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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 26, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________.
Commission File No. 1-9249
Graco Inc.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-2332
(Address of principal executive offices) (Zip Code)
(612) 623-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
Shares registered on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act:
None
As of March 6, 1998, 25,790,412 shares of Common Stock were outstanding.
Indicate by a 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of approximately 16,506,833 shares held by
non-affiliates of the registrant was approximately $492 million on March 6,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 5, 1998, are incorporated by reference into Part
III, as specifically set forth in said Part III.
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1
GRACO INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Page
Part I
Item 1 Business ...........................................................3
Item 2 Properties .........................................................5
Item 3 Legal Proceedings ..................................................6
Item 4 Submission of Matters to a Vote of Security Holders ................6
Executive Officers of the Company ..................................6
Part II
Item 5 Market for the Company's Common Stock and
Related Stockholder Matters......................................8
Item 6 Selected Financial Data.............................................9
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
Item 8 Financial Statements and Supplementary Data........................14
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure .........................29
Part III
Item 10 Directors and Executive Officers of the Company....................29
Item 11 Executive Compensation.............................................29
Item 12 Security Ownership of Certain Beneficial Owners and Management.....29
Item 13 Certain Relationships and Related Transactions.....................29
Part IV
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K....29
Signatures ...................................................................31
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NOTE: Certain exhibits listed in the Index to Exhibits beginning on
page 32, and filed with the Securities and Exchange Commission, have
been omitted. Copies of such exhibits may be obtained upon written
request directed to:
Treasurer
Graco Inc.
P.O. Box 1441
Minneapolis, Minnesota
55440-1441
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2
PART I
Item 1. Business
General Information. Graco Inc. ("Graco" or "the Company") supplies technology
and expertise for the management of fluids in both industrial and commercial
settings. Based in Minneapolis, Minnesota, Graco serves customers around the
world in the manufacturing, processing, construction and maintenance industries.
It designs, manufactures and markets systems, products and technology to move,
measure, control, dispense and apply a wide variety of fluids and viscous
materials. The Company helps customers solve difficult manufacturing problems,
increase productivity, improve quality, conserve energy, save expensive
material, control environmental emissions and reduce labor costs. Primary uses
of the Company's equipment include the application of coatings and finishes to
various industrial and commercial products; the mixing, metering, dispensing and
application of adhesive, sealant and chemical bonding materials; the application
of paint and other materials to architectural structures; the lubrication and
maintenance of vehicles and industrial machinery; and the transferring and
dispensing of various fluids. Graco is the successor to Gray Company, Inc.,
which was incorporated in 1926 as a manufacturer of auto lubrication equipment,
and became a public company in 1969.
It is Graco's strategic objective to be the highest quality, lowest cost, most
responsive supplier in the world for its principal products. In working to
achieve its goal to be a world-class manufacturer, Graco has organized its
manufacturing operations around focused factories which contain product-based
cells. The Company continues to refine these cells as new products are
introduced and new equipment is purchased with the ultimate goal of creating
cells which function independently of each other. Substantial investments in new
manufacturing technology have reduced cycle time and improved quality.
The Company operates in one industry segment, namely the design, manufacture,
marketing, sale and installation of systems and equipment for the handling of
fluids. Financial information concerning geographic operations and export sales
for the last three fiscal years is set forth in Note B of the Notes to
Consolidated Financial Statements.
Recent Developments. The David A. Koch Center, a world-class manufacturing and
global distribution facility, which opened in November 1996 in Rogers,
Minnesota, finished its first full year of operation in 1997. The Koch Center
provides additional production capacity, enhanced build-to-order capability for
projected growth and expanded space for warehousing and distribution. During
1997, the Company's product development efforts resulted in the introduction of
approximately 250 new products and pre-engineered system packages. During 1997,
Graco completed construction of a laboratory in its Riverside facility to
support the consolidation of product development activities in Minneapolis and
to provide world-class demonstration, training, test and display capabilities.
Products. Graco manufactures a wide array of specialized pumps, applicators,
regulators, valves, meters, atomizing devices, replacement parts, and
accessories, both individually and in system configurations which are used in
industrial and commercial applications in the movement, measurement, control,
dispensing and application of many fluids and semi-solids, including paints,
adhesives, sealants, and lubricants. In addition, it offers an extensive line of
portable equipment which is used in construction and maintenance businesses for
the application of paint and other materials.
Commercial and industrial equipment offered by Graco includes specialized pumps,
air and airless spray units, manual finishing equipment and fluid handling
systems. A variety of pumps provide fluid pressures ranging from 20 to more than
6,000 pounds per square inch and flow rates from under 1 gallon to 275 gallons
per minute.
The Company sells accessories for use with its equipment, including hoses,
couplings, regulators, valves, filters, reels, meters, and gauges, as well as a
complete line of spray guns, tips and applicators. These accessories increase
the flexibility, efficiency and effectiveness of Graco equipment. Packings,
seals, hoses and other parts, which must be replaced periodically in order to
maintain efficiency and prevent loss of material, are also sold by the Company.
Graco introduced a family of sophisticated plural component electronic
proportioners in 1996 and 1997. These proportioners, which provide high ratio
accuracy, on-line diagnostics and an electronic display panel, proportion, mix
and apply two-component materials. One of these proportioners is targeted at the
application of hem flange adhesive by automotive customers. The first in a line
of sealant and adhesive devices for manual bead dispense applications in the
automotive industry was introduced in 1997. These application devices possess
substantially reduced size, weight and trigger pull. In 1997, the Company
launched the Delta Spray"(TM)" family of air and high volume low pressure spray
guns designed for the application of paints and coatings. Two electronic meters
for automotive service applications were introduced in 1997. These streamlined
meters have a digital display and dispense up to five gallons per minute.
3
Sales of replacement parts and accessories have averaged 46 percent of the
Company's consolidated net sales and approximately 52 percent of gross profits
during the last three years. The following table summarizes the consolidated net
sales and gross profits (net sales less cost of products sold) by the Company's
principal product groups for that same period.
Product Group Sales and Gross Profit
(In thousands) 1997 1996 1995
---------------- ---------------- ---------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
NET SALES
Commercial and industrial equipment $226,198 54.7% $207,327 52.9% $206,558 53.5%
Accessories and replacement parts 187,699 45.3 184,429 47.1 179,756 46.5
-------- ----- -------- ----- -------- -----
$413,897 100.0% $391,756 100.0% $386,314 100.0%
======== ===== ======== ===== ======== =====
GROSS PROFIT
Commercial and industrial equipment $ 99,063 48.8% $ 92,480 47.2% $ 90,526 47.7%
Accessories and replacement parts 103,925 51.2 103,501 52.8 99,101 52.3
-------- ----- -------- ----- -------- -----
$202,988 100.0% $195,981 100.0% $189,627 100.0%
======== ===== ======== ===== ======== =====
Marketing and Distribution. Graco's operations are organized to allow its full
line of products and systems to be offered in each of its major geographic
markets: the Americas (North, Central and South America), Europe (includes the
Middle East and Africa), and Asia Pacific. The Industrial Equipment Division,
the Automotive Equipment Division, the Contractor Equipment Division, and the
Lubrication Equipment Division provide worldwide marketing direction and product
design and application assistance to each of these geographic markets.
Graco sells its equipment worldwide principally through independent
distributors. In Canada, Japan, Korea, and Europe, Graco equipment is sold to
distribution through sales subsidiaries. In the Americas and Europe, the Company
maintains a specialized direct sales force, which handles sales of large systems
and sales to certain corporate accounts. Manufacturers' representatives are used
with some product lines.
In 1997, Graco's net sales in the Americas were $276,410,000 or approximately 67
percent of the Company's consolidated net sales; in Europe net sales were
$82,028,000 or approximately 20 percent; and in the Asia Pacific region, net
sales were $55,459,000 or approximately 13 percent.
Consolidated backlog at December 26, 1997, was $22 million compared to $19
million at the end of 1996.
Research, Product Development and Technical Services. Graco's research,
development and engineering activities focus on new product design, product
improvements, applied engineering and strategic technologies. A dedicated
support group of application engineers and technicians also provides specialized
technical assistance to customers in the design and evaluation of fluid transfer
and application systems. It is one of Graco's goals to generate 30 percent of
each year's sales from products introduced in the prior three years. With the
exception of an automotive design group based at the Plymouth, Michigan
facility, all major research and development activities are now conducted in
facilities located in Minneapolis, and Rogers, Minnesota. Total research and
development expenditures were $17,817,000, $17,909,000, and $15,715,000 for the
1997, 1996, and 1995 fiscal years, respectively.
Intellectual Property. Graco owns a number of patents and has patent
applications pending both in the United States and in foreign countries,
licenses its patents to others, and is licensed under patents owned by others.
In the opinion of the Company, its business is not materially dependent upon any
one or more of these patents or licenses. The Company also owns a number of
trademarks in the United States and foreign countries, including the registered
trademarks for "GRACO," several forms of a capital "G" and various product
trademarks which are material to the business of the Company inasmuch as they
identify Graco and its products to its customers.
4
Competition. Graco faces substantial competition in all of its markets. The
nature and extent of this competition varies in different markets due to the
diversity of the Company's products. Product quality, reliability, design,
customer support and service, specialized engineering and pricing are the major
competitive factors. Although no competitor duplicates all of Graco's products,
some competitors are larger than the Company, both in terms of sales of directly
competing products and in terms of total sales and financial resources. Graco
believes it is one of the world's leading producers of high-quality specialized
fluid management equipment and systems. It is impossible, because of the absence
of reliable industry-wide third-party data, to determine its exact relative
market position.
Environmental Protection. During the fiscal year ending December 26, 1997, the
amounts incurred to comply with federal, state and local legislation pertaining
to environmental standards did not have a material effect upon the capital
expenditures or earnings of the Company.
Employees. As of December 26, 1997, the Company employed approximately 2,086
persons on a full-time basis. Of this total, approximately 352 were employees
based outside the United States, and 843 were hourly factory workers in the
United States.
