Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d) of theSecurities Exchange Act of 1934
For the quarterly period ended September 28, 2007
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer X Accelerated Filer Non-accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
62,893,000 shares of the Registrant’s Common Stock, $1.00 par value were outstanding as of October 18, 2007.
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Net earnings of $39 million for the quarter were 5 percent higher than net earnings in the third quarter last year. Sales of $207 million were 3 percent higher than the same period last year. Year-to-date net earnings of $117 million were 3 percent higher than last year and sales of $636 million were up 4 percent. Higher sales in Europe and Asia were offset to a great extent by lower sales in the Americas.
Foreign currency translation rates had a favorable impact on sales and net earnings. Translated at consistent exchange rates, net earnings and sales for the quarter were each up 1 percent. Year-to-date net earnings were down 1 percent and sales increased 2 percent.
Results include the operations of Lubriquip, which was acquired in July 2006. Sales of Lubriquip products contributed approximately 2 percentage points of year-to-date sales growth. Year-to-date costs and expenses related to moving and consolidation activities (including the consolidation of Gusmer operations completed in the first quarter) totaled approximately $2 million.
Sales by reportable segment and geographic area were as follows (in thousands):
North and South America, including the U.S.
Europe, Africa and Middle East
Industrial segment sales increased 7 percent for both the quarter and year-to-date. Double-digit percentage growth in Europe and Asia more than offset the 5 percent decrease in the Americas for both the quarter and year-to-date.
Contractor segment sales decreased 3 percent for the quarter and 4 percent year-to-date. Strong increases in Europe and Asia were not enough to offset the decrease in the Americas, where sales were down in both the home center and the professional paint store channels.
Lubrication segment sales increased 2 percent for the quarter and 19 percent year-to-date. The year-to-date increase is due to sales of Lubriquip products, acquired in mid-2006. Year-to-date sales in this segment increased in all geographic areas.
Gross profit as a percentage of sales was 53.4 percent for the quarter compared to 52.7 percent for the third quarter last year. Translated at consistent exchange rates, gross profit percentage for the quarter is virtually the same as last year.
Year-to-date gross profit percentage was 53.1 percent in 2007 compared to 53.3 percent in 2006. The decrease was due mainly to lower margin rates on Lubriquip products, consolidation costs and higher material costs, offset somewhat by the favorable impacts of currency translation and pricing.
Total operating expenses for the quarter increased 1 percent. Product development and general and administrative expenses were down slightly while higher selling, marketing and distribution spending was in line with the sales increase.
Year-to-date operating expenses increased 4 percent, mostly due to expenses related to Lubriquip. Operating expenses as a percentage of sales are about the same as last year.
The effective income tax rate of 32 percent for the quarter was 2 percentage points lower than the year-to-date rate. The lower rate in the quarter resulted from expiring statutes of limitations and a higher than expected benefit upon filing of prior year tax returns.
Effective tax rates were about the same as last year for both the quarter and year-to-date.
In the first nine months of 2007, the Company used cash from operations and borrowings to purchase and retire $165 million of Company common stock. Other significant uses of cash in the first nine months of 2007 included $33 million for payment of dividends and $28 million for capital additions.
In the first nine months of 2006, the Company used primarily cash from operations to purchase and retire $70 million of Company common stock. Other significant uses of cash in the first nine months of 2006 included $31 million for the acquisition of Lubriquip, $30 million for payment of dividends and $22 million for capital additions.
In July 2007, the Company entered into an agreement with a syndicate of lenders providing $250 million of unsecured committed credit with an option for an additional $150 million. The new credit facility will be used for general corporate purposes including acquisitions and share repurchases. Upon securing the new facility, certain committed lines of credit totaling $50 million were terminated. Additional uncommitted lines totaling $55 million expired at the end of July 2007.
At September 28, 2007, the Company’s various lines of credit, including the new facility, totaled $295 million, of which $193 million was unused. Internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs.
Management is optimistic about continued strength in the Company’s international businesses and remains cautious in its outlook for the Americas. Portions of the Company’s business that have ties to the housing sector in the Americas are expected to be soft until market conditions improve.
In September 2007, the Company announced the launch of new paint sprayers in the home center channel. The new sprayers are expected to generate higher per-store net sales; however sales to home centers in 2008 are estimated to be approximately $7 to $8 million lower than 2007 due to a reduction in the number of stores carrying the sprayers. Incremental expenses totaling approximately $5 million related to the launch and production of new units will be incurred over the next 15 months, including $0.5 million in 2007.
The integration of Lubriquip is on track for completion by the end of the year and the consolidation of Gusmer operations was completed in the first quarter. These integration activities will improve the contribution of the acquired products.
Management believes it can continue to guide the business to higher sales and earnings by making long-term investments in key growth strategies including new product development, expanding distribution, entering new markets and pursuing strategic acquisitions.
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 2006 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.
There are no material changes related to market risk from the disclosures made in the Company’s 2006 Annual Report on Form 10-K.
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.
There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2006 Annual Report on Form 10-K.
On February 17, 2006, the Board of Directors authorized the Company to purchase up to a total of 7,000,000 shares of its outstanding common stock, primarily through open-market transactions. This authorization expires on February 29, 2008. On September 28, 2007, the Board of Directors authorized the Company to purchase up to a total of an additional 7,000,000 shares. This authorization expires on September 30, 2009.
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:
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.