UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 24, 1999
Commission File Number: 001-9249
GRACO INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
- ------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(612) 623-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
---------- -------------
20,415,979 common shares were outstanding as of October 22, 1999.
<PAGE>
GRACO INC. AND SUBSIDIARIES
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Amendment dated August 31, 1999, to Credit Agreement
Dated June 26, 1998 between the Company and
Wachovia Bank, N.A. Exhibit 4
Retirement and Release Agreement between Clayton R.
Carter and the Company, dated June 26, 1999. Exhibit 10
Separation and Release Agreement between Roger L. King
and the Company, dated August 10, 1999. Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
<PAGE>
<TABLE>
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended Twenty Six Weeks Ended
----------------------------- ----------------------------
Sept 24, 1999 Sept 25, 1998 Sept 24, 1999 Sept 25,1998
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net Sales $ 110,076 $ 106,202 $ 328,020 $ 327,072
Cost of products sold 52,566 52,221 158,034 163,059
------------- ------------- ------------- ------------
Gross Profit 57,510 53,981 169,986 164,013
Product development 4,845 4,369 14,370 13,867
Selling, marketing and distribution 19,049 19,725 57,289 63,922
General and administrative 9,599 9,920 28,729 32,339
------------- ------------- ------------- ------------
Operating Profit 24,017 19,967 69,598 53,885
Interest expense 1,661 2,569 5,472 2,967
Other (income) expense, net (187) 675 (2,579) 783
------------- ------------- ------------- ------------
Earnings Before Income Taxes 22,543 16,723 66,705 50,135
Income taxes 7,500 5,650 22,500 17,350
------------- ------------- ------------- ------------
Net Earnings $ 15,043 $ 11,073 $ 44,205 $ 32,785
============= ============= ============= ============
Basic Net Earnings
Per Common Share $ .74 $ .54 $ 2.19 $ 1.38
============= ============= ============= ============
Diluted Net Earnings
Per Common Share $ .72 $ .53 $ 2.12 $ 1.35
============= ============= ============= ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept 24, 1999 Dec. 25, 1998
------------- -------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 2,082 $ 3,555
Accounts receivable, less allowances
of $4,800 and $4,400 79,081 80,146
Inventories 36,293 34,018
Deferred income taxes 12,769 12,384
Other current assets 1,846 1,217
------------- -------------
Total current assets 132,071 131,320
Property, Plant and Equipment:
Cost 189,191 199,122
Accumulated depreciation (102,478) (102,756)
------------- ------------
86,713 96,366
Other Assets 13,219 6,016
------------- -------------
$ 232,003 $ 233,702
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 4,284 $ 14,560
Current portion of long-term debt 1,715 3,157
Trade accounts payable 10,349 11,965
Salaries, wages & commissions 13,137 14,025
Accrued insurance liabilities 11,153 10,809
Income taxes payable 6,391 5,134
Other current liabilities 22,284 23,316
------------- -------------
Total current liabilities 69,313 82,966
Long-Term Debt, less current portion 82,098 112,582
Retirement Benefits and Deferred Compensation 30,484 28,841
Shareholders' Equity:
Common stock 20,415 20,097
Additional paid-in capital 29,480 23,892
Retained deficit (1,639) (35,878)
Other, net 1,852 1,202
------------- -------------
Total shareholders' equity 50,108 9,313
------------- -------------
$ 232,003 $ 233,702
============= =============
See notes to consolidated financial statements.
<PAGE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks
------------------------------
Sept 24, 1999 Sept 25, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net Earnings $ 44,205 $ 32,785
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 11,451 10,975
Deferred income taxes (88) (1,052)
(Gain) loss on sale of fixed assets (3,147) 211
Change in:
Accounts receivable 2,534 2,100
Inventories 4,910 3,949
Trade accounts payable (1,554) (1,703)
Salaries, wages and commissions (656) (1,352)
Retirement benefits and deferred
compensation (715) (1,705)
Other accrued liabilities 689 4,507
Other 300 1,906
------------- -------------
57,929 50,621
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (5,947) (8,486)
Proceeds from sale of property, plant
and equipment 9,523 112
Acquisition of business (18,389) -
------------- -------------
(14,813) (8,374)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable and lines of credit 90,243 39,407
Payments on notes payable and lines of credit (100,585) (32,591)
Borrowings on long-term debt 25,001 176,200
Payments on long-term debt (56,821) (41,045)
Common stock issued 6,125 4,709
Retirement of common stock (3,468) (190,899)
Cash dividends paid (6,682) (8,491)
------------- -------------
(46,187) (52,710)
------------- -------------
Effect of exchange rate changes on cash 1,598 582
------------- -------------
Net increase in cash and cash equivalents (1,473) (9,881)
Cash and cash equivalents:
Beginning of period 3,555 13,523
------------- -------------
End of period $ 2,082 $ 3,642
============= =============
See notes to consolidated financial statements.
<PAGE>
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company)
as of September 24, 1999, and the related statements of earnings for the
thirteen and thirty-nine weeks ended September 24, 1999 and September 25,
1998, and cash flows for the thirty-nine weeks ended September 24, 1999 and
September 25, 1998 have been prepared by the Company without being audited.
