 September 28, 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 ------ ------- 31,090,328 common shares were outstanding as of October 31, 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 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 EXHIBITS 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 Thirty-nine Weeks Ended ---------------------------- ---------------------------- Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29, 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net Sales $118,651 $123,100 $359,338 $378,095 Cost of products sold 59,495 60,151 186,915 180,791 ------------- ------------- ------------- ------------- Gross Profit 59,156 62,949 178,547 191,180 Product development 4,666 5,324 16,664 15,244 Selling, marketing and distribution 20,285 20,569 61,398 66,743 General and administrative 8,813 8,531 26,106 25,985 ------------- ------------- ------------- ------------- Operating Earnings 25,392 28,525 74,379 83,208 Interest expense 261 985 1,066 3,522 Other expense 171 267 985 1,507 ------------- ------------- ------------- ------------- Earnings Before Income Taxes 24,960 27,273 72,328 78,179 Income taxes 8,200 9,200 24,200 26,800 ------------- ------------- ------------- ------------- Net Earnings $ 16,760 $ 18,073 $ 48,128 $ 51,379 ============= ============= ============= ============= Basic Net Earnings Per Common Share $ .54 $ .60 $ 1.56 $ 1.69 ============= ============= ============= ============= Diluted Net Earnings Per Common Share $ .53 $ .59 $ 1.53 $ 1.66 ============= ============= ============= ============= See notes to consolidated financial statements. </TABLE> GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) Sep. 28, 2001 Dec. 29, 2000 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 10,431 $ 11,071 Accounts receivable, less allowances of $4,200 and $4,700 85,111 85,836 Inventories 37,318 33,079 Deferred income taxes 10,711 11,574 Other current assets 2,338 2,182 ------------- ------------- Total current assets 145,909 143,742 Property, Plant and Equipment: Cost 206,779 186,872 Accumulated depreciation (110,457) (102,883) ------------- ------------- 96,322 83,989 Other Assets 21,086 10,245 ------------- ------------- $263,317 $237,976 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 12,440 $ 15,713 Current portion of long-term debt 1,050 1,310 Trade accounts payable 10,768 12,899 Salaries, wages and commissions 9,932 14,532 Accrued insurance liabilities 11,595 10,622 Income taxes payable 8,436 4,642 Other current liabilities 23,967 22,123 ------------- ------------- Total current liabilities 78,188 81,841 Long-term Debt, less current portion 500 18,050 Retirement Benefits and Deferred Compensation 27,543 27,230 Shareholders' Equity: Common stock 31,074 20,274 Additional paid-in capital 50,412 39,954 Retained earnings 75,582 50,233 Other, net 18 394 ------------- ------------- Total shareholders' equity 157,086 110,855 ------------- ------------- $263,317 $237,976 ============= ============= See notes to consolidated financial statements. GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Thirty-nine Weeks ----------------- Sep. 28, 2001 Sep. 29, 2000 ------------- ------------- Cash Flows from Operating Activities: Net Earnings $ 48,128 $ 51,379 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 13,573 11,927 Deferred income taxes 766 200 Loss on sale of fixed assets 156 131 Change in: Accounts receivable 1,745 (5,903) Inventories (1,506) 3,220 Trade accounts payable (2,380) (957) Salaries, wages and commissions (4,643) 862 Retirement benefits and deferred compensation (1,871) (3,240) Other accrued liabilities 5,227 5,446 Other 370 (1,047) ------------- ------------- 59,565 62,018 ------------- ------------- Cash Flows from Investing Activities: Property, plant and equipment additions (23,033) (9,391) Proceeds from sale of property, plant and 103 162 equipment Acquisition of business, net of cash acquired (15,949) - ------------- ------------- (38,879) (9,229) ------------- ------------- Cash Flows from (for) Financing Activities: Borrowings on notes payable and lines of credit 148,255 159,264 Payments on notes payable and lines of credit (151,365) (161,644) Borrowings on long-term debt 21,000 26,135 Payments on long-term debt (38,810) (62,715) Common stock issued 11,381 7,028 Retirement of common stock (3,600) (18,966) Cash dividends paid (9,232) (8,532) ------------- ------------- (22,371) (59,430) Effect of exchange rate changes on cash 1,045 2,216 ------------- ------------- Net increase (decrease) in cash and cash equivalents (640) (4,425) Cash and cash equivalents: Beginning of year 11,071 6,588 ------------- ------------- End of Period $ 10,431 $ 2,163 ============= ============= 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 