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GRACO INC — Interim / Quarterly Report 2007
Jul 26, 2007
30443_10-q_2007-07-26_e5e7f105-5356-4c1a-84ac-d65878607ee8.zip
Interim / Quarterly Report
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10-Q/A 1 gracoamendedform10q2ndqtr07.htm GRACO INC. AMENDED FORM 10-Q Graco's Form 10-Q/A, Second Quarter 2007 MARKER FORMAT-SHEET="Head Major Center Bold-TNR" FSL="Project"
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
MARKER FORMAT-SHEET="Head Minor Center-TNR" FSL="Project"
Washington, D.C. 20549
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FORM 10-Q/A Amendment No. 1
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Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
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For the quarterly period ended June 29, 2007
MARKER FORMAT-SHEET="Head Left-TNR" FSL="Default"
Commission File Number: 001-9249
| 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) |
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Default"
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
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Default"
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
Large Accelerated Filer X Accelerated Filer Non-accelerated Filer
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Default"
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Default"
65,286,000 shares of the Registrants Common Stock, $1.00 par value were outstanding as of July 18, 2007.
MARKER FORMAT-SHEET="Head Major Center Bold 1-TNR" FSL="Project"
Explanatory Note
MARKER FORMAT-SHEET="Para Flush Lv 0 - TNR" FSL="Project"
This Form 10-Q/A is being filed by Graco Inc. to amend its Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2007 (the Report) that was filed with the Securities and Exchange Commission on July 25, 2007. The amendment is being filed to correct errors made in the process of converting and formatting the Report to an electronic format for filing with the Securities and Exchange Commission through the EDGAR system. These errors caused the amount recorded for Other Assets on the Consolidated Balance Sheets as of June 29, 2007 and the Operating Earnings for the Industrial segment, for the Twenty-six Weeks Ended June 30, 2006 in Note 6 of the Notes to Consolidated Financial Statements to be incorrect. The correct amount for Other Assets on the Consolidated Balance Sheets is 4,845; the correct Operating Earnings for the Industrial segment are $64,562 (both in thousands). This amendment is filed solely to correct these typographical errors. The courtesy copy provided in PDF format is correct.
MARKER FORMAT-SHEET="Para Flush Lv 0 - TNR" FSL="Project"
The information contained in this Amendment No. 1 does not reflect events occurring after the filing of the Report and does not modify or update the disclosures therein, except as specifically identified above.
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GRACO INC. AND SUBSIDIARIES
MARKER FORMAT-SHEET="Head Major Center Bold-TNR" FSL="Project"
INDEX
| PART I | FINANCIAL INFORMATION | Page Number | |
|---|---|---|---|
| Item 1. | Financial Statements | ||
| Consolidated Statements of Earnings | 4 | ||
| Consolidated Balance Sheets | 5 | ||
| Consolidated Statements of Cash Flows | 6 | ||
| Notes to Consolidated Financial Statements | 7-14 | ||
| PART II | OTHER INFORMATION | ||
| Item 6. | Exhibits | 15 | |
| SIGNATURES | |||
| EXHIBITS |
| PART I | |
|---|---|
| GRACO INC. AND SUBSIDIARIES | |
| Item 1. | CONSOLIDATED STATEMENTS OF EARNINGS |
| (Unaudited) | |
| (In thousands except per share amounts) |
| Thirteen Weeks Ended — June 29, 2007 | June 30, 2006 | Twenty-Six Weeks Ended — June 29, 2007 | June 30, 2006 | ||
|---|---|---|---|---|---|
| Net Sales | $ 231,384 | $ 218,632 | $ 428,879 | $ | 410,848 |
| Cost of products sold | 109,152 | 101,686 | 201,785 | 190,675 | |
| Gross Profit | 122,232 | 116,946 | 227,094 | 220,173 | |
| Product development | 7,544 | 7,538 | 15,816 | 14,750 | |
| Selling, marketing and distribution | 31,917 | 30,524 | 61,180 | 58,466 | |
| General and administrative | 15,057 | 15,056 | 30,297 | 28,477 | |
| Operating Earnings | 67,714 | 63,828 | 119,801 | 118,480 | |
| Interest expense | 642 | 189 | 900 | 314 | |
| Other expense (income), net | 92 | 4 | (14 | ) | 9 |
| Earnings Before Income Taxes | 66,980 | 63,635 | 118,915 | 118,157 | |
| Income Taxes | 22,800 | 22,300 | 41,000 | 41,400 | |
| Net Earnings | $ 44,180 | $ 41,335 | $ 77,915 | $ | 76,757 |
| Basic Net Earnings | |||||
| per Common Share | $ 0.67 | $ 0.61 | $ 1.17 | $ | 1.12 |
| Diluted Net Earnings | |||||
| per Common Share | $ 0.66 | $ 0.60 | $ 1.16 | $ | 1.11 |
| Cash Dividends Declared | |||||
| per Common Share | $ 0.17 | $ 0.15 | $ 0.33 | $ | 0.29 |
MARKER FORMAT-SHEET="Head Minor Center-TNR" FSL="Project"
See notes to consolidated financial statements.