In the opinion of management, these consolidated statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 24,
1999, and the results of operations and cash flows for all periods
presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Therefore, these statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 1998 Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Major components of inventories were as follows (in thousands):
Sept 26, 1999 Dec 25, 1998
------------- ------------
Finished products and components $ 32,397 $ 27,764
Products and components in various
stages of completion 20,865 23,024
Raw materials 18,551 18,970
------------- ------------
71,813 69,758
Reduction to LIFO cost (35,520) (35,740)
------------- ------------
$ 36,293 $ 34,018
============= ============
<PAGE>
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. The Company has three reportable segments: Industrial/Automotive,
Contractor and Lubrication. Assets of the Company are not identified along
reportable segment lines. Sales and operating profit by segment for the
thirteen and thirty-nine weeks ended September 24, 1999 and September 25,
1998 are as follows (in thousands):
<TABLE>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- -----------------------------
Sept 24,1999 Sept 25,1998 Sept 24, 1999 Sept 25,1998
------------ ------------ ------------- ------------
Net Sales
<S> <C> <C> <C> <C>
Industrial/Automotive $ 56,982 $ 55,331 $ 161,677 $ 172,078
Contractor 42,988 39,785 134,402 121,432
Lubrication 10,106 11,086 31,941 33,562
------------ ------------ ------------- ------------
Total $ 110,076 $ 106,202 $ 328,020 $ 327,072
============ ============ ============= ============
Operating Profit
Industrial/Automotive $ 11,846 $ 10,345 $ 34,533 $ 26,969
Contractor 11,038 9,623 33,081 27,503
Lubrication 2,326 2,222 7,291 6,350
Unallocated Corporate
expenses (1,193) (2,223) (5,307) (6,937)
------------ ------------ ------------- ------------
Total $ 24,017 $ 19,967 $ 69,598 $ 53,885
============ ============ ============= ============
</TABLE>
4. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will be effective for the
Company in 2001. SFAS No. 133 requires that all derivatives are recognized
in the financial statements as either assets or liabilities measured at
fair value and also specifies new methods of accounting for hedging
transactions. The Company has not yet determined the impact of SFAS 133, if
any.
5. The Company formed Graco Verfahrenstechnik (GV) which on June 1, 1999
purchased certain assets and assumed certain liabilities of Bollhoff
Verfahrenstechnik (BV), located in Bielefeld, Germany. BV designed,
manufactured and sold fluid application equipment for industrial and
automotive markets, primarily in Germany, and had 1998 sales of
approximately $20 million.
<PAGE>
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net earnings of $15.0 million and diluted earnings per share of $0.72 for the
quarter ended September 24, 1999 were up 36 percent from the third quarter of
1998. Reduced expenses and improved sales drove the quarterly performance. For
the nine months ended September 24, 1999, net earnings of $44.2 million are 35
percent higher than the earnings in the same period a year ago while diluted
earning per share of $2.12 are up 57 percent due to improved earnings and the
common stock repurchase in 1998. Year to date net earnings include a
non-recurring after-tax gain of $2.1 million, or $0.10 per diluted share, from
the sale of the Company's Plymouth, Michigan and Los Angeles facilities.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
<TABLE>
Third Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
-------------------- --------------------
September September September September
24, 1999 25, 1998 24, 1999 25, 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Cost of products sold 47.8 49.2 48.2 49.9
Product development 4.4 4.1 4.4 4.2
Selling, marketing and distribution 17.3 18.6 17.5 19.5
General and administrative 8.7 9.3 8.7 9.9
--------- --------- --------- ---------
Operating Profit 21.8 18.8 21.2 16.5
--------- --------- --------- ---------
Interest expense 1.5 2.5 1.7 1.0
--------- --------- --------- ---------
Other (income) expense, net (0.2) .6 (0.8) .2
--------- --------- --------- ---------
Earnings Before Income Taxes 20.5 15.7 20.3 15.3
Income taxes 6.8 5.3 6.9 5.3
--------- --------- --------- ---------
Net Earnings 13.7% 10.4% 13.4% 10.0%
========= ========= ========= =========
</TABLE>
<PAGE>
Net Sales
Net sales in the third quarter of $110.1 million were up 4 percent from the
third quarter of 1998. Year-to-date sales of $328.0 million were up slightly
when compared to last year.
Contractor Equipment segment sales were up 8 percent in the quarter and 11
percent year-to-date as the housing market in the North America has remained
strong. Industrial/Automotive segment sales were up slightly for the quarter but
remained below 1998 on a year-to-date basis primarily due to the Company's exit
from the custom designed systems business. Lubrication Equipment segment sales
were below 1998 in the third quarter due in part to a shift in promotional
activity from the third quarter last year into the fourth quarter of 1999.
