UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
| [X] | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 26, 2003 or |
|
| [ ] | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to ___________. |
Commission File No. 001-09249
Graco Inc.
(Exact name
of Registrant as specified in its charter)
| Minnesota | 41-0285640 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
88 –11th Avenue
Northeast
Minneapolis, MN 55413
(Address of principal executive offices) (Zip Code)
(612) 623-6000
(Registrant’s telephone number, including area code)
Securities registered
pursuant to Section 12(b) of the Act:
Common Stock, par value $1.00 per share
Preferred
Share Purchase Rights
Shares registered on the New York Stock Exchange.
Securities registered
pursuant to Section 12(g) of the Act:
None
As of February 23, 2004, 45,912,519 shares of Common Stock were outstanding.
Indicate by a 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]
The aggregate market value of approximately 45,515,642 shares held by non-affiliates of the registrant was approximately $1.4 billion on June 27, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 23, 2004, are incorporated by reference into Part III, as specifically set forth in said Part III.
GRACO INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
ACCESS TO REPORTS Investors may obtain access free of charge to the Graco Inc. annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports by visiting the Graco website at www.graco.com. These reports will be available as soon as reasonably practicable following electronic filing with or furnishing to the Securities and Exchange Commission. |
General Information
Graco Inc. ("Graco" or "the Company") supplies technology and expertise for the management of fluids in vehicle lubrication, industrial and commercial applications. The Company's products help customers solve difficult manufacturing problems, increase productivity, improve quality, conserve energy, save expensive material, control environmental emissions and reduce labor costs. Graco is the successor to Gray Company, Inc., which was incorporated in 1926 as a manufacturer of automobile lubrication equipment, and became a public company in 1969.
Headquartered in Minneapolis, Minnesota, Graco serves customers around the world in the manufacturing, process, construction and maintenance industries. It designs, manufactures and markets systems and equipment to move, measure, mix, proportion, control, dispense and spray a wide variety of fluids and viscous materials.
Graco's strategic objectives include: increasing the proportion of sales outside North America; growing revenue by 10 percent and net earnings by 12 percent per year; generating at least 30 percent of each year's sales from products introduced in the last three years; generating at least 5 percent of each year's sales from markets entered in the last three years; expanding its distribution network; and actively pursuing focused acquisitions where the Company can add significant value.
Operating Segment Information; Geographic Information
Graco's businesses are classified by management into three operating segments: Industrial/Automotive Equipment, Contractor Equipment and Lubrication Equipment. Financial information concerning these operating segments is set forth in Part II, Item 7, at page 12, and in Note B to the Consolidated Financial Statements. Financial information about geographic areas is set forth in Note B to the Consolidated Financial Statements.
Industrial/Automotive Equipment
Graco's Industrial/Automotive Equipment segment designs, markets and sells equipment for the following applications: sealants and adhesives, process, finishing, protective coatings and automotive refinishing. The markets served include firms that manufacture, assemble, repair, and refinish a wide variety of vehicles, equipment and fixtures, including: automobiles and components, wood products, railcars, ships and other marine equipment, aircraft and other aerospace equipment, farm and construction equipment, trucks, buses and recreational vehicles.
Products offered by the Industrial/Automotive Equipment segment include air, electric and hydraulic-powered pumps that pressurize and transfer paints, stains, chemicals, sealants, adhesives, food, and other viscous materials through various application devices, including airless, air-assisted airless, electrostatic, HVLP (high volume-low pressure), and air spray guns. Fluid pressures ranging from 5 to more than 7,250 pounds per square inch and flow rates from 1 ounce to 275 gallons per minute are available. Sealant and adhesive, paint circulating and plural component packages and modules, and a complete line of parts and accessories, are also offered.
Industrial/Automotive equipment is sold worldwide through general and specialized distributors, integrators, warehouse distributors, jobbers and original equipment manufacturers. The Sharpe® operation also uses manufacturer representatives. Distributors promote and sell the equipment, provide product application expertise, and offer on-site service, technical support and integration capabilities. Integrators implement large individual installations in manufacturing plants where products and services from a number of different vendors are aggregated into a single system. Warehouse distributors and jobbers are prevalent in the automobile refinishing market. Original equipment manufacturers incorporate individual Graco products into their general equipment offerings to their customers.
Products marketed by the Industrial/Automotive Equipment segment are manufactured in Minneapolis, Minnesota; Sioux Falls, South Dakota; and Santa Fe Springs, California. Assembly of certain products for the European market is performed in Maasmechelen, Belgium.
Important drivers of product development in the Industrial/Automotive Equipment segment are the desire by customers to manage costs by controlling and reducing the amount of material used and/or waste generated, the desire to improve quality and increase productivity by upgrading or automating production processes, the need to modify processes in order to meet environmental and other governmental regulations, and the need to adapt equipment to handle new materials.