Item 2. Properties
As of December 31, 1997, the Company's principal operations that occupy more
than 10,000 square feet were conducted in the following facilities:
Gross
Type of Facility Location Square Footage
- ---------------- -------- --------------
Owned
- -----
Distribution/Manufacturing/Office Rogers, Minnesota 333,000
Manufacturing/Office Minneapolis, Minnesota 242,300
Manufacturing/Office Minneapolis, Minnesota 202,300
Engineering/Research & Development Minneapolis, Minnesota 138,700
Engineering/Manufacturing/Office Plymouth, Michigan 106,000
Assembly/European Headquarters/Warehouse Maasmechelen, Belgium 75,800
Corporate Headquarters Golden Valley, Minnesota 73,800
Manufacturing/Office Sioux Falls, South Dakota 55,100
Sales Office/Warehouse Los Angeles, California 21,000
Office/Warehouse Mississauga, Ontario, Canada 20,000
Leased
- ------
Engineering/Office/Warehouse Yokohama, Japan (4 facilities) 48,724
Sales Office Rungis, France 12,626
Assembly/Engineering/Office/Warehouse Neuss, Germany 41,765
Sales Office West Midlands, United Kingdom 16,320
Warehouse Gwangju-Gun, Korea 10,549
The lease of the Graco Communications Center, (18,200 square foot facility in
Minneapolis, Minnesota) where technical publication, mail and literature
operations were previously performed, was terminated on February 28, 1997. These
operations were transferred to the David A. Koch Center in Rogers, Minnesota and
the Riverside facility in Minneapolis, Minnesota.
The sales office in Rungis, France was moved in February, 1997, to a smaller
facility within the same industrial park. The previous lease was terminated
effective March 31, 1997.
Manufacturing operations previously conducted in the facility in Franklin Park,
Illinois (82,000 square feet) were relocated to the Riverside facility and the
facility was sold.
A world-class demonstration laboratory in the Riverside facility was completed
during the second quarter of 1997. This laboratory is used for product training
and product demonstrations to customers.
5
The Company leases space for subsidiary sales or liaison offices around the
world, some of which have demonstration areas and/or warehouse space.
Graco's facilities are in satisfactory condition, suitable for their respective
uses and are sufficient and adequate to meet current needs, with the recent
expansions. Manufacturing capacity met business demand in 1997. Future
production requirements are expected to be met through existing production
capabilities, efficiency and productivity improvement and the use of available
subcontract services.
Item 3. Legal Proceedings
The Company is engaged in routine litigation incident to its business, which
management believes will not have a material adverse effect upon its operations
or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No issues were submitted to a vote of security holders during the fourth quarter
of 1997.
Executive Officers of the Company
The following are all the executive officers of the Company as of March 6, 1998.
George Aristides, 62, was elected Chief Executive Officer on January 1, 1996.
From 1993 to 1997 he was President. From 1993 to 1996 he was Chief Operating
Officer. From March 1993 to June 1993, he was Executive Vice President,
Industrial/Automotive Equipment Division, Manufacturing, Distribution and
Eurafrican Operations. From 1985 until 1993, he was Vice President,
Manufacturing Operations and Controller. He joined the Company in 1973 as
Corporate Controller and became Vice President and Controller in 1980. He has
served as a director of the Company since 1993.
Charles M. Osborne, 44, was elected President and Chief Operating Officer on May
6, 1997. From 1989 to 1997, he was Senior Vice President and Chief Financial
Officer, Deluxe Corporation, a printer of checks and business forms and a
supplier of electronic processing services to the financial payments industry.
He has been a director of Graco since 1995. Dale Johnson, a Vice President of
the Company, is a brother-in-law to Mr. Osborne.
Clayton R. Carter, 59, was elected Vice President, Industrial Equipment
Division, effective December 17, 1996. From January 1, 1995, he was Vice
President, Lubrication Equipment Division. He became Director, Vehicle Services
Division, in February 1994. He joined the Company in 1962 and has held various
sales management positions.
James A. Graner, 53, was elected Vice President and Controller in February 1994.
He became Treasurer in May 1993. Prior to becoming Assistant Treasurer in 1988,
he held various managerial positions in the treasury, accounting and information
systems departments. He joined Graco in 1974.
Clyde W. Hansen, 65, was elected Vice President, Human Resources and Quality
Management Systems, in December 1993. He joined the Company in 1984 as Employee
Relations Director, a position he held until December 1993.
John L. Heller, 61, was elected Vice President, Asia Pacific, Latin America &
Developing Markets in 1997. From 1996 to 1997 he was Vice President, Latin
America & Developing Markets. From July 1993 to December 1995, he was Senior
Vice President and General Manager - Contractor Equipment Division. He became
Vice President, Far East Operations and Latin America, in 1992. Prior to
becoming Vice President, Far East Operations in 1984, he held various management
and staff positions in sales and human resources. He joined the Company in 1972.
Dale D. Johnson, 43, was appointed Vice President, Contractor Equipment
Division, on December 17, 1996. Prior to becoming the Director of Marketing in
June 1996, he held various marketing and sales positions in the Contractor
Equipment Division. He joined the Company in 1976. Charles Osborne, President
and Chief Operating Officer of the Company, is a brother-in-law to Mr. Johnson.
6
Roger L. King, 52, was named Vice President & General Manager, European
Operations, effective January 4, 1996. From July 1993 to December 1995, he was
Senior Vice President and General Manager - International Operations. He was
Senior Vice President and Chief Financial Officer from March 1993 to July 1993,
and Vice President and Treasurer from 1987 to March 1993. Prior to becoming Vice
President, Treasurer and Secretary in 1980, he held the position of Treasurer
and Secretary and various treasury management positions with Graco. He joined
the Company in 1970.
David M. Lowe, 42, was elected to the position of Vice President, Lubrication
Equipment Division, in December 1996. From February 1995 to December 1996, he
was Treasurer. Prior to joining the Company, he was employed by Ecolab Inc.,
where he held various positions in the Treasury Department, including
Manager-Corporate Finance; Director, Corporate Finance and most recently
Director, Corporate Development.
Robert M. Mattison, 50, was elected Vice President, General Counsel and
Secretary, in January 1992, a position which he holds today. Prior to joining
the Company, he held various legal positions with Honeywell Inc., most recently
as Associate General Counsel.
Charles L. Rescorla, 46, is Vice President, Manufacturing & Distribution
Operations, a position to which he was appointed on January 1, 1995. Prior to
becoming the Director of Manufacturing in March 1994, he was the Director of
Engineering, Industrial Division, a position which he assumed in 1988 when he
joined the Company.
Mark W. Sheahan, 33, was elected Treasurer, effective December 17, 1996. He
joined the Company as Treasury Operations Manager in 1995. Prior to joining the
Company, he was a Senior Manager with KPMG Peat Marwick llp.
The Board of Directors elected Messrs. Aristides, Osborne, Carter, Graner,
Hansen, Heller, King, Lowe, Mattison and Sheahan on May 6, 1997, all to hold
office until the next annual meeting of directors or until their successors are
elected and qualify. Messrs. Johnson and Rescorla were appointed to their
positions by management effective December 17, 1996 and January 1, 1995,
respectively.
7
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
Graco Common Stock. Graco common stock is traded on the New York Stock Exchange
under the ticker symbol "GGG." As of March 6, 1998, there were 25,790,412 shares
outstanding and 2,426 common shareholders of record, which includes nominees or
broker dealers holding stock on behalf of an estimated 3,950 beneficial owners.
Quarterly Financial Information.
(In thousands, except per share amounts)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net Sales $92,099 $111,721 $101,920 $108,157
Gross Profit 44,533 53,399 51,362 53,694
Net Earnings 6,181 10,418 12,879 15,238
Per Common Share:
Basic Net Earnings 0.24 0.41 0.50 0.60
Diluted Net Earnings 0.24 0.40 0.49 0.58
Dividends Declared 0.09 0.09 0.09 0.11
- --------------------------------------------------------------------------------
Stock Price (per share)
High $ 24.08 $ 21.25 $ 23.25 $ 26.46
Low 16.17 15.67 19.42 22.17
Close* 19.17 20.08 23.83 24.87
- --------------------------------------------------------------------------------
Volume (# of shares) 2,958 4,030 1,577 2,307
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Net Sales $90,153 $ 97,099 $ 97,680 $106,824
Gross Profit 44,837 49,422 49,976 51,746
Net Earnings 5,585 10,032 10,157 10,395
Per Common Share:
Basic Net Earnings 0.22 0.39 0.39 0.41
Diluted Net Earnings 0.21 0.38 0.39 0.40
Dividends Declared 0.08 0.08 0.08 0.09
- --------------------------------------------------------------------------------
Stock Price (per share)
High $ 13.83 $ 14.42 $ 13.59 $ 17.33
Low 11.83 11.92 12.17 12.33
Close* 13.00 13.42 12.50 16.33
- --------------------------------------------------------------------------------
Volume (# of shares) 2,693 2,832 2,270 2,269
- --------------------------------------------------------------------------------
(1) All share and per share data has been restated for the three-for-two stock
split declared on December 12, 1997 and paid February 4, 1998.
*As of the last trading day of the calendar quarter.
8
Item 6. Selected Financial Data
Graco Inc. & Subsidiaries
(In thousands, except per share amounts) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Net Sales $413,897 $391,756 $386,314 $360,013 $322,602
Net Earnings 44,716 36,169 27,706 15,326 9,493
- ---------------------------------------------------------------------------------------------
Per Common Share:
Basic Net Earnings $ 1.75 $ 1.40 $ 1.07 $ .59 $ .37
Diluted Net Earnings 1.71 1.38 1.06 .59 .37
- ---------------------------------------------------------------------------------------------
Total Assets $264,532 $247,814 $217,833 $228,385 $216,365
Long-term Debt (including current portion) 7,959 9,920 12,009 32,483 19,480
Redeemable Preferred Stock -- -- -- 1,474 1,485
- ---------------------------------------------------------------------------------------------
Cash Dividends Declared
per Common Share $ 0.38 $ 0.33 $ 0.30 $ 0.26 $ 1.43
=============================================================================================
(1) Includes the special one-time dividend of $1.20 per share declared December
17, 1993.
