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
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)
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.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 27, 1996 December 29, 1995
------------------ -----------------
(Unaudited)
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.
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks
-----------------
Sept. 27, 1996 Sept. 29, 1995
-------------- --------------
(In thousands)
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.
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
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT (this "Amendment") dated as of September 27, 1996,
amends and modifies that certain Credit Agreement, dated as of October 1, 1990,
as amended pursuant to Amendments dated as of June 12, 1992, December 31, 1992,
November 8, 1993, February 8, 1994, and April 10, 1995 (as so amended, the
"Credit Agreement"), between GRACO INC., a Minnesota corporation (the "Company")
and FIRST BANK NATIONAL ASSOCIATION (the "Bank"). Terms not otherwise expressly
defined herein shall have the meanings set forth in the Credit Agreement.
FOR VALUE RECEIVED, the Company and the Bank agree that the Credit
Agreement is amended as follows:
ARTICLE 1 - AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Defined Terms. Section 1.01 is amended as follows:
(a) The definition of "Applicable Margin" is amended to read as follows:
"'Applicable Margin': For each CD loan shall mean 0.75%, for each
Reference Rate Loan shall mean 0% and for each Eurocurrency loan shall
mean 0.625%."
(b) The definition of "Maturity Date" is amended to read as follows:
"'Maturity Date': June 30, 1997."
(c) The following new definition are added:
"'EBIT': for any period of determination, Consolidated Net
Earnings of the Company and its Subsidiaries before provision for
income taxes and Interest Expenses, all as determined in accordance
with generally accepted accounting principles, excluding therefrom (to
the extent included during any period) the net total of the following,
to the extent that such net total is less than or equal to $2,000,000:
(a) non-operating (including, without limitations, extraordinary or
nonrecurring gains, gains from discontinuance of operations and gains
arising from the sale of assets other than inventory) during the
applicable period; and (b) similar non-operating losses during such
period."
"'EBITDA': for any period of determination, EBIT, plus to the
extent deducted in Consolidated Net Earnings, depreciation and
amortization."
"'Interest-bearing Indebtedness': all interest-bearing
indebtedness of the Company and its Subsidiaries for borrowed money,
determined in accordance generally accepted accounting principles."
"'Interest Expense'" for any period of determination, all
interest accrued on indebtedness of the Company and its Subsidiaries
determined in accordance with generally accepted accounting
principals, including without limitation implicit interest expense on
capitalized leases."
1.2 Deleted Sections. The following Sections are amended to read as follows
(and definitions only used in such Sections shall be deemed deleted):
"7.11 Intentionally omitted."
"7.12 Intentionally omitted."
"7.15 Intentionally omitted."
"7.16 Intentionally omitted."
1.3 Consolidated Tangible Net Worth. Section 7.13 is amended to read as
follows:
"7.13 Consolidated Tangible Net Worth. Not at any time permit
Consolidated Tangible Net Worth to be less than $75,000,000 plus 50%
of Consolidated Net Earnings after December 31, 1995."
1.4 Leverage Ratio. Section 7.14 is amended to read as follows:
"7.14 Leverage Ratio. Not permit the ratio of Interest-bearing
Indebtedness as of the last day of any fiscal quarter to EBITDA for
the period of four consecutive fiscal quarters then ending to be more
than 2.5 to 1.00."
1.5 Interest Coverage Ratio. New Section 7.18 is added following Section
7.17 and shall read as follows:
"7.18 Interest Coverage Ratio. Not permit the ratio of EBIT to
Interest Expense, each measured for each period of four consecutive
fiscal quarters, to be less than 4.00 to 1.00."
1.6 Exhibit G. Exhibit G to the Credit Agreement is replaced by Exhibit G
attached to this Amendment.
1.7 Note. The Loans shall continue to be evidenced by Note dated April 10,
1995 in the principal amount of $25,000,000.
1.8 Construction. All references in the Credit Agreement to "this
Agreement", "herein" and similar references shall be deemed to refer to the
Credit Agreement as amended by this Amendment.
ARTICLE II - WAIVER
The Borrower has informed the Bank that with respect to its fiscal year
ended December 31, 1995, it may not have complied with certain provisions of
ERISA, as required by Section 7.17 of the Credit Agreement. The Borrower has
requested that the Bank waive such failure to comply. Effective as provided
below, the Bank waives the Borrower's compliance with Section 7.17 of the Credit
Agreement as applied to such fiscal year, on the further condition that fines
and charges resulting from any such non-compliance shall not exceed $50,000.
