Attached files
file | filename |
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EX-10.3 - EX-10.3 - GRACO INC | c64348exv10w3.htm |
EX-99.1 - EX-99.1 - GRACO INC | c64348exv99w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - GRACO INC | Financial_Report.xls |
EX-32 - EX-32 - GRACO INC | c64348exv32.htm |
EX-31.1 - EX-31.1 - GRACO INC | c64348exv31w1.htm |
EX-31.2 - EX-31.2 - GRACO INC | c64348exv31w2.htm |
EX-10.4 - EX-10.4 - GRACO INC | c64348exv10w4.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
Securities Exchange Act of 1934
For the quarterly period ended April 1, 2011
Commission File Number: 001-09249
GRACO INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-0285640 | |
(State of incorporation) | (I.R.S. Employer Identification Number) |
88 11th Avenue N.E. Minneapolis, Minnesota |
55413 | |
(Address of principal executive offices) | (Zip Code) |
(612) 623-6000
(Registrants 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
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that
the registrant was required to submit and post such files).
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
Large Accelerated Filer
|
X | Accelerated Filer | ||||
Non-accelerated Filer
|
Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes
No X
60,649,000 shares of the Registrants Common Stock, $1.00 par value, were outstanding as of
April 20, 2011.
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 | |||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
15 | |||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
21 | |||||
Item 4. Controls and Procedures |
21 | |||||
PART II OTHER INFORMATION | ||||||
Item 1A. Risk Factors |
22 | |||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
22 | |||||
Item 6. |
Exhibits | 23 | ||||
SIGNATURES | ||||||
EXHIBITS |
2
PART I
Item 1.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands except per share amounts)
(In thousands except per share amounts)
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Net Sales |
$ | 217,679 | $ | 164,721 | ||||
Cost of products sold |
93,282 | 75,426 | ||||||
Gross Profit |
124,397 | 89,295 | ||||||
Product development |
9,931 | 9,474 | ||||||
Selling, marketing and distribution |
37,483 | 29,160 | ||||||
General and administrative |
19,914 | 17,955 | ||||||
Operating Earnings |
57,069 | 32,706 | ||||||
Interest expense |
616 | 1,080 | ||||||
Other expense, net |
- | 161 | ||||||
Earnings Before Income Taxes |
56,453 | 31,465 | ||||||
Income taxes |
19,200 | 10,900 | ||||||
Net Earnings |
$ | 37,253 | $ | 20,565 | ||||
Basic Net Earnings
per Common Share |
$ | 0.62 | $ | 0.34 | ||||
Diluted Net Earnings
per Common Share |
$ | 0.61 | $ | 0.34 | ||||
Cash Dividends Declared
per Common Share |
$ | 0.21 | $ | 0.20 |
See notes to consolidated financial statements.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
(In thousands)
April 1, | Dec 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 102,509 | $ | 9,591 | ||||
Accounts receivable, less allowances of $5,500 and $5,600 |
153,541 | 124,593 | ||||||
Inventories |
102,785 | 91,620 | ||||||
Deferred income taxes |
19,272 | 18,647 | ||||||
Other current assets |
2,418 | 7,957 | ||||||
Total current assets |
380,525 | 252,408 | ||||||
Property, Plant and Equipment |
||||||||
Cost |
342,777 | 344,854 | ||||||
Accumulated depreciation |
(209,388 | ) | (210,669 | ) | ||||
Property, plant and equipment, net |
133,389 | 134,185 | ||||||
Goodwill |
91,740 | 91,740 | ||||||
Other Intangible Assets, net |
25,461 | 28,338 | ||||||
Deferred Income Taxes |
15,267 | 14,696 | ||||||
Other Assets |
9,040 | 9,107 | ||||||
Total Assets |
$ | 655,422 | $ | 530,474 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Notes payable to banks |
$ | 11,192 | $ | 8,183 | ||||
Trade accounts payable |
28,930 | 19,669 | ||||||
Salaries and incentives |
18,362 | 34,907 | ||||||
Dividends payable |
12,621 | 12,610 | ||||||
Other current liabilities |
50,658 | 44,385 | ||||||
Total current liabilities |
121,763 | 119,754 | ||||||
Long-term Debt |
150,000 | 70,255 | ||||||
Retirement Benefits and Deferred Compensation |
77,437 | 76,351 | ||||||
Shareholders Equity |
||||||||
Common stock |
60,625 | 60,048 | ||||||
Additional paid-in-capital |
227,823 | 212,073 | ||||||
Retained earnings |
69,066 | 44,436 | ||||||
Accumulated other comprehensive income (loss) |
(51,292 | ) | (52,443 | ) | ||||
Total shareholders equity |
306,222 | 264,114 | ||||||
Total Liabilities and Shareholders Equity |
$ | 655,422 | $ | 530,474 | ||||
See notes to consolidated financial statements.