(2) All per share data has been restated for the three-for-two stock split
declared on December 12, 1997 and paid February 4, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S REVIEW AND DISCUSSION
The following is Management's Review and Discussion and is not covered by the
Independent Auditors' Report.
Graco's net earnings of $44.7 million in 1997 are 24 percent higher than the
$36.2 million earned in 1996 and are significantly higher than the $27.7 million
recorded in 1995. The large increases in 1997 and 1996 are due largely to
enhanced profit margins, lower effective tax rates and higher net sales.
The table below indicates the percentage relationship between income and expense
items included in the Consolidated Statements of Earnings for the three most
recent fiscal years and the percentage changes in those items for such years.
Revenue & Expense Item Revenue & Expense Item
As a Percentage of Net Sales Percentage Increase (Decrease)
1997 1996 1995 1997/96 1996/95
- ------------------------------------------------------------------------------------------------
Net Sales 100.0 100.0 100.0 6 1
- ------------------------------------------------------------------------------------------------
Cost of Products Sold 51.0 50.0 50.9 8 --
Product Development 4.3 4.6 4.1 -- 14
Selling 21.1 21.8 22.4 3 (2)
General & Administrative 7.8 10.1 10.9 (19) (5)
- ------------------------------------------------------------------------------------------------
Operating Profit 15.8 13.5 11.7 23 17
- ------------------------------------------------------------------------------------------------
Interest Expense (0.2) (0.2) (0.6) 4 (64)
Other (Expense) Income, Net (0.3) 0.1 0.2 * *
- ------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 15.3 13.4 11.3 20 21
Income Taxes 4.5 4.2 4.1 13 5
- ------------------------------------------------------------------------------------------------
Net Earnings 10.8 9.2 7.2 24 31
================================================================================================
* Not a Meaningful Figure
9
NET SALES
In 1997, Graco recorded its fifth consecutive year of record net sales, posting
a 6 percent increase over 1996 to $413.9 million. The 1997 increase was due to
higher sales in all regions except Asia Pacific. Geographically, net sales in
the Americas of $276.4 million in 1997 increased by 9 percent when compared to
1996. European sales increased 4 percent in 1997 to $82.0 million, a 13 percent
increase, offset by a 9 percent decline due to exchange rates. Sales in Asia
Pacific declined 8 percent in 1997 to $55.5 million, a 1 percent decrease and a
7 percent decline due to exchange rates. For the past two years, declines in
Asia Pacific have been primarily due to exchange rates.
In 1996, sales increased 1 percent over 1995, due primarily to higher sales in
North America, somewhat offset by declines in Europe and Asia Pacific.
Periodic price increases have contributed to net sales increases. The Company's
most recent U.S. price increase was effective in March 1997 and represented an
average 0.4 percent increase from its January 1996 price lists. The January 1996
U.S. price change was an average 2.5 percent increase from January 1995 prices.
Consolidated backlog at December 26, 1997, was $22 million compared to $19
million at the end of 1996, and $20 million at the end of 1995.
% Increase (Decrease)
---------------------
(In thousands) 1997 1996 1995 1997/96 1996/95
- ------------------------ -------- -------- -------- ------- -------
Division Sales:
Industrial Equipment $162,557 $154,866 $151,016 5 3
Automotive Equipment 63,557 69,910 75,637 (9) (8)
Contractor Equipment 142,400 124,392 118,818 15 5
Lubrication Equipment 45,383 42,588 40,843 7 4
-------- -------- -------- ------- -------
Consolidated $413,897 $391,756 $386,314 6 1
======== ======== ======== ======= =======
Geographic Sales:
Americas $276,410 $252,615 $238,874 9 6
Europe 82,028 78,666 82,552 4 (5)
Asia Pacific 55,459 60,475 64,888 (8) (7)
-------- -------- -------- ------- -------
Consolidated $413,897 $391,756 $386,314 6 1
======== ======== ======== ======= =======
COST OF PRODUCTS SOLD
The cost of products sold, as a percentage of net sales, increased in 1997 to
51.0 percent from 50.0 percent in 1996. This increase was the result of several
factors, including material cost increases and exchange rates, partially offset
by improved manufacturing efficiencies. The cost of products sold as a
percentage of net sales of 50.0 percent in 1996 decreased from 50.9 percent in
1995, due to a combination of factors including modest price increases and
improved manufacturing efficiencies, partially offset by material and
manufacturing cost increases.
OPERATING EXPENSES
Operating expenses in 1997 declined 4 percent from 1996, primarily due to the
impact of lower general and administrative expenses, partially offset by higher
selling expenses resulting from increased net sales. The lower expense level is
the result of the ongoing benefits of restructuring, exchange rates, higher
investment returns on employee retirement plan assets, and elimination of
discretionary contributions. Operating expenses in 1996 declined 1 percent from
1995, due primarily to lower selling and general and administrative expenses as
well as lower non-recurring charges in 1996 when compared to 1995.
Product development expenses in 1997 were virtually unchanged from 1996 levels.
In 1996, product development costs were 14 percent higher than 1995
expenditures. Graco is committed to expanding its sales by making significant
investments in product development.
10
FOREIGN CURRENCY EFFECTS
Foreign currency translations negatively impacted 1997 earnings before income
taxes by $6.2 million when compared to 1996, and decreased earnings before
income taxes by $2.7 million in 1996 when compared to 1995. The reduced profits
in both years were due to a strong U.S. dollar versus other foreign currencies.
Since approximately 34 percent of the Company's sales and 12 percent of its
product costs are in currencies other than the U.S. dollar, a strong U.S. dollar
reduces the Company's profits. A weakening of the U.S. dollar has the reverse
impact on the Company's profits. Gains and losses attributable to translating
the financial statements for all non-U.S. subsidiaries, and the gains and losses
on the forward and option contracts used to hedge these exposures, which are
non-speculative, are in Other (expense) income.
OTHER (EXPENSE) INCOME
The Company's interest expense rose 4 percent in 1997, primarily reflecting an
increase in the average levels of debt during the year. This increase in debt
levels resulted from higher short-term debt during portions of 1997.
Other expense of $1.1 million in 1997, other income of $0.5 million in 1996, and
$0.7 million for 1995, include, among other things, the foreign currency
translation gains and losses discussed above, a $1.2 million gain from the sale
of real estate in 1997, a $0.8 million favorable settlement of a legal dispute
in 1997, a $1.5 million favorable settlement of a legal dispute in 1996, and a
$0.9 million gain from the sale of real estate in 1995.
INCOME TAXES
The Company's net effective tax rate of 30 percent in 1997 is five percentage
points lower than the 1997 U.S. federal tax rate of 35 percent. The decrease
from the 31 percent rate in 1996 is due primarily to foreign earnings being
taxed at effective rates lower than the U.S. rate as foreign subsidiary earnings
permitted recognition of previously reserved deferred tax benefits and previous
tax filings were validated. The effective tax rate of 31 percent in 1996 was
lower than the 1995 rate of 36 percent principally due to foreign earnings being
taxed at lower effective rates than the U.S. rate from the utilization of
previously reserved net operating losses. Detailed reconciliations of the U.S.
federal tax rate to the effective rates for 1997, 1996, and 1995 are included in
Note D to the Consolidated Financial Statements.
EARNINGS
In 1997, earnings increased by 24 percent to $44.7 million, or $1.71 per diluted
share as compared to 1996, when earnings increased by 31 percent to $36.2
million or $1.38 per diluted share as compared to 1995.
ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" in 1997. Refer to notes A and K to the Consolidated
Financial Statements for more detailed information.
YEAR 2000 INFORMATION SYSTEMS DISCLOSURES
The Year 2000 issue is the result of a computer program being written using two
digits rather than four to define the applicable year, which could cause
potential failure or miscalculation in date-sensitive software that recognizes
"00" as 1900, rather than 2000.
The Company is continuing its program, begun in 1996, to ensure that all
hardware and software will be year 2000 compliant. A dedicated project team is
expected to complete the conversion of core business applications in 1998.
Additional teams have initiated year 2000 compliance projects on the Company's
network, operating system software, and distributed systems.
The Company has incurred costs totaling $1 million during 1997, and estimates a
total of an additional $5 to $8 million to be spent in 1998 and 1999 to resolve
year 2000 issues. These costs are charged to expense as incurred and include
software license fees and allocation of internal staff time. Incremental costs
associated with year 2000 compliance are not anticipated to result in
significant increases in future operating expenses and will not have a material
adverse effect on the results of operations, liquidity and capital resources.
Rather, existing resources are being redeployed and other projects are being
delayed to accommodate year 2000 related projects. A contingency plan is being
11
developed in 1998 for critical business applications to mitigate potential
problems or delays associated with either new system replacements or established
vendor delivery dates. Additionally, the Company is working with customers and
suppliers to assess the potential impact of their year 2000 compliance issues on
Graco. Although all companies have risks associated with the year 2000,
management believes that sufficient resources have been allocated and project
plans are in place which will result in uninterrupted business activity with no
material impact on operations or operating results.
OUTLOOK
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 in recent years that have
improved 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.
SAFE HARBOR CAUTIONARY STATEMENT
This annual report on Form 10-K 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.
Risk 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.
SHAREHOLDER ACTIONS
Periodically, the Company initiates measures aimed at enhancing shareholder
value, broadening common stock ownership, improving the liquidity of its common
shares, and effectively managing its cash balances. A summary of recent actions
follows:
o three-for-two stock splits paid in 1998 and in 1996;
o share repurchases of approximately 1 million shares over the last two
years;
o a 18 percent increase in the regular dividend in 1997;
o a 17 percent increase in the regular dividend in 1996;
o a 13 percent increase in the regular dividend in 1995.
ASSETS
The following table highlights several key measures of asset performance.
(In thousands) 1997 1996
- ------------------------------------ ------- -------
Cash and Cash Equivalents $13,523 $ 6,535
Working Capital $87,312 $63,884
Current Ratio 2.3 1.8
Average Days Receivables Outstanding 75 75
Inventory Turnover 4.9 4.7
Average inventory balances and inventory turnover increased during 1997 when
compared to 1996, and year-end inventory was higher at $43.9 million to
accommodate increased sales activity. Accounts receivable at year end increased
3 percent to $86.1 million.
