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 June 28, 1996
Commission File Number: 1-9249
GRACO INC.
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(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
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(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
----- -----
17,261,240 common shares were outstanding as of July 26, 1996.
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 Financial Condition and
Results of Operations 7-8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
1996 Corporate and Business Unit Annual Bonus Plan Exhibit 10.1
Long Term Stock Incentive Plan, as amended through
May 7, 1996 Exhibit 10.2
Nonemployee Director Stock Option Plan Exhibit 10.3
Form of agreement used for award of nonstatutory stock
options to nonemployee directors, dated May 7, 1996 Exhibit 10.4
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule Exhibit 27
2
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
June 28, 1996 June 30, 1995 June 28, 1996 June 30,1995
------------- ------------- ------------- ------------
(In thousands except per share amounts)
Net Sales ....................................... $ 97,099 $ 103,402 $ 187,252 $ 198,929
Cost of products sold .......................... 47,677 51,987 92,993 100,987
--------- --------- --------- ---------
Gross Profit .................................... 49,422 51,415 94,259 97,942
Product development ............................ 4,623 3,941 8,852 7,862
Selling ........................................ 21,240 22,068 41,090 43,758
General and administrative ..................... 10,005 10,982 21,680 22,082
--------- --------- --------- ---------
Operating Profit ................................ 13,554 14,424 22,637 24,240
Interest expense ............................... 345 745 577 1,429
Other (income) expense, net .................... (1,323) (53) (757) 343
--------- --------- --------- ---------
Earnings Before Income Taxes .................... 14,532 13,732 22,817 22,468
Income taxes ................................... 4,500 5,200 7,200 8,500
--------- --------- --------- ---------
Net Earnings .................................... $ 10,032 $ 8,532 $ 15,617 $ 13,968
========= ========= ========= =========
Net Earnings Per Common and
Common Equivalent Share ........................ $ .57 $ .49 $ .89 $ .80
========= ========= ========= =========
Cash Dividend Per Common Share .................. $ .12 $ .11 $ .24 $ .22
========= ========= ========= =========
See notes to consolidated financial statements.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 28, 1996 December 29, 1995
------------- -----------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents ................................................ $ 2,340 $ 1,643
Accounts receivable, less allowances
of $5,036 and $4,856 .................................................. 74,357 73,205
Inventories .............................................................. 47,024 41,693
Deferred income taxes .................................................... 10,634 10,608
Other current assets ..................................................... 2,019 1,333
--------- ---------
Total current assets ............................................... 136,374 128,482
Property, Plant and Equipment:
Cost ..................................................................... 165,026 156,168
Accumulated depreciation ................................................. (85,175) (79,310)
--------- ---------
79,851 76,858
Other Assets ................................................................... 11,264 12,493
--------- ---------
$ 227,489 $ 217,833
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks ................................................... $ 5,734 $ 5,051
Current portion of long-term debt ........................................ 1,865 1,935
Trade accounts payable ................................................... 12,490 13,849
Dividends payable ........................................................ 2,071 2,072
Income taxes payable ..................................................... 3,612 4,229
Other current liabilities ................................................ 45,763 44,447
--------- ---------
Total current liabilities .......................................... 71,535 71,583
Long-term Debt, less current portion ........................................... 9,117 10,074
Retirement Benefits and Deferred Compensation .................................. 32,971 32,605
Shareholders' Equity:
Common stock ............................................................. 17,261 17,265
Additional paid-in capital ............................................... 19,170 20,397
Retained earnings ........................................................ 76,346 64,949
Other, net ............................................................... 1,089 960
--------- ---------
113,866 103,571
--------- ---------
$ 227,489 $ 217,833
========= =========
See notes to consolidated financial statements.
