Annual Statements Open main menu

GRACO INC - Quarter Report: 2015 March (Form 10-Q)

10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

For the quarterly period ended March 27, 2015

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

 

(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              

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    

58,678,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of April 17, 2015.


Table of Contents

INDEX

 

           

 

Page Number

 

  

 

PART I   FINANCIAL INFORMATION   
  Item 1.      Financial Statements   
       Consolidated Statements of Earnings      3             
       Consolidated Statements of Comprehensive Income      3             
       Consolidated Balance Sheets      4             
       Consolidated Statements of Cash Flows      5             
       Notes to Consolidated Financial Statements      6             
  Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations      18             
  Item 3.      Quantitative and Qualitative Disclosures About
Market Risk
     24             
  Item 4.      Controls and Procedures      24             
PART II   OTHER INFORMATION   
  Item 1A.      Risk Factors      25             
  Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds      25             
  Item 6.      Exhibits      26             
SIGNATURES   
EXHIBITS   

 

2


Table of Contents

PART I    Item 1.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited) (In thousands except per share amounts)

 

    Thirteen Weeks Ended  
      March 27,  
2015
      March 28,  
2014
 

Net Sales

   $ 306,453       $ 289,962   

Cost of products sold

    144,324        130,650   
 

 

 

   

 

 

 

Gross Profit

    162,129        159,312   

Product development

    15,290        13,159   

Selling, marketing and distribution

    51,424        46,342   

General and administrative

    30,184        25,106   
 

 

 

   

 

 

 

Operating Earnings

    65,231        74,705   

Interest expense

    5,303        4,588   

Held separate investment (income), net

    (29,523)        (3,675)   

Other expense (income), net

    710        247   
 

 

 

   

 

 

 

Earnings Before Income Taxes

    88,741        73,545   

Income taxes

    19,900        22,800   
 

 

 

   

 

 

 

Net Earnings

   $ 68,841       $ 50,745   
 

 

 

   

 

 

 

Per Common Share

   

Basic net earnings

   $ 1.17       $ 0.83   

Diluted net earnings

   $ 1.14       $ 0.81   

Cash dividends declared

   $ 0.30       $ $0.28   

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)

 

    Thirteen Weeks Ended  
      March 27,  
2015
      March 28,  
2014
 

Net Earnings

   $ 68,841       $ 50,745   

Other comprehensive income (loss)

   

Cumulative translation adjustment

    (3,011)        (86)   

Pension and postretirement medical liability adjustment

    2,438        1,188   

Income taxes

   

Pension and postretirement medical liability adjustment

    (902)        (428)   
 

 

 

   

 

 

 

Other comprehensive income (loss)

    (1,475)        674   
 

 

 

   

 

 

 

Comprehensive Income

   $ 67,366       $ 51,419   
 

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

     March 27,
2015
     Dec 26,
2014
 

ASSETS

     

Current Assets

     

Cash and cash equivalents

    $ 27,678        $ 23,656   

Accounts receivable, less allowances of $8,800 and $8,100

     243,228         214,944   

Inventories

     182,485         159,797   

Deferred income taxes

     20,972         19,969   

Investment in businesses held separate

     421,767         421,767   

Other current assets

     9,174         19,374   
  

 

 

    

 

 

 

Total current assets

     905,304         859,507   

Property, Plant and Equipment

     

Cost

     439,566         433,751   

Accumulated depreciation

     (271,445)         (272,521)   
  

 

 

    

 

 

 

Property, plant and equipment, net

     168,121         161,230   

Goodwill

     393,448         292,574   

Other Intangible Assets, net

     242,665         176,278   

Deferred Income Taxes

     32,205         28,982   

Other Assets

     26,062         26,207   
  

 

 

    

 

 

 

Total Assets

    $     1,767,805        $ 1,544,778   
  

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Current Liabilities

     

Notes payable to banks

    $ 52,013        $ 5,016   

Trade accounts payable

     45,930         39,306   

Salaries and incentives

     24,707         40,775   

Dividends payable

     17,700         17,790   

Other current liabilities

     78,327         71,593   
  

 

 

    

 

 

 

Total current liabilities

     218,677         174,480   

Long-term Debt

     767,040         615,000   

Retirement Benefits and Deferred Compensation

     136,722         136,812   

Deferred Income Taxes

     22,055         22,454   

Other non-current liabilities

     6,375          

Shareholders’ Equity

     