12
LIABILITIES
At the end of 1997, the Company's long-term debt (including the current portion
thereof) was 5 percent of total capital (long-term debt plus shareholders'
equity) compared to 7 percent in 1996. The Company's total debt (notes payable
to banks plus long-term debt including the current portion thereof) as a
percentage of total capital fell to 7 percent at the end of 1997, down from 10
percent in 1996. The Company had $67.7 million in unused credit lines available
at December 26, 1997. The Company believes that available credit lines plus
operating cash flows are adequate to fund its short and long-term initiatives.
SHAREHOLDERS' EQUITY
Shareholders' equity totaled $157.5 million on December 26, 1997, $31.5 million
higher than 1996.
CASH FLOWS FROM OPERATING ACTIVITIES
During 1997, the Company's operating cash flow of $36.3 million was lower than
1996 due to changes in working capital requirements. Cash flow from operating
activities in 1996 was $48.6 million, slightly lower than the $51.7 million
recorded in 1995.
The Company's operating cash flows have been, and are expected to be, the
principal source of funds required for future additions to property, plant, and
equipment, and working capital, as well as for other corporate purposes.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $20.1 million in 1997, $30.0 million in 1996, and
$19.8 million in 1995. These expenditures have enhanced the Company's
engineering and manufacturing capabilities, improved product quality, increased
capacity, and lowered costs. Substantial expenditures in 1997 included the
addition of manufacturing equipment and the construction of a demonstration
laboratory in the Riverside facility.
The Company expects to spend in excess of $20 million on capital improvements in
1998. Capital expenditures in 1998 will include manufacturing equipment, and
cellular manufacturing and information systems initiatives.
CASH FLOWS FROM FINANCING ACTIVITIES
The amount of common stock issued represents the funds received for shares sold
through the Company's Dividend Reinvestment Plan, its Employee Stock Purchase
Plan, and the distribution of shares pursuant to its Long Term Stock Incentive
Plan, more fully described in Note H to the Consolidated Financial Statements.
Graco offers an Automatic Dividend Reinvestment Plan, which gives shareholders a
simple and convenient way to reinvest quarterly cash dividends in additional
shares of Graco common stock. Brokerage and service charges are paid by the
Company.
From time to time, the Company may make open market purchases of its common
shares. On February 20, 1998, the Company's Board of Directors authorized
management to repurchase up to 1,200,000 shares for a period ending on February
28, 2000. In 1997, the Company repurchased 389,550 split-adjusted shares at an
average split-adjusted price per share of $17.90.
Graco is currently paying 11 cents per share as its regular quarterly dividend.
Annual cash dividends paid on the Company's common and preferred stock were $9.6
million in 1997, $8.3 million in 1996, and $7.5 million in 1995. The Company
expects to continue paying regular quarterly dividends to its common
shareholders at amounts that will adjust periodically to reflect earning
performance and management expectations.
Debt was reduced by $1.9 million and $2.4 million in 1997 and 1996,
respectively, reflecting strong cash flows from operations attributable to
higher net income and lower working capital requirements.
13
Item 8. Financial Statements and Supplementary Data
Page
o Responsibility for Financial Reporting 15
o Independent Auditors' Report 15
o Consolidated Statements of Earnings for fiscal years
1997, 1996, and 1995 16
o Consolidated Statements of Changes in Shareholders' Equity
Accounts (See Footnote F, Notes to Consolidated Financial
Statements) 23
o Consolidated Balance Sheets for fiscal years 1997 and 1996 17
o Consolidated Statements of Cash Flows for fiscal years
1997, 1996, and 1995 18
o Notes to Consolidated Financial Statements 19
o Selected Quarterly Financial Data (See Part II, Item 5, Market
for the Company's Common Stock and Related Stockholder Matters) 8
14
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the accuracy, consistency, and integrity of the
information presented in this annual report on Form 10-K. The consolidated
financial statements and financial statement schedule have been prepared in
accordance with generally accepted accounting principles and, where necessary,
include estimates based upon management's informed judgment.
In meeting this responsibility, management believes that its comprehensive
systems of internal controls provide reasonable assurance that the Company's
assets are safeguarded and transactions are executed and recorded by qualified
personnel in accordance with approved procedures. Internal auditors periodically
review these accounting and control systems. Deloitte & Touche LLP, independent
certified public accountants, are retained to audit the consolidated financial
statements, and express an opinion thereon. Their opinion is included below.
The Board of Directors pursues its oversight role through its Audit Committee.
The Audit Committee, composed of directors who are not employees, meets twice a
year with management, internal auditors, and Deloitte & Touche LLP to review the
systems of internal control, accounting practices, financial reporting, and the
results of auditing activities.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Graco Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Graco Inc. and
Subsidiaries (the "Company") as of December 26, 1997 and December 27, 1996, and
the related statements of earnings and cash flows for each of the three years in
the period ended December 26, 1997. Our audit also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Graco Inc. and Subsidiaries as of
December 26, 1997 and December 27, 1996, and the results of their operations and
their cash flows for each of the three years in the period ended December 26,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche llp
Minneapolis, Minnesota
January 19, 1998
15
CONSOLIDATED STATEMENTS OF EARNINGS GRACO INC. & Subsidiaries
Years Ended
--------------------------------------------
December 26, December 27, December 29,
(In thousands, except per share amounts) ..................... 1997 1996 1995
------------ ----------- ------------
Net Sales .................................................... $ 413,897 $ 391,756 $ 386,314
Cost of products sold ...................................... 210,909 195,775 196,687
------------ ----------- ------------
Gross Profit ................................................. 202,988 195,981 189,627
Product development ........................................ 17,817 17,909 15,715
Selling .................................................... 87,479 85,281 86,634
General and administrative ................................. 32,219 39,734 42,044
------------ ----------- ------------
Operating Profit ............................................. 65,473 53,057 45,234
Interest expense ........................................... (866) (831) (2,335)
Other (expense) income, net ................................ (1,091) 543 657
------------ ----------- ------------
Earnings before Income Taxes ................................. 63,516 52,769 43,556
Income taxes ............................................... 18,800 16,600 15,850
------------ ----------- ------------
Net Earnings ................................................. $ 44,716 $ 36,169 $ 27,706
============ =========== ============
Basic Net Earnings per Common Share .......................... $ 1.75 $ 1.40 $ 1.07
============ =========== ============
Diluted Net Earnings per Common Share ........................ $ 1.71 $ 1.38 $ 1.06
============ =========== ============
All per share data has been restated for the three-for-two stock split declared
on December 12, 1997, paid February 4, 1998.
See Notes to Consolidated Financial Statement.
16
CONSOLIDATED BALANCE SHEETS GRACO INC. & Subsidiaries
December 26, December 27,
(In thousands, except share amounts) 1997 1996
- ------------------------------------ ------------ ------------
Assets
Current Assets:
Cash and cash equivalents....................... $ 13,523 $ 6,535
Accounts receivable, less allowances of
$4,100 in 1997 and $4,700 in 1996............ 86,148 83,474
Inventories..................................... 43,942 41,531
Deferred income taxes, net...................... 11,140 11,633
Other current assets............................ 1,539 1,321
------------ ------------
Total current assets........................... 156,292 144,494
Property, Plant and Equipment, at Cost:
Land............................................ 5,083 5,227
Buildings and improvements...................... 63,981 63,213
Manufacturing equipment......................... 91,161 82,544
Office, warehouse and automotive equipment...... 30,497 31,049
Construction in progress........................ 6,218 1,052
------------ ------------
Total property, plant and equipment, at cost... 196,940 183,085
Accumulated depreciation........................ (96,760) (88,913)
------------ ------------
Net property, plant and equipment.............. 100,180 94,172
Other Assets...................................... 8,060 9,148
------------ ------------
$264,532 $247,814
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable to banks.......................... $ 2,911 $ 3,813
Current portion of long-term debt............... 1,796 1,845
Trade accounts payable.......................... 12,542 13,854
Salaries, wages and commissions................. 14,903 14,808
Accrued insurance liabilities................... 10,227 10,925
Income taxes payable............................ 5,546 4,647
Other current liabilities....................... 21,055 30,718
------------ ------------
Total current liabilities...................... 68,980 80,610
Long-term Debt, less current portion.............. 6,163 8,075
Retirement Benefits and Deferred Compensation..... 31,880 33,079
Commitments and Contingencies (Note J)
Shareholders' Equity
Common stock, $1 par value; 33,750,000 shares
authorized; shares outstanding, 25,552,694
and 17,047,166, in 1997 and 1996,
respectively................................. 25,553 17,047
Additional paid-in capital...................... 26,085 22,254
Retained earnings............................... 105,030 85,232
Other, net...................................... 841 1,517
------------ ------------
Total shareholders' equity..................... 157,509 126,050
------------ ------------
$264,532 $247,814
============ ============
See Notes to Consolidated Financial Statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS GRACO INC. & Subsidiaries
Years Ended
------------------------------------------
December 26, December 27, December 29,
(In thousands) 1997 1996 1995
- ---------------------------------------------------- ------------ ------------ ------------
Cash Flows from Operating Activities:
Net earnings ..................................... $ 44,716 $ 36,169 $ 27,706
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization ................ 13,494 12,658 11,082
Deferred income taxes ........................ (358) 781 1,938
Change in:
Accounts receivable ........................ (7,804) (10,192) 4,499
Inventories ................................ (3,860) (394) 9,693
Trade accounts payable ..................... (839) 459 (6,193)
Salaries, wages and commissions ............ 437 1,081 999
Retirement benefits and deferred
compensation ............................ (626) 928 2,448
Other accrued liabilities .................. (8,549) 6,963 (3,417)
Other ...................................... (330) 148 2,955
------------ ------------ ------------
36,281 48,601 51,710
------------ ------------ ------------
Cash Flows from Investing Activities:
Property, plant and equipment additions .......... (20,109) (30,038) (19,848)
Proceeds from sale of property, plant and
equipment..................................... 1,990 1,058 3,036
------------ ------------ ------------
(18,119) (28,980) (16,812)
------------ ------------ ------------
Cash Flows from (for) Financing Activities:
Borrowing on notes payable and lines of credit.... 44,033 15,890 44,248
Payments on notes payable and lines of credit..... (44,460) (16,657) (50,927)
Payments on long-term debt ....................... (1,455) (1,652) (20,333)
Common stock issued .............................. 3,260 2,525 2,485
Retirement of common and preferred stock ......... (6,971) (8,115) (1,547)
Cash dividends paid .............................. (9,608) (8,344) (7,490)
------------ ------------ ------------
(15,201) (16,353) (33,564)
------------ ------------ ------------
Effect of exchange rate changes on cash ............ 4,027 1,624 (2,135)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,988 4,892 (801)
Cash and cash equivalents
Beginning of year ................................ 6,535 1,643 2,444
------------ ------------ ------------
End of year ...................................... $ 13,523 $ 6,535 $ 1,643
============ ============ ============
See Notes to Consolidated Financial Statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRACO INC. & Subsidiaries
Years Ended December 26, 1997, December 27, 1996, and December 29, 1995
A. Summary of Significant Accounting Policies
Fiscal Year. The Company's fiscal year is 52 or 53 weeks, ending on the last
Friday in December.