| GRACO INC. AND SUBSIDIARIES |
|---|
| CONSOLIDATED BALANCE SHEETS |
| (Unaudited) |
| (In thousands) |
| June 29, 2007 | ||||
|---|---|---|---|---|
| ASSETS | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ 4,689 | $ | 5,871 | |
| Accounts receivable, less allowances of | ||||
| $6,300 and $5,800 | 159,874 | 134,105 | ||
| Inventories | 81,833 | 76,311 | ||
| Deferred income taxes | 21,883 | 20,682 | ||
| Other current assets | 2,039 | 2,014 | ||
| Total current assets | 270,318 | 238,983 | ||
| Property, Plant and Equipment | ||||
| Cost | 295,848 | 278,318 | ||
| Accumulated depreciation | (159,166 | ) | (153,794 | ) |
| Total property, plant and equipment, net | 136,682 | 124,524 | ||
| Prepaid Pension | 28,503 | 26,903 | ||
| Goodwill | 67,206 | 67,174 | ||
| Other Intangible Assets, net | 46,157 | 50,325 | ||
| Other Assets | 4,845 | 3,694 | ||
| Total Assets | $ 553,711 | $ | 511,603 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
| Current Liabilities | ||||
| Notes payable to banks | $ 65,168 | $ | 18,363 | |
| Trade accounts payable | 31,330 | 27,442 | ||
| Salaries, wages and commissions | 16,132 | 26,303 | ||
| Dividends payable | 10,841 | 11,055 | ||
| Other current liabilities | 39,594 | 45,766 | ||
| Total current liabilities | 163,065 | 128,929 | ||
| Retirement Benefits and Deferred Compensation | 38,023 | 36,946 | ||
| Uncertain Tax Positions | 6,100 | | ||
| Deferred Income Taxes | 11,651 | 14,724 | ||
| Shareholders' Equity | ||||
| Common stock | 65,633 | 66,805 | ||
| Additional paid-in-capital | 154,186 | 130,621 | ||
| Retained earnings | 119,982 | 138,702 | ||
| Accumulated other comprehensive income (loss) | ||||
| Cumulative translation adjustment | 54 | (60 | ) | |
| Pension liability adjustment | (4,983 | ) | (5,064 | ) |
| Total shareholders' equity | 334,872 | 331,004 | ||
| Total Liabilities and Shareholders' Equity | $ 553,711 | $ | 511,603 |
MARKER FORMAT-SHEET="Head Minor Center-TNR" FSL="Project"
See notes to consolidated financial statements.