Geographically, sales in the America's of $75.0 million were flat for the
quarter when compared to the same period last year. Year-to-date sales were up 3
percent from the first nine months of 1998. European sales of $18.4 million were
12 percent higher than last year's third quarter, and would have been 18 percent
higher with consistent exchange rates. Third quarter sales growth in Europe was
due primarily to Industrial/Automotive sales generated by Graco
Verfahrenstechnik, acquired in June of 1999. Year-to-date sales in Europe were
down 7 percent. Asia Pacific quarterly sales of $11.1 million increased 21
percent from last year (up 11 percent with consistent exchange rates) as
business improved throughout the Asia Pacific region, except in Japan. Sales in
Asia Pacific for the first nine months were up 13 percent from last year and
were up 5 percent with consistent exchange rates.
Gross Profit
Gross profit as a percentage of quarterly and year-to-date sales has risen to
52.2 and 51.8 percent, up 1.4 and 1.7 percentage points from the same periods in
1998. The increases were due primarily to the change in approach to serving the
automotive industry by providing pre-engineered packages rather than custom
designed systems, pricing and cost containment.
Operating Expenses
Third quarter operating expenses of $33.5 million decreased 2 percent from the
third quarter of 1999, despite the addition of GV. Selling, marketing and
distribution expenditures are down 10 percent in the first nine months of 1999,
when compared to the same period last year due primarily to restructuring of the
Company's industrial and automotive businesses in 1998. Year-to-date general and
administrative expenses were 11 percent lower than 1998 due largely to the
results of restructuring the Company's Asia Pacific operations last year and due
to decreased Year 2000 related expenditures.
Interest Expense
Interest expense was $1.6 and $5.5 million for the quarter and first nine months
of 1999, down significantly from the third quarter of 1998 as the Company
continues to pay down the debt related to the repurchase of 5.8 million shares
of the Company's common stock for $190.9 million in July of 1998.
<PAGE>
Other Income (Expense)
Other income was $0.2 million in the third quarter of 1999, compared to $0.7
million expense in 1998. The third quarter of 1998 was unfavorably impacted by
the settlement of a lawsuit. Other income for the nine months ended September
24, 1999 included gains on the sale of real estate totaling $3.2 million.
Income Taxes
The third quarter and year-to-date income tax rates were 33 and 34 percent in
1999 versus 34 and 35 percent for the same periods in 1998.
Liquidity and Capital Resources
- -------------------------------
The Company generated $57.9 million of cash from operating activities in the
first nine months of 1999, compared to $50.6 million for the same period last
year. Cash flow from operating activities and $9.5 million received from the
sale of real estate was used to pay $18.6 million for a business acquisition. In
addition, the company made net payments on borrowings (short and long-term debt)
of $42.2 million in the first nine months of 1999. The company had unused lines
of credit available at September 24, 1999 totaling $83.1 million.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs that were 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 has nearly completed its program, begun in 1996, to ensure that all
information technology systems and non-information technology (non-IT) systems
will be Year 2000 compliant. The assessment phase of the Year 2000 Project
determined that the Company needed to modify or upgrade most of its mainframe
applications, operating systems, network hardware and software and desktop
hardware and software. In addition, many non-IT systems required upgrading or
replacement in order to ensure proper functioning beyond the year 1999.
The mainframe modification phase involving the conversion of core business
applications was completed in July 1998 and the operating systems' upgrades were
completed in November 1998. Testing of all mission critical mainframe
applications and databases was completed in June 1999. The network and desktop
upgrades, involving the replacement of certain hardware and software, was
substantially complete in September 1999.
The Company has incurred costs totaling approximately $6.2 million, including
$1.4 million in 1999, and estimates an additional $0.3 million will be spent in
the remainder of 1999 to resolve Year 2000 issues. These costs are charged to
expense as incurred and include software license fees and cost of persons
assigned to the project. Existing resources were redeployed and other projects
delayed to accommodate Year 2000 related projects. These delays are not expected
to have a material adverse impact on future results of operations or financial
condition.
Business continuation plans for critical business processes and applications
have been developed. These plans include adequate staffing on-site during the
Year 2000 date change to quickly repair any errant applications. In addition in
the event of any problems, the Company will follow its current computer outage
business continuation plans until such problems are corrected.
<PAGE>
Approximately 300 non-IT applications were identified at the Company. Non-IT
applications are primarily microprocessors and other electronic controls
embedded in non-computer equipment used by the Company. All business critical,
and substantially all non-business critical non-IT applications were compliant
as of September 1999. Conversion of the remaining non-IT applications will
continue through the remainder of 1999.
The Company has a very limited number of products with embedded controls and
does not believe there are any Year 2000 compatibility issues with these
products. The Company has very few customers whose loss of business would be
material to the Company. It is not aware of any Year 2000 issues with these
customers that would have a material adverse impact on the Company's results.
The Company had discussions with, and sent questionnaires to, its suppliers to
assess their Year 2000 readiness. The Company is not aware of any Year 2000
issues with its suppliers that would have a material impact on the Company's
results.
