UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 1, 1994
Commission File Number: 1-9249
GRACO INC
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
(State of incorporation) (I.R.S. Employer Identification Number)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
(Address of principal executive offices) Zip Code)
(612) 623-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
11,629,204 common shares were outstanding as of July 1, 1994.
GRACO INC. AND SUBSIDIARIES
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 7
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote 8
of Security Holders
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
Nonemployee Director Stock Plan Exhibit 10.1
1994 Corporate and Business Unit Annual Bonus Plan Exhibit 10.2
Stock Option Agreement (Non-ISO) Exhibit 10.3
Computation of Net Earnings per Common Share Exhibit 11
2
PART I
GRACO INC. AND SUBSIDIARIES
Item 1 CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 1, 1994 June 25, 1993 July 1, 1994 June 25, 1993
(In thousands except per share amounts)
Net sales $94,179 $79,415 $175,109 $157,226
Cost of products sold 49,952 40,094 92,446 81,696
Gross profit 44,227 39,321 82,663 75,530
Product development 3,566 2,865 7,122 5,642
Selling 22,789 20,791 45,088 40,231
General and administrative 10,659 9,306 20,147 18,456
Operating profit 7,213 6,359 10,306 11,201
Interest expense 480 537 848 1,143
Other expense, net 138 158 177 272
Earnings before income taxes 6,595 5,664 9,281 9,786
Income taxes 2,400 1,550 3,250 3,100
Net earnings $4,195 $4,114 $6,031 $6,686
Net earnings per common share $0.36 $0.36 $0.52 $0.59
Cash dividend per common share $0.14 $0.13 $0.28 $0.25
See notes to consolidated financial statements.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 1, 1994 December 31, 1993
ASSETS (Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $2,577 $11,095
Marketable securities 0 26,345
Accounts receivable, less allowancces of 74,833 62,178
$4,700 and $4,100
Inventories 48,874 35,719
Deferred income taxes 9,542 8,843
Other current assets 4,037 3,079
Total current assets 139,863 147,259
Property, plant and equipment:
Cost 135,915 129,876
Less accumulated depreciation (75,475) (72,132)
60,440 57,744
Other assets 10,986 11,362
$211,289 $216,365
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $20,066 $3,234
Current portion of long-term debt 5,606 5,543
Trade accounts payable 18,860 16,737
Dividends payable 1,628 32,535
Income taxes payable 4,481 5,658
Other current liabilities 37,503 35,904
Total current liabilities 88,144 99,611
Long-term debt, less current portion above 13,544 13,937
Retirement benefits and deferred compensation 29,312 28,132
Shareholders' equity:
Preferred stock 1,474 1,485
Common stock 11,629 11,449
Additional paid-in capital 22,268 19,813
Retained earnings 44,875 42,430
Other, net 43 (492)
80,289 74,685
$211,289 $216,365
See notes to consolidated financial statements.
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Six Weeks Ended
July 1, 1994 June 26, 1993
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net earnings $6,031 $6,686
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,157 4,860
Deferred income taxes (549) 257
Change in:
Accounts receivable (11,644) 3,552
Inventories (12,868) 3,989
Trade accounts payable 1,895 (5,066)
Accrued salaries (872) (1,211)
Retirement benefits and deferred compensation 1,025 2,028
Other accrued liabilities 1,097 (7,829)
Other (831) (3,327)
(11,559) 3,939
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (7,659) (6,023)
Proceeds from sale of property, plant, and equipment 169 626
Purchases of marketable securities (5,464) (7,512)
Proceeds from marketable securities 31,809 5,806
18,855 (7,103)
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable, net change 16,643 (2,807)
Payments on long-term debt (332) (192)
Common stock issued 2,774 2,378
Retirement of common and preferred stock (5) (1,750)
Cash dividends paid (34,493) (2,919)
(15,413) (5,290)
Effect of exchange rate changes on cash (401) 170
Net decrease in cash and cash equivalents (8,518) (8,284)
Cash and cash equivalents:
Beginning of year 11,095 18,869
End of period $2,577 $10,585
See notes to consolidated financial statements.
5
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of July 1, 1994, the consolidated
statements of earnings for the twenty-six weeks ended July 1, 1994, and
June 25, 1993, and the consolidated statements of cash flows for the twenty-
six weeks then ended have been prepared by the Company without being
audited.
In the opinion of management, these consolidated statements reflect all
adjustments necessary to present fairly the financial position of Graco
Inc. at July 1, 1994, and June 25, 1993, and the results of operations
and cash flows for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Therefore, these statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 1993 Form 10-K.
The results of operations for interim periods are not necessarily indicative
of results which will be realized for the full fiscal year.