| GRACO INC. AND SUBSIDIARIES |
|---|
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| (In thousands) |
| Twenty-six Weeks Ended — June 29, 2007 | June 30, 2006 | |||
|---|---|---|---|---|
| Cash Flows from Operating Activities | ||||
| Net Earnings | $ 77,915 | $ | 76,757 | |
| Adjustments to reconcile net earnings to | ||||
| net cash provided by operating activities: | ||||
| Depreciation and amortization | 13,994 | 12,093 | ||
| Deferred income taxes | (4,312 | ) | (2,850 | ) |
| Share-based compensation | 4,351 | 4,637 | ||
| Excess tax benefit related to share-based | ||||
| payment arrangements | (3,848 | ) | (2,400 | ) |
| Change in: | ||||
| Accounts receivable | (24,733 | ) | (13,780 | ) |
| Inventories | (5,358 | ) | (10,147 | ) |
| Trade accounts payable | 1,465 | 2,411 | ||
| Salaries, wages and commissions | (10,313 | ) | (5,178 | ) |
| Retirement benefits and deferred compensation | (713 | ) | 139 | |
| Other accrued liabilities | (1,270 | ) | 2,625 | |
| Uncertain tax positions | 6,100 | | ||
| Other | (114 | ) | 220 | |
| Net cash provided by operating activities | 53,164 | 64,527 | ||
| Cash Flows from Investing Activities | ||||
| Property, plant and equipment additions | (21,646 | ) | (9,467 | ) |
| Proceeds from sale of property, plant and equipment | 207 | 86 | ||
| Investment in life insurance | (1,499 | ) | | |
| Capitalized software and other intangible asset additions | (5 | ) | (73 | ) |
| Net cash used in investing activities | (22,943 | ) | (9,454 | ) |
| Cash Flows from Financing Activities | ||||
| Borrowings on notes payable and lines of credit | 96,557 | 21,912 | ||
| Payments on notes payable and lines of credit | (49,812 | ) | (23,592 | ) |
| Excess tax benefit related to share-based | ||||
| payment arrangements | 3,848 | 2,400 | ||
| Common stock issued | 19,194 | 11,101 | ||
| Common stock retired | (78,470 | ) | (45,839 | ) |
| Cash dividends paid | (21,984 | ) | (19,841 | ) |
| Net cash provided by (used in) financing activities | (30,667 | ) | (53,859 | ) |
| Effect of exchange rate changes on cash | (736 | ) | (1,509 | ) |
| Net increase (decrease) in cash and cash equivalents | (1,182 | ) | (295 | ) |
| Cash and cash equivalents | ||||
| Beginning of year | 5,871 | 18,664 | ||
| End of period | $ 4,689 | $ | 18,369 |
MARKER FORMAT-SHEET="Head Minor Center-TNR" FSL="Project"
See notes to consolidated financial statements.
MARKER FORMAT-SHEET="Head Major Center Bold-TNR" FSL="Project"
GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of June 29, 2007 and the related statements of earnings for the thirteen and twenty-six weeks ended June 29, 2007 and June 30, 2006, and cash flows for the twenty-six weeks ended June 29, 2007 and June 30, 2006 have been prepared by the Company and have not been audited.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
In the opinion of management, these consolidated statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Graco Inc. and Subsidiaries as of June 29, 2007, and the results of operations and cash flows for all periods presented.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Companys 2006 Annual Report on Form 10-K.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
| Thirteen Weeks Ended — June 29, 2007 | June 30, 2006 | Twenty-six Weeks Ended — June 29, 2007 | June 30, 2006 | |
|---|---|---|---|---|
| Net earnings available to common shareholders | $ 44,180 | $ 41,335 | $ 77,915 | $ 76,757 |
| Weighted average shares outstanding for basic | ||||
| earnings per share | 66,045 | 68,121 | 66,356 | 68,275 |
| Dilutive effect of stock options computed using the | ||||
| treasury stock method and | ||||
| the average market price | 1,025 | 1,199 | 1,036 | 1,159 |
| Weighted average shares outstanding for diluted | ||||
| earnings per share | 67,070 | 69,320 | 67,392 | 69,434 |
| Basic earnings per share | $ 0.67 | $ 0.61 | $ 1.17 | $ 1.12 |
| Diluted earnings per share | $ 0.66 | $ 0.60 | $ 1.16 | $ 1.11 |
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
Stock options to purchase 1,228,000 and 619,000 shares are not included in the 2007 and 2006 calculations of diluted earnings per share, respectively, because they would have been anti-dilutive.
