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 September 24, 2010
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 - 11 th 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     
59,878,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of October 14, 2010.

 

 

INDEX
                 
            Page Number
 
PART I   FINANCIAL INFORMATION        
       
 
       
    Item 1.          
       
 
       
            3  
            4  
            5  
            6  
       
 
       
    Item 2.       13  
       
 
       
    Item 3.       18  
       
 
       
    Item 4.       18  
 
       
 
       
PART II   OTHER INFORMATION        
       
 
       
    Item 1A.       19  
       
 
       
    Item 2.       19  
       
 
       
    Item 6.       20  
       
 
       
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     Thirty-nine Weeks Ended  
    Sep 24,     Sep 25,     Sep 24,     Sep 25,  
    2010     2009     2010     2009  
 
                               
Net Sales
    $ 189,963       $ 147,308       $ 546,772       $ 432,900  
 
                               
Cost of products sold
    85,405       69,167       250,999       217,423  
                 
 
                               
Gross Profit
    104,558       78,141       295,773       215,477  
 
                               
Product development
    9,263       8,752       28,209       28,584  
Selling, marketing and distribution
    33,280       26,589       95,087       86,814  
General and administrative
    18,592       16,613       57,139       49,317  
                 
 
                               
Operating Earnings
    43,423       26,187       115,338       50,762  
 
                               
Interest expense
    1,038       1,148       3,159       3,735  
Other expense (income), net
    254       203       147       889  
                 
 
                               
Earnings Before Income Taxes
    42,131       24,836       112,032       46,138  
 
                               
Income taxes
    11,700       7,500       36,200       14,400  
                 
 
                               
Net Earnings
    $ 30,431       $ 17,336       $ 75,832       $ 31,738  
                 
 
                               
Basic Net Earnings
                               
per Common Share
    $ 0.51       $ 0.29       $ 1.26       $ 0.53  
 
                               
Diluted Net Earnings
                               
per Common Share
    $ 0.50       $ 0.29       $ 1.25       $ 0.53  
 
                               
Cash Dividends Declared
                               
per Common Share
    $ 0.20       $ 0.19       $ 0.60       $ 0.57  
See notes to consolidated financial statements.

3

Table of Contents

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
                 
    Sep 24,     Dec 25,  
    2010     2009  
ASSETS
               
Current Assets
               
Cash and cash equivalents
    $ 9,666       $ 5,412  
Accounts receivable, less allowances of $5,300 and $6,500
    135,583       100,824  
Inventories
    85,342       58,658  
Deferred income taxes
    20,441       20,380  
Other current assets
    2,636       3,719  
         
Total current assets
    253,668       188,993  
 
               
Property, Plant and Equipment
               
Cost
    340,287       334,440  
Accumulated depreciation
    (207,963 )     (195,387 )
         
Property, plant and equipment, net
    132,324       139,053  
 
               
Goodwill
    91,740       91,740  
Other Intangible Assets, net
    31,274       40,170  
Deferred Income Taxes
    9,618       8,372  
Other Assets
    8,516       8,106  
         
Total Assets
    $ 527,140       $ 476,434  
         
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Notes payable to banks
    $ 11,066       $ 12,028  
Trade accounts payable
    24,869       17,983  
Salaries and incentives
    29,059       14,428  
Dividends payable
    11,977       12,003  
Other current liabilities
    46,338       47,373  
         
Total current liabilities
    123,309       103,815  
 
               
Long-term Debt
    90,000       86,260  
Retirement Benefits and Deferred Compensation
    65,977       73,705  
Uncertain Tax Positions
    -       3,000  
 
               
Shareholders’ Equity
               
Common stock
    59,868       59,999  
Additional paid-in-capital
    205,353       190,261  
Retained earnings
    30,035       11,121  
Accumulated other comprehensive income (loss)
    (47,402 )     (51,727 )
         
Total shareholders’ equity
    247,854       209,654  
         
Total Liabilities and Shareholders’ Equity
    $ 527,140       $ 476,434  
         
See notes to consolidated financial statements.

4

Table of Contents

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
                 
    Thirty-nine Weeks Ended  
    Sep 24,     Sep 25,  
    2010     2009  
Cash Flows From Operating Activities
               
Net Earnings
    $ 75,832       $ 31,738  
Adjustments to reconcile net earnings to
net cash provided by operating activities
               
Depreciation and amortization
    25,496       26,200  
Deferred income taxes
    (3,848 )     4,671  
Share-based compensation
    7,339       7,441  
Excess tax benefit related to share-based
payment arrangements
    (1,000 )     (300 )
Change in
               
Accounts receivable
    (34,845 )     22,434  
Inventories
    (26,740 )     30,745  
Trade accounts payable
    6,892       (2,050 )
Salaries and incentives
    14,637       (3,853 )
Retirement benefits and deferred compensation
    (2,810 )     (4,741 )
Other accrued liabilities
    (258 )     (2,437 )
Other
    1,744       313  
         
Net cash provided by operating activities
    62,439       110,161  
         
Cash Flows From Investing Activities
               
Property, plant and equipment additions
    (9,416 )     (9,375 )
Proceeds from sale of property, plant and equipment
    180       615  
Investment in life insurance
    (1,499 )     (1,499 )
Capitalized software and other intangible asset additions
    (342 )     (501 )
         
Net cash used in investing activities
    (11,077 )     (10,760 )
         
