UNITED STATESSECURITIES 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 endedMarch 28, 2003
Commission File Number:001-9249
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
45,660,000 common shares were outstanding as of April 25, 2003.
See notes to consolidated financial statements.
The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of March 28, 2003 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 28, 2003, 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 2002 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.
The Company accounts for its stock option and purchase plans using the intrinsic value method and has adopted the “disclosure only” provisions of Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” No compensation cost has been recognized for the Employee Stock Purchase Plan and stock options granted under the various stock incentive plans.
Had compensation cost been determined based upon fair value (using the Black-Scholes option-pricing method) at the grant date for awards under these plans, the Company’s net earnings and earnings per share would have been reduced as follows (in thousands, except per share amounts):
Total comprehensive income for the quarter was $18.4 million in 2003 and $15.6 million in 2002. There have been no significant changes to the components of comprehensive income from those noted on the 2002 Form 10-K.
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 28, 2003 and March 29, 2002 were as follows (in thousands):
Major components of inventories were as follows (in thousands):
Components of intangible assets were (in thousands):
Amortization of intangibles during the first quarter of 2003 was $411,000. Estimated annual amortization is as follows: $1,600,000 in 2003, $900,000 in 2004, $400,000 in 2005, $300,000 in 2006 and $200,000 in 2007.
Subsequent Event: On March 31, 2003, the Company purchased certain assets and assumed certain liabilities of Sharpe Manufacturing Company for approximately $13 million cash. The purchase price will be allocated to assets acquired based on the results of an independent appraisal. Sharpe manufactures spray guns and related parts and accessories for the automotive refinishing market. Sharpe had sales of approximately $11 million in 2002.
Results of Operations
The following table sets forth items from the Company’s Consolidated Statements of Earnings as percentages of net sales:
Net Sales
Sales by segment and geographic area were as follows (in thousands):
Currency exchange rates had a significant effect on first quarter sales. Sales increased 7 percent in local currencies; 11 percent when translated to U.S. dollars. Most of the translation effect came from Europe, where sales were flat in local currencies but increased by 19 percent when translated to U.S. dollars. In Asia Pacific, sales increased 40 percent in local currencies; 47 percent when translated to U.S. dollars. Most of the translation effect is reflected in the Industrial/Automotive segment, which has more sales in Europe and Asia Pacific than the Contractor and Lubrication segments.
Strong demand for the Company's products resulted in higher sales in Asia Pacific. All regions in Asia Pacific except for Japan had sales gains, with the largest increase in China. The Company's investment in additional sales personnel, marketing programs, and expenditures to obtain new distributors have contributed to increased sales.
Contractor segment sales were higher than last year in all regions. In the Americas, sales were higher in the professional paint store channel and slightly lower in the home center channel. Successful new product launches in the paint store channel more than offset the impact of poor weather conditions and a weak commercial construction market in the United States.
Lubrication segment sales increased by 17% primarily due to successful new product introductions and a February sales promotion.
Gross Profit
Gross profit percentage of sales increased to 52.7 percent from 51.1 percent primarily due to favorable currency translation rates. Changes in exchange rates have less impact on the cost of products sold than on sales because most product costs are incurred in U.S. dollars, which had the effect of increasing gross profit rate in the first quarter of 2003 when compared to the same period last year.
Operating Expenses
Increases in operating expenses resulted from higher spending levels required to generate profitable sales growth. First quarter expenses are consistent with the level of spending in the fourth quarter of 2002 but are higher than first quarter of 2002, when spending was restricted due to uncertainties following September 11. Much of the increase from first quarter of 2002 is from payroll-related costs (salaries, incentives and benefits) and also includes higher sales meeting, travel and product introduction expenses. Changes in exchange rates used to translate expenses incurred in foreign currencies also had the effect of increasing expenses as reported in U.S. dollars. General and administrative expenses in 2002 included a $700,000 contribution to the Graco Foundation - no contribution was made in the first quarter of 2003.
Liquidity and Capital Resources
In March 2003, the Company repurchased 2.2 million shares of its common stock for $54.8 million from David A. Koch, a current Board member, and former Chairman and Chief Executive Officer of the Company, his wife, and a family trust and family foundation. The Company used available cash balances to fund the repurchase.
The Company had unused lines of credit available at March 28, 2003 totaling $55 million. Cash balances of $58 million at March 28, 2003, internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs, including approximately $13 million cash used in fiscal April 2003 for the acquisition of Sharpe Manufacturing operations.
Outlook
While management believes that 2003 will be a year of modest underlying growth for the major industrialized countries, the Company is aggressively pursuing its growth strategies to increase its revenues and earnings at a faster rate. New products, distribution initiatives, new market activities and strategic acquisitions should add revenues and earnings for the balance of this year.
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 2002 for a more comprehensive discussion of these and other risk factors.
Evaluation of disclosure controls and procedures
Within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of the Company's President and Chief Executive Officer, Vice President and Controller, Vice President and Treasurer, and 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.
Changes in internal controls
There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls.
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 28, 2003
Executive Long Term Incentive Agreement. Form of agreement used for award of restricted stock to one executive officer, dated January 6, 2003
Stock Purchase Agreement dated March 13, 2003, between Graco Inc. and David A. Koch, Barbara Koch, Paul M. Torgerson and U.S. Bank Trust National Association SD, as Trustees of the Trust administered pursuant to Article V of the Last Will and Testament and Codicil thereto of Clarissa L. Gray deceased, and Greycoach Foundation (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K dated March 20, 2003)
Certification of President and Chief Executive Officer, Vice President and Controller, and Vice President and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following Current Report on Form 8-K was filed during the quarter ended March 28, 2003:
On March 20, 2003, Graco Inc. filed a current report on Form 8-K to disclose a stock repurchase.
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.
I, David A. Roberts, certify that:
I have reviewed this quarterly report on Form 10-Q of Graco Inc.;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared.
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
I, James A. Graner, certify that:
I, Mark W. Sheahan, certify that: