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 26, 1997
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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16,979,650 common shares were outstanding as of October 23, 1997.
1
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 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Stock Option Agreement. Form of agreement used for
award of nonstatutory stock options to nonemployee
director, dated September 5, 1997 Exhibit 10.1
Trust Agreement dated September 30, 1997,
between the Company and Norwest Bank
Minnesota, N.A. Exhibit 10.2
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
2
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Sept. 26, 1997 Sept. 27, 1996 Sept. 26, 1997 Sept. 27, 1996
-------------- -------------- -------------- --------------
(In thousands except per share amounts)
Net sales ................................... $ 101,920 $ 97,680 $ 305,740 $ 284,932
Cost of products sold ................. 50,558 47,704 156,446 140,697
-------------- -------------- -------------- --------------
Gross profit ............................... 51,362 49,976 149,294 144,235
Product development .................. 4,167 4,714 13,820 13,566
Selling .............................. 21,051 21,624 66,448 62,714
General and administrative ........... 8,425 8,316 25,264 29,996
-------------- -------------- -------------- --------------
Operating profit ........................... 17,719 15,322 43,762 37,959
Interest expense ..................... 216 155 663 732
Other expense, net ................... 124 310 371 (447)
-------------- -------------- -------------- --------------
Earnings before income taxes ............... 17,379 14,857 42,728 37,674
Income taxes ......................... 4,500 4,700 13,250 11,900
-------------- -------------- -------------- --------------
Net earnings ............................... $ 12,879 $ 10,157 $ 29,478 $ 25,774
============== ============== ============== ===============
Net earnings per common and
common equivalent share .............. $ .74 $ .58 $ 1.69 $ 1.47
============== ============== ============== ===============
Cash dividend declared per common share .... $ .14 $ .12 $ .42 $ .36
============== ============== ============== ===============
See notes to consolidated financial statements.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 26, 1997 December 27, 1996
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 7,382 $ 6,535
Accounts receivable, less allowances
of $4,196 and $4,723 ................................. 82,566 83,474
Inventories ............................................. 44,768 41,531
Deferred income taxes ................................... 12,459 11,633
Other current assets .................................... 1,387 1,321
------------------ -----------------
Total current assets .............................. 148,562 144,494
Property, plant and equipment:
Cost .................................................... 194,343 183,085
Less Accumulated Depreciation ........................... (94,310) (88,913)
------------------ -----------------
100,033 94,172
Other assets .................................................. 9,066 9,148
------------------ -----------------
$ 257,661 $ 247,814
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks .................................. $ 2,444 $ 3,813
Current portion of long-term debt ....................... 1,620 1,845
Trade accounts payable .................................. 14,191 13,854
Salaries, wages and commissions ......................... 13,639 14,808
Accrued insurance liabilities ........................... 12,157 10,925
Income taxes payable .................................... 7,453 4,647
Other current liabilities ............................... 20,810 30,718
------------------ -----------------
Total current liabilities ......................... 72,314 80,610
Long-term debt, less current portion .......................... 7,145 8,075
Retirement benefits and deferred compensation ................. 33,795 33,079
Shareholders' equity:
Common stock ............................................ 17,020 17,047
Additional paid-in capital .............................. 19,399 22,254
Retained earnings ....................................... 106,471 85,232
Other, net .............................................. 1,517 1,517
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Total shareholders' equity ........................ 144,407 126,050
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$ 257,661 $ 247,814
================== =================
See notes to consolidated financial statements
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks
-----------------
Sept. 26, 1997 Sept. 27, 1996
-------------- --------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings ...................................................... $ 29,478 $ 25,774
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization ............................... 10,507 9,633
Deferred income taxes ....................................... (2,137) 2,318
Change in:
Accounts receivable ....................................... (2,665) (3,182)
Inventories ............................................... (4,972) (7,147)
Trade accounts payable .................................... 655 (380)
Retirement benefits and deferred
compensation ............................................. 1,036 564
Other accrued liabilities ................................. (5,743) 6,813
Other ..................................................... (240) 350
-------------- --------------
25,919 34,743
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions ........................ (16,793) (18,681)
Proceeds from sale of property, plant,
and equipment ............................................. 1,642 62
-------------- --------------
(15,151) (18,619)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable and lines of credit ............. 40,289 13,932
Payments on notes payable and lines of credit .............. (41,470) (13,957)
Borrowing on long-term debt ................................ -- 198
Payments on long-term debt ................................. (922) (1,347)
Common stock issued ........................................ 2,926 2,352
Retirement of common and preferred stock ................... (6,971) (6,819)
Cash dividends paid ........................................ (7,219) (6,293)
-------------- --------------
(13,367) (11,934)
-------------- --------------
Effect of exchange rate changes on cash ....................... 3,446 1,568
-------------- --------------
Net increase in cash and cash equivalents ..................... 847 5,758
Cash and cash equivalents:
Beginning of year .......................................... 6,535 1,643
-------------- --------------
End of period .............................................. $ 7,382 $ 7,401
============== ==============
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 26, 1997 and the related statements of earnings for the
thirteen and thirty-nine weeks ended September 26, 1997 and September 27,
1996 and cash flows for the thirty-nine weeks ended September 26, 1997, and
September 27, 1996, have been prepared by the Company without being
audited.