Cash Flows From Financing Activities
               
Net borrowings (payments) on short-term lines of credit
    (334 )     (4,700 )
Borrowings on long-term line of credit
    10,000       75,491  
Payments on long-term line of credit
    (6,260 )     (148,127 )
Excess tax benefit related to share-based
payment arrangements
    1,000       300  
Common stock issued
    9,667       6,119  
Common stock retired
    (24,218 )     (157 )
Cash dividends paid
    (36,171 )     (34,069 )
         
Net cash provided by (used in) financing activities
    (46,316 )     (105,143 )
         
Effect of exchange rate changes on cash
    (792 )     (1,313 )
         
Net increase (decrease) in cash and cash equivalents
    4,254       (7,055 )
Cash and cash equivalents:
               
Beginning of year
    5,412       12,119  
         
End of period
    $ 9,666       $ 5,064  
         
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 September 24, 2010 and the related statements of earnings for the thirteen and thirty-nine weeks ended September 24, 2010 and September 25, 2009, and cash flows for the thirty-nine weeks ended September 24, 2010 and September 25, 2009 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 September 24, 2010, 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 2009 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   Thirty-nine Weeks Ended
    Sep 24,   Sep 25,   Sep 24,   Sep 25,  
    2010   2009   2010   2009  
 
                               
Net earnings available to
common shareholders
    $ 30,431       $ 17,336       $ 75,832       $ 31,738  
 
                               
Weighted average shares
outstanding for basic
earnings per share
    60,107       59,940       60,304       59,827  
 
                               
Dilutive effect of stock
options computed using the
treasury stock method and
the average market price
    517       374       536       306  
 
                               
Weighted average shares
outstanding for diluted
earnings per share
    60,624       60,314       60,840       60,133  
 
                               
Basic earnings per share
    $ 0.51       $ 0.29       $ 1.26       $ 0.53  
 
                               
Diluted earnings per share
    $ 0.50       $ 0.29       $ 1.25       $ 0.53  

6

Table of Contents

    Stock options to purchase 2,965,000 and 2,834,000 shares were not included in the 2010 and 2009 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 thirty-nine weeks ended September 24, 2010 is shown below (in thousands, except per share amounts):
                                 
            Weighted             Weighted  
            Average             Average  
    Option     Exercise     Options     Exercise  
    Shares   Price   Exercisable   Price
 
Outstanding, December 25, 2009
    4,813      $ 28.98       2,445      $ 28.38  
Granted
    827       27.80                  
Exercised
    (251 )     12.54                  
Canceled
    (61 )     32.23                  
 
                           
Outstanding, September 24, 2010
    5,328      $ 29.53       2,841      $ 30.41  
 
                           
    The Company recognized year-to-date share-based compensation of $7.3 million in 2010 and $7.7 million in 2009. As of September 24, 2010, there was $7.3 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.1 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:
                 
    Thirty-nine Weeks Ended
    Sep 24,   Sep 25,
    2010   2009
Expected life in years
    6.0       6.0  
Interest rate
    2.7  %     2.1  %
Volatility
    34.0  %     30.1  %
Dividend yield
    3.0  %     3.7  %
Weighted average fair value per share
  $ 7.38     $ 4.27  
    Under the Company’s Employee Stock Purchase Plan, the Company issued 436,000 shares in 2010 and 312,000 shares in 2009. 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:

7

Table of Contents

                 
  Thirty-nine Weeks Ended
  Sep 24,   Sep 25,
  2010   2009
Expected life in years
    1.0       1.0  
Interest rate
    0.3  %     0.7  %
Volatility
    42.8  %     51.5  %
Dividend yield
    2.9  %     4.5  %
Weighted average fair value per share
$   8.48     $ 5.60  
4.   The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
                                 
    Thirteen Weeks Ended   Thirty-nine Weeks Ended
    Sep 24,   Sep 25,   Sep 24,   Sep 25,
    2010   2009   2010   2009
Pension Benefits
                               
Service cost
   $ 1,038      $ 1,078      $ 3,173      $ 3,498  
Interest cost
    3,160       2,926       9,575       9,261  
Expected return on assets
    (3,564 )     (2,593 )     (10,364 )     (8,143 )
Amortization and other
    1,547       2,034       4,599       6,761  
 
               
Net periodic benefit cost
   $ 2,181      $ 3,445      $ 6,983      $ 11,377  
 
               
 
                               
Postretirement Medical
                               
Service cost
   $ 138      $ 174      $ 413      $ 424  
Interest cost
    310       335       930       985  
Amortization
    (50 )     (45 )     (145 )     (45 )
 
               
Net periodic benefit cost
   $ 398      $ 464      $ 1,198      $ 1,364  
 
               
    The Company made voluntary tax-deductible contributions to its funded defined benefit plan in the amount of $10 million in the third quarter of 2010 and $15 million in the third quarter of 2009.
 
    The Company paid $1.5 million in June 2010 and $1.5 million in June 2009 for contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts will be used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company’s insolvency. Cash surrender value of $6.0 million and $4.4 million is included in other assets in the consolidated balance sheet as of September 24, 2010 and December 25, 2009, respectively.