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Cash Flows From Operating Activities |
||||||||
Net Earnings |
$ | 37,253 | $ | 20,565 | ||||
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation and amortization |
8,427 | 8,578 | ||||||
Deferred income taxes |
(1,795 | ) | (3,254 | ) | ||||
Share-based compensation |
2,658 | 2,108 | ||||||
Excess tax benefit related to share-based
payment arrangements |
(1,200 | ) | (700 | ) | ||||
Change in |
||||||||
Accounts receivable |
(27,372 | ) | (19,601 | ) | ||||
Inventories |
(11,037 | ) | (7,849 | ) | ||||
Trade accounts payable |
9,193 | 6,088 | ||||||
Salaries and incentives |
(17,139 | ) | 1,333 | |||||
Retirement benefits and deferred compensation |
2,025 | 2,714 | ||||||
Other accrued liabilities |
7,853 | 6,153 | ||||||
Other |
5,314 | (94 | ) | |||||
Net cash provided by operating activities |
14,180 | 16,041 | ||||||
Cash Flows From Investing Activities |
||||||||
Property, plant and equipment additions |
(4,517 | ) | (2,847 | ) | ||||
Proceeds from sale of property, plant and equipment |
143 | 57 | ||||||
Capitalized software and other intangible asset additions |
- | (125 | ) | |||||
Net cash used in investing activities |
(4,374) | (2,915 | ) | |||||
Cash Flows From Financing Activities |
||||||||
Borrowings on short-term lines of credit |
7,861 | 3,851 | ||||||
Payments on short-term lines of credit |
(5,220 | ) | (960 | ) | ||||
Borrowings on long-term notes and line of credit |
252,175 | 17,315 | ||||||
Payments on long-term line of credit |
(172,430 | ) | (23,575 | ) | ||||
Excess tax benefit related to share-based
payment arrangements |
1,200 | 700 | ||||||
Common stock issued |
12,437 | 7,984 | ||||||
Common stock repurchased |
- | (52 | ) | |||||
Cash dividends paid |
(12,612 | ) | (12,002 | ) | ||||
Net cash provided by (used in) financing activities |
83,411 | (6,739 | ) | |||||
Effect of exchange rate changes on cash |
(299 | ) | (166 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
92,918 | 6,221 | ||||||
Cash and cash equivalents
|
||||||||
Beginning of year |
9,591 | 5,412 | ||||||
End of period |
$ | 102,509 | $ | 11,633 | ||||
See notes to consolidated financial statements.
