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
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GRACO INC.
(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)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
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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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20,212,321 common shares were outstanding as of July 31, 2000.
<PAGE>
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
<PAGE>
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
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)
<S> <C> <C> <C> <C>
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
============= ============ ========+==== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, 2000 Dec. 31, 1999
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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)
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85,052 86,493
Other Assets 10,442 11,551
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$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
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Total shareholders' equity 77,871 62,940
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$236,101 $236,033
============= =============
See notes to consolidated financial statements.
<PAGE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks
June 30, 2000 June 25, 1999
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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
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29,315 32,098
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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)
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(5,854) (12,760)
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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)
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(26,815) (19,112)
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Effect of exchange rate changes on cash 1,133 1,794
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Net increase (decrease) in cash and cash (2,221) 2,020
equivalents
Cash and cash equivalents:
Beginning of year 6,588 3,555
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End of Period $ 4,367 $ 5,575
============= =============
See notes to consolidated financial statements.
<PAGE>
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
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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
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70,779 71,269
Reduction to LIFO cost (34,067) (33,567)
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$36,712 $37,702
============= =============
<PAGE>
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):
<TABLE>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------- ---------------------------
June 30,2000 June 25,1999 June 30, 2000 June 25,1999
------------ ------------ ------------- ------------
Net Sales
<S> <C> <C> <C> <C>
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
=========== ============ ============= ============
</TABLE>
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.
<PAGE>
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:
<TABLE>
Three Months Six Months
(13 weeks) Ended (26 weeks) Ended
----------------------------- -----------------------------
June 30, 2000 June 25, 1999 June 30, 2000 June 25, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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%
============= ============= ============= =============
</TABLE>
<PAGE>
Net Sales
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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.
<PAGE>
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.
<PAGE>
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
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George Aristides
Chief Executive Officer
Date: August 3, 2000 By: /s/James A. Graner
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James A. Graner
Vice President & Controller
("duly authorized officer")