8

Table of Contents

5.   Total comprehensive income was as follows (in thousands):
                                 
    Thirteen Weeks Ended   Thirty-nine Weeks Ended
    Sep 24,   Sep 25,   Sep 24,   Sep 25,
    2010   2009   2010   2009
 
                               
Net earnings
  $ 30,431     $ 17,336     $ 75,832     $ 31,738  
Cumulative translation
adjustment
    -       -       -       234  
Pension and postretirement
medical liability adjustment
    1,507       2,432       4,466       7,183  
Gain (loss) on interest
rate hedge contracts
    763       303       2,401       594  
 
                               
Income taxes
    (841 )     (1,011 )     (2,542 )     (2,877 )
 
                               
 
               
Comprehensive income
  $ 31,860     $ 19,060     $ 80,157     $ 36,872  
 
               
    Components of accumulated other comprehensive income (loss) were (in thousands):
                 
    Sep 24,   Dec 25,
    2010   2009
 
Pension and postretirement medical liability adjustment
  $ (45,747 )   $ (48,560 )
Gain (loss) on interest rate hedge contracts
    (832 )     (2,344 )
Cumulative translation adjustment
    (823 )     (823 )
 
       
Total
  $ (47,402 )   $ (51,727 )
 
       
6.   The Company has three reportable segments: Industrial, Contractor and Lubrication. The Company does not track assets by segment. Sales and operating earnings by segment for the thirteen and thirty-nine weeks ended September 24, 2010 and September 25, 2009 were as follows (in thousands):
                                 
    Thirteen Weeks Ended   Thirty-nine Weeks Ended
    Sep 24,   Sep 25,   Sep 24,   Sep 25,
    2010   2009   2010   2009
Net Sales
                               
Industrial
  $ 99,236     $ 78,242     $ 296,489     $ 226,808  
Contractor
    70,362       55,379       194,941       163,213  
Lubrication
    20,365       13,687       55,342       42,879  
 
               
Total
  $ 189,963     $ 147,308     $ 546,772     $ 432,900  
 
               
Operating Earnings
                               
Industrial
  $ 31,195     $ 20,332     $ 91,234     $ 45,262  
Contractor
    13,753       11,138       31,839       24,420  
Lubrication
    2,751       (167 )     6,326       (3,348 )
Unallocated corporate (expense)
    (4,276 )     (5,116 )     (14,061 )     (15,572 )
 
               
Total
  $ 43,423     $ 26,187     $ 115,338     $ 50,762  
 
               

9

Table of Contents

7.   Major components of inventories were as follows (in thousands):
                      
    Sep 24,   Dec 25,
    2010   2009
 
Finished products and components
  $      48,690     $      36,665  
Products and components in various
stages of completion
    28,742       22,646  
Raw materials and purchased components
    41,284       31,826  
 
       
 
    118,716       91,137  
Reduction to LIFO cost
    (33,374 )     (32,479 )
 
       
Total
  $      85,342     $      58,658  
 
       
8.   Information related to other intangible assets follows (dollars in thousands):
                                                 
    Estimated                   Foreign    
    Life   Original   Accumulated   Currency   Book
    (years)   Cost   Amortization   Translation   Value
September 24, 2010                        
                                       
Customer relationships
    3 - 8     $      41,075     $      (23,294 )   $      (181 )   $      17,600  
Patents, proprietary technology
and product documentation
    3 - 10       21,072       (14,347 )     (85 )     6,640  
Trademarks, trade names
and other
    3 - 10       8,154       (4,300 )     -       3,854  
 
                       
 
 
            70,301       (41,941 )     (266 )     28,094  
 
Not Subject to Amortization:
                                       
Brand names
            3,180       -       -       3,180  
 
                       
 
Total
          $      73,481     $      (41,941 )   $      (266 )   $      31,274  
 
                       
 
                                       
December 25, 2009                        
                                       
Customer relationships
    3 - 8     $      41,075     $      (18,655 )   $      (181 )   $      22,239  
Patents, proprietary technology
and product documentation
    3 - 10       22,862       (13,708 )     (87 )     9,067  
Trademarks, trade names
and other
    3 - 10       8,154       (2,470 )     -       5,684  
 
                       
 
                                       
 
            72,091       (34,833 )     (268 )     36,990  
Not Subject to Amortization:
Brand names
            3,180       -       -       3,180  
 
                       
 
                                       
Total
          $      75,271     $      (34,833 )   $      (268 )   $      40,170  
 
                       

10

Table of Contents

    Amortization of intangibles was $3.0 million in the third quarter of 2010 and $8.9 million year-to-date. Estimated annual amortization expense is as follows: $11.8 million in 2010, $10.7 million in 2011, $8.8 million in 2012, $4.1 million in 2013, $0.9 million in 2014 and $0.7 million thereafter.
 
9.   Components of other current liabilities were (in thousands):
                   
    Sep 24,   Dec 25,
    2010   2009
 
               
Accrued self-insurance retentions
  $      7,282     $      7,785  
Accrued warranty and service liabilities
    6,815       7,437  
Accrued trade promotions
    4,757       2,953  
Payable for employee stock purchases
    4,040       5,115  
Income taxes payable
    2,739       1,550  
Other
    20,705       22,533  
 
       
Total other current liabilities
  $           46,338     $           47,373  
 
       
    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):
                 
    Thirty-nine    
    Weeks Ended   Year Ended
    Sep 24,   Dec 25,
    2010   2009
 
               
Balance, beginning of year
    $ 7,437       $ 8,033  
Charged to expense
    2,203       4,548  
Margin on parts sales reversed
    1,921       2,876  
Reductions for claims settled
    (4,746 )     (8,020 )
 
       
Balance, end of period
    $ 6,815       $ 7,437  
 
       
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 Company’s policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales.