Basis of Statement Presentation. The Consolidated Financial Statements include
the accounts of the parent company and its subsidiaries after elimination of all
significant intercompany balances and transactions. As of December 26, 1997, all
subsidiaries are 100 percent owned. Subsidiaries outside North America have been
included principally on the basis of fiscal years ended November 30 to effect
more timely consolidated financial reporting. The U.S. dollar is the functional
currency for all foreign subsidiaries.
Accounting Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents. All highly liquid investments with a maturity of three months
or less at the date of purchase are considered to be cash equivalents.
Inventory Valuation. Inventories are stated at the lower of cost or market. The
last-in, first-out (LIFO) cost method is used for valuing all U.S. inventories.
Inventories of foreign subsidiaries are valued using the first-in, first-out
(FIFO) cost method.
Currency Hedges. The Company periodically evaluates its monetary asset and
liability positions denominated in foreign currencies. The Company enters into
forward contracts, borrowings in various currencies or options, in order to
hedge its net monetary positions. Consistent with financial reporting
requirements, these hedges and net monetary positions are recorded at current
market values and the gains and losses are included in Other (expense) income.
The Company believes it uses strong financial counterparts in these transactions
and that the resulting credit risk under these hedging strategies is not
significant. The notional amounts (which may not be indicative of credit or
market risk) of such contracts were (in U.S. dollars) $28,271,000 and $9,322,000
at December 26, 1997 and December 27, 1996, respectively.
Property, Plant and Equipment. For financial reporting purposes, plant and
equipment are depreciated over their estimated useful lives, primarily by using
the straight-line method as follows:
Buildings and improvements 10 to 30 years
Leasehold improvements 3 to 10 years
Manufacturing equipment and tooling 3 to 10 years
Office, warehouse and automotive equipment 4 to 10 years
Revenue Recognition. Revenue is recognized on large contracted systems using the
percentage-of-completion method of accounting. The Company recognizes revenue on
other products when title passes, which is usually upon shipment.
Earnings Per Common Share. Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" was issued in February 1997 and requires the
presentation of earnings per share on a basic and diluted basis. Basic earnings
per share is computed by dividing earnings available to common shareholders by
the weighted average number of shares outstanding during the year. Diluted
earnings per share is computed after giving effect to the exercise of all
dilutive outstanding options grants. The Company adopted SFAS No. 128 in 1997.
Stock Based Compensation. SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued in October 1995 and requires companies to measure
employee stock compensation plans based on the fair value method of accounting.
However, the statement allows the alternative of continued use of Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," with pro forma disclosure of net income and earnings per share
determined as if the fair value method had been applied in measuring
compensation cost. The Company adopted SFAS No. 123 in 1996 and elected the
continued use of APB No. 25.
19
Segment Reporting. 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 beginning January 1, 1998. 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 completed its analysis of which operating segments it will report on.
B. Industry Segment and Foreign Operations
The Company operates in one industry segment, namely, the design, manufacture,
marketing, sale and installation of systems and equipment for the management of
fluids.
The Company's operations by geographical area for the last three years are shown
below.
(In thousands) 1997 1996 1995
- -------------------------------------------------------- --------- --------- ---------
Sales to unaffiliated customers:
Americas $ 276,410 $ 252,615 $ 238,874
Europe 82,028 78,666 82,552
Asia Pacific 55,459 60,475 64,888
--------- --------- ---------
413,897 391,756 386,314
Intercompany sales between geographic areas:
Americas 74,633 54,615 56,703
Europe 5 57 32
Asia Pacific 997 433 1,398
Eliminations (75,635) (55,105) (58,133)
--------- --------- ---------
Total sales $ 413,897 $ 391,756 $ 386,314
========= ========= =========
Operating profit:
Americas $ 86,858 $ 71,909 $ 70,037
Europe 7,480 9,153 1,916
Asia Pacific 3,195 6,312 4,384
Eliminations (1,167) 1,203 1,139
--------- --------- ---------
96,366 88,577 77,476
General corporate expenses and corporate initiatives (31,984) (34,977) (31,585)
Interest expense (866) (831) (2,335)
--------- --------- ---------
Earnings before income taxes $ 63,516 $ 52,769 $ 43,556
========= ========= =========
Assets:
Americas $ 193,310 $ 180,467 $ 152,831
Europe 39,722 40,938 46,618
Asia Pacific 22,499 26,492 26,985
Corporate 13,526 6,536 1,643
Eliminations (4,525) (6,619) (10,244)
--------- --------- ---------
Total assets $ 264,532 $ 247,814 $ 217,833
========= ========= =========
1 Included are U.S. export sales to unaffiliated customers of $37,477, $27,989,
and $29,549, in 1997, 1996, and 1995, respectively.
2 Transfers between entities are made at prices which allow appropriate markups
to the manufacturing and selling unit.
Net earnings for subsidiaries operating outside the U.S. were $6,500,000,
$10,468,000, and $12,506,000 for 1997, 1996, and 1995, respectively.
Retained earnings for subsidiaries operating outside the U.S. were $8,889,000
and $8,872,000 for 1997 and 1996, respectively.
Net transaction and translation gains or losses, included in Other (expense)
income, were $(2,825,000), $(617,000), and $528,000 for 1997, 1996, and 1995,
respectively.
20
C. Inventories
Major components of inventories for the last two years were as follows:
(In thousands) 1997 1996
- ------------------------------------------------------- ------- -------
Finished products and components $38,290 $38,707
Products and components in various stages of completion 25,320 24,691
Raw materials 16,715 15,192
------- -------
80,325 78,590
Reduction to LIFO cost (36,383) (37,059)
------- -------
$43,942 $41,531
------- -------
Inventories valued under the LIFO method were $26,593,000 and $26,303,000 for
1997 and 1996, respectively. All other inventory was valued on the FIFO method.
In 1997, certain inventory quantities were reduced, resulting in liquidation of
LIFO inventory quantities carried at lower costs from prior years. The effect on
net earnings in 1997 was not significant.
D. Income Taxes
Earnings before income tax expense consist of:
(In thousands) 1997 1996 1995
- -------------- ------- ------- -------
Domestic $53,139 $33,844 $27,247
Foreign 10,377 18,925 16,309
------- ------- -------
Total $63,516 $52,769 $43,556
======= ======= =======
Income tax expense consists of:
(In thousands) 1997 1996 1995
- -------------- ------- ------- -------
Current:
Domestic:
Federal $11,729 $10,518 $ 9,629
State and local 1,709 1,201 1,591
Foreign 5,281 4,638 3,479
------- ------- -------
18,719 16,357 14,699
------- ------- -------
Deferred:
Domestic 1,994 (227) 227
Foreign (1,913) 470 924
------- ------- -------
81 243 1,151
------- ------- -------
Total $18,800 $16,600 $15,850
------- ------- -------
Income taxes paid were $17,148,000, $14,967,000, and $16,019,000 in 1997, 1996,
and 1995, respectively.
21
A reconciliation between the U.S. federal statutory tax rate and the effective
tax rate is as follows:
1997 1996 1995
---- ---- ----
Statutory tax rate 35% 35% 35%
Foreign earnings with (lower) higher tax rates (3) (2) 3
Reduction of valuation allowance (3) (6) (4)
State taxes, net of federal effect 2 2 2
U.S. general business tax credits (1) (1) (1)
Other -- (1) 1
---- ---- ----
Effective tax rate 30% 31% 36%
==== ==== ====
Deferred income taxes are provided for all temporary differences between the
financial reporting and the tax basis of assets and liabilities. The deferred
tax assets (liabilities) resulting from these differences are as follows:
(In thousands) 1997 1996
- ------------------------------------------------------------ -------- --------
Inventory valuations $ 3,299 $ 3,307
Insurance accruals 3,445 3,669
Vacation accruals 1,343 1,417
Bad debt reserves 1,109 1,281
Other 1,944 1,959
-------- --------
Current 11,140 11,633
-------- --------
Unremitted earnings of consolidated foreign subsidiaries (3,500) (3,800)
Excess of tax over book depreciation (5,594) (4,906)
Postretirement benefits 5,149 4,891
Pension and deferred compensation 5,397 5,352
Net operating loss carryforward -- 1,272
Other 480 594
Valuation allowance -- (1,995)
-------- --------
Non-current 1,932 1,408
-------- --------
Net deferred tax assets $ 13,072 $ 13,041
======== ========
1 Payable at the time these earnings are distributed to the parent, however, tax
planning strategies may mitigate this liability.
Net non-current deferred tax assets above are included in Other Assets. Total
deferred tax assets were $22,522,000 and $22,247,000, and total deferred tax
liabilities were $9,450,000 and $9,206,000 on December 26, 1997 and December 27,
1996, respectively. A valuation allowance of $1,995,000 has been recorded as of
December 27, 1996, primarily related to the uncertainty of obtaining tax
benefits for subsidiary operating losses.
