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 29, 2002 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 ------ ------- 31,657,000 common shares were outstanding as of April 26, 2002.
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 12 SIGNATURES 13 EXHIBITS 2002 Corporate & SBU Bonus Plan Exhibit 10 2002 Executive Officer Annual Incentive Bonus Plan Exhibit 10.1 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. Stock Incentive Plan with schedule of awards current as of March 29, 2002 Exhibit 10.2 Computation of Net Earnings per Common Share Exhibit 11
PART I GRACO INC. AND SUBSIDIARIES Item I. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except per share amounts) Thirteen Weeks Ended March 29, 2002 March 30, 2001 -------------- -------------- Net Sales $107,857 $109,814 Cost of products sold 52,694 54,676 -------------- -------------- Gross Profit 55,163 55,138 Product development 4,161 6,287 Selling, marketing and distribution 19,792 20,672 General and administrative 7,717 7,696 -------------- -------------- Operating Earnings 23,493 20,483 Interest expense 150 450 Other expense (income), net (3) 213 -------------- -------------- Earnings before Income Taxes 23,346 19,820 Income taxes 7,800 6,700 -------------- -------------- Net Earnings $ 15,546 $ 13,120 ============== ============== Basic Net Earnings Per Common Share $ .50 $ .43 ============== ============== Diluted Net Earnings Per Common Share $ .49 $ .42 ============== ============== See notes to consolidated financial statements. GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 29, 2002 Dec. 28, 2001 -------------- ------------- ASSETS Current Assets Cash and cash equivalents $ 44,226 $ 26,531 Accounts receivable, less allowances of $5,200 and $4,500 91,129 85,440 Inventories 31,653 30,333 Deferred income taxes 12,115 11,710 Prepaid expenses 1,454 1,483 -------------- ------------- Total current assets 180,577 155,497 Property, Plant and Equipment: Cost 212,838 211,523 Accumulated depreciation (116,223) (112,579) -------------- ------------- 96,615 98,944 Intangible Assets, net 13,633 14,274 Other Assets 7,508 7,398 -------------- ------------- $298,333 $276,113 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable to banks $ 11,296 $ 9,512 Current portion of long-term debt 500 550 Trade accounts payable 10,638 10,676 Salaries, wages and commissions 7,571 10,620 Accrued insurance liabilities 10,936 10,380 Accrued warranty and service liabilities 6,258 6,091 Income taxes payable 10,485 6,014 Other current liabilities 14,546 19,410 -------------- ------------- Total current liabilities 72,230 73,253 Retirement Benefits and Deferred Compensation 27,388 27,359 Deferred Income Taxes 1,873 1,761 Shareholders' Equity Common stock 31,629 31,113 Additional paid-in capital 65,359 54,269 Retained earnings 100,625 89,155 Other, net (771) (797) -------------- ------------- Total shareholders' equity 196,842 173,740 -------------- ------------- $298,333 $276,113 ============== ============= See notes to consolidated financial statements. GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> Thirteen Weeks -------------- March 29, 2002 March 30, 2001 -------------- -------------- <S> <C> <C> Cash Flows from Operating Activities Net Earnings $ 15,546 $ 13,120 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 4,592 4,240 Deferred income taxes (332) (182) Tax benefit related to stock options exercised 2,500 - Change in: Accounts receivable (6,015) 4,065 Inventories (1,319) (5,510) Trade accounts payable (19) (358) Salaries, wages and commissions (3,029) (6,569) Retirement benefits and deferred (9) 272 compensation Other accrued liabilities 403 2,832 Other 40 (789) -------------- -------------- 12,358 11,121 -------------- -------------- Cash Flows from Investing Activities Property, plant and equipment additions (1,639) (6,203) Proceeds from sale of property, plant and equipment 13 45 Acquisition of business, net of cash acquired - (15,949) -------------- -------------- (1,626) (22,107) -------------- -------------- Cash Flows from (for) Financing Activities Borrowings on notes payable and lines of credit 8,512 41,274 Payments on notes payable and lines of credit (6,632) (42,307) Borrowings on long-term debt - 18,000 Payments on long-term debt (50) (15,810) Common stock issued 9,151 6,320 Common stock retired (686) (177) Cash dividends paid (3,424) (3,044) -------------- -------------- 6,871 4,256 -------------- -------------- Effect of exchange rate changes on cash 92 341 -------------- -------------- Net increase (decrease) in cash and cash equivalents 17,695 (6,389) Cash and cash equivalents Beginning of year 26,531 11,071 -------------- -------------- End of period $ 44,226 $ 4,682 ============== ============== </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 29, 2002 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 29, 2002, 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 2001 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): March 29, 2002 Dec. 28, 2001 -------------- ------------- Finished products and components $26,583 $23,863 Products and components in various stages of completion 18,250 18,827 Raw materials and purchased components 18,154 18,899 -------------- ------------- 62,987 61,589 Reduction to LIFO cost (31,334) (31,256) -------------- ------------- $31,653 $30,333 ============== ============= 3. 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 weeks ended March 29, 2002 and March 30, 2001 were as follows (in thousands): Thirteen Weeks Ended -------------------- March 29, 2002 March 30, 2001 -------------- -------------- Net Sales Industrial/Automotive $ 46,103 $ 47,649 Contractor 51,135 49,901 Lubrication 10,619 12,264 -------------- -------------- Total $107,857 $109,814 ============== ============== Operating Earnings Industrial/Automotive $ 11,737 $ 9,394 Contractor 10,865 8,620 Lubrication 2,392 2,956 Unallocated corporate expenses (1,501) (487) -------------- -------------- Total $ 23,493 $ 20,483 ============== ============== 4. Total comprehensive income for the quarter was $15.6 million in 2002 and $12.4 million in 2001. There have been no significant changes to the components of comprehensive income from those noted on the 2001 Form 10-K except as described in note 6 below, with respect to translation gains and losses. 5. Effective at the beginning of fiscal year 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142, amortization of goodwill ceased, and results of initial goodwill impairment testing indicated no impairment. Had SFAS No. 142 been effective at the beginning of 2001, the non-amortization provisions would have had no effect on first quarter results. GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Components of intangible assets were (in thousands): March 29, 2002 Dec. 28, 2001 -------------- ------------- Goodwill $ 7,939 $ 7,939 Other identifiable intangibles, net of accumulated amortization of $7,000 and $6,400 5,694 6,335 -------------- ------------- $13,633 $14,274 ============== ============= Amortization of intangibles during the first quarter of 2002 was $642,000. Estimated annual amortization is as follows: $2,400,000 in 2002, $1,600,000 in 2003, $800,000 in 2004, $400,000 in 2005 and $300,000 in 2006. 6. During the third quarter of 2001, the Company announced plans to relocate the operations of its German subsidiary, Graco Verfahrenstechnik (GV) to other Company facilities in Belgium and the U.S. This included termination of approximately 50 employees, termination of leases and consolidation of product lines. General and administrative expense in the third quarter of 2001 included a $1.4 million charge to establish a restructuring accrual for incremental costs associated with relocating GV operations. Through the end of the first quarter of 2002, there were no significant payments charged against the accrual, but the Company expects that all amounts accrued will be paid by the end of 2002. The economic facts and circumstances considered in determining the functional currency of GV changed as a result of relocating GV operations. Consequently, the Company determined that the functional currency of GV changed from the euro to the U.S. dollar. Effective at the beginning of 2002, adjustments resulting from the translation of GV financial statements into U.S. dollars are no longer charged or credited to shareholders' equity, but are now included in other expense (income). 7. Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was effective for the Company at the beginning of fiscal year 2002. This standard provides for a single accounting model to be used for long-lived assets to be disposed of, and broadens the presentation of discontinued operations to include more disposal transactions. The adoption of SFAS No. 144 had no effect on the Company's first quarter financial position or operating results.
Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Sales are down compared to the prior year, but net earnings are up due to an improved gross margin rate and lower expenses. The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: Thirteen Weeks Ended -------------------- March 29, 2002 March 30, 2001 -------------- -------------- Net Sales 100.0% 100.0% Cost of products sold 48.9 49.8 Product development 3.9 5.7 Selling, marketing and distribution 18.3 18.8 General and administrative 7.1 7.0 -------------- -------------- Operating Earnings 21.8 18.7 Interest expense 0.2 0.4 Other (income) expense, net 0.0 0.2 -------------- -------------- Earnings Before Income Taxes 21.6 18.1 Income taxes 7.2 6.1 -------------- -------------- Net Earnings 14.4% 12.0% ============== ============== Net Sales - --------- Sales in the Industrial / Automotive segment were down 3 percent compared to last year, and continue to be affected by weak economic conditions in North America, Europe and Japan. Contractor segment sales are up 2 percent, mostly from home center channel and ASM products. The Company acquired ASM at the end of the first quarter of 2001. Lubrication segment sales were down, as large orders received in 2001 were not repeated in 2002. Sales by geographic area were as follows (in thousands): Thirteen Weeks Ended -------------------- March 29, 2002 March 30, 2001 -------------- -------------- Americas $ 78,578 $ 78,993 Europe 19,802 20,722 Asia Pacific 9,477 10,099 -------------- -------------- Consolidated $107,857 $109,814 ============== =============- Sales in Europe declined 4 percent, but would have been flat if translated at consistent exchange rates. Sales in the Asia Pacific region were down 6 percent, but were down only 2 percent when translated at consistent exchange rates. Gross Profit - ------------ Gross profit percentage of sales increased to 51.1 percent from 50.2 percent due to manufacturing efficiencies, cost reduction initiatives, price increases and product mix. Operating Expenses - ------------------ Total operating expenses decreased by 9 percent compared to last year. The largest part of the decrease came from reduced product development expenses, which dropped by 34 percent due to actions taken during 2001. Actions to contain spending were also successful in reducing selling and general and administrative expenses from the prior year. General and administrative expenses included a $700,000 contribution to the Graco Foundation. No similar contribution was made in the first quarter of 2001. Liquidity and Capital Resources - ------------------------------- Cash generated from operations and from issuance of common stock in the first quarter of 2002 increased cash and cash equivalent balances by $18 million, after cash dividend payments of $3 million. In the first quarter of 2001, the primary uses of cash included the acquisition of ASM Company and fixed asset additions. Accounts receivable increased during the first quarter due to extended terms on selected accounts. The Company had unused lines of credit available at March 29, 2002 totaling $41 million. The available credit facilities and internally generated funds provide the Company with the financial flexibility to meet liquidity needs. Outlook - ------- Predictions of a general economic recovery have not yet translated into incremental sales in the Industrial / Automotive segment, but management believes that a broad-based economic recovery would have a positive effect on its business. While internal sales growth may be challenged by continued difficult economic conditions, management remains committed to high profitability while funding the Company's long-term growth strategies of introducing new products, entering new markets, expanding distribution coverage and pursuing strategic acquisitions. Management is cautiously optimistic that 2002 will be a year of higher net earnings for the Company. SAFE HARBOR CAUTIONARY STATEMENT - -------------------------------- 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 2001 for a more comprehensive discussion of these and other risk factors.
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 10 2002 Corporate & SBU Bonus Plan 10.1 2002 Executive Officer Annual Incentive Bonus Plan 10.2 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. Stock Incentive Plan with schedule of awards current as of March 29, 2002 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: April 30, 2002 By: /s/David A. Roberts ---------------------------------- David A. Roberts President & Chief Executive Officer Date: April 30, 2002 By: /s/James A. Graner ----------------------------------- James A. Graner Vice President & Controller Chief Accounting Officer Date: April 30, 2002 By: /s/Mark W. Sheahan ----------------------------------- Mark W. Sheahan Vice President & Treasurer Principal Financial Officer