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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 30, 1994 (Fee
Required)27, 1996 or
[ ]Transition] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________.
Commission File No. 1-9249
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 No.)
incorporation or organization)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-5332
(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:
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
Shares registered on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act:
None
As of March 6, 1995, 11,377,9047, 1997, 17,217,589 shares of Common Stock were outstanding.
Indicate by a 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 X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of approximately 7,313,00011,059,977 shares held by
non-
affiliatesnon-affiliates of the registrant was approximately $167$344 million on March 6,
1995.7,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 2, 1995,6, 1997, are incorporated by reference into Part
III, as specifically set forth in said Part III.
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1
GRACO INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Page
Part I
Item 1 Business 3Business...........................................................3
Item 2 Properties 5Properties.........................................................5
Item 3 Legal Proceedings 5Proceedings..................................................6
Item 4 Submission of Matters to a Vote of Security Holders 5Holders................6
Executive Officers of the Company 6Company..................................6
Part II
Item 5 Market for the Company's Common Stock and
Related Stockholder Matters 8Matters....................................8
Item 6 Selected Financial Data 9Data............................................8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9Operations......................................9
Item 8 Financial Statements and Supplementary Data 13Data.......................13
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 26.......................26
Part III
Item 10 Directors and Executive Officers of the Company 27Company...................27
Item 11 Executive Compensation 27Compensation............................................27
Item 12 Security Ownership of Certain Beneficial Owners and Management 27Management....27
Item 13 Certain Relationships and Related Transactions 27Transactions....................27
Part IV
Item 14 Exhibits, Financial Statement Schedules,Schedule, and Reports on Form 8-K 278-K...27
Signatures 29..................................................................29
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NOTE: Certain exhibits listed in the Index to Exhibits beginning on
page 30,27, and filed with the Securities and Exchange Commission, have
been omitted. Copies of such exhibits may be obtained upon written
request directed to:
Treasurer
Graco Inc.
P.O. Box 1441
Minneapolis, Minnesota
55440-1441
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2
PART I
Item 1. Business
General Information. Graco Inc. ("Graco" or "the Company") supplies technology
and expertise for the management of fluids in both industrial and commercial
settings. Based in Minneapolis, Minnesota, Graco serves customers around the
world in the manufacturing, processing, construction and maintenance industries.
It designs, manufactures and markets systems, products and equipmenttechnology to move,
measure, control, dispense and apply fluida wide variety of fluids and viscous
materials. The Company helps customers solve difficult manufacturing problems,
increase productivity, improve quality, conserve energy, save expensive
materials,material, control environmental emissions and reduce labor costs. Primary uses
of the Company's equipment include the application of coatings and finishes to
various industrial and commercial products; the mixing, metering, dispensing and
application of adhesive, sealant and chemical bonding and sealant materials; the application
of paint and other materials to architectural structures; the lubrication and
maintenance of vehicles and industrial machinery; and the transferring and
dispensing of various fluids. Graco is the successor to Gray Company, Inc.,
which was incorporated in 1926 as a manufacturer of auto lubrication equipment,
and became a public company in 1969.
It is Graco's goal to become the highest quality, lowest cost, most responsive
supplier in the world for its principal products. In working to achieve these
goals to become a world class manufacturer, Graco has been
convertingcontinues to organize its Minneapolis
manufacturing operations toaround focused factories organized around team-directed manufacturing cells, a process expected to
be completed in 1997.which contain product-based
cells. Substantial investments in new manufacturing technology have reduced
cycle time and improved quality.
The Company operates in one industry segment, namely the design, manufacture,
marketing, sale and installation of systems and equipment for the managementhandling of
fluids. Financial information concerning geographic operations and export sales
for the last three fiscal years is set forth in Note B of the Notes to Consolidated Financial
Statements.
Recent Developments. During 1994,The David A. Koch Center, a world-class manufacturing and
global distribution facility, was opened in November 1996 in Rogers, Minnesota.
The Koch Center provides additional production capacity and enhanced
build-to-order capability for projected growth. All distribution operations
conducted by the Company began the restructuring and
consolidation ofat its operationsdistribution center in Europe and Japan. The European customer
service and distribution functionsBrooklyn Center,
Minnesota were relocated from the Company's
facility in Rungis, Francetransferred to the new facility, together with the engineering
and manufacturing groups for the Contractor Equipment Division ("CED") and final
assembly operations for Industrial pumps. During 1996, the Company's product
development efforts resulted in Maasmechelen, Belgium.
In the fallintroduction of 1994, Graco announced that managementapproximately 130 new
products and packages. To enhance product development efficiencies, the CED
Advanced Product Development Group headquartered in Denver, Colorado, was
consolidated with the CED Engineering Group in Minneapolis, Minnesota and the
Denver facility was closed. The application engineering, manufacturing and
customer service functions formerly performed in Franklin Park, Illinois were
moved to Minneapolis, Minnesota, in order to realize process improvements in
manufacturing and distribution and to take advantage of its European
operations would be centralized in a new headquarters operationthe enhanced technical
capabilities available at the Company's recently expanded facility in Maasmechelen, Belgium during 1995.
In June of 1994, Graco initiated an intensive evaluation of its domestic
marketing and sales groups with the goal of maximizing effectiveness and
substantially reducing the cost of sales. Implementation of the
recommendations generated by this evaluation are currently underway. As of
January 1, 1995, the majority of order entry, customer service, and
accounting functions for Graco's Canadian subsidiary was being performed in
the United States. In 1994, Graco began a construction project to more
than double the size of the Russell J. Gray Technical Center
and the Franklin Park facility has closed. Graco is currently constructing a
laboratory in its Riverside facility to house
additional testing andsupport the consolidation of product
development activities and personnel.
Manufacturing in Minneapolis operated at near peak capacityand to provide world-class demonstration,
training, test and display capabilities. This laboratory is expected to be
completed during 1994.the second quarter of 1997.
Products. Graco Inc. manufactures a wide array of specialized pumps, applicators,
regulators, valves, meters, atomizing devices, replacement parts, and
accessories, which are used in industrial and commercial applications in the
movement, measurement, control, dispensing and application of many fluids and
semi-solids, including paints, adhesives, sealants, and lubricants. In addition,
it offers an extensive line of portable equipment which is used in construction
and maintenance businesses for the application of paint and other materials.
Graco fluid systems incorporate sophisticated paint circulating and fluid
application technology.
Commercial and industrial equipment offered by Graco includes specialized pumps,
air and airless spray units, manual finishing equipment and fluid handling
systems. A variety of pumps provide fluid pressures ranging from 20 to more than
6,000 pounds per square inch and flow rates from under 1 gallon to 140 gallons
per minute. In 1995, Graco introduced a new generation of pumps, which produce
higher pressures, have improved corrosion resistance and are easier to service
than existing products.
The Company sells accessories for use with its equipment, including hoses,
couplings, regulators, valves, filters, reels, meters, and gauges, as well as a
complete line of spray guns, tips and applicators. These accessories increase
the flexibility, efficiency and effectiveness of Graco equipment. Packings,
seals, hoses and other parts, which must be replaced periodically in order to
maintain efficiency and prevent loss of material, are also sold.sold by the Company.
3
Sales of replacement parts and accessories have averaged 4345.6 percent of the
Company's consolidated net sales and approximately 4951.3 percent of gross profits
during the last three years. The following table summarizes the consolidated net
sales and gross profits (net sales less cost of products sold) by the Company's
principal product groups for that same period.
3
Product Group Sales and Gross Profit
(In thousands) 1996 1995 1994
1993 1992------------------- ------------------- -------------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
NET SALES
Commercial and industrial equipment $207,327 52.9% $206,558 53.5% $204,584 56.8% $179,619 55.7% $188,681 58.9%
Accessories and replacement parts 184,429 47.1 179,756 46.5 155,429 43.2
142,983 44.3 131,653 41.1-------- ----- -------- ----- -------- -----
$391,756 100.0% $386,314 100.0% $360,013 100.0%
$322,602 100.0% $320,334 100.0%======== ===== ======== ===== ======== =====
GROSS PROFIT
Commercial and industrial equipment $ 92,480 47.2% $ 90,526 47.7% $ 89,262 51.3% $ 76,325 49.8% $ 82,859 52.9%
Accessories and replacement parts 103,501 52.8 99,101 52.3 84,749 48.7
76,802 50.2 73,827 47.1-------- ----- -------- ----- -------- -----
$195,981 100.0% $189,627 100.0% $174,011 100.0%
$153,127 100.0% $156,686 100.0%======== ===== ======== ===== ======== =====
Marketing and Distribution. Graco's operations are organized to allow its full
line of fluid handling products and systems to be offered in each of its major geographic
market:markets: the Americas, Europe and Asia Pacific. The Industrial Equipment
Division, the Automotive Equipment Division, the Contractor Equipment Division,
and the Lubrication Equipment Division provide worldwide marketing direction and
product design and application assistance to each of these geographic markets.
Graco'sGraco sells its equipment worldwide principally through independent
distributors. In Canada, Japan, Korea, and Europe, Graco equipment is sold worldwide principallyto
distribution through the Company's
international sales subsidiaries, direct sales personnel and regional
distributors. Manufacturers' representatives are used with some product
lines.subsidiaries. In the Americas and Europe, the Company
maintains a specialized direct sales force, which handles sales of large systems
and sales to certain corporate accounts. Manufacturers' representatives are used
with some product lines.
In 1994,1996, Graco's net sales in the Americas were $241,169,000$252,615,000 or approximately 6765
percent of the Company's consolidated net sales; in Europe (including the Middle
East and Africa) net sales were $65,888,000$78,666,000 or approximately 1820 percent; and in
the Asia Pacific region, net sales were $52,956,000$60,475,000 or approximately 15 percent.
Consolidated backlog at December 27, 1996, was $19 million compared to $20
million at the end of 1995.
Research, Product Development and Technical Services. Graco's research,
development and engineering activities focus on new product design, product
improvements, applied engineering and strategic technologies. A dedicated
support group of application engineers and technicians also provides specialized
technical assistance to customers in the design and evaluation of fluid transfer
and application systems. It is one of Graco's financial goals to generate 30
percent of each year's sales from products introduced in the prior three years.
To achieve this goal, Graco substantially
increased its new product design and application
engineering staff, and more than doubled the size of the Russell J. Gray
Technical Center in 1995 to provide expansion space for engineering, testing and
laboratory activities
during 1994. Occupancy ofactivities. During 1996, the new wing ofCED Advanced Product Development Group,
formerly located in Denver, Colorado, was merged with the Technical Center will be
completed by May 1995.CED Engineering Group
in Minneapolis, and the Engineered Application Solutions Group from Franklin
Park, Illinois was consolidated with the Industrial Application Engineering
Group in Minneapolis to realize efficiencies in the product development and
application engineering processes. Total research and development expenditures
were $14,591,000, $12,382,000$17,909,000, $15,715,000 and $10,616,000$14,591,000 for the 1994, 19931996, 1995 and 19921994 fiscal
years, respectively.
Intellectual Property. Graco owns a number of patents and has patent
applications pending both in the United States and in foreign countries,
licenses its patents to others, and is licensed under patents owned by others.
In the opinion of the Company, its business is not materially dependent upon any
one or more of these patents or licenses. The Company also owns a number of
trademarks in the United States and foreign countries, including the registered
trademarks for "GRACO," several forms of a capital "G" and various product
trademarks which are material to the business of the Company in thatinasmuch as they
identify Graco and its products to its customers.
4
Competition. Graco faces substantial competition in all of its markets. The
nature and extent of this competition varies in different markets due to the
diversity of the Company's products. Product quality, reliability, design,
customer support and service, specialized engineering and pricing are the major
competitive factors. Although no competitor duplicates all of Graco's products,
some competitors are larger than the Company, both in terms of sales of directly
competing products and in terms of total sales and financial resources. Graco
believes it is one of the world's leading producers of high-quality specialized
fluid management equipment and systems. It is impossible, because of the absence
of reliable industry-
wideindustry-wide figures, to determine its exact relative market
position.
Environmental Protection. During the fiscal year ending December 30, 1994,27, 1996, the
amounts incurred to comply with federal, state and local legislation pertaining
to environmental standards did not have a material effect upon the capital
expenditures or earnings of the Company.
4
Employees. As of December 30, 1994,27, 1996, the Company employed approximately 2,0751,997
persons on a full-time basis. Of this total, approximately 390332 were employees
based outside the United States, and 815800 were hourly factory workers in the
United States.
Although Graco's U.S. employees are not
covered by collective bargaining agreements, various national industry-wide
labor agreements apply to select employees in Europe. The Company believes
it has a good relationship with its employees.
Item 2. Properties
As of December 31, 1996, the Company's principal operations that occupy more
than 10,000 square feet were conducted in the following facilities:
Type of Facility Location Square Footage
---------------- -------- --------------
Owned
-----
Distribution/Manufacturing/Office Rogers, Minnesota 324,000
Manufacturing/Office Minneapolis, Minnesota 237,600
Manufacturing/Office Minneapolis, Minnesota 207,000
Engineering/Research & Development Minneapolis, Minnesota 138,200
Engineering/Manufacturing/Office Plymouth, Michigan 106,000
Engineering/Manufacturing/Office Franklin Park, Illinois 82,000
Assembly/European Headquarters/Warehouse Maasmechelen, Belgium 75,800
Corporate Headquarters Golden Valley, Minnesota 68,000
Manufacturing/Office Sioux Falls, South Dakota 55,000
Sales Office/Warehouse Los Angeles, California 21,000
Office/Warehouse Mississauga, Ontario, Canada 20,000
Leased
------
Engineering/Office/Warehouse Yokohama, Japan (3 facilities) 48,724
Sales Office Rungis, France 46,600
Assembly/Engineering/Office/Warehouse Neuss, Germany 41,765
Technical Publications Minneapolis, Minnesota 18,200
Sales Office West Midlands, United Kingdom 16,320
Warehouse Gwangju-Gun, Korea 10,549
The Company owns the four buildings which house its corporate offices,
principalDavid A. Koch Center, a new manufacturing assembly and research and development activities.
