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 September 27, 1996
Commission File Number: 1-9249
GRACO INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
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(State of incorporation) (I.R.S. Employer Identification Number)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
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(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
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17,099,116 common shares were outstanding as of October 25, 1996.
GRACO INC. AND SUBSIDIARIES
INDEX
Page Number
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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 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
Sixth Amendment dated September 27, 1996
to Credit Agreement between the Company and
First Bank National Association Exhibit 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 Thirty-Nine Weeks Ended
-------------------- -----------------------
Sept. 27, 1996 Sept. 29, 1995 Sept. 27, 1996 Sept. 29, 1995
-------------- -------------- -------------- --------------
(In thousands except per share amounts)
Net sales ..................................... $ 97,680 $ 94,797 $ 284,932 $ 293,726
Cost of products sold ................... 47,704 48,510 140,697 149,497
--------- --------- --------- ---------
Gross profit .................................. 49,976 46,287 144,235 144,229
Product development ..................... 4,714 3,557 13,566 11,419
Selling ................................. 21,624 21,982 62,714 65,740
General and administrative .............. 8,316 10,263 29,996 32,345
--------- --------- --------- ---------
Operating profit .............................. 15,322 10,485 37,959 34,725
Interest expense ........................ 155 596 732 2,025
Other expense, net ...................... 310 220 (447) 563
--------- --------- --------- ---------
Earnings before income taxes .................. 14,857 9,669 37,674 32,137
Income taxes ............................ 4,700 3,100 11,900 11,600
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Net earnings .................................. $ 10,157 $ 6,569 $ 25,774 $ 20,537
========= ========= ========= =========
Net earnings per common and
common equivalent share ................. $ .58 $ .37 $ 1.47 $ 1.18
========= ========= ========= =========
Cash dividend declared per
common share ............................ $ .12 $ .11 $ .36 $ .32
========= ========= ========= =========
See notes to consolidated financial statements.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 27, 1996 December 29, 1995
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 7,401 $ 1,643
Accounts receivable, less allowances
of $5,181 and $4,856 .............................................. 76,744 73,205
Inventories .......................................................... 48,319 41,693
Deferred income taxes ................................................ 10,609 10,608
Other current assets ................................................. 1,946 1,333
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Total current assets ........................................... 145,019 128,482
Property, plant and equipment:
Cost ................................................................. 173,423 156,168
Less Accumulated Depreciation ........................................ (87,586) (79,310)
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85,837 76,858
Other assets ............................................................... 8,883 12,493
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$ 239,739 $ 217,833
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks ............................................... $ 4,712 $ 5,051
Current portion of long-term debt .................................... 1,865 1,935
Trade accounts payable ............................................... 13,164 13,849
Customer advances .................................................... 4,963 803
Dividends payable .................................................... 2,053 2,072
Income taxes payable ................................................. 3,797 4,229
Other current liabilities ............................................ 48,559 43,644
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Total current liabilities ...................................... 79,113 71,583
Long-term debt, less current portion above ................................. 8,911 10,074
Retirement benefits and deferred compensation .............................. 32,917 32,605
Shareholders' equity:
Common stock ......................................................... 17,092 17,265
Additional paid-in capital ........................................... 16,102 20,397
Retained earnings .................................................... 84,451 64,949
Other, net ........................................................... 1,153 960
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$ 239,739 $ 217,833
========= =========
See notes to consolidated financial statements.
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks
-----------------
Sept. 27, 1996 Sept. 29, 1995
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings ................................................................. $ 25,774 $ 20,537
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization .......................................... 9,633 9,251
Deferred income taxes .................................................. 2,318 1,186
Change in:
Accounts receivable .................................................. (3,182) 2,733
Inventories .......................................................... (7,147) 1,241
Trade accounts payable ............................................... (380) (4,954)
Retirement benefits and deferred
compensation ........................................................ 564 2,659
Other accrued liabilities ............................................ 6,813 (3,191)
Other ................................................................ 350 821
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34,743 30,283
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions ................................... (18,681) (16,546)
Proceeds from sale of property, plant,
and equipment ........................................................ 62 151
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(18,619) (16,395)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable and lines of credit ............................ 13,932 111,279
Payments on notes payable and lines of credit ............................. (13,957) (120,794)
Borrowing on long-term debt ............................................... 198 --
Payments on long-term debt ................................................ (1,347) (613)
Common stock issued ....................................................... 2,352 2,234
Retirement of common and preferred stock .................................. (6,819) --
Cash dividends paid ....................................................... (6,293) (5,625)
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(11,934) (13,519)
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Effect of exchange rate changes on cash ...................................... 1,568 (2,164)
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Net increase(decrease)in cash and cash equivalents ........................... 5,758 (1,795)
Cash and cash equivalents:
Beginning of year ......................................................... 1,643 2,444
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End of period ............................................................. $ 7,401 $ 649
========= =========
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 September 27, 1996 and the related statements of earnings
and cash flows for the thirty-nine weeks ended September 27, 1996, and
September 29, 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 September 27, 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):
Sept. 27, 1996 Dec. 29, 1995
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Finished products and components $45,497 $40,335
Products and components in various
stages of completion 27,248 22,597
Raw materials 12,188 13,152
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84,933 76,084
Reduction to LIFO cost (36,614) (34,391)
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$48,319 $41,693
============ ============
6
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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Net earnings of $10.2 million for the quarter ended September 27, 1996 increased
$3.6 million, or 55 percent, over the same period last year. Net earnings of
$25.8 million for the nine months ended September 27, 1996 increased $5.2
million, or 26 percent, over the first nine months of 1995. The earnings
improvement came primarily as a result of improved gross margin, 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.