Graco is developing new products for the global marketplace and expanding its distribution throughout the world in order to achieve optimum market coverage.
Recent Developments. Effective April 1, 2003, the Company purchased the assets of Sharpe Manufacturing Company of Santa Fe Springs, California. The Sharpe operation manufactures and sells equipment designed for the automotive refinishing professional. Products distributed by the Sharpe operation include spray guns and related parts and accessories, infra-red paint curing systems, and air supply accessories, such as hose, fittings, filters, dryers and regulators. At the beginning of September 2003, the Company announced that it would relocate manufacturing operations of Sharpe from southern California to the Company's plant in Sioux Falls, South Dakota, during the first quarter of 2004 to take full advantage of the manufacturing capability in the Sioux Falls plant and realize cost reductions from the elimination of duplicate facilities. In September 2003, the Company reached an agreement with NASCAR for the Sharpe operation to join NASCAR's Automotive Aftermarket marketing program and for the Sharpe operation to be named as the "Officially Licensed Infra-Red Paint Curing Equipment of NASCAR." The Aftermarket Program creates marketing alliances with leading manufacturers in the automotive industry to build awareness of the sport of stock car racing, one of the most popular professional sports in the United States.
The Company's operations in its Plymouth, Michigan, facility ceased at the end of 2003. The precision dispense testing and demonstration capabilities of this operation were transferred to Graco's Minneapolis facilities and several technologically sophisticated distributors in the midwestern United States and Ontario, Canada. This change is designed to enhance the new product development process by bringing application expertise closer to the product development teams in Minneapolis and to increase regional expertise and service to end users.
During 2003, North American Industrial/Automotive sales personnel in the following application areas: automobile refinishing, sealants and adhesives, process equipment, finishing and protective coatings, were aligned with the corresponding marketing personnel under a single manager. Each manager will have worldwide responsibility for marketing in their application area. The teams created by this structure are designed to improve the Company's market responsiveness, coordination between sales and marketing, the implementation of programs and the speed to market of new products.
The Reactor™, a multi-featured proportioning system, designed to apply two-component polyureas, foams and other fast-set materials, was introduced during 2003. Polyurea is a protective coating that is used to coat tanks, cover concrete floors and provide a protective barrier on other surfaces. Traditional air and hydraulic-operated systems as well as a new electric-operated system are available. The Reactor's electronics provide diagnostic, data reporting, pressure readout, temperature and pressure controls and an auto-shutdown capability. The Company also introduced the Fusion™ plural-component spray gun in both air-purge and mechanical-purge versions that can be used with the Reactor to spray polyurea, foam, polyurethane coatings and adhesives with reduced maintenance and longer intervals between cleanings. The new patent-pending Air-Shot™ air cap reduces material build-up and clogging at the tip by providing a blast of air across the orifice. Hand-tight connections reduce the need for tools and hardened stainless steel parts provide longer life.
In March 2003, the Company released the PrecisionFlo LT™, a simplified version of the PrecisionFlo XL™ fluid metering system. The PrecisionFlo LT offers entry-level ease-of-use combined with real-time, closed-loop pressure and flow control for the processing and dispensing of ambient and hot melt sealants and adhesives in automotive and industrial applications.
In the spring of 2003, Graco introduced the Thermo-Flo™ tank system, which provides a method for the use of pellets, slats and other small-form hot melt adhesives in product assembly and packaging applications.
In December 2003, Graco registered the operations carried on at its George Aristides Riverside Center to the ISO 14001 Environmental Management Standard (EMS) Specification. ISO 14001 establishes a comprehensive set of environmental management principles focused on improving environmental performance. Key components include the establishment of an environmental management policy; implementation of procedures to identify significant environmental aspects of the Company's activities, products and services; and establishment of environmental objectives. Implementation of the ISO 14001-based EMS will result in more systematic environmental performance, improved compliance, and enhanced protection of human health and the environment.
Contractor Equipment
Graco's Contractor Equipment segment designs and markets sprayers for the application of paint and other architectural coatings, and the high-pressure cleaning of equipment and structures. The segment offers its equipment to distributors who sell to contractors in the painting, roofing, texture, corrosion control and line striping markets. The segment offers equipment, which gives contractors the opportunity to produce a high quality finish at high production rates with sprayers that are durable and easy to use.
The segment's primary product lines are airless paint sprayers and associated parts and accessories, such as hose, spray guns, filters, valves and tips. Also offered are pressure washers and specialized spraying equipment for the application of roofing materials, texture coatings and traffic paint. Fluid pressures ranging from 5 to more than 4,000 pounds per square inch and flow rates up to 4 gallons per minute are available. Pumps powered by electricity, air and gasoline are available. HVLP (high volume-low pressure) equipment provides the ability to spray with reduced overspray. Replacement and maintenance parts, such as packings and seals, which must be replaced periodically in order to maintain efficiency and prevent loss of material, are also offered for sale.
The equipment is sold primarily through retail stores which sell paint and other coatings, and secondarily through general equipment distributors. In 2003, sales to The Sherwin-Williams Company, a paint manufacturer and retailer, were 10 percent of the Company's consolidated sales. Graco markets a limited line of sprayers through the home center channel. In 2003, sales to The Home Depot, a home center retailer, totaled 11 percent of the Company's consolidated sales. Graco sales personnel sell Graco-branded equipment to the paint store, home center and rental agency channels. The ASM® product line of airless paint sprayers and spray guns, pressure washers and parts and accessories is promoted to these same channels largely through independent sales representatives.
Products for the contractor equipment markets are manufactured in Rogers and Minneapolis, Minnesota; and Sioux Falls, South Dakota.
Recent Developments. In 2003, Graco introduced the Ultra® 395 and 495 electric airless sprayers. These sprayers, which replaced the ST™ Pro 395 and 495, have the SmartControl™, a microprocessor that precisely controls fluid pressure. Additional features include an EasyOut™ manifold filter which cleans from the inside out, an Endurance™ piston pump with QuikAccess™ Inlet Valve, new SwivelHose™ suction hose, and a totally-enclosed fan-cooled DC motor. Each sprayer comes complete with a spray gun and RAC® X SwitchTip™. A digital display accessory is available with spray pressure display, and the Watchdog Pump Protection System™, which automatically shuts down the pump when material runs out.
The RAC X™ line of premium spray tips was released in 2003. These tips deliver exceptional life, pattern consistency and finish quality. The family includes Latex RAC™, Wide RAC™ and Fine Finish RAC™. The Latex RAC series is designed to provide a long-lasting fan pattern and superior finish for the application of latex paint. The Wide RAC series enables high production spraying with an up to 24-inch wide fan pattern and the Fine Finish RAC series provides superior atomization for the application of coatings on cabinets, trim and all surfaces that require exceptional finish quality.
In 2003, Graco introduced the GTX 2000™, a new gas-powered high-production texture sprayer which supports longer hose lengths and heavier materials. The gas-powered/air compressor pack may be easily removed without tools to reduce sprayer weight and leave engine noise and exhaust fumes outside while spraying interiors.
The LineLazer™ III 200HS Line Striper was introduced during 2003. Powered by a hydraulically-driven pumping system which delivers the highest output and highest production rate of any Graco line striper, this model contains the Digital Tracking System™ for easy monitoring, Fat Track™ System for sharper lines, QuikSelect™ Gun Selector for quick switching between guns, and Endurance Piston Pump for dependability and long life.
Graco's popular Contractor™ Airless Spray Gun was upgraded in 2003 with the release of the Contractor™ II and Contractor FTx™ II Airless Spray Guns, with a revolutionary needle assembly containing a spring installed outside the fluid path and a needle requiring no adjustment to eliminate spits and sticky needles, lighter weight, EasyOut filter with inside-out filtration, EasyGlide™ swivel connection for easier gun movement under pressure, and two- and four-finger trigger styles.
During 2003, Graco introduced the G-Force™, Model 2525 LD, a new entry-level direct-drive pressure washer. This pressure washer is designed for the semi-professional contractor, remodeler, handyman, and do-it-yourself homeowner and sprays 2.5 gallons per minute at 2500 pounds per square inch.
In 2003, the ASM operations supplied a private label line of electric sprayers, spray guns, reversible tips and accessories to the ALLPRO™ buying group for sale by their members. The exclusive ASM Uni-Tip™ reversible tip, useable in many competitive housings, is part of this offering.
Lubrication Equipment
Graco's Lubrication Equipment segment designs and markets products for the lubrication and maintenance of vehicles and other equipment. The markets for the segment's products include fast oil change facilities, service garages, fleet service centers, automobile dealerships, and industrial lubrication. The purchase of vehicle lubrication equipment is often funded by major oil companies for their customers as a marketing tool.
The Lubrication Equipment segment offers a full line of lubrication pumps (air and hydraulic-powered), hose reels, meters and dispense valves, fluid management systems, equipment for handling used oil, automatic lubrication equipment, and parts and accessories.
Products are distributed primarily through independent distributors worldwide, which are serviced by a network of independent sales representatives and direct sales generalists in foreign markets.
Products for the Lubrication Equipment markets are manufactured in Minneapolis, Minnesota.
Recent Developments. In July 2003, Graco reached an agreement with NASCAR to join its Automotive Aftermarket marketing program and be named as the "Officially Licensed Lubrication Equipment of NASCAR." The Aftermarket program creates marketing alliances with leading manufacturers in the automotive industry to build awareness for the sport of stock car racing.
The Company introduced an E-commerce site for new and existing customers to purchase Lubrication Equipment products via the Internet at www.BuyGraco.com. This site is the first direct-from-the manufacturer, lubrication equipment E-commerce site in the industry. BuyGraco.com features more than 350 products including lubrication pumps, meters, hose reels and accessories, as well as repair parts.
Sales of the Matrix™ Total Fluid Management System, which was introduced in late 2002, were suspended in July 2003 because of field performance issues. The Matrix System provides wireless automated tracking and monitoring of vehicle fluids for car dealerships, fleet servicing centers, fast oil change centers and general vehicle servicing. The Company expects to reintroduce this product by mid 2004.
Marketing and Distribution
Graco sells its full line of products in each of the following major geographic markets: the Americas (North and South America), Europe (including the Middle East and Africa), and Asia Pacific. Graco provides worldwide marketing, product design and application assistance to each of these geographic markets. Graco-employed sales personnel provide sales assistance in all geographic markets.
Graco sells its equipment worldwide principally through independent distributors. Manufacturers' representatives are also used. In Japan, Korea and Europe, Graco equipment is sold to distributors through sales subsidiaries. In the People's Republic of China, a subsidiary sells a limited line of contractor equipment and some industrial/automotive equipment to local distributors.
In 2003, Graco's net sales in the Americas were $367.8 million or approximately 69 percent of the Company's consolidated net sales; in Europe, net sales were $101.5 million or approximately 19 percent; and in the Asia Pacific Region, net sales were $65.8 million or approximately 12 percent.
Research, Product Development and Technical Services
Graco's research, development and engineering activities are organized by operating segment. The engineering group in each segment focuses on new product design, product improvements, applied engineering and strategic technologies for its specific customer base. In each of the last four years, the Company exceeded its goal of generating at least 30 percent of each year's sales from products introduced in the prior three years. All major research and development activities are conducted in facilities located in Minneapolis, and Rogers, Minnesota. Total research and development expenditures were $18 million, $18 million and $21 million for 2003, 2002 and 2001, respectively.
Intellectual Property
Graco owns a number of patents and has patent applications pending both in the United States and in other countries, licenses its patents to others, and is licensed under patents owned by others. In the opinion of the Company, its business is not materially dependent upon any one or more of these patents or licenses. The Company also owns a number of trademarks in the United States and foreign countries, including the registered trademarks for "GRACO," several forms of a capital "G" and various product trademarks which are material to the business of the Company, inasmuch as they identify Graco and its products to its customers.
Competition
Graco faces substantial competition in all of its markets. The nature and extent of this competition varies in different markets due to the depth and breadth of the Company's product lines. Product quality, reliability, design, customer support and service, specialized engineering and pricing are the major competitive factors. Although no competitor duplicates all of Graco's products, some competitors are larger than the Company, both in terms of sales of directly competing products and in terms of total sales and financial resources. The Company faces competitors with different cost structures and expectations of profitability. Graco believes it is one of the world's leading producers of high-quality specialized fluid management equipment. It is not possible to determine its relative market position because of the absence of reliable industry-wide third-party data.
Environmental Protection
The Company's compliance with federal, state and local environmental laws and regulations did not have a material effect upon the capital expenditures, earnings or competitive position of the Company during the fiscal year ending December 26, 2003.
Employees
As of December 26, 2003, the Company employed approximately 1,750 persons on a full-time basis. Of this total, approximately 230 were employees based outside the United States, and 750 were hourly factory workers in the United States. None of the Company's U.S. employees is covered by a collective bargaining agreement. Various national industry-wide labor agreements apply to certain employees in Europe. Compliance with such agreements has no material effect on the Company or its operations.
As of December 26, 2003, the Company's principal operations that occupy more than 10,000 square feet were conducted in the following facilities:
| Type of Facility | Location | Gross Square Footage | |
|---|---|---|---|
| Owned | |||
| Manufacturing/Warehouse/Office | Minneapolis, Minnesota | 405,000 | |
| Manufacturing/Warehouse/Office/ Contractor Product Development and Marketing |
Rogers, Minnesota | 333,000 | |
| Corporate Headquarters/Lubrication and Industrial/Automotive Product Development and Marketing |
Minneapolis, Minnesota | 139,000 | |
| Manufacturing/Office | Sioux Falls, South Dakota | 127,000 | |
| European Headquarters/Warehouse | Maasmechelen, Belgium | 75,000 | |
| Leased | |||
| Office/Manufacturing/Warehouse | Santa Fe Springs, California | 44,000 | |
| Office | Yokohama, Japan | 18,500 | |
| Office/Warehouse | Gwangju-Gun, Korea (2 facilities) | 14,500 |
The Company leases space for liaison offices and a warehouse in the People’s Republic of China.
Operations in the facility in Plymouth, Michigan ceased in late December 2003. The Company’s lease on the facility will expire in June 2004.
As of December 2003, all manufacturing operations formerly carried on in the Company’s Main Plant in Minneapolis had been relocated to the adjacent George Aristides Riverside Center. In January 2004, office functions previously conducted in the Main Plant will be moved to a new 42,000 square foot office building on the Minneapolis campus. The Main Plant will be demolished during the first half of 2004.
The facilities listed above are in satisfactory condition, suitable for their respective uses and are sufficient and adequate to meet current needs. Manufacturing capacity exceeded business demand in 2003. Production requirements in the immediate future are expected to be met through existing production capabilities, efficiency and productivity improvements, and the use of available subcontract services.
Operations in the leased facility in Santa Fe Springs, California, will cease in the second quarter of 2004. Graco’s sublease on this facility will terminate on August 31, 2004.
The Company is engaged in routine litigation incident to its business, which management believes will not have a material adverse effect upon its operations or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No issues were submitted to a vote of security holders during the fourth quarter of 2003.
Executive Officers of the Company
The following are all the executive officers of the Company as of February 23, 2004.
David A. Roberts, 56, is President and Chief Executive Officer of the Company, a position he has held since June 25, 2001. Prior to joining Graco, from 1996 to June 2001, he was Group Vice President of the Marmon Group, where he had responsibility for a group of manufacturing companies with products including grocery store refrigeration, retail store fixtures and fast food restaurant equipment. Mr. Roberts has been a director of Graco since June 2001.
Karen Park Gallivan, 47, became Vice President, Human Resources on January 6, 2003. Prior to joining Graco, she was Vice President of Human Resources & Communications at Syngenta Seeds Inc. from January 1999 through December 2002. From 1992 to January 1999, she was Vice President, Human Resources, Communications and General Counsel at Novartis Nutrition Corporation.
James A. Graner, 59, became Vice President and Controller in February 1994. He was Treasurer from May 1993 to February 1994. Prior to becoming Treasurer, he held various managerial positions in the treasury, accounting and information systems departments. He joined the Company in 1974.
Dale D. Johnson, 49, became Vice President, Contractor Equipment Division on March 19, 2001. From January 14, 2000, to March 2001, he served as President and Chief Operating Officer. From December 1996 to January 2000, he was Vice President, Contractor Equipment Division. Prior to becoming the Director of Marketing, Contractor Equipment Division, in June 1996, he held various marketing and sales positions in the Contractor Equipment Division and the Industrial Equipment Division. He joined the Company in 1976.
D. Christian Koch, 39, became Vice President, Asia Pacific and Latin America, effective June 16, 2003. From February 2000 until June 2003, he was Vice President, Lubrication Equipment Division. From August 1999 to February 2000, he was the Director, Industrial Global Sales and Marketing. From December 1998 to August 1999, he was Director, Lubrication Marketing. Prior to joining the Company in December 1998, he was employed by H.B. Fuller Company, where he held various positions, including President and Division Manager of TEC Incorporated and Vice President and Business Unit Manager of Foster Products Corporation.
David M. Lowe, 48, became Vice President and General Manager, European Operations, effective September 1, 1999. He was Vice President, Lubrication Equipment Division, from December 1996 to September 1999. From February 1995 to December 1996, he was Treasurer. Mr. Lowe joined the Company in 1995.
Robert M. Mattison, 56, became Vice President, General Counsel and Secretary, in January 1992, a position which he holds today. He joined the Company in 1992.
Patrick J. McHale, 42, became Vice President of the Lubrication Equipment Division and Regional Manufacturing, effective June 16, 2003. He was Vice President of Manufacturing from March 2001 until June 2003. From February 2000 to March 2001, he served as Vice President, Contractor Equipment Division. Mr. McHale was also Vice President, Lubrication Equipment Division, from September 1999 to February 2000. He was Contractor Equipment Manufacturing – Distribution Operations Manager from February 1998 to September 1999. From March 1997 to February 1998, he was Director of Michigan Operations. From February 1996 to March 1997, he was Contractor Equipment Manufacturing Operations Manager and from January 1994 to February 1996, he was the Sioux Falls Plant Manager. Mr. McHale joined the Company in 1989.
Charles L. Rescorla, 52, became Vice President of Manufacturing/Distribution Operations and Information Systems, effective June 16, 2003. From March 2001 until June 2003, he was Vice President of the Industrial/Automotive Equipment Division. From January 1995 through March 2001, he served as Vice President, Manufacturing and Distribution Operations. Prior to becoming the Director of Manufacturing in March 1994, he was the Director of Engineering, Industrial/Automotive Division, a position which he assumed in 1988 when he joined the Company.
Mark W. Sheahan, 39, became Vice President and Treasurer on December 11, 1998. Effective December 17, 1996, he became Treasurer. Prior to becoming Treasurer, he was Manager of Treasury Services where he was responsible for strategic and financial activities. He joined the Company in 1995.
Fred A. Sutter, 43, became Vice President of the Industrial/Automotive Equipment Division, effective June 16, 2003. He was Vice President, Asia Pacific and Latin America, from March 1999 to June 2003. From March 1995 to February 28, 1999, he was Director of Industrial Marketing. He joined the Company in 1995.
The Board of Directors elected Ms. Gallivan and Mr. Roberts, Mr. Graner, Mr. Johnson, Mr. Lowe, Mr. Mattison and Mr. Sheahan on May 6, 2003, and Mr. Koch, Mr. McHale, Mr. Rescorla, and Mr. Sutter on June 12, 2003, effective June 16, 2003, all to hold office until the next annual meeting of directors or until their successors are elected and qualify.
Item 5. Market for the Company's Common Stock and Related Shareholder Matters
Graco Common Stock. Graco common stock is traded on the New York Stock Exchange under the ticker symbol “GGG.” As of February 23, 2004, the share price was $42.25 and there were 45,912,519 shares outstanding and 2,260 common shareholders of record, which includes nominees or broker dealers holding stock on behalf of an estimated 14,100 beneficial owners.
Quarterly Financial
Information
(In thousands, except per share amounts)
| 2003 | First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|---|---|---|---|---|
| Net sales | $119,660 | $146,364 | $133,788 | $135,286 |
| Gross profit | 63,003 | 75,932 | 71,403 | 72,464 |
| Net earnings | 18,194 | 24,463 | 22,711 | 21,345 |
| Per common share | ||||
| Basic net earnings | .39 | .54 | .50 | .46 |
| Diluted net earnings | .38 | .53 | .49 | .46 |
| Dividends declared | .08 | .08 | .08 | 2.39 |
| Stock price (per share) | ||||
| High | $29.80 | $32.00 | $40.10 | $40.49 |
| Low | 25.68 | 28.27 | 32.93 | 36.01 |
| Close2 | 28.10 | 32.00 | 37.55 | 40.10 |
| Volume (# of shares) | 7,124 | 8,766 | 12,440 | 8,137 |
| 2002 | First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|---|---|---|---|---|
| Net sales | $107,857 | $132,796 | $125,832 | $120,563 |
| Gross profit | 55,163 | 67,141 | 65,414 | 62,440 |
| Net earnings | 15,546 | 21,516 | 20,494 | 18,069 |
| Per common share1 | ||||
| Basic net earnings | 0.33 | 0.45 | 0.43 | 0.38 |
| Diluted net earnings | 0.32 | 0.44 | 0.42 | 0.37 |
| Dividends declared | 0.07 | 0.07 | 0.07 | 0.08 |
| Stock price (per share) | ||||
| High | $28.09 | $30.49 | $26.99 | $30.16 |
| Low | 24.50 | 25.14 | 22.90 | 23.35 |
| Close2 | 27.23 | 25.14 | 24.80 | 28.65 |
| Volume (# of shares) | 6,645 | 8,077 | 8,891 | 7,922 |
| 1 | All share and per share data has been restated for the three-for-two stock split declared on May 7, 2002, and distributed on June 6, 2002. |
| 2 | As of the last trading day of the calendar quarter. |
Item 6. Selected Financial Data
| Graco Inc. & Subsidiaries
(In thousands, except per share amounts) |
2003 | 2002 | 2001 | 2000 | 1999 |
| Net sales | $535,098 | $487,048 | $472,819 | $494,373 | $450,474 |
| Net earnings | 86,713 | 75,625 | 65,266 | 70,108 | 59,341 |
| Per common share: | |||||
| Basic net earnings | $1.88 | $1.59 | $1.41 | $1.54 | $1.30 |
| Diluted net earnings | 1.85 | 1.57 | 1.38 | 1.51 | 1.27 |
| Total assets | $397,390 | $355,850 | $276,113 | $238,544 | $236,033 |
| Long-term debt (including current portion) | -- | -- | 550 | 19,360 | 66,910 |
| Cash dividends declared | |||||
| per common share1,2 | 2.64 | 0.30 | 0.27 | 0.25 | 0.21 |
| 1 | All share and per share data has been restated for the three-for-two stock split declared on May 7, 2002, and distributed on June 6, 2002. |
| 2 | 2003 includes a special dividend of $2.25 per share declared on December 12, 2003, to be paid on March 25, 2004, to shareholders of record as of March 11, 2004. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements and other financial information included elsewhere in this report.
2003 Compared to 2002
Overview:
Net income totaled $86.7 million, or $1.85 per diluted share, compared with $75.6 million, or $1.57 per diluted share, in 2002. The effects of currency translation increased net earnings by approximately $8 million in 2003, primarily due to the strength of the euro versus the U.S. dollar. The remaining portion of the increase in net earnings was the result of higher sales. Diluted earnings per share were affected by share repurchases in 2003 (repurchased 2.2 million shares, or approximately 4.6 percent of basic shares outstanding). Higher sales were reported in all three business segments in 2003 with Industrial/Automotive Equipment sales up 13.5 percent, Contractor Equipment sales up 7.7 percent and Lubrication Equipment sales up 4.7 percent. Operating expenses were higher in most categories except product development. Overall operating expenses were up $16.7 million in 2003 with some of the major items being warranty and extended service (up approximately $4 million), wages, benefit and severance expenses (up approximately $6 million), the addition of Sharpe expenses (approximately $2 million) and the impact of currency translations (approximately $4 million).
Cash flow from operations was $109.8 million in 2003 versus $95.7 million in 2002. The significant uses of cash in 2003 included share repurchases ($55.5 million), a pension contribution ($20 million), property, plant and equipment additions ($15.5 million), dividends ($15.3 million), acquisitions ($13.5 million), and retirement of debt ($9.6 million). By the end of the year the Company had $112.1 million of cash after beginning the year with $103.3 million. The Company announced that it intends to pay a $2.25 per share one-time dividend (approximately $104 million) on March 25, 2004 to shareholders of record as of March 11, 2004. The Company also announced a 70 percent increase in its regular common dividend to be paid in 2004 (up approximately $10.5 million versus 2003).
Sales:
| (In millions) | 2003 | 2002 | % Increase (Decrease) |
| Segment Sales: | |||
| Industrial/Automotive | $231.8 | $204.2 | 13.5 |
| Contractor | 256.4 | 238.0 | 7.7 |
| Lubrication | 46.9 | 44.8 | 4.7 |
| Consolidated | $535.1 | $487.0 | 9.9 |
| Geographic Sales: | |||
| Americas1 | $367.8 | $345.7 | 6.4 |
| Europe2 | 101.5 | 88.3 | 14.9 |
| Asia Pacific | 65.8 | 53.0 | 24.1 |
| Consolidated | $535.1 | $487.0 | 9.9 |
| 1 | North and South America, including the United States. Sales in the United States were $336.6 in 2003 and $315.9 in 2002. |
| 2 | Europe, Africa and Middle East. |
Components of Net Sales Change
| 2003 | |||||
| Americas | Europe | Asia | Consolidated | ||
| Volume & Price | 3.7% | (1.3)% | 20.7% | 4.5% | |
| Acquisitions | 2.0% | 0.0% | 0.0% | 1.4% | |
| Currency | 0.7% | 16.2% | 3.4% | 4.0% | |
| Total | 6.4% | 14.9% | 24.1% | 9.9% | |
| 2003 | ||||
| Industrial/Automotive | Contractor | Lubrication | Consolidated | |
| Volume & price | 3.5% | 5.5% | 2.7% | 4.5% |
| Acquisitions | 3.4% | 0.0% | 0.0% | 1.4% |
| Currency | 6.6% | 2.2% | 2.0% | 4.0% |
| Total | 13.5% | 7.7% | 4.7% | 9.9% |
Worldwide net sales in 2003 totaled $535.1 million, compared with $487.0 million in 2002, a 9.9 percent increase. In 2003, volume (which includes price increases) increased 4.5 percent, acquisitions increased net sales by 1.4 percent, and changes in the value of the U.S. dollar increased worldwide net sales by 4.0 percent. In the Americas, net sales for 2003 increased 6.4 percent to $367.8 million, with volume up 3.7 percent, acquisitions contributing 2.0 percent and currency translations adding 0.7 percent. Volume growth in the Americas (excluding acquisitions and currency translations) came from all three segments, with Industrial/Automotive Equipment up 2.4 percent, Contractor Equipment up 4.5 percent and Lubrication Equipment up 2.3 percent. This growth was primarily due to successful new product introductions in the Contractor Equipment and Industrial/Automotive Equipment segments, modest underlying economic growth for both Industrial/Automotive Equipment and Lubrication Equipment, the continued robust housing market in the Americas and the addition of distribution outlets having a favorable impact on demand for Contractor Equipment products. The Company did experience a significant increase (up 14 percent) in Industrial/Automotive Equipment sales (excluding acquisitions and currency translations) in the Americas during the fourth quarter of 2003. Management believes that this increase was the result of improved economic conditions in the United States. In Europe, sales for 2003 totaled $101.5 million (up 14.9 percent in U.S. dollars), with volume (excluding acquisitions and currency translations) down 1.3 percent. The volume decline in Europe was the result of weak industrial production in large portions of the region with Industrial/Automotive sales down 4.1 percent and Lubrication Equipment sales down 4.9 percent. Contractor Equipment sales volume in Europe was up 5.8 percent, primarily as the result of successful new products and increased market share from adding distribution outlets. In Asia Pacific, 2003 sales were $65.8 million, (up 24.1 percent in U.S. dollars), with volume up 20.7 percent. The volume growth in Asia Pacific was the result of higher sales in all three segments, with Industrial/Automotive Equipment up 20.2 percent, Contractor Equipment up 21.8 percent and Lubrication Equipment sales up 25.4 percent. This growth was primarily due to new product introductions, adding distribution and robust economic conditions resulting from significant capital investments being made throughout the region, except for Japan, which remained weak.