These buildings,global distribution center
located in Minneapolis,Rogers, Minnesota, have an aggregate areawas completed and occupied during the last quarter
of approximately 664,200 square feet.1996. The Company's distribution
operations are located in 123,800facility has 324,000 square feet of space in a Minneapolis
suburb under a lease which expires at the end of 1996. The Company's
technical assistance, productand includes office,
engineering, research and development, manufacturing, customer service and
technical publications
departments are locateddistribution functions. Functions formerly performed in 18,200the Distribution Center
(123,800 square feet of spacefeet) in Brooklyn Center, Minnesota, and the Communications
Center (18,200 square feet) in Minneapolis, under a lease which will expire in 1996.
The Company owns a 106,000 square foot facility in Plymouth, Michigan,
which contains manufacturing, engineering and administrative operations
devoted primarily to salesMinnesota, were transferred to the
automotive industry.Koch Center, and the leases of these facilities were terminated on December 31,
1996 and February 28, 1997, respectively.
A 55,00021,700 square foot building in Farmington Hills, Michigan and a 57,000Atlanta, Georgia was sold during the last
quarter of 1996. The sale of the 82,000 square foot building in Wixom, Michigan are currently for sale.
Graco manufactures paint spray guns and other products and accessories in a
Company-owned 55,000 square foot building in Sioux Falls, South Dakota.
The Company owns an office and plant located in Franklin Park,
Illinois was completed February 18, 1997. The lease on the Colorado facility
(11,600 square feet) terminated on November 30, 1996, and the operations were
transferred to Minneapolis, Minnesota. The sales office in Rungis, France will
be moved to a smaller facility during the first quarter of approximately 82,000 square feet. Graco's Japanese subsidiary leases an
office building which functions as its technical sales center which houses
engineering, demonstration and test activities, customer service,
information systems and administration and a warehouse, all under long-term
leases with renewal options on favorable terms. Graco's Canadian
subsidiary owns a 20,000 square foot facility in Mississaugua, Ontario,
which contains office and warehouse space. With the exception of the
Maasmechelen facility, which is owned by the Belgium subsidiary, the1997.
5
The Company leases branch orspace for subsidiary sales or liaison offices inaround the
United States and
abroad,world, some of which have demonstration areas and/or warehouse space.
During 1994, Graco built a 67,000 square foot warehouse, production and
office building in Maasmechelen, Belgium. An expansion of 8,800 square
feet was started in late 1994 to accommodate the European headquarters
operations being relocated from France to Belgium, with completion expected
the second quarter of 1995. European customer service, distribution and
modular assembly functions formerly based in France and assembly operations
previously carried on in Houthhalen, Belgium, were consolidated in 1994 at
this location. In 1995, Graco plans to relocate its operations in the
Midlands region of the United Kingdom to a better quality leased facility
with office, systems assembly and warehouse space. In Minneapolis, an
80,000 square foot expansion of the Company's Russell J. Gray Technical
Center is nearing completion, with occupancy expected to be complete by
May, 1995.
Graco's facilities are in good operatingsatisfactory condition, suitable for their respective
uses and are sufficient and adequate to meet current needs, with the recent and
planned expansions. Manufacturing capacity met business demand in 1996. Future
production requirements are expected to be met through existing production
capabilities, efficiency and productivity improvement and the use of available
subcontract services.
Item 3. Legal Proceedings
The Company is engaged in routine litigation incident to its business, which
management believes will not have a material adverse effect upon its operations
or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No issues were submitted to a vote of security holders during the fourth quarter
of 1994.
5
1996.
Executive Officers of the Company
The following are all the executive officers of the Company as of March 1,
1995.7, 1997.
There are no family relationships between any of the officers named.
David A. Koch, 64,66, is Chairman and Chief Executive Officer, positionsof the Board, a position he has held since 1985.
Prior to January 1, 1996, he was also the Chief Executive Officer of the
Company, a position he had held since 1962. He joined the Company in 1956 and
held various sales and marketing positions with the Company prior to assuming
the office of President in 1962. For a five month period from January to June 1993, he
also held the office of President. He has served as a director of the Company
since 1962.
George Aristides, 59,61, was namedelected President and Chief Executive Officer
effective January 1, 1996. He became President and Chief Operating Officer and
was elected a director of the Company in
June 1993. He becameFrom March 1993 to June 1993, he was Executive Vice President,
Industrial/Automotive Equipment Division, Manufacturing, Distribution and
Eurafrican Operations, in March 1993.Operations. From 1985 until 1993, he was Vice President,
Manufacturing Operations and Controller. He joined the Company in 1973 as
Corporate Controller and became Vice President and Controller in 1980. He has
served as a director of the Company since 1993.
Clayton R. Carter, 58, was elected Vice President, Worldwide Industrial
Equipment Division, effective December 17, 1996. From January 1, 1995, he was
Vice President, Worldwide Lubrication Equipment Division. He became Director,
Vehicle Services Division, in February 1994. He joined the Company in 1962 and
has held various sales management positions.
James A. Graner, 52, was elected Vice President and Controller in February 1994.
He became Treasurer in May 1993. Prior to becoming Assistant Treasurer in 1988,
he held various managerial positions in the treasury, accounting and information
systems departments. He joined Graco in 1974.
Clyde W. Hansen, 64, was elected Vice President, Human Resources and Quality
Management Systems, in December 1993. He joined the Company in 1984 as Employee
Relations Director, a position he held until his election.
John L. Heller, 58,60, was namedelected Vice President, Latin America & Developing
Markets, effective January 4, 1996. From July 1993 to December 1995, he was
Senior Vice President and General Manager - Contractor Equipment Division in July 1993.Division. He
became Vice President, Far East Operations and Latin America, in 1992. Prior to
becoming Vice President, Far East Operations in 1984, he held various management
and staff positions in sales and human resources. He joined the Company in 1972.
Roger L. King, 49,51, was named Vice President & General Manager, European
Operations, effective January 4, 1996. From July 1993 to December 1995, he was
Senior Vice President and General Manager - International Operations in July 1993. He is responsible for Graco's sales
activities and operations outside North America.Operations. He became
Senior Vice President and Chief Financial Officer in March 1993, and Vice
President and Treasurer in 1987. Prior to becoming Vice President, Treasurer and
Secretary in 1980, he held the position of Treasurer and Secretary and various
treasury management positions with Graco. He joined the Company in 1970.
James A. Graner, 50, was elected Vice President and Controller in February
1994. He became Treasurer in May 1993. Prior to becoming Assistant
Treasurer in 1988, he held various managerial positions in the treasury,
accounting and information systems departments. He joined Graco in 1974 as
an accountant.
Clyde W. Hansen, 62, was elected Vice President, Human Resources, in
December 1993. He joined the Company in 1984 as Employee Relations
Director, a position he held until his election.6
David M. Lowe, 39,41, was elected to the position of TreasurerVice President, Worldwide
Lubrication Equipment Division, in December 1996. From February 1995.1995 to December
1996, he was Treasurer. Prior to joining the Company, he was employed by Ecolab
Inc. in St.
Paul, Minnesota,, where he held various positions in the Treasury Department, including
Manager-Corporate Finance; Director, Corporate Finance and most recently
Director, Corporate Development.
Robert M. Mattison, 47,49, was elected Vice President, General Counsel and
Secretary, in January 1992.1992, a position which he holds today. Prior to joining
the Company, he held various legal positions with Honeywell Inc., most recently
as Associate General Counsel.
Mark W. Sheahan, 32, was elected Treasurer, effective December 17, 1996. He
joined the Company as Treasury Operations Manager in September 1995. Prior to
joining the Company, he held various positions in public accounting with KPMG
Peat Marwick LLP and Coopers & Lybrand.
Robert A. Wagner, 44,46, was elected Vice President, Asia Pacific, of Graco Inc.
and President, Graco K.K. effective January 1995. He became Vice President and
Treasurer, Graco Inc., in February 1994. He joined the Company in December 1991,
as Vice President, Corporate Development and Planning. Prior to joining the
Company, he was employed by Texas Instruments for nearly five years, where he
held various managerial positions, includingmost recently as Vice President and Manager,
Corporate Development, a
position which he held immediately prior to his departure.
Clayton R. Carter, 56,Development.
Thomas J. Fay, 46, was appointed to the position of Vice President, LubricationWorldwide
Automotive Equipment Division, effective January 1, 1995. He became
Director, Vehicle Services Division, in February 1994. He joined the
Company in 1962 and has held various sales management positions, most
recently in the Contractor Equipment Division.
Thomas J. Fay, 44, is4, 1996. During 1995, he was
Vice President, European Operations, a position to
which he was appointed on January 1, 1995.Operations. Prior to becoming General Manager of
European Operations in March 1994, he held the position of General Manager,
Region III, in Europe. Mr. Fay joined the Company in 1984 and held various sales
management positions before moving to Europe in 1990.
6
Vincent C. Hren, 44,Dale D. Johnson, 42, was appointed Vice President, Worldwide Contractor
Equipment Division, on December 17, 1996. Prior to becoming the Director of
Marketing in June 1996, he held various marketing and sales positions in CED. He
joined the Company in 1976.
Charles L. Rescorla, 45, is Vice President, and General Manager, Automotive
Division, a position to which he was appointed in December 1994. Prior to
joining the Company, he was employed by Fisher-Rosemount in various
managerial positions in manufacturing, most recently as Vice President of
Worldwide Operations.
Charles L. Rescorla, 43, is Vice President, Manufacturing & Distribution
Operations, a position to which he was appointed on January 1, 1995. Prior to
becoming the Director of Manufacturing in March 1994, he was the Director of
Engineering, Industrial Division, a position which he assumed in 1988 when he
joined the Company.
With the exception of David M. Lowe, Clayton R. Carter, Thomas J. Fay,
Vincent C. Hren, and Charles L. Rescorla, the officers identified were
elected by theThe Board of Directors elected Messrs. Koch, Aristides, Graner, Hansen, Heller,
King, Mattison and Wagner on May 3, 1994,7, 1996, and Messrs. Carter, Lowe and Sheahan
on December 17, 1996, all to hold office until the next annual meeting of
directors or until their successors are elected and qualify. In addition, effective January 1, 1995, Robert A. Wagner, who
formerly held the position of Vice President and Treasurer, was elected to
the office of Vice President, Asia Pacific, and on February 24, 1995, David
M. Lowe was elected to the office of Vice President and Treasurer. Messrs. Carter, Fay,
Hren,Johnson and Rescorla were appointed to their positions by management effective
January 1, 1995, January 1, 1995,4, 1996, December 27, 1994,17, 1996 and January 1, 1995, respectively.
7
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
Graco Common Stock. Graco common stock is traded on the New York Stock Exchange
under the ticker symbol "GGG." As of March 6, 1995,7, 1997, there were 11,377,90417,217,589 shares
outstanding and 1,8001,984 common shareholders of record, with another estimated
1,8003,100 shareholders whose stock is held by nominees or broker dealers.
Quarterly Financial Information.
(In thousands, except per share amounts)
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
Net Sales $80,930 $94,179 $89,048 $95,856
Gross Profit 38,436 44,227 43,269 48,079
Net Earnings (Loss) 1,836 4,195 4,248 5,047
Per Common Share:
Net Earnings (Loss) .16 .36 .37 .44
Dividends Declared .14 .14 .14 .16
Stock Price (per share)
High $ 24.16 $ 23.00 $ 18.88 $ 21.75
Low 20.00 18.75 16.88 18.00
Volume (# of shares) 2,056.7 373.6 603.1 288.4
1993
Net Sales $ 77,811 $ 79,415 $ 81,751 $ 83,625
Gross Profit 36,209 39,321 39,337 38,260
Net Earnings (Loss) 2,572 4,114 3,463 (656)
Per Common Share:
Net Earnings (Loss) .23 .36 .30 (.06)
Dividends Declared .127 .127 .127 2.84
Stock Price (per share)
High $ 17.83 $ 21.67 $ 22.00 $ 24.25
Low 15.42 17.33 20.75 21.17
Volume (# of shares) 573.9 692.0 635.1 424.1
1 Includes the special one-time dividend of $2.70 per share declared
December 17, 1993, paid March 21, 1994.
8
Quarterly Financial Information.
(In thousands, except per share amounts)
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- ---- -------- -------- -------- --------
Net Sales $ 90,153 $ 97,099 $ 97,680 $106,824
Gross Profit 44,837 49,422 49,976 51,746
Net Earnings 5,585 10,032 10,157 10,395
Per Common Share:
Net Earnings 0.32 0.57 0.58 0.60
Dividends Declared 0.12 0.12 0.12 0.14
-------- -------- -------- --------
Stock Price (per share)
High $ 20.75 $ 21.63 $ 20.38 $ 26.00
Low 17.75 17.88 18.25 18.50
Volume (# of shares) 1,795.1 1,888.2 1,513.1 1,512.8
-------- -------- -------- --------
1995
- ----
Net Sales $ 95,527 $103,402 $ 94,797 $ 92,588
Gross Profit 46,527 51,415 46,287 45,398
Net Earnings 5,436 8,532 6,569 7,169
Per Common Share:
Net Earnings 0.31 0.49 0.37 0.41
Dividends Declared 0.11 0.11 0.11 0.12
-------- -------- -------- --------
Stock Price (per share)
High $ 16.17 $ 19.50 $ 23.17 $ 25.50
Low 13.17 16.00 17.42 20.00
Volume (# of shares) 686.9 854.1 1,530.6 1,395.0
-------- -------- -------- --------
Item 6. Selected Financial Data
Graco Inc. & Subsidiaries
(In thousands, except per share amounts) 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Net Sales $391,756 $386,314 $360,013 $322,602 $320,334 $311,874 $321,263
Earnings Before Change in Accounting Principles 36,169 27,706 15,326 9,493 11,145
8,946 17,713
Net Earnings 36,169 27,706 15,326 9,493 5,301
8,946 17,713-------- -------- -------- -------- --------
Per Common Share:
Earnings Before Change in Accounting Principles $ 1.322.07 $ .821.59 $ .97.88 $ .79.55 $ 1.63.65
Net Earnings 1.32 .82 .46 .79 1.632.07 1.59 .88 .55 .31
-------- -------- -------- -------- --------
Total Assets $247,814 $217,833 $228,385 $216,365 $220,418 $205,929 $209,480
Long-term Debt (including current portion) 9,920 12,009 32,483 19,480 22,762
23,898 28,651
Redeemable Preferred Stock -- -- 1,474 1,485 1,487
1,493 1,493-------- -------- -------- -------- --------
Cash Dividends Declared per Common Share $ 0.50 $ 0.45 $ 0.39 $ 2.15 $ .58 $ 3.22 $ .49 $ .45 $ .410.33
======== ======== ======== ======== ========
1 All per share data has been restated for the three-for-two stock split paid
February 2, 1994.