5
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. | The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of April 1, 2011 and the related statements of earnings for the thirteen weeks ended April 1, 2011 and March 26, 2010, and cash flows for the thirteen weeks ended April 1, 2011 and March 26, 2010 have been prepared by the Company and have not been audited. |
In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Graco Inc. and Subsidiaries as of April 1, 2011, and the results of operations and cash flows for all periods presented. | |||
In the fourth quarter of 2010, the Company changed its cash flow presentation of notes payable activity, for all periods presented, to separately disclose borrowings and payments. The Company also changed the cash flow presentation of activity on the swingline portion of its long-term revolving credit arrangement by changing the method it uses to accumulate borrowing and payment amounts. In prior periods, such activity was disclosed on a net basis. The effect of this change was to increase both borrowings and payments on long-term line of credit by $17 million in the first quarter of 2010. These changes had no impact on net cash used in financing activities. | |||
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 Companys 2010 Annual Report on 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. |
6
2. | The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): |
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Net earnings available to
common shareholders |
$ | 37,253 | $ | 20,565 | ||||
Weighted average shares
outstanding for basic
earnings per share |
60,270 | 60,206 | ||||||
Dilutive effect of stock
options computed using the
treasury stock method and
the average market price |
1,090 | 507 | ||||||
Weighted average shares
outstanding for diluted
earnings per share |
61,360 | 60,713 | ||||||
Basic earnings per share |
$ | 0.62 | $ | 0.34 | ||||
Diluted earnings per share |
$ | 0.61 | $ | 0.34 |
Stock options to purchase 828,000 and 3,103,000 shares were not included in the 2011 and 2010 computations of diluted earnings per share, respectively, because they would have been anti-dilutive. |
3. | Information on option shares outstanding and option activity for the thirteen weeks ended April 1, 2011 is shown below (in thousands, except per share amounts): |
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Option | Exercise | Options | Exercise | |||||||||||||
Shares | Price | Exercisable | Price | |||||||||||||
Outstanding, December 31, 2010 |
5,509 | $ | 30.42 | 2,980 | $ | 31.99 | ||||||||||
Granted |
497 | 42.73 | ||||||||||||||
Exercised |
(235 | ) | 20.69 | |||||||||||||
Canceled |
(17 | ) | 37.25 | |||||||||||||
Outstanding, April 1, 2011 |
5,754 | $ | 31.86 | 3,410 | $ | 32.08 | ||||||||||
The Company recognized year-to-date share-based compensation of $2.7 million in 2011 and $2.1 million in 2010. As of April 1, 2011, there was $13.0 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.4 years. |
7
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results: |
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Expected life in years |
6.5 | 6.0 | ||||||
Interest rate |
2.8 | % | 2.7 | % | ||||
Volatility |
33.7 | % | 33.8 | % | ||||
Dividend yield |
2.0 | % | 3.0 | % | ||||
Weighted average fair value per share |
$ | 13.21 | $ | 7.16 |
Under the Companys Employee Stock Purchase Plan, the Company issued 313,000 shares in 2011 and 436,000 shares in 2010. The fair value of the employees purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results: |
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Expected life in years |
1.0 | 1.0 | ||||||
Interest rate |
0.3 | % | 0.3 | % | ||||
Volatility |
27.8 | % | 42.8 | % | ||||
Dividend yield |
2.1 | % | 2.9 | % | ||||
Weighted average fair value per share |
$ | 10.05 | $ | 8.48 |
4. | The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands): |
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Pension Benefits |
||||||||
Service cost |
$ | 1,233 | $ | 1,241 | ||||
Interest cost |
3,370 | 3,277 | ||||||
Expected return on assets |
(4,000 | ) | (3,475 | ) | ||||
Amortization and other |
1,481 | 1,504 | ||||||
Net periodic benefit cost |
$ | 2,084 | $ | 2,547 | ||||
Postretirement Medical |
||||||||
Service cost |
$ | 125 | $ | 125 | ||||
Interest cost |
325 | 325 | ||||||
Net periodic benefit cost |
$ | 450 | $ | 450 | ||||
8
5. | Total comprehensive income was as follows (in thousands): |
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Net earnings |
$ | 37,253 | $ | 20,565 | ||||
Pension and postretirement
medical liability adjustment |
1,363 | 1,468 | ||||||
Gain (loss) on interest
rate hedge contracts |
454 | 705 | ||||||
Income taxes |
(666 | ) | (805 | ) | ||||
Comprehensive income |
$ | 38,404 | $ | 21,933 | ||||
Components of accumulated other comprehensive income (loss) were (in thousands): | ||||||||
April 1, | Dec 31, | |||||||
2011 | 2010 | |||||||
Pension and postretirement
medical liability adjustment |
$ | (50,469 | ) | $ | (51,334 | ) | ||
Gain (loss) on interest rate hedge contracts |
- | (286 | ) | |||||
Cumulative translation adjustment |
(823 | ) | (823 | ) | ||||
Total |
$ | (51,292 | ) | $ | (52,443 | ) | ||
6. | The Company has three reportable segments: Industrial, Contractor and Lubrication. Sales and operating earnings by segment for the thirteen weeks ended April 1, 2011 and March 26, 2010 were as follows (in thousands): |
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Net Sales |
||||||||
Industrial |
$ | 122,830 | $ | 96,792 | ||||
Contractor |
70,205 | 50,797 | ||||||
Lubrication |
24,644 | 17,132 | ||||||
Total |
$ | 217,679 | $ | 164,721 | ||||
Operating Earnings |
||||||||
Industrial |
$ | 45,025 | $ | 30,474 | ||||
Contractor |
11,115 | 4,883 | ||||||
Lubrication |
5,227 | 1,707 | ||||||
Unallocated corporate (expense) |
(4,298 | ) | (4,358 | ) | ||||
Total |
$ | 57,069 | $ | 32,706 | ||||
9
Assets by segment were as follows (in thousands): |
April 1, | Dec 31, | |||||||
2011 | 2010 | |||||||
Industrial |
$ | 286,027 | $ | 270,160 | ||||
Contractor |
155,261 | 134,938 | ||||||
Lubrication |
85,017 | 81,746 | ||||||
Unallocated corporate |
129,117 | 43,630 | ||||||
Total |
$ | 655,422 | $ | 530,474 | ||||
7. | Major components of inventories were as follows (in thousands): |
April 1, | Dec 31, | |||||||
2011 | 2010 | |||||||
Finished products and components |
$ | 53,719 | $ | 48,670 | ||||
Products and components in various
stages of completion |
36,028 | 31,275 | ||||||
Raw materials and purchased components |
48,630 | 46,693 | ||||||
138,377 | 126,638 | |||||||
Reduction to LIFO cost |
(35,592 | ) | (35,018 | ) | ||||
Total |
$ | 102,785 | $ | 91,620 | ||||
10
8. | Information related to other intangible assets follows (dollars in thousands): |
Estimated | Foreign | |||||||||||||||||||
Life | Original | Accumulated | Currency | Book | ||||||||||||||||
(years) | Cost | Amortization | Translation | Value | ||||||||||||||||
April 1, 2011 |
||||||||||||||||||||
Customer relationships |
5-8 | $ | 40,875 | $ | (26,180 | ) | $ | (181 | ) | $ | 14,514 | |||||||||
Patents, proprietary technology
and product documentation |
3-10 | 19,452 | (14,233 | ) | (87 | ) | 5,132 | |||||||||||||
Trademarks, trade names
and other |
3 | 6,960 | (4,325 | ) | - | 2,635 | ||||||||||||||
67,287 | (44,738 | ) | (268 | ) | 22,281 | |||||||||||||||
Not Subject to Amortization: |
||||||||||||||||||||
Brand names |
3,180 | - | - | 3,180 | ||||||||||||||||
Total |
$ | 70,467 | $ | (44,738 | ) | $ | (268 | ) | $ | 25,461 | ||||||||||
December 31, 2010 |
||||||||||||||||||||
Customer relationships |
3-8 | $ | 41,075 | $ | (24,840 | ) | $ | (181 | ) | $ | 16,054 | |||||||||
Patents, proprietary technology
and product documentation |
3-10 | 19,902 | (13,956 | ) | (87 | ) | 5,859 | |||||||||||||
Trademarks, trade names
and other |
3-10 | 8,154 | (4,909 | ) | - | 3,245 | ||||||||||||||
69,131 | (43,705 | ) | (268 | ) | 25,158 | |||||||||||||||
Not Subject to Amortization: |
||||||||||||||||||||
Brand names |
3,180 | - | - | 3,180 | ||||||||||||||||
Total |
$ | 72,311 | $ | (43,705 | ) | $ | (268 | ) | $ | 28,338 | ||||||||||
Amortization of intangibles was $2.9 million in the first quarter of 2011. Estimated annual amortization expense is as follows: $10.7 million in 2011, $8.8 million in 2012, $4.1 million in 2013, $0.9 million in 2014, $0.5 million in 2015 and $0.2 million thereafter. |
11
9. | Components of other current liabilities were (in thousands): |
April 1, | Dec 31, | |||||||
2011 | 2010 | |||||||
Accrued self-insurance retentions |
$ | 6,797 | $ | 6,675 | ||||
Accrued warranty and service liabilities |
6,907 | 6,862 | ||||||
Accrued trade promotions |
3,673 | 5,947 | ||||||
Payable for employee stock purchases |
1,276 | 5,655 | ||||||
Income taxes payable |
13,007 | 733 | ||||||
Other |
18,998 | 18,513 | ||||||
Total other current liabilities |
$ | 50,658 | $ | 44,385 | ||||
A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands): |
Thirteen | ||||||||
Weeks Ended | Year Ended | |||||||
April 1, | Dec 31, | |||||||
2011 | 2010 | |||||||
Balance, beginning of year |
$ | 6,862 | $ | 7,437 | ||||
Charged to expense |
1,189 | 3,484 | ||||||
Margin on parts sales reversed |
789 | 3,412 | ||||||
Reductions for claims settled |
(1,933 | ) | (7,471 | ) | ||||
Balance, end of period |
$ | 6,907 | $ | 6,862 | ||||
10. | The Company accounts for all derivatives, including those embedded in other contracts, as either assets or liabilities and measures those financial instruments at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. | |
As part of its risk management program, the Company may periodically use forward exchange contracts and interest rate swaps to manage known market exposures. Terms of derivative instruments are structured to match the terms of the risk being managed and are generally held to maturity. The Company does not hold or issue derivative financial instruments for trading purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Companys policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales. | ||
The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The Company enters into forward contracts or options, or borrows in various currencies, in order to hedge its net monetary positions. These instruments are recorded at current market values and the gains and losses are |
12
included in other expense (income), net. There were seven contracts outstanding as of April 1, 2011, with notional amounts totaling $21 million. The Company believes it uses strong financial counterparts in these transactions and that the resulting credit risk under these hedging strategies is not significant. | ||
The Company uses significant other observable inputs to value the derivative instruments used to hedge interest rate volatility and net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. The fair market value and balance sheet classification of such instruments follows (in thousands): |
Balance Sheet | April 1, | Dec 31, | ||||||||
Classification | 2011 | 2010 | ||||||||
Gain (loss) on interest
rate hedge contracts |
Other current liabilities | $ | | $ | (454 | ) | ||||
Gain (loss) on foreign
currency forward contracts |
||||||||||
Gains |
$ | 186 | $ | 92 | ||||||
Losses |
(263 | ) | (284 | ) | ||||||
Net |
Other current liabilities | $ | (77 | ) | $ | (192 | ) | |||
11. | In March 2011, the Company entered into a note agreement and sold $150 million of unsecured notes (series A and B) in a private placement. Proceeds were used to repay revolving line of credit borrowings and invested in cash equivalents. The note agreement provides for the issuance and sale of an additional $150 million in unsecured notes (series C and D) on or before July 26, 2011. | |
Interest rates and maturity dates on the four series of notes are as follows (dollars in millions): |
Series | Amount | Rate | Maturity | |||||||||
A |
$ | 75 | 4.00 | % | March 2018 | |||||||
B |
$ | 75 | 5.01 | % | March 2023 | |||||||
C |
$ | 75 | 4.88 | % | January 2020 | |||||||
D |
$ | 75 | 5.35 | % | July 2026 |
The note agreement requires the Company to maintain certain financial ratios as to cash flow leverage and interest coverage. | ||
The Company is in compliance with all financial covenants of its debt agreements. | ||
The estimated fair value of the notes sold in March 2011 is not significantly different from the $150 million carrying amount as of April 1, 2011. |
13
12. | In April 2011, the Company entered into a definitive agreement to purchase the finishing businesses of Illinois Tool Works Inc. (ITW) in a $650 million cash transaction. The agreement contemplates a closing date on or after June 1, 2011, subject to regulatory reviews and other customary closing conditions. The Company currently expects the transaction to close in the third quarter of 2011. The Company plans to finance the acquisition through a new committed $450 million revolving credit facility and funds available under the long-term notes referenced above. |
14
Item 2.
|
GRACO INC. AND SUBSIDIARIES |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company designs, manufactures and markets systems and equipment to move, measure, control,
dispense and spray fluid materials. Management classifies the Companys business into three
reportable segments: Industrial, Contractor and Lubrication. Key strategies include
developing and marketing new products, expanding distribution globally, opening new markets
with technology and channel expansion and completing strategic acquisitions.
The following Managements Discussion and Analysis reviews significant factors affecting the
Companys results of operations and financial condition. This discussion should be read in
conjunction with the financial statements and the accompanying notes to the financial
statements.
