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 March 27, 1998
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
25,814,967 common shares were outstanding as of April 30, 1998.
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 8-10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
1998 Corporate and Business Unit Annual Bonus Plan Exhibit 10
Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to executive
officers, dated February 27, 1998 Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule Exhibit 27
2
PART I
GRACO INC. AND SUBSIDIARIES
Item 1. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended
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March 27, 1998 March 28, 1997
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(In thousands except per share amounts)
Net Sales $ 105,717 $ 92,099
Cost of products sold 53,772 47,566
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Gross Profit 51,945 44,533
Product development 4,782 4,825
Selling 22,647 21,633
General and administrative 10,165 8,555
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Operating Profit 14,351 9,520
Interest expense 225 207
Other expense, net 279 (368)
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Earnings Before Income Taxes 13,847 9,681
Income taxes 4,900 3,500
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Net Earnings $ 8,947 $ 6,181
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Basic Net Earnings Per Common Share* $ .35 $ .24
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Diluted Net Earnings Per Common* $ .34 $ .24
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Basic Weighted Average Number
of Common Shares* 25,635 25,659
Diluted Weighted Average Number
of Common Shares* 26,239 26,248
*All 1997 per share data has been restated for the three-for-two stock split
paid February 4, 1998.
See notes to consolidated financial statements.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 27, 1998 December 26, 1997
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ASSETS (In thousands)
Current Assets:
Cash and cash equivalents $ 28,383 $ 13,523
Accounts receivable, less allowances
of $4,600 and $4,100 83,699 86,148
Inventories 46,170 43,942
Deferred income taxes 10,949 11,140
Prepaid expenses 1,282 1,539
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Total current assets 170,483 156,292
Property, Plant and Equipment:
Cost 197,284 196,940
Accumulated depreciation (98,176) (96,760)
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99,108 100,180
Other Assets 7,586 8,060
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$ 277,177 $ 264,532
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 4,996 $ 2,911
Current portion of long-term debt 1,796 1,796
Trade accounts payable 14,562 12,542
Salaries, wages & commissions 10,753 14,903
Accrued insurance liabilities 10,571 10,227
Income taxes payable 7,399 5,546
Other current liabilities 21,853 21,055
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Total current liabilities 71,930 68,980
Long-term debt, less current portion 5,809 6,163
Retirement benefits and deferred compensation 31,594 31,880
Shareholders' equity:
Common stock 25,792 25,553
Additional paid-in capital 29,670 26,085
Retained earnings 112,382 105,030
Other, net 0 841
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Total Shareholders' Equity 167,844 157,509
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$ 277,177 $ 264,532
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See notes to consolidated financial statements.
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks
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March 27, 1998 March 28, 1997
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CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net Earnings $ 8,947 $ 6,181
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 3,994 3,548
Deferred income taxes 158 (481)
Change in:
Accounts receivable 952 (61)
Inventories (2,531) (6,688)
Trade accounts payable 1,999 (419)
Retirement benefits and deferred
compensation (200) 571
Other accrued liabilities (1,125) (7,029)
Other 839 (1,453)
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13,033 (5,831)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (2,995) (6,340)
Proceeds from sale of property, plant,
and equipment 170 1,578
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(2,825) (4,762)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable and lines of credit 5,037 5,335
Payments on notes payable and lines of credit (2,772) (1,528)
Payments on long-term debt (310) (326)
Common stock issued 3,822 2,790
Repurchase of common stock (12) --
Cash dividends paid (2,811) (2,420)
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2,954 3,851
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Effect of exchange rate changes on cash 1,698 1,585
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Net increase (decrease) in cash and cash
equivalents 14,860 (5,157)
Cash and cash equivalents:
Beginning of year 13,523 6,535
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End of period $ 28,383 $ 1,378
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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 March 27, 1998 and the related statements of earnings for the
thirteen weeks ended March 27, 1998 and March 28, 1997 and cash flows for
the thirteen weeks ended March 27, 1998, and March 28, 1997, 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 March 27, 1998, 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 1997 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):
March 27, 1998 December 26, 1997
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Finished products and components $ 39,170 $ 38,290
Products and components in various
stages of completion 24,375 25,320
Raw materials 19,171 16,715
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82,716 80,325
Reduction to LIFO cost (36,546) (36,383)
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$ 46,170 $ 43,942
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6
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
( Continued)
3. 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 at the end of the 1998 fiscal year. SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain
financial and descriptive 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.
4. Europe's December 1997 operating results were recorded as an adjustment to
equity. Those results included sales of $3,836,000 and net earnings of
$300,000. The results of operations for Graco Inc., (the Company) for the
quarter ended March 27, 1998 include Europe's operations for the months of
January, February and March. First quarter 1997 results included the months
of December, 1996 and January and February, 1997. Had the company included
the months of January, February and March in its operating results for
Europe in the first quarter of 1997, net sales would have been $94,099,000,
net earnings would have been $6,854,000 and diluted earnings per share
would have been $0.26.
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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 $8.9 million for the quarter ended March 27, 1998 increased 45
percent over the first quarter of 1997 earnings of $6.2 million. The quarterly
earnings improvement was driven by higher sales and improved gross margin rates.