Management believes that sufficient resources have been allocated and project
plans are in place to avoid any adverse material impact on operations or
operating results. However, there can be no guarantee that the Company's systems
were successfully converted and that Year 2000 problems will not have an adverse
effect on the Company. The Year 2000 efforts of third parties are not within the
Company's control and their failure to respond to Year 2000 issues successfully
could result in business disruption and increased operating costs to the
Company. At the present time, it is not possible to determine whether any such
events are likely to occur, or to quantify any potential impact they may have on
the Company's future results of operations and financial condition.
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the company's disclosures under the
heading: "SAFE HARBOR CAUTIONARY STATEMENT" below.
Outlook
- -------
The company is optimistic that sales growth will continue for the remainder of
the year while maintaining gross profit percentages.
SAFE HARBOR CAUTIONARY STATEMENT
The information in this 10-Q contains "forward-looking statements" about the
Company's expectations of the future, which are subject to certain risk factors
that could cause actual results to differ materially from those expectations.
These factors include economic conditions in the United States and other major
world economies, currency exchange fluctuations, the results of the efforts of
the Company, its suppliers and customers to avoid any adverse effect as a result
of the Year 2000 issue, and additional factors identified in Exhibit 99 to the
Company's Report on Form 10-K for fiscal year 1998.
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Amendment dated August 31, 1999, to Credit
Agreement dated June 26, 1998 between the Company
and Wachovia Bank, N.A. Exhibit 4
Retirement and Release Agreement between Clayton R.
Carter and the Company dated June 26, 1999. Exhibit 10
Separation and Release Agreement between Roger L.
King and the Company, dated August 10, 1999. Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRACO INC.
Date: October 27, 1999 By: /s/James A. Earnshaw
---------------- -----------------------------------------
James A. Earnshaw
President & Chief Executive Officer
Date: October 27, 1999 By: /s/James A. Graner
---------------- -----------------------------------------
James A. Graner
Vice President & Controller
(duly authorized officer)
Exhibit 4
AMENDED AND RESTATED CONFIRMATION
TO: Graco Inc.
ATTN: Mark Sheahan
FAX: (612) 623-6942
FROM: Rafeek Ghafur
Wachovia Bank, N.A.
Derivative Products Services
DATE: August 31, 1999
- --------------------------------------------------------------------------------
This Confirmation cancels and replaces in its entirety our Confirmation dated
June 26, 1998, evidencing that certain Swap Transaction entered into between
Wachovia Bank, N.A. and Shamrock Corporation on June 26, 1998 (the
"Transaction), which transaction is hereby restated.
The purpose of this letter agreement is to confirm the terms and conditions of
the Amended and Restated Swap Transaction entered into between Wachovia Bank,
N.A. ("Wachovia") and Graco Inc. ("Company") on the Trade Date specified below
(the "Amended and Restated Swap Transaction"). This letter agreement constitutes
a "Confirmation" as referred to in the Agreement (as defined below).
The definition and provisions contained in the 1991 ISDA Definitions published
by the International Swaps and Derivatives Association, Inc. (the "Definitions")
are incorporated into this Confirmation. In the event of any inconsistency
between those definitions and provisions and this Confirmation, this
Confirmation will govern.
1. This Confirmation supplements, forms part of, and is subject to the 1992
Master Agreement dated July 2, 1998 as amended and supplemented from time
to time (the "Agreement") between you and us. All provisions contained in
the Agreement will govern this Confirmation except as expressly modified
below.
2. The terms of the particular Amended and Restated Swap Transaction to which
this Confirmation relates are as follows:
A. TRADE DETAILS
Notional Amount: USD 75,000,000.00, 7-2-98 to 9-2-99
USD 50,000,000.00, 9-2-99 to 7-3-00
Trade Date: June 26, 1998, amended August 31, 1999
Effective Date: July 2, 1998
Termination Date: July 3, 2000, subject to adjustment in
accordance with The Modified Following
Business Day Convention.
Fixed Amounts:
Fixed Rate Payer: The Company
Fixed Rate Payer
Payment Dates: The 2nd day of each month, commencing
August 3, 1998 up to and including the
Termination Date subject to adjustment
in accordance with The Modified Follow-
ing Business Day Convention.
Fixed Rate: 5.74% per annum from 7-2-98 to 9-2-99
5.76% per annum from 9-2-99 to 7-3-00
Fixed Rate Day
Count Fraction: Actual / 360
Floating Amounts:
Floating Rate Payer: Wachovia
Floating Rate Payer
Payment Dates: The 2nd day of each month, commencing
August 3, 1998 up to and including the
Termination Date subject to adjustment
in accordance with The Modified Follow-
ing Business Day Convention.
Floating Rate for
Initial Calculation
Period: 5.66016 per annum
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: One Month
Floating Rate Day
Count Fraction: Actual / 360
Reset Dates: First Day of each Calculation Period
Business Days: London Business Days for rate resets
and London and New York Business Days
for payments.
Calculation Agent: Wachovia Bank, N.A.
B. ACCOUNT DETAILS
Payments to Wachovia: Wachovia Bank N.A.
Fed Routing No.: 061-000-010
For the Account of: Derivatives Settlement
Account Number: 18805813
Attention: Susan Lucia
Payments to the Company: US Bank N.A.