Common stock

     58,806         59,199   

Additional paid-in-capital

     398,253         384,704   

Retained earnings

     262,088         252,865   

Accumulated other comprehensive income (loss)

     (102,211)         (100,736)   
  

 

 

    

 

 

 

Total shareholders’ equity

     616,936         596,032   
  

 

 

    

 

 

 

Total Liabilities and Shareholders’ Equity

    $ 1,767,805        $     1,544,778   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

 

     Thirteen Weeks Ended  
         March 27,  
2015
         March 28,  
2014
 

Cash Flows From Operating Activities

     

Net Earnings

    $ 68,841        $ 50,745   

Adjustments to reconcile net earnings to
net cash provided by operating activities

     

Depreciation and amortization

     10,810         9,262   

Deferred income taxes

     (4,044)         (3,244)   

Share-based compensation

     5,033         4,401   

Excess tax benefit related to share-based
payment arrangements

     (300)         (1,500)   

Change in

     

Accounts receivable

     (26,632)         (23,251)   

Inventories

     (13,545)         (9,985)   

Trade accounts payable

     6,088         6,164   

Salaries and incentives

     (16,910)         (16,125)   

Retirement benefits and deferred compensation

     3,171         1,496   

Other accrued liabilities

     4,947         6,044   

Other

     9,762         4,235   
  

 

 

    

 

 

 

Net cash provided by operating activities

     47,221         28,242   
  

 

 

    

 

 

 

Cash Flows From Investing Activities

     

Property, plant and equipment additions

     (9,796)         (6,879)   

Acquisition of businesses, net of cash acquired

     (182,904)         (65,150)   

Other

     38          
  

 

 

    

 

 

 

Net cash used in investing activities

     (192,662)         (72,026)   
  

 

 

    

 

 

 

Cash Flows From Financing Activities

     

Borrowings (payments) on short-term lines of credit, net

     47,605          1,141   

Borrowings on long-term line of credit

     379,095         177,710   

Payments on long-term line of credit

     (227,055)         (83,070)   

Excess tax benefit related to share-based payment arrangements

     300         1,500   

Common stock issued

     12,746         15,275   

Common stock repurchased

     (46,935)         (47,542)   

Cash dividends paid

     (17,730)         (16,813)   
  

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     148,026         48,201   
  

 

 

    

 

 

 

Effect of exchange rate changes on cash

     1,437         (91)   
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,022         4,326   

Cash and cash equivalents

     

Beginning of year

     23,656         19,756   
  

 

 

    

 

 

 

End of period

    $ 27,678        $ 24,082   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

GRACO INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the “Company”) as of March 27, 2015 and the related statements of earnings for the thirteen weeks ended March 27, 2015 and March 28, 2014, and cash flows for the thirteen weeks ended March 27, 2015 and March 28, 2014 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 the Company as of March 27, 2015, 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 2014 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.

 

2. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

    Thirteen Weeks Ended       
       March 27,   
2015
       March 28,   
2014
    

 

Net earnings available to common shareholders

   $ 68,841      $ 50,745     

 

Weighted average shares outstanding for basic earnings per share

    58,981       60,822     

 

Dilutive effect of stock options computed using the treasury stock method and the average market price

    1,484       1,616     

 

Weighted average shares outstanding for diluted earnings per share

    60,465       62,438     

 

Basic earnings per share

  $ 1.17     $ 0.83     

 

Diluted earnings per share

  $ 1.14     $ 0.81     

 

6


Table of Contents

Stock options to purchase 1,186,000 and 838,000 shares were not included in the March 27, 2015 and March 28, 2014 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

 

3. Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):

 

    Option
  Shares  
      Weighted  
Average
Exercise
Price
    Options
Exercisable
      Weighted  
Average
Exercise
Price
 

Outstanding, December 26, 2014

    4,975      $ 44.72       3,318     $ 34.86  

Granted

    496        74.39      

Exercised

    (60)        32.57      

Canceled

    (6)        72.12      
 

 

 

       

Outstanding, March 27, 2015

    5,405      $ 47.55       3,722     $ 37.63  
 

 

 

       

The Company recognized year-to-date share-based compensation of $5.0 million in 2015 and $4.4 million in 2014. As of March 27, 2015, there was $21.3 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 1.9 years.

