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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 31, 1999 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. 001-9249
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 3, 2000, 20,494,563 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 [ ]
The aggregate market value of approximately 17,675,339 shares held by
non-affiliates of the registrant was approximately $542 million on March 3,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 2, 2000, are incorporated by reference into Part
III, as specifically set forth in said Part III.
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<PAGE>
GRACO INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Page
Part I
Item 1 Business............................................................3
Item 2 Properties..........................................................6
Item 3 Legal Proceedings...................................................7
Item 4 Submission of Matters to a Vote of Security Holders.................7
Executive Officers of the Company...................................7
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........................13
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
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
<PAGE>
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/automotive and commercial settings. The
Company helps customers solve difficult manufacturing problems, increase
productivity, improve quality, conserve energy, save expensive material, control
environmental emissions and reduce labor costs. Graco is the successor to Gray
Company, Inc., which was incorporated in 1926 as a manufacturer of automobile
lubrication equipment, and became a public company in 1969.
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 spray a wide variety of fluids and viscous materials.
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 product focused factories which contain
product-based cells. The Company continues to refine these factories as new
products are introduced and new equipment is purchased with the ultimate goal of
creating factories which function independently.
Operating Segment Information
Graco's businesses are classified by management into three primary operating
segments: (1) Industrial/Automotive Equipment, (2) Contractor Equipment, and (3)
Lubrication Equipment. Financial information concerning these operating segments
is set forth in Part II, Item 7, at page 10.
Industrial/Automotive Equipment
Graco's Industrial/Automotive Equipment segment designs and markets fluid
application systems, primarily for paints, coatings, sealants and adhesives. The
markets served include automotive assembly and components plants, wood products,
rail, marine, aerospace, farm and construction equipment, truck, bus and
recreational vehicles and approximately thirty other industries.
Worldwide, Industrial/Automotive Equipment is sold through general and
specialized distribution and integrators as well as directly to automotive
assembly plants. Distributors promote and sell the equipment, provide expertise
to customers in its application, and offer integration capabilities, on-site
service and technical support.
Products for the industrial/automotive markets are manufactured by product
focused factories in Minneapolis and Rogers, Minnesota, Sioux Falls, South
Dakota and Bielefeld, Germany. Assembly of certain products for the European
market is performed in Maasmechelen, Belgium.
Recent Developments. Graco continues to develop its strategy of serving the
automotive market through the sale of pre-engineered packages and modules sold
directly to automotive assembly plants and through independent distributors,
integrators and robot companies. Specialized automotive marketing personnel are
responsible for identifying and developing new products for automotive plants
and an experienced specialized sales force serves the unique needs of
integrators, robotic companies as well as automotive assembly plants.
In the industrial market, Graco is focusing its product design and marketing
efforts on four key product areas: sealants and adhesives, air-operated
diaphragm pumps, finishing and protective coatings. A major driver of product
development in the industrial/automotive area is the need to reduce the emission
of volatile organic compounds ("VOCs") from coatings during the application
process in order to meet environmental regulations. The industrial sales force
delivers products to customers in over thirty industries, with significant
efforts being devoted to wood products, rail, marine, aerospace, farm and
construction equipment, truck, bus and recreational vehicles. In the
international arena, Graco is developing products and expanding its specialized
distribution to achieve maximum coverage in these industries.
In 1999, Graco introduced PrecisionSwirl(TM), an electric orbital applicator
used to produce a variety of open and closed loop patterns for sealants and
adhesives. The technology improves the material's performance and production
characteristics while reducing material usage and overspray. When used with
Graco's PrecisionFlo(TM) or PrecisionFlo Plus dispensing units, PrecisionSwirl
effectively minimizes bead variations and decreases material usage, manual
touch-up and rework, thereby lowering manufacturing costs and improving product
quality and reliability.
The PrecisionMix(R) II was introduced for use in the industrial/automotive
markets in the summer of 1999. PrecisionMix II, an advance over the PrecisionMix
I, is an electronically-controlled plural component proportioning controller
with a global platform which makes it highly configurable by end users in all
electrical environments worldwide. It offers end users the ability to perform
color changes quickly and to use the equipment in robotic applications.
In June of 1999, Graco acquired certain assets of Bollhoff Verfahrenstechnik,
located in Bielefeld, Germany. Its principal products include piston pumps,
diaphragm pumps, two-component proportioning equipment and applicators used in
the automotive and industrial markets, primarily in Europe. This acquisition
added market share for Graco's European operations, especially in Germany.
The Falcon(TM), a compact entry-level sprayer for medium-sized wood finishing
customers, was introduced in August 1999. The Falcon package contains the
Alpha(TM), an ergonomically-designed air-assisted airless spray gun, and an
all-stainless steel lower pump. It provides excellent finish quality with high
transfer efficiency.
Products. Products offered by the Industrial/Automotive segment include high and
low pressure air-powered, electric, and hydraulic pumps that pressurize and
transfer paints, stains, chemicals, sealants, adhesives, food, and other viscous
materials through various application devices, including air, airless,
air-airless, electrostatic, and high-volume-low-pressure ("HVLP") spray guns.
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 are available. Sealant
and adhesive, paint circulating and plural component packages and modules and a
complete line of parts and accessories are also offered.
Contractor Equipment
Graco's Contractor Equipment segment designs and markets sprayers for the
application of paint and other architectural coatings, and for the high-pressure
cleaning of equipment and structures. The segment offers its equipment to
distributors selling to contractors in the painting, roofing, texture, corrosion
control and line striping markets.
The equipment is sold primarily through retail stores which also sell paint and
other coatings, and secondarily through general equipment distributors. In 1999,
sales to The Sherwin-Williams Company, a paint manufacturer and retailer in the
Contractor segment, totaled 11% of the Company's consolidated sales.
Manufacturers' representatives are used to sell the Company's equipment to the
rental market.
Products for the contractor equipment markets are manufactured by product
focused factories in Rogers, Minnesota, and Sioux Falls, South Dakota. Assembly
of certain products for the European market is performed in Maasmechelen,
Belgium.
Recent Developments. The Magnum(TM) line of airless sprayers and accessories for
the entry-level painting contractor and remodeler will be introduced in early
2000 and will be distributed through Home Depot(R) stores throughout the United
States and Canada as well as retail paint stores.
The Mark V, a unit that can spray either texture coatings or paint by changing
the spray gun, was introduced during 1999. The LineLazer II(TM) gas-operated
line stripers introduced in 1999 offer enhanced stability for straighter, more
consistent lines. A new reversible tip for airless spray guns, the RAC(TM) 5
Reverse-A-Clean(R) Switch Tip(TM) was launched in 1999. This new tip comes with
a Handtite(TM) TipGuard which permits installation without tools and a single
seal for all fluids, making assembly and clean up easier.
Products. The segment's primary product lines are airless paint sprayers and
associated accessories such as spray guns, filters, valves and tips, pressure
washers and specialized spraying equipment for the application of roofing
materials, texture coatings and traffic paint. Fluid pressures ranging from 5 to
more than 4,000 pounds per square inch and flow rates up to 4 gallons per minute
are available. Pumps are electric, hydraulic and air-powered models in addition
to gasoline-powered models, increasing the flexibility of contractors in areas
where electricity is not readily available. High-volume-low-pressure ("HVLP")
equipment has become increasingly popular as regulation of volatile emissions
has increased. Replacement and maintenance parts, such as packings, seals and
hoses, which must be replaced periodically in order to maintain efficiency and
prevent loss of material, are also offered for sale.
Lubrication Equipment
The Lubrication Equipment segment designs and markets products for the
lubrication and maintenance of vehicles and other equipment. The markets for the
segment's products include fast oil change facilities, service garages, fleet
service centers, automobile dealerships and the mining industry. The purchase of
vehicle lubrication equipment is often funded by major oil companies for their
customers as a marketing tool.
Products are distributed primarily through independent distributors worldwide,
which are serviced by a network of independent sales representatives. The number
and quality of distributors serving the mining industry in North America and
Australia has increased significantly in recent years.
Recent Developments. A key product line being marketed to the mining industry is
a heavy duty on-board automatic lubrication system for haul trucks. The Graco
system automatically dispenses grease to critical vehicle components at timed
intervals, thereby reducing downtime and improving productivity. The system
includes externally adjustable high pressure injectors with visual operation
indicators, a compact reliable solid state full-function timer, and a large
capacity reservoir, vent valve and Fireball(TM) pump module.