2. Major components of inventories were as follows:
July 1, 1994 Dec. 31,1993
(In thousands)
Finished products and components $47,017 $42,010
Products and components in
various stages of completion 28,455 21,410
Raw Materials 10,195 8,642
Reduction to LIFO cost (36,793) (36,343)
$48,874 $35,719
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Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Net earnings in the second quarter of $4,195,000 increased $81,000 from the same
period a year ago as higher operating earnings were nearly offset by a higher
tax rate. Net earnings of $6,031,000 for the first half of 1994 were $655,000
below 1993 as increased sales, up 11 percent over 1993, were more than offset by
a lower gross margin rate and higher expenses.
Sales in the second quarter of $94,179,000 increased $14,764,000, or 19 percent,
from the same period in 1993. Second quarter sales in the Americas increased 27
percent overall to $66,424,000. Contractor Equipment sales increased 33
percent, Lubrication Equipment sales were up 24 percent and
Industrial/Automotive Equipment rose 21 percent, with new product sales and an
expanding economy driving the increases. Sales in Europe were up 7 percent to
$15,072,000 (a 12 percent volume increase, offset 5 percent due to exchange
rates). In the Pacific, sales were down 4 percent to $12,683,000 (a 9 percent
volume decline, and a gain of 5 percent on exchange rates).
Sales for the six months were $175,109,000, an 11 percent increase over the same
period last year. In the Americas, sales increased 20 percent to $125,108,000.
European sales were down 1 percent to $27,125,000 (a volume increase of 4
percent, offset by a 5 percent exchange rate loss). Sales in the Pacific
decreased 9 percent to $22,876,000 (a 14 percent volume decline and a 5 percent
exchange rate gain.)
Gross profit margins decreased during the second quarter 1994 to 47 percent of
sales from 50 percent for the same period in 1993, primarily due to an increased
volume of lower-margin, large engineered systems.
Operating expenses in the second quarter of $37,014,000 increased $4,052,000, or
12 percent, from the second quarter of 1993. Product development expense
increased 24 percent over 1993, as previously announced spending increases
continued. Selling expenses were up 10 percent, while general and
administrative expenses were up 15 percent. Approximately half of the increase
in selling and general and administrative expense is attributable to costs
associated with the Company's ongoing cost reduction efforts. Operating
expenses for the six months increased $8,028,000, or 12 percent.
Because of operating losses at certain of its foreign subsidiaries for which no
tax benefit has been recorded, Graco has increased its expected annual tax rate
for 1994 to 35 percent, resulting in a 36 percent tax rate for the second
quarter.
For the second quarter, overall bookings were up 17 percent. Bookings were very
strong in the Americas, up modestly in Europe, and down in the Pacific. Backlog
at July 1, 1994 was $30 million, down $3 million from the beginning of the
quarter, but an increase of $7 million from $23 million on June 25, 1993.
The Company expects continued strong performance in the Americas and improved
performance in Europe as the economies there continue to strengthen. The
Pacific, and Japan in particular, remain weak. The Company is encouraged by the
increase in its bookings. It intends to continue making investments in
manufacturing efficiency and new product development, and is striving for a more
efficient global sales and marketing organization to improve its financial
performance.
Financial Condition
Accounts receivable increased $11,644,000 from the prior year-end due to the
increased sales volume, and inventories increased $12,868,000 primarily in the
Minneapolis production areas and in Europe. Property, plant and equipment
totaling $7,659,000 was purchased year-to-date. Marketable securities were sold
to fund the special one-time dividend of $31,200,000 which was paid in March of
this year.
The Company has unused lines of credit available at July 1, 1994, totaling $28
million.
7
PART II
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 3, 1994, George
Aristides, Ronald O. Baukol, Joe R. Lee and Gerard C. Planchon were
elected to the Office of Director with the following votes:
For Withheld
George Aristides 9,673,251 64,396
Ronald O. Baukol 9,674,586 63,061
Joe R. Lee 9,675,011 62,635
Gerard C. Planchon 9,671,077 66,570
At the same meeting, the Graco Inc. Nonemployee Director Stock Plan was
presented for approval. The plan allows nonemployee members of the
Board of Directors to receive, in lieu of cash, part or all of their
annual cash retainer in Graco Common Stock. The plan was approved,
with the following votes:
For Against Abstentions Broker Non-Vote
9,594,427 110,380 32,840 0
At the same meeting, the selection of Deloitte & Touche as independent
auditors for the current year was approved and ratified, with the
following votes:
For Against Abstentions Broker Non-Vote
9,706,530 17,371 13,746 0
No other matters were voted on at the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Nonemployee Director Stock Plan Exhibit 10.1
1994 Corporate and Business Exhibit 10.2
Unit Annual Bonus Plan
Stock Option Agreement. Form Exhibit 10.3
of Agreement used for award of
non-incentive stock options to
executive officers
Statement on Computation Exhibit 11
of Per Share Earnings
(b) No reports on Form 8-K have been
filed during the quarter for which this
report is filed.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRACO INC.
Date: August 8, 1994 By: /s/ David A. Koch
David A. Koch
Chairman and Chief Executive Officer
Date: August 5, 1994 By: /s/ Robert A. Wagner
Robert A. Wagner
Vice President and Treasurer
(Principal Financial Officer)
9