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  
       March 27,  
2015
       March 28,  
2014
 

Expected life in years

     6.5             6.5       

Interest rate

     1.7 %          2.0 %    

Volatility

     35.3 %          36.1 %    

Dividend yield

     1.6 %          1.5 %    

Weighted average fair value per share

   $ 23.42           $ 24.90       

 

7


Table of Contents

Under the Company’s Employee Stock Purchase Plan, the Company issued 166,000 shares in 2015 and 193,000 shares in 2014. 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      
         March 27,    
2015
         March 28,    
2014
   

Expected life in years

     1.0            1.0        

Interest rate

     0.2 %         0.1 %     

Volatility

     18.9 %         21.4 %     

Dividend yield

     1.6 %         1.4 %     

Weighted average fair value per share

   $ 16.51          $ 17.81        

 

4. The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):

 

    Thirteen Weeks Ended  
          March 27,      
2015
          March 28,      
2014
 

Pension Benefits

   

Service cost

  $ 2,096      $ 1,742   

Interest cost

    3,775        4,136   

Expected return on assets

    (4,917)        (5,419)   

Amortization and other

    2,353        1,333   
 

 

 

   

 

 

 

Net periodic benefit cost

  $ 3,307      $ 1,792   
 

 

 

   

 

 

 

 

Postretirement Medical

   

Service cost

  $ 150      $ 125   

Interest cost

    226        277   

Amortization

    (101)        (128)   
 

 

 

   

 

 

 

Net periodic benefit cost

  $ 275      $ 274   
 

 

 

   

 

 

 

 

8


Table of Contents
5. Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):

 

       Pension  
  and Post-  
  retirement  
  Medical  
       Cumulative  
  Translation  
  Adjustment  
     Total  

Thirteen Weeks Ended

    March 28, 2014

                    

Beginning balance

    $ (50,132)        $ 3,783        $ (46,349)   

Other comprehensive income
before reclassifications

            (86)         (86)   

Amounts reclassified from accumulated
other comprehensive income

     760                760   
  

 

 

    

 

 

    

 

 

 

Ending balance

    $ (49,372)        $ 3,697        $ (45,675)   
  

 

 

    

 

 

    

 

 

 

Thirteen Weeks Ended

    March 27, 2015

                    

Beginning balance

    $ (76,584)        $ (24,152)        $ (100,736)   

Other comprehensive income
before reclassifications

            (3,011)         (3,011)   

Amounts reclassified from accumulated
other comprehensive income

     1,536                1,536   
  

 

 

    

 

 

    

 

 

 

Ending balance

    $ (75,048)        $ (27,163)        $       (102,211)   
  

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

Amounts related to pension and postretirement medical adjustments are reclassified to pension cost, which is allocated to cost of products sold and operating expenses based on salaries and wages, approximately as follows (in thousands):

 

     Thirteen Weeks Ended  
       March 27,  
2015
       March 28,  
2014
 

Cost of products sold

    $ 938        $ 436   

Product development

     383         187   

Selling, marketing and distribution

     703         335   

General and administrative

     414         230   
  

 

 

    

 

 

 

Total before tax

    $ 2,438        $ 1,188   

Income tax (benefit)

     (902)         (428)   
  

 

 

    

 

 

 

Total after tax

    $ 1,536        $ 760   
  

 

 

    

 

 

 

 

6. Beginning with the first quarter of 2015 the Company revised the presentation of its financial reporting segments. Operations of the Process and the Oil and Natural Gas divisions, historically included in the Industrial segment, are now aggregated with the Lubrication division (formerly reported as a separate segment) in the newly-formed Process segment. This change aligns the types of products offered and markets served within the segments. Prior year segment information has been restated to conform to 2015 reporting.

A summary of the Company’s three reportable segments (Industrial, Process and Contractor) follows.

The Industrial segment includes the Industrial Products and the Applied Fluid Technologies divisions. The Industrial segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and vehicle assembly and components production, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles, and various other industries.

The Process segment includes the Process, the Oil and Natural Gas, and the Lubrication divisions. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, waste water, petroleum, food, lubricants and other fluids. Markets served include food and beverage, dairy, oil and natural gas, pharmaceutical, cosmetics, electronics, waste water, mining, fast oil change facilities, service garages, fleet service centers, automobile dealerships and industrial lubrication applications.

The Contractor segment remains unchanged. The Contractor segment markets sprayers for architectural coatings for painting, corrosion control, texture, and line striping.