Except as expressly provided herein, all provisions of the Credit Agreement
remain in full force and effect and this waiver shall not apply to any other or
subsequent failure to comply with such Section or any other provision of the
Credit Agreement.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and maintain
the Loans under the Credit Agreement as amended hereby, the Company hereby
warrants and represents to the Bank that it is duly authorized to execute and
deliver this Amendment, and to perform its obligations under the Credit
Agreement as amended hereby, and that this Amendment constitutes the legal,
valid and binding obligation of the Company, enforceable in accordance with its
terms.
ARTICLE III - CONDITIONS PRECEDENT
This Agreement shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions precedent:
3.1 Warranties. Before and after giving effect to this Amendment, the
representations and warranties in Section 6 of the Credit Agreement shall be
true and correct as thought made on the date hereof, except for changes that are
permitted by the terms of the Credit Agreement. The execution by the Company of
this Agreement shall be deemed a representation that the Company has complied
with the foregoing condition.
3.2 Defaults. Before and after giving effect to this Amendment, no Event of
Default and no Unmarred Event of Default shall have occurred and be continuing
under the Credit Agreement. The execution by the Company of this Agreement shall
be deemed a representation that the Company has complied with the foregoing
condition.
3.3 Documents. The Company shall have delivered this Amendment and
certified copies of resolutions of the Board of Directors of the Company
authorizing or ratifying the execution, delivery and performance, respectively,
of this Amendment, together with an incumbency certificate of officers executing
this Amendment.
ARTICLE IV - GENERAL
4.1 Expenses. The Company agrees to reimburse the Bank upon demand for all
reasonable expenses, including reasonable fees of attorneys (who may be
employees of the Bank) and legal expenses incurred by the Bank in the
preparation, negotiation and execution of this Amendment and any other document
required to be furnished herewith, and in enforcing the obligations of the
Company hereunder, and to pay and save the Bank harmless from all liability for,
any taxes which may be payable with respect to the execution or delivery of this
Agreement, which obligations of the Company shall survive any termination of the
Credit Agreement.
4.2 Counterparts. This Agreement may be executed in as many counterparts as
may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
4.3 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition of unenforceablility without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
4.4 Law. This Amendment shall be a contract made under the laws of the
State of Minnesota, which laws shall govern all the rights and duties hereunder.
4.5 Successors; Enforceability. This Amendment shall be binding upon the
Company and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Company and the Bank and the successors and assigns
of the Bank. Except as hereby amended, the Credit Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed at Minneapolis, Minnesota by their respective officers thereunto duly
authorized as of the date first written above.
GRACO INC.
By:/S/David M. Lowe
------------------------
Title: Treasurer
FIRST BANK NATIONAL ASSOCIATION
By:/S/Michael S. Harter
------------------------
Title: Commercial Banking Officer
EXHIBIT G
SUBSIDIARIES OF
GRACO INC.
Percentage of Voting
Jurisdiction of Securities Owned by
Subsidiary Incorporation The Company
- ---------- ------------- --------------------
Graco N.V. Belgium 100%
Graco Canada Incorporated Canada 100%
Graco Chile Limitada Chile 100%
Graco Europe N.V. Belgium 100%
Graco Gmbh Germany 100%
Graco Hong Kong Limited Hong Kong 100%
Graco K.K. Japan 100%
Graco Korea Inc. Korea 100%
Graco A.S. Norway 100%
Graco S.A. France 100%
Graco S.r.l. Italy 100%
Graco Limited England 100%
Graco Barbados FSC Limited Barbados 100%
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended Thirty-NineWeeks Ended
-------------------- ----------------------
Sept. 27, 1996 Sept. 29, 1995 Sept. 27, 1996 Sept. 29, 1995
-------------- -------------- -------------- --------------
(In thousands except per share amounts)
Net earnings applicable to common stock:
Net earnings ................................ $10,157 $ 6,569 $25,774 $20,537
Less dividends on preferred stock ........... -- 19 -- 56
------- ------- ------- -------
$10,157 $ 6,550 $25,774 $20,481
======= ======= ======= =======
Average number of common and common
equivalent shares outstanding:
Average number of common
shares outstanding ....................... 17,181 17,245 17,282 17,181
Dilutive effect of stock options
computed on the treasury
stock method ............................. 229 279 236 228
------- ------- ------- -------
17,410 17,524 17,518 17,409
======= ======= ======= =======
Net earnings per common
and common equivalent share .............. $ .58 $ .37 $ 1.47 $ 1.18
======= ======= ======= =======
Primary and fully diluted earnings per share are substantially the same.
5
0000042888
GRACO INC.
1,000
U.S. DOLLARS
9-MOS
DEC-27-1996
JUN-29-1996
SEP-27-1996
1
7,401
0
76,744
5,181
48,319
145,019
173,423
87,586
239,739
79,113
10,776
0
0
17,092
101,706
239,739
284,932
284,932
140,697
140,697
106,561
155
732
37,674
11,900
25,774
0
0
0
25,774
1.47
1.47