11

Table of Contents

    In 2007, the Company entered into interest rate swap contracts that effectively fix the rates paid on a total of $80 million of variable rate borrowings. One contract fixed the rate on $40 million of borrowings at 4.7 percent plus the applicable spread (depending on cash flow leverage ratio) until December 2010. The second contract fixed an additional $40 million of borrowings at 4.6 percent plus the applicable spread until January 2011. Both contracts have been designated as cash flow hedges against interest rate volatility. Consequently, changes in the fair market value are recorded in accumulated other comprehensive income (loss) (AOCI). Amounts included in AOCI will be reclassified to earnings as interest rates increase and as the swap contracts approach their expiration dates. Net amounts paid or payable under terms of the contracts were charged to interest expense and totaled $2.6 million in the first nine months of 2010.
 
    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 included in other expense (income), net. There were seven contracts outstanding as of September 24, 2010, with notional amounts totaling $20 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. The fair market value and balance sheet classification of such instruments follows (in thousands):
                         
    Balance Sheet   Sep 24,   Dec 25,
    Classification   2010   2009
Gain (loss) on interest
rate hedge contracts
  Other current liabilities   $           (1,321 )   $           (3,722 )
 
           
 
                   
Gain (loss) on foreign
currency forward contracts
                   
Gains
      $ 42     $ 207  
Losses
        (280 )     (249 )
 
           
Net
  Other current liabilities   $ (238 )   $ (42 )
 
           

12

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 materials. Management classifies the Company’s 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 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.
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   Thirty-nine Weeks Ended
    Sep 24,   Sep 25,   %   Sep 24,   Sep 25,   %
    2010   2009   Change   2010   2009   Change
 
                                               
Net Sales
  $ 190.0     $ 147.3       29 %   $ 546.8     $ 432.9       26 %
Net Earnings
  $ 30.4     $ 17.3       76 %   $ 75.8     $ 31.7       139 %
Diluted Net Earnings
per Common Share
  $ 0.50     $ 0.29       72 %   $ 1.25     $ 0.53       136 %
All segments and geographic regions had double-digit percentage revenue growth for both the quarter and year-to-date. 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 or year-to-date.

13

Table of Contents

Consolidated Results
Sales by geographic area were as follows (in millions):
                                 
  Thirteen Weeks Ended   Thirty-nine Weeks Ended
  Sep 24,   Sep 25,   Sep 24,   Sep 25,
  2010   2009   2010   2009
 
                               
Americas 1
  $ 108.7     $ 84.1     $ 305.6     $ 252.6  
Europe 2
    43.4       35.6       129.2       105.9  
Asia Pacific
    37.9       27.6       112.0       74.4  
 
               
Consolidated
  $ 190.0     $ 147.3     $ 546.8     $ 432.9  
 
               
 
1 North and South America, including the U.S.
 
2 Europe, Africa and Middle East
Sales for the quarter increased 29 percent in the Americas, 22 percent in Europe (32 percent at consistent translation rates) and 37 percent in Asia Pacific (33 percent at consistent translation rates). Year-to-date sales increased 21 percent in the Americas, 22 percent in Europe (25 percent at consistent translation rates) and 51 percent in Asia Pacific (45 percent at consistent translation rates). Translation rates did not have a significant impact on the overall sales increases of 29 percent for the quarter and 26 percent year-to-date.
Gross profit margin, expressed as a percentage of sales, was 55 percent for the quarter and 54 percent year-to-date, up from 53 percent and 50 percent, for the comparable periods last year, respectively. Higher production volume in 2010 was the major factor in the improvement in both the quarter and year-to-date rates. Selling price increases and lower pension costs contributed to the increase in margin rates. Costs related to workforce reductions lowered the 2009 nine-month gross margin rate.
Total operating expenses increased $9 million for the quarter and $16 million year-to-date. Higher incentives expense, driven by improved results, accounted for most of the increase in both the quarter and year-to-date. As a percentage of sales, operating expenses decreased to 32 percent for the quarter and 33 percent year-to-date, from 35 percent and 38 percent for the comparable periods last year.
The effective income tax rate of 28 percent for the quarter reflects the effects of expiring statutes of limitations and recent tax law rulings. The year-to-date effective income tax rate of 32 percent for 2010 was higher than the 31 percent rate for the comparable period of 2009. The federal R&D credit has not been renewed for 2010, so no credit is included in the 2010 rate.