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- Information on option shares outstanding and option activity for the twenty-six weeks ended June 29, 2007 is shown below (in thousands, except per share amounts):
| Outstanding, December 29, 2006 | 3,956 | $ | 24.79 | 2,272 | Weighted Average Exercise Price — $ 16.94 |
|---|---|---|---|---|---|
| Granted | 648 | 41.23 | |||
| Exercised | (652 | ) | 18.49 | ||
| Canceled | (353 | ) | 39.10 | ||
| Outstanding, June 29, 2007 | 3,599 | $ | 27.48 | 2,112 | $ 20.10 |
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
The aggregate intrinsic value of exercisable option shares was $42.8 million as of June 29, 2007, with a weighted average contractual term of 4.9 years. There were approximately 3.5 million vested share options and share options expected to vest as of June 29, 2007, with an aggregate intrinsic value of $47.0 million, a weighted average exercise price of $27.19 and a weighted average contractual term of 6.3 years.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
Information related to options exercised in the first six months of 2007 and 2006 follows (in thousands):
| Twenty-six Weeks Ended — June 29, 2007 | June 30, 2006 | |
|---|---|---|
| Cash received | $12,046 | $4,197 |
| Aggregate intrinsic value | 14,535 | 7,802 |
| Tax benefit realized | 5,300 | 2,800 |
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
The Company recognized year-to-date share-based compensation of $4.4 million in 2007 and $4.6 million in 2006. As of June 29, 2007, there was $12.2 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.2 years.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
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:
| Twenty Six Weeks Ended — June 29, 2007 | June 30, 2006 | |
|---|---|---|
| Expected life in years | 6.0 | 6.3 |
| Interest rate | 4.7% | 4.6% |
| Volatility | 26.1% | 27.8% |
| Dividend yield | 1.6% | 1.4% |
| Weighted average fair value per share of options granted | $12.01 | $12.97 |
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
Under the Companys Employee Stock Purchase Plan, the Company issued 202,000 shares in 2007 and 204,000 shares in 2006. 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:
| Twenty-six Weeks Ended — June 29, 2007 | June 30, 2006 | |
|---|---|---|
| Expected life in years | 1.0 | 1.0 |
| Interest rate | 4.9% | 4.6% |
| Volatility | 24.4% | 24.0% |
| Dividend yield | 1.6% | 1.4% |
| Weighted average fair value per share of options granted | $9.79 | $10.18 |
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
| Thirteen Weeks Ended — June 29, 2007 | June 30, 2006 | June 29, 2007 | June 30, 2006 | |||||
|---|---|---|---|---|---|---|---|---|
| Pension Benefits | ||||||||
| Service cost | $ 1,501 | $ 1,634 | $ | 2,980 | $ 3,074 | |||
| Interest cost | 2,885 | 2,609 | 5,767 | 5,217 | ||||
| Expected return on assets | (4,800 | ) | (4,175 | ) | (9,600 | ) | (8,350 | ) |
| Amortization and other | 291 | 100 | 546 | 292 | ||||
| Net periodic benefit cost (credit) | $ (123 | ) | $ 168 | $ | (307 | ) | $ 233 | |
| Postretirement Medical | ||||||||
| Service cost | $ 150 | $ 250 | $ | 300 | $ 500 | |||
| Interest cost | 315 | 420 | 615 | 840 | ||||
| Amortization of net loss | 623 | 79 | 573 | 265 | ||||
| Net periodic benefit cost | $ 1,088 | $ 749 | $ | 1,488 | $ 1,605 |
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
In June 2007, the Company paid $1.5 million 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 informally 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 Companys insolvency. Cash surrender value of $1.4 million is included in other assets in the consolidated balance sheet as of June 29, 2007.