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Six Weeks
----------------
June 28, 1996 June 30, 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net Earnings ............................................................................... $ 15,617 $ 13,968
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization ........................................................ 6,563 6,381
Deferred income taxes ................................................................ 841 321
Change in:
Accounts receivable ................................................................ (3,358) (2,623)
Inventories ........................................................................ (5,779) (1,542)
Trade accounts payable ............................................................. (1,025) (2,125)
Retirement benefits and deferred
compensation ...................................................................... 628 1,950
Other accrued liabilities .......................................................... 4,096 (5,438)
Other .............................................................................. (3,084) (121)
-------- --------
14,499 10,771
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions ................................................. (9,600) (11,189)
Proceeds from sale of property, plant,
and equipment ........................................................................ 6 260
-------- --------
(9,594) (10,929)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable and lines of credit .......................................... 2,907 92,331
Payments on notes payable and lines of credit ........................................... (1,901) (89,041)
Borrowing on long-term debt ............................................................. 9,892 --
Payments on long-term debt .............................................................. (10,778) (410)
Common stock issued ..................................................................... 2,309 2,157
Retirement of common and preferred stock ................................................ (3,540) 0
Cash dividends paid ..................................................................... (4,221) (3,765)
-------- --------
(5,331) 1,272
-------- --------
Effect of exchange rate changes on cash .................................................... 1,123 (2,421)
-------- --------
Net increase (decrease) in cash and cash equivalents ....................................... 697 (1,307)
Cash and cash equivalents:
Beginning of year ....................................................................... 1,643 2,444
-------- --------
End of period ........................................................................... $ 2,340 $ 1,137
======== ========
See notes to consolidated financial statements
5
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the
Company) as of June 28, 1996 and the related statements of earnings and
cash flows for the twenty-six weeks ended June 28, 1996, and June 30,
1995, 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. and Subsidiaries as of June 28, 1996, 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 1995 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 (in thousands):
June 28, 1996 Dec 29, 1995
------------- ------------
Finished products and components ......... $ 45,081 $ 40,335
Products and components in various
stages of completion ................. 25,691 22,597
Raw materials ............................ 11,858 13,152
-------- --------
82,630 76,084
Reduction to LIFO cost ................... (35,606) (34,391)
-------- --------
$ 47,024 $ 41,693
======== ========
6
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- - ---------------------
Net earnings of $10.0 million for the quarter ended June 28, 1996 increased $1.5
million, or 18 percent, over the same period last year. Net earnings of $15.6
million for the six months ended June 28, 1996 increased $1.6 million, or 12
percent, over the first six months of 1995. The earnings improvement came
primarily as a result of reduced operating expenses, a $1.5 million pretax
settlement of a lawsuit involving an escrow deposit dating back to 1986, lower
interest expense resulting from lower debt balances, and a lower effective tax
rate, partially offset by a decrease in sales.
Sales for the quarter of $97.1 million were $6.3 million, or 6 percent, lower
than the second quarter of 1995. Year-to-date sales of $187.3 million were $11.7
million, or 6 percent, lower than 1995. The decline in sales can be attributed
primarily to economic softness in the European markets and currency
fluctuations.
Sales in the Americas were at the 1995 level for the quarter at $64.0 million
and slightly lower than the 1995 six month level at $125.8 million. European
sales continue to lag behind last year with quarterly and year-to-date sales of
$17.0 million and $32.8 million, respectively. Europe's second quarter sales
performance is 19 percent lower than the same period of 1995 (a 16 percent
volume decrease, and a 3 percent loss due to exchange rates) and is 12 percent
lower than 1995 for the first six months (entirely a volume decrease). In Asia
Pacific, sales decreased 13 percent from last year's second quarter to $16.1
million (a 3 percent volume decrease, and a 10 percent loss due to exchange
rates). For the six month period ended June 28, 1996, Asia Pacific sales of
$28.6 million were 12 percent lower than 1995 (a 6 percent volume decrease and a
6 percent loss due to exchange rates).
Worldwide, Industrial/Automotive Equipment sales declined 11 percent to $52.6
million from last year's second quarter of $59.4 million, Contractor Equipment
sales declined 1 percent to $33.2 million from $33.6 million, and Lubrication
Equipment sales increased 9 percent to $11.3 million from $10.4 million. For
1996's first six months, Industrial/Automotive Equipment sales of $99.9 million
were 11 percent lower than the same period last year, Contractor Equipment sales
of $66.0 million were 1 percent lower, and Lubrication Equipment sales of $21.3
million were 6 percent higher. The Company believes that increased levels of
automotive activity should provide opportunities for top line growth in the
second half of the year.