 

10


Table of Contents

Sales and operating earnings by segment were as follows (in thousands):

 

     Thirteen Weeks Ended  
           March 27,      
2015
           March 28,      
2014
 

Net Sales

     

Industrial

    $ 143,266        $ 152,046   

Process

     67,681         53,010   

Contractor

     95,506         84,906   
  

 

 

    

 

 

 

Total

    $ 306,453        $ 289,962   
  

 

 

    

 

 

 

Operating Earnings

     

Industrial

    $ 42,940        $ 49,105   

Process

     10,498         12,643   

Contractor

     19,375         18,250   

Unallocated corporate (expense)

     (7,582)         (5,293)   
  

 

 

    

 

 

 

Total

    $ 65,231        $ 74,705   
  

 

 

    

 

 

 

Assets by segment were as follows (in thousands):

 

           March 27,      
2015
           Dec 26,      
2014
 

Industrial

    $ 546,930        $ 548,868   

Process

     489,775         304,903   

Contractor

     209,864         176,757   

Unallocated corporate

     521,236         514,250   
  

 

 

    

 

 

 

Total

    $ 1,767,805        $ 1,544,778   
  

 

 

    

 

 

 

 

11


Table of Contents

Geographic information follows (in thousands):

 

    Thirteen Weeks Ended          
          March 27,      
2015
          March 28,      
2014
         

Net sales

       

(based on customer location)

       

United States

   $ 159,328       $ 133,922       

Other countries

     147,125         156,040       
 

 

 

   

 

 

     

Total

   $ 306,453       $ 289,962       
 

 

 

   

 

 

     
          March 27,      
2015
          Dec 26,      
2014
         

Long-lived assets

       

United States

   $ 137,538       $ 131,131       

Other countries

     30,583         30,099       
 

 

 

   

 

 

     

Total

   $ 168,121       $ 161,230       
 

 

 

   

 

 

     

 

7. Major components of inventories were as follows (in thousands):

 

          March 27,      
2015
          Dec 26,      
2014
     

Finished products and components

   $ 100,372       $ 87,384     

Products and components in various stages of completion

     46,420         47,682     

Raw materials and purchased components

     80,753         69,212     
 

 

 

   

 

 

   
     227,545         204,278     

Reduction to LIFO cost

    (45,060)        (44,481)     
 

 

 

   

 

 

   

Total

   $ 182,485       $ 159,797     
 

 

 

   

 

 

   

 

12


Table of Contents
8. Information related to other intangible assets follows (dollars in thousands):

 

    Estimated
Life
(years)
  Cost     Accumulated
Amortization
    Foreign
Currency
Translation
    Book
Value
 

March 27, 2015

                           

Customer relationships

  3 - 14    $ 196,884       $ (25,488)       $ (7,471)       $     163,925   

Patents, proprietary technology

and product documentation

  3 - 11     20,168        (7,628)        (477)        12,063   

Trademarks, trade names
and other

  5     495        (68)        (50)        377   
   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

 

217,547 

 

 

    (33,184)        (7,998)        176,365   

Not Subject to Amortization:

         

Brand names

      69,165              (2,865)        66,300   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Total

     $     286,712       $ (33,184)       $ (10,863)       $ 242,665   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

December 26, 2014

                           

Customer relationships

  3 - 14    $ 143,144       $ (21,948)       $ (7,334)       $ 113,862   

Patents, proprietary technology

and product documentation

  3 - 11     18,268        (7,126)        (655)        10,487   

Trademarks, trade names
and other

  5     175        (44)              131   
   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

 

161,587 

 

 

    (29,118)        (7,989)        124,480   

Not Subject to Amortization:

         

Brand names

      55,265              (3,467)        51,798   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Total

   

 

 $

 

    216,852 

 

 

   $ (29,118)       $     (11,456)       $ 176,278   
   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of intangibles for the quarter was $4.1 million in 2015 and $3.1 million in 2014. Estimated annual amortization expense is as follows: $17.1 million in 2015, $17.1 million in 2016, $16.9 million in 2017, $16.6 million in 2018, $16.4 million in 2019 and $96.4 million thereafter.