2 Includes the special one-time dividend of $2.70$1.80 per post-split share paid
March 21, 1994.declared
December 17, 1993.
2 Includes Lockwood Technical, Inc. (LTI), a former wholly-owned subsidiary,
sold in 1992.
Above information includes Lockwood Technical, Inc. (LTI) and Graco
Robotics Inc. (GRI), former wholly-owned subsidiaries, sold in 1992 and
1991, respectively.8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S REVIEW AND DISCUSSION
The following is Management's Review and Discussion and is not covered by the
Independent Auditors' Report.
NetGraco's net earnings of $36.2 million in 1994 of $15,326,000 were1996 are 31 percent higher than the
$27.7 million earned in 1995 and are significantly higher than the $9,493,000$15.3 million
recorded in 1993,1994. The large increases in 1996 and the $5,301,000 in 1992. The 61 percent increase in
19941995 primarily reflects the impact ofreflect a
reduced effective tax rate, enhanced profit margins, and higher sales and the decline in
operating costs as a percent of sales. Operating
costs include increased product development costs and restructuring charges.expenditures.
The increase in net
earnings between 1993 and 1992 principally resulted from the one-time net
reduction in 1992 of $5,844,000 for the cumulative effect of changes in two
accounting principles.
The following table below indicates the percentage relationship ofbetween income and expense
items before changes in accounting principles, included in the Consolidated Statements of Earnings for the three most
recent fiscal years and the percentage changes in those items for such years.
Revenue & Expense Item Revenue & Expense Item
As a Percentage of Net Sales Percentage Increase (Decrease)
---------------------------- ------------------------------
1996 1995 1994 1993 1992 1994/93 1993/92 1992/911996/95 1995/94
----- ----- ----- ------- -------
Net Sales 100.0 100.0 100.0 12 1 37
----- ----- ----- ------- -------
Cost of Products Sold 50.0 50.9 51.7 52.6 51.1 10 4 2-- 6
Product Development 4.6 4.1 4.0 3.8 3.3 18 17 (11)14 8
Selling 21.8 22.4 25.8 26.6 26.7 8 0 7(2) (7)
General & Administrative 10.1 10.9 11.2 11.8 12.8 6 (7) 3(5) 4
----- ----- ----- ------- -------
Operating Profit 13.5 11.7 7.3 5.2 6.1 56 (13) 117 71
----- ----- ----- ------- -------
Interest Expense (0.2) (0.6) (0.5) (0.7) (0.9) (16) (16) (27)(64) 21
Other (Expense) Income (Expense), Net 0.1 0.2 (0.3) (0.3) 0.4 nmf nmf nmf* *
----- ----- ----- ------- -------
Earnings Before Income Taxes and
Changes in Accounting Principles13.4 11.3 6.5 4.2 5.6 70 (24) 1821 86
Income Taxes 4.2 4.1 2.2 1.3 2.1 88 (38) 85 96
----- ----- ----- ------- -------
Net Earnings Before Changes
in Accounting Principles9.2 7.2 4.3 2.9 3.5 61 (15) 25
nmf - No31 81
===== ===== ===== ======= =======
* Not a Meaningful Figure
9
NET SALES
In 1996, Graco achievedrecorded its fourth consecutive year of record net sales, posting
a 1 percent increase over 1995 to $392 million. The 1996 increase was
principally due to an increase in 1994. Net sales increased 12 percent to
$360,013,000, principally as the result of significantly higherNorth American sales. Geographically, net
sales in the Americas of $253 million in all divisions. Geographically, higher sales in the
Americas, Europe and the Pacific were partially offset1996 increased by a 146 percent
sales decline in Japan. In 1993, sales increased 1 percent over 1992 as
significant increases in the Americas and the Pacific were offset by
declines in Europe and Japan. The impact of exchange rate movement on
sales was not significant in 1994 when
compared to 1993, or in 1993 when
compared to 1992.
Consolidated backlog at December 30, 1994 was $25 million, compared to $20
million at year-end 19931995. With slow economies and $18 million atweak currencies during most of the
end of 1992. The increased
backlog at the end of 1994 resulted primarily from increased Automotive
Equipment Division system orders in the Pacific.
Sales increased 12year, European sales declined 5 percent in 1994 when compared1996 to 1993$79 million (a 3 percent
volume decrease and a 2 percent in
1993 from 1992, excluding operations divested in 1992.
% Increase (Decrease)
(In thousands) 1994 1993 1992 1994/93 1993/92
Division Sales:
Industrial Equipment $136,995 $118,155 $129,078 16 (8)
Automotive Equipment 67,457 64,765 62,587 4 3
Contractor Equipment 121,478 110,802 97,592 10 14
Lubrication Equipment 34,083 28,880 25,837 18 12
360,013 322,602 315,094 12 2
Divested Operations - - 5,240 nmf nmf
Consolidated $360,013 $322,602 $320,334 12 1
Geographic Sales:
Americas $241,169 $206,464 $183,181 17 13
Europe 65,888 60,546 75,807 9 (20)
Pacific 52,956 55,592 56,106 (5) (1)
360,013 322,602 315,094 12 2
Divested Operations - - 5,240 nmf nmf
Consolidated $360,013 $322,602 $320,334 12 1
nmf - No Meaningful Figure
COST OF PRODUCTS SOLD
Cost of products sold in 1994, as a percent of net sales, decreased to 51.7
from 52.6 in 1993, primarilydecline due to manufacturing efficiencies gained from
continued investmentexchange rates). Sales in technologyAsia
Pacific declined 7 percent in 1996 to $60 million. (Volume was flat and the
decline was due to exchange rates.)
In 1995, sales increased manufacturing volumes.
Manufacturing efficiencies gained from continued investment7 percent over 1994, due primarily to higher worldwide
sales in state-of-the-
art manufacturing technology, principally in Minneapolis, Minnesota, and
Sioux Falls, South Dakota, have more than offset increases in raw material
and subcontract costs. Partially offsetting these factors were an increased
proportion of lower-margin, engineered industrial and automotive system
sales.all divisions except Contractor Equipment.
Periodic price increases have generally permitted the Companycontributed to recover
increases in the cost of products sold.net sales. The Company's lastmost
recent U.S. price changeincrease was effective in January 1995,1996 and represented an
average 22.5 percent increase from its April 1994January 1995 price lists. The April 1994January 1995
price change was an average 2 percent increase from June 1992April 1994 prices.
Consolidated backlog at December 27, 1996 was $19 million compared to $20
million at the end of 1995, and $25 million at the end of 1994.
9
% Increase (Decrease)
---------------------
(In thousands) 1996 1995 1994 1996/95 1995/94
- ------------------------ -------- -------- -------- ------- -------
Division Sales:
Industrial Equipment $154,866 $151,016 $136,995 3 10
Automotive Equipment 69,910 75,637 67,457 (8) 12
Contractor Equipment 124,392 118,818 121,478 5 (2)
Lubrication Equipment 42,588 40,843 34,083 4 20
-------- -------- -------- ------- -------
Consolidated $391,756 $386,314 $360,013 1 7
======== ======== ======== ======= =======
Geographic Sales:
Americas $252,615 $238,874 $241,169 6 (1)
Europe 78,666 82,552 65,888 (5) 25
Asia Pacific 60,475 64,888 52,956 (7) 23
-------- -------- -------- ------- -------
Consolidated $391,756 $386,314 $360,013 1 7
======== ======== ======== ======= =======
COST OF PRODUCTS SOLD
The cost of products sold, as a percentage of net sales, declined in 1996 to
50.0 percent from 50.9 percent in 1995. This decrease was the result of a
combination of factors, including modest price increases and improved
manufacturing efficiencies, partially offset by material and manufacturing cost
increases. In 1995, cost of products sold as a percent of net sales declined
from 51.7 percent in 1994, due to a combination of factors including modest
price increases.
OPERATING EXPENSES
Operating expenses in 1994 increased 8.41996 declined 1.0 percent from 1993,1995, due primarily
to continued investment in product development and ongoing restructuring
initiatives. Restructuring and work force reduction costs worldwide
accounted for approximately 50 percentthe impact of
the increase.
Product development expenses in 1994 increased 18 percent to $14,591,000 as
the Company added engineering personnel to achieve its goal of increasing
sales of new products.
Included in 1993lower selling and general and administrative expenses. The lower expense level
is also the result of lower non-recurring charges in 1996 when compared to 1995.
Operating expenses are
$1,700,000in 1995 declined 2.2 percent from 1994, due primarily to the
impact of non-recurringGraco's worldwide cost restructuring initiatives, and reduced
restructuring charges.
Product development expenses in 1996 increased 14.0 percent over 1995 to $17.9
million. In 1995, product development costs including costs forwere 7.7 percent higher than 1994
expenditures. These increases reflect Graco's commitment to expanding sales
through the relocationdevelopment of administrative and technical facilities in Japan.
10
Included in 1992 selling and general and administrative expenses were
$5,200,000 in costs associated with the relocation and consolidation of the
Company's Detroit-based operations, reductions in the U.S. sales force and
European operations, and other personnel reductions.new products.
FOREIGN CURRENCY EFFECTS
The costs of the Company's products are generally denominated in U.S. dollars,
with approximately 1711 percent sourced in non-U.S. currencies. A greater
proportion of its sales, approximately 3235 percent, isare denominated in currencies
other than the U.S. dollar. As a result, a weakeningstrengthening of the U.S. dollar
increasesdecreases sales more than costs and expenses, improvingreducing the Company's gross and
operating profits. A weakening of the U.S. dollar has the reverse impact on the
Company's gross and operating profits. During 1994 when compared to 1993,1996, the U.S. dollar was
generally stronger against other major currencies, and during 1995, the U.S.
dollar was generally weaker against other major currencies. In
1993 when compared to 1992, it was stronger.
The gainsGains and losses
that result from the translation ofattributable to translating the financial statements for all non-U.S.
subsidiaries, except Japan, and the gains and losses on the forward and option contracts used
to hedge these exposures, are included in Other (expense) income. For 1995, the translation gains or
losses included in Other (expense) income will include Japan.
In(expense).
The total the effect of theexchange rate changes in exchange rates on operating profits and theplus translation
gains and losses included in Other income (expense) decreased earnings before
income taxes by $2.7 million in 1996 when compared to 1995 and increased
earnings before income taxes by $2,300,000$3.5 million in 1994,1995 when compared to 1993,
and decreased earnings before income taxes by $4,500,000 in 1993, when
compared to 1992.1994.
OTHER INCOME (EXPENSE)
INCOME
The decrease inCompany's interest expense fell in 1994 reflects1996, primarily reflecting a reductiondecline in
the amountaverage levels of and interest rate on long-term debt. This decrease was offset by higher
floating rate borrowings used primarily to finance the Company's increased
working capital requirements and investments in plant and equipmentdebt during the year. Increased product demand accelerated previously scheduled
investmentsThis decrease in manufacturing equipment.debt levels is due
to the reduction in short-term debt as operating cash flows exceeded working
capital and capital investment requirements.
10
Other (expense) income of ($1,040,000), ($821,000)$0.5 million in 1996 and $1,293,000$0.7 million in 1995, and other
expenses of $1.0 million for 1994, 1993 and 1992, respectively, includes,include, among other things,
the exchangeforeign currency translation gains and losses discussed previously,above, a $1.5
million favorable settlement of an escrow dispute in 1996, and a $1,800,000$0.9 million
gain onfrom the sale of Lockwood Technical, Inc. (LTI)unutilized real estate in 1992.1995.
INCOME TAXES
The Company's net effective tax rate for 1994 was atof 31 percent in 1996 is four percentage
points lower than the 1996 U.S. federal tax rate of 35 percent. The increasedecrease
from the 3136 percent rate for 1993 results
principally from a non-recurring tax benefit received in 1993 associated
with the increase in value of deferred tax assets caused by1995 is due primarily to foreign earnings being
taxed at effective rates lower than the U.S. statutory tax rate change to 35 percent.from the utilization of prior
net operating losses. The effective tax rate of 3836 percent in 19921995 was higher
than the then U.S. federal1994 rate of 3435 percent withprincipally due to the difference resulting principally from state taxes and foreign
earnings taxed at rates higher than thereduced relative effect
of U.S. rate. Reconciliationbusiness tax credits. Detailed reconciliations of the U.S. federal tax
rate to the effective rates isfor 1996, 1995, and 1994 are discussed in Note D to
the Consolidated Financial Statements.
EARNINGS
BEFORE CHANGES IN ACCOUNTING PRINCIPLES
Earnings during 1994In 1996, earnings increased by 6131 percent to $15,326,000,$36.2 million, or $1.32$2.07 per share
as compared to 1993,1995, when earnings decreasedincreased by 1581 percent to $9,493,000,$27.7 million or
$.82$1.59 per share from 1992 before changes in accounting
principles.as compared to 1994.
ACCOUNTING CHANGES IN ACCOUNTING PRINCIPLES
The Company recorded one-time adjustments in 1992 for the cumulative effect
of its required adoption of Statementsadopted Statement of Financial Accounting Standards (SFAS)("SFAS") No.
106 (Employers' Accounting123, "Accounting for Postretirement Benefits Other
Than Pensions)Stock Based Compensation" in 1996. Refer to Notes A and No. 109 (Accounting for Income Taxes), as described in
Note AH
to the Consolidated Financial Statements.Statements for more detailed information.
OUTLOOK
The CompanyGraco anticipates higher sales in 1995 as the result of1997, driven primarily by continued new
product introductions, focus on specific industries, positivean improved worldwide distribution network, satisfactory
economic conditions in the Americas, improving conditions inNorth America and Europe, and continued
economicrobust growth in the Asia
Pacific region excluding Japan.
11
Theother than Japan, which remains stagnant.
Graco has undertaken a number of restructuring efforts undertaken in recent years that have
positioned the
Companyimproved operating margins and net profit. It is anticipated that these efforts
will continue to capitalizehave a favorable impact on future growth opportunities while benefiting from
overall lower operating expenses as a percent of sales.margins and profits in 1997. The
Company expects
its restructuring efforts to continue, however, at a lower level than 1994.
Full year gross profit margins are expectedis looking for additional opportunities to improve moderately in 1995,
as a result of manufacturing efficiencies and higher volumes, subject tooperating efficiency.
Currency fluctuations, especially the strength of the U.S. dollar (see Foreign Currency Effects). Operating
expenses asrelative to
other major currencies, may have an impact on operating margins. In 1997, Graco
anticipates a percenthigher effective tax rate.
SAFE HARBOR CAUTIONARY STATEMENT
This annual report on Form 10-K contains "forward-looking statements" about the
Company's expectations of salesthe future, which are expectedsubject to decrease, even thoughcertain risk factors
that could cause actual results to differ materially from those expectations.
These factors include economic conditions in the United States and other major
world economies, currency exchange fluctuations, and additional factors
identified in Exhibit 99 to the Company's Report on Form 10-K for fiscal year
1996.
11
SHAREHOLDER ACTIONS
Periodically, the Company will continue to fund its long-term strategic initiatives in
product development.
DIVIDEND ACTIONS
Over the last two years the Company has undertaken a number ofinitiates measures to
enhanceaimed at enhancing shareholder
value, broadenbroadening common stock ownership, improveimproving the liquidity of its common
shares, and distribute excesseffectively managing its cash balances:balances. A summary of recent actions
follows:
- A- a three-for-two stock split distributedpaid in 1994;1996;
- A special one-time dividend- repurchase of $2.70 per post-split share declared406,000 shares in 1993($31,224,000 in total);1996;
- A 10- a 17 percent increase in the regular dividend in 1993;1996;
- A- a 13 percent increase in the regular dividend in 1995;
- - a 14 percent increase in the regular dividend in 1994.
ASSETS
The following table highlights several key measures of asset performance.
($ in thousands) 1994 1993 1992
Cash, Cash Equivalents and Marketable Securities $ 2,444 $37,440 $38,186
Working Capital $54,405 $47,648 $84,828
Current Ratio 1.6 1.5 2.1(in thousands) 1996 1995
- ------------------------------------ ------- -------
Cash and Cash Equivalents $ 6,535 $ 1,643
Working Capital $63,884 $56,899
Current Ratio 1.8 1.8
Average Days Receivables Outstanding 75 73
Inventory Turnover 4.7 4.3
Average Days Receivables Outstanding 71 71 67
Inventory Turnover 4.3 4.0 3.3
Improved inventory management early in 1994 led to an increase in inventory
turns to 4.3balances decreased during 1996 when compared to 4.0 in 1993. However,1995; however,
year-end inventory balances
were 41 percent higher than 1993, principally due to new product
introductions, increased volume and additional inventory carried to support
customer service levels. Management is focusing its efforts to further
improve inventory turns in 1995.
Overall, 1994 collection performance was flat at 71 average days
receivables outstanding.$41.5 million. Accounts receivable increased 14.0
percent to $83.5 million. The 22 percent increase in accounts receivableis primarily due to $75,589,000, resulted primarily from increaseda combination of
factors, including higher fourth quarter sales
compared to 1993.consolidated sales.
LIABILITIES
At year-end,the end of 1996, the Company's long-term debt (including the current portion)portion
thereof) was 287.3 percent of total capital (long-term debt plus shareholders'
equity) compared to 2110.4 percent in 1993 and 181995. The Company's total debt (notes
payable to banks plus long-term debt including the current portion thereof) as a
percentage of capital fell to 9.8 percent at the end of 1996, down from 14.1
percent in 1992.1995. The Company had $19$66.7 million in unused credit lines available
at December 30, 1994. While the27, 1996. The Company believes that available credit lines plus operating
cash flows are adequate to fund the Company'sits short and long-term initiatives, additional credit lines
may be arranged from time to time as necessary.initiatives.
SHAREHOLDERS' EQUITY
Shareholders' equity totaled $81,851,000$126.1 million on December 30, 1994, $7,166,00027, 1996, $22.5 million
higher than 1993, but down from 1992, as the result of the Company's
decision to pay the special one-time dividend of $2.70 per share as
previously noted.1995.
CASH FLOWS FROM OPERATING ACTIVITIES
In 1994,During 1996, the Company's operating cash flow from operationsof $48.6 million was $8,587,000, substantially lessslightly
lower than net earnings. This is primarily the result of increased1995 due to changes in working capital requirements for inventory and accounts receivable.requirements. Cash flow from
operating activities in 19931995 was $23,116,000, $2,986,000 less$51.7 million, $43.1 million higher than the
$26,102,000$8.6 million recorded in 1992.
12
1994.
Cash flows from operating activities have been, and are expected to be, the
principal source of funds required for future additions to property, plant, and
equipment, and working capital, as well as for other corporate purposes.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $23,100,000$30.0 million in 1994, $16,178,0001996, $19.8 million in 19931995, and
$10,194,000$23.1 million in 1992.1994. These expenditures have enhanced the Company's
engineering and manufacturing capabilities, improved product quality, increased
capacity, and lowered costs. ExpendituresSubstantial expenditures in 1994 include1996 included the
construction of an 80,000 square foot addition to the Company's technical
centerDavid A. Koch Center located in Minneapolis,Rogers, Minnesota, and the
accelerationaddition of planned machinery
purchases.manufacturing equipment.
12
The Company expects to make approximately $25,000,000spend in excess of $20 million on capital investmentsimprovements in
1995: $15,000,000 for machinery1997. Capital expenditures in 1997 will include manufacturing equipment, and
equipment, $6,000,000
for the expansion of the Russell L. Gray Technical Centercellular manufacturing and $4,000,000
for manufacturing capacity expansion.
During 1994, the Company sold its marketable securities to fund the special
one-time dividend of $31,224,000 paid to shareholders on March 21, 1994.
The Company realized cash proceeds of $8,569,000 on its sale of LTI in
April 1992.information systems initiatives.
CASH FLOWS FROM FINANCING ACTIVITIES
The amount of common stock issued represents the funds received to purchasefor shares sold
through the Company's dividend reinvestment plan,Dividend Reinvestment Plan, its Employee Stock Purchase
Plan, and the distribution of shares pursuant to its Long Term Stock Incentive
Plan, more fully described in Note FH to the Consolidated Financial Statements.
Graco offers an Automatic Dividend Reinvestment Plan, which providesgives shareholders with a
simple and convenient way to reinvest quarterly cash dividends in additional
shares of Graco common stock. Brokerage and service charges are paid by the
Company.
All Graco employees in the U.S. participate in the Graco Employee Stock
Ownership Plan.Plan (ESOP). The final distribution of common shares from the ESOP
will be made to eligible U.S. employees in 1997. Eligible employees may also
purchase Graco common stock through the Company's Employee Stock Purchase Plan.
From time to time, the Company makesmay make open market purchases of its common
shares. These shares are available for issuance to satisfy grants under its
Long Term Stock Incentive Plan and other plans, as well as for other
corporate purposes. On February 25, 1994,23, 1996, the Company's Board of Directors authorized
management to repurchase up to 400,000 shares. As of December
31, 1994,800,000 shares for a period ending on February
28, 1998. In 1996, under this repurchase program, the Company had repurchased
253,400406,000 shares at an average price per share of $17.94.
The Company$19.99.
Graco is currently paying 1614 cents per share as its regular quarterly dividend.
Annual cash dividends paid on the Company's common and preferred stock, includingwere
$8.3 million in 1996, $7.5 million in 1995, and $37.7 million in 1994 (including
a special one-time dividend of $31,224,000$31.2 million paid on March 21, 1994, were $37,732,000 in 1994, $5,879,000 in 1993 and $5,484,000 in
1992.1994). The
Company expects to continue paying regular quarterly dividends to its common
shareholders at amounts which will be adjusted periodically to reflect earnings
and cash flow performance and management expectations.
In 1994,During 1996, debt increasedwas reduced by $21,444,000,$2.4 million. Debt was reduced by $27.1 million
in 1995, reflecting increasedstrong cash flows from operations attributable to higher net
income and lower working capital investment, primarily in inventory, receivables and capital
expenditures.requirements.
In 1995, the Company redeemed all of its 5 percent cumulative preferred stock
for approximately $1.5 million.
Item 8. Financial Statements and Supplementary Data
Page
-o Responsibility for Financial Reporting 14
-o Independent Auditors' Report 14
-o Consolidated Statements of Earnings for fiscal years 1996, 1995,
and 1994 1993 and 1992 15
-o Consolidated Statements of Changes in Shareholders' Equity Accounts
(See Footnote F, Notes to Consolidated Financial Statements) 22
-o Consolidated Balance Sheets for fiscal years 1994, 19931996 and 19921995 16
-o Consolidated Statements of Cash Flows for fiscal years 1996, 1995,
and 1994 1993 and 1992 17
-o Notes to Consolidated Financial Statements 18
-o Selected Quarterly Financial Data (See Part II, Item 5, Market
for the Company's Common Stock and Related Stockholder Matters) 8
13
Responsibility For Financial ReportingRESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the accuracy, consistency, and integrity of the
information presented in this annual report on Form 10-K. The consolidated
financial statements and financial statement schedulesschedule have been prepared in
accordance with generally accepted accounting principles and, where necessary,
include estimates based upon management's informed judgment.
In meeting this responsibility, management believes that its comprehensive
systems of internal control structure providescontrols provide reasonable assurance that the Company's
assets are safeguarded and transactions are executed and recorded by qualified
personnel in accordance with approved procedures. Internal auditors periodically
review the internalthese accounting and control structure.systems. Deloitte & Touche LLP, independent
certified public accountants, are retained to audit the consolidated financial
statements, and express an opinion thereon. Their opinion follows.is included below.
The Board of Directors pursues its oversight role through its Audit Committee.
The Audit Committee, composed of directors who are not employees, meets twice a
year with management, internal auditors, and Deloitte & Touche LLP to review the
systems of internal control, structure, accounting practices, financial reporting, and the
results of auditing activities.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Graco Inc.
Minneapolis, Minnesota
We have audited the accompanying Consolidated Balance Sheetsconsolidated balance sheets of Graco Inc. and
Subsidiaries (the "Company") as of December 30, 1994, December 31,
1993,27, 1996 and December 25, 1992,29, 1995, and
the related statements of earnings and cash flows for each of the three years in
the period ended December 30,
1994.27, 1996. Our audit also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statementsconsolidated financial statements present fairly, in all
material respects, the financial position of Graco Inc. and Subsidiaries as of
December 30, 1994, December 31, 1993,27, 1996 and December 25,
1992,29, 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 30, 1994,27,
1996 in conformity with generally accepted accounting principles. Also, onin our
opinion, such financial statement schedule, when considered in relation to the
basic Consolidated Financial Statementsconsolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the Consolidated Financial Statements, the
Company changed its method of accounting for income taxes and
postretirement health care benefits during the year ended December 25,
1992.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 7, 1995January 20, 1997
14
CONSOLIDATED STATEMENTS OF EARNINGS GRACO INC. & Subsidiaries
Years Ended
-----------
December 27, December 29, December 30, December 31, December 25,
(In thousands, except per share amounts) 1996 1995 1994
1993 1992- ---------------------------------------- ------------ ------------ ------------
Net Sales $360,013 $322,602 $320,334.................................................. $ 391,756 $ 386,314 $ 360,013
Cost of products sold .................................... 195,775 196,687 186,002
169,475 163,648------------ ------------ ------------
Gross Profit ............................................... 195,981 189,627 174,011 153,127 156,686
Product development ...................................... 17,909 15,715 14,591
12,382 10,616
Selling .................................................. 85,281 86,634 92,752 85,757 85,583
General and administrative ............................... 39,734 42,044 40,279
38,086 41,019------------ ------------ ------------
Operating Profit ........................................... 53,057 45,234 26,389 16,902 19,468
Interest expense ......................................... (831) (2,335) (1,923)
(2,288) (2,716)
Other (expense) income (expense), net .............................. 543 657 (1,040)
(821) 1,293------------ ------------ ------------
Earnings Beforebefore Income Taxes And
Changes In Accounting Principles............................... 52,769 43,556 23,426 13,793 18,045
Income taxes ............................................. 16,600 15,850 8,100
4,300 6,900
Earnings Before Changes In
Accounting Principles 15,326 9,493 11,145
Cumulative effect of change in accounting
principle relating to postretirement benefits - - (6,768)
Cumulative effect of change in accounting
principle relating to income taxes - - 924------------ ------------ ------------
Net Earnings ............................................... $ 36,169 $ 27,706 $ 15,326
$ 9,493 $ 5,301
Per Common Share Amounts:
Earnings before changes in accounting principles $ 1.32 $ .82 $ .97
Cumulative effect of change in accounting
principle relating to postretirement benefits - - (.60)
Cumulative effect of change in accounting
principle relating to income taxes - - .09============ ============ ============
Net Earnings Per Common Share .............................. $ 1.322.07 $ .821.59 $ .46.88
============ ============ ============
See Notes to Consolidated Financial Statements.Statements
15
CONSOLIDATED BALANCE SHEETS GRACO INC. & Subsidiaries
December 30,27, December 31, December 25,29,
(In thousands, except share amounts) 1994 1993 19921996 1995
- ------------------------------------ ------------ ------------
Assets
Current Assets:
Cash and cash equivalents .......................................................... $ 2,4446,535 $ 11,095 $ 18,869
Marketable securities 0 26,345 19,3171,643
Accounts receivable, less allowances of $4,700 $4,100,in 1996 and $4,500 75,589 62,178 61,195$4,800 in 1995........... 83,474 73,205
Inventories 50,529 35,719 49,871........................................................................ 41,531 41,693
Deferred income taxes, net 11,755 8,843 10,704......................................................... 11,633 10,608
Other current assets 3,628 3,079 1,985............................................................... 1,321 1,333
------------ ------------
Total current assets 143,945 147,259 161,941.............................................................. 144,494 128,482
Property, Plant Andand Equipment, Atat Cost:
Land 3,547 3,125 2,976............................................................................... 5,227 3,502
Buildings and improvements 46,777 41,526 38,733......................................................... 63,213 50,534
Manufacturing equipment 60,014 53,629 47,871............................................................ 82,544 71,437
Office, warehouse and automotive equipment 27,337 29,092 26,457......................................... 31,049 28,578
Construction in progress 7,489 2,504 773
145,164 129,876 116,810........................................................... 1,052 2,117
------------ ------------
Total property, plant and equipment, at cost ...................................... 183,085 156,168
Accumulated depreciation (75,124) (72,132) (65,772)
70,040 57,744 51,038........................................................... (88,913) (79,310)
------------ ------------
Net property, plant and equipment ................................................. 94,172 76,858
Other Assets 14,400 11,362 7,439
$228,385 $216,365 $220,418......................................................................... 9,148 12,493
$247,814 $217,833
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable to banks ............................................................. $ 11,6753,813 $ 3,234 $ 3,6155,051
Current portion of long-term debt 5,685 5,543 4,917.................................................. 1,845 1,935
Trade accounts payable 19,764 16,737 19,267............................................................. 13,854 13,849
Salaries, wages and commissions 13,433 12,115 13,292
Dividends payable 1,857 32,535 1,471.................................................... 14,808 14,260
Accrued insurance liabilities 9,918 8,783 7,850...................................................... 10,925 10,792
Income taxes payable 5,761 5,658 6,588............................................................... 4,647 4,229
Other current liabilities 21,447 15,006 20,113.......................................................... 30,718 21,467
------------ ------------
Total current liabilities 89,540 99,611 77,113
Long-Term......................................................... 80,610 71,583
Long-term Debt, less current portion 26,798 13,937 17,845................................................. 8,075 10,074
Retirement Benefits Andand Deferred Compensation 30,196 28,132 25,290........................................ 33,079 32,605
Commitments Andand Contingencies (Note H)J)
Shareholders' Equity
5% Cumulative Preferred Stock, $100 par value;
22,549 shares authorized; 14,740, 14,845
and 14,870 shares outstanding 1,474 1,485 1,487
Common stock, $1 par value; 15,000,00022,500,000 shares authorized;
11,377,004, 11,449,623 and
7,547,478 shares outstanding, 11,377 11,449 7,54717,047,166 and 17,264,509, in 1996
and 1995, respectively ............................................................ 17,047 17,265
Additional paid-in capital 18,289 19,813 18,569......................................................... 22,254 20,397
Retained earnings 50,702 42,430 73,697.................................................................. 85,232 64,949
Other, net 9 (492) (1,130)
81,851 74,685 100,170
$228,385 $216,365 $220,418......................................................................... 1,517 960
------------ ------------
Total shareholders' equity ........................................................ 126,050 103,571
------------ ------------
$247,814 $217,833
============ ============
See Notes to Consolidated Financial Statements.
16
CONSOLIDATED STATEMENTS OF CASH FLOWS GRACO INC. & Subsidiaries
Years Ended
--------------------------------------------------
December 27, December 29, December 30,
December 31, December 25,
(In thousands) 1996 1995 1994
1993 1992- --------------------------------------------------------------------------- ------------ ------------ ------------
Cash Flows Fromfrom Operating Activities:
Net earnings ............................................................ $ 36,169 $ 27,706 $ 15,326 $ 9,493 $ 5,301
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization ....................................... 12,658 11,082 10,447 9,292 8,629
Deferred income taxes ............................................... 781 1,938 (4,042) 827 (5,997)
Gain on sale of business - - (1,792)
Change in:
Accounts receivable ............................................... (10,192) 4,499 (10,806)
(730) 3,399
Inventories ....................................................... (394) 9,693 (13,967) 14,901 (2,889)
Trade accounts payable ............................................ 459 (6,193) 2,358
(3,226) (3,924)
Accrued salariesSalaries, wages and commissions ................................... 1,081 999 1,439 (749) 2,905
Retirement benefits and deferred compensation ..................... 928 2,448
1,670 2,481 13,558
Other accrued liabilities ......................................... 6,963 (3,417) 6,858
(4,782) 6,664
Other ............................................................. 148 2,955 (696)
(4,391) 248------------ ------------ ------------
48,601 51,710 8,587
23,116 26,102------------ ------------ ------------
Cash Flows Fromfrom Investing Activities:
Property, plant and equipment additions ................................. (30,038) (19,848) (23,100) (16,178) (10,194)
Proceeds from sale of property, plant and equipment ..................... 1,058 3,036 693 795 264
Proceeds from sale of business - - 8,569
Purchases of marketable securities ...................................... -- -- (5,464) (25,703) (20,504)
Proceeds from sales of marketable securities ............................ -- -- 31,809
18,675 1,187------------ ------------ ------------
(28,980) (16,812) 3,938
(22,411) (20,678)------------ ------------ ------------
Cash Flows Fromfrom Financing Activities:
Proceeds from short-term borrowingsBorrowing on notes payable and lines of credit........................... 15,890 44,248 10,411 15,098 19,163
Payments on short-term borrowingsnotes payable and lines of credit............................ (16,657) (50,927) (2,395) (15,567) (22,997)
Proceeds from long-term debt ............................................ -- -- 16,632 1,297 569
Payments on long-term debt .............................................. (1,652) (20,333) (5,380) (5,739) (4,407)
Common stock issued ..................................................... 2,525 2,485 3,102 3,390 2,524
Retirement of common and preferred stock ................................ (8,115) (1,547) (4,564) (1,750) (248)
Cash dividends paid ..................................................... (8,344) (7,490) (37,732)
(5,879) (5,484)------------ ------------ ------------
(16,353) (33,564) (19,926)
(9,150) (10,880)------------ ------------ ------------
Effect of exchange rate changes on cash ................................... 1,624 (2,135) (1,250)
671 347------------ ------------ ------------
Net decreaseincrease (decrease) in cash and cash equivalents ...................... 4,892 (801) (8,651) (7,774) (5,109)
Cash and cash equivalents
Beginning of year ....................................................... 1,643 2,444 11,095
18,869 23,978------------ ------------ ------------
End of year ............................................................. $ 6,535 $ 1,643 $ 2,444
$ 11,095 $ 18,869============ ============ ============
See Notes to Consolidated Financial Statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRACO INC. & Subsidiaries
Years Ended December 27, 1996, December 29, 1995, and December 30, 1994
December 31, 1993, and December 25, 1992
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR.Summary of Significant Accounting Policies
Fiscal Year. The Company's fiscal year is 52 or 53 weeks, ending on the last
Friday in December.
BASIS OF STATEMENT PRESENTATION.Basis of Statement Presentation. The Consolidated Financial Statements include
the accounts of the parent company and its subsidiaries after elimination of all
significant intercompany balances and transactions. As of December 30, 1994,27, 1996, all
subsidiaries are 100 percent owned. Subsidiaries outside North America have been
included principally on the basis of fiscal years ended November 30 to effect
more timely consolidated financial reporting. The U.S. dollar wasis the functional
currency for all foreign subsidiaries, except Graco K.K. (Japan), wheresubsidiaries.
Accounting Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the local currency wasreported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the functional currency.
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES.date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. All highly liquid investments with a maturity of
three months or less at the date of purchase are considered to be cash
equivalents.
Marketable securities
include debt securities of various maturities. Realized gains and losses
are computed based on the specific identified cost method. At December 31,
1993, the securities were reported at fair value. At December 25, 1992, the
securities were recorded at the lower of cost or market. Cost approximated
market at both December 31, 1993 and December 25, 1992.
INVENTORY VALUATION.Inventory Valuation. Inventories are stated at the lower of cost or market. The
last-in, first-out (LIFO) cost method is used for valuing all U.S. inventories.
Inventories of foreign subsidiaries are valued using the first-in, first-out
(FIFO) cost method.
CURRENCY HEDGES.Currenty Hedges. The Company periodically evaluates its monetary asset and
liability positions denominated in foreign currencies. Subsequently,
theThe Company enters into
forward contracts, borrowings in various currencies or options, in order to
hedge its net monetary positions. Consistent with financial reporting
requirements, these hedges and net monetary positions are marked to market.recorded at current
market values and the gains and losses are included in Other income (expense).
The Company believes it uses strong financial counterpartiescounterparts in these transactions
and that the resulting credit risk under these hedging strategies is not
significant. The notional amounts (which domay not representbe indictative of credit or
market risk) of such contracts were (in U.S. dollars) $9,086,000, $15,258,000,$9,322,000 and $16,709,000$10,226,000
at December 30, 1994, December 31, 1993,27, 1996 and December 25, 1992,29, 1995, respectively.
PROPERTY, PLANT AND EQUIPMENT.Property, Plant and Equipment. For financial reporting purposes, plant and
equipment are depreciated over their estimated useful lives, primarily by using
the straight-line method as follows: Buildings and improvements 10 to 4530 years
Leasehold improvements 3 to 10 years Manufacturing equipment and tooling 3 to 10
years Office, warehouse and automotive equipment 4equipment4 to 10 years
REVENUE RECOGNITION.Revenue Recognition. Revenue is recognized on large contracted systems using the
percentage-of-completion method of accounting. The Company recognizes revenue on
other products when title passes, which is usually upon shipment.
INCOME TAXES. Effective the beginning of 1992, the Company
adopted SFAS No. 109 (Accounting for Income Taxessee Note D). The Company
provides taxes on unremitted earnings of subsidiaries.
EARNINGS PER COMMON SHARE. On December 17, 1993, the Board of
Directors approved a three-for-two stock split, effected in the form of a
stock dividend, payable February 2, 1994, to shareholders of record on
January 5, 1994. All share and per share data has been restated to reflect
the split.Earnings Per Common Share. Earnings per common share are computed on earnings
reduced by dividend requirements on preferred stock and based upon the weighted
average number of common shares and common equivalent shares, consisting of the
dilutive effect of stock options outstanding during each year. Earnings per
common share assuming full dilution are substantially the same.
RETIREE HEALTH CARE BENEFITS. EffectiveStock Based Compensation. Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," was issued in October 1995
and requires companies to measure employee stock compensation plans based on the
beginningfair value method of 1992,accounting. However, the statement allows the alternative
of continued use of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," with pro forma disclosure of net
income and earnings per share determined as if the fair value method had been
applied in measuring compensation cost. The Company adopted SFAS No. 106 (Employers' Accounting for Postretirement
Benefits Other Than Pensions). This Statement requires123 in 1996
and elected the accrualcontinued use of postretirement benefit costs during the years an employee provides
services. The Company elected to charge the entire unfunded obligation of
$10,254,000APB No. 25.
18
($6,768,000 after tax), against earnings as of the beginning of 1992, as a
cumulative effect of a change in accounting principle. In addition, the
effect of this change decreased 1992 earnings before income taxes by
$848,000.
1992 SALE OF SUBSIDIARY. On April 24, 1992, the Company sold a
wholly owned subsidiary, Lockwood Technical, Inc., (LTI)B. Industry Segment and a related
Japanese joint venture affiliate (LTI-Graco K.K.). A gain on the sale of
$1,792,000 is reflected in 1992 results.
B. INDUSTRY SEGMENT AND FOREIGN OPERATIONSForeign Operations
The Company operates in one industry segment, namely, the design, manufacture,
marketing, sale and installation of systems and equipment for the management of
fluids.
The Company's operations by geographical area for the last three years are shown
below.
(In thousands) 1996 1995 1994
1993 1992- ----------------------------------------------------- --------- --------- ---------
Sales to unaffiliated customers:
Americas $241,169 $206,464 $187,724 $ 252,615 $ 238,874 $ 241,169
Europe 78,666 82,552 65,888
60,546 75,914Asia Pacific 60,475 64,888 52,956
55,592 56,696--------- --------- ---------
391,756 386,314 360,013 322,602 320,334
Intercompany sales between geographic area:areas:
Americas 54,615 56,703 51,939
38,902 43,957
Europe 57 32 14
3,798 3,073Asia Pacific 433 1,398 450
402 542
Eliminations (55,105) (58,133) (52,403)
(43,102) (47,572)--------- --------- ---------
Total sales $360,013 $322,602 $320,334$ 391,756 $ 386,314 $ 360,013
========= ========= =========
Operating profit:
Americas $ 71,909 $ 70,037 $ 62,650
$ 46,260 $ 41,950
Europe ( 5,463) ( 2,780) 1,8109,153 1,916 (5,463)
Asia Pacific 6,312 4,384 1,639
654 4,600
Eliminations ( 2,205) 1,627 2,0671,203 1,139 (2,205)
--------- --------- ---------
88,577 77,476 56,621 45,761 50,427
General corporate expenses and corporate initiatives (34,977) (31,585) (31,272) (29,680) (29,666)
Interest expense ( 1,923) ( 2,288) ( 2,716)(831) (2,335) (1,923)
--------- --------- ---------
Earnings before income taxes and
changes in accounting principles$ 52,769 $ 43,556 $ 23,426
$ 13,793 $ 18,045========= ========= =========
Assets:
Americas $163,201 $128,713 $129,219$ 180,467 $ 152,831 $ 163,201
Europe 40,938 46,618 50,503
30,737 34,829Asia Pacific 26,492 26,985 26,605
25,680 25,043
Corporate 6,536 1,643 2,444
37,440 38,186
Eliminations (6,619) (10,244) (14,368)
( 6,205) ( 6,859)--------- --------- ---------
Total assets $228,385 $216,365 $220,418$ 247,814 $ 217,833 $ 228,385
========= ========= =========
1 Included are U.S. export sales to unaffiliated customers of $27,989, $29,549,
and $23,408, $25,251,in 1996, 1995, and $18,675, in 1994, 1993, and 1992, respectively.
