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 September 28, 2001
Commission File Number: 001-9249
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GRACO INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
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(State of incorporation) (I.R.S. Employer Identification Number)
88 - 11th Avenue N.E.
Minneapolis, Minnesota 55413
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(Address of principal executive offices) (Zip Code)
(612) 623-6000
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(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
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31,090,328 common shares were outstanding as of October 31, 2001.
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 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-12
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBITS
Computation of Net Earnings per Common Share Exhibit 11
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
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Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29, 2000
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Net Sales $118,651 $123,100 $359,338 $378,095
Cost of products sold 59,495 60,151 186,915 180,791
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Gross Profit 59,156 62,949 178,547 191,180
Product development 4,666 5,324 16,664 15,244
Selling, marketing and distribution 20,285 20,569 61,398 66,743
General and administrative 8,813 8,531 26,106 25,985
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Operating Earnings 25,392 28,525 74,379 83,208
Interest expense 261 985 1,066 3,522
Other expense 171 267 985 1,507
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Earnings Before Income Taxes 24,960 27,273 72,328 78,179
Income taxes 8,200 9,200 24,200 26,800
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Net Earnings $ 16,760 $ 18,073 $ 48,128 $ 51,379
============= ============= ============= =============
Basic Net Earnings
Per Common Share $ .54 $ .60 $ 1.56 $ 1.69
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Diluted Net Earnings
Per Common Share $ .53 $ .59 $ 1.53 $ 1.66
============= ============= ============= =============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Sep. 28, 2001 Dec. 29, 2000
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ASSETS
Current Assets:
Cash and cash equivalents $ 10,431 $ 11,071
Accounts receivable, less allowances
of $4,200 and $4,700 85,111 85,836
Inventories 37,318 33,079
Deferred income taxes 10,711 11,574
Other current assets 2,338 2,182
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Total current assets 145,909 143,742
Property, Plant and Equipment:
Cost 206,779 186,872
Accumulated depreciation (110,457) (102,883)
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96,322 83,989
Other Assets 21,086 10,245
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$263,317 $237,976
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 12,440 $ 15,713
Current portion of long-term debt 1,050 1,310
Trade accounts payable 10,768 12,899
Salaries, wages and commissions 9,932 14,532
Accrued insurance liabilities 11,595 10,622
Income taxes payable 8,436 4,642
Other current liabilities 23,967 22,123
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Total current liabilities 78,188 81,841
Long-term Debt, less current portion 500 18,050
Retirement Benefits and Deferred Compensation 27,543 27,230
Shareholders' Equity:
Common stock 31,074 20,274
Additional paid-in capital 50,412 39,954
Retained earnings 75,582 50,233
Other, net 18 394
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Total shareholders' equity 157,086 110,855
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$263,317 $237,976
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Thirty-nine Weeks
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Sep. 28, 2001 Sep. 29, 2000
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Cash Flows from Operating Activities:
Net Earnings $ 48,128 $ 51,379
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 13,573 11,927
Deferred income taxes 766 200
Loss on sale of fixed assets 156 131
Change in:
Accounts receivable 1,745 (5,903)
Inventories (1,506) 3,220
Trade accounts payable (2,380) (957)
Salaries, wages and commissions (4,643) 862
Retirement benefits and deferred compensation (1,871) (3,240)
Other accrued liabilities 5,227 5,446
Other 370 (1,047)
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59,565 62,018
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Cash Flows from Investing Activities:
Property, plant and equipment additions (23,033) (9,391)
Proceeds from sale of property, plant and 103 162
equipment
Acquisition of business, net of cash acquired (15,949) -
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(38,879) (9,229)
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Cash Flows from (for) Financing Activities:
Borrowings on notes payable and lines of credit 148,255 159,264
Payments on notes payable and lines of credit (151,365) (161,644)
Borrowings on long-term debt 21,000 26,135
Payments on long-term debt (38,810) (62,715)
Common stock issued 11,381 7,028
Retirement of common stock (3,600) (18,966)
Cash dividends paid (9,232) (8,532)
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(22,371) (59,430)
Effect of exchange rate changes on cash 1,045 2,216
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Net increase (decrease) in cash and cash equivalents (640) (4,425)
Cash and cash equivalents:
Beginning of year 11,071 6,588
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End of Period $ 10,431 $ 2,163
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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 September 28, 2001, and the related statements of earnings
for the thirteen and thirty-nine weeks ended September 28, 2001 and
September 29, 2000, and cash flows for the thirty-nine weeks ended
September 28, 2001 and September 29, 2000 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
September 28, 2001, 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 2000 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):
Sep. 28, 2001 Dec. 29, 2000
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Finished products and components $27,111 $26,812
Products and components in various stages
of completion 20,596 20,153
Raw materials and purchased components 21,678 19,259
