Graco - 10-Q quarterly report FY2010 Q2

Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the quarterly period ended June 25, 2010

Commission File Number: 001-09249

(612) 623-6000

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.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

See notes to consolidated financial statements

The Company designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid materials. Management classifies the Company’s business into three reportable segments: Industrial, Contractor and Lubrication. Key strategies include developing and marketing new products, expanding distribution globally, opening new markets with technology and channel expansion and completing strategic acquisitions.

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying notes to the financial statements.

Net sales, net earnings and earnings per share were as follows (in millions except per share amounts and percentages):

Sales, gross profit margins and net earnings for the quarter and year-to-date improved significantly compared to last year. Sales increased in all segments and geographic regions. Currency translation had a favorable effect on year-to-date sales ($6 million) and net earnings ($3 million) but there was no significant effect on consolidated results for the quarter.

Sales by geographic area were as follows (in millions):

¹ North and South America, including the U.S.

Sales for the quarter increased 25 percent in the Americas, 27 percent in Europe (33 percent at consistent translation rates) and 53 percent in Asia Pacific (47 percent at consistent translation rates). Translation rates did not have a significant impact on the overall sales increase of 30 percent. Year-to-date sales increased 17 percent in the Americas, 22 percent in Europe and 59 percent in Asia Pacific (51 percent at consistent translation rates). The overall year-to-date growth rate of 25 percent included 2 percentage points from translation.

Gross profit margin, expressed as a percentage of sales, was 53 percent for the quarter and 53¹/2percent year-to-date, up from 49¹/2 percent and 48 percent, for the comparable periods last year, respectively. Higher production volume in 2010 was the major factor in the improvement in both the quarter and year-to-date rates. Costs related to workforce reductions lowered the 2009 first-half gross margin rate and the favorable effects of currency translation contributed to the increase in the 2010 year-to-date rate. Selling price increases, lower material and pension costs, and divisional mix also contributed to the increase in margin rates.

Total operating expenses were up $7 million year-to-date. Improved results drove the increase, mainly from higher incentives expense, partially offset by lower pension expense.

The year-to-date effective income tax rate of 35 percent for 2010 was higher than the 32 percent rate for the comparable period of 2009. The federal R&D credit has not been renewed for 2010, so no credit is included in the 2010 rate.

Certain measurements of segment operations compared to last year are summarized below:

The Industrial segment had strong sales increases in all regions. For the quarter, sales increased 28 percent in the Americas, 37 percent in Europe (43 percent at consistent translation rates) and 54 percent in Asia Pacific (50 percent at consistent translation rates). Year-to-date sales increased 23 percent in the Americas, 26 percent in Europe and 63 percent in Asia Pacific (57 percent at consistent translation rates).

Higher volume and lower costs and expenses (from actions taken in 2009 and 2008), along with price increases, contributed to the improvement in operating earnings as a percentage of sales.

For the quarter, Contractor segment sales increased 26 percent in the Americas, 10 percent in Europe (15 percent at consistent translation rates) and 29 percent in Asia Pacific (22 percent at consistent translation rates). Year-to-date sales increased 15 percent in the Americas, 12 percent in Europe and 29 percent in Asia Pacific (21 percent at consistent translation rates).

Stocking shipments of new products contributed to strong second quarter sales, but costs and expenses related to the new product introduction resulted in a small decrease in operating earnings as a percentage of sales.

For the quarter, Lubrication segment sales increased 12 percent in the Americas. From small bases, sales approximately doubled in Europe and Asia Pacific. Year-to-date, sales increased 7 percent in the Americas, 55 percent in Europe and 108 percent in Asia Pacific.

Higher volume and lower costs and expenses (from actions taken in 2009 and 2008) contributed to the improvement in operating earnings as a percentage of sales.

In the first half of 2010, the Company used cash to reduce borrowings under its long-term line of credit by $6 million and paid dividends of $24 million. The Company also purchased $10 million of its common stock, of which $6¹/2 million settled in the third quarter and is included in trade accounts payable as of June 25, 2010. Significant uses of cash in the first half of 2009 included $36 million for reduction of borrowings under the long-term line of credit and $23 million for payment of dividends.

Since the end of 2009, inventories increased by $18 million to meet higher demand. Accounts receivable increased by $37 million due to higher sales levels.

At June 25, 2010, the Company had various lines of credit totaling $269 million, of which $178 million was unused. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2010.

Investments in new product development, international sales people and global distribution channel are paying off in the form of improved results. While second quarter is generally the strongest quarter for the Contractor business, management expects modest improvement in end markets in the Americas and Europe over the last half of 2010, and anticipates that activity in Asia Pacific will remain strong.

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, or 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 Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2009 for a more comprehensive discussion of these and other risk factors.

Investors should realize that factors other than those identified above and in Item 1A and Exhibit 99 might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer, the Chief Financial Officer and Treasurer, the Vice President and Controller, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company’s disclosure obligations under the Exchange Act.

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

On September 18, 2009, the Board of Directors authorized the Company to purchase up to 6,000,000 shares of its outstanding common stock, primarily through open-market transactions. The authorization expires on September 30, 2012.

In addition to shares purchased under the Board authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax withholding on option exercises.

Information on issuer purchases of equity securities follows:

Item 6.  Exhibits