Sales for the quarter of $97.7 million were $2.9 million, or 3 percent higher,
than the third quarter of 1995. The increase in quarterly sales occurred
primarily in the Americas. Year-to-date sales of $284.9 million were $8.8
million, or 3 percent, lower than 1995. The decline in year-to-date sales can be
attributed primarily to economic softness in the international markets and
currency fluctuations.
Sales in the Americas of $62.0 million for the quarter were 8 percent higher
than 1995. Year-to-date sales of $187.9 million were 1 percent higher. European
sales continue to lag behind last year with quarterly and year-to-date sales of
$21.7 million and $54.6 million, respectively. Europe's third quarter sales were
equal to 1995's level (a 4 percent volume increase, offset by a 4 percent loss
due to exchange rates). Year-to-date European sales are 7 percent lower than
1995 (a 6 percent volume decease, and a 1 percent loss due to exchange rates).
In Asia Pacific, sales decreased 12 percent from last year's third quarter to
$13.9 million (a 2 percent volume decease, and a 10 percent loss due to exchange
rates). For the nine month period ended September 27, 1996, Asia Pacific sales
of $42.4 million were 12 percent lower than 1995 (a 5 percent volume decrease,
and a 7 percent loss due to exchange rates).
While many of the markets the Company serves were slow in the first half of
1996, the Company is encouraged by the somewhat improved levels of business
activity during the third quarter. Worldwide, Industrial/Automotive Equipment
sales improved 3 percent to $56.2 million from last year's third quarter,
Contractor Equipment sales improved 4 percent to $30.6 million, and Lubrication
Equipment sales improved 2 percent to $10.9 million. For 1996's first nine
months, Industrial/Automotive Equipment sales of $156.1 million were 6 percent
lower than the same period last year, Contractor Equipment sales of $96.6
million were at the 1995 level, and Lubrication Equipment sales of $32.2 million
were 5 percent higher than 1995.
The gross profit margin percentage for both the quarter and year-to-date
increased 2 percentage points over a year ago to 51 percent. The increase can be
attributed to improved pricing in the Americas and Europe, manufacturing volume
and efficiencies.
Operating expenses of $34.7 million for the quarter and $106.3 million for the
first nine months are both 3 percent lower than the same periods last year.
While investments in product development and marketing reached record levels,
close control of selling and general and administrative costs have kept
operating expenses below 1995 levels.
7
Interest expense of $0.2 million is $0.4 million, or 74 percent, lower than the
third quarter of 1995. Year-to-date interest expense of $0.7 million is $1.3
million, or 64 percent lower. The decreases in interest expense result from
lower debt balances at September 27, 1996 as compared to September 29, 1995.
The effective tax rate for both the quarter and the nine month period ended
September 27, 1996 of 32 percent is 4 percentage points lower than the
year-to-date rate for 1995. The decline in the effective tax rate in 1996
results from lower effective tax rates on foreign earnings. The Company expects
a higher effective tax rate in 1997.
The Company's backlog of $33.0 million is nearly $10.0 million higher than the
level a year ago and the current rate of incoming orders provides the Company
with reason to be cautiously optimistic about a solid fourth quarter. The
earnings momentum and modestly improved sales activity achieved by the Company
across all divisions gives it added confidence that its investments in new
products, technology, globalization, and world-class manufacturing are having a
significant impact on the Company's long-term ability to grow profitably.
Liquidity and Capital Resources
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The Company generated cash from operations of $34.7 million for the first nine
months of 1996 as compared to $30.3 million for the same period last year.
Significant uses of cash include increases in inventory balances in anticipation
of a November factory move to a new facility as discussed below, purchases of
property, plant and equipment, payments of cash dividends, and repurchases of
common stock. Working capital increased $9.0 million to $65.9 million from $56.9
million at December 29, 1995. The Company plans on spending approximately $17.0
million in 1996 ($8.5 million to date) 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 September 27, 1996 totaling
$70.1 million.
8
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Sixth Amendment dated September 27, 1996
to Credit Agreement between the Company and
First Bank National Association Exhibit 4
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.
9
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: November 4, 1996 By:/S/George Aristides
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George Aristides
President and Chief Executive Officer
Date: November 4, 1996 By:/S/David M. Lowe
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David M. Lowe
Treasurer
(Principal Financial Officer)
10