E. Debt
(In thousands) 1997 1996
- ------------------------------------------------------ ----- ------
Term debt, 5.08% at October 1, 1997, final
equal annual installment paid in 1997 $ -- $ 300
Industrial development refunding revenue
bonds, 4.38% at December 26, 1997,
payable through 2002 (property carried at
$2,852 pledged as collateral) 3,500 4,000
Obligations related to low-income housing investments 2,508 3,205
Other 1,951 2,415
------ ------
Total long-term debt 7,959 9,920
Less current portion 1,796 1,845
------ ------
Long-term portion $6,163 $8,075
====== ======
22
Aggregate annual scheduled maturities of long-term debt for the next five years
are as follows: 1998-$1,796,000; 1999-$3,088,000; 2000-$1,215,000;
2001-$1,310,000; 2002-$550,000. Interest paid on debt during 1997, 1996, and
1995 amounted to $856,000, $841,000, and $2,179,000, respectively. The fair
value of the Company's long-term debt at December 26, 1997 and December 27,
1996, is not materially different than its recorded value.
The Company has an interest rate swap agreement in place whereby it fixed the
interest rate of the remaining principal amounts of the Company's previously
variable interest rate revenue bond debt at 4.38 percent through 2002. At
December 26, 1997, the contractual variable interest rate under the revenue
bonds was Bankers Trust reference rate plus 0.62 percent, or 4.78 percent. The
cash flows related to the swap agreement are recorded as income when received
and expense when paid. Market and credit risk are not significant.
On December 26, 1997, the Company had lines of credit with U.S. and foreign
banks of $70,082,000, including a $25,000,000 revolving credit agreement. The
unused portion of these credit lines was $67,734,000 at December 26, 1997.
Borrowing rates under these facilities vary with the prime rate, rates on
domestic certificates of deposit, and the London interbank market. The weighted
short-term borrowing rates were 5.8 percent, 3.6 percent, and 2.2 percent at
December 26, 1997, December 27, 1996, and December 29, 1995, respectively. The
Company pays commitment fees of up to 3/16 percent per annum on the daily
average unused amounts on certain of these lines. No compensating balances are
required.
The Company is in compliance with the financial covenants of its debt
agreements. Under the most restrictive terms of the agreements, approximately
$28,137,000 of retained earnings were available for payment of cash dividends at
December 26, 1997.
F. Shareholders' Equity
Changes in shareholders' equity accounts are as follows:
(In thousands) 1997 1996 1995
- ----------------------------------- --------- --------- ---------
Preferred Stock
Balance, beginning of year $ -- $ -- $ 1,474
Shares repurchased -- -- (1,474)
--------- --------- ---------
Balance, end of year -- -- --
--------- --------- ---------
Common Stock
Balance, beginning of year 17,047 17,265 11,377
Stock split 8,516 -- 5,754
Shares issued 250 188 143
Shares repurchased (260) (406) (9)
--------- --------- ---------
Balance, end of year 25,553 17,047 17,265
--------- --------- ---------
Additional Paid-In Capital
Balance, beginning of year 22,254 20,397 18,289
Shares issued 4,171 2,337 2,342
Shares repurchased (340) (480) (234)
--------- --------- ---------
Balance, end of year 26,085 22,254 20,397
--------- --------- ---------
Retained Earnings
Balance, beginning of year 85,232 64,949 50,702
Net income 44,716 36,169 27,706
Cash dividends declared (10,033) (8,657) (7,705)
Stock split (8,516) -- (5,754)
Shares repurchased (6,369) (7,229) --
--------- --------- ---------
Balance, end of year 105,030 85,232 64,949
--------- --------- ---------
Other, Net
Balance, end of year 841 1,517 960
--------- --------- ---------
Total Shareholders' Equity $ 157,509 $ 126,050 $ 103,571
========= ========= =========
23
The Board of Directors declared three-for-two stock splits on December 12, 1997
and December 15, 1995, respectively; effected in the form of 50 percent stock
dividends payable February 4, 1998 and February 7, 1996, respectively; to
shareholders of record on January 7, 1998, and January 3, 1996, respectively.
Accordingly, December 26, 1997 and December 29, 1995 balances reflect the splits
with an increase in common stock and reduction in retained earnings of
$8,516,000 and $5,754,000, respectively. All stock option, share, and per share
data has been restated to reflect the splits.
At December 26, 1997, the Company had 22,549 authorized, but not issued,
cumulative preferred shares. The Company also has authorized, but not issued, a
separate class of 3,000,000 shares of preferred stock, $1 par value.
During 1995, the Company redeemed all 14,740 outstanding shares of cumulative
preferred stock at the call price of $105 per share plus accrued and unpaid
dividends. Prior to redemption, the holders of the cumulative preferred stock
were entitled to fixed cumulative dividends of 5 percent per annum on the par
value before cash dividends were paid or declared on common stock.
The Company maintains a Plan in which one preferred share purchase right
("Right") exists for each common share of the Company. Each Right will entitle
its holder to purchase one one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $80, subject to
adjustment. The Rights are exercisable only if a person or group acquires
beneficial ownership of 20 percent or more of the Company's outstanding common
stock. The Rights expire in March 2000 and may be redeemed earlier by the Board
of Directors for $.01 per Right.
G. Employee Stock Ownership Plan
The Company has a leveraged Employee Stock Ownership Plan (ESOP) under which
there was an outstanding debt of $300,000 at December 27, 1996. The remaining
balance of a concurrent loan to the ESOP Trust from the Company was paid in
1997. The Company's loan was included in long-term debt with the receivable from
the ESOP in a like amount recorded as a reduction of shareholders' equity
reflected in the Other, net category. The Company has made an annual
contribution to the ESOP Trust through 1997 which was sufficient to repay the
loan and interest thereon.
H. Stock Option and Purchase Plans
Stock Option Plans. The Company has a Long Term Stock Incentive Plan, under
which a total of 5,212,500 common shares have been reserved for issuance, with
2,029,073 shares remaining reserved at December 26, 1997. Grants under this Plan
are in the form of restrictive share awards and stock options. Restrictive share
awards of 963,914 common shares have been made to certain key employees under
the Plan, with 67,500 shares still restricted for disposition, such restrictions
will lapse on 15,000, 22,500, and 30,000 common shares in 1998, 1999, and 2000,
respectively. Compensation cost charged to operations for the restricted share
awards was $188,000, $256,000, and $319,000, in 1997, 1996, and 1995,
respectively. In 1997, certain officers of the Company agreed to forfeit certain
stock appreciation rights under an agreement which had been granted in prior
years. The net impact on earnings before income taxes in 1997 was $898,000.
Unearned compensation expense relating to the remaining restricted shares is
$976,000 at December 26, 1997 and is included as a reduction of shareholders'
equity in the Other, net category.
Stock options for 2,366,405 common shares have also been granted under the Plan.
The option price is the market price at the date of grant. Options become
exercisable at such time and in such installments as set by the Company, and
expire ten years from the date of grant.
In 1996, the shareholders approved a Nonemployee Director Stock Option Plan,
under which the Company makes initial and annual grants to the nonemployee
directors of the Company. There are 300,000 common shares authorized for
issuance under the Plan, all of which remained reserved at the end of 1997.
Nonemployee directors receive an initial option grant of 3,000 shares upon first
appointment or election and an annual option grant of 2,250 shares. The exercise
price of each option is the fair market value at the date of grant. The options
have a ten-year duration and may be exercised in equal installments over four
years, beginning one year from the date of grant.
24
Options on common shares granted and outstanding, as well as the weighted
average exercise price, are shown below:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding, December 30, 1994 1,026,815 $ 8.00
Granted 220,716 12.60
Exercised (58,478) 5.96
Canceled (133,258) 7.66
--------- ----------------
Outstanding, December 29, 1995 1,055,795 9.13
Granted 105,039 13.10
Exercised (43,680) 8.02
Canceled (54,362) 8.09
--------- ----------------
Outstanding, December 27, 1996 1,062,792 9.56
Granted 237,000 19.51
Exercised (80,961) 21.46
Canceled (115,113) 10.92
--------- ----------------
Outstanding, December 26, 1997 1,103,718 $ 11.65
========= ================
The number of stock options exercisable was 460,146, 349,094, and 208,863, at
December 26, 1997, December 27, 1996, and December 29, 1995, respectively. These
stock options had a weighted average exercise price per share of $8.73, $7.97,
and $7.62, at December 26, 1997, December 27, 1996, and December 29, 1995,
respectively.
The outstanding options at December 26, 1997 expire from 2002 to 2007, with a
weighted average contractual life remaining of 7.2 years, at exercise prices
ranging from $6.89 to $22.75.
Stock Purchase Plans. Under the Company's Employee Stock Purchase Plan,
3,900,000 common shares have been reserved for sale to employees, 914,174 of
which remained unissued at the end of 1997. The purchase price of the shares
under the Plan is the lesser of 85 percent of the fair market value on the first
day or the last day of the Plan year.
In 1994, the shareholders approved a Nonemployee Director Stock Plan which
enable individual nonemployee directors of the Company to elect to receive or
defer all or part of a director's annual retainer in the form of shares of the
Company's common stock instead of cash. The Company issued 2,725, 2,282, and 728
shares under this plan during 1997, 1996, and 1995, respectively. The expense
related to this plan is not significant.
Stock-Based Compensation. The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock option
and purchase plans. Accordingly, no compensation cost has been recognized for
the Employee Stock Purchase Plan and stock options granted under the Long Term
Incentive Plan and the Nonemployee Director Stock Option Plan. Had compensation
cost for the stock option plans been determined based upon fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123 - "Accounting for Stock-Based Compensation," the
Company's net earnings and earnings per share would have been reduced as
follows:
1997 1996 1995
------- ------- -------
Net earnings
As reported $44,716 $36,169 $27,706
Pro forma 43,358 35,276 27,075
Net earnings per common share
Basic as reported $1.75 $1.40 $1.07
Diluted as reported 1.71 1.38 1.06
Pro forma Basic $1.70 $1.36 $1.05
Pro forma Diluted 1.66 1.34 1.04
25
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995, respectively: dividend
yields of 2.0%, 2.9%, and 2.6%, expected volatility of 32.0%, 25.1%, and 21.8%,
risk-free interest rates of 6.6%, 6.3%, and 6.5% and expected lives of an
average of 8 years. Based upon these assumptions, the weighted average fair
value at grant date of options granted during 1997, 1996, and 1995 was $10.47,
$5.25, and $5.02, respectively.