MARKER FORMAT-SHEET="Para Hang Lv 0-TNR" FSL="Project"
- Total comprehensive income was as follows (in thousands):
| Thirteen Weeks Ended — June 29, 2007 | June 30, 2006 | June 29, 2007 | June 30, 2006 | |||
|---|---|---|---|---|---|---|
| Net Income | $ 44,180 | $ 41,335 | $ | 77,915 | $ 76,757 | |
| Foreign currency translation adjustments | 121 | 1,225 | 114 | 1,740 | ||
| Pension liability adjustment, net of tax | 90 | (37 | ) | 81 | (56 | ) |
| Comprehensive income | $ 44,391 | $ 42,523 | $ | 78,110 | $ 78,441 |
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- 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 twenty-six weeks ended June 29, 2007 and June 30, 2006 were as follows (in thousands):
| Thirteen Weeks Ended — June 29, 2007 | June 30, 2006 | June 29, 2007 | June 30, 2006 | |||||
|---|---|---|---|---|---|---|---|---|
| Net Sales | ||||||||
| Industrial | $ 114,281 | $ | 104,555 | $ | 219,346 | $ | 204,715 | |
| Contractor | 94,231 | 96,507 | 163,982 | 170,859 | ||||
| Lubrication | 22,872 | 17,570 | 45,551 | 35,274 | ||||
| Consolidated | $ 231,384 | $ | 218,632 | $ | 428,879 | $ | 410,848 | |
| Operating Earnings | ||||||||
| Industrial | $ 39,555 | $ | 32,479 | $ | 73,973 | $ | 64,562 | |
| Contractor | 28,619 | 29,521 | 45,646 | 50,563 | ||||
| Lubrication | 2,196 | 4,466 | 5,260 | 9,221 | ||||
| Unallocated Corporate | (2,656 | ) | (2,638 | ) | (5,078 | ) | (5,866 | ) |
| Consolidated | $ 67,714 | $ | 63,828 | $ | 119,801 | $ | 118,480 |
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- Major components of inventories were as follows (in thousands):
| Finished products and components | June 29, 2007 — $ 51,073 | $ | 44,969 | |
|---|---|---|---|---|
| Products and components in various stages | ||||
| of completion | 26,893 | 26,841 | ||
| Raw materials and purchased components | 34,728 | 35,258 | ||
| 112,694 | 107,068 | |||
| Reduction to LIFO cost | (30,861 | ) | (30,757 | ) |
| Total | $ 81,833 | $ | 76,311 |
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- Information related to other intangible assets follows (dollars in thousands):
| Estimated Life (Years) | Original Cost | Accumulated Amortization | Foreign Currency Translation | Book Value | ||
|---|---|---|---|---|---|---|
| June 29, 2007 | ||||||
| Customer relationships and | ||||||
| distribution network | 4 - 8 | $ 26,102 | $ (9,215 | ) | $ 32 | $ 16,919 |
| Patents, proprietary technology | ||||||
| and product documentation | 5 - 15 | 22,243 | (6,082 | ) | 17 | 16,178 |
| Trademarks, trade names | ||||||
| and other | 3 - 10 | 4,684 | (1,908 | ) | 24 | 2,800 |
| 53,029 | (17,205 | ) | 73 | 35,897 | ||
| Not Subject to Amortization: | ||||||
| Brand names | 10,260 | | | 10,260 | ||
| Total | $ 63,289 | $ (17,205 | ) | $ 73 | $ 46,157 | |
| December 29, 2006 | ||||||
| Customer relationships and | ||||||
| distribution network | 4 - 8 | $ 26,102 | $ (7,335 | ) | $ 6 | $ 18,773 |
| Patents, proprietary technology | ||||||
| and product documentation | 5 - 15 | 22,243 | (4,443 | ) | 5 | 17,805 |
| Trademarks, trade names and | ||||||
| other | 3 - 10 | 5,114 | (1,641 | ) | 14 | 3,487 |
| 53,459 | (13,419 | ) | 25 | 40,065 | ||
| Not Subject to Amortization: | ||||||
| Brand names | 10,260 | | | 10,260 | ||
| Total | $ 63,719 | $ (13,419 | ) | $ 25 | $ 50,325 |
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
Amortization of intangibles was $2.1 million in the second quarter of 2007 and $4.2 million year-to-date. Estimated annual amortization expense is as follows: $8.2 million in 2007, $7.8 million in 2008, $6.9 million in 2009, $5.8 million in 2010, $4.9 million in 2011 and $6.4 million thereafter.