14

Table of Contents

Segment Results
Certain measurements of segment operations compared to last year are summarized below:
Industrial
                                              
       Thirteen Weeks Ended           Thirty-nine Weeks Ended     
    Sep 24,     Sep 25,     Sep 24,     Sep 25,  
    2010     2009     2010     2009  
 
                               
Net sales (in millions)
                               
Americas
  $ 46.7      $ 37.0      $ 134.1      $ 108.3   
Europe
    25.6        22.0        80.6        65.7   
Asia Pacific
    26.9        19.2        81.8        52.8   
 
                       
Total
  $ 99.2      $ 78.2      $ 296.5      $ 226.8   
 
                       
 
                               
Operating earnings as a percentage of net sales
    31 %       26 %       31 %       20 %  
 
                       
Industrial segment sales for the quarter increased 26 percent in the Americas, 16 percent in Europe (25 percent at consistent translation rates) and 40 percent in Asia Pacific (36 percent at consistent translation rates). Year-to-date sales increased 24 percent in the Americas, 23 percent in Europe and 55 percent in Asia Pacific (49 percent at consistent translation rates).
Higher volume and leveraging of expenses, along with price increases, contributed to the improvement in operating earnings as a percentage of sales.
Contractor
                                         
       Thirteen Weeks Ended           Thirty-nine Weeks Ended     
    Sep 24,     Sep 25,     Sep 24,     Sep 25,  
    2010     2009     2010     2009  
 
                               
Net sales (in millions)
                               
Americas
  $ 46.8      $ 36.2      $ 130.2      $ 109.0   
Europe
    16.2        12.5        44.1        37.3   
Asia Pacific
    7.4        6.7        20.6        16.9   
 
                       
Total
  $ 70.4      $ 55.4      $ 194.9      $ 163.2   
 
                       
 
                               
Operating earnings as a percentage of net sales
    20 %       20 %       16 %       15 %  
 
                       
Contractor segment sales for the quarter increased 29 percent in the Americas, 30 percent in Europe (41 percent at consistent translation rates) and 10 percent in Asia Pacific (7 percent at consistent translation rates). Year-to-date sales increased 20 percent in the Americas, 18 percent in Europe (22 percent at consistent translation rates) and 22 percent in Asia Pacific (16 percent at consistent translation rates). Sales of new products contributed to the increased pace of sales in the third quarter.
Operating margin percentages were steady compared to last year as the favorable effects of higher volume were offset by costs and expenses related to new product introductions.

15

Table of Contents

Lubrication
                                      
    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
    Sep 24,     Sep 25,     Sep 24,     Sep 25,  
    2010     2009     2010     2009  
 
                               
Net sales (in millions)
                               
Americas
  $          15.2      $          10.9      $    41.2      $    35.4   
Europe
    1.6        1.1        4.5        2.9   
Asia Pacific
    3.6        1.7        9.6        4.6   
 
                       
Total
  $          20.4      $          13.7      $    55.3      $    42.9   
 
                       
 
                               
Operating earnings as a percentage of net sales
    14 %     (1)%       11 %       (8)%  
 
                       
Lubrication segment sales for the quarter increased 39 percent in the Americas. From small bases, sales increased 49 percent in Europe and approximately doubled in Asia Pacific. Year-to-date sales increased 17 percent in the Americas, 53 percent in Europe and 111 percent in Asia Pacific.
Higher volume, actions to reduce product costs, leveraging of expenses and price increases contributed to the improvement in operating earnings as a percentage of sales.
Liquidity and Capital Resources
In the first nine months of 2010, the Company paid dividends of $36 million and purchased $24 million of its common stock. The Company also made a $10 million voluntary contribution to a funded defined benefit pension plan. Significant uses of cash in the first nine months of 2009 included $73 million for reduction of borrowings under the long-term line of credit, $34 million for payment of dividends and $15 million for a contribution to a funded pension plan.
Since the end of 2009, inventories increased by $27 million to meet higher demand. Accounts receivable increased by $35 million due to higher sales levels.
At September 24, 2010, the Company had various lines of credit totaling $270 million, of which $171 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 2010.

16

Table of Contents

Outlook
During the recession, the Company continued to invest in new product development and international expansion. Management is pleased with the resulting flow of new products and the strengthened teams, infrastructure and channel in Europe and Asia Pacific that are contributing to sales and earnings growth. Although management expects construction markets in the U.S. and parts of Europe will remain in difficult shape for the near-term, we are optimistic that the global industrial recovery will continue.
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 Company’s current thinking on market trends and the Company’s 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. Please refer to Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2009 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 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.

17

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 2009 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 and Treasurer, the Vice President and Controller, 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.

18

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 2009 Annual Report on Form 10-K.
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.
Information on issuer purchases of equity securities follows:
                                 
                            Maximum  
                    Total     Number of  
                    Number     Shares that  
                    of Shares     May Yet Be  
                    Purchased     Purchased  
                    as Part of     Under the  
    Total     Average     Publicly     Plans or  
    Number     Price     Announced     Programs  
    of Shares     Paid per     Plans or     (at end of  
Period    Purchased       Share       Programs        period)    
 
                               
Jun 26, 2010 – Jul 23, 2010
    86,411     $ 29.30       86,411       5,590,000  
 
                               
Jul 24, 2010 – Aug 20, 2010
    215,000     $ 29.58       215,000       5,375,000  
 
                               
Aug 21, 2010 – Sep 24, 2010
    195,362     $ 28.13       195,362       5,179,638  

19

Table of Contents

Item 6.       Exhibits
  10.1   Graco Restoration Plan (2005 Statement). Fifth Amendment adopted September 16, 2010.
 
  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 Third Quarter Earnings, dated October 20, 2010.
 