In 1999, the OilAce(TM) Pressurized Oil Drain was introduced. With a 24 gallon
capacity, this product collects waste oil as it is drained from a vehicle. When
full, standard shop compressed air can be used to evacuate the waste oil into a
central holding tank for disposal. The 250 Series Hose Reel, a new line of hose
reels targeted at fast oil change facilities, service garages, automobile
dealerships and pump tank packages, with heavy duty positive latching mechanisms
and springs, was launched during the year.
Products. The Lubrication Equipment segment offers a full line of lubrication
pumps (air and hydraulic-powered), meters, fluid and air pressure gauges, fluid
management systems, hose reels and dispense valves. The segment sells a fluid
management system for the vehicle services market, which tracks and records
inventories of lubricants and the quantities dispensed. It continues to develop
its capability to service the mining industry with automatic lubrication
systems. A complete line of parts and accessories is also offered.
Products for the Lubrication Equipment markets are manufactured by product
focused factories in Minneapolis, Minnesota.
Marketing and Distribution
Graco's operations are organized to sell its full line of products in each of
the major geographic markets: the Americas (North, Central and South America),
Europe (including the Middle East and Africa), and Asia Pacific. The
Industrial/Automotive Equipment segment, Contractor Equipment segment, and the
Lubrication Equipment segment 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 Japan, Korea, and Europe, Graco equipment is sold to
distribution through sales subsidiaries. Manufacturers' representatives are used
in the Lubrication Equipment segment and in the Contractor Equipment segment for
sales to the rental market.
In 1999, Graco's net sales in the Americas were $308,144,000 or approximately 70
percent of the Company's consolidated net sales; in Europe net sales were
$88,470,000 or approximately 20 percent; and in the Asia Pacific Region, net
sales were $45,860,000 approximately 10 percent.
Consolidated backlog at December 31, 1999, was $21 million compared to $13
million at the end of 1998.
Research, Product Development and Technical Services
Graco's research, development and engineering activities are organized by
operating segment. The engineering group in each segment focuses on new product
design, product improvements, applied engineering and strategic technologies for
its specific customer base. During 1999, the marketing groups for both the
Industrial/Automotive and the Lubrication segments moved into the same facility
with their respective engineering groups, increasing the opportunities for
collaboration. It is one of Graco's goals to generate 30 percent of each year's
sales from products introduced in the prior three years. All major research and
development activities are conducted in facilities located in Minneapolis, and
Rogers, Minnesota. Total research and development expenditures were $19,688,000,
$18,213,000 and $17,817,000 for 1999, 1998 and 1997.
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.
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. In foreign markets, the
Company faces indigenous competitors with different cost structures and
expectations of profitability. Graco believes it is one of the world's leading
producers of high-quality specialized fluid management equipment. It is
impossible, because of the absence of reliable industry-wide third-party data,
to determine its relative market position.
Environmental Protection
During the fiscal year ended December 31, 1999, 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 31, 1999, the Company employed approximately 1,980 persons on a
full-time basis. Of this total, approximately 359 were employees based outside
the United States, and 816 were hourly factory workers in the United States.
Item 2. Properties
As of December 31, 1999, the Company's principal operations that occupy more
than 10,000 square feet were conducted in the following facilities:
<TABLE>
<CAPTION>
Gross
Type of Facility Location Square Footage
---------------- -------- --------------
Owned
-----
<S> <C> <C>
Distribution/Manufacturing/Office Rogers, Minnesota 333,000
Manufacturing/Office Minneapolis, Minnesota 242,300
Manufacturing/Office Minneapolis, Minnesota 202,300
Research & Development/Office Minneapolis, Minnesota 138,700
Assembly/European Headquarters/Warehouse Maasmechelen, Belgium 75,175
Corporate Headquarters Golden Valley, Minnesota 73,800
Manufacturing/Office Sioux Falls, South Dakota 55,100
Leased
------
Manufacturing/Office Bielefeld, Germany 69,400
Office/Warehouse Yokohama, Japan (2 facilities) 32,837
Office/Warehouse Gwangju-Gun, Korea 10,549
Office Plymouth, Michigan 21,000
</TABLE>
A 106,000 square foot building in Plymouth, Michigan and a 21,000 square foot
building in Los Angeles, California were sold during second quarter 1999.
The Company leases space for liaison offices in China.
Graco's facilities are in satisfactory condition, suitable for their respective
uses and are sufficient and adequate to meet current needs. Manufacturing
capacity met business demand in 1999. Production requirements in the immediate
future are expected to be met through existing production capabilities,
efficiency and productivity improvements and the use of available subcontract
services. Management is currently evaluating options for future facility needs
due to the planned growth of the business.
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 1999.
Executive Officers of the Company
The following are all the executive officers of the Company as of March 3, 2000.
George Aristides, 64, was elected Chief Executive Officer effective January 3,
2000. From March 1, 1999 to December 29, 1999, he was Vice Chairman. From
January 1, 1996 to February 28, 1999 he was Chief Executive Officer. From 1993
to 1997 he was President. From 1993 to 1996 he was President and Chief Operating
Officer. 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.
James A. Graner, 55, 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.
Dale D. Johnson, 45, was elected President and Chief Operating Officer effective
January 14, 2000. From December 1996 to January 2000 he was Vice President,
Contractor Equipment Division. Prior to becoming the Director of Marketing,
Contractor Equipment Division in June 1996, he held various marketing and sales
positions in the Contractor Equipment Division and the Industrial Equipment
Division. He joined the Company in 1976.
D. Christian Koch, 35, was appointed Vice President, Lubrication Equipment
Division effective February 15, 2000. From August 1999 to February 2000, he was
the Director, Industrial Global Sales and Marketing. From December 1998 to
August 1999 he was Director, Lubrication Marketing. Prior to joining the Company
in December 1998, he was employed by H.B. Fuller Company, where he held various
positions, including President and Division Manager of TEC Incorporated and Vice
President and Business Unit Manager of Foster Products Corporation. (Mr. Koch is
not related to David A. Koch, Chairman of the Board.)
David M. Lowe, 44, became Vice President and General Manager, European
Operations effective September 1, 1999. Mr. Lowe was Vice President, Lubrication
Equipment Division from December 1996 to September 1999. From February 1995 to
December 1996 he was Treasurer. Prior to joining the Company in 1995, he was
employed by Ecolab Inc., where he held various positions in the Treasury
Department, including Manager, Corporate Finance; Director, Corporate Finance;
and Director, Corporate Development.
Robert M. Mattison, 52, was first elected Vice President, General Counsel and
Secretary, in January 1992, a position which he holds today.
Patrick J. McHale, 38, was appointed Vice President, Contractor Equipment
Division effective February 15, 2000. Mr. McHale was Vice President, Lubrication
Equipment Division from September 1999 to February 2000. He was Contractor
Equipment Manufacturing - Distribution Operations Manager from February 1998 to
September 1999. From March 1997 to February 1998 he was Director of Michigan
Operations. From February 1996 to March 1997 he was Contractor Equipment
Manufacturing Operations Manager and from January 1994 to February 1996 he was
the Sioux Falls Plant Manager. Mr. McHale joined the Company in December 1989.
Charles L. Rescorla, 48, is Vice President, Manufacturing and Distribution
Operations, a position to which he was first elected on May 5, 1998. Mr.
Rescorla was previously appointed to that position on January 1, 1995. Prior to
becoming the Director of Manufacturing in March 1994, he was the Director of
Engineering, Industrial/Automotive Division, a position which he assumed in 1988
when he joined the Company.
Mark W. Sheahan, 35, was elected Vice President and Treasurer on December 11,
1998. Effective December 17, 1996, he was elected Treasurer. Prior to joining
the Company as Treasury Operations Manager in 1995, he was a Senior Manager with
KPMG Peat Marwick LLP.
Fred A. Sutter, 39, was appointed Vice President, Asia Pacific and Latin America
effective March 1, 1999. From March 1995 to February 28, 1999 he was Director of
Industrial Marketing. Prior to joining the Company in 1995, he held various
positions with Fisher-Rosemount, most recently as Director of Marketing.