Results of Operations
Net sales, net earnings and earnings per share were as follows (in millions except per share
amounts and percentages):
Thirteen Weeks Ended | ||||||||||||||
April 1, | March 26, | % | ||||||||||||
2011 | 2010 | Change | ||||||||||||
Net Sales |
$ | 217.7 | $ | 164.7 | 32 | % | ||||||||
Net Earnings |
$ | 37.3 | $ | 20.6 | 81 | % | ||||||||
Diluted Net Earnings per Common Share |
$ | 0.61 | $ | 0.34 | 79 | % |
All segments and geographic regions had double-digit percentage revenue growth for the first
quarter. Volume increases drove improvements in gross margin rates and net earnings.
Currency translation did not have a significant effect on consolidated results for the
quarter.
15
Consolidated Results
Sales by geographic area were as follows (in millions):
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Americas1 |
$ | 115.6 | $ | 86.7 | ||||
Europe2 |
53.3 | 41.8 | ||||||
Asia Pacific |
48.8 | 36.2 | ||||||
Consolidated |
$ | 217.7 | $ | 164.7 | ||||
1 | North and South America, including the U.S. | |
2 | Europe, Africa and Middle East |
First quarter sales increased 33 percent in the Americas, 27 percent in Europe and 35 percent in
Asia Pacific (31 percent at consistent translation rates). Translation rates did not have a
significant impact on the overall sales increase of 32 percent.
Gross profit margin, expressed as a percentage of sales, was 57 percent, up from 54 percent for the
first quarter last year. Higher production volume was the major factor in the improvement.
Selling price increases also contributed to the increase in margin rates.
Total operating expenses increased $11 million (19 percent) compared to first quarter last year,
including increases of $8 million in selling and marketing and $2 million in general and
administrative. Increases in payroll (headcount and incentives) and product promotion (mostly
Contractor segment) were related to higher levels of business activity. As a percentage of sales,
operating expenses decreased to 31 percent from 34 percent for the first quarter last year.
The effective income tax rate was 34 percent compared to 341/2 percent for the first quarter last
year. The decrease is mostly due to the federal R&D credit included in the 2011 rate. There was
no R&D credit included in the rate for the first quarter of 2010.
16
Segment Results
Certain measurements of segment operations compared to last year are summarized below:
Industrial | ||||||||
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Net sales (in millions) |
||||||||
Americas |
$ | 52.9 | $ | 41.9 | ||||
Europe |
34.4 | 27.9 | ||||||
Asia Pacific |
35.5 | 27.0 | ||||||
Total |
$ | 122.8 | $ | 96.8 | ||||
Operating earnings as a percentage of net sales |
37 | % | 31 | % | ||||
Industrial segment sales increased 26 percent in the Americas, 24 percent in Europe and 31
percent in Asia Pacific.
Higher volume and expense leverage contributed to the improvement in operating earnings as a
percentage of sales.
Contractor | ||||||||
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Net sales (in millions) |
||||||||
Americas |
$ | 44.9 | $ | 31.9 | ||||
Europe |
16.7 | 12.6 | ||||||
Asia Pacific |
8.6 | 6.3 | ||||||
Total |
$ | 70.2 | $ | 50.8 | ||||
Operating earnings as a percentage of net sales |
16 | % | 10 | % | ||||
Contractor segment sales increased 41 percent in the Americas, with substantial gains in both
the paint store and home center channels. Sales increased 33 percent in Europe and 38 percent
in Asia Pacific.
Higher volume and expense leverage contributed to the improvement in operating earnings as a
percentage of sales. High product development expenses affected operating margin rate in
2010, and increased marketing, including product launch and promotion expenses, moderated the
improvement in 2011.
17
Lubrication | ||||||||
Thirteen Weeks Ended | ||||||||
April 1, | March 26, | |||||||
2011 | 2010 | |||||||
Net sales (in millions) |
||||||||
Americas |
$ | 17.8 | $ | 12.8 | ||||
Europe |
2.2 | 1.4 | ||||||
Asia Pacific |
4.6 | 2.9 | ||||||
Total |
$ | 24.6 | $ | 17.1 | ||||
Operating earnings as a percentage of net sales |
21 | % | 10 | % | ||||
Lubrication segment sales increased 39 percent in the Americas. From small bases, sales
increased 55 percent in Europe and 61 percent in Asia Pacific.
