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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
GRACO INC.
1997 CORPORATE
&
BUSINESS UNIT
ANNUAL BONUS PLAN
Effective January 1, 1997
Human Resources
<PAGE>
1997 EXECUTIVE CORPORATE & SBU BONUS PLAN
Objectives
- - To create shareholder value through achievement of annual financial
objectives.
- - To motivate and retain those key executives and managers who work in
positions where they can impact the Company's annual financial objectives.
Plan Design
The Plan links the size of each individual's award to specific financial
objectives. These objectives are tailored for the Corporation and for each
Business Unit. These objectives are:
- Corporation
- Corporate Sales and/or Net Earnings objectives
- Business Units
- Sales and/or Contribution Growth objectives
Eligibility Requirements
Only those positions which carry clear managerial responsibility for directly
contributing to Graco's Corporate Sales and/or Net Earnings objective and
Business Unit Sales and/or Contribution Growth objectives are eligible to be
included in this Plan.
Only those individuals in eligible positions who have demonstrated and are
maintaining a performance level that meets the supervisor's normal expectations
for that position are eligible for annual participation in this Plan as well as
the receipt of any annual Bonus Payments.
Participation
The top executive in each organizational unit may nominate managers for
participation in this Plan when the established position and individual
eligibility requirements have been met.
The Management Organization and Compensation Committee of the Graco Inc. Board
of Directors has sole authority to approve the participation of the Chief
Executive Officer in the Plan.
The Chief Executive Officer of Graco Inc. has sole authority to select and
approve all other Plan participants.
Bonus Maximum
Taken in conjunction with base salary market comparisons, bonus maximum for all
positions will be:
- Commensurate with the position's ability to impact the annual Corporate
Sales and/or Net Earnings objective and Business Unit Sales and/or
Contribution Growth objectives.
- Consistent with total compensation levels prevalent for similar positions
in the market place.
Based on these criteria, bonus maximums ranging from 10% to 80% have been
established for each individual.
Bonus Payment
The determination of a participant's annual Bonus Payment will be calculated by
adding the bonus results attained for Corporate Sales and/or Net Earnings
performance (expressed in percent) to the bonus results attained for any
applicable Business Unit's Sales and/or Contribution Growth performance
(expressed in percent). These bonus results are then multiplied by the
participant's Maximum Bonus Percentage and then multiplied by the participant's
Base Salary for the Plan Year, to determine the total Bonus Payment.
Example:
|----------- -----------------|
|Annual Annual Business | Participant's Participant's
|Corporate Unit Performance | Maximum Annual
|Performance + Results (if | x Bonus x Base = Bonus
|Results applicable) | Salary Salary
| % % | $ $ $
|----------- -----------------|
Administration
The following rules have been established to insure equitable administration of
Graco's Annual Bonus Plan (the Plan):
1. The Plan will be administered by the Management Organization and
Compensation Committee of the Board of Directors. The Committee may cancel
the Plan and interpret the Plan.
2. The Management Organization and Compensation Committee shall establish the
Annual Corporate Bonus Plan financial objectives. Within the basic
framework of the Plan, the Chief Executive Officer may establish the annual
bonus plan financial objectives for individual Business Units. The CEO may
also establish deadlines for filing administrative forms and adopt other
administrative rules.
The CEO has established the Bonus Administrative Committee consisting of
the President, the Vice President, Human Resources, and the Compensation
Manager. This Committee is responsible for making approval recommendations
on all Annual Bonus Program administrative matters, such as participation
award payments, performance measures, and performance results. All requests
for adjustments or exceptions are to be formally submitted to this
Committee for review through the Compensation Manager.
3. Key executives and managers selected to participate in the Plan after its
annual effective date (January 1st) may be included on a pro-rata basis.
4. Participation in the Plan one year does not necessarily assure
participation in subsequent years. Eligibility requirements for both the
position and individual performance must be met continually.
5. Participation continues during any paid time off such as short-term
disability (up to six months). Participation ceases with retirement, death,
or long-term disability (over six months). In the event participation
ceases due to retirement, death, or long term disability, the Participant
will be eligible for a Bonus Payment, calculated using the Maximum Bonus
Percent and Base Salary up to the time of retirement, death, or long-term
disability and the annual performance results for the year in which
retirement, death, or long-term disability occurs.
6. A participant who transfers to a position not eligible for inclusion in the
Plan will be eligible for a pro-rata award based on the actual time
employed in the eligible position during the year. The pro-rated award will
be paid as described in Administrative Rule #11.
7. A participant who resigns or is terminated effective during the Plan Year
is ineligible for a bonus.
Participants must maintain satisfactory performance throughout the Plan
year in order to be eligible to receive a bonus award payment.
In addition, a participant whose employment termination has been requested
due to performance or otherwise for cause will be ineligible for a bonus
payment even though the participant is still employed at year-end.
8. Corporate Sales and Net Eearnings calculations will include such effects as
those created by foreign exchange gain/loss translation and income tax rate
changes.
9. Corporate Sales and/or Net Earnings calculations will be based on actual
exchange rates, not plan rates.
10. Acquisitions and divestitures not included in the annual business plan for
the Plan Year will be excluded from the Corporate Sales and/or Net Earnings
calculations.
11. Significant changes in historical FASB accounting practices or income tax
rates will be included in corporate earnings calculations at the discretion
of the Management Organization and Compensation Committee of the Board of
Directors.
12. Payments will be made by March 15th of the year following each successive
Corporate and Business Unit performance year.
1997
Corporate Performance Results and Awards
for 100% Corporate Participants
================================================
1997 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
$30,000 0.00%
$34,000 18.75%
$38,000 37.50%
$41,500 56.25%
$45,000 75.00%
================================================
================================================
1997 Percent of Maximum
Corporate Sales Bonus Award
Results Earned
$400,000 0.00%
$410,000 6.25%
$420,000 12.50%
$430,000 18.75%
$440,000 25.00%
================================================
Note: Calculations exclude acquisitions and divestitures which were not
included in 1997 Annual Business Plan.
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended
--------------------
March 28, 1997 March 29, 1996
-------------- --------------
(In thousands except per share amounts)
Net earnings applicable to common stock:
Net earnings $6,181 $5,585
========== ==========
Average number of common and common equivalent shares outstanding:
Average number of common
shares outstanding 17,106 17,315
Dilutive effect of stock options computed
on the treasury stock method
397 238
---------- ----------
17,503 17,553
========== ==========
Net earnings per common
and common equivalent share $.35 $.32
========== ==========
Primary and fully diluted earnings per share are substantially the same.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Graco Inc.
and subsidiaries consolidated statements of earnings and consolidated balance
sheets for the quarterly period ending March 28, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000042888
<NAME> GRACO INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> MAR-28-1997
<EXCHANGE-RATE> 1
<CASH> 1,378
<SECURITIES> 0
<RECEIVABLES> 81,061
<ALLOWANCES> 4,614
<INVENTORY> 47,609
<CURRENT-ASSETS> 143,808
<PP&E> 185,782
<DEPRECIATION> 89,138
<TOTAL-ASSETS> 249,076
<CURRENT-LIABILITIES> 75,585
<BONDS> 9,445
0
0
<COMMON> 17,218
<OTHER-SE> 115,384
<TOTAL-LIABILITY-AND-EQUITY> 249,076
<SALES> 92,099
<TOTAL-REVENUES> 92,099
<CGS> 47,566
<TOTAL-COSTS> 47,566
<OTHER-EXPENSES> 34,852
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 207
<INCOME-PRETAX> 9,681
<INCOME-TAX> 3,500
<INCOME-CONTINUING> 6,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,181
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