The Board of Directors elected Messrs. Aristides, Graner, Lowe, Mattison,
Rescorla and Sheahan on May 4, 1999, all to hold office until the next annual
meeting of directors or until their successors are elected and qualify. Mr.
Aristides resigned as Vice Chairman effective December 29, 1999, and was elected
Chief Executive Officer on January 3, 2000. Mr. Johnson was elected to the
position of President and Chief Operating Officer on January 14, 2000.
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 3, 2000, there were 20,494,563 shares
outstanding and 6,416 common shareholders of record, which includes nominees or
broker dealers holding stock on behalf of an estimated 4,159 beneficial owners.
Quarterly Financial Information.
(In thousands, except per share amounts)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- ----------------------- -------- -------- -------- --------
Net sales $103,241 $114,703 $110,076 $114,454
Gross profit 52,857 59,619 57,510 61,149
Net earnings 11,201 17,961 15,043 15,136
Per common share:
Basic net earnings 0.56 0.89 0.74 0.74
Diluted net earnings 0.54 0.86 0.72 0.72
Dividends declared 0.11 0.11 0.11 0.14
-------- -------- -------- --------
Stock price (per share)
High $ 30.25 $ 32.63 $ 34.88 $ 35.88
Low 20.00 21.50 28.50 31.94
Close* 21.44 29.31 33.06 35.88
-------- -------- -------- --------
Volume (# of shares) 2,859 2,997 2,335 2,528
======== ======== ======== ========
1998
- -----------------------
Net sales $105,717 $115,153 $106,202 $105,113
Gross profit 51,945 58,087 53,981 55,388
Net earnings 8,947 12,765 11,073 14,478
Per common share:
Basic net earnings 0.35 0.49 0.54 0.72
Diluted net earnings 0.34 0.48 0.53 0.70
Dividends declared 0.11 0.11 0.11 0.11
-------- -------- -------- --------
Stock price (per share)
High $ 31.19 $ 36.50 $ 35.31 $ 30.13
Low 22.83 29.25 24.13 19.88
Close* 30.31 34.88 23.25 29.50
-------- -------- -------- --------
Volume (# of shares) 2,499 3,478 3,350 2,756
======== ======== ======== ========
*As of the last trading day of the calendar quarter.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Graco Inc. & Subsidiaries
(In thousands, except per share amounts) 1999 1998 1997 1996 1995
- ------------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $442,474 $432,185 $413,897 $391,756 $386,314
Net earnings 59,341 47,263 44,716 36,169 27,706
-------- -------- -------- -------- --------
Per common share:
Basic net earnings $ 2.93 $ 2.06 $ 1.75 $ 1.40 $ 1.07
Diluted net earnings 2.84 2.01 1.71 1.38 1.06
-------- -------- -------- -------- --------
Total assets $236,033 $233,702 $264,532 $247,814 $217,833
Long-term debt (including current portion) 66,910 115,739 7,959 9,920 12,009
Cash dividends declared per common share $ 0.44 $ 0.44 $ 0.38 $ 0.33 $ 0.30
======== ======== ======== ======== ========
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S REVIEW AND DISCUSSION
Graco's net earnings of $59.3 million in 1999 are 25.5 percent higher than the
$47.3 million earned in 1998 and are 32.7 percent higher than the $44.7 million
recorded in 1997. The increases in 1999 and 1998 are primarily due to enhanced
profit margins resulting from many factors, including exiting the custom systems
business, closing facilities, improved manufacturing efficiencies and price
increases.
The table below reflects the percentage relationship between income and expense
items included in the Consolidated Statements of Earnings for the three fiscal
years and the percentage changes in those items for such years.
<TABLE>
<CAPTION>
Revenue & Expense Item Revenue & Expense Item
As a Percentage of Net Sales Percentage Increase (Decrease)
1999 1998 1997 99/98 98/97
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales 100.0 100.0 100.0 2 4
----- ----- ----- ----- -----
Cost of products sold 47.8 49.2 51.0 (1) 1
Product development 4.4 4.2 4.3 8 2
Selling, marketing and
distribution 18.1 19.2 21.1 (4) (5)
General and administrative 8.7 9.6 7.8 (7) 28
----- ----- ----- ----- -----
Operating profit 21.0 17.8 15.8 21 17
----- ----- ----- ----- -----
Interest expense 1.6 1.3 0.2 32 *
Other expense (income), net (0.6) -- 0.3 * *
----- ----- ----- ----- -----
Earnings before income taxes 20.0 16.5 15.3 24 12
Income taxes 6.6 5.6 4.5 22 28
----- ----- ----- ----- -----
Net Earnings 13.4 10.9 10.8 26 6
===== ===== ===== ===== =====
* Not a meaningful figure.
</TABLE>
NET SALES
Worldwide net sales in 1999 reached a record $442.5 million, a 2.4 percent
increase over 1998 sales of $432.2 million. Foreign currency translations had no
net impact on reported sales in 1999 when compared to 1998. By segment, 1999 net
sales versus 1998 increased in the Contractor Equipment segment by 11.6 percent,
while sales in the Industrial/Automotive Equipment and Lubrication Equipment
segments were 3.3 percent and 1.1 percent lower, respectively. The Company's
decision to exit the custom-engineered systems business reduced
Industrial/Automotive Equipment sales.
Geographically, sales outside of the Americas represented 30.4 percent of total
sales in 1999, compared to 30.6 percent in 1998. Net sales gains in Asia Pacific
were offset by lower sales in Europe. In the Americas, 1999 sales increased 2.7
percent for the year, primarily due to strong sales in the Company's Contractor
Equipment business segment, offset by sales declines in the
Industrial/Automotive Equipment and Lubrication Equipment business segments. In
Europe, local volume declined 1.6 percent and reported net sales were 5.0
percent lower than 1998 after unfavorable currency translations. In the Asia
Pacific Region, local volume increased 7.6 percent from 1998 and reported net
sales were 17.0 percent higher than 1998 after favorable currency translations.
Worldwide net sales in 1998 were $432.2 million, a 4 percent increase over 1997.
Advances in local volume and price increases accounted for a 7 percent increase,
but the impact of the strong U.S. dollar on currency translations reduced
reported sales by 3 percent. The 1998 increase was due to higher sales in all
regions except Asia Pacific. Net sales in the Americas, which accounted for 69.4
percent of net sales, advanced 8 percent. Graco's sales outside the Americas
accounted for 30.6 percent of total 1998 sales versus 33.2 percent of total
sales in 1997.
Consolidated backlog at December 31, 1999 was $21 million compared to $13
million at the end of 1998 and $22 million at the end of 1997. The increase in
1999 backlog versus 1998 was due in part to orders for a new line of Contractor
Equipment products to be shipped in the first quarter of 2000. The decline in
1998 backlog versus 1997 was primarily due to the Company's decision to exit the
custom-engineered systems business.
<TABLE>
<CAPTION>
% Increase (Decrease)
(In thousands) 1999 1998 1997 99/98 98/97
- --------------------------------- -------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Segment Sales:
Industrial/Automotive Equipment $224,606 $231,924 $226,114 (3) 3
Contractor Equipment 174,632 156,535 142,400 12 10
Lubrication Equipment 43,236 43,726 45,383 (1) (4)
-------- -------- -------- ----- -----
Consolidated $442,474 $432,185 $413,897 2 4
======== ======== ======== ===== =====
Geographic Sales:
Americas $308,145 $299,799 $276,410 3 8
Europe 88,470 93,114 82,028 (5) 14
Asia Pacific 45,859 39,272 55,459 17 (29)
-------- -------- -------- ----- -----
Consolidated $442,474 $432,185 $413,897 2 4
======== ======== ======== ===== =====
</TABLE>
GROSS MARGINS
Gross margins, expressed as a percentage of sales, were 52.2 percent in 1999,
compared with 50.8 percent in 1998. The mix of products sold, pricing, improved
manufacturing efficiencies, exiting the custom-engineered systems business, and
slightly higher sales all contributed to the enhanced gross margin. 1998 gross
margins of 50.8 percent were up from 1997 gross margins of 49.0 percent. This
was a result of several factors, including the mix of products sold, improved
manufacturing efficiencies and higher sales.
