☒Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 28, 2019
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 001-09249
GRACO INC.
(Exact name of registrant as specified in its charter)
Minnesota
41-0285640
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
GGG
The New York Stock Exchange
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
166,805,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July 17, 2019.
The consolidated balance sheet of Graco Inc. and Subsidiaries (the “Company”) as of June 28, 2019 and the related statements of earnings, comprehensive income and shareholders' equity for the three and six months ended June 28, 2019 and June 29, 2018, and cash flows for the six months ended June 28, 2019 and June 29, 2018 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 June 28, 2019, 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 2018 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.
Segment Information
The Company has three reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands):
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended
Six Months Ended
June 28, 2019
June 29, 2018
June 28, 2019
June 29, 2018
Net earnings available to common shareholders
$
88,137
$
89,140
$
174,886
$
174,650
Weighted average shares outstanding for basic earnings per share
166,684
167,260
166,150
168,166
Dilutive effect of stock options computed using the treasury stock method and the average market price
5,363
6,005
5,303
6,291
Weighted average shares outstanding for diluted earnings per share
172,047
173,265
171,453
174,457
Basic earnings per share
$
0.53
$
0.53
$
1.05
$
1.04
Diluted earnings per share
$
0.51
$
0.51
$
1.02
$
1.00
Stock options to purchase 1,532,000 and 1,099,000 shares were not included in the June 28, 2019 and June 29, 2018 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
4.Share-Based Awards
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 28, 2018
12,270
$
24.67
7,312
$
20.17
Granted
1,285
45.91
Exercised
(1,241
)
15.59
Canceled
(22
)
32.72
Outstanding, June 28, 2019
12,292
$
27.79
7,731
$
22.98
The Company recognized year-to-date share-based compensation of $17.5 million in 2019 and $15.8 million in 2018. As of June 28, 2019, there was $12.4 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.0 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:
Six Months Ended
June 28, 2019
June 29, 2018
Expected life in years
7.5
7.5
Interest rate
2.6
%
2.8
%
Volatility
24.6
%
25.5
%
Dividend yield
1.4
%
1.2
%
Weighted average fair value per share
$
12.26
$
12.84
Under the Company’s Employee Stock Purchase Plan, the Company issued 398,000 shares in 2019 and 480,000 shares in 2018. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percentdiscount 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:
Six Months Ended
June 28, 2019
June 29, 2018
Expected life in years
1.0
1.0
Interest rate
2.6
%
2.1
%
Volatility
22.7
%
21.3
%
Dividend yield
1.4
%
1.2
%
Weighted average fair value per share
$
11.36
$
10.28
5.Retirement Benefits
The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):
Pension and
Postretirement
Medical
Cumulative
Translation
Adjustment
Total
Three Months Ended June 28, 2019
Balance, March 29, 2019
$
(85,232
)
$
(56,799
)
$
(142,031
)
Other comprehensive income (loss) before reclassifications
—
1,232
1,232
Reclassified to pension cost and deferred tax
1,487
—
1,487
Balance, June 28, 2019
$
(83,745
)
$
(55,567
)
$
(139,312
)
Six Months Ended June 28, 2019
Balance, December 28, 2018
$
(86,889
)
$
(57,968
)
$
(144,857
)
Other comprehensive income (loss) before reclassifications
—
2,401
2,401
Reclassified to pension cost and deferred tax
3,144
—
3,144
Balance, June 28, 2019
$
(83,745
)
$
(55,567
)
$
(139,312
)
Three Months Ended June 29, 2018
Balance, March 30, 2018
$
(92,458
)
$
(40,613
)
$
(133,071
)
Other comprehensive income (loss) before reclassifications
—
(15,112
)
(15,112
)
Reclassified to pension cost and deferred tax
2,109
—
2,109
Balance, June 29, 2018
$
(90,349
)
$
(55,725
)
$
(146,074
)
Six Months Ended June 29, 2018
Balance, December 29, 2017
$
(78,430
)
$
(49,359
)
$
(127,789
)
Other comprehensive income (loss) before reclassifications
—
(6,366
)
(6,366
)
Reclassified to pension cost and deferred tax
3,534
—
3,534
Reclassified to retained earnings
(15,453
)
—
(15,453
)
Balance, June 29, 2018
$
(90,349
)
$
(55,725
)
$
(146,074
)
Amounts related to pension and postretirement medical adjustments are reclassified to non-service components of pension cost that are included within other non-operating expenses.
In February 2018, the Financial Accounting Standards Board ("FASB") issued a new standard related to reclassification of certain tax effects from accumulated other comprehensive income (AOCI). We adopted the new standard in the first quarter of 2018. We elected to reclassify $15.5 million from accumulated other comprehensive income to retained earnings, representing the amount of "stranded" tax effects resulting from the change in the U.S. federal tax rate and the consequent revaluation of deferred tax assets related to pension and postretirement medical expense.
Major components of inventories were as follows (in thousands):
June 28, 2019
December 28, 2018
Finished products and components
$
147,159
$
142,535
Products and components in various stages of completion
87,670
83,768
Raw materials and purchased components
122,318
115,705
Subtotal
357,147
342,008
Reduction to LIFO cost
(59,602
)
(58,026
)
Total
$
297,545
$
283,982
8.Intangible Assets
Components of other intangible assets were (dollars in thousands):
Finite Life
Indefinite Life
Customer Relationships
Patents and Proprietary Technology
Trademarks, Trade Names and Other
Trade Names
Total
As of June 28, 2019
Cost
$
182,410
$
18,913
$
1,020
$
60,220
$
262,563
Accumulated amortization
(73,974
)
(9,557
)
(545
)
—
(84,076
)
Foreign currency translation
(10,352
)
(861
)
(72
)
(3,638
)
(14,923
)
Book value
$
98,084
$
8,495
$
403
$
56,582
$
163,564
Weighted average life in years
13
10
4
N/A
As of December 28, 2018
Cost
$
179,449
$
18,571
$
1,020
$
59,537
$
258,577
Accumulated amortization
(67,322
)
(8,647
)
(439
)
—
(76,408
)
Foreign currency translation
(10,817
)
(895
)
(73
)
(4,074
)
(15,859
)
Book value
$
101,310
$
9,029
$
508
$
55,463
$
166,310
Weighted average life in years
13
10
4
N/A
Amortization of intangibles for the quarter was $3.8 million in 2019 and $4.0 million in 2018 and for the year to date was $7.7 million in 2019 and $8.0 million in 2018. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Estimated Amortization Expense
$
15,503
$
15,289
$
15,089
$
15,001
$
14,088
$
39,686
Changes in the carrying amount of goodwill for each reportable segment were (in thousands):
Industrial
Process
Contractor
Total
Balance, December 28, 2018
$
177,124
$
97,168
$
19,554
$
293,846
Additions, adjustments from business acquisitions
—
1,575
—
1,575
Foreign currency translation
803
49
—
852
Balance, June 28, 2019
$
177,927
$
98,792
$
19,554
$
296,273
The Company completed business acquisitions in 2019 that were not material to the consolidated financial statements.