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. ------------------------------------------------------ (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 ------- ------- 17,099,116 common shares were outstanding as of October 25, 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 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
<TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> 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 --------- --------- --------- --------- 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. </TABLE> 3
<TABLE> <CAPTION> GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) September 27, 1996 December 29, 1995 ------------------ ----------------- (Unaudited) <S> <C> <C> 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 --------- --------- Total current assets ........................................... 145,019 128,482 Property, plant and equipment: Cost ................................................................. 173,423 156,168 Less Accumulated Depreciation ........................................ (87,586) (79,310) --------- --------- 85,837 76,858 Other assets ............................................................... 8,883 12,493 --------- --------- $ 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 --------- --------- 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 --------- --------- $ 239,739 $ 217,833 ========= ========= See notes to consolidated financial statements. </TABLE> 4
<TABLE> <CAPTION> GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Thirty-Nine Weeks ----------------- Sept. 27, 1996 Sept. 29, 1995 -------------- -------------- (In thousands) <S> <C> <C> 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 --------- --------- 34,743 30,283 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions ................................... (18,681) (16,546) Proceeds from sale of property, plant, and equipment ........................................................ 62 151 --------- --------- (18,619) (16,395) --------- --------- 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) --------- --------- (11,934) (13,519) --------- --------- Effect of exchange rate changes on cash ...................................... 1,568 (2,164) --------- --------- Net increase(decrease)in cash and cash equivalents ........................... 5,758 (1,795) Cash and cash equivalents: Beginning of year ......................................................... 1,643 2,444 --------- --------- End of period ............................................................. $ 7,401 $ 649 ========= ========= See notes to consolidated financial statements. </TABLE> 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 -------------- ------------- 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 ------------ ------------ 84,933 76,084 Reduction to LIFO cost (36,614) (34,391) ------------ ------------ $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 - --------------------- 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 - ------------------------------- 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 ------------------- George Aristides President and Chief Executive Officer Date: November 4, 1996 By:/S/David M. Lowe ------------------- David M. Lowe Treasurer (Principal Financial Officer) 10