OPERATING EXPENSES
Overall, operating expenses, expressed as a percentage of net sales, decreased
3.2 percentage points in 1999 versus 1998. In 1999, product development expenses
increased versus 1998, to $19.7 million. In 1998, product development expenses
of $18.2 million were higher than the $17.8 million of product development
expenses in 1997. Graco continues to be committed to expanding its sales by
making significant investments in product development. Selling, marketing,
distribution and general and administrative expenses, expressed as a percentage
of sales, were 26.7 percent in 1999 and 28.8 percent in 1998. In 1999, overall
selling, marketing, distribution, and administrative expenses were lower than in
1998 due to the benefits of prior year corporate expense reduction initiatives,
lower information systems expenditures, and reduced non-recurring charges. In
all segments, operating expenses decreased as a percentage of net sales. In
1998, selling, marketing, distribution and general and administrative expenses,
expressed as a percentage of sales, were 28.8 percent, virtually the same as in
1997. In 1998, overall selling expenses were lower than in 1997 due to corporate
expense reduction initiatives. Administrative expenses were higher than 1997
levels due to significant investments in information systems and non-recurring
charges.
DIVISIONAL OPERATING PROFITS
Increases in 1999 operating profits are the result of several factors, including
corporate expense reduction initiatives, improved manufacturing efficiencies,
and higher net sales in Contractor Equipment. Operating profits for
Industrial/Automotive Equipment increased by 13.1 percent versus 1998 and by 3.3
percentage points as a percentage of net sales primarily as a result of exiting
the systems business. Contractor Equipment operating profits increased by 17.4
percent versus 1998 and by 1.2 percentage points as a percentage of net sales as
increased sales more than offset increased product development, marketing and
sales-related expenses. Lubrication Equipment operating profits increased by
17.4 percent versus 1998 and by 3.8 percentage points as a percentage of sales.
FOREIGN CURRENCY EFFECTS
Foreign currency translations decreased earnings before income taxes by $1.3
million in 1999 when compared to 1998 and $4.5 million in 1998 when compared to
1997. Since approximately 31 percent of the Company's sales and 10 percent of
its product costs are in currencies other than the U.S. dollar, the strong U.S.
dollar decreased the Company's profits. Gains and losses attributable to
re-measuring the financial statements of 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 reported in Other expense (income).
OTHER EXPENSE (INCOME)
In 1999, interest expense, net of interest income, increased to $7.0 million due
to the full-year impact of borrowing incurred to fund the July 2, 1998
repurchase of 5.8 million shares of Graco Inc. common stock from the Trust under
the Will of Clarissa L. Gray. In 1998, interest expense of $5.3 million was
higher than the $0.9 million of interest expense in 1997 due to the incremental
borrowings associated with the above-referenced share repurchase.
Other income, net of other expense, was $2.6 million in 1999 compared to other
expense in 1998 of $0.2 million and other income in 1997 of $1.1 million. Other
income (expense) includes, among other things, the foreign currency translation
gains and losses discussed above, $2.9 million of net gains on the sale of
assets in 1999, a $1.2 million gain from the sale of real estate in 1997, and a
$0.8 million favorable settlement of a legal dispute in 1997.
INCOME TAXES
The Company's net effective tax rate of 33 percent in 1999 is 2 percentage
points lower than the 1999 U.S. federal tax rate of 35 percent. The decrease
from the 34 percent rate in 1998 is due primarily to foreign earnings being
taxed at lower effective rates. The 1998 effective tax rate of 34 percent was
higher than the 1997 rate of 30 percent principally due to foreign earnings
being taxed at higher effective rates and the full utilization in 1997 of tax
benefits associated with previously reserved foreign subsidiary net operating
losses. Reconciliations of the U.S. federal tax rate to the effective rates for
1999, 1998 and 1997 are included in Note E to the Consolidated Financial
Statements.
ACCOUNTING CHANGES
The one-month reporting lag of the Company's European subsidiaries was
eliminated in 1998 and resulted in Europe's December 1997 net earnings being
recorded as an adjustment to equity.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As discussed under Foreign Currency Effects, Graco sells and purchases products
and services in currencies other than the U.S. dollar. Consequently, the Company
is subject to profitability risk arising from exchange rate movements.
Graco uses foreign exchange contracts to reduce risks associated with foreign
currency net balance sheet positions. These contracts typically have maturities
of 90 days or less, and gains or losses from changes in market value of these
contracts offset foreign exchange gains and losses on the underlying balance
sheet items. At December 31, 1999, the foreign currencies to which the Company
had the most significant balance sheet exchange rate exposure were the European
euro, Canadian dollar, Japanese yen, British pound, and Korean won. The Company
does not use derivative financial instruments for trading purposes.
To evaluate its currency exchange rate risks on its foreign exchange contracts,
the Company uses sensitivity analysis, which measures the impact on earnings of
hypothetical changes in the value of foreign currencies to which it has
exposure. At December 31, 1999, due to the short-term nature of the Company's
hedging instruments, reasonably likely fluctuations in foreign currency exchange
rates in the near term would not materially affect Graco's consolidated
operating results, financial position or cash flows.
The Company utilizes interest rate swaps to manage its exposure to fluctuations
in earnings due to changes in interest rates on its variable rate debt. At
December 31, 1999, a 50 basis point increase or decrease in the market interest
rates, principally LIBOR, would not materially increase or decrease interest
expense or cash flows.
For further discussion of the Company's foreign currency and interest rate
hedging strategy and position, see Note A to the Consolidated Financial
Statements.
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 recognized
"00" as 1900 rather than 2000. The Company completed its program to insure that
all technology systems and non-information technology systems are Year 2000
compliant. The Company has not experienced any significant Year 2000 outages nor
is it aware of any Year 2000 issues with suppliers, customers or its products
that may have a material adverse impact on the Company's results.
OUTLOOK
Our view of 2000 is that a recovery in most international markets is underway,
except for Japan and Latin America, which remain weak. North America continues
to be strong, but we expect a slowing in 2000 versus what we have experienced in
the past three years. Overall, Graco is well positioned to improve results by
leveraging its strengths--our committed employees, our strong distribution
partners, our cumulative manufacturing knowledge, our ability to develop new
products, and our careful attention to expenses and the balance sheet.
Our Contractor Equipment Division introduced a new line of paint sprayers and
accessories for a new market. These new units are designed to meet the needs of
small painting contractors and others that do not paint exclusively but will
significantly benefit from using airless spray. We released the new line for
sale in the first quarter of 2000 and expect meaningful incremental revenues and
profits.
Graco has changed a number of business processes in recent years that have
improved its effectiveness in the markets it serves, and has increased the
Company's operating margins and net profits. These efforts will continue to
favorably impact margins and profits in 2000. Graco has achieved strong returns
on its pension assets in recent years. We are expecting that these strong
returns will have a favorable impact on earnings in 2000.
We anticipate that the continued strength of the U.S. dollar relative to other
major currencies will have a slightly negative impact on operating margins in
2000.
SAFE HARBOR CAUTIONARY STATEMENT
The information in 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. 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 Annual Report on Form 10-K for fiscal
year 1999.
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 a 27 percent increase in the regular dividend to be paid in 2000;
o repurchase of 5.8 million shares in 1998 from Graco's largest shareholder,
the Trust under the Will of Clarissa L. Gray;
o three-for-two stock splits in 1998 and 1996; and
o an 18 percent increase in the regular dividend in 1997
LIQUIDITY AND SOURCES OF CAPITAL
The following table highlights several key measures of asset performance.
(In thousands) 1999 1998
- ------------------------------------ ------- -------
Cash and cash equivalents $ 6,588 $ 3,555
Working capital $59,726 $48,354
Current ratio 1.8 1.6
Average days receivables outstanding 65 67
Inventory turnover 5.6 6.3
In 1999, working capital increased $11.4 million to $59.7 million. As a result
of strong cash flow from operations, as well as cash generated from the sale of
facilities, the Company reduced its total debt by $48.7 million in 1999. Total
debt at the end of 1999 was $81.6 million as compared to $130.3 million at the
end of 1998. Receivables decreased $0.5 million in 1999 compared with the same
period in 1998. Inventories increased $3.6 million in 1999 primarily as a result
of a build-up in inventory in conjunction with the February 2000 introduction of
the Contractor Equipment Magnum line.