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69,385 66,224
Reduction to LIFO cost (32,067) (33,145)
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$37,318 $33,079
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3. Other assets consist of the following (in thousands):
Sep. 28, 2001 Dec. 29, 2000
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Identifiable intangibles, net of accumulated
amortization of $4,500 and $2,800 $ 7,024 $ 5,576
Goodwill, net of accumulated amortization
of $400 in 2001 7,723 -
Prepaid pension 5,560 3,150
Other 779 1,519
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$21,086 $10,245
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4. The Company has three reportable segments; Industrial/Automotive,
Contractor and Lubrication. The Company does not identify assets by
segment. Sales and operating profit by segment for the thirteen and
thirty-nine weeks ended September 28, 2001 and September 29, 2000 were as
follows (in thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
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Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29, 2000
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Net Sales
Industrial/Automotive $ 48,583 $ 56,798 $147,681 $169,343
Contractor 58,918 55,759 175,595 176,277
Lubrication 11,150 10,543 36,062 32,475
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Consolidated $118,651 $123,100 $359,338 $378,095
============= ============= ============= =============
Operating Earnings
Industrial/Automotive $ 12,500 $ 14,484 $ 34,007 $ 40,751
Contractor 12,695 12,857 36,852 38,309
Lubrication 2,807 2,437 8,835 7,162
Unallocated Corporate Expenses (2,610) (1,253) (5,315) (3,014)
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Consolidated Operating Earnings $ 25,392 $ 28,525 $ 74,379 $ 83,208
============= ============= ============= =============
5. There have been no significant changes to the components of comprehensive
income from those noted on the 2000 Form 10-K. Total comprehensive income
in 2001 was $17.8 million in the third quarter and $47.8 million
year-to-date. In 2000, comprehensive income was $16.9 million for the
third quarter and $49.6 million for the nine-month period.
6. The adoption of Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" on
December 30, 2000, resulted in no transition adjustment. See Note A to
financial statements included in the Company's 2000 Form 10-K for a
description of the Company's use of derivative instruments and hedging
activities.
7. On March 19, 2001, the Company purchased ASM Company, Inc. ("ASM") for $16
million cash. ASM manufactures and markets spray tips, guns, poles and
other accessories for the professional painter, and had sales of
approximately $11 million in 2000.
The Company used the purchase method to account for the acquisition. Based
on the results of an independent appraisal, the purchase price was
allocated to net tangible assets of $5 million (net of assumed liabilities
totaling $2 million), identifiable intangible assets of $3 million and
goodwill of $8 million. Identifiable intangible assets include patents,
proprietary technologies, trade names, trademarks, customer list and a
non-compete agreement. Intangibles and goodwill are being amortized on a
straight-line basis over useful lives ranging from 2 to 10 years.
8. In July 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets", which will be effective for
the Company at the beginning of fiscal year 2002. Upon adoption of SFAS
No. 142, goodwill amortization of approximately $800,000 on an annualized
basis will cease. Based on a preliminary assessment, management believes
that other provisions of SFAS No. 142 will not have a material impact on
the Company's financial position or results of operations, however results
of initial goodwill impairment testing required upon adoption are not
currently determinable.
9. Upon the acquisition of ASM, the Company began implementing a plan to move
ASM operations from California to expanded facilities in Sioux Falls,
South Dakota. Estimated incremental costs associated with the plan that
would not benefit continuing activities were recognized as liabilities
assumed in the acquisition and included in the allocation of acquisition
cost.
During the third quarter of 2001, the Company also announced plans to
restructure the operations of its German subsidiary, Graco
Verfahrenstechnik (GV), including termination of approximately 50
employees, termination of leases, consolidation of product lines, and
relocation of operations to other Company facilities in Belgium and the
U.S.
Third quarter general and administrative expense includes a $1.4 million
charge to establish a restructuring accrual for incremental costs
associated with relocating GV operations. There were no significant
payments charged against the accrual during the quarter.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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Net earnings are down from prior year due to lower sales. Sales are down due to
reduced demand resulting from economic weakness and the adverse impacts of
foreign currency exchange rates.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Thirteen Weeks Ended Thirty-nine Weeks Ended
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Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29, 2000
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Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 50.1 48.9 50.3 49.4
Product development 4.0 4.3 4.6 4.0
Selling, marketing and distribution 17.1 16.7 17.1 17.7
General and administrative 7.4 6.9 7.3 6.9
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Operating Earnings 21.4 23.2 20.7 22.0
Interest expense 0.2 0.8 0.3 0.9
Other (income) expense, net 0.2 0.2 0.3 0.4
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Earnings Before Income Taxes 21.0 22.2 20.1 20.7
Income taxes 6.9 7.5 6.7 7.1
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Net Earnings 14.1% 14.7% 13.4% 13.6%
============= ============= ============= =============
Net Sales
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Sales in the Industrial / Automotive segment were down due to reduced demand
resulting from weak economic conditions, particularly in North America. In the
Contractor segment, third quarter sales increased compared to prior year on the
strength of sales in the home center channel, which increased 21 percent.