First quarter operating earnings include charges related to restructuring
Graco's Automotive operation in Plymouth, Michigan. Many of the functions that
were performed in Plymouth will be relocated to Graco's Minneapolis facilities.
Most of the restructuring charges have been recognized, and it is expected that
the transition will be completed by the end of the second quarter of 1998. First
quarter operating results also include charges for restructuring operations in
Asia Pacific.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
First Quarter
(13 weeks) Ended
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March 27, 1998 March 28, 1997
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Net Sales 100.0% 100.0%
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Cost of Products Sold 50.9 51.6
Product Development 4.5 5.2
Selling 21.4 23.6
General and Administrative 9.6 9.3
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Operating Profit 13.6 10.3
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Interest Expense (.2) (.2)
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Other Income(Expense), Net (.3) .4
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Earnings Before Income Taxes 13.1 10.5
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Income Taxes 4.6 3.8
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Net Earnings 8.5% 6.7%
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8
GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net Sales
Net sales in the first quarter of $105.7 million were 15 percent higher than the
same period last year. The improved sales level was achieved despite a negative
currency impact, which had a 3 percent impact on sales for the quarter.
The Contractor Equipment Division sales of $37.4 million increased from last
year's first quarter due to new product introductions and stronger demand for
existing products. Industrial Equipment Division sales of $40.5 million improved
10 percent, driven by strong demand for industrial products in Europe and the
Americas. Automotive sales of $17.0 million increased 26 percent due to strong
sales in North America, improved system sales in Europe and the change in
calendar months reported in Europe. Lubrication Equipment Division quarterly
sales increased 2 percent to $10.9 million.
Geographically, sales in the Americas (North, South and Central) increased 15
percent to $71.9 million for the quarter primarily due to strong Contractor and
Industrial activity. European sales, on a comparable basis, of $20.4 million
were 21 percent higher than last year, and would have been 29% higher with
constant exchange rates The growth in Europe was attributable primarily to
strong Industrial and Automotive sales. Asia Pacific sales of $10.5 million were
17 percent lower than last year's first quarter (including an 11 percent decline
due to exchange rates) due to the instability in the economies of Japan, Korea
and Southeast Asia.
Gross Profit
Gross profit as a percentage of net sales increased to 49.1 percent in the first
quarter, compared to 48.4 percent for the same period last year. The increases
were primarily due to manufacturing efficiencies and price increases.
Operating Expenses
Operating expenses in the first quarter of $37.6 million increased 7 percent
from the first quarter of 1997, but decreased from 38.1% to 35.5% of net sales.
General and administrative expenses were 19 percent higher than the same quarter
last year, largely due to restructuring charges related to operations in
Plymouth, Michigan and South East Asia. Selling expenses increased 5 percent
compared to the first quarter last year due to increased sales levels and
increased warranty costs. Product development costs remained relatively flat in
comparison to the first quarter of 1997.
9
GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other Income (Expense)
Other expense was $0.3 million in the first quarter, compared to $0.4 million of
income for the same period last year. The first quarter of 1998 was affected
more unfavorably by foreign exchange rate changes, while 1997 was favorably
impacted by a gain on the sale of the Company's Franklin Park, Illinois
facility.
Income Taxes
The effective tax rate decreased to 35 percent in the quarter compared to 36
percent last year.
Liquidity and Capital Resources
The Company generated $13.0 million of cash flow from operating activities in
the first three months of 1998 compared to using cash of $5.8 million for the
same period last year. Significant uses of operating cash flow in 1998 resulted
from a planned increase in inventory levels primarily in Europe. Available cash
and borrowing on lines of credit of $5.0 million were used to fund short-term
operating needs, finance capital expenditures of $3.0 million and pay dividends
of $2.8 million. The Company had unused lines of credit available at March 27,
1998 totaling $70.1 million. The available credit facilities and
internally-generated funds provide the Company with the financial flexibility to
meet liquidity needs.
Outlook
The Company is cautiously optimistic about the outlook for 1998 based on the
level of activity during the first quarter. Overall we expect improved financial
results in 1998. We anticipate higher sales, driven by continued new product
introductions, an improved and expanding worldwide distribution network and good
economic conditions in North America and Europe, despite weakness in Asia
Pacific, including Japan, South Korea and Southeast Asia.
Graco has undertaken a number of restructuring efforts recently to improve its
effectiveness in the markets it serves, and have increased the Company's
operating margins and net profits. These efforts will continue to favorably
impact margins and profits in 1998. We are implementing additional measures to
improve operating efficiency.
We anticipate that the strength of the U.S. dollar relative to other major
currency will negatively impact operating margins in 1998. We also anticipate a
higher tax rate in 1998.
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
1997.
11
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1998 Corporate and Business Unit
Annual Bonus Plan Exhibit 10
Stock Option Agreement. Form of agreement
used for award of non-incentive stock options
to executive officers, dated February 28, 1998. Exhibit 10.1
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: May 8, 1998 By:/s/George Aristides
George Aristides
Chief Executive Officer
Date: May 8, 1998 By:/s/Mark W. Sheahan
Mark W. Sheahan
Treasurer
(Principal Financial Officer)
13