Cash provided by operations was $75.8 million in 1999, versus $77.1 million in
1998 and $36.3 million in 1997. Significant uses of cash included the retirement
of debt, the acquisition of certain assets of Bollhoff Verfahrenstechnik,
capital expenditures, taxes, dividends and share repurchases. In 1998,
additional cash needs were funded by bank borrowings. Significant uses of cash
in 1998 included the repurchase of 5.8 million shares of Graco Inc. common stock
for $191 million and capital expenditures and dividends in 1997.
At December 31, 1999, Graco had various lines of credit totaling $158 million,
of which $80 million was unused. The Company believes that the combination of
present capital resources, internally generated funds and unused financing
sources are more than adequate to meet cash requirements for 2000.
Item 8. Financial Statements and Supplementary Data
Page
o Selected Quarterly Financial Data (See Part II, Item 5,
Market for the Company's Common Stock and Related Stock-
holder Matters) 8
o Responsibility for Financial Reporting 13
o Independent Auditors' Report 14
o Consolidated Statements of Earnings for fiscal years 1999,
1998 and 1997 15
o Consolidated Balance Sheets for fiscal years 1999 and 1998 16
o Consolidated Statements of Cash Flows for fiscal years 1999,
1998 and 1997 17
o Consolidated Statements of Changes in Shareholders' Equity
for fiscal years 1999, 1998 and 1997 18
o Consolidated Statements of Comprehensive Income for fiscal
years 1999, 1998 and 1997 18
o Notes to Consolidated Financial Statements 19
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 control 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.
<PAGE>
INDEPENDENT AUDITOR'S 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 31, 1999 and December 25, 1998 and the
related statements of earnings, shareholders' equity, comprehensive income, and
cash flows for each of the three years in the period ended December 31, 1999,
which includes the financial statement schedule listed in the Index at Item 14.
These consolidated financial statements 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 31, 1999 and December 25, 1998 and the results of operations,
shareholders' equity, comprehensive income, and cash flows for each of the three
years in the period ended December 31, 1999, 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.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
January 24, 2000
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings Graco Inc. and Subsidiaries
Years Ended
------------------------------------------------
December 31, December 25, December 26,
(In thousands, except per share amounts) 1999 1998 1997
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net Sales $ 442,474 $ 432,185 $ 413,897
Cost of products sold 211,339 212,784 210,909
------------ ------------ ------------
Gross Profit 231,135 219,401 202,988
Product development 19,688 18,213 17,817
Selling, marketing and distribution 79,922 83,169 87,479
General and administrative 38,334 41,146 32,219
------------ ------------ ------------
Operating Earnings 93,191 76,873 65,473
Interest expense 7,016 5,319 866
Other expense (income), net (2,666) 191 1,091
------------ ------------ ------------
Earnings before Income Taxes 88,841 71,363 63,516
Income taxes 29,500 24,100 18,800
------------ ------------ ------------
Net Earnings $ 59,341 $ 47,263 $ 44,716
============ ============ ============
Basic Net Earnings per Common Share $ 2.93 $ 2.06 $ 1.75
============ ============ ============
Diluted Net Earnings per Common Share $ 2.84 $ 2.01 $ 1.71
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets Graco Inc. and Subsidiaries
December 31, December 25,
(In thousands, except share amounts) 1999 1998
- ----------------------------------------------------------- ------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 6,588 $ 3,555
Accounts receivable, less allowances of $4,500 and $4,400 79,696 80,146
Inventories 37,702 34,018
Deferred income taxes, net 12,357 12,384
Other current assets 1,646 1,217
------------ ------------
Total current assets 137,989 131,320
Property, Plant and Equipment, net 86,493 96,366
Other Assets 11,551 6,016
------------ ------------
Total Assets $ 236,033 $ 233,702
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable to banks $ 14,640 $ 14,560
Current portion of long-term debt 1,215 3,157
Trade accounts payable 13,500 11,965
Salaries, wages and commissions 12,832 14,025
Accrued insurance liabilities 10,332 10,809
Income taxes payable 2,323 5,134
Other current liabilities 23,421 23,316
------------ ------------
Total current liabilities 78,263 82,966
Long-Term Debt, Less Current Portion 65,695 112,582
Retirement Benefits and Deferred Compensation 29,135 28,841
Commitments and Contingencies (Note K)
Shareholders' Equity
Common stock, $1 par value; 33,750,000 shares authorized;
shares outstanding, 20,415,827 and 20,096,814 in 1999
and 1998 20,416 20,097
Additional paid-in capital 31,755 23,892
Retained earnings (deficit) 9,279 (35,878)
Other, net 1,490 1,202
------------ ------------
Total shareholders' equity 62,940 9,313
------------ ------------
Total liabilities and shareholders' equity $ 236,033 $ 233,702
------------ ------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows Graco Inc. and Subsidiaries
Years Ended
----------------------------------------
December 31, December 25, December 26,
(In thousands) 1999 1998 1997
- ----------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 59,341 $ 47,263 $ 44,716
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 14,701 13,736 13,494
Deferred income taxes 1,152 (593) (358)
(Gain) loss on sale of fixed assets (2,936) (139) 199
Change in:
Accounts receivable 2,097 6,293 (7,804)
Inventories 3,309 10,547 (3,860)
Trade accounts payable 1,551 (761) (839)
Salaries, wages and commissions (946) (934) 437
Retirement benefits and deferred compensation (2,112) (3,255) (626)
Other accrued liabilities (1,257) 2,695 (8,549)
Other 921 2,257 (529)
------------ ------------ ------------
Net cash provided by operating activities 75,821 77,109 36,281
------------ ------------ ------------
Cash Flows from Investing Activities
Property, plant and equipment additions (9,140) (11,962) (20,109)
Proceeds from sale of property, plant and equipment 9,695 2,201 1,990
Acquisition of business (18,388) -- --
------------ ------------ ------------
Net cash used in investing activities (17,833) (9,761) (18,119)
------------ ------------ ------------
Cash Flows from (for) Financing Activities
Borrowing on notes payable and lines of credit 118,900 65,869 44,033
Payments on notes payable and lines of credit (119,201) (54,376) (44,460)
Borrowings on long-term debt 25,001 180,985 --
Payments on long-term debt (73,711) (73,273) (1,455)
Common stock issued 6,760 4,876 3,260
Retirement of common stock (5,077) (190,899) (6,971)
Cash dividends paid (8,927) (10,701) (9,608)
------------ ------------ ------------
Net cash used in financing activities (56,255) (77,519) (15,201)
------------ ------------ ------------
Effect of exchange rate changes on cash 1,300 203 4,027
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,033 (9,968) 6,988
Cash and cash equivalents
Beginning of year 3,555 13,523 6,535
------------ ------------ ------------
End of year $ 6,588 $ 3,555 $ 13,523
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Graco Inc. and Subsidiaries
December 31, December 25, December 26,
(In thousands) 1999 1998 1997
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Common Stock
Balance, beginning of year $ 20,097 $ 25,553 $ 17,047
Stock split -- -- 8,516
Shares issued 466 344 250
Shares repurchased (147) (5,800) (260)
------------ ------------ ------------
Balance, end of year 20,416 20,097 25,553
------------ ------------ ------------
Additional Paid-In Capital
Balance, beginning of year 23,892 26,085 22,254
Shares issued 8,184 4,535 4,171
Shares repurchased (321) (6,728) (340)
------------ ------------ ------------
Balance, end of year 31,755 23,892 26,085
------------ ------------ ------------
Retained Earnings (deficit)
Balance, beginning of year (35,878) 105,030 85,232
Net income 59,341 47,263 44,716
Dividends declared (9,575) (10,102) (10,033)
Change in accounting period -- 300 --
Stock split -- -- (8,516)
Shares repurchased (4,609) (178,369) (6,369)
------------ ------------ ------------
Balance, end of year 9,279 (35,878) 105,030
------------ ------------ ------------
Foreign Currency Translation Adjustments
Balance, beginning of year 1,817 1,817 1,817
Current period change (327) -- --
------------ ------------ ------------
Balance, end of year 1,490 1,817 1,817
------------ ------------ ------------
Unearned Compensation
Balance, beginning of year (615) (976) --
Current period change 615 361 (976)
------------ ------------ ------------
Balance, end of year -- (615) (976)
------------ ------------ ------------
Total Shareholders' Equity $ 62,940 $ 9,313 $ 157,509
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Graco Inc. and Subsidiaries
Years Ended
------------------------------------------
December 31, December 25, December 26,
(In thousands) 1999 1998 1997
- -------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net Earnings $ 59,341 $ 47,263 $ 44,716
Other comprehensive income, net of tax:
Foreign currency translation adjustments (327) -- --
Additional minimum pension liability adjustment (90) -- --
------------ ------------ ------------
Comprehensive Income $ 58,924 $ 47,263 $ 44,716
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRACO Inc. & Subsidiaries
Years Ended December 31, 1999, December 25, 1998 and December 26, 1997
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. The year ended December 31, 1999 was a 53 week year.