Higher volume and expense leverage contributed to the improvement in operating earnings as a
percentage of sales.
Liquidity and Capital Resources
Net cash provided by operating activities was $14 million in 2011 and $16 million in 2010.
The effect of higher net earnings was offset by larger increases in inventories and
receivables and higher 2010 incentive and bonus payments made in the first quarter of 2011.
Since the end of 2010, inventories increased by $11 million to meet higher demand, and
accounts receivable increased by $29 million due to higher sales levels.
At April 1, 2011, the Company had various lines of credit totaling $271 million, of which $262
million was unused.
In March 2011, the Company entered into a note agreement and sold $150 million of unsecured
notes in a private placement. One series of notes totaling $75 million bears interest at 4.0
percent and matures in 2018. Another series of notes totaling $75 million bears interest at
5.01 percent and matures in 2023. Proceeds were used to repay revolving line of credit
borrowings and invested in cash equivalents. The note agreement provides for the issuance and
sale of an additional $150 million in unsecured notes on or before July 26, 2011. One series
of notes to be issued totaling $75 million will bear interest at 4.88 percent and mature in
2020. Another series of notes to be issued totaling $75 million will bear interest at 5.35
percent and mature in 2026.
Under terms of the note agreement, interest is payable quarterly. The Company is required to
maintain a cash flow leverage ratio of not more than 3.25 to 1.00 and an interest coverage
ratio of not less than 3.00 to 1.00. If a significant acquisition is consummated, the
agreement allows, for a one-year period, for a cash flow leverage ratio of 3.75 to 1.00 and an
interest coverage ratio of not less than 2.50 to 1.00. The note agreement contains covenants
typical of unsecured credit facilities, including customary default provisions. If an event
of default occurs, all outstanding obligations may become immediately due and payable. The
Company was in compliance with all financial covenants at April 1, 2011.
18
In April 2011, the Company entered into a definitive agreement to purchase the finishing
business operations of Illinois Tool Works Inc. (ITW) in a $650 million cash transaction. The
agreement contemplates a closing date on or after June 1, 2011, subject to regulatory reviews
and other customary closing conditions. The Company currently expects the transaction to
close in the third quarter of 2011. The Company plans to finance the acquisition through a
new committed $450 million revolving credit facility and funds available under the long-term
notes referenced above.
Internally generated funds and unused financing sources are expected to provide the Company
with the flexibility to meet its liquidity needs in 2011.
19
Outlook
Management is optimistic that sales momentum will continue throughout 2011, although
percentage gains may decline due to tougher sales comparisons, particularly in the Contractor
segment, where the initial stocking of new handheld products occurred in the second quarter of
2010.
The pending acquisition of the ITW finishing businesses would advance all of the Companys
stated core growth strategies, including new products and technology, geographic expansion,
and new markets.
SAFE HARBOR CAUTIONARY STATEMENT
A forward-looking statement is any statement made in this report and other reports that the
Company files periodically with the Securities and Exchange Commission, or in press or
earnings releases, analyst briefings and conference calls, which reflects the Companys
current thinking on market trends and the Companys future financial performance at the time
they are made. All forecasts and projections are forward-looking statements.
The Company desires to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 by making cautionary statements concerning any
forward-looking statements made by or on behalf of the Company. The Company cannot give any
assurance that the results forecasted in any forward-looking statement will actually be
achieved. Future results could differ materially from those expressed, due to the impact of
changes in various factors. These risk factors include, but are not limited to: economic
conditions in the United States and other major world economies, currency fluctuations,
political instability, changes in laws and regulations, and changes in product demand. In
addition, risk factors related to the Companys pending acquisition of the ITW finishing
business include: whether and when the required regulatory approvals will be obtained,
whether and when the closing conditions will be satisfied and whether and when the transaction
will close, the ability to close on committed financing on satisfactory terms, the amount of
debt that the Company will incur to complete the transaction, completion of purchase price
valuation for acquired assets, whether and when the Company will be able to realize the
expected financial results and accretive effect of the transaction, how customers,
competitors, suppliers and employees will react to the transaction, and economic changes in
global markets. Please refer to Item 1A of, and Exhibit 99 to, the Companys Annual Report on
Form 10-K for fiscal year 2010 and Item 1A of this Quarterly Report on Form 10-Q for a more
comprehensive discussion of these and other risk factors.