The gross profit margin percentage for the quarter increased 1 percentage point
over a year ago to 51 percent. The year-to-date gross profit margin of 50
percent is also 1 percentage point over last year. The improvement in gross
profit margins is due to manufacturing efficiencies, favorable product sourcing
in Japan, pricing and product mix.
Operating expenses of $35.9 million for the quarter and $71.6 million for the
first six months are both 3 percent lower than the same periods last year. While
investments in product development increased substantially, close control of
selling and general and administrative costs have kept operating expenses below
1995 levels.
7
Interest expense of $0.3 million is $0.4 million, or 54 percent, lower than the
second quarter of 1995. Year-to-date interest expense of $0.6 million is $0.9
million, or 60 percent lower. The decreases in interest expense result from
lower debt balances at June 28, 1996 as compared to June 30, 1995.
The effective tax rates for the quarter and for the six month period are 31.0
percent and 31.5 percent, respectively. These rates are lower than 1995's
quarterly and six month effective rates of 37.9 percent and 37.8 percent,
respectively. The decline in the effective tax rate in 1996 results from lower
effective tax rates on foreign earnings.
Liquidity and Capital Resources
- - -------------------------------
The Company generated cash from operations of $14.5 million for the first six
months of 1996 as compared to $10.8 million for the same period last year.
Significant uses of cash include purchases of property, plant and equipment,
payments of cash dividends and repurchases of common stock. Working capital
increased $7.9 million, or 14 percent, to $64.8 million at June 28, 1996 from
$56.9 million at December 29, 1995. The Company plans on spending approximately
$17.0 million in 1996 for the construction of a 325,000 square foot world-class
manufacturing facility and global distribution center in Rogers, Minnesota
(approximately 20 miles northwest of Minneapolis). This expenditure will be
funded primarily with cash generated through operations. The Company has unused
lines of credit available at June 28, 1996 totaling $70.2 million.
8
PART II
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on May 7, 1996, David A. Koch,
Richard D. McFarland, Lee R. Mitau, and Martha A. M. Morfitt were elected to the
Office of Director with the following votes:
FOR WITHHELD
---------- --------
David A. Koch 15,160,399 124,918
Richard D. McFarland 15,247,269 38,048
Lee R. Mitau 15,157,343 127,974
Martha A. M. Morfitt 15,251,335 33,982
At the same meeting, the following matters were also voted upon with the votes
as indicated:
An amendment to the Employee Stock Purchase Plan to authorize the sale of an
additional 750,000 common shares pursuant to the Plan was approved, with the
following votes:
For Against Abstentions Broker Non-Vote
--- ------- ----------- ---------------
12,947,200 1,446,348 53,841 837,928
An amendment to the Long Term Stock Incentive Plan to authorize the issuance of
an additional 1,000,000 common shares pursuant to the Plan was approved, with
the following votes:
For Against Abstentions Broker Non-Vote
--- ------- ----------- ---------------
12,042,788 2,138,843 64,260 1,239,426
The Graco Inc. Nonemployee Director Stock Option Plan was approved, with the
following votes:
For Against Abstentions Broker Non-Vote
--- ------- ----------- ---------------
13,387,592 750,522 107,777 1,039,426
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
--- ------- ----------- ---------------
15,186,565 27,721 71,031 0
No other matters were voted on at the meeting.
9
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1996 Corporate and Business Unit
Annual Bonus Plan Exhibit 10.1
Long Term Stock Incentive Plan, as Exhibit 10.2
amended through May 7, 1996
Nonemployee Director Stock Option Plan Exhibit 10.3
Form of Agreement used for award of Exhibit 10.4
nonstatutory stock options to nonemployee
directors, dated May 7, 1996
Statement on Computation Exhibit 11
of Per Share Earnings
Financial Data Schedule Exhibit 27
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
10
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 9, 1996 By:/S/James A. Graner
---------------------------
James A. Graner
Vice President & Controller
("duly authorized officer")
Date: August 9, 1996 By:/S/David M. Lowe
----------------------------
David M. Lowe
Treasurer
(Principal Financial Officer)
11