Changes in the carrying amount of goodwill in 2015 were as follows (in thousands):

 

    Industrial     Process     Contractor     Total  

Beginning balance

   $ 188,273       $ 91,569       $ 12,732       $       292,574   

Additions from business acquisitions

    759        102,645              103,404   

Foreign currency translation

    925        (3,455)              (2,530)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $       189,957       $       190,759       $       12,732       $       393,448   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents
9. Components of other current liabilities were (in thousands):

 

          March 27,      
2015
         Dec 26,      
2014
     

Accrued self-insurance retentions

   $ 7,330       $ 7,089     

Accrued warranty and service liabilities

     7,644         7,609     

Accrued trade promotions

     7,326         7,697     

Payable for employee stock purchases

     2,217         9,126     

Customer advances and deferred revenue

     10,985         8,918     

Income taxes payable

     15,048         5,997     

Other

     27,777         25,157     
 

 

 

   

 

 

   

Total other current liabilities

   $       78,327       $ 71,593     
 

 

 

   

 

 

   

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 
March 27,
2015
     Year Ended 
Dec 26,
2014
     

Balance, beginning of year

   $ 7,609       $ 7,771     

Assumed in business acquisition

    -         12     

Charged to expense

    1,685        6,069     

Margin on parts sales reversed

    549        1,920     

Reductions for claims settled

    (2,199)        (8,163)     
 

 

 

   

 

 

   

Balance, end of period

   $ 7,644       $ 7,609     
 

 

 

   

 

 

   

 

14


Table of Contents
10. Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):

 

       Level      March 27,
2015
     Dec 26,
2014
      

Assets

           

Cash surrender value of life insurance

   2     $ 13,403        $ 13,187      

Forward exchange contracts

   2      -           280      
     

 

 

    

 

 

    

Total assets at fair value

       $ 13,403        $ 13,467      
     

 

 

    

 

 

    

 

Liabilities

           

Contingent consideration

   3     $ 8,100        $ -        

Deferred compensation

   2      3,114         2,676      

Forward exchange contracts

   2      102         -        
     

 

 

    

 

 

    

Total liabilities at fair value

       $     11,316        $     2,676      
     

 

 

    

 

 

    

Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.

Contingent consideration liability represents the estimated value (using a market approach) of future payments to be made to previous owners of an acquired business (see Note 11).

Long-term notes payable with fixed interest rates have a carrying amount of $300 million and an estimated fair value of $330 million as of March 27, 2015 and $330 million as of December 26, 2014. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.

 

11. On January 20, 2015, the Company completed the acquisition of High Pressure Equipment Holdings, LLC (HiP) for $160 million cash. HiP designs and manufactures valves, fittings and other flow control equipment engineered to perform in ultra-high pressure environments. HiP’s products and business relationships will enhance Graco’s position in the oil and natural gas industry and complement Graco’s core competencies of designing and manufacturing advanced flow control technologies. HiP had sales of $38 million in 2014. Results of HiP operations, including $7 million of sales, have been included in the Company’s Process segment from the date of acquisition.

 

15


Table of Contents

Purchase consideration was allocated to assets acquired and liabilities assumed based on estimated fair values, subject to post-closing adjustments, as follows (in thousands):

 

Cash and cash equivalents

    $ 1,904   

Accounts receivable

     4,714   

Inventories

     7,605   

Other current assets

     69   

Property, plant and equipment

     1,962   

Deferred income taxes

     1,840   

Identifiable intangible assets

     60,100   

Goodwill

     86,623   
  

 

 

 

Total assets acquired

     164,817   

Liabilities assumed

     (3,414)   
  

 

 

 

Net assets acquired

    $         161,403   
  

 

 

 

Identifiable intangible assets and estimated useful life are as follows (dollars in thousands):

 

           Estimated
 Life (years) 

Customer relationships

     47,100      12

Trade names

     13,000      Indefinite
  

 

 

   

Total identifiable intangible assets

    $         60,100     
  

 

 

   

Approximately two-thirds of the goodwill acquired with HiP is deductible for tax purposes.

On January 2, 2015 the Company acquired White Knight Fluid Handling for $16 million cash and a commitment for additional consideration if future revenues exceed certain thresholds, valued at $8 million. The maximum payout is not limited. White Knight designs and manufactures high purity, metal-free pumps used in the production process of manufacturing semiconductors, solar panels, LED flat panel displays and various other electronics. The products, brands and distribution channels of White Knight expand and complement the offerings of the Company’s Process segment. The purchase price was allocated based on estimated fair values, including $12 million of goodwill, $9 million of other identifiable intangible assets and $3 million of net tangible assets.

Post-closing working capital adjustments that completed the Alco purchase price allocation, acquired in the fourth quarter of 2014, resulted in a $4 million addition to goodwill in the first quarter of 2015.