Year-to-date, Contractor sales were even with last year. Sales in the
Lubrication segment exceeded 2000 sales for both the three-month and nine-month
periods due mostly to large sales to key customers and increased market share.
Price increases have not had a significant impact on sales in 2001.
Sales by geographic area were as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended
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Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29,2000
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Americas $ 86,513 $ 89,613 $262,601 $278,655
Europe 20,851 21,355 62,430 64,351
Asia Pacific 11,287 12,132 34,307 35,089
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Consolidated $118,651 $123,100 $359,338 $378,095
============= ============= ============= =============
Year-to-date translated at consistent exchange rates, Europe would have shown a
2 percent increase in sales compared to last year, and Asia Pacific region would
have shown a 5 percent increase over prior year sales. For the third quarter,
the impact of changes in foreign exchange rates was not as great as it was in
the first two quarters of 2001 due to the strengthening of the U.S. dollar in
Europe.
Gross Profit
- ------------
Gross profit percentages of sales for the quarter and year-to-date were down
compared to the prior year due to lower sales volume, product mix and the
negative impact of changes in exchange rates.
Operating Expenses
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Year-to-date product development expenses were up due to spending for
significant new product launches in the first part of the year, but are down for
the third quarter due to lower product-launch-related expenses and management
actions to reduce the product development expense running rate. Selling,
marketing and distribution expenses were down from prior year due in part to
lower sales-based incentives. In addition, the first half of last year included
costs related to the launch of Contractor products in the home center channel.
The Company estimates that costs related to relocating GV and ASM will total
approximately $4 million over a twelve month period, including the $1.4 million
restructuring charge to general and administrative expense in the third quarter.
Excluding the restructuring charge, general and administrative expenses
decreased due mostly to reduced information systems spending and lower
sales-and-earnings-based incentives.
Year-to-date operations include a $2.5 million pension credit related to the
Company's U.S. defined benefit pension plan, compared to a $3.6 million credit
in the same period last year. These credits resulted from recognition of
investment gains attributable to pension plan assets, and are included in cost
of products sold and operating expenses based on salaries and wages.
Interest Expense and Other Expense
- ----------------------------------
Interest expense decreased due to reduced debt levels.
Liquidity and Capital Resources
- -------------------------------
The Company generated $60 million of cash flow from operating activities in the
first nine months of 2001, compared to $62 million for the same period last
year. Significant uses of cash in 2001 include the construction of expanded
manufacturing, warehouse and office facilities in Minneapolis, Minnesota and
Sioux Falls, South Dakota, the acquisition of ASM, and reduction of debt.
The Company had unused lines of credit available at September 28, 2001 totaling
$74 million. The available credit facilities and internally generated funds
provide the Company with the financial flexibility to meet liquidity needs.
Outlook
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The Company remains concerned about the weak North American economy and an
economic slowdown in Europe. While internal sales growth will be challenged by
difficult economic conditions, management believes the Company is positioned to
perform at high levels of profitability in both good and difficult times.
SAFE HARBOR CAUTIONARY STATEMENT
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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
2000.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Net Earnings per Common Share
(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: November 8, 2001 By: /s/David A. Roberts
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David A. Roberts
President & Chief Executive Officer
Date: November 8, 2001 By: /s/James A. Graner
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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 Thirty-nine Weeks Ended
----------------------------- ----------------------------
Sep. 28, 2001 Sep. 29, 2000 Sep. 28, 2001 Sep. 29, 2000
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(in thousands except per share amounts)
Net earnings applicable to common
shareholders for basic and
diluted earnings per share $16,760 $18,073 $48,128 $51,379
Weighted average shares outstanding
for basic earnings per share 31,108 30,318 30,841 30,426
Dilutive effect of stock options
computed using the treasury stock
method and the average market price 574 509 578 491
Weighted average shares outstanding
for diluted earnings per share 31,682 30,827 31,419 30,917
Basic earnings per share $ 0.54 $ 0.60 $ 1.56 $ 1.69
Diluted earnings per share $ 0.53 $ 0.59 $ 1.53 $ 1.66