UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the SecuritiesExchange Act of 1934
For the quarterly period ended April 1, 2005
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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
69,190,000 common shares were outstanding as of April 25, 2005.
INDEX
PART I
See notes to consolidated financial statements.
See notes to consolidated financial statements
GRACO INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of April 1, 2005 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 April 1, 2005, 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 2004 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 following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Stock options to purchase 311,800 shares are not included in the 2005 calculation of diluted earnings per share because they would have been anti-dilutive.
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):
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004), “Share-Based Payment” that requires compensation costs related to share-based payment transactions to be recognized in the financial statements. This standard will be effective for the Company starting with the first quarter of 2006. Annual compensation cost, net of tax effects, related to unvested stock compensation as of April 1, 2005 is approximately $4.6 million in 2005, $2.5 million in 2006, $1.7 million in 2007 and $0.6 million in 2008 (as valued and calculated under SFAS 123 pro forma disclosures.) The Company has not yet determined how it will value future grants or whether it will elect to adjust prior periods upon adoption of SFAS No. 123 (Revised 2004).
The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
Total comprehensive income for the quarter was $26.9 million in 2005 and $22.0 million in 2004. There have been no significant changes to the components of comprehensive income from those noted on the 2004 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 April 1, 2005 and March 26, 2004 were as follows (in thousands):
Segment operating earnings for 2004 have been restated to conform to 2005, which includes amortization of intangibles formerly classified as unallocated corporate expense.
Major components of inventories were as follows (in thousands):
Information related to other intangible assets follows (dollars in thousands):
Amortization of intangibles during the first quarter of 2005 was $1.0 million. Estimated annual amortization is as follows: $4.5 million in 2005, $4.6 million in 2006, $4.6 million in 2007, $3.9 million in 2008, $3.5 million in 2009 and $9.2 million thereafter.
Components of other current liabilities were (in thousands):
A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific customer warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):
Effective January 1, 2005, the Company purchased the stock of Liquid Control Corporation, Inc. and its affiliated company Profill Corp. for approximately $35 million cash. Liquid Control designs and manufactures highly engineered precision resin dispensing equipment, which will expand and complement the Company’s Industrial/Automotive business. Liquid Control had sales of approximately $26 million in 2004. Results of Liquid Control’s operations have been included in the Industrial/Automotive segment since the date of acquisition.
The purchase price was allocated based on estimated fair values as follows (in thousands):
Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):
For tax purposes, the transaction will be treated as a purchase of assets and goodwill is expected to be fully deductible.
Effective February 4, 2005, the Company purchased the stock of Gusmer Corporation Inc. and Gusmer Europe, S.L. for approximately $68 million cash. Gusmer designs and manufactures specialized two-component dispense equipment systems, which will expand and complement the Company’s Industrial/Automotive business. Gusmer had sales of approximately $43 million in 2004. Results of Gusmer’s operations have been included in the Industrial/Automotive segment since the date of acquisition.
The purchase price has not been finalized and is subject to agreement on closing asset and liability balances. The preliminary purchase price was allocated based on estimated fair values as follows (in thousands):
The following pro forma information assumes the acquisitions of Liquid Control and Gusmer occurred as of the beginning of each quarter presented. The pro forma information is not necessarily indicative of what would have actually occurred or of future results (in thousands, except per share amounts).
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):
North and South America, including the U.S.
Europe, Africa and Middle East
Consolidated sales increased by 27 percent compared to the first quarter last year. Sales from acquired businesses contributed 11 percentage points of the increase. All operating segments and geographic regions experienced double-digit percentage growth in sales.
Industrial/Automotive sales increased by 39 percent, 15 percent before sales from acquired operations. Demand for this segment’s products remained strong in all major product categories and in all geographic regions.
Contractor segment sales increased by 15 percent. In the Americas, there was double-digit percentage growth in both the professional paint store channel and the home center channel. Sales of larger paint sprayers were particularly strong in the professional paint store channel. The rollout of texture sprayers contributed to the increase in home center channel sales.
Lubrication segment sales increased by 20 percent. Sales were strong in all geographic regions and major product categories. Re-introduction of the Matrix™ fluid management system in the second quarter should have a positive impact on future sales.
Gross Profit
Gross profit as a percentage of sales was 50.2 percent compared to 54.4 percent for the first quarter last year. Approximately 3 percentage points of the decline was due to the impact of acquisitions, including lower margins on acquired products and the recognition of costs assigned to inventories as part of the valuation of assets acquired. The remainder of the decrease is due to several factors, including mix of products sold and higher material costs, offset somewhat by favorable effects of higher volume and process improvements.
Operating Expenses
Total operating expenses increased due to the expenses of the acquired operations. Expenses as a percentage of sales decreased to 26.1 percent from 29.6 percent.
General and administrative expense includes approximately $1 million from the amortization of intangible assets related to the businesses acquired in 2005. The annual recurring non-cash expense associated with amortization of intangible assets from those acquired companies is expected to be approximately $4 million.
Liquidity and Capital Resources
During the quarter, significant uses of cash included $103 million for acquisitions of businesses, $9 million of dividends paid and $7 million for purchases and retirement of Company common stock. The Company used cash on hand and a $40 million advance from a line of credit to fund the acquisitions. During the first quarter of 2004, significant uses of cash included $111 million of dividends paid (including $104 million for a one-time special dividend) and $15 million for purchases and retirement of Company common stock.
The Company had unused lines of credit available at April 1, 2005 totaling $80 million. Cash balances of $12 million at April 1, 2005, internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs.
Outlook
Results for the first quarter were in line with management’s expectations. While management’s vision is limited due to the short cycle nature of the business, the sales tempo experienced throughout the quarter was good and management continues to expect growth this year. Management expects that the businesses acquired in the first quarter will begin to contribute to net earnings in the second half 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 2004 for a more comprehensive discussion of these and other risk factors.
Investors should realize that factors other than those identified above and in 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.
Evaluation of disclosure controls and procedures
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, 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
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.
PART II
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On February 22, 2002, the Board of Directors authorized a plan for the Company to purchase up to a total of 2,700,000 shares of its outstanding common stock, primarily through open-market transactions. This plan effectively expired upon approval of a new plan on February 20, 2004, authorizing the purchase of up to 3,000,000 shares and expiring on February 28, 2006.
In addition to shares purchased under the plan, 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:
Submission of Matters to a Vote of Security Holders
None
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.