Costs:
| As a Percentage of Net Sales | ||
| 2003 | 2002 | |
| Net Sales | 100.0 | 100.0 |
| Cost of products sold | 47.1 | 48.6 |
| Product development | 3.4 | 3.7 |
| Selling, marketing and distribution | 18.6 | 17.8 |
| General and administrative | 6.8 | 6.7 |
| Operating earnings | 24.1 | 23.2 |
| Interest expense | 0.1 | 0.2 |
| Other expense, net | 0.1 | 0.1 |
| Earnings before income taxes | 23.9 | 22.9 |
| Income taxes | 7.7 | 7.4 |
| Net Earnings | 16.2 | 15.5 |
Gross profit margin, expressed as a percentage of sales, was 52.9 percent versus 51.4 percent last year. Without the favorable impact of currency translations, the 2003 gross profit margin would have been unchanged from 2002 as normal production-related cost increases were offset by improved productivity, reduced material costs and selected price increases.
Product development expenses for 2003 were 3.4 percent of net sales, down 3/10ths of one percentage point from 2002. Product development spending totaled $18.1 million in 2003, virtually flat with 2002. The Company anticipates increasing its product development spending in 2004 to drive incremental sales growth.
Selling, marketing and distribution (SM&D) expenses for 2003 were 18.6 percent of net sales, up 8/10ths of one percentage point from 2002. SM&D spending totaled $99.4 million in 2003, up 15 percent from 2002. The increase in SM&D costs was the result of several factors including currency translation effects ($3 million), warranty and extended service expenses (up $4.4 million), severance payments (up $2 million), payroll benefits (up $1 million) and the addition of Sharpe expenses ($1.5 million).
General and administrative (G&A) expenses for 2003 were 6.8 percent of net sales, up 1/10th of one percentage point from 2002. G&A spending totaled $36.5 million in 2003, up 11 percent from 2002. The increase in G&A costs was the result of several factors including currency translation effects ($1 million), employee bonus and incentives (up $1 million), payroll benefits (up $0.5 million) and the addition of Sharpe expenses ($0.5 million). General and administrative expenses for 2003 and 2002 include contributions to the Graco Foundation totaling $1.7 million and $1.5 million, respectively.
The Company recorded pension expense of $2.6 million in 2003 versus pension income of $0.3 million in 2002. The primary reason for the increased pension expense in 2003 was lower investment performance of plan assets. Pension expense/income is recorded in cost of products sold and operating expense based on salaries and wages.
Operating earnings:
Operating earnings are used by management to measure performance of its business segments and the Company as a whole. Operating earnings excludes interest expense, interest income and the provision for income taxes. Consolidated operating earnings in 2003 were 24.1 percent of net sales, compared with 23.2 percent in 2002. Higher sales and an improved gross margin (both discussed previously) more than offset higher spending and were primarily responsible for the increased operating earnings. Operating results by segment were as follows:
| (In millions) | 2003 | 2002 | % Increase (Decrease) | ||||||||
| Segment Sales: | |||||||||||
| Industrial/Automotive | $ | 231.8 | $ | 204.2 | 13.5 | ||||||
| Contractor | 256.4 | 238.0 | 7.7 | ||||||||
| Lubrication | 46.9 | 44.8 | 4.7 | ||||||||
| Consolidated | $ | 535.1 | $ | 487.0 | 9.9 | ||||||
| Operating Earnings: | |||||||||||
| Industrial/Automotive | $ | 65.9 | $ | 54.2 | 21.5 | ||||||
| Contractor | 59.4 | 53.7 | 10.6 | ||||||||
| Lubrication | 9.9 | 9.6 | 2.8 | ||||||||
| Unallocated Corporate Expense | (6.4 | ) | (4.7 | ) | 34.6 | ||||||
| Consolidated | |||||||||||