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 31, 1999, all
subsidiaries are 100 percent owned. The Company's European subsidiaries' fiscal
years ended December 31, 1999, December 25, 1998, and November 30, 1997. The
European subsidiaries' one-month reporting lag was eliminated in 1998 with
Europe's December 1997 net earnings being recorded as an adjustment to equity.
All other 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 except Graco Verfahrenstechnik (Germany) whose functional currency
is the Euro.
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) $23 million and $18
million at December 31, 1999 and December 25, 1998.
Interest Rate Hedges. The Company utilizes interest rate swaps to convert all or
a portion of its underlying debt from a variable rate to a fixed rate.
Consistent with financial reporting requirements, the gains and losses on these
agreements are included in interest expense. The notional amounts of such
contracts were $52 million and $78 million at December 31, 1999 and December 25,
1998.
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 3 to 10 years
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment
whenever events or changes in business circumstances indicate the carrying value
of the assets may not be recoverable. There have been no write downs of any
long-lived assets in the periods presented.
Revenue Recognition. The Company recognizes revenue when title passes, which is
usually upon shipment.
Earnings Per Common Share. 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 option grants.
Stock-Based Compensation. SFAS No. 123, "Accounting for Stock-Based
Compensation," 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 elected the continued use of
APB No. 25 with pro forma disclosures.
Comprehensive Earnings. Comprehensive earnings is a measure of all nonowner
changes in shareholders' equity and includes such items as net earnings, certain
foreign currency translation items, minimum pension liability adjustments and
changes in the value of available-for-sale securities.
Derivative Instruments and Hedging Activities. SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments. The
statement requires recognition of all derivatives as either assets or
liabilities in the statement of financial position measured at fair value and
will be effective in fiscal Year 2001. The Company has not yet completed its
analysis of the impact SFAS No. 133 will have on its consolidated financial
statements.
B. Segment Information
The Company has three reportable segments: Industrial/Automotive, Contractor and
Lubrication. The Industrial/Automotive segment markets fluid systems and
equipment for moving and applying paints, coatings, sealants, adhesives and
other fluids for automotive and truck assembly and feeder plants as well as the
wood products, rail, marine, aerospace, farm, construction, bus and recreational
vehicles, and various other industries. The Contractor segment markets sprayers
for architectural coatings for painting, roofing, texture, corrosion control and
line striping and also high-pressure washers. The Lubrication segment markets
products to move and dispense lubricants for fast oil change facilities, fleet
service centers, automobile dealerships and mining. All segments market parts
and accessories for their products.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The cost of manufacturing for each
segment is based on product cost, and expenses are based on actual costs
incurred along with cost allocations of shared and centralized functions.
Certain products are sold across segments, in which case the segment marketing
the product is credited with the sale. Assets of the Company are not tracked
along reportable segment lines.
Reportable segments are defined by product and type of customer. Segments are
responsible for the sales, marketing and development of their products and
market channel. This allows for focused marketing and efficient product
development. The segments share common purchasing, manufacturing and
distribution.
<TABLE>
<CAPTION>
(In thousands) Industrial/
Reportable Segments Automotive Contractor Lubrication Total
- ----------------------------------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
1999
Net sales to unaffiliated customers $ 224,606 $ 174,632 $ 43,236 $442,474
Segment operating profit 48,143 41,736 10,307 100,186
1998
Net sales to unaffiliated customers 231,924 156,535 43,726 432,185
Segment operating profit 42,973 35,836 8,829 87,638
1997
Net sales to unaffiliated customers 226,114 142,400 45,383 413,897
Segment operating profit 36,146 27,947 5,603 69,696
----------- ---------- ----------- --------
</TABLE>
<TABLE>
<CAPTION>
Profit Reconciliation 1999 1998 1997
- ------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Total profit for reportable segments $ 100,186 $ 87,638 $ 69,696
Unallocated corporate expenses (6,995) (10,765) (4,223)
--------- --------- ---------
Total operating profit $ 93,191 $ 76,873 $ 65,473
========= ========= =========
Geographic Information 1999 1998 1997
- ------------------------------------ --------- --------- ---------
Sales
United States $ 280,758 $ 264,326 $ 243,197
Other countries 161,716 167,859 170,700
--------- --------- ---------
Total $ 442,474 $ 432,185 $ 413,897
--------- --------- ---------
Long-lived assets
United States $ 80,259 $ 91,068 $ 94,599
Belgium 11,298 5,554 5,562
Other countries 5,972 4,569 6,147
--------- --------- ---------
Total $ 97,529 $ 101,191 $ 106,308
========= ========= =========
</TABLE>
Sales to Major Customers
In 1999, sales to a paint manufacturer and retailer in the Contractor segment
totaled 11 percent of consolidated sales. No customer represented 10 percent or
more of consolidated sales in 1998 or 1997.
C. Inventories
Major components of inventories for the last two years were as follows:
(In thousands) 1999 1998
- ------------------------------------------------------- ------- -------
Finished products and components $25,748 $27,764
Products and components in various stages of completion 23,560 23,024
Raw materials 21,961 18,970
------- -------
71,269 69,758
Reduction to LIFO cost (33,567) (35,740)
------- -------
Total $37,702 $34,018
======= =======
Inventories valued under the LIFO method were $22,990,000 and $22,874,000 for
1999 and 1998. All other inventory was valued on the FIFO method.
In 1999 and 1998, certain inventory quantities were reduced, resulting in
liquidation of LIFO inventory quantities carried at lower costs from prior
years. The effect on net earnings was not significant.
D. Property, Plant and Equipment
Property, plant and equipment at December 31, 1999 were as follows:
(In thousands) 1999 1998
- ------------------------------------------ -------- ----------
Land $ 3,923 $ 5,343
Buildings and improvements 54,607 61,712
Manufacturing equipment 101,044 98,723
Office, warehouse and automotive equipment 22,196 31,010
Construction in progress 386 2,334
-------- ----------
Total property, plant and equipment 182,156 199,122
Accumulated depreciation (95,663) (102,756)
-------- ----------
Net property, plant and equipment $ 86,493 $ 96,366
======== ==========
E. Income Taxes
Earnings before income tax expense consist of:
(In thousands) 1999 1998 1997
- ------------------ ------- ------- -------
Domestic $87,292 $61,709 $53,139
Foreign 1,549 9,654 10,377
------- ------- -------
Total $88,841 $71,363 $63,516
======= ======= =======
Income tax expense consists of:
(In thousands) 1999 1998 1997
- ------------------ ------- ------- -------
Current:
Domestic:
Federal $23,081 $17,374 $11,729
State and local 2,323 1,600 1,709
Foreign 2,867 5,628 5,281
------- ------- -------
$28,271 24,602 18,719
Deferred:
Domestic 1,778 (423) 1,994
Foreign (549) (79) (1,913)
------- ------- -------
1,229 (502) 81
------- ------- -------
Total $29,500 $24,100 $18,800
======= ======= =======
Income taxes paid were $31,272,000, $22,922,000 and $17,148,000 in 1999, 1998
and 1997.