September 28, 2001, and the related statements of earnings for the thirteen and thirty-nine weeks ended September 28, 2001 and September 29, 2000, and cash flows for the thirty-nine weeks ended September 28, 2001 and September 29, 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 September 28, 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): Sep. 28, 2001 Dec. 29, 2000 ------------- ------------- Finished products and components $27,111 $26,812 Products and components in various stages of completion 20,596 20,153 Raw materials and purchased components 21,678 19,259 ------------- ------------- 69,385 66,224 Reduction to LIFO cost (32,067) (33,145) ------------- ------------- $37,318 $33,079 ============= ============= 3. Other assets consist of the following (in thousands): Sep. 28, 2001 Dec. 29, 2000 ------------- ------------- Identifiable intangibles, net of accumulated amortization of $4,500 and $2,800 $ 7,024 $ 5,576 Goodwill, net of accumulated amortization of $400 in 2001 7,723 - Prepaid pension 5,560 3,150 Other 779 1,519 ------------- ------------- $21,086 $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 thirty-nine weeks ended September 28, 2001 and September 29, 2000 were as follows (in thousands): <TABLE> Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------- ----------------------- Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29, 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net Sales Industrial/Automotive $ 48,583 $ 56,798 $147,681 $169,343 Contractor 58,918 55,759 175,595 176,277 Lubrication 11,150 10,543 36,062 32,475 ------------- ------------- ------------- ------------- Consolidated $118,651 $123,100 $359,338 $378,095 ============= ============= ============= ============= Operating Earnings Industrial/Automotive $ 12,500 $ 14,484 $ 34,007 $ 40,751 Contractor 12,695 12,857 36,852 38,309 Lubrication 2,807 2,437 8,835 7,162 Unallocated Corporate Expenses (2,610) (1,253) (5,315) (3,014) ------------- ------------- ------------- ------------- Consolidated Operating Earnings $ 25,392 $ 28,525 $ 74,379 $ 83,208 ============= ============= ============= ============= </TABLE> 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 $17.8 million in the third quarter and $47.8 million year-to-date. In 2000, comprehensive income was $16.9 million for the third quarter and $49.6 million for the nine-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. In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets", which will be effective for the Company at the beginning of fiscal year 2002. Upon adoption of SFAS No. 142, goodwill amortization of approximately $800,000 on an annualized basis will cease. Based on a preliminary assessment, management believes that other provisions of SFAS No. 142 will not have a material impact on the Company's financial position or results of operations, however results of initial goodwill impairment testing required upon adoption are not currently determinable. 9. Upon the acquisition of ASM, the Company began implementing a plan to move ASM operations from California to expanded facilities in Sioux Falls, South Dakota. Estimated incremental costs associated with the plan that would not benefit continuing activities were recognized as liabilities assumed in the acquisition and included in the allocation of acquisition cost. During the third quarter of 2001, the Company also announced plans to restructure the operations of its German subsidiary, Graco Verfahrenstechnik (GV), including termination of approximately 50 employees, termination of leases, consolidation of product lines, and relocation of operations to other Company facilities in Belgium and the U.S. Third quarter general and administrative expense includes a $1.4 million charge to establish a restructuring accrual for incremental costs associated with relocating GV operations. There were no significant payments charged against the accrual during the quarter. Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net earnings are down from prior year due to lower sales. Sales are down 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 Thirty-nine Weeks Ended ---------------------------- ---------------------------- Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29, 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net Sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 50.1 48.9 50.3 49.4 Product development 4.0 4.3 4.6 4.0 Selling, marketing and distribution 17.1 16.7 17.1 17.7 General and administrative 7.4 6.9 7.3 6.9 ------------- ------------- ------------- ------------- Operating Earnings 21.4 23.2 20.7 22.0 Interest expense 0.2 0.8 0.3 0.9 Other (income) expense, net 0.2 0.2 0.3 0.4 ------------- ------------- ------------- ------------- Earnings