Investors should realize that factors other than those identified above and in Item 1A and
Exhibit 99 might prove important to the Companys future results. It is not possible for
management to identify each and every factor that may have an impact on the Companys
operations in the future as new factors can develop from time to time.
20
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes related to market risk from the disclosures made in
the Companys 2010 Annual Report on Form 10-K.
Item 4. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of the end of the fiscal quarter covered by this report, the Company carried out an
evaluation of the effectiveness of the design and operation of its disclosure controls and
procedures. This evaluation was done under the supervision and with the participation of the
Companys President and Chief Executive Officer, the Chief Financial Officer and Treasurer,
the Vice President and Controller, and the Vice President, General Counsel and Secretary.
Based upon that evaluation, they concluded that the Companys disclosure controls and
procedures are effective.
Changes in internal controls
During the quarter, there was no change in the Companys internal control over financial reporting
that has materially affected or is reasonably likely to materially affect the Companys internal
control over financial reporting.
21
PART II | OTHER INFORMATION |
Item 1A. | Risk Factors |
There have been no material changes to the Companys risk factors from those disclosed in the
Companys 2010 Annual Report on Form 10-K, except for the addition of the risk factor described
below:
Pending Acquisition Our pending acquisition of the finishing business operations of Illinois Tool
Works Inc. is subject to regulatory approvals and the expected benefits from the acquisition may
not be fully realized.
We have entered into a definitive agreement to purchase the finishing business of Illinois Tools
Works Inc. (ITW) in a $650 million cash transaction. We cannot predict whether or when the
required regulatory approvals will be obtained or if the closing conditions will be satisfied. If
we terminate the agreement before April 1, 2012 due to failure to obtain regulatory approval, we
will be required to pay a $20 million termination fee. The $450 million revolving credit facility
that will be used to finance the transaction has not yet been executed. After the transaction
closes, significant changes to our financial condition as a result of global economic changes or
difficulties in the integration of the newly acquired businesses may affect our ability to obtain
the expected benefits from the transaction or to satisfy the
financial covenants included in the
terms of the financing arrangements.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
On September 18, 2009, the Board of Directors authorized the Company to purchase up to
6,000,000 shares of its outstanding common stock, primarily through open-market transactions.
The authorization expires on September 30, 2012.
In addition to shares purchased under the Board authorizations, the Company purchases shares
of common stock held by employees who wish to tender owned shares to satisfy the exercise
price or tax withholding on option exercises.
No shares were purchased in the first quarter of 2011. As of April 1, 2011, there were
5,179,638 shares that may yet be purchased under the Board authorization.
22
Item 6. Exhibits
10.1
|
Chief Executive Officer Restricted Stock Agreement (Performance-Based). Form of agreement used to award performance-based restricted stock to the Chief Executive Officer (incorporated by reference to Exhibit 10.1 to the Companys Report on Form 8-K filed March 2, 2011). | |
10.2
|
Note Agreement, dated March 11, 2011, between Graco Inc. and the Purchasers listed on the Purchaser Schedule attached thereto, which includes as exhibits the form of Senior Notes (incorporated by reference to Exhibit 10.1 to the Companys Report on Form 8-K filed March 16, 2011). | |
10.3
|
Stock Option Agreement. Form of agreement used for award in 2011 of non-qualified stock options to chief executive officer under the Graco Inc. 2010 Stock Incentive Plan. | |
10.4
|
Stock Option Agreement. Form of agreement used for award in 2011 of non-qualified stock options to executive officers under the Graco Inc. 2010 Stock Incentive Plan. | |
31.1
|
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a). | |
31.2
|
Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a). | |
32
|
Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C. | |
99.1
|
Press Release, Reporting First Quarter Earnings, dated April 27, 2011. | |
101
|
Interactive Data File. |
23
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: April 27, 2011 | By: | /s/ Patrick J. McHale | ||
Patrick J. McHale | ||||
President and Chief Executive Officer (Principal Executive Officer) |
Date: April 27, 2011 | By: | /s/ James A. Graner | ||
James A. Graner | ||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
Date: April 27, 2011 | By: | /s/ Caroline M. Chambers | ||
Caroline M. Chambers Vice President and Controller (Principal Accounting Officer) |
||||