The Company completed another acquisition in 2015 that was not material to the consolidated financial statements.

 

16


Table of Contents
12. In March 2015, the FTC approved the Company’s application to sell the Liquid Finishing business assets it acquired in 2012. The sale was completed on April 1, 2015 in a $590 million cash transaction, subject to customary post-closing adjustments. The Company used proceeds from the sale to repay approximately $500 million of debt, including $40 million drawn on a short-term credit agreement that expired upon closing of the sale transaction.

The Liquid Finishing business assets were held as a cost-method investment on Graco’s balance sheet, and income was recognized based on dividends received from current earnings. The Company received dividends of $30 million in the first quarter of 2015 and $4 million in the comparable period of 2014. Dividends for the full year totaled $28 million in 2014 and $28 million in 2013.

 

17


Table of Contents
Item 2.   GRACO INC. AND SUBSIDIARIES   
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF   
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS   

Overview

The Company designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and coating materials. Management classifies the Company’s business into three reportable segments: Industrial, Process and Contractor. 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 Management’s Discussion and Analysis reviews significant factors affecting the Company’s 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.

Consolidated Results

Net sales, net earnings and earnings per share were as follows (in millions except per share amounts and percentages):

 

     Thirteen Weeks Ended  
       March 27,  
2015
       March 28,  
2014
     %
Change
 

Net Sales

   $ 306.5      $ 290.0        6  %   

Operating Earnings

   $ 65.2      $ 74.7        (13) %   

Net Earnings

   $ 68.8      $ 50.7        36  %   

Diluted Net Earnings per Common Share

   $ 1.14      $ 0.81        41  %   

The following table presents components of changes in sales:

 

     Year-to-Date  
     Segment      Region         
     Industrial      Process      Contractor      Americas      EMEA      Asia Pacific      Total  

Volume and Price

     (1) %          5  %          16  %          12  %          -  %          (10) %          5  %    

Acquisitions

     -  %          27  %          -  %          5  %          8  %          4  %          5  %    

Currency

     (5) %          (4) %          (4) %          (1) %          (14) %          (3) %          (4) %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     (6) %          28  %          12  %          16  %          (6) %          (9) %          6  %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

Sales by geographic area were as follows (in millions):

 

     Thirteen Weeks Ended  
        March 27,   
2015
        March 28,   
2014
 

Americas

   $ 184.8       $ 158.8   

EMEA

     68.8         73.4   

Asia Pacific

     52.9         57.8   
  

 

 

    

 

 

 

Consolidated

   $     306.5       $ 290.0   
  

 

 

    

 

 

 

North and South America, including the U.S.

Europe, Middle East and Africa

Changes in currency translation rates reduced sales and net earnings by approximately $13 million and $4 million, respectively, for the quarter.

Sales increased 6 percent, with a 16 percent increase in the Americas and decreases of 6 percent in EMEA and 9 percent in Asia Pacific. Sales from operations acquired in the fourth quarter of 2014 and the first quarter of 2015 totaled $15 million, contributing 5 percentage points of growth. Organic sales at consistent translation rates increased 5 percent, with a 12 percent increase in the Americas, flat in EMEA, and a 10 percent decrease in Asia Pacific.

Gross profit margin rate was 53 percent, down 2 percentage points from the comparable period last year. Changes in currency translation rates accounted for more than half of the decrease. Effects of purchase accounting totaling approximately $3 million and changes in mix also contributed to the decrease.

Total operating expenses were $12 million (15 percent) higher than the comparable period last year. The increase included expenses of acquired operations totaling $6 million, incremental spending related to regional expansion and product initiatives of $2 million, Contractor marketing and new product launch costs of $2 million and additional unallocated corporate expense (mostly pension, stock compensation and new central warehouse) totaling $2 million.

Held separate investment income, net included dividends received from the Liquid Finishing businesses that were held separate from the Company’s other businesses. First quarter dividend income was $30 million in 2015 and $4 million in 2014.

The effective income tax rate of 22 percent for the quarter was 9 percentage points lower than the comparable period last year, mostly due to the impact of higher post-tax dividend income.