The FAS No. 123 weighted average fair value of the employees' purchase rights
under the Employee Stock Purchase Plan was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 1997,
1996, and 1995, respectively: dividend yields of 1.7%, 2.4%, and 2.7%, expected
volatility of 31.7%, 25.1%, and 20.5%, risk-free interest rate of 6.5%, 6.1%,
and 7.7% and expected lives of 1 year. The benefit of the 15% discount from the
lesser of the fair market value per common share on the first day and the last
day of the Plan year was added to the fair value of the employees' purchase
rights determined using Black-Scholes. The weighted average fair value per
common share was $8.05, $4.67, and $3.51 in 1997, 1996, and 1995, respectively.
I. Retirement Benefits
The Company has a defined contribution plan, under Section 401(k) of the
Internal Revenue Code, which provides additional retirement benefits to all U.S.
employees who elect to participate. The Company matched employee contributions
at a 50 percent rate, up to 3 percent of the employee's compensation prior to
1998. Currently, the Company matches employee contributions at a 100 percent
rate, up to 3 percent of the employee's compensation. Employer contributions
were $941,000, $841,000, and $852,000 in 1997, 1996, and 1995, respectively.
The Company has noncontributory defined benefit pension plans covering
substantially all U.S. employees and directors and certain of the employees of
the Company's non-U.S. subsidiaries. For the U.S. plans, the benefits are based
on years of service and the highest five consecutive years' earnings in the ten
years preceding retirement. The Company funds these plans annually in amounts
consistent with minimum funding requirements and maximum tax deduction limits
and invests primarily in common stocks and bonds, including the Company's common
stock. The market value of the plans' investment in the common stock of the
Company was $16,860,000 and $11,070,000 at December 26, 1997 and December 27,
1996, respectively. The expenses for these plans consist of the following
components:
(In thousands) 1997 1996 1995
- ------------------------------------------------ -------- -------- --------
Service cost - benefits earned during the period $ 2,366 $ 2,366 $ 2,385
Interest cost on projected benefit obligation 5,031 4,699 4,561
Actual return on assets (14,557) (12,228) (12,774)
Net amortization and deferral 5,339 6,254 7,879
Cost of pension plans which are not significant
and have not adopted SFAS No. 87 233 171 65
-------- -------- --------
Net periodic pension cost ($ 1,588) $ 1,262 $ 2,116
======== ======== ========
26
The plans' funded status and the amounts recognized in the Company's financial
statements are summarized below:
1997 1996
----------------------------- -----------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
(In thousands) Benefits Exceed Assets Benefits Exceed Assets
- ----------------------------------- ------------- ------------- ------------- -------------
Actuarial present value:
Vested benefit obligation $ 60,181 $ 4,348 $ 55,688 $ 4,340
Accumulated benefit obligation $ 65,262 $ 4,783 $ 60,609 $ 4,772
------------- ------------- ------------- -------------
Projected benefit obligation $ 72,963 $ 6,086 $ 67,921 $ 6,258
Plan assets at fair value 89,460 -- 76,797 --
------------- ------------- ------------- -------------
Projected benefit obligation (in
excess of) less than plan assets 16,497 (6,086) 8,876 (6,258)
Unrecognized net (gain) loss (23,824) (404) (18,553) 43
Unrecognized net (asset) liability
being amortized (113) 53 (128) 144
Adjustment required to recognize
minimum liability -- (210) -- (327)
------------- ------------- ------------- -------------
Accrued pension cost ($ 7,440) ($ 6,647) ($ 9,805) ($ 6,398)
------------- ------------- ------------- -------------
Major assumptions at year-end:
1997 1996 1995
---------- ---------- ----------
Discount rate 4 - 7% 4 - 7% 4 - 7%
Rate of increase in future compensation levels 2 1/2 - 7% 2 1/2 - 7% 2 1/2 - 7%
Expected long-term rate of return on plan assets 11% 9% 9%
1 The estimated impact in 1997, of the change in the expected long-term rate of
return on plan assets, was a reduction of employee benefit cost of approximately
$1,700.
In addition to providing pension benefits, the Company pays part of the health
insurance costs for its retired U.S. employees and their dependents.
The Company's retiree health benefit expense for 1997, 1996, and 1995 was as
follows:
(In thousands) 1997 1996 1995
- -------------------- -------- -------- --------
Service cost $ 484 $ 457 $ 496
Interest cost 979 924 890
-------- -------- --------
Net benefit expense $ 1,463 $ 1,381 $ 1,386
======== ======== ========
The Company's policy is to fund these benefits on a pay-as-you-go basis. The
actuarial present value of these health benefit obligations and the amount
recognized in the consolidated balance sheets were as follows:
(In thousands) 1997 1996
- ---------------------------------------------- ---------- ----------
Accumulated postretirement benefit obligation:
Retirees and beneficiaries ($ 6,444) ($ 6,000)
Fully eligible active plan participants (2,456) (2,531)
Other active plan participants (6,165) (5,738)
---------- ---------
Accumulated benefit obligations (15,065) (14,269)
Unrecognized net loss 353 415
---------- ---------
Accrued postretirement benefit cost ($ 14,712) ($ 13,854)
========== =========
27
The Company's retirement medical benefit plan limits the annual cost increase
that will be paid by the Company. In measuring the Accumulated Postretirement
Benefit Obligation (APBO), a 6 percent maximum annual trend rate for healthcare
costs was assumed for the year ending December 26, 1997. This rate is assumed to
remain constant through the year 2001, decline by 1/2 percent for each of the
following three years to 4.5 percent and remain at that level thereafter. The
discount rate assumption at year-end for 1997, 1996, and 1995 was 7.0 percent.
If the assumed healthcare cost trend rate changed by 1 percent, the APBO as of
December 26, 1997 would change by 14.1 percent. The effect of a 1 percent change
in the cost trend rate on the service and interest cost components of the net
periodic postretirement benefits expense would be a change of 16.3 percent.
J. Commitments and Contingencies
Lease Commitments. Aggregate annual rental commitments at December 26, 1997,
under operating leases with noncancelable terms of more than one year, were
$6,101,000, payable as follows:
Vehicles &
(In thousands) Buildings Equipment Total
- --------------- --------- ---------- -------
1998 $ 1,716 $ 779 $ 2,495
1999 1,032 459 1,491
2000 582 154 736
2001 389 11 400
2002 264 2 266
Thereafter 713 - 713
--------- ---------- -------
$ 4,696 $ 1,405 $ 6,101
========= ========== =======
Total rental expense was $3,339,000 for 1997, $3,815,000 for 1996, and
$4,722,000 for 1995.
Contingencies. The Company is party to various legal proceedings arising in the
normal course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's consolidated results
of operations or its financial position.
K. Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securitities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, where appropriate, restated to conform to the Statement 128
requirements.
Earnings per share for all years presented, has been calculated to reflect the 3
for 2 stock splits declared on December 12, 1997 and December 15, 1995,
respectively. The following table set forth the computation of basic and diluted
earnings per share:
(In thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------- ------- ------- -------
Numerator:
Net earnings $44,716 $36,169 $27,706
Less dividends on preferred stock -- -- 61
------- ------- -------
Numerator for basic and diluted earnings per share
-earnings available to common shareholders $44,716 $36,169 $27,645
======= ======= =======
Denominator
Denominator for basic earnings per share - weighted average shares 25,575 25,908 25,774
Dilutive effect of stock options computed based on the treasury
stock method using the average market price 591 394 239
------- ------- -------
Denominator for diluted earnings per share 26,166 26,302 26,013
======= ======= =======
Basic earnings per share $ 1.75 $ 1.40 $ 1.07
======= ======= =======
Diluted earnings per share $ 1.71 $ 1.38 $ 1.06
======= ======= =======
28
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the heading "Executive Officers of the Company" in Part I
of this 1997 Annual Report on Form 10-K and the information under the headings
"Election of Directors, Nominees and Other Directors" on pages 2 through 4 and
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance on
page 13, of the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders, to be held on May 5, 1998 (the "Proxy Statement"), is incorporated
herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" on pages 5
through 12 of the Proxy Statement is incorporated herein by reference, other
than the subsection thereunder entitled "Report of the Management Organization
and Compensation Committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Beneficial Ownership of Shares" on
pages 12 through 13 of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The Company knows of no relationships or transactions which meet the
requirements of this Item 13.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Part II
(2) Financial Statement Schedule
Page
o Schedule II - Valuation and Qualifying Accounts..............30
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
(3) Management Contract, Compensatory Plan or
Arrangement. (See Exhibit Index)................................32
Those entries marked by an asterisk are Management Contracts,
Compensatory Plans or Arrangements.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the thirteen weeks ended
December 26, 1997.
(c) Exhibit Index.....................................................32
29
Schedule II - Valuation and Qualifying Accounts GRACO INC. & Subsidiaries
(In thousands)
Additions
Balance charged to Deductions
at costs and from Balance at
Description beginning expenses reserves end of year
--------- ---------- ---------- -----------
Year ended December 26, 1997:
Allowance for doubtful accounts $ 2,400 $ 500 $ 700 $ 2,200
Allowance for obsolete and
overstock inventory 5,100 1,500 1,900 4,700
Allowance for returns and credits 2,300 3,700 4,100 1,900
Valuation allowance for tax
benefits 1,995 -- 1,995 --
--------- ---------- ---------- -----------
$11,795 $ 5,700 $ 8,695 $ 8,800
========= ========== ========== ===========
Year ended December 27, 1996:
Allowance for doubtful accounts $ 2,800 $ 900 $ 1,300 $ 2,400
Allowance for obsolete and
overstock inventory 5,900 2,500 3,300 5,100
Allowance for returns and credits 2,000 4,100 3,800 2,300
Valuation allowance for tax
benefits 5,020 -- 3,025 1,995
--------- ---------- ---------- -----------
$15,720 $ 7,500 $11,425 $11,795
========= ========== ========== ===========
Year ended December 29, 1995:
Allowance for doubtful accounts $ 2,700 $ 700 $ 600 $ 2,800
Allowance for obsolete and
overstock inventory 6,400 1,400 1,900 5,900
Allowance for returns and credits 2,000 3,400 3,400 2,000
Valuation allowance for tax
benefits 6,900 -- 1,880 5,020
--------- ---------- ---------- -----------
$18,000 $ 5,500 $ 7,780 $15,720
========= ========== ========== ===========
1 Accounts determined to be uncollectible and charged against reserve, net of
collections on accounts previously charged against reserves.
