SEC Filing | Graco

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 June 30, 2000 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) 4050 Olson Memorial Highway Golden Valley, Minnesota 55422 - ---------------------------------------- ---------- (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 ------ ------ 20,212,321 common shares were outstanding as of July 31, 2000.

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 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 Computation of Net Earnings per Common Share Exhibit 11 Financial Data Schedule (EDGAR filing only) Exhibit 27

PART I GRACO INC. AND SUBSIDIARIES Item I. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- June 30, 2000 June 25, 1999 June 30, 2000 June 25,1999 ------------- ------------- ------------- ------------ (In thousands except per share amounts) Net Sales $130,168 $114,703 $250,395 $217,944 Cost of products sold 64,066 55,084 122,164 105,468 ------------- ------------ ------------- ------------ Gross Profit 66,102 59,619 128,231 112,476 Product development 4,896 4,771 9,920 9,525 Selling, marketing and distribution 22,360 18,935 46,174 38,240 General and administrative 8,810 9,606 17,454 19,130 ------------- ------------ ------------- ------------ Operating Profit 30,036 26,307 54,683 45,581 Interest expense 1,302 1,858 2,537 3,811 Other (income) expense, net 803 (2,712) 1,240 (2,392) ------------- ------------ ------------- ------------ Earnings Before Income Taxes 27,931 27,161 50,906 44,162 Income taxes 9,600 9,200 17,600 15,000 ------------- ------------ ------------- ----------- Net Earnings $ 18,331 $ 17,961 $ 33,306 $ 29,162 ============= ============ ============= =========== Basic Net Earnings Per Common Share $ .91 $ .89 $ 1.64 $ 1.45 ============= ============ ========+==== =========== Diluted Net Earnings Per Common Share $ .89 $ .86 $ 1.61 $ 1.41 ============= ============ ========+==== =========== See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) June 30, 2000 Dec. 31, 1999 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 4,367 $ 6,588 Accounts receivable, less allowances of $4,500 and $4,400 85,450 79,696 Inventories 36,712 37,702 Deferred income taxes 12,264 12,357 Other current assets 1,814 1,646 ------------- ------------- Total current assets 140,607 137,989 Property, Plant and Equipment: Cost 187,548 182,156 Accumulated depreciation (102,496) (95,663) ------------- ------------- 85,052 86,493 Other Assets 10,442 11,551 ------------- ------------- $236,101 $236,033 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 12,965 $ 14,640 Current portion of long-term debt 810 1,215 Trade accounts payable 11,252 13,500 Salaries, wages & commissions 11,164 12,832 Accrued insurance liabilities 11,419 10,332 Income taxes payable 2,577 2,323 Other current liabilities 22,731 23,421 ------------- ------------- Total current liabilities 72,918 78,263 Long-term Debt, less current portion 58,474 65,695 Retirement Benefits and Deferred Compensation 26,838 29,135 Shareholders' Equity: Common stock 20,210 20,416 Additional paid-in capital 37,350 31,755 Retained earnings 19,505 9,279 Other, net 806 1,490 ------------- ------------- Total shareholders' equity 77,871 62,940 ------------- ------------- $236,101 $236,033 ============= ============= See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Twenty-six Weeks June 30, 2000 June 25, 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands) Net Earnings $ 33,306 $29,162 Adjustments to reconcile net earnings to Net cash provided by operating activities: Depreciation and amortization 7,996 7,615 Deferred income taxes (23) 123 (Gain) loss on sale of fixed assets 116 (3,209) Change in: Accounts receivable (7,014) (2) Inventories 697 4,041 Trade accounts payable (2,197) (997) Salaries, wages and commissions (1,538) (1,940) Retirement benefits and deferred Compensation (2,035) (546) Other accrued liabilities 674 (2,288) Other (667) 139 ------------- ------------- 29,315 32,098 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (5,932) (3,844) Proceeds from sale of property, plant and equipment 78 9,473 Acquisition of business - (18,389) ------------- ------------- (5,854) (12,760) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on notes payable and lines of credit 99,026 58,688 Payments on notes payable and lines of credit (100,496) (67,382) Borrowings on long-term debt 34,090 25,082 Payments on long-term debt (41,715) (34,988) Common stock issued 6,949 3,933 Retirement of common stock (18,966) - Cash dividends paid (5,703) (4,445) ------------- ------------- (26,815) (19,112) ------------- ------------- Effect of exchange rate changes on cash 1,133 1,794 ------------- ------------- Net increase (decrease) in cash and cash (2,221) 2,020 equivalents Cash and cash equivalents: Beginning of year 6,588 3,555 ------------- ------------- End of Period $ 4,367 $ 5,575 ============= ============= 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 June 30, 2000, and the related statements of earnings for the thirteen and twenty-six weeks ended June 30, 2000 and June 25, 1999, and cash flows for the twenty-six weeks ended June 30, 2000 and June 25, 1999 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 June 30, 2000, 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 1999 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): June 30, 2000 Dec. 31, 1999 ------------- ------------- Finished products and components $30,267 $25,748 Products and components in various stages of completion 21,037 23,560 Raw materials and purchased components 19,475 21,961 ------------- ------------- 70,779 71,269 Reduction to LIFO cost (34,067) (33,567) ------------- ------------- $36,712 $37,702 ============= =============

GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. The Company has three reportable segments; Industrial/Automotive, Contractor and Lubrication. Assets of the Company are not tracked along reportable segment lines. Sales and operating profit by segment for the thirteen and twenty-six weeks ended June 30, 2000 and June 25, 1999 were as follows (in thousands): Thirteen Weeks Ended Twenty-six Weeks Ended -------------------------- --------------------------- June 30,2000 June 25,1999 June 30, 2000 June 25,1999 ------------ ------------ ------------- ------------ Net Sales Industrial/Automotive $ 54,692 $ 53,948 $110,681 $104,695 Contractor 64,767 49,719 118,354 91,414 Lubrication 10,709 11,036 21,360 21,835 ----------- ----------- ------------ ----------- Total $130,168 $114,703 $250,395 $217,944 =========== =========== ============ =========== Operating Profit Industrial/Automotive $ 13,760 $ 12,942 $ 26,267 $ 22,687 Contractor 14,966 13,144 25,452 22,044 Lubrication 2,409 2,676 4,725 4,964 Unallocated Corporate expenses (1,099) (2,455) (1,761) (4,114) ----------- ------------ ------------- ------------ Consolidated Operating Profit $ 30,036 $ 26,307 $ 54,683 $ 45,581 =========== ============ ============= ============ 4. There have been no changes to the components of comprehensive income from those noted on the 1999 Form 10K. 5. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which will be effective for the Company in fiscal year 2001. The statement, as amended by SFAS No. 138 issued June 2000, requires that all derivatives be recognized in the financial statements as either assets or liabilities measured at fair value, and also specifies new methods of accounting for hedging transactions. The Company has not yet determined the impact of SFAS 133 and 138, if any.

Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net earnings of $18.3 million ($.89 per diluted share) for the quarter ended June 30, 2000 increased 2 percent from second quarter 1999 earnings of $18.0 million ($.86 per diluted share). Earnings in the second quarter of 1999 included non-recurring after-tax gains of $2.1 million ($.10 per diluted share) from the sale of the Company's Plymouth, Michigan and Los Angeles facilities. Year to date net earnings increased to $33.3 million, a 14 percent increase over the same period last year. Strong sales continued to drive improvements in quarterly and year to date net earnings. The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: Three Months Six Months (13 weeks) Ended (26 weeks) Ended ----------------------------- ----------------------------- June 30, 2000 June 25, 1999 June 30, 2000 June 25, 1999 ------------- ------------- ------------- ------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 49.2 48.0 48.8 48.4 Product development 3.7 4.2 4.0 4.4 Selling, marketing and distribution 17.2 16.5 18.4 17.5 General and administrative 6.8 8.4 7.0 8.8 ------------- ------------- ------------- ------------- Operating Profit 23.1 22.9 21.8 20.9 ------------- ------------- ------------- ------------- Interest expense 1.0 1.6 1.0 1.7 ------------- ------------- ------------- ------------- Other (income) expense, net 0.6 (2.4) 0.5 (1.1) ------------- ------------- ------------- ------------- Earnings Before Income Taxes 21.5 23.7 20.3 20.3 Income taxes 7.4 8.0 7.0 6.9 ------------- ------------- ------------- ------------- Net Earnings 14.1% 15.7% 13.3% 13.4% ============= ============= ============= =============