In the opinion of management, these consolidated statements reflect all
adjustments necessary (consisting of only normal recurring adjustments) to
present fairly the financial position of Graco Inc. and Subsidiaries as of
September 26, 1997, 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 1996 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. 26, 1997 Dec. 27, 1996
-------------- -------------
Finished products and components $43,148 $38,707
Products and components in various
stages of completion 26,943 24,691
Raw materials 12,387 15,192
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82,478 78,590
Reduction to LIFO cost (37,710) (37,059)
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$44,768 $41,531
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6
3. Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", was issued in February 1997 and requires adoption for annual
periods ending after December 15, 1997. Earnings per Share determined in
accordance with SFAS No. 128 are not materially different than the current
disclosure under APB Opinion No. 15.
4. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which will be effective for the
Company beginning with the 1998 fiscal year. SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain
financial and description information about a company's operating segments.
The Company has not yet determined the nature of its segments, nor has it
determined how adoption of SFAS No. 131 will impact its future disclosures.
7
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net earnings of $12.9 million for the quarter ended September 26, 1997 increased
27 percent over the third quarter of 1996 earnings of $10.2 million. For the
nine months ended September 26, 1997, net earnings of $29.5 million were 14
percent over 1996 earnings of $25.8 million. The quarterly earnings improvement
results primarily from a 4 percent increase in sales, coupled with a 3 percent
decline in operating expenses. A lower effective tax rate and income of
approximately $450,000, net of tax, related to the settlement of a lawsuit, also
contributed to the net earnings improvement. Partially offsetting the
improvements were a lower gross profit margin on product sales and losses
resulting from unfavorable exchange rate changes.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Third Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
---------------- ----------------
September September September September
26, 1997 27, 1996 26, 1997 27, 1996
--------- --------- --------- ---------
Net Sales ................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Cost of Products Sold ....................... 49.6 48.8 51.2 49.4
Product Development ......................... 4.1 4.8 4.5 4.8
Selling ..................................... 20.7 22.1 21.7 22.0
General and Administrative .................. 8.2 8.6 8.3 10.5
--------- --------- --------- ---------
Operating Profit ............................ 17.4 15.7 14.3 13.3
--------- --------- --------- ---------
Interest Expense ............................ .2 .2 .2 .3
--------- --------- --------- ---------
Other Income(Expense), Net .................. (.1) (.3) (.1) .2
--------- --------- --------- ---------
Earnings Before Income Taxes ................ 17.1 15.2 14.0 13.2
Income Taxes ................................ 4.5 4.8 4.4 4.2
--------- --------- --------- ---------
Net Earnings ................................ 12.6% 10.4% 9.6% 9.0%
========= ========= ========= =========
8
Net Sales
Net sales during the third quarter of $101.9 million were 4 percent higher than
1996's third quarter. Year-to-date sales of $305.7 million were 7 percent higher
than the first nine months of 1996. Improved sales levels were achieved despite
a negative currency impact, which reduced sales by 4 percent for the quarter and
3 percent for the nine month period.
Industrial/Automotive Equipment sales worldwide fell 5 percent to $53.5 million
from last year's third quarter, 4 percent due to exchange and most of the
remainder due to a decline in automotive systems demand in Europe. Sales for the
nine month period ended September 26, 1997 in Industrial/Automotive of $160.9
million were 3 percent higher than 1996. Third quarter Contractor Equipment
sales of $37.2 million were 22 percent higher than last year due primarily to
new products and price repositioning. Year-to-date Contractor Equipment sales
were up 15 percent to $110.7 million. Lubrication Equipment quarterly sales
increased 3 percent to $11.2 million. Sales of $34.1 million for the first nine
months in Lubrication were up 6 percent over the same period last year
reflecting a healthy North American economy and an increased key distributor
base.