2 Transfers between entities are made at prices which allow appropriate markups
to the manufacturing and selling unit.
Net earnings (loss) for subsidiaries operating outside the U.S. were
$10,468,000, $12,506,000, and ($5,624,000), ($2,261,000), for 1996, 1995, and $6,608,000 for 1994, 1993, and 1992,
respectively.
Retained earnings for subsidiaries operating outside the U.S. were $8,860,000, $9,760,000,$8,872,000
and $9,908,000$4,373,000 for 1994, 1993,1996 and 1992,1995, respectively.
TransactionNet transaction and translation net gains or losses, included in Other income
(expense), net were ($617,000), $528,000, and $366,000 ($1,294,000),for 1996, 1995, and ($670,000) for 1994, 1993,
and 1992,
respectively.
19
C. INVENTORIESInventories
Major components of inventories for the last threetwo years were as follows:
(In thousands) 1994 1993 1992
Finished products and components $ 46,694 $ 42,010 $ 46,234
Products and components in various
stages of completion 24,826 21,410 27,700
Raw materials 13,918 8,642 10,315
85,438 72,062 84,249
Reduction to LIFO cost (34,909) (36,343) (34,378)
$ 50,529 $ 35,719 $ 49,871
(In thousands) 1996 1995
- ------------------------------------------------------- -------- --------
Finished products and components $ 38,707 $ 40,335
Products and components in various stages of completion 24,691 22,597
Raw materials 15,192 13,152
-------- --------
78,590 76,084
Reduction to LIFO cost (37,059) (34,391)
$ 41,531 $ 41,693
-------- --------
Inventories valued under the LIFO method were $32,743,000, $19,700,000,$26,303,000 and $30,309,000$23,783,000 for
1994, 1993,1996 and 1992,1995, respectively. The balance of theAll other inventory was valued on the FIFO method.
In 1993,1995, certain inventory quantities were reduced, resulting in liquidation of
LIFO inventory quantities carried at lower costs from prior years. The effect
was to increasedecrease net earnings in 1995 by approximately $900,000 in
1993.$100,000.
D. INCOME TAXES
The Company adopted SFAS No. 109 (Accounting for Income Taxes) as of the
beginning of 1992.Taxes
Earnings before income tax expense and changes in accounting principles consist of:
(In thousands) 1996 1995 1994
1993 1992- -------------- -------- -------- --------
Domestic $ 33,844 $ 27,247 $ 28,168
$ 13,796 $ 11,573
Foreign 18,925 16,309 (4,742)
(3) 6,472-------- -------- --------
Total $ 52,769 $ 43,556 $ 23,426
$ 13,793 $ 18,045======== ======== ========
Income tax expense before the cumulative effect of changes in accounting
principles, consists of:
(In thousands) 1996 1995 1994
1993 1992- --------------------- -------- -------- --------
Current:
Domestic:
Federal $ 9,38310,518 $ 1,5989,629 $ 4,9879,383
State and local 1,201 1,591 1,030
385 745
Foreign 4,638 3,479 2,596
1,551 2,833-------- -------- --------
16,357 14,699 13,009
3,534 8,565-------- -------- --------
Deferred:
Domestic (227) 227 (3,617)
(134) (2,117)
Foreign 470 924 (1,292)
900 452-------- -------- --------
243 1,151 (4,909)
766 (1,665)-------- -------- --------
Total $ 16,600 $ 15,850 $ 8,100
$ 4,300 $ 6,900======== ======== ========
Income taxes paid were $14,967,000, $16,019,000, and $12,136,000 $4,620,000,in 1996, 1995,
and $6,186,000 in 1994, 1993, and 1992, respectively.
20
A reconciliation between the U.S. federal statutory tax rate and the effective
tax rate is as follows:
1996 1995 1994
1993 1992---- ---- ----
Statutory tax rate 35% 35% 34%35%
Foreign earnings with (lower) higher tax rates (4) (1) 2 1 4
State taxes, net of federal effect 32 2 3
(Increase) in deferred tax assets from
statutory tax rate increase - (3) -
U.S. general business tax credits (3) (1) (1) (3)
Other (1) 1 (2)
(3) (2)---- ---- ----
Effective tax rate 31% 36% 35%
31% 38%==== ==== ====
20
Deferred income taxes are provided for all temporary differences between the
financial reporting and the tax basis of assets and liabilities. The deferred
tax assets (liabilities) resulting from these differences are as follows:
(In thousands) 1994 1993 19921996 1995
- ----------------------------------------------------------- -------- --------
Inventory valuations $ 4,6163,307 $ 3,004 $ 3,6733,726
Cost reductions and severance accruals 1,377 742 2,268922 1,115
Insurance accruals 3,232 2,876 2,2303,669 3,505
Vacation accruals 1,428 1,398 1,1991,417 1,378
Bad debt reserves 893 894 9791,281 961
Other 422 (71) 355
Valuation allowance (213) - -1,037 (77)
-------- --------
Current 11,755 8,843 10,70411,633 10,608
-------- --------
Unremitted earnings of consolidated foreign subsidiaries * (2,938) (4,141) (4,637) (3,800) (3,529)
Excess of tax over book depreciation (3,104) (2,845) (2,657)(4,906) (3,896)
Postretirement benefits 4,447 4,194 3,7754,891 4,653
Pension and deferred compensation 5,103 4,856 4,2915,352 5,666
Net operating loss carry forward 6,715 2,066 -carryforward 1,272 4,404
Other 407 895 308594 1,207
Valuation allowance (6,680) (2,740) -(1,995) (5,015)
-------- --------
Non-current 3,950 2,285 1,0801,408 3,490
-------- --------
Net deferred tax assets $15,705 $11,128 $11,784
*$ 13,041 $ 14,098
======== ========
1 Payable at the time these earnings are distributed to the parentparent.
Net non-current deferred tax assets above are included in other assets.Other Assets. Total
deferred tax assets were $22,506,000, $18,637,000$22,247,000 and $19,218,000,$23,040,000, and total deferred tax
liabilities were $6,801,000, $7,509,000,$9,206,000 and $7,434,000$8,942,000 on December 30, 1994, December 31, 199327, 1996 and December 25, 1992,29,
1995, respectively. A valuation allowance of $6,893,000$1,995,000 and $2,740,000$5,015,000, has been
recorded as of December 30, 199427, 1996 and December 31, 1993,29, 1995, respectively, primarily
related to the uncertainty of obtaining tax benefits for subsidiary operating
losses, which expire beginning in 1998 in Japan and in
later years for other subsidiaries.losses. The effect of these allowances has been considered in "Foreign earnings
with (lower) higher tax rates" in the Company's tax rate reconciliation.
21
E. DEBT
Long-term debt consists of the following:Debt
(In thousands) 1994 1993 19921996 1995
- ---------------------------------------------------------------------------------------- ------- -------
Term debt, 6.53%, payable in equal
annual installments through 1995 $ 4,000 $ 8,000 $12,000
Term debt, 5.70%5.05% at December 30, 1994,27, 1996, payable in equal annual installments through 1997 900 1,200 1,500$ 300 $ 600
Industrial development refunding revenue bonds, 4.65% at December 30, 1994,27, 1996,
payable through 2002 (property carried at $3,219$3,056 pledged as collateral) 5,000 5,500 6,000
Revolving credit agreement, 7% at December 30,1994,
payable September 30, 1996 14,850 - -4,000 4,500
Obligations related to low incomelow-income housing investments 4,534 2,867 -3,205 4,063
Other 3,199 1,913 3,2622,415 2,846
------- -------
Total long-term debt 32,483 19,480 22,7629,920 12,009
Less current portion: 5,685 5,543 4,917portion 1,845 1,935
------- -------
Long-term portion $26,798 $13,937 $17,845$ 8,075 $10,074
======= =======
Aggregate annual scheduled maturities of long-term debt for the next five years
are as follows: 1995, $5,685,000; 1996, $16,744,000; 1997,
$1,886,000; 1998, $1,803,000; 1999, $2,763,000.1997-$1,845,000; 1998-$1,796,000; 1999-$3,295,000;
2000-$1,123,000; 2001-$1,310,000. Interest paid on debt during 1994, 1993,1996, 1995, and
19921994 amounted to $1,923,000, $3,230,000,$841,000, $2,179,000, and $1,910,000,$1,923,000, respectively. The fair
value of the Company's long-term debt at December 30, 1994, December 31, 199327, 1996 and December 25, 1992,29,
1995, is not materially different than its recorded value.
During 1992, theThe Company entered intohas an interest rate swap agreement in place whereby it fixed the
interest rate of the remaining principal amounts of the Company's previously
variable interest rate revenue bond debt at 4.65 percent through 1997, at which
time the debt will revert back to a variable interest rate. The cash flows
related to the swap agreement are recorded as income when received and expense
when paid. Market and credit risk are not significant.
21
On December 30, 1994,27, 1996, the Company had lines of credit with U.S. and foreign
banks of $44,280,000,$70,379,000, including a $15,000,000$25,000,000 revolving credit agreement. The
unused portion of these credit lines was $18,993,000$66,666,000 at December 30,
1994.27, 1996.
Borrowing rates under these facilities vary with the prime rate, rates on
domestic certificates of deposit, and the London interbank market. During the years ended December 30, 1994, December 31, 1993 and December
25, 1992, the Company'sThe weighted
average short termshort-term borrowing rates were 4.8 percent, 10.33.6 percent and 11.52.2 percent, at December 27,
1996 and December 29, 1995, respectively. The Company pays commitment fees of up
to 3/16 percent per annum on the daily average unused amounts on certain of
these lines. No compensating balances are required.
The Company is in compliance with the covenants of its debt agreements. Under
the most restrictive terms of the agreements, approximately $7,378,000$19,710,000 of
retained earnings were available for payment of cash dividends at December 30, 1994.27,
1996.
F. SHAREHOLDERS' EQUITYShareholders' Equity
Changes in shareholders' equity accounts are as follows:
(In thousands) 1996 1995 1994
- -------------------------- --------- --------- ---------
Preferred Stock
Balance, beginning of year $ -- $ 1,474 $ 1,485
Shares repurchased -- (1,474) (11)
--------- --------- ---------
Balance, end of year -- -- 1,474
--------- --------- ---------
Common Stock
Balance, beginning of year 17,265 11,377 11,449
Stock split -- 5,754 --
Shares issued 188 143 188
Shares repurchased (406) (9) (260)
--------- --------- ---------
Balance, end of year 17,047 17,265 11,377
--------- --------- ---------
Additional Paid-In Capital
Balance, beginning of year 20,397 18,289 19,813
Shares issued 2,337 2,342 2,914
Shares repurchased (480) (234) (4,438)
--------- --------- ---------
Balance, end of year 22,254 20,397 18,289
--------- --------- ---------
Retained Earnings
Balance, beginning of year 64,949 50,702 42,430
Net income 36,169 27,706 15,326
Cash dividends declared (8,657) (7,705) (7,054)
Stock split -- (5,754) --
Shares repurchased (7,229) -- --
--------- --------- ---------
Balance, end of year 85,232 64,949 50,702
--------- --------- ---------
Other, Net
Balance, end of year 1,517 960 9
--------- --------- ---------
Total Shareholders' Equity $ 126,050 $ 103,571 $ 81,851
========= ========= =========
At December 27, 1996, the Company had 22,549 authorized, but not issued,
cumulative preferred shares. The holdersCompany also has authorized, but not issued, a
separate class of 3,000,000 shares of preferred stock, $1 par value.
During 1995, the Company redeemed all 14,740 outstanding shares of cumulative
preferred stock areat the call price of $105 per share plus accrued and unpaid
dividends. Prior to the redemption, the holders of the cumulative preferred
stock were entitled to fixed cumulative dividends of 5 percent per annum on the
par value before cash dividends may
bewere paid or declared on common stock.
The preferred stock may be redeemed at
the option of the Company at $105 per share plus accrued and unpaid
dividends. Preferred stockholders are entitled to $105 per share in the
event of voluntary liquidation of the Company or $100 per share for
involuntary liquidation, plus all accrued and unpaid dividends. All
required dividends have been paid.
The Company has authorized, but not issued, a separate class of 3,000,000
shares of preferred stock, $1 par value.
22
The Company has a leveraged Employee Stock Ownership Plan (ESOP) under
which outstanding debt was $900,000, $1,200,000 and $1,500,000 at December
30, 1994, December 31, 1993 and December 25, 1992, respectively. This is
also the remaining balance of a concurrent loan to the ESOP Trust from the
Company on the same terms. The Company's loan is included in long-term debt
with the receivable from the ESOP in a like amount recorded as a reduction
of shareholders' equity reflected in the Other, net category. The Company
is obligated to make annual contributions to the ESOP Trust through 1997
sufficient to repay the loan and interest thereon.
On May 3, 1994, the shareholders approved a Nonemployee Director Stock Plan
which enables individual nonemployee directors of the Company to elect to
receive all or part of a director's annual retainer in the form of shares
of the Company's common stock instead of cash.
On December 17, 1993, the Board of Directors approved a three-for-two stock split on December 15,
1995, effected in the form of a 50 percent stock dividend payable February 2, 19947,
1996, to shareholders of record on January 5, 1994.3, 1996. Accordingly, December 31,
199329,
1995 balances reflect the split with an increase in common stock and a
reduction
in retained earnings of $3,817,000.$5,754,000. All stock option, share, and per share data
havehas been restated to reflect the split. On December 17,
1993, the Board of Directors also approved a special one-time dividend of
$2.70 per common share to be paid March 21, 1994, on post-split shares to
shareholders of record on March 7, 1994. Dividends payable at December 31,
1993, reflect the special one-time dividend.
Under the Company's Employee Stock Purchase Plan, 2,100,000 common shares
have been authorized for sale to employees, 434,546 of which remained
unissued at the end of 1994. The purchase price of the shares under the
Plan is the lesser of 85 percent of the fair market value on the first day
or the last day of the Plan year.
The Company maintains a Plan in which one preferred share purchase right (Right)
exists for each common share of the Company. Each Right will entitle its holder
to purchase one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $80, subject to adjustment. The Rights
are exercisable only if a person or group acquires beneficial ownership of 20
percent or more of the Company's outstanding common stock. The Rights expire in
March 2000 and may be redeemed earlier by the Board of Directors for $.01 per
Right.
G. Employee Stock Ownership Plan
The Company has a leveraged Employee Stock Ownership Plan (ESOP) under which
outstanding debt was $300,000 and $600,000, at December 27, 1996 and December
29, 1995, respectively. This is also the remaining balance of a concurrent loan
to the ESOP Trust from the Company on the same terms. The Company's loan is
included in long-term debt with the receivable from the ESOP in a like amount
recorded as a reduction of shareholders' equity reflected in the Other, net
category. The Company is obligated to make annual contributions to the ESOP
Trust through 1997 sufficient to repay the loan and interest thereon.
H. Stock Option and Purchase Plans
Stock Option Plans. The Company has a Long Term Stock Incentive Plan, under
which a total of 1,650,0003,475,000 common shares have been reserved for issuance, with
790,8122,129,047 shares remaining reserved at December 30, 1994.27, 1996. Grants under this Plan
are in the form of restrictive share awards and stock options. Restrictive share
awards of 398,406597,609 common shares have been made to certain key employees under
the Plan, with 62,316 shares restricted for disposition,
such restrictions lapsing fromin 1997. Compensation cost charged to
operations for the restricted share awards was $256,000, $319,000, and $361,000
in 1996, 1995, to 1997. Unearned compensation expense
relating to the remaining restricted shares is $745,000 at December 30,and 1994, and is included as a reduction of shareholders' equity in the Other,
net category.respectively. Stock options for 801,6221,419,603 common shares
have also been granted under the Plan. The option price is the market price at
the date of grant. Options become exercisable at such time and in such
installments as set by the Company, and expire in five to ten years from the date of grant.
In 1993,1996, the shareholders approved a Nonemployee Director Stock Option Plan,
under which the Company granted Stock Appreciation Rights (SARs)makes initial and annual grants to certain
key employees, utilizing a portionthe nonemployee
directors of the above options. UponCompany. There are 200,000 common shares authorized for
issuance under the Plan, 182,000 of which remained reserved at the end of 1996.
Nonemployee directors receive an initial option grant of 2,000 shares upon first
appointment or election and an annual option grant of 1,500 shares. The exercise
price of the SARs, the employee will surrender the unexercised relatedeach option and
will receive a cash payment equal to the excess ofis the fair market value at the timedate of exercisegrant. The options
have a ten-year duration and may be exercised in equal installments over four
years, beginning one year from the pricedate of the related option. Compensation
expense related to the SARs is not significant.
23
Shares and optionsgrant.
Options on common shares granted and exercisable,outstanding, as well as the weighted
average exercise price, are shown below:
Weighted Average
Shares Exercise Price
------- ------
Outstanding, December 31, 1993 399,209 $10.43
Granted 387,555 13.06
Exercised (78,315) 9.37
Canceled (23,906) 10.17
------- ------
Outstanding, December 30, 1994 684,543 12.00
Granted 147,144 18.90
Exercised (38,985) 8.94
Canceled (88,839) 11.49
------- ------
Outstanding, December 29, 1995 703,863 13.70
Granted 70,026 19.65
Exercised (29,120) 12.03
Canceled (36,241) 12.14
------- ------
Outstanding, December 27, 1996 708,528 $14.34
======= ======
23
The number of stock options exercisable was 232,729, 139,242, and 110,774 at
December 27, 1996, December 29, 1995, and December 30, 1994, respectively. These
stock options had a weighted average exercise price per share of $11.96, $11.43,
and $10.24 at December 27, 1996, December 29, 1995, and December 30, 1994,
respectively.
Stock Purchase Plans. Under the Company's Employee Stock Purchase Plan,
3,900,000 common shares have been authorized for sale to employees, 1,064,568 of
which remained unissued at the end of 1996. The purchase price of the shares
under the Plan is the lesser of 85 percent of the fair market value on the first
day or the last day of the Plan year.
In 1994, the shareholders approved a Nonemployee Director Stock Plan which
enables individual nonemployee directors of the Company to elect to receive all
or part of a director's annual retainer in the form of shares of the Company's
common stock instead of cash. The company issued 1,521 and 485 shares under this
plan during 1996 and 1995, respectively. No shares were issued during 1994. The
expense related to this plan is not significant.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for the last three years inEmployee Stock
Purchase Plan and stock options granted under the table below:
NUMBER OF SHARES
Option Price
Reserved Granted Exercisable Per Share
Balance at December 27, 1991 249,060 250,080 238,830 $ 5.22 - 14.45
Reserved 750,000 - - -
Granted - 157,020 25,470 5.22 - 17.67
Exercised (84,729) (84,729) (84,729) 5.22 - 17.67
Canceled 27,947 (4,950) (4,950) 12.67 - 17.75
Balance at December 25, 1992 942,278 317,421 174,621 11.59 - 16.09
Granted - 82,800 25,875 15.50 - 19.92
Exercised (130,632) (130,632) (130,632) 11.59 - 18.92
Canceled 23,322 (3,450) 4,950 12.67 - 17.75
Balance at December 31, 1993 834,968 266,139 74,814 11.59 - 19.92
Granted - 258,370 53,835 11.50 - 22.63
Exercised (52,210) (52,210) (52,210) 11.58 - 18.92
Canceled 8,054 (15,937) (2,590) 11.58 - 18.92
Balance at December 30, 1994 790,812 456,362 73,849 $11.50 - 22.63
The changes in shareholders' equity accounts are as follows:
(In thousands) 1994 1993 1992
Preferred stock
Balance, beginning of year $ 1,485 $ 1,487 $ 1,493
Shares repurchased (11) (2) (6)
Balance, end of year 1,474 1,485 1,487
Common stock
Balance, beginning of year 11,449 7,547 7,446
Stock split - 3,817 -
Shares issued 188 157 120
Shares repurchased (260) (72) (19)
Balance, end of year 11,377 11,449 7,547
Additional paid-in capital
Balance, beginning of year 19,813 18,569 16,633
Shares issued 2,914 3,198 2,404
Shares repurchased (4,438) (1,954) (468)
Balance, end of year 18,289 19,813 18,569
Retained earnings
Balance, beginning of year 42,430 73,697 74,048
Net Income 15,326 9,493 5,301
Cash Dividends (7,054) (36,943) (5,652)
Stock split - (3,817) -
Balance, end of year 50,702 42,430 73,697
Cumulative translation adjustment
Balance, end of year 1,654 1,958 2,368
Other, net
Balance, end of year (1,645) (2,450) (3,498)
Total Shareholders' Equity $ 81,851 $ 74,685 $100,170
24
G. RETIREMENT BENEFITSLong Term Incentive Plan and
the Nonemployee Director Stock Option Plan. Compensation cost for these plans
determined on the basis of fair value pursuant to SFAS No. 123 is not
significant.
I. Retirement Benefits
The Company has a defined contribution plan, under Section 401(k) of the
Internal Revenue Code, which provides additional retirement benefits to all U.S.
employees who elect to participate. Currently, the Company matches employee
contributions at a 50 percent rate, up to 3 percent of the employee's
compensation. Employer contributions were $841,000, $852,000 and $850,000 in
1996, 1995, and 1994, $819,000 in 1993, and $813,000 in 1992.respectively.
The Company has non-contributorynoncontributory defined benefit pension plans covering
substantially all U.S. employees and directors and most of the employees of the
Company's non-U.S. subsidiairies. For the U.S. plans, the benefits are based on
years of service and the highest five consecutive years' earnings in the ten
years preceding retirement. The Company funds these plans annually in amounts
consistent with minimum funding requirements and maximum tax deduction limits
and invests primarily in common stocks and bonds.bonds, including the Company's common
stock. The market value of the plans' investment in the common stock of the
Company was $11,070,000 and $9,188,000 at December 27, 1996 and December 29,
1995, respectively. The expenses for these plans consist of the following
components:
(In thousands) 1996 1995 1994
1993 1992- ----------------------------------------------------- -------- -------- --------
Service cost - benefits earned during the period $ 2,4992,366 $ 2,2442,385 $ 2,3892,499
Interest cost on projected benefit obligation 4,699 4,561 4,301 4,115 3,917
Actual return on assets (12,228) (12,774) 579 (11,736) (1,325)
Net amortization and deferral 6,254 7,879 (5,583) 7,354 (2,688)
Cost of pension plans which are not significant
and have not adopted SFAS No. 87 171 65 312
190 289-------- -------- --------
Net periodic pension cost $ 1,262 $ 2,116 $ 2,108
$ 2,167 $ 2,582======== ======== ========
24
The plans' funded status of the Company's plans and the amounts recognized in the Company's financial
statements are:are summarized below:
1996 1995
-------------------------------- --------------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
(In thousands) 1994 1993 1992Benefits Exceed Assets Benefits Exceed Assets
- ----------------------------------- ------------- ------------- ------------- -------------
Actuarial present value:
Vested benefit obligation $ 49,42955,688 $ 43,4924,340 $ 33,85051,266 $ 5,444
Accumulated benefit obligation $ 54,88460,609 $ 48,6444,772 $ 37,60356,461 $ 5,947
============= ============= ============= =============
Projected benefit obligation $ 66,09367,921 $ 60,1446,258 $ 52,72464,240 $ 7,437
Plan assets at fair value 55,057 57,151 46,520
Funded status (11,036) (2,993) (6,204)76,797 -- 66,182 --
------------- ------------- ------------- -------------
Projected benefit obligation (in
excess of) less than plan assets 8,876 (6,258) 1,942 (7,437)
Unrecognized net gain (3,787) (10,910) (5,989)(gain) loss (18,553) 43 (11,263) 656
Unrecognized net (asset) liability
being amortized 204 249 265(128) 144 (142) 255
Adjustment required to recognize
minimum liability (1,192) (467) (269)-- (327) -- (473)
------------- ------------- ------------- -------------
Accrued pension cost ($ 15,811)9,805) ($ 14,121)6,398) ($ 12,197)9,463) ($ 6,999)
============= ============= ============= =============
Major assumptions at year-end:
1996 1995 1994
1993 1992---------- ---------- ----------
Discount rate 4 - 7 1/2%7% 4 - 7 1/2% 67% 4 - 87 1/2%
Rate of increase in future compensation levels 32 1/2 - 7% 2 1/2 - 7% 3 - 7% 4 - 8%
Expected long-term rate of return on plan assets 9% 9% 9%
---------- ---------- ----------
In addition to providing pension benefits, the Company pays part of the health
insurance costs for its retired U.S. employees and their dependents.
The cost ofCompany's retiree health benefit expense for 1994, 19931996, 1995, and 19921994 was as
follows:
(In thousands) 1994 1993 1992
Service cost $ 503 $ 454 $ 345
Interest cost 947 976 851
Net benefit expense $1,450 $1,430 $1,196
25
(In thousands) 1996 1995 1994
- ------------------- ------- ------- -------
Service cost $ 457 $ 496 $ 503
Interest cost 924 890 947
------- ------- -------
Net benefit expense $ 1,381 $ 1,386 $ 1,450
======= ======= =======
The Company's policy is to fund these benefits on a pay-as-you-go basis. The
actuarial present value of these health benefit obligations and the amount
recognized in the Consolidated Balance Sheetsconsolidated balance sheets were as follows:
(In thousands) 1994 1993 1992
Accumulated postretirement benefit obligation
Retirees and beneficiaries ($ 5,502) ($ 5,387) ($ 4,756)
Fully eligible active plan participants (2,168) (2,010) (2,070)
Other active plan participants (6,104) (6,090) (4,141)
Accumulated benefit obligations (13,774) (13,487) (10,967)
Unrecognized net (gain) loss 1,069 1,504 (135)
Accrued postretirement benefit cost ($ 12,705) ($ 11,983) ($ 11,102)
(In thousands) 1996 1995
- ---------------------------------------------- ---------- ----------
Accumulated postretirement benefit obligation:
Retirees and beneficiaries ($ 6,000) ($ 4,684)
Fully eligible active plan participants (2,531) (2,657)
Other active plan participants (5,738) (6,067)
---------- ----------
Accumulated benefit obligations (14,269) (13,408)
Unrecognized net loss 415 114
---------- ----------
Accrued postretirement benefit cost ($ 13,854) ($ 13,294)
========== ==========
The Company's retirement medical benefit plan limits the annual cost increase
that will be paid by the Company. Actuarial computations shown
above haveIn measuring the Accumulated Postretirement
Benefit Obligation (APBO), a 6 percent maximum annual trend rate for healthcare
costs was assumed for the maximum cost increase.year ending December 27, 1996. This rate is assumed to
remain constant through the year 2001, decline by 1/2 percent for each of the
following three years to 4.5 percent and remain at that level thereafter. The
discount rate assumption at year-end for 1996, 1995, and 1994 1993was 7.0 percent,
7.0 percent, and 1992 was 7.5 percent, 7.5respectively. If
25
the assumed healthcare cost trend rate changed by 1 percent, the APBO as of
December 27, 1996 would change by 14.4 percent. The effect of a 1 percent change
in the cost trend rate on the service and 8.5 percent,
respectively.
H. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS:interest cost components of the net
periodic postretirement benefits expense would be a change of 16.5 percent.
J. Commitments and Contingencies
Lease Commitments. Aggregate annual rental commitments at December 30, 1994,27, 1996,
under operating leases with noncancelable terms of more than one year, were
$10,970,000,$7,031,000, payable as follows:
Vehicles &
(In thousands) Buildings Equipment Total
1995 $ 2,587 $ 899 $ 3,486
1996 2,249 342 2,591
1997 1,764 118 1,882
1998 1,580 43 1,623
1999 733 7 740
Thereafter 648 0 648
$ 9,561 $ 1,409 $10,970
Vehicles &
(In thousands) Buildings Equipment Total
- -------------- --------- ---------- -------
1997 $ 1,993 $ 751 $ 2,744
1998 1,630 434 2,064
1999 844 187 1,031
2000 492 66 558
2001 182 15 197
Thereafter 437 -- 437
--------- ---------- -------
$ 5,578 $ 1,453 $ 7,031
========= ========== =======
Total rental expense was $3,815,000 for 1996, $4,722,000 for 1995, and
$4,103,000 for 1994, $4,276,000 for 1993, and
$3,646,000 for 1992.
CONTINGENCIES:
On June 29, 1993, the U.S. District Court for the Southern District of
Texas ruled that Binks Manufacturing1994.
Contingencies. The Company of Franklin Park, Illinois
deliberately infringed the patent covering Graco Inc.'s Glutton pumps. The
court awarded compensatory damages, treble damages and attorneys' feesis party to Graco Inc., plus prejudgement interest, in a total amount of $2,750,000.
Because Binks Manufacturing Company has appealed the decision, the Company
will not recognize this awardvarious legal proceedings arising in the
normal course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's consolidated results
of operations or its financial statements until the appeal
reaches an appropriate state of resolution.position.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
26
PART III
Part III, Items 10, 11, 12 and 13, except for certain information relating to
Executive Officers included in Part I, is omitted as the Company intends to file
with the Securities and Exchange Commission within 120 days of the close of the
fiscal year ended December 30, 1994,27, 1996, a definitive proxy statement containing
such information pursuant to Regulation 14A of the Securities Exchange Act of
1934 and such information shall be deemed to be incorporated herein by reference
from the date of filing such document.
The Company knows of no contractual arrangements which may, at a subsequent
date, result in a change in control of the Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules,Schedule, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements See Part II
(2) Financial Statement Schedule Page
- Schedule II - Valuation and Qualifying Accounts 28Accounts..................28
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the Consolidated Financial Statements or Notes thereto.
(3) Management Contract, Compensatory Plan or Arrangement.
(See Exhibit Index) 30Index.).....................................................30
Those entries marked by an asterisk are Management Contracts,
Compensatory Plans or Arrangements.Arrangements
(b) Reports on Form 8-K
There were no reports on Form 8-K for the fourteenthirteen
weeks ended December 30, 1994.27, 1996.
(c) Exhibit Index. 30Index............................................................30
27
Schedule II - Valuation and Qualifying Accounts
GRACO INC. & Subsidiaries
(In thousands)
Additions
Balance at charged to Deductions
beginning costs and from Balance at
Description of year expenses reserves end of year
---------- ---------- ---------- -----------
Year ended December 27, 1996:
Allowance for doubtful accounts $ 2,800 $ 900 $ 1,300 $ 2,400
Allowance for obsolete and overstock inventory 5,900 2,500 3,300 5,100
Allowance for returns and credits 2,000 4,100 3,800 2,300
Valuation allowance for tax benefits 5,020 -- 3,025 1,995
------- ------- -------- -------
$15,720 $ 7,500 $ 11,425 $11,795
======= ======= ======== =======
Year ended December 29, 1995:
Allowance for doubtful accounts $ 2,700 $ 700 $ 600 $ 2,800
Allowance for obsolete and overstock inventory 6,400 1,400 1,900 5,900
Allowance for returns and credits 2,000 3,400 3,400 2,000
Valuation allowance for tax benefits 6,900 -- 1,880 5,020
------- ------- -------- -------
$18,000 $ 5,500 $ 7,780 $15,720
======= ======= ======== =======
Year ended December 30, 1994:
Allowance for doubtful accounts $ 2,200 $ 1,200 $ 700 $ 2,700
Allowance for obsolete and overstock inventory 5,500 3,100 2,200 6,400
Allowance for returns and credits 1,900 2,000 1,900 2,000
Valuation allowance for tax benefits 2,740 4,160 -- 6,900
------- ------- -------- -------
$12,340 $10,460 $ 4,800 $18,000
Year ended December 31, 1993:
Allowance for doubtful accounts $ 2,700 $ 500 $ 1,000======= ======= ======== =======
$ 2,200
Allowance for obsolete and overstock inventory 6,100 1,300 1,900 5,500
Allowance for returns and credits 1,800 1,900 1,800 1,900
Valuation allowance for tax benefits 2,740 2,740
$10,600 $ 6,440 $ 4,700 $12,340
Year ended December 25, 1992:
Allowance for doubtful accounts $ 2,800 $ 500 $ 600 $ 2,700
Allowance for obsolete and overstock inventory 6,000 1,700 1,600 6,100
Allowance for returns and credits 1,800 1,700 1,700 1,800
$10,600 $ 3,900 $ 3,900 $10,600
1Accounts1 Accounts determined to be uncollectible and charged against reserve, net of
collections on accounts previously chargedagainstcharged against reserves.
2Items2 Items scrapped or otherwise disposed of during the year.
3Credits3 Credits issued and returns processed, related to prior years.
28
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
\David A. Koch/s/GEORGE ARISTIDES March 20, 1995
David A. Koch
Chairman19, 1997
------------------------------------- --------------
George Aristides
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
\David M. Lowe/s/GEORGE ARISTIDES March 20, 1995
David M. Lowe19, 1997
------------------------------------- --------------
George Aristides
President and Chief Executive Officer
(Principal Executive Officer)
/s/MARK W. SHEAHAN March 19, 1997
------------------------------------- --------------
Mark W. Sheahan
Treasurer
(Principal Financial Officer)
\James/s/JAMES A. GranerGRANER March 20, 199519, 1997
------------------------------------- --------------
James A. Graner
Vice President and Controller
(Principal Accounting Officer)
D. A. Koch Director, Chairman and Chief Executive Officerof the Board
G. Aristides Director, President and Chief OperatingExecutive Officer
R. O. Baukol Director
J. W. Lacey Director
J. R. LeeD. McFarland Director
L. R. Mitau Director
R. D. McFarlandM. A.M. Morfitt Director
D. R. Olseth Director
C. M. Osborne Director
W. G. C. PlanchonVan Dyke Director
C. B. Thompson Director
David A. Koch,George Aristides, by signing his name hereto, does hereby sign this document on
behalf of himself and each of the above named directors of the Registrant
pursuant to powers of attorney duly executed by such persons.
\David A. Koch/s/GEORGE ARISTIDES March 20, 1995
David A. Koch19, 1997
------------------------------------- --------------
George Aristides
(For himself and as attorney-in-fact)
29
Exhibit Index
Exhibit
Number Description
------- ------------------------------------------------------------
3.1 Restated Articles of Incorporation. See also Exhibit 4.4. (Incorporated by reference to Exhibit 3.1 to the
Company's 1993 Annual Report on Form 10-K.)4.3.
3.2 Restated Bylaws. (Incorporated by reference to Exhibit 2 to
the Company's Report on Form 8-K dated January 12, 1988.)
3.3 Bylaws Amendment. (Incorporated by reference to Exhibit 1 to
the Company's Report on Form 8-K dated March 1, 1990.)
4.1 Credit Agreement dated October 1, 1990, between the Company
and First Bank National Association. (Incorporated by
reference to Exhibit 5 to the Company's Report on Form 10-
Q10-Q
for the thirty-nine weeks ended September 28, 1990.)
4.2 Amendment 1 dated June 12, 1992, to Credit Agreement dated
October 1, 1990, between the Company and First Bank National
Association; and Amendment 2 dated December 31, 1992, to the
same Agreement. (Incorporated by reference to Exhibit 1 to
the Company's Report on Form 8-K dated March 11, 1993.)
Amendment 3 dated November 8, 1993, and Amendment 4, dated
February 8, 1994. (Incorporated by reference to Exhibit 4.2
to the Company's 1993 Annual Report on Form 10-
K.10-K.) 4.3 Loan AgreementAmendment
5, dated November 24, 1993, betweenApril 10, 1995. (Incorporated by reference to
Exhibit 4.2 to the Company and Metropolitan Life Insurance Company, as amendedCompany's 1995 Annual Report on January 13, 1994.Form
10-K.) Amendment 6, dated September 27, 1996. (Incorporated
by reference to Exhibit 4 to the Company's Report on Form
10-Q for the thirty-nine weeks ended September 27, 1996.)
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of
certain instruments defining the rights of holders of
certain long-term debt of the Company and its subsidiaries
are not filed as exhibits because the amount of debt
authorized under any such instrument does not exceed 10
percent of the total assets of the Company and in lieu thereof, theits
subsidiaries. The Company agrees to furnish copies thereof
to the Securities and Exchange Commission upon request.
4.44.3 Rights Agreement dated as of March 9, 1990, between the
Company and Norwest Bank Minnesota, National Association, as
Rights Agent, including as Exhibit A the form of the
Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Shares. (Incorporated by
reference to Exhibit 1 to the Company's Report on Form 8-K
dated March 19.19, 1990.)
*10.1 19941996 Corporate and Business Unit Annual Bonus Plan.
(Incorporated by reference to Exhibit 210.1 to the Company's
Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.June 28,
1996.)
*10.2 Deferred Compensation Plan Restated, effective December 1,
1992. (Incorporated by reference to Exhibit 2 to the
Company's Report on Form 8-K dated March 11, 1993.)
*10.3 Executive Deferred Compensation Agreement. Form of
supplementary agreement entered into by the Company which
provides a retirement benefit to executive officers, as
amended by Amendment 1, effective September 1, 1990.
(Incorporated by reference to Exhibit 3 to the Company's
Report on Form 8-K dated March 11, 1993.)
*10.4 Chairman's Award Plan. (Incorporated by reference to Exhibit
3 to the Company's Report on Form 8-K dated March 7, 1988.)
30
*10.5 Executive Long Term Incentive Agreements. Form of restricted
stock award agreement used for awards to executive officers.
(Incorporated by reference to Attachment B to Item 5 to the
Company's Report on Form 10-Q for the thirteen weeks ended
March 29, 1991.) Form of restricted stock award agreement
used for awards to Chairman. (Incorporated by reference to
Attachment A to Item 5 to the Company's Report on Form 10-Q
for the twenty-six weeks ended June 28, 1991.)
30
*10.6 Executive Long Term Incentive Agreement. Form of agreement
used for restricted stock awards to two new officers.
(Incorporated by reference to Attachment B to Company's
Report on Form 10-Q for the thirteen weeks ended March 27,
1992.)
*10.7 Executive Long Term Incentive Agreement. Form of agreement
used for one year restricted stock award to one officer.
(Incorporated by reference to Exhibit 2 to Company's Report
on Form 10-Q for the twenty-six weeks ended June 25, 1993.)
*10.8 Long Term Stock Incentive Plan as amended. (Incorporated by
reference to Attachment CExhibit 10.2 to the Company's Report on Form
10-
Q10-Q for the thirteentwenty-six weeks ended March 27, 1992.June 28, 1996.)
*10.9 Retirement Plan for Non-Employee Directors. (Incorporated by
reference to Attachment C to Item 5 to the Company's Report
on Form 10-Q for the thirteen weeks ended March 29, 1991.)
*10.10 Deferred Compensation Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 2 to the Company's
Report on Form 8-K dated March 7, 1988.)
*10.11 Restoration Plan, restating Excess Benefit Plan, effective
as of July 1, 1988. (Incorporated by reference to Exhibit 1
to the Company's Report on Form 10-Q for the thirteen weeks
ended March 26, 1993.)
*10.12 Stock Option Agreement. Form of agreement used for incentive
stock option/alternative stock appreciation right award to
selected officers, dated February 25, 1993. (Incorporated by
reference to Exhibit 10.14 to the Company's 1993 Annual
Report on Form 10-K.)
*10.13 Stock Option Agreement. Form of agreement used for
non-incentive stock option/alternative stock appreciation
right award to selected officers, dated May 4, 1993.
(Incorporated by reference to Exhibit 10.15 to the Company's
1993 Annual Report on Form 10-K.)
*10.14 Nonemployee Director Stock Plan (Incorporated by reference
to Exhibit 110.1 to the Company's Report on Form 10-Q for the
twenty-six weeks ended July 1, 1994.)
*10.15 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated May
2, 1994. (Incorporated by reference to Exhibit 310.3 to the
Company's Report on Form 10-Q for the twenty-six weeks ended
July 1, 1994.)
*10.16 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to selected officers, dated
December 15, 1994, December 27, 1994 and February 23, 1995.
(Incorporated by reference to Exhibit 10.16 to the Company's
1994 Annual Report on Form 10-K.)
*10.17 Separation and Supplemental Retirement AgreementStock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated
March 1, 1995. (Incorporated by reference to Exhibit 10 to
the Company's Report on Form 10-Q for the thirteen weeks
ended March 31, 1995.)
*10.18 Stock Option Agreement. Form of agreement used for award of
non-incentive stock option to one executive officer, dated
December 15, 1995. (Incorporated by reference to Exhibit
10.18 to the Company's 1995 Annual Report on Form 10-K.)
31
*10.19 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated
March 1, 1996. (Incorporated by reference to Exhibit 10.19
to the Company's 1995 Annual Report on Form 10-K.)
*10.20 Salary protection arrangement with one executive officer.
(Incorporated by reference to Exhibit 10.20 to the Company's
1995 Annual Report on Form 10-K.)
*10.21 Form of salary protection arrangement between Barry A. Calhoon and the Company
and executive officers. (Incorporated by reference to
Exhibit 10.21 the Company's 1995 Annual Report on form
10-K.)
*10.22 Nonemployee Director Stock Option Plan. (Incorporated by
reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the twenty-six weeks ended June 28, 1996.)
*10.23 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee directors, dated
January 3,
1995.May 7, 1996. (Incorporated by reference to Exhibit 10.4 to
the Company's Report on Form 10-Q for the twenty-six weeks
ended June 28, 1996.)
*10.24 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated
February 28, 1997.
*10.25 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from incentive stock option agreement dated February
25, 1993, for selected officers.
*10.26 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from non-incentive stock option agreement dated May 4,
1993, for selected officers.
11 Statement of Computation of Earnings per share included
herein on page 32.33.
21 Subsidiaries of the Registrant included herein on page 33.34.
23 Independent Auditor's Consent included herein on page 33.34.
24 Power of Attorney included herein on page 34.35.
27 Financial Data Schedule (EDGAR filing only).
99 Cautionary Statement Regarding Forward-Looking Statements.
*Management Contracts, Compensatory Plans or Arrangements.
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