<PAGE>
A reconciliation between the U.S. federal statutory tax rate and the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Statutory tax rate 35% 35% 35%
Foreign earnings with (lower) higher tax rates (2) (1) (3)
Reduction of valuation allowance -- -- (3)
State taxes, net of federal effect 2 2 2
U.S. general business tax credits (2) (1) (1)
Other -- (1) --
------- ------- -------
Effective tax rate 33% 34% 30%
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- -------------------------------------------------------- ------- -------
<S> <C> <C>
Inventory valuations $ 3,365 $ 3,463
Insurance accruals 3,202 3,349
Vacation accruals 1,207 1,258
Bad debt reserves 1,247 1,243
Net operating loss carryforward 653 606
Other 2,683 2,465
------- -------
Current 12,357 12,384
------- -------
Unremitted earnings of consolidated foreign subsidiaries (2,544) (2,827)
Excess of tax over book depreciation (6,597) (6,237)
Postretirement benefits 5,363 5,230
Pension and deferred compensation 3,239 4,428
Other 1,054 597
------- -------
Non-current 515 1,191
------- -------
Net deferred tax assets $12,872 $13,575
======= =======
</TABLE>
Net non-current deferred tax assets above are included in Other Assets. Total
deferred tax assets were $22,319,000 and $22,993,000 and total deferred tax
liabilities were $9,447,000 and $9,418,000 on December 31, 1999 and December 25,
1998.
F. Debt
(In thousands) 1999 1998
- ----------------------------------------- ------- --------
Reducing revolving credit facility, 6.96%
at December 31, 1999 $63,834 $109,509
Industrial development refunding revenue
bonds, 5.2% at December 31, 1999,
payable through 2002 (property carried at
$2,487 pledged as collateral) 2,000 3,000
Other 1,076 3,230
------- --------
Total long-term debt 66,910 115,739
Less current portion 1,215 3,157
------- --------
Long-term portion $65,695 $112,582
======= ========
Aggregate annual scheduled maturities of long-term debt for the next five years
are as follows: 2000-$1,215,000; 2001-$1,310,000; 2002-$550,000; 2003-
$63,834,000; 2004-$0. Interest paid on debt during 1999, 1998 and 1997 amounted
to $6,843,000, $4,742,000 and $856,000. The fair value of the Company's long-
term debt at December 31, 1999 and December 25, 1998 is not materially different
than its recorded value.
In July 1998, the Company entered into a five-year $190 million reducing
revolving credit facility (the "Revolver") with a syndicate of ten banks
including the lead bank, U.S. Bank National Association. The Revolver was
subsequently reduced to $147 million by December 25, 1998 and was further
reduced to $132 million by December 31, 1999. The Company's initial borrowing of
$158 million financed a portion of the stock repurchase discussed in Note G. The
$63,834,500 outstanding balance bears underlying interest at the London
Interbank Offered Rate plus a spread of 0.50 percent. This spread reduces as the
ratio of total debt to earnings before interest, taxes and depreciation and
amortization declines. The Revolver specifies quarterly reductions of the
maximum amount of the credit line, and requires the Company to maintain certain
financial ratios as to net worth, cash flow leverage and fixed charge coverage.
The Revolver effectively restricts dividend payments that would cause a
violation of the tangible net worth ratio covenant. The amount of the
restriction was $45 million at December 31, 1999.
The Company has an interest rate swap agreement in place whereby it fixed the
underlying interest rate on $50 million of the Revolver at 5.76 percent through
July 3, 2000. At December 31, 1999, the contractual underlying variable interest
rate under the Revolver was 5.83 percent. The cash flows related to the swap
agreement are recorded as an adjustment to interest expense. Market and credit
risks are not significant.
The Company also 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 31, 1999, the contractual variable interest rate under the revenue
bonds was Bankers Trust reference rate plus 0.30 percent, or 5.20 percent.
On December 31, 1999, the Company had lines of credit with U.S. and foreign
banks of $158 million, including the $132 million Revolver. The unused portion
of these credit lines was $80,297,770 at December 31, 1999. 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 5.4 percent, 6.3 percent and 5.8 percent at December 31, 1999,
December 25, 1998 and December 26, 1997. The Company pays commitment fees of up
to 0.175 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 covenants of its debt agreements.
G. Shareholders' Equity
In July 1998 the Company repurchased 5.8 million shares of common stock for
$190,887,000 from its largest shareholder, the Trust under the Will of Clarissa
L. Gray. The stock repurchase was funded with cash of $32,887,000 and
$158,000,000 from the Revolver discussed in Note F.
The Board of Directors declared a three-for-two stock split on December 12,
1997, effective February 4, 1998, for shares outstanding on January 7, 1998.
Accordingly, the December 26, 1997, balance reflects the split with an increase
in common stock and reduction in retained earnings of $8,516,000. All stock
option, share and per share data has been restated to reflect the split.
At December 31, 1999, 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 million shares of preferred stock, $1 par value.
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.
H. Stock Option and Purchase Plans
Stock Option Plans. In 1999, the Board of Directors approved an Employee Stock
Incentive Plan, under which the Company grants stock options to employees who
are not officers of the Company. The option price is the market price at the
date of grant and the options vest three years from the date of the grant and
expire after ten years. 1,000,000 shares have been reserved for issuance under
the Plan, with 999,600 remaining reserved at December 31, 1999.
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 2,622,278 shares
remaining reserved at December 31, 1999. Grants under this Plan are in the form
of restricted share awards and stock options. The option price is the market
price at the date of grant. Options become exercisable in equal installments
over four years beginning two years from the date of grant, and expire ten years
from the date of grant. Restricted share awards of 963,914 common shares have
been made to certain key employees under the Plan. No restricted share awards
are outstanding at December 31, 1999. Compensation cost charged to operations
for the restricted share awards was $615,000, $361,000 and $188,000 in 1999,
1998 and 1997. In 1997, certain officers of the Company agreed to forfeit
certain stock appreciation rights under agreements signed in prior years. The
net impact on earnings before income taxes in 1997 was $898,000.
The Company has a Non-employee Director Stock Option Plan, under which the
Company makes initial and annual grants to the non-employee directors of the
Company. Non-employee directors receive an initial option grant of 3,000 shares
upon first appointment or election and an annual option grant of 2,250 shares.
There are 300,000 common shares authorized for issuance under the Plan; 296,624
remained reserved at the end of 1999. 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.
Options on common shares granted and outstanding, as well as the weighted
average exercise price, are shown below:
<TABLE>
<CAPTION>
Weighted Average Options Weighted Average
Options Exercise Price Exercisable Exercise Price
--------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
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 11.65 460,146 $ 8.73
Granted 319,750 29.79
Exercised (142,055) 8.60
Canceled (99,625) 17.84
--------- ---------------- ----------- ----------------
Outstanding, December 25, 1998 1,181,788 $ 16.29 510,886 $ 9.88
Granted 471,165 21.86
Exercised (283,053) 7.23
Canceled (37,137) 23.53
--------- ---------------- ----------- ----------------
Outstanding, December 31, 1999 1,332,763 $ 19.04 745,026 $ 15.00
========= ================ =========== ================
</TABLE>
The following table summarizes information for options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Options Options
Outstanding Outstanding Exercisable
Range of Options Weighted Avg. Weighted Avg. Options Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
-------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 6-15 468,449 4 $ 9.91 444,219 $ 9.81
16-27 579,849 6 21.04 233,929 20.55
28-35 284,465 7 29.99 66,878 30.02
-------- ----------- -------------- -------------- ----------- --------------
$ 6-35 1,332,763 5 $ 19.04 745,026 $ 15.00
</TABLE>
Stock Purchase Plans. Under the Company's Employee Stock Purchase Plan,
5,850,000 common shares have been reserved for sale to employees, 991,824 of
which remained unissued at the end of 1999. 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.
Non-employee Director Stock Plan. The Plan enables individual non-employee
directors of the Company to elect to receive or defer all or part of a
director's annual retainer, and/or payment for attendance at Board or Committee
meetings, in the form of shares of the Company's common stock instead of cash.
The Company issued 4,107, 3,357 and 2,725 shares under this Plan during 1999,
1998 and 1997. The expense related to this Plan is not significant.
<PAGE>
Stock-Based Compensation. As allowed under FAS No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock option and purchase plans and adopt the "disclosure only" provisions
of FAS No. 123. 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 Non-employee 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, the Company's net earnings and earnings
per share would have been reduced as follows:
1999 1998 1997
------- ------- -------
Net earnings
As reported $59,341 $47,263 $44,716
Pro forma 55,998 45,144 43,358
Net earnings per common share
Basic as reported $ 2.93 $ 2.06 $ 1.75
Diluted as reported 2.84 2.01 1.71
Pro forma basic 2.77 1.97 1.70
Pro forma diluted 2.68 1.92 1.66
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:
1999 1998 1997
---- ---- ----
Expected life in years 5.3 8 8
Interest rate 5.1% 5.5% 6.6%
Volatility 43.5% 40.2% 32.0%
Dividend yield 1.9% 1.5% 2.0%
Based upon these assumptions, the weighted average fair value at grant date of
options granted in 1999, 1998 and 1997 was $7.79, $12.37 and $10.47.