Sales in the Americas (North, South and Central) increased 12 percent to $69.3
million for the quarter primarily due to strong sales performance in Contractor
Equipment, partially offset by a decline in North American automotive systems
sales. Year-to-date sales in the Americas of $207.8 million were up 11 percent
compared to the same period last year. Quarterly sales in Europe of $18.5
million were 15 percent lower than last year. Much of the decline (9 percent)
can be attributed to changes in exchange rates. The remainder is due primarily
to a shift in timing of automotive systems sales between quarters. Year-to-date
automotive system sales remain ahead of last year. Sales in Europe for the nine
months ended September 26, 1997 of $57.3 million improved 5 percent from the
same period last year (a 13 percent volume increase, and an 8 percent decline
due to exchange rates). Asia Pacific sales of $14.1 million were 2 percent
higher than last year's third quarter (a 7 percent volume increase, and a 5
percent decline due to exchange rates). Sales in Asia Pacific for nine months of
$40.7 million were 4 percent lower than last year (a 3 percent volume increase,
and a 7 percent decline due to exchange rates).
Gross Profit
Gross profit as a percentage of quarterly and year-to-date net sales has risen
to 50.4 and 48.8 percent respectively from the second quarter of 1997. These
rates, however, are .8 and 1.8 percentage points lower than the 1996 third
quarter and year-to-date rates, respectively. The decreases for the quarter and
nine months were primarily the result of a shift in the product mix within
Contractor Equipment to an upgraded product line which generates a lower margin
than other products. The strengthening of the U.S. dollar also reduced the gross
margin as a greater proportion of the Company's sales, relative to costs, are
denominated in currencies other than the U.S. dollar.
9
Operating Expenses
Operating expenses for the quarter ended September 26, 1997 of $33.6 million
decreased 3 percent from the same quarter of 1996. Operating expenses of $105.5
million for the first nine months were 1 percent below the 1996 level. Quarterly
product development expense decreased 12 percent from 1996 and selling expense
decreased 3 percent. The decline in both product development and selling can be
attributed to lower employee benefit costs. General and administrative costs
remained relatively flat in comparison to the third quarter of 1996.
Other Income (Expense)
Other expense was $.1 million in the third quarter, compared to expense of $.3
million for the same period last year. The third quarter of 1997 includes
proceeds from the settlement of a lawsuit. This income was partially offset by
losses due to exchange rate fluctuations. Other expense for the nine months
ended September 26, 1997 was $.4 million, compared to income of $.4 million in
the same period of 1996.
Income Taxes
The quarterly and year-to-date effective income tax rates decreased to 25.9
percent and 31.0 percent, respectively compared to 31.6 percent for both periods
last year. The lower rates in 1997 were principally due to previously
unrecognized foreign tax benefits.
Liquidity and Capital Resources
- -------------------------------
The Company generated $25.9 million of cash flow from operating activities in
the first nine months of 1997 compared to $34.7 million for the same period last
year. Significant uses of operating cash flow in 1997 resulted from an increase
in accounts receivable balances attributable to higher sales levels and from a
reduction in other accrued liabilities, most significantly the reserve
established in the prior year for the relocation of the Company's Franklin Park,
Illinois operations. Operating cash was also used to fund an increase in
inventory levels which was driven by higher engineered systems activity in the
foreign operations. Available cash, borrowing on lines of credit of $40.3
million, and proceeds from issuances of common stock were used to fund
short-term operating needs, finance capital expenditures of $16.8 million,
repurchase $7.0 million in common stock and pay dividends of $7.2 million. The
Company had unused lines of credit available at September 26, 1997 totaling
$68.7 million. The available credit facilities and internally-generated funds
provide the Company with the financial flexibility to meet liquidity needs.
Outlook
The Company is optimistic about performance for the remainder of the year. With
the exception of North American Automotive, the Company is experiencing strong
demand for its products. Sales backlog has grown by $11 million since the
beginning of the year to $30 million. Also, despite continuing unfavorable
exchange rate changes, the Company's profitability has improved.
10
SAFE HARBOR CAUTIONARY STATEMENT
The information in this 10Q contains "forward-looking statements" about the
Company's expectations of the future, which are subject to certain 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
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Stock Option Agreement. Form of agreement used
for award of nonstatutory stock options to
nonemployee director, dated September 5, 1997 Exhibit 10.1
Trust agreement dated September 30, 1997, between
the Company and Norwest Bank, Minnesota N.A. Exhibit 10.2
Statement on Computation Exhibit 11
of Per Share Earnings
Financial Data Schedule (EDGAR filing only) Exhibit 27
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
12
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: 11/6/97 By:/s/George Aristides
George Aristides
Chief Executive Officer
Date: 11/6/97 By:/s/Mark W. Sheahan
Mark W. Sheahan
Treasurer
(Principal Financial Officer)
13