Fed Routing No.: 091-000-022
For the Account of: Graco Inc.
Account Number: 1502-5004-2184
Attention: Mark Sheahan
C. OFFICES
Wachovia Bank, N.A.: 191 Peachtree Street
Atlanta, GA 30303
Telephone: (404) 332-6970
Fax: (404) 332-6880
Graco Inc.: PO Box 1441
Minneapolis MN 55440-1441
Telephone: (612) 623-6656
Fax: (612) 623-6942
3. The Company has consulted, to the extent it has deemed necessary, with its
legal, tax and financial advisors regarding its decision to enter into the
Amended and Restated Swap Transaction and has had an opportunity to ask
questions of, and has obtained all requested information from, Wachovia
concerning the Amended and Restated Swap Transaction. The Company has made
its own independent decision to enter into the Amended and Restated Swap
Transaction based upon its own judgment, with full understanding of the
economic, legal and other risks associated with the Amended and Restated
Swap Transaction (which risks it is willing to assume) and is entering into
the Amended and Restated Swap Transaction without relying upon any advice
(oral or written) or projections provided by Wachovia. The Company
understands that Wachovia is relying on the statements made by the Company
in this paragraph in entering into the Amended and Restated Swap
Transaction.
Please confirm that the foregoing correctly set out the terms of our agreement
by signing a copy of this Confirmation and returning it to us with two Business
Days.
Wachovia Bank, N.A. Graco Inc.
By: /s/Rafeek Ghafur By: /s/Mark W. Sheahan
-------------------------------- ----------------------------------
Name: Rafeek Ghafur Name: Mark W. Sheahan
Title: Vice President Title: Vice President & Treasurer
Exhibit 10
RETIREMENT AND RELEASE AGREEMENT
THIS AGREEMENT is effective the 26th day of June, 1999, by and between
Graco Inc., a Minnesota corporation ("Graco"), with its principal offices at
4050 Olson Memorial Highway, Golden Valley, Minnesota, 55422 and Clayton R.
Carter, an individual, residing at 4667 Bayswater Road, Shorewood, MN. 55331
("Mr. Carter").
WHEREAS, Mr. Carter is now employed by Graco; and
WHEREAS, The parties have agreed that Mr. Carter will retire as an officer
and employee of Graco effective June 30, 1999, and will terminate his employment
relationship with Graco in accordance with the terms of this Agreement.
NOW, THEREFORE, It is hereby mutually agreed by and between the parties for
good and valuable consideration as follows:
1. Separation Payment
------------------
On or before July 2, 1999, or two business days after Mr. Carter
executes this Agreement, whichever is later, Graco will pay to Mr.
Carter in a lump sum as a separation payment the amount of two hundred
thousand dollars ($200,000), subject to tax withholding and deductions
required by law.
2. Annual Bonus Plan
-----------------
Mr. Carter shall be entitled to payment under the 1999 Corporate and
Business Unit Annual Bonus Plan of one-half of the full year annual
bonus to which he would have been entitled under said plan had he
stayed in the position he held upon retirement until the end of 1999.
Said payment shall be made in 2000 when the payments under said plan
are made to all participants therein.
3. Stock Options
-------------
All stock options granted to Mr. Carter under the Graco Long Term
Incentive Plan shall be governed by the provisions of said plan and
the stock option agreements executed between Graco and Mr. Carter
pursuant to said plan.
4. Benefits
--------
Mr. Carter's entitlement to, continuation or cessation of retirement
benefits following the date of his retirement are described in a
letter from the Graco Benefits Department to Mr. Carter's attention,
dated March 16, 1999
5. Cooperation
-----------
Mr. Carter shall render all reasonable cooperation to Graco in
connection with the prosecution or defense of any lawsuit or other
judicial or administrative action, including participating as a source
of information or witness in any such action. Graco shall reimburse
Mr. Carter for any reasonable out-of-pocket expenses (including
attorneys' fees, if necessary) incurred by him in connection with
rendering such cooperation.
6. Confidentiality
---------------
a. Mr. Carter hereby agrees that, for a period of three (3) years
after June 30, 1999, he will not, directly or indirectly,
disclose any Confidential Information, as defined in subsection
(b) below, to any other party, and will not in any way use such
Confidential Information in the course of any future employment.
b. As used herein, the term "Confidential Information" shall mean
all information which is treated as confidential or proprietary
by Graco in the normal course of its business, including, without
limitation, documents so marked, or is a trade secret of Graco,
which has been disclosed by Graco to Mr. Carter, including,
without limitation, information relating to Graco products,
processes, product development or research, equipment, machinery,
apparatus, business operations, financial results or condition,
strategic plans or projections, customers, suppliers, marketing,
sales, management practices, technical information, drawings,
specifications, material, and the like, and any knowledge or
information developed by Mr. Carter relating to the same,
provided, however, that Confidential Information shall not
include information which is at the time of disclosure, or
thereafter becomes, a part of the public domain through no act or
omission by Mr. Carter, or information which Mr. Carter is
required to disclose in a court or other judicial proceeding or
is otherwise legally required to disclose.
c. The provisions of this Section 6 are in addition to, and not in
lieu of, the fiduciary and other duties and obligations of Mr.