  101   Interactive Data File.

20

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:
    October 20, 2010   By:        /s/ Patrick J. McHale    
 
 
 
     
 
     Patrick J. McHale 		   
 
               President and Chief Executive Officer    
 
                (Principal Executive Officer)    
 
               
Date:
    October 20, 2010   By:        /s/ James A. Graner    
 
               
 
               James A. Graner    
 
               Chief Financial Officer and Treasurer    
 
                (Principal Financial Officer)    
 
               
Date:
    October 20, 2010   By:        /s/ Caroline M. Chambers    
 
               
 
               Caroline M. Chambers    
 
               Vice President and Controller    
 
                (Principal Accounting Officer)    

 

Exhibit 10.1
FIFTH AMENDMENT
GRACO RESTORATION PLAN
(2005 Statement)
               Graco Inc. has established and maintains a nonqualified deferred compensation plan (the “Plan”) which, in its most recent amended and restated form, is embodied in a document entitled “GRACO RESTORATION PLAN (2005 Statement),” effective January 1, 2005 (as amended, the “Plan Statement”) The amendment to the Plan set forth below is not intended to make any change in the documentation or operation of the Plan that would cause a violation of section 409A of the Internal Revenue Code or its accompanying regulations. If any change that occurs as a result of this amendment is determined to be a violation of section 409A, this amendment shall be ineffective and shall be disregarded in the administration of the Plan. Subject to the limitation stated above, the Plan is hereby amended as follows:
1.           ONE-TIME ELECTION. Effective October 1, 2010, a new Section 7.1.2(e) is added to the Plan Statement that reads as follows:
  (e)  
One-Time Election . If a Participant is an active employee of an Employer on October 1, 2010 and has accrued benefits under the Plan, the Participant shall be eligible to make a one-time election as described in this Section 7.1.2(e) with respect to the form of payment for benefits accrued under the Plan on and after January 1, 2011. The following rules shall apply if a Participant makes the one-time election provided for under this paragraph:
  (i)  
The election provided for under this paragraph may be made only once with respect to the benefits accrued on and after January 1, 2011. A one-time election form shall be completed, signed and returned to Graco’s Vice President-Human Resources on or before December 1, 2010.
 
  (ii)  
On and after January 1, 2011, a Participant may make a subsequent election to change the form of payment of the benefits for which a one-time election has been made (benefits accrued on and after January 1, 2011), provided that the Participant complies with the provisions of Section 7.1.2(b) of the Plan. The Participant may also make a separate subsequent election pursuant to the provisions of Section 7.1.2(b) with respect to the benefits the Participant accrued prior to January 1, 2011.
 
  (iii)  
If a Participant’s benefits under the Plan on or after January 1, 2011 exceed the Participant’s benefits as of December 31, 2010, the excess amount shall be subject to the one-time election (if any) made by the Participant between October 1, 2010 and December 1, 2010.
 
  (iv)  
If a Participant makes a one-time election, this Section 7.1.2(e) is intended to bifurcate the Participant’s benefits under the Plan into (1) benefits accrued prior to January 1, 2011 and (2) benefits accrued on and after January 1, 2011. The Participant’s benefits accrued as of December 31, 2010 shall be calculated in accordance with the provisions of the Plan and the guidance provided under section 409A of the Code.

 

 

Exhibit 10.1
     
Any change in the amount of benefits accrued under the Plan is not intended to impermissibly accelerate or delay payment of those benefits within the meaning of section 409A of the Code. The intent is to freeze the benefits accrued as of December 31, 2010, so that no benefits are shifted from being paid under one form of payment to being paid under any other form of payment. If, at the time that the distribution of the Participant’s benefits is to commence, the Participant’s benefit exceeds the amount of the Participant’s benefit as of December 31, 2010, the additional amount shall be paid as directed by the Participant in the one-time election made between October 1, 2010 and December 1, 2010, as modified by any subsequent election made pursuant to Section 7.1.2(b) with respect to benefits accrued on and after January 1, 2011. If, at the time that the distribution of the Participant’s benefits is to commence, the Participant’s benefit is equal to or less than the amount of the Participant’s benefits as of December 31, 2010, the one-time election shall not apply and all of the Participant’s benefits shall be paid as provided by the Plan as modified by any subsequent election with respect to the benefits accrued as of December 31, 2010, made pursuant to Section 7.1.2(b)
 
  (v)  
If a Participant does not make the one-time election provided for in this Section 7.1.2(e), then the provisions of this Section 7.1.2(e) shall not apply. No Participant shall be eligible to make the one-time election provided for under Section 7.1.2(e) after December 31, 2010.
 
  (vi)  
The Committee shall have complete discretion to interpret this Section 7.1.2(e) and to determine the Participant’s benefit in a manner consistent with the intent of Section 7.1.2(e) and section 409A of the Code. The Committee may resolve questions regarding, and make adjustments to, the factors (such as compensation and years of service) used to calculate a Participant’s benefits.
2.           SAVINGS CLAUSE. Save and except as hereinabove expressly amended, the Plan Statement shall continue in full force and effect.

 

Exhibit 31.1
CERTIFICATION
I, Patrick J. McHale, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Graco Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date:
       October 20, 2010        /s/ Patrick J. McHale
 
       
 
           Patrick J. McHale
 
           President and Chief Executive Officer

 

Exhibit 31.2
CERTIFICATION
I, James A. Graner, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Graco Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date:
       October 20, 2010        /s/ James A. Graner
 
       
 
           James A. Graner
 
           Chief Financial Officer and Treasurer

 

Exhibit 32
CERTIFICATION UNDER SECTION 1350
Pursuant to Section 1350 of Title 18 of the United States Code, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of Graco Inc.
         