 

19


Table of Contents

Segment Results

Certain measurements of segment operations compared to last year are summarized below:

Industrial

     Thirteen Weeks Ended  
        March 27,   
2015
        March 28,   
2014
 

Net sales (in millions)

     

Americas

   $ 67.8       $ 65.7   

EMEA

     41.0         47.6   

Asia Pacific

     34.5         38.7   
  

 

 

    

 

 

 

Total

   $ 143.3       $ 152.0   
  

 

 

    

 

 

 

Operating earnings as a percentage of net sales

     30 %         32 %   
  

 

 

    

 

 

 

Industrial segment sales decreased 6 percent (1 percent at consistent translation rates). Sales in this segment increased 3 percent in the Americas and decreased 14 percent in EMEA (1 percent at consistent translation rates) and 11 percent in Asia Pacific (8 percent at consistent translation rates). Operating margin rate for the Industrial segment decreased 2 percentage points compared to last year, driven by changes in currency translation rates and higher expenses relative to sales.

Process

     Thirteen Weeks Ended  
        March 27,   
2015
        March 28,   
2014
 

Net sales (in millions)

     

Americas

   $ 42.9       $ 34.5   

EMEA

     13.9         9.4   

Asia Pacific

     10.9         9.1   
  

 

 

    

 

 

 

Total

   $ 67.7       $ 53.0   
  

 

 

    

 

 

 

Operating earnings as a percentage of net sales

     16 %         24 %   
  

 

 

    

 

 

 

Process segment sales increased 28 percent (32 percent at consistent translation rates), including double-digit percentage increases in all regions. Nearly all of the sales increase was from acquired operations including Alco Valves (acquired fourth quarter of 2014), White Knight Fluid Handling and High Pressure Equipment (both acquired in January 2015). Changes in currency translation rates and incremental investment in oil and natural gas products led to the decrease in operating margin rate for this segment.

 

20


Table of Contents

Contractor

     Thirteen Weeks Ended  
        March 27,   
2015
        March 28,   
2014
 

Net sales (in millions)

     

Americas

   $ 74.2       $ 58.5   

EMEA

     13.9         16.4   

Asia Pacific

     7.4         10.0   
  

 

 

    

 

 

 

Total

   $ 95.5       $ 84.9   
  

 

 

    

 

 

 

Operating earnings as a percentage of net sales

     20 %         21 %   
  

 

 

    

 

 

 

Contractor segment sales increased 12 percent (16 percent at consistent translation rates). Sales increased 27 percent in the Americas and decreased 15 percent in EMEA (2 percent at consistent translation rates) and decreased 26 percent in Asia Pacific (23 percent at consistent translation rates). Operating margin rate in the Contractor segment decreased by one percentage point mostly due to changes in currency translation rates and $2 million additional marketing spending, including new product launch costs and other volume-related increases.

Liquidity and Capital Resources

Net cash provided by operating activities was $47 million in 2015, a $19 million increase over the comparable period of 2014, due mostly to the increase in net earnings. Accounts receivable and inventory balances have increased since the end of 2014 due to acquisitions and increases in business activity. In the first quarter, the Company used borrowings under its credit agreements and operating cash flow to fund business acquisitions totaling $183 million, purchases of Company common stock of $47 million and dividends of $18 million paid to shareholders.

In January 2015, the Company completed the acquisition of High Pressure Equipment Holdings, LLC (HiP) for $160 million. HiP designs and manufactures valves, fittings and other flow control equipment engineered to perform in ultra-high pressure environments. The Company also acquired White Knight Fluid Handling, a manufacturer of high purity, metal-free pumps used in the production process of manufacturing semiconductors, solar panels, LED flat panel displays and various other electronics.

At March 27, 2015, the Company had various lines of credit totaling $588 million, of which $70 million was unused. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2015.

Subsequent Event - Divestiture

In March 2015, the FTC approved the Company’s application to sell the Liquid Finishing business assets it acquired in 2012. The sale was completed on April 1, 2015 in a $590 million cash transaction, subject to customary post-closing adjustments. The Company used proceeds from the sale to repay approximately $500 million of debt, including $40 million drawn on a short-term credit agreement that expired upon closing of the sale transaction. The Company expects to use the remaining proceeds from the sale for ongoing share repurchases and to make investments in strategic acquisitions that provide synergistic opportunities.

 

21


Table of Contents

The Liquid Finishing business assets were held separate as a cost-method investment on Graco’s balance sheet, and income was recognized based on dividends received from current earnings. The Company received dividends of $30 million in the first quarter of 2015 and $4 million in the comparable period of 2014. Dividends for the full year totaled $28 million in 2014 and $28 million in 2013.

