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 28, 1997 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 -------- -------- 17,124,485 common shares were outstanding as of April 30, 1997.
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 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 11 1997 Corporate and Business Unit Annual Bonus Plan Exhibit 10 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 -------------------- March 28, 1997 March 29, 1996 -------------- -------------- (In thousands except per share amounts) Net Sales $92,099 $90,153 Cost of products sold 47,566 45,316 ------------- ------------- Gross Profit 44,533 44,837 Product development 4,825 4,229 Selling 21,633 19,850 General and administrative 8,555 11,675 ------------- ------------- Operating Profit 9,520 9,083 Interest expense (207) (232) Other income (expense), net 368 (566) ------------- ------------- Earnings Before Income Taxes 9,681 8,285 Income taxes 3,500 2,700 ------------- ------------- Net Earnings $6,181 $5,585 ============= ============= Net Earnings Per Common and Common Equivalent Share $.35 $.32 ============= ============= Cash Dividend Per Common Share $.14 $.12 ============= ============= See notes to consolidated financial statements. 3
GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) March 28, 1997 December 27, 1996 -------------- ----------------- ASSETS (In thousands) Current Assets: Cash and cash equivalents $1,378 $6,535 Accounts receivable, less allowances of $4,614 and $4,700 81,061 83,474 Inventories 47,609 41,531 Deferred income taxes 12,107 11,633 Other current assets 1,653 1,321 ----------- ----------- Total current assets 143,808 144,494 Property, Plant and Equipment: Cost 185,782 183,085 Accumulated depreciation (89,138) (88,913) ------------ ----------- 96,644 94,172 Other Assets 8,624 9,148 ----------- ----------- $249,076 $247,814 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $7,302 $3,813 Current portion of long-term debt 1,827 1,845 Trade accounts payable 13,132 13,854 Salaries, wages & commissions 10,753 14,808 Accrued insurance liabilities 11,624 10,925 Income taxes payable 7,622 4,647 Other current liabilities 23,325 30,718 ----------- ----------- Total current liabilities 75,585 80,610 Long-term Debt, less current portion 7,618 8,075 Retirement Benefits and Deferred Compensation 33,271 33,079 Shareholders' Equity: Common stock 17,218 17,047 Additional paid-in capital 24,873 22,254 Retained earnings 88,994 85,232 Other, net 1,517 1,517 ----------- ----------- Total Stockholder's Equity 132,602 126,050 ----------- ----------- $249,076 $247,814 =========== =========== See notes to consolidated financial statements. 4
GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Thirteen Weeks -------------- March 28, 1997 March 29, 1996 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands) Net Earnings $6,181 $5,585 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,548 3,299 Deferred income taxes (481) (605) Change in: Accounts receivable (61) 52 Inventories (6,688) (3,355) Trade accounts payable (419) (367) Retirement benefits and deferred compensation 571 89 Other accrued liabilities (7,029) 887 Other (1,453) (1,084) ----------- ----------- (5,831) 4,501 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (6,340) (4,485) Proceeds from sale of property, plant, and equipment 1,578 5 ---------- ----------- (4,762) (4,480) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing on notes payable and lines of credit 5,335 1,937 Payments on notes payable and lines of credit (1,528) (1,662) Payments on long-term debt (326) - Common stock issued 2,790 2,271 Retirement of common and preferred stock - (446) Cash dividends paid (2,420) (2,126) ----------- ----------- 3,851 (26) ---------- ----------- Effect of exchange rate changes on cash 1,585 465 ---------- ----------- Net increase (decrease) in cash and cash equivalents (5,157) 460 Cash and cash equivalents: Beginning of year 6,535 1,643 ---------- ----------- End of period $1,378 $2,103 ========== =========== 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 28, 1997 and the related statements of earnings and cash flows for the thirteen weeks ended March 28, 1997, and March 29, 1996, 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 28, 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): March 28, 1997 Dec. 28, 1996 -------------- ------------- Finished products and components $44,595 $38,707 Products and components in various stages of completion 28,289 24,691 Raw materials 12,334 15,192 ------------ ----------- 85,218 78,590 Reduction to LIFO cost (37,609) (37,059) ------------ ------------ $47,609 $41,531 ============ ============ 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. 6
Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net earnings in the first quarter increased 11% over the same period last year. The earnings improvement was driven by reduced operating expenses, a gain on the sale of the Company's Franklin Park, Illinois facility and higher sales. A reduced gross margin rate, foreign currency translation losses and a higher effective tax rate had a negative impact on earnings for the quarter. The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: First Quarter (13 weeks) Ended ------------------------------ 1996 1997 ------ ------ Net Sales 100.0% 100.0% ------ ------ Cost of Products Sold 51.6 50.3 Product Development 5.2 4.7 Selling 23.6 22.0 General and Administrative 9.3 12.9 ------ ------ Operating Profit 10.3 10.1 ------ ------ Interest Expense (.2) (.3) ------ ------ Other Income(Expense), Net .4 (.6) ------ ------ Earnings Before Income Taxes 10.5 9.2 Income Taxes 3.8 3.0 ------ ------ Net Earnings 6.7% 6.2% ====== ====== Net Sales Net sales in the first quarter of $92.1 million were 2 percent higher than last year. The increased sales level was achieved despite a negative currency impact, which reduced sales by 2 percent. Industrial/Automotive Division sales improved 6 percent to $50.2 million, driven by strong demand for industrial products across all three geographic regions, the Americas, Europe and Asia Pacific. Contractor Division sales of $31.3 million were 4 percent lower than last year due in part to the introduction of an upgraded product line in North America. The late quarter introduction held down sales early in the quarter as customers anticipated the new product release. Additionally, a new pricing structure in the Contractor Division was implemented in 1997 which is expected to result in a seasonal change in demand, versus price promotions in 1996 which forced more activity into the first quarter. Lubrication Division sales increased 6 percent to $10.6 million, reflecting a healthy North American economy, an increased key distributor base and the benefit of new product introductions late in 1996. 7
Geographically, sales in the Americas increased 1 percent to $62.6 million primarily due to strong Industrial activity, partially offset by the soft start in the Contractor Division and sluggish automotive system's activity. European sales of $16.9 million were 7 percent higher than last year (including a 5 percent decline due to exchange rates). Asia Pacific sales of $12.6 million were 1 percent higher than last year (including a 8 percent decline due to exchange rates). The growth in Europe and Asia Pacific was attributable primarily to strong automotive system's activity and improved results in the Contractor Division. Gross Profit Gross profit as a percentage of net sales declined to 48.4 percent in the first quarter, compared with 49.7 percent for the same period last year. The decrease was primarily the result of a shift in the product mix within the Contractor Division 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 are denominated in currencies other than the U.S. dollar than are costs. Operating Expenses Operating expenses in the first quarter of $35.0 million decreased 2 percent from the first quarter of 1996. Product development expense increased 14 percent over 1996, reflecting the Company's commitment to expanding sales through the development of new products. Selling expenses were 9 percent higher than the same period last year, largely due to increased information systems development costs and distributor training programs, as well as the increased sales level. General and administrative costs declined 27 percent, as the first quarter of 1996 included expenses related to the relocation of the Company's Franklin Park, Illinois operations to Minneapolis. Other Income (Expense) Other income was $.4 million in the first quarter, compared with $.6 million of expense for the same period last year. The first quarter of 1997 was favorably impacted by a gain from the sale of the Company's Franklin Park, Illinois facility, which was partially offset by foreign currency translation losses. Income Taxes The effective income tax rate increased to 36 percent in the quarter compared with 33 percent last year. The higher rate in 1997 was principally due to higher effective rates on foreign earnings. 8
Liquidity and Capital Resources - ------------------------------- The Company used $5.8 million of cash flow for operating activities in the first quarter of 1997 compared with generating cash from operations of $4.5 million in the first quarter of last year. Significant uses of operating cash flow in 1997 resulted from the 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 flow was also used to fund an increase in inventory levels which was driven by higher engineered systems activity in the foreign operations and anticipated demand for the upgraded product line in the Contractor Division. Available cash and borrowing on lines of credit of $5.3 million were used to fund short-term operating needs, finance capital expenditures of $6.3 million and pay dividends of $2.4 million. The Company has unused lines of credit available at March 28, 1997 totaling $69.6 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 level of activity during the first quarter. Incoming orders in the first quarter exceeded sales by $7.3 million, increasing backlog to $26.4 million. The Company also expects to introduce a number of new products in 1997 and believes that the continued investments in product development, marketing and manufacturing should have a positive impact on the Company in 1997 and the long-term ability to grow profitably. 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. 9
PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 1997 Corporate and Business Unit Annual Exhibit 10 Bonus Plan 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: May 9, 1997 By: /s/ James A. Graner James A. Graner Vice President and Controller ("duly authorized officer") Date: May 9, 1997 By: /s/ Mark W. Sheahan Mark W. Sheahan Treasurer (Principal Financial Officer) 11