Carter as an employee, officer and director of Graco, and this
Section 6 does not limit said obligations in any way, by time or
otherwise.
7. Release
-------
a. Except with respect to the provisions of this Agreement and the
provisions of the letter dated March 16, 1999 referenced above,
Mr. Carter hereby releases and forever discharges Graco and its
officers, employees, agents, successors, and assigns from any and
all claims, causes of action, demands, damages, liability and
responsibility whatsoever, arising prior to the date of this
Agreement, including without limitation, any rights or claims for
further compensation, or any rights to participate in any
Company-sponsored program relating to the purchase or acquisition
of any Graco common stock, preferred stock, or other equity in
Graco or any subsidiary thereof, except as specifically provided
in this Agreement, including the Exhibit hereto, or any right or
claim Mr. Carter may have or assert under the common law or any
state, municipal, federal, or other statute or regulation
regarding the rights of employees generally or based on
discrimination on the basis of race, creed, gender, age, or other
protected status. This Section 7 shall not affect Mr. Carter's
rights to indemnification as an officer, director, and employee
of Graco under Graco's by-laws and applicable Minnesota law nor
any rights which he has accrued by participating in any Graco
benefit plan, subject to the provisions of this Agreement and the
terms and conditions set forth in such plan as of his retirement
date.
b. Mr. Carter certifies, represents and agrees that:
(i) this Agreement is written in a manner that he understands;
(ii) he understands that this Section 7 specifically waives any
rights or claims he may have arising under federal, state,
and local laws prohibiting employment discrimination, such
as the Age Discrimination in Employment Act, the Minnesota
Human Rights Act, Title VII of the Civil Rights Act of 1964,
the Rehabilitation Act of 1973, the Americans with
Disabilities Act and/or any claims for damages or for
injuries based on common law theories of contract,
quasi-contract or tort;
(iii)the waiver herein of rights or claims are to those which
may have arisen prior to the execution date of this
Agreement;
(iv) a portion of the consideration set out in this Agreement is
in addition to compensation that he may already have been
entitled to;
(v) he has been specifically advised in writing to consult with
an attorney prior to executing this Agreement;
(vi) he has been informed that he has a period of at least
twenty-one (21) calendar days within which to consider this
Agreement;
(vii)he specifically understands that he may revoke this
Agreement for a period of at least fifteen (15) calendar
days following his execution of this Agreement, and that
this Agreement is not effective or enforceable until the
fifteen (15) day revocation period has expired;
(viii) if he decides to revoke this Agreement within said fifteen
(15) day period, he must provide written notice to the Vice
President, General Counsel and Secretary, delivered in
person or by mail. If his revocation is sent by mail, it
must be postmarked on or before July 15, 1999, properly
addressed to Robert M. Mattison, Vice President, General
Counsel and Secretary, Graco Inc., P.O. Box 1441,
Minneapolis, MN. 55440, and sent by certified mail, return
receipt requested. Mr. Carter understands that Graco will
have no obligation to pay him anything under this Agreement
if he revokes his acceptance within the time limit
specified, and that he will be obligated to immediately
refund to Graco all sums paid to him by Graco pursuant
hereto.
(ix) Mr. Carter expressly agrees that the waiver of his rights
pursuant to the Agreement is knowing and voluntary on his
part.
8. Applicable Law
--------------
Except to the extent governed by federal law, this Agreement and any
controversies between the parties shall be governed by and construed
in accordance with the laws of the State of Minnesota.
9. Entire Agreement
----------------
This Agreement constitutes the entire agreement and understanding
between the parties with respect to the subject matter hereof, and,
except as otherwise specifically provided herein, specifically
supersedes and replaces any and all prior written or oral agreements
or understandings. This Agreement may not be amended except in a
writing signed by authorized representatives of both parties.
10. Headings
--------
The headings of the paragraphs herein are included solely for the
convenience of reference and shall not control the meaning or
interpretation of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate originals on the day and year first above written.
GRACO INC.
By: /s/James A. Earnshaw
------------------------------------
James A. Earnshaw
President and Chief Executive Officer
CLAYTON R. CARTER
By: /s/Clayton R. Carter
------------------------------------
SEPARATION AND RELEASE AGREEMENT
THIS AGREEMENT is effective the 10th day of August, 1999, by and between Graco
Inc., a Minnesota corporation ("Graco"), with its principal offices at 4050
Olson Memorial Highway, Golden Valley, Minnesota, 55422, and Roger L King, an
individual, with a residence at 2011 Sugarwoods Drive, Orono, Mn. 55356 ("Mr.
King").
WHEREAS, Mr. King is now employed by Graco; and
WHEREAS, the parties have agreed that Mr. King will cease to be an officer
and employee of Graco effective March 2, 2000 (the "Separation Date"), and will
complete and terminate his employment relationship with Graco in accordance with
the terms of this Agreement.
