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 March 30, 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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30,794,894 common shares were outstanding as of May 3, 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 6-7
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
2001 Executive Corporate and SBU Bonus Plan Exhibit 10
Non-employee Director Stock Option Plan, as amended and
Restated February 23, 2001 Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended
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March 30, 2001 March 31, 2000
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(In thousands except per share amounts)
Net Sales $109,814 $122,227
Cost of products sold 54,676 60,098
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Gross Profit 55,138 62,129
Product development 6,287 5,024
Selling, marketing and distribution 20,672 23,814
General and administrative 7,696 8,644
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Operating Profit 20,483 24,647
Interest expense 450 1,235
Other (income) expense, net 213 437
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Earnings Before Income Taxes 19,820 22,975
Income taxes 6,700 8,000
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Net Earnings $ 13,120 $ 14,975
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Basic Net Earnings Per Common Share $ .43 $ .49
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Diluted Net Earnings Per Common Share $ .42 $ .48
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 30, 2001 Dec. 29, 2000
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ASSETS
Current Assets:
Cash and cash equivalents $ 4,682 $ 11,071
Accounts receivable, less allowances
of $4,800 and $4,700 83,301 85,836
Inventories 41,177 33,079
Deferred income taxes 11,627 11,574
Other current assets 2,565 2,182
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Total current assets 143,352 143,742
Property, Plant and Equipment:
Cost 193,942 186,872
Accumulated depreciation (106,615) (102,883)
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87,327 83,989
Other Assets 20,840 10,245
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$251,519 $ 237,976
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 14,241 $ 15,713
Current portion of long-term debt 1,050 1,310
Trade accounts payable 12,742 12,899
Salaries, wages & commissions 7,962 14,532
Accrued insurance liabilities 10,925 10,622
Income taxes payable 10,678 4,642
Other current liabilities 20,026 22,123
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Total current liabilities 77,624 81,841
Long-term Debt, less current portion 20,500 18,050
Retirement Benefits and Deferred 27,106 27,230
Compensation
Shareholders' Equity:
Common stock 30,778 20,274
Additional paid-in capital 45,902 39,954
Retained earnings 49,992 50,233
Other, net (383) 394
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Total shareholders' equity 126,289 110,855
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$251,519 $ 237,976
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks
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March 30, 2001 March 31, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net Earnings $13,120 $14,975
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,240 4,005
Deferred income taxes (182) 127
Change in:
Accounts receivable 4,065 (9,733)
Inventories (5,510) (4,255)
Trade accounts payable (358) 1,941
Salaries, wages and commissions (6,569) (3,283)
Retirement benefits and deferred
compensation 272 124
Other accrued liabilities 2,832 5,267
Other (789) (356)
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11,121 8,812
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (6,203) (2,968)
Proceeds from sale of property, plant
and equipment 45 58
Acquisition of business, net of cash acquired (15,949) -
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(22,107) (2,910)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable and lines of credit 36,274 47,979
Payments on notes payable and lines of credit (37,307) (49,939)
Borrowings on long-term debt 23,000 20,000
Payments on long-term debt (20,810) (17,265)
Common stock issued 6,320 6,632
Retirement of common stock (177) (15,300)
Cash dividends paid (3,044) (2,862)
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4,256 (10,755)
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Effect of exchange rate changes on cash 341 1,099
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Net increase (decrease) in cash and cash (6,389) (3,754)
equivalents
Cash and cash equivalents:
Beginning of year 11,071 6,588
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End of Period $ 4,682 $ 2,834
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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 March 30, 2001, 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 30, 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):
Mar. 30, 2001 Dec. 29, 2000
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Finished products and components $29,675 $26,812
Products and components in various
stages of completion 21,961 20,153
Raw materials 22,601 19,259
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74,237 66,224
Reduction to LIFO cost (33,060) (33,145)
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$41,177 $33,079
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GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. 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 weeks
ended March 30, 2001 and March 31, 2000 are as follows (in thousands):
Mar. 30, 2001 Mar. 31,2000
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Net Sales
Industrial/Automotive $ 47,649 $ 56,831
Contractor 49,901 54,481
Lubrication 12,264 10,915
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Total $109,814 $122,227
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Operating Profit
Industrial/Automotive $ 9,394 $ 12,507
Contractor 8,620 10,486
Lubrication 2,956 2,316
Unallocated Corporate
Expenses (487) (662)
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Consolidated Operating Profit $ 20,483 $ 24,647
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4. There have been no changes to the components of comprehensive income from
those noted in the 2000 Form 10-K. Total comprehensive income for the
quarter was $12.4 million in 2001 and $14.2 million in 2000.
5. The adoption of 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.
6. On March 19, 2001, the Company purchased ASM Company, Inc. for $16 million
cash. Based on management's estimates of value, the purchase price has been
allocated to net tangible assets of approximately $5 million and intangible
assets totaling approximately $11 million. Intangible assets are included
in the other assets caption on the consolidated balance sheets. The
purchase price allocation is subject to adjustment upon completion of an
independent appraisal. ASM manufactures and markets spray tips, guns, poles
and other accessories for the professional painter. ASM had sales of
approximately $11 million in 2000.
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 sales and earnings in the first quarter decreased from last year. The impact
of reduced sales on net earnings was mitigated by a reduction of expenses. The
increase in product development expense was more than offset by reductions in
other operating expenses.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Thirteen Weeks Ended
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March 30, 2001 March 31,2000
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Net Sales 100.0% 100.0%
Cost of products sold 49.8 49.2
Product development 5.7 4.1
Selling, marketing and distribution 18.8 19.5
General and administrative 7.0 7.0
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Operating Profit 18.7 20.2
Interest expense 0.4 1.0
Other (income) expense, net 0.2 0.4
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Earnings Before Income Taxes 18.1 18.8
Income taxes 6.1 6.5
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Net Earnings 12.0% 12.3%
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Net Sales
Net sales in the first quarter of 2001 were down 10 percent from first quarter
2000. Economic conditions in North America led to reduced demand and lower sales
in the Industrial / Automotive segment (down 16 percent) and the Contractor
Equipment segment (down 8 percent). Lubrication Equipment segment sales (up 12
percent) were helped by new products launched last September and large sales to
several key customers. Within the Contractor Equipment segment, sales in the
home center channel were $9.3 million, up 3 percent from the first quarter of
2000. The Company began selling through the home center channel in January 2000,
and most of the sales in the first quarter of 2000 were initial stocking orders.
Geographically, sales in the Americas decreased 13 percent. In Europe, sales
measured in local currencies increased 2 percent, but decreased 4 percent after
unfavorable currency translation. Asia Pacific sales were 3 percent lower than
last year, but would have increased 4 percent if translated at consistent
exchange rates. Fluctuations in exchange rates adversely impacted consolidated
net sales for the quarter by approximately $2 million.
Gross Profit
Gross profit as a percentage of net sales was 50.2 percent compared to 50.8
percent last year. Gross profit as a percentage of net sales would have
decreased only .2 percentage points if sales and cost of products sold were
translated at consistent exchange rates.
Operating Expenses
Product development expense increased 25 percent from the first quarter of 2000,
as several new products approached launch dates. Other operating expenses
decreased commensurate with reduced sales levels. Selling, marketing and
distribution expense decreased 13 percent and decreased as a percentage of sales
to 18.8 percent from 19.5 percent. First quarter 2000 included significant
spending related to the introduction of new products and entry into the home
center channel. General and administrative expenses were down 11 percent due to
controls placed on spending, including restrictions on discretionary items, and
the impact of reduced sales on incentive bonus provisions.
Interest Expense and Other Income (Expense)
Interest expense decreased due to reduced debt levels.
Liquidity and Capital Resources
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The Company generated $11.1 million of cash flow from operating activities in
the first three months of 2000, compared to $8.8 million for the same period
last year. Significant uses of cash in 2001 included the acquisition of ASM
Company, Inc. and the construction in progress of expanded manufacturing,
warehouse and office facilities in Minneapolis. In 2000, the Company utilized
cash flow to retire $15.3 million of common stock. The Company plans to expand
its Sioux Falls, South Dakota manufacturing facilities to accommodate the move
of ASM operations from its current location in California. The Company had
unused lines of credit available at March 30, 2001 totaling $90 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 cautious about its outlook for 2001, as the North American
economy has slowed down considerably from the levels of a year ago. Nonetheless,
management remains confident that the Company will continue to post good results
in light of the circumstances. Management expects to generate incremental
revenues and profits by aggressively implementing growth strategies of
developing new products, expanding distribution, entering new markets and
pursuing strategic acquisitions.
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
2000.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2001 Executive Corporate and SBU Bonus Plan Exhibit 10
Non-employee Director Stock Option Plan,
as amended and restated February 23, 2001 Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
(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: May 1, 2001 By: /s/George Aristides
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George Aristides
Chief Executive Officer
Date: May 1, 2001 By: /s/James A. Graner
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James A. Graner
Vice President & Controller
("duly authorized officer")