Net Sales - --------- Net sales of $130.2 million in the second quarter were up 13 percent from the second quarter of 1999. Year to date sales of $250.4 million increased 15 percent over the prior year. Contractor Equipment segment sales accounted for most of the sales improvement, increasing 30 percent over seond quarter last year and 29 percent year to date due to new product releases and an additional sales channel in North America. Graco introduced its new Magnum sprayers in the first quarter of 2000. These units are being sold primarily in the recently established home center sales channel within the Contractor Equipment segment, but are available to customers in other channels. Industrial/Automotive segment sales increased 1 percent from second quarter 1999 and increased 6 percent over 1999 year to date. Lubrication Equipment segment sales decreased 3 percent for the quarter and 2 percent year to date. Geographically, sales in the Americas increased 19 percent in both the quarter and six month periods due to strong Contractor sales. Sales of $20.9 million for the quarter in Europe were flat compared to last year but would have increased 12 percent if translated at consistent exchange rates. Compared to prior year to date, European sales increased 5 percent; 17 percent translated at consistent exchange rates. Asia Pacific quarterly sales of $12.5 million were also flat compared to last year and would have decreased 5 percent if translated at consistent exchange rates. For the six month period, Asia Pacific sales increased by 4 percent, but decreased 1 percent when translated at consistent exchange rates. Gross Profit - ------------ Gross profit as a percentage of quarterly net sales dropped to 50.8 percent from 52.0 percent. For the six month period, gross profit percentage decreased to 51.2 percent from 51.6 percent. The decrease was due to product mix and the negative impact of changes in exchange rates. The decrease was partially offset by the effects of improved manufacturing efficiencies resulting from higher production and sales levels. Operating Expenses - ------------------ Operating expenses of $36.1 million for the quarter and $73.5 million for the six month period increased 8 percent and 10 percent respectively from the same periods of 1999. Selling, marketing and distribution expenses were up 18 percent quarterly, 21 percent year to date, and included increased spending related to the introduction of new products in the home center channel in the first half of 2000. General and administrative expenses were down 8 percent for the quarter and 9 percent for the six month period primarily due to reduced information system spending. Product development spending increased 3 percent to $4.9 million for the quarter and 4 percent to $9.9 million year to date. Other Income (Expense) - ---------------------- Other expense for the second quarter was $0.8 million compared to $2.7 million of income in the same period of 1999. Other income in the second quarter of 1999 included $3.2 million of gains on sales of real estate. Liquidity and Capital Resources - ------------------------------- The Company generated $29 million of cash flow from operating activities in the first six months of 2000, and generated $32 million for the same period last year. In 2000, the Company utilized cash flow to repurchase common shares for $19 million and made net payments of $9 million on short and long term borrowings. The Company's Board of Directors has approved a proposal to expand manufacturing facilities in Minneapolis. Also, the Company's corporate headquarters building in Golden Valley, Minnesota is for sale, as headquarters personnel are being moved into other Company owned office space in Minneapolis and Rogers, Minnesota. The Company had unused lines of credit available at June 30, 2000 totaling $82 million. The available credit facilities and internally generated funds provide the Company with the financial flexibility to meet liquidity needs. Outlook - ------- While the Company's business was strong in the first half of 2000, management remains cautious about the impact of global economies, and believes it prudent to plan for a slowing in North America in the second half of the year. Notwithstanding this cautious outlook, management is optimistic about achieving improved sales and earnings performance versus last year. SAFE HARBOR CAUTIONARY STATEMENT - -------------------------------- The information in this 10-Q contains "forward-looking statements" about the Company's expectations of the future, which are subject to certain risk factors that could cause actual results to differ materially from those expectations. These factors include economic conditions in the United States and other major world economies, currency exchange fluctuations and additional factors identified in Exhibit 99 to the Company's Report on Form 10-K for fiscal year 1999.

PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Computation of Net Earnings per Common Share Exhibit 11 Financial Data Schedule (EDGAR filing only) Exhibit 27 (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: August 3, 2000 By: /s/George Aristides -------------- ----------------------- George Aristides Chief Executive Officer Date: August 3, 2000 By: /s/James A. Graner -------------- ----------------------- James A. Graner Vice President & Controller ("duly authorized officer")

EXHIBIT 11 GRACO INC. AND SUBSIDIARIES COMPUTATION OF NET EARNINGS PER COMMON SHARE (Unaudited) Thirteen Weeks Ended Twenty-six Weeks Ended ----------------------------- ----------------------------- June 30, 2000 June 25, 1999 June 30, 2000 June 25, 1999 ------------- ------------- ------------- ------------- (in thousands except per share amounts) Net earnings applicable to common shareholders for basic and diluted earnings per share $18,331 $17,961 $33,306 $29,162 Weighted average shares outstanding for basic earnings per share 20,246 20,139 20,320 20,122 Dilutive effect of stock options computed using the treasury stock method and the average market price 324 708 321 605 Weighted average shares outstanding for diluted earnings per share 20,570 20,847 20,641 20,727 Basic earnings per share $ 0.91 $ 0.89 $ 1.64 $ 1.45 Diluted earnings per share $ 0.89 $ 0.86 $ 1.61 $ 1.41

5 This schedule contains summary financial information extracted from Graco Inc. and subsidiaries consolidated balance sheets for the quarterly period ending June 30,2000 and is qualified in its entirety by reference to such statements. 0000042888 Graco Inc 1 U.S. DOLLARS 3-MOS DEC-29-2000 APR-01-2000 JUN-30-2000 1 4,367 0 89,950 4,500 36,712 140,606 187,548 102,496 236,101 72,918 59,284 0 0 20,210 57,661 236,101 130,168 130,168 64,066 64,066 38,171 10 1,302 27,931 9,600 18,331 0 0 0 18,331 0.91 0.89