Date:
       October 20, 2010        /s/ Patrick J. McHale
 
       
 
           Patrick J. McHale
 
           President and Chief Executive Officer
 
       
Date:
       October 20, 2010        /s/ James A. Graner
 
       
 
           James A. Graner
 
           Chief Financial Officer and Treasurer

 

Exhibit 99.1        
         
News Release
  GRACO INC.
P.O. Box 1441
Minneapolis, MN
55440-1441
NYSE: GGG 		  (GRACO LOGO)
       
FOR IMMEDIATE RELEASE:
Wednesday, October 20, 2010
  FOR FURTHER INFORMATION:
James A. Graner (612) 623-6635 		 
GRACO REPORTS THIRD QUARTER SALES AND EARNINGS
REVENUE GROWTH DRIVES IMPROVED RESULTS
MINNEAPOLIS, MN (October 20, 2010) - Graco Inc. (NYSE: GGG) today announced results for the quarter and nine months ended September 24, 2010.
Summary
$ in millions except per share amounts
                                                 
    Thirteen Weeks Ended     Thirty-nine Weeks Ended
    Sep 24,     Sep 25,     %     Sep 24,     Sep 25,     %
    2010     2009     Change     2010     2009     Change
 
Net Sales
   $   190.0       $   147.3        29 %    $   546.8       $   432.9        26  %
Net Earnings
    30.4        17.3        76 %     75.8        31.7        139  %
Diluted Net Earnings
per Common Share
   $   0.50       $   0.29        72 %    $   1.25       $   0.53        136  %
  •   All divisions and regions had double-digit percentage revenue growth for the quarter and year-to-date.
 
  •   Year-to-date gross margin rate of 54 percent was 4 percentage points higher than the rate for the comparable period last year.
 
  •   Return on sales for the quarter was 16 percent, up from 12 percent for the third quarter last year. Year-to-date return on sales was 14 percent, up from 7 percent for the comparable period last year.
 
  •   Sales of new products contributed to third-quarter growth in the Contractor segment.
 
  •   Strong sales growth in Asia Pacific continued (up 37 percent for the quarter and 51 percent year-to-date).
“Revenue growth continued to drive improved earnings,” said Patrick J. McHale, President and Chief Executive Officer. “Sales gains were strong worldwide, with increases in excess of 20 percent in all regions. We are particularly pleased with the revenue performance of our Contractor segment, which was able to grow with new products despite the depressed conditions in major construction markets. Operating margins in our Industrial and Lubrication businesses improved nicely on strong top-line performance, driven by improved economic conditions, new products and solid global execution.”
Consolidated Results
Sales for the quarter increased 29 percent in the Americas, 22 percent in Europe (32 percent at consistent translation rates) and 37 percent in Asia Pacific (33 percent at consistent translation rates). Year-to-date sales increased 21 percent in the Americas, 22 percent in Europe (25 percent at consistent translation rates) and 51 percent in Asia Pacific (45 percent at consistent translation rates). Translation rates did not have a significant impact on the overall sales increases of 29 percent for the quarter and 26 percent year-to-date.
Gross profit margin, expressed as a percentage of sales, was 55 percent for the quarter and 54 percent year-to-date, up from 53 percent and 50 percent, for the comparable periods last year. Higher production volume in 2010 was the
More . . .

 

 

Exhibit 99.1      
Page 2 GRACO
major factor in the improvement in both the quarter and year-to-date rates. Selling price increases and lower pension costs contributed to the increase in margin rates. Costs related to workforce reductions lowered the 2009 nine-month gross margin rate.
Total operating expenses increased $9 million for the quarter and $16 million year-to-date. Higher incentives expense, from improved results, accounted for most of the increase in both the quarter and year-to-date. As a percentage of sales, operating expenses decreased to 32 percent for the quarter and 33 percent year-to-date, from 35 percent and 38 percent for the comparable periods last year.
The effective income tax rate of 28 percent for the quarter reflects the effects of expiring statutes of limitations and recent tax law rulings. The year-to-date effective income tax rate of 32 percent for 2010 was higher than the 31 percent rate for the comparable period of 2009. The federal R&D credit has not been renewed for 2010, so no credit is included in the 2010 rate.
Segment Results
Certain measurements of segment operations are summarized below:
                                                 
    Thirteen Weeks     Thirty-nine Weeks
 
    Industrial     Contractor     Lubrication     Industrial     Contractor     Lubrication
 
Net sales (in millions)
   $   99.2       $   70.4       $   20.4       $    296.5       $   194.9       $   55.3
Net sales percentage change
from last year
    27 %        27 %        49 %        31 %        19 %        29  %
Operating earnings as a
percentage of net sales
                                               
2010
    31 %        20 %        14 %        31 %        16 %        11  %
2009
    26 %        20 %        (1)%        20 %        15 %        (8 )%
Industrial segment sales increased 27 percent for the quarter and 31 percent year-to-date, with the strongest percentage growth in Asia Pacific (up 40 percent for the quarter and 55 percent year-to-date). Contractor segment sales increased 27 percent for the quarter and 19 percent year-to-date, including gains for the quarter of 29 percent in the Americas and 30 percent in Europe (41 percent at consistent translation rates). Sales of new products boosted third quarter sales in the Contractor segment. Lubrication segment sales increased 49 percent for the quarter and 29 percent year-to-date, with strong increases in all regions.
Higher volume and leveraging of expenses drove continued improvement in operating earnings, particularly in the Industrial and Lubrication segments. In the Contractor segment, operating margin percentages were steady as the favorable effects of higher volume were offset by costs and expenses related to new product introductions.
Outlook
“Although we expect construction markets in the U.S. and parts of Europe will remain in difficult shape for the near-term, we are optimistic that the global industrial recovery will continue,” said Patrick J. McHale, President and Chief Executive Officer. “During the recession, we continued to invest heavily in new product development and international expansion. We are pleased with the resulting flow of exciting new products, from every division, that are contributing to our growth performance, and with the continued strengthening of our teams, infrastructure and channel in Europe and Asia Pacific. ”
More . . .