NOW, THEREFORE, it is hereby mutually agreed by and between the parties for
good and valuable consideration as follows:
1. Duties Prior to Separation
--------------------------
As of September 1, 1999, Mr. King will end his assignment as Vice
President and General Manager, European Operations, and assume the
title of Vice President. From September 1, 1999, to October 31, 1999,
Mr. King will continue to work at Graco's Maasmechelen, Belgium,
facility assisting in the transition of leadership for the Graco
European Operations. On or before October 31, 1999, the Company shall
repatriate Mr. King in accordance with its standard practice.
After Mr. King is repatriated and until the Separation Date, he shall
not have any specific duties or responsibilities, but shall be
available to the Chief Executive Officer for consultation and advice.
In the event that Mr. King obtains, and performs, full time employment
with another entity prior to the Separation Date, Mr. King will
immediately resign from Graco and his employment shall terminate as of
the date of said resignation, rather than the Separation Date, in
accordance with normal Graco policy and practice.
2. Salary and Annual Bonus Plan
----------------------------
Mr. King's current base salary, and all benefits, shall continue until
the Separation Date. He shall be entitled to payment under the 1999
Corporate and Business Unit Annual Bonus Plan for the full year annual
bonus to which he would have been entitled under said plan had he
stayed in the position of Vice President and General Manager, European
Operations. Said payment shall be made in 2000 when the payments under
said plan are made to all participants therein. He shall not be
entitled to any bonus under the Annual Bonus Plan for 2000.
3. Stock Options
-------------
All stock options granted to Mr. King under the Graco Long Term
Incentive Plan shall be governed by the provisions of said plan and
the stock option agreements executed between Graco and Mr. King
pursuant to said plan, based on a Separation Date of March 2, 2000, or
earlier termination date if Mr. King's employment is otherwise
terminated as provided herein.
4. Cooperation
-----------
For a period of three (3) years after March 2, 2000, Mr. King shall
render all reasonable cooperation to Graco in connection with the
prosecution or defense of any lawsuit or other judicial or
administrative action, including participating as a source of
information or witness in any such action. Graco shall reimburse Mr.
King for any reasonable out-of-pocket expenses (including attorneys'
fees, if necessary) incurred by him in connection with rendering such
cooperation.
5. Confidentiality
---------------
a. Mr. King hereby agrees that, for a period of three (3) years
after March 2, 2000, he will not, directly or indirectly,
disclose any Confidential Information, as defined in subsection
(b) below, to any other party, and will not in any way use such
Confidential Information in the course of any future employment.
b. As used herein, the term "Confidential Information" shall mean
all information which is treated as confidential or proprietary
by Graco in the normal course of its business, including, without
limitation, documents so marked, or is a trade secret of Graco,
which has been disclosed by Graco to Mr. King, including, without
limitation, information relating to Graco products, processes,
product development or research, equipment, machinery, apparatus,
business operations, financial results or condition, strategic
plans or projections, customers, suppliers, marketing, sales,
management practices, technical information, drawings,
specifications, material, and the like, and any knowledge or
information developed by Mr. King relating to the same, provided,
however, that Confidential Information shall not include
information which is at the time of disclosure, or thereafter
becomes, a part of the public domain through no act or omission
by Mr. King, or information which Mr. King is required to
disclose in a court or other judicial proceeding or is otherwise
legally required to disclose.
c. The provisions of this Section 5 are in addition to, and not in
lieu of, the fiduciary and other duties and obligations of Mr.
King as an employee, officer and director of Graco, and this
Section 6 does not limit said obligations in any way, by time or
otherwise.
6. Release
-------
a. Except with respect to the provisions of this Agreement, Mr. King
hereby releases and forever discharges Graco and its officers,
employees, agents, successors, and assigns from any and all
claims, causes of action, demands, damages, liability and
responsibility whatsoever, arising prior to the Separation Date,
including without limitation, any rights or claims for further
compensation, or any rights to participate in any
Company-sponsored program relating to the purchase or acquisition
of any Graco common stock, preferred stock, or other equity in
Graco or any subsidiary thereof, except as specifically provided
in this Agreement, or any right or claim Mr. King may have or
assert under the common law or any state, municipal, federal, or
other statute or regulation regarding the rights of employees
generally or based on discrimination on the basis of race, creed,
gender, age, or other protected status. This Section 6 shall not
affect Mr. King's rights to indemnification as an officer,
director, and employee of Graco under Graco's by-laws and
applicable Minnesota law nor any rights which he has accrued by
participating in any Graco benefit plan, subject to the
provisions of this Agreement and the terms and conditions set
forth in such plan as of the Separation Date.
b. Mr. King certifies, represents and agrees that:
(i) this Agreement is written in a manner that he understands;
(ii) he understands that this Section 6 specifically waives any
rights or claims he may have arising under federal, state,
and local laws prohibiting employment discrimination, such
as the Age Discrimination in Employment Act, the Minnesota
Human Rights Act, Title VII of the Civil Rights Act of 1964,
the Rehabilitation Act of 1973, the Americans with
Disabilities Act and/or any claims for damages or for
injuries based on common law theories of contract,
quasi-contract or tort;
(iii)the waiver herein of rights or claims are to those which
may have arisen prior to the execution date of this
Agreement or arise prior to the Separation Date;
(iv) a portion of the consideration set out in this Agreement is
in addition to compensation that he may already have been
entitled to;
(v) he has been specifically advised in writing to consult with
an attorney prior to executing this Agreement;
(vi) he has been informed that he has a period of at least
twenty-one (21) calendar days within which to consider this
Agreement;
(vii)he specifically understands that he may revoke this
Agreement for a period of at least fifteen (15) calendar
days following his execution of this Agreement, and that
this Agreement is not effective or enforceable until the
fifteen (15) day revocation period has expired;
(viii) if he decides to revoke this Agreement within said fifteen
(15) day period, he must provide written notice to the Vice
President, General Counsel and Secretary, delivered in
person or by mail. If his revocation is sent by mail, it
must be properly addressed to Robert M. Mattison, Vice
President, General Counsel and Secretary, Graco Inc., P.O.
Box 1441, Minneapolis, MN. 55440, and sent by certified
mail, return receipt requested. Mr. King understands that
Graco will have no obligation under this Agreement if he
revokes his acceptance within the time limit specified.
(ix).Mr. King expressly agrees that the waiver of his rights
pursuant to the Agreement is knowing and voluntary on his
part.
7. Termination for Cause; Death or Disability
---------------------------------------------
It is understood that notwithstanding this Agreement, the Company may
terminate Mr. King for cause, as defined herein. In the event that Mr.
King shall die, or his employment is terminated due to disability as
defined in the Graco Long-Term Disability Plan, or his employment is
terminated for cause (defined herein as his gross or willful
misconduct, including but not limited to the wrongful appropriation of
Company funds or the commission of a felony), in each case prior to
the Separation Date, then in all such cases the standard Graco
policies, and with respect to stock options the provisions of the
Graco Long Term Incentive Plan and the stock option agreements
executed between Graco and Mr. King, shall govern any such termination
notwithstanding the provisions of this Agreement.
8. Applicable Law
--------------
Except to the extent governed by federal law, this Agreement and any
controversies between the parties shall be governed by and construed
in accordance with the laws of the State of Minnesota.
9. Entire Agreement
----------------
This Agreement constitutes the entire agreement and understanding
between the parties with respect to the subject matter hereof, and,
except as otherwise specifically provided herein, specifically
supersedes and replaces any and all prior written or oral agreements
or understandings. This Agreement may not be amended except in a
writing signed by authorized representatives of both parties.
10. Headings
--------
The headings of the paragraphs herein are included solely for the
convenience of reference and shall not control the meaning or
interpretation of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate originals on the day and year first above written.
GRACO INC.
By: /s/James A. Earnshaw
-----------------------------------
James A. Earnshaw
President and Chief Executive Officer
ROGER L. KING
By: /s/Roger L. King
-----------------------------------
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- -----------------------------
Sept 24, 1999 Sept 25, 1998 Sept 24, 1999 Sept 25, 1998
------------- ------------- ------------- -------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net earnings applicable to
common shareholders for
basic and diluted earnings
per share $ 15,043 $ 11,073 $ 44,205 $ 32,785
------------- ------------- ------------- -------------
Weighted average shares
outstanding for basic
earnings per share 20,338 20,388 20,194 23,793
Dilutive effect of stock
options computed using the
treasury stock method and the
average market price 678 591 629 638
Weighted average shares
outstanding for diluted
earnings per share 21,016 20,979 20,823 24,431
Basic earnings per share $ .74 $ .54 $ 2.19 $ 1.38
------------- ------------- ------------- -------------
Diluted earnings per share $ .72 $ .53 $ 2.12 $ 1.35
------------- ------------- ------------- -------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Graco
Inc. and subsidiearies consolidated balance sheets for the quarterly period
ending September 24, 1999 and is qualified in its entirety by reference to
such statements.
</LEGEND>
<CIK> 0000042888
<NAME> Graco Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUN-26-1999
<PERIOD-END> SEP-24-1999
<EXCHANGE-RATE> 1
<CASH> 2,082
<SECURITIES> 0
<RECEIVABLES> 79,081
<ALLOWANCES> 4,779
<INVENTORY> 36,293
<CURRENT-ASSETS> 132,071
<PP&E> 189,191
<DEPRECIATION> 102,478
<TOTAL-ASSETS> 232,003
<CURRENT-LIABILITIES> 69,313
<BONDS> 83,813
0
0
<COMMON> 20,415
<OTHER-SE> 29,693
<TOTAL-LIABILITY-AND-EQUITY> 232,003
<SALES> 110,076
<TOTAL-REVENUES> 110,076
<CGS> 52,566
<TOTAL-COSTS> 52,566
<OTHER-EXPENSES> 34,967
<LOSS-PROVISION> 70
<INTEREST-EXPENSE> 1,661
<INCOME-PRETAX> 22,543
<INCOME-TAX> 7,500
<INCOME-CONTINUING> 15,043
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,043
<EPS-BASIC> .74
<EPS-DILUTED> .72
</TABLE>