2 Items scrapped or otherwise disposed of during the year.
3 Credits issued and returns processed, related to prior years.
30
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/George Aristides March 17, 1998
----------------------------- --------------
George Aristides
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/George Aristides March 17, 1998
----------------------------- --------------
George Aristides
Chief Executive Officer
(Principal Executive Officer)
/s/Mark W. Sheahan March 17, 1998
----------------------------- --------------
Mark W. Sheahan
Treasurer
(Principal Financial Officer)
/s/James A. Graner March 17, 1998
----------------------------- --------------
James A. Graner
Vice President and Controller
(Principal Accounting Officer)
D. A. Koch Director, Chairman of the Board
G. Aristides Director, and Chief Executive Officer
C. M. Osborne Director, President and Chief Operating Officer
R. O. Baukol Director
R. D. McFarland Director
L. R. Mitau Director
M. A.M. Morfitt Director
D. R. Olseth Director
J. L. Scott Director
W. G. Van Dyke Director
George Aristides, by signing his name hereto, does hereby sign this document on
behalf of himself and each of the above named directors of the Registrant
pursuant to powers of attorney duly executed by such persons.
/s/George Aristides March 17, 1998
----------------------------- --------------
George Aristides
(For himself and as attorney-in-fact)
31
Exhibit Index
Exhibit
Number Description
------ -----------------------------------------------------------------
3.1 Restated Articles of Incorporation as amended December 12, 1997.
See also Exhibit 4.3.
3.2 Restated Bylaws. (Incorporated by reference to Exhibit 3 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
4.1 Credit Agreement dated October 1, 1990, between the Company and
First Bank National Association. (Incorporated by reference to
Exhibit 5 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 28, 1990.)
4.2 Amendment 1 dated June 12, 1992, to Credit Agreement dated
October 1, 1990, between the Company and First Bank National
Association; and Amendment 2 dated December 31, 1992, to the same
Agreement. (Incorporated by reference to Exhibit 1 to the
Company's Report on Form 8-K dated March 11, 1993.) Amendment 3
dated November 8, 1993, and Amendment 4, dated February 8, 1994.
(Incorporated by reference to Exhibit 4.2 to the Company's 1993
Annual Report on Form 10-K.) Amendment 5, dated April 10, 1995.
(Incorporated by reference to Exhibit 4.2 to the Company's 1995
Annual Report on Form 10-K.) Amendment 6, dated September 27,
1996. (Incorporated by reference to Exhibit 4 to the Company's
Report on Form 10-Q for the thirty-nine weeks ended September 27,
1996.) Amendment 7 dated May 27, 1997. (Incorporated by reference
to Exhibit 4 to the Company's Report on Form 10-Q for the
twenty-six weeks ended June 27, 1997.)
4.3 Rights Agreement dated as of March 9, 1990, between the Company
and Norwest Bank Minnesota, National Association, as Rights
Agent, including as Exhibit A the form of the Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Shares. (Incorporated by reference to
Exhibit 1 to the Company's Report on Form 8-K dated March 19,
1990.)
*10.1 1997 Corporate and Business Unit Annual Bonus Plan.
(Incorporated by reference to Exhibit 10 to the Company's Report
on Form 10-Q for the thirteen weeks ended March 28, 1997.)
*10.2 Deferred Compensation Plan Restated, effective December 1, 1992.
(Incorporated by reference to Exhibit 2 to the Company's Report
on Form 8-K dated March 11, 1993.) Amendment 1 dated September 1,
1996. (Incorporated by reference to the Company's Report on Form
10-Q for the twenty-six weeks ended June 27, 1997.)
*10.3 Executive Deferred Compensation Agreement. Form of supplementary
agreement entered into by the Company which provides a retirement
benefit to selected executive officers, as amended by Amendment
1, effective September 1, 1990. (Incorporated by reference to
Exhibit 3 to the Company's Report on Form 8-K dated March 11,
1993.)
*10.4 Chairman's Award Plan. (Incorporated by reference to Exhibit 3
to the Company's Report on Form 8-K dated March 7, 1988.)
*10.5 Long Term Stock Incentive Plan, as amended December 12, 1997.
*10.6 Retirement Plan for Non-Employee Directors. (Incorporated by
reference to Attachment C to Item 5 to the Company's Report on
Form 10-Q for the thirteen weeks ended March 29, 1991.)
32
*10.7 Deferred Compensation Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 2 to the Company's Report
on Form 8-K dated March 7, 1988.)
*10.8 Restoration Plan (1998 Restatement).
*10.9 Stock Option Agreement. Form of agreement used for incentive
stock option/alternative stock appreciation right award to
selected officers, dated February 25, 1993. (Incorporated by
reference to Exhibit 10.14 to the Company's 1993 Annual Report on
Form 10-K.)
*10.10 Stock Option Agreement. Form of agreement used for non-
incentive stock option/alternative stock appreciation right
award to selected officers, dated May 4, 1993. (Incorporated by
reference to Exhibit 10.15 to the Company's 1993 Annual Report on
Form 10-K.)
*10.11 Nonemployee Director Stock Plan, as amended November 6, 1997.
*10.12 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated May 2,
1994. (Incorporated by reference to Exhibit 10.3 to the Company's
Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.13 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to selected officers, dated December
15, 1994, December 27, 1994 and February 23, 1995. (Incorporated
by reference to Exhibit 10.16 to the Company's 1994 Annual Report
on Form 10-K.)
*10.14 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to executive officers, dated March 1,
1995. (Incorporated by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the thirteen weeks ended March 31, 1995.)
*10.15 Stock Option Agreement. Form of agreement used for award of non-
incentive stock option to one executive officer, dated December
15, 1995. (Incorporated by reference to Exhibit 10.18 to the
Company's 1995 Annual Report on Form 10-K.)
*10.16 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to executive officers, dated March 1,
1996. (Incorporated by reference to Exhibit 10.19 to the
Company's 1995 Annual Report on Form 10-K.)
*10.17 Form of salary protection arrangement between the Company and
executive officers. (Incorporated by reference to Exhibit 10.21
to the Company's 1995 Annual Report on Form 10-K.)
*10.18 Nonemployee Director Stock Option Plan, as amended November 6,
1997.
*10.19 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee directors, dated May 7,
1996. (Incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-Q for the twenty-six weeks ended June 28,
1996.)
*10.20 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to executive officers, dated February 28,
1997.(Incorporated by reference to Exhibit 10.24 to the Company's
1996 Annual Report on Form 10-K.)
*10.21 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from incentive stock option agreement dated February 25,
1993, for selected officers. (Incorporated by reference to
Exhibit 10.25 to the Company's 1996 Annual Report on Form 10-K.)
33
*10.22 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from non-incentive stock option agreement dated May 4,
1993, for selected officers. (Incorporated by reference to
Exhibit 10.26 to the Company's 1996 Annual Report on Form 10-K.)
*10.23 Key Employee Agreement. Form of agreement with officers and
other key employees relating to change of control, dated April 2,
1997. (Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the twenty-six weeks ended June 27,
1997.)
*10.24 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to executive officer dated May 2,
1994, March 1, 1995 and March 1, 1996. (Incorporated by reference
to Exhibit 10.6 to the Company's Report on Form 10-Q for the
twenty-six weeks ended June 27, 1997.)
*10.25 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to selected officers dated December
15, 1994. (Incorporated by reference to Exhibit 10.7 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.26 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to one executive officer dated
December 15, 1995. (Incorporated by reference to Exhibit 10.8 to
the Company's Report on Form 10-Q for the twenty-six weeks ended
June 27, 1997.)
*10.27 Stock Option Agreement. Form of agreement used for award of non-
incentive stock option to one executive officer, dated April 23,
1997. (Incorporated by reference to Exhibit 10.9 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.28 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee directors, dated May 6,
1997. (Incorporated by reference to Exhibit 10.10 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.29 Executive Long Term Incentive Agreement. Form of restricted
stock award agreement used for award to one executive officer,
dated May 6, 1997. (Incorporated by reference to Exhibit 10.11 to
the Company's Report on Form 10-Q for the twenty-six weeks ended
June 27, 1997.)
*10.30 Stock Option Agreement. Form of agreement used for award of
non-incentive stock option to two executive officers, dated May
6, 1997. (Incorporated by reference to Exhibit 10.12 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.31 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee director, dated
September 5, 1997. (Incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the thirty-nine weeks ended
September 26, 1997.)
*10.32 Trust Agreement dated September 30, 1997, between the Company
and Norwest Bank Minnesota, N.A. (Incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 26, 1997.)
*10.33 Key Employee Agreement Amendment. Form of amendment dated
January 9, 1998, revising payment reduction provisions.
34
11 Statement of Computation of Earnings per share included in
footnote K on page 28.
21 Subsidiaries of the Registrant included herein on page 36.
23 Independent Auditor's Consent included herein on page 36.
24 Power of Attorney included herein on page 37.
27 Financial Data Schedule (EDGAR filing only).
99 Cautionary Statement Regarding Forward-Looking Statements.
*Management Contracts, Compensatory Plans or Arrangements.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments
defining the rights of holders of certain long-term debt of the Company and its
subsidiaries are not filed as exhibits because the amount of debt authorized
under any such instrument does not exceed 10 percent of the total assets of the
Company and its subsidiaries. The Company agrees to furnish copies thereof to
the Securities and Exchange Commission upon request.
35