 

 

Exhibit 99.1      
Page 3 GRACO
Cautionary Statement Regarding Forward-Looking Statements
A forward-looking statement is any statement made in this earnings release and other reports that the Company files periodically with the Securities and Exchange Commission, as well as in press releases, analyst briefings, conference calls and the Company’s Annual Report to shareholders, which reflects the Company’s current thinking on market trends and the Company’s future financial performance at the time it is made. All forecasts and projections are forward-looking statements. The Company undertakes no obligation to update these statements in light of new information or future events.
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. Please refer to Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2009 (and most recent Form 10-Q, if applicable) for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com and the Securities and Exchange Commission’s website at www.sec.gov .
Conference Call
Graco management will hold a conference call, including slides via webcast, with analysts and institutional investors on Thursday, October 21, 2010, at 11:00 a.m. ET, to discuss Graco’s third quarter results.
A real-time Webcast of the conference call will be broadcast live over the Internet. Individuals wanting to listen and view slides can access the call at the Company’s website at www.graco.com . Listeners should go to the website at least 15 minutes prior to the live conference call to install any necessary audio software.
For those unable to listen to the live event, a replay will be available soon after the conference call at Graco’s website, or by telephone beginning at approximately 2:00 p.m. ET on October 21, 2010, by dialing 800-406-7325, Conference ID #4370547, if calling within the U.S. or Canada. The dial-in number for international participants is 303-590-3030, with the same Conference ID #. The replay by telephone will be available through October 24, 2010.
Graco Inc. supplies technology and expertise for the management of fluids in both industrial and commercial applications. It designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid materials. A recognized leader in its specialties, Minneapolis-based Graco serves customers around the world in the manufacturing, processing, construction and maintenance industries. For additional information about Graco Inc., please visit us at www.graco.com .
More . . .

 

 

Exhibit 99.1      
Page 4 GRACO
GRACO INC. AND SUBSIDIARIES
Consolidated Statement of Earnings (Unaudited)
                                 
    Thirteen Weeks Ended     Thirty-nine Weeks Ended
(in thousands, except per share amounts)   Sep 24,     Sep 25,     Sep 24,     Sep 25,
    2010     2009     2010     2009
Net Sales
   $ 189,963       $ 147,308       $ 546,772       $ 432,900  
Cost of products sold
    85,405        69,167        250,999        217,423  
 
                     
Gross Profit
    104,558        78,141        295,773        215,477  
Product development
    9,263        8,752        28,209        28,584  
Selling, marketing and distribution
    33,280        26,589        95,087        86,814  
General and administrative
    18,592        16,613        57,139        49,317  
 
                     
Operating Earnings
    43,423        26,187        115,338        50,762  
Interest expense
    1,038        1,148        3,159        3,735  
Other expense (income), net
    254        203        147        889  
 
                     
Earnings Before Income Taxes
    42,131        24,836        112,032        46,138  
Income taxes
    11,700        7,500        36,200        14,400  
 
                     
Net Earnings
   $ 30,431       $ 17,336       $ 75,832       $ 31,738  
 
                     
Net Earnings per Common Share
                               
Basic
   $ 0.51       $ 0.29       $ 1.26       $ 0.53  
Diluted
   $ 0.50       $ 0.29       $ 1.25       $ 0.53  
Weighted Average Number of Shares
                               
Basic
    60,107        59,940        60,304        59,827  
Diluted
    60,624        60,314        60,840        60,133  
 
Segment Information (Unaudited)
                                 
    Thirteen Weeks Ended     Thirty-nine Weeks Ended
    Sep 24,     Sep 25,     Sep 24,     Sep 25,
    2010     2009     2010     2009
Net Sales
                               
Industrial
   $ 99,236       $ 78,242       $ 296,489       $ 226,808  
Contractor
    70,362        55,379        194,941        163,213  
Lubrication
    20,365        13,687        55,342        42,879  
 
                     
Total
   $ 189,963       $ 147,308       $ 546,772       $ 432,900  
 
                     
Operating Earnings
                               
Industrial
   $ 31,195       $ 20,332       $ 91,234       $ 45,262  
Contractor
    13,753        11,138        31,839        24,420  
Lubrication
    2,751        (167)       6,326        (3,348 )
Unallocated corporate (expense)
    (4,276)       (5,116)       (14,061)       (15,572 )
 
                     
Total
   $ 43,423       $ 26,187       $ 115,338       $ 50,762  
 
                     
All figures are subject to audit and adjustment at the end of the fiscal year.
The consolidated Balance Sheets, Consolidated Statements of Cash Flows and Management’s Discussion and Analysis are available in our Quarterly Report on Form 10-Q on our website at www.graco.com .
# # #