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- Components of other current liabilities were (in thousands):
| June 29, 2007 | Dec. 29, 2006 | |
|---|---|---|
| Accrued insurance liabilities | $ 8,002 | $ 7,833 |
| Accrued warranty and service liabilities | 6,405 | 6,675 |
| Accrued trade promotions | 4,706 | 7,265 |
| Payable for employee stock purchases | 2,793 | 5,846 |
| Income taxes payable | 1,177 | 3,920 |
| Other | 16,511 | 14,227 |
| Total | $39,594 | $45,766 |
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
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):
| Balance, beginning of year | Twenty-six Weeks Ended June 29, 2007 — $ 6,675 | $ | 7,649 | |
|---|---|---|---|---|
| Charged to expense | 2,432 | 4,442 | ||
| Margin on parts sales reversed | 1,481 | 1,944 | ||
| Reductions for claims settled | (4,183 | ) | (7,360 | ) |
| Balance, end of period | $ 6,405 | $ | 6,675 |
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- Effective at the beginning of 2007, the Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. The adoption of FIN 48 resulted in no adjustment to beginning retained earnings.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
At the beginning of 2007, the Companys liability for uncertain tax positions was $5.5 million. Unrecognized tax benefits of $4.9 million would affect the Companys effective tax rate if recognized. The Company records penalties and accrued interest related to uncertain tax positions in income tax expense. At the beginning of 2007, approximately $0.6 million was included in the liability for uncertain tax positions for the possible payment of interest and penalties. There were no significant changes in components of the liability in the first half of 2007.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2001. The Companys U.S. income tax returns for 2004 and 2005 are currently under examination by the IRS. An estimate of the range of possible changes that may result from the examination cannot be made at this time.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
Approximately $1 million of unrecognized tax benefits relate to items that are affected by expiring statute of limitations within the next 12 months.
MARKER FORMAT-SHEET="Para (List) Hang Lv 0-TNR" FSL="Project"
- In July 2007, the Company entered into an agreement with a syndicate of lenders providing an unsecured credit facility for 5 years. The new credit facility provides $250 million of unsecured committed credit with an option for an additional $150 million. The facility is available for general corporate purposes, working capital needs, share repurchases and acquisitions. Borrowings under the facility bear interest at either the banks prime rate, the federal funds effective rate plus 0.5 percent or the London Interbank Offered Rate plus a spread of between 0.23 percent and 0.57 percent, depending on the Companys cash flow leverage ratio (debt to earnings before interest, taxes, depreciation and amortization.) The Company is also required to pay a facility fee on the full amount of the loan commitment at an annual rate ranging from 0.07 percent to 0.15 percent, depending on the Companys cash flow leverage ratio. The agreement requires the Company to maintain certain financial ratios as to cash flow leverage and interest coverage.
MARKER FORMAT-SHEET="Para Flush Lv 1-TNR" FSL="Project"
Upon securing the new facility, certain committed lines of credit totaling $50 million were terminated. Additional uncommitted lines totaling $55 million will expire at the end of July 2007.
MARKER FORMAT-SHEET="Para (List) Hang LV 1-TNR" FSL="Project"
ITEM 6. Exhibits
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
3.1* Restated Articles of Incorporation as amended June 14, 2007.
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
4.1* Credit Agreement dated April 1, 2006, between the Company and Wachovia Bank, N.A. (Promissory Note); as extended by letter from Wachovia Bank, N.A. to Graco Inc., dated May 23, 2007.
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
10.1* Graco Inc. Executive Officers Annual Incentive Bonus Plan effective January 1, 2008. (Incorporated by reference to Appendix A to the Companys Proxy Statement for the Annual Meeting of Shareholders held on April 20, 2007.)
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
10.2* Deferred Compensation Plan (1992 Restatement) Amendment 4 adopted June 14, 2007.
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
10.3* Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Graco Inc. Amended and Restated Stock Incentive Plan (2006).
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
10.4* Election form. Amended form of agreement used for the 2006 plan year issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Stock Incentive Plan.
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
10.5* Election form. Form of agreement used for the 2007 plan year for issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Amended and Restated Stock Incentive Plan (2006).
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
31.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a)
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
31.2 Certification of Chief Financial Officer and Treasurer pursuant to rule 13a-14(a)
MARKER FORMAT-SHEET="Exhibit Index Hang TNR" FSL="Project"
32 Certification of President and Chief Executive Officer, and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C.
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*Previously filed with the Report.
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SIGNATURES
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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.
| Date: | July 26, 2007 | By: | GRACO INC. — /s/Patrick J. McHale |
|---|---|---|---|
| Patrick J. McHale | |||
| President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date: | July 26, 2007 | By: | /s/James A. Graner |
| James A. Graner | |||
| Chief Financial Officer and Treasurer | |||
| (Principal Financial Officer) |