Before Income Taxes 21.0 22.2 20.1 20.7 Income taxes 6.9 7.5 6.7 7.1 ------------- ------------- ------------- ------------- Net Earnings 14.1% 14.7% 13.4% 13.6% ============= ============= ============= ============= </TABLE> Net Sales - --------- Sales in the Industrial / Automotive segment were down due to reduced demand resulting from weak economic conditions, particularly in North America. In the Contractor segment, third quarter sales increased compared to prior year on the strength of sales in the home center channel, which increased 21 percent. Year-to-date, Contractor sales were even with last year. Sales in the Lubrication segment exceeded 2000 sales for both the three-month and nine-month periods due mostly to large sales to key customers and increased market share. Price increases have not had a significant impact on sales in 2001. Sales by geographic area were as follows: <TABLE> Thirteen Weeks Ended Thirty-nine Weeks Ended ----------------------------- ---------------------------- Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29,2000 ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> Americas $ 86,513 $ 89,613 $262,601 $278,655 Europe 20,851 21,355 62,430 64,351 Asia Pacific 11,287 12,132 34,307 35,089 ------------- ------------- ------------- ------------- Consolidated $118,651 $123,100 $359,338 $378,095 ============= ============= ============= ============= </TABLE> Year-to-date translated at consistent exchange rates, Europe would have shown a 2 percent increase in sales compared to last year, and Asia Pacific region would have shown a 5 percent increase over prior year sales. For the third quarter, the impact of changes in foreign exchange rates was not as great as it was in the first two quarters of 2001 due to the strengthening of the U.S. dollar in Europe. Gross Profit - ------------ Gross profit percentages of sales for the quarter and year-to-date were down compared to the prior year due to lower sales volume, product mix and the negative impact of changes in exchange rates. Operating Expenses - ------------------ Year-to-date product development expenses were up due to spending for significant new product launches in the first part of the year, but are down for the third quarter due to lower product-launch-related expenses and management actions to reduce the product development expense running rate. 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. The Company estimates that costs related to relocating GV and ASM will total approximately $4 million over a twelve month period, including the $1.4 million restructuring charge to general and administrative expense in the third quarter. Excluding the restructuring charge, general and administrative expenses decreased due mostly to reduced information systems spending and lower sales-and-earnings-based incentives. Year-to-date operations include a $2.5 million pension credit related to the Company's U.S. defined benefit pension plan, compared to a $3.6 million credit in the same period last year. These credits resulted from recognition of investment gains attributable to pension plan assets, and are included in cost of products sold and operating expenses based on salaries and wages. Interest Expense and Other Expense - ---------------------------------- Interest expense decreased due to reduced debt levels. Liquidity and Capital Resources - ------------------------------- The Company generated $60 million of cash flow from operating activities in the first nine months of 2001, compared to $62 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, Minnesota and Sioux Falls, South Dakota, the acquisition of ASM, and reduction of debt. The Company had unused lines of credit available at September 28, 2001 totaling $74 million. The available credit facilities and internally generated funds provide the Company with the financial flexibility to meet liquidity needs. Outlook - ------- The Company remains concerned about the weak North American economy and an economic slowdown in Europe. While internal sales growth will be challenged by difficult economic conditions, management believes the Company is positioned to perform at high levels of profitability in both good and difficult times. 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 None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 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: November 8, 2001 By: /s/David A. Roberts -------------------------------- ----------------------------------- David A. Roberts President & Chief Executive Officer Date: November 8, 2001 By: /s/James A. Graner -------------------------------- ----------------------------------- James A. Graner Vice President & Controller ("duly authorized officer")