Results excluding Liquid Finishing investment income and expense are a better measure of the Company’s on-going operations and provide a more consistent base of comparison to future results. A calculation of the non-GAAP measurement of net earnings excluding investment income and expense follows (in millions except per share amounts):

 

     Thirteen Weeks Ended  
        March 27,   
2015
        March 28,   
2014
 

Net Earnings

    $ 68.8        $ 50.7   

Held separate investment (income), net

     (29.7)         (3.8)   
  

 

 

    

 

 

 

Adjusted Net Earnings

    $         39.1        $         46.9   
  

 

 

    

 

 

 

Diluted earnings per share

     

Including investment income, net

    $ 1.14        $ 0.81   

Excluding investment income, net

     0.65         0.75   

Outlook

We remain committed to achieving mid-single digit organic sales growth, on a constant currency basis, for the full year 2015 as well as growth in every reportable segment and geography. Continued investments in our long-term growth initiatives are a priority in 2015, which support our organic sales growth expectations but will hamper near-term profitability. Ongoing currency headwinds and geopolitical instability remain a concern. At current exchange rates, unfavorable changes in foreign currency translation rates create a full-year headwind of approximately 5 percent on sales and 11 percent on earnings in 2015.

 

22


Table of Contents

SAFE HARBOR CAUTIONARY STATEMENT

The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including this Form 10-Q and our Form 10-K and Form 8-Ks, and other disclosures, including our 2014 Overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.

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: our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; economic conditions in the United States and other major world economies; changes in currency translation rates; changes in laws and regulations; compliance with anti-corruption laws; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; political instability; results of and costs associated with, litigation, administrative proceedings and regulatory reviews incident to our business; the possibility of decline in purchases from few large customers of the Contractor segment; variations in activity in the construction and automotive industries; and natural disasters. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year 2014 for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com/ir and the Securities and Exchange Commission’s website at www.sec.gov. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

 

23


Table of Contents

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 Company’s 2014 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 Company’s President and Chief Executive Officer, the Chief Financial Officer, the Vice President, Controller and Information Systems, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective.

Changes in internal controls

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

 

24


Table of Contents

PART II    OTHER INFORMATION

Item 1A.      Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2014 Annual Report on Form 10-K, except for the deletion of the risk factor relating to our divestiture of the Liquid Finishing business assets acquired from ITW as the divestiture was completed April 1, 2015.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On September 14, 2012, 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, 2015.

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 due upon exercise of options or vesting of restricted stock.

Information on issuer purchases of equity securities follows:

 

Period

   Total
Number
of Shares
Purchased
        Average
Price
Paid per
Share
   Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans  or
Programs
   Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans  or
Programs
(at end of
period)

Dec 27, 2014 – Jan 23, 2015

   180,000       $        78.55    180,000    2,277,377

Jan 24, 2015 – Feb 20, 2015

   190,000       $        73.48    190,000    2,087,377

Feb 21, 2015 – Mar 27, 2015

   250,000       $        74.11    250,000    1,837,377

 

25


Table of Contents

Item 6.   Exhibits

 

  2.1       Amendment No. 1 to Asset Purchase Agreement entered into as of March 6, 2015 by and among Carlisle Companies Incorporated, Carlisle Fluid Technologies, Inc., Graco Inc. and Finishing Brands Holdings Inc. (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Securities and Exchange Commission upon request). (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 8-K filed on March 9, 2015.)
  3.1       Restated Articles of Incorporation as amended June 13, 2014. (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed June 16, 2014.)
  3.2       Restated Bylaws as amended February 14, 2014. (Incorporated by reference to Exhibit 3.2 to the Company’s 2013 Annual Report on Form 10-K.)
  31.1       Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a).
  31.2       Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
  32       Certification of President and Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Title 18, U.S.C.
  99.1       Press Release Reporting First Quarter Earnings dated April 22, 2015.
      101       Interactive Data File.

 

26


Table of Contents

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 22, 2015

  By:  

   /s/ Patrick J. McHale

         Patrick J. McHale
         President and Chief Executive Officer
         (Principal Executive Officer)
Date:  

  April 22, 2015

  By:  

   /s/ James A. Graner

         James A. Graner
         Chief Financial Officer
         (Principal Financial Officer)
Date:  

  April 22, 2015

  By:  

   /s/ Caroline M. Chambers

         Caroline M. Chambers
     

   Vice President, Corporate Controller

      and Information Systems

         (Principal Accounting Officer)