The 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:
1999 1998 1997
---- ---- ----
Expected life in years 1 1 1
Interest rate 5.2% 5.5% 6.5%
Volatility 43.8% 40.2% 31.7%
Dividend yield 2.0% 1.5% 1.7%
The benefit of the 15 percent 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 $6.12, $7.85 and $8.05 in
1999, 1998 and 1997.
<PAGE>
I. Earnings per Share
Earnings per share for all years presented has been calculated to reflect the
three-for-two stock split declared on December 12, 1997. The following table
sets forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998 1997
- ----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Numerator:
Net earnings available to common shareholders $59,341 $47,263 $44,716
------- ------- -------
Denominators:
Denominator for basic earnings per share -
weighted average shares 20,248 22,941 25,575
Dilutive effect of stock options computed
based on the treasury stock method using
the average market price 618 606 591
------- ------- -------
Denominator for diluted earnings per share 20,866 23,547 26,166
======= ======= =======
Basic earnings per share $ 2.93 $ 2.06 $ 1.75
======= ======= =======
Diluted earnings per share $ 2.84 $ 2.01 $ 1.71
======= ======= =======
</TABLE>
J. 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 matches employee contributions
at a 100 percent rate, up to 3 percent of the employee's compensation. Prior to
1998, the Company matched employee contributions at a 50 percent rate, up to 3
percent of the employee's compensation. Employer contributions were $2,008,000,
$1,989,000 and $941,000 in 1999, 1998 and 1997.
The Company's postretirement medical plan provides certain medical benefits for
retired employees. U.S employees are eligible for these benefits upon retirement
and fulfillment of other eligibility requirements as specified by the Plan.
The Company has noncontributory defined benefit pension plans covering
substantially all U.S. employees and directors and some 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. In 1998, the Company amended the plans to remove the
30-year limitation on benefit service. 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 $19,472,000 and $19,995,000 at December 31, 1999 and December
25, 1998. The following tables provide a reconciliation of the changes in the
Plans' benefit obligations and fair value of assets over the periods ending
December 31, 1999 and December 25, 1998, and a statement of the funded status as
of the same dates.
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------- --------------------
(In thousands) 1999 1998 1999 1998
- ------------------------------------ --------- --------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation
Obligation, beginning of year $ 95,141 $ 79,049 $ 15,623 $ 15,065
Service cost 3,517 2,959 482 442
Interest cost 6,267 5,595 995 954
Plan amendments -- 1,716 -- --
Acquisition 2,671
Curtailment (541)
Actuarial (gain) loss (2,162) 9,443 (573) 54
Benefit payments (2,853) (3,621) (1,097) (892)
--------- --------- -------- --------
Obligation, end of year $ 102,040 $ 95,141 $ 15,430 $ 15,623
--------- --------- -------- --------
Reconciliation of fair value of plan assets
Fair value, beginning of year $ 103,106 $ 89,460 $ -- $ --
Actual return on assets 35,454 15,855 -- --
Employer contribution 264 1,412 1,097 892
Benefit payments (2,827) (3,621) (1,097) (892)
--------- --------- -------- --------
Fair value, end of year $ 135,997 $ 103,106 $ -- $ --
--------- --------- -------- --------
Funded status
Funded status over (under), end of year $ 33,957 $ 7,965 $(15,430) $(15,623)
Unrecognized transition (asset) obligation (68) (74) -- --
Unrecognized prior service cost 1,954 2,184 -- --
Unrecognized (gain) loss (46,058) (20,036) 107 680
--------- --------- -------- --------
Net $ (10,215) $ (9,961) $(15,323) $(14,943)
========= ========= ======== ========
</TABLE>
The following table provides the amounts included in the Statement of Financial
Position as of December 31, 1999 and December 25, 1998.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------- --------------------
(In thousands) 1999 1998 1999 1998
- ------------------------------------ --------- --------- -------- --------
<S> <C> <C> <C> <C>
Accrued benefit liability $ (10,659) $ (10,272) $(15,323) $(14,943)
Intangible asset 427 311 -- --
--------- --------- -------- --------
Net $ (10,232) $ (9,961) $(15,323) $(14,943)
========= ========= ======== ========
</TABLE>
The components of net periodic benefit cost for the plans for 1999, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------- ------------------------------
(In thousands) 1999 1998 1997 1999 1998 1997
- ------------------------------------------------ --------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits earned during the period $ 3,517 $ 2,959 $ 2,366 $ 482 $ 442 $ 484
Interest cost on projected benefit obligation 6,267 5,595 5,031 995 954 979
Expected return on assets (11,189) (9,711) (8,342) -- -- --
Amortization of transition (asset) obligation (4) (3) 68 -- -- --
Amortization of prior service cost 231 230 95 -- -- --
Amortization of net (gain) loss (629) (1,067) (944) -- -- --
Cost of pension plans which are not significant
and have not adopted SFAS No. 87 266 371 233 N/A N/A N/A
--------- --------- --------- -------- -------- --------
Net periodic benefit (credit) cost (1,541) (1,626) (1,493) 1,477 1,396 1,463
--------- --------- --------- -------- -------- --------
Curtailment gain (541) (239) -- -- -- --
Settlement gain -- (271) -- -- -- --
--------- --------- --------- -------- -------- --------
Net periodic benefit (credit) cost after
curtailments and settlements $ (2,082) $ (2,136) $ (1,493) $ 1,477 $ 1,396 $ 1,463
========= ========= ========= ======== ======== ========
</TABLE>
The Company's retirement medical 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 31, 1999. This rate is assumed to
remain constant through the year 2001, decline to 5.5 percent in 2002 and 4.5
percent in 2003, and remain at that level thereafter. The other assumptions used
in the measurement of the Company's benefit obligation are shown below:
Pension Benefits Other Benefits
------------------- -------------------
Weighted average assumptions 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Discount rate 7.0% 6.5% 7.0% 6.5% 7.0% 7.0%
Expected return on assets 11.0% 11.0% 11.0% N/A N/A N/A
Rate of compensation increase 3.6% 3.3% 3.3% N/A N/A N/A
---- ---- ---- ---- ---- ----
At December 31, 1999, a 1 percent change in assumed healthcare cost trend rates
would have the following effects:
1% Increase 1% Decrease
----------- -----------
Effect on total of service and interest cost
components of net periodic postretirement
healthcare benefit cost $ 254 $ (203)
Effect on the healthcare component of the
accumulated postretirement benefit obligation $ 2,172 $ (1,794)
----------- -----------
K. Commitments and Contingencies
Lease Commitments. Aggregate annual rental commitments at December 31, 1999,
under operating leases with non-cancelable terms of more than one year, were
$6,836,000, payable as follows:
Vehicles &
(In thousands) Buildings Equipment Total
- -------------- --------- ---------- ------
2000 $ 1,571 $ 2,326 $3,897
2001 1,004 892 1,896
2002 290 276 566
2003 259 89 348
2004 118 11 129
Thereafter -- -- --
--------- ---------- ------
Total $ 3,242 $ 3,594 $6,836
========= ========== ======
Total rental expense was $3,492,000 for 1999, $3,307,000 for 1998 and $3,339,000
for 1997.
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.
L. Acquisition
In 1999, the Company formed Graco Verfahrenstechnik 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.
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 1999 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 2000 Annual Meeting of
Shareholders, to be held on May 2, 2000 (the "Proxy Statement"), is incorporated
herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" on pages 5
through 11 of the Proxy Statement is incorporated herein by reference, other
than the subsection thereunder entitled "Report of the Management Organization
and Compensation Committee" and "Comparative Stock Performance Graph."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Beneficial Ownership of Shares" on
pages 11 through 13 of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Certain Business Relationships" on page 11 of
the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders, to be
held on May 2, 2000 (the "Proxy Statement"), is incorporated herein by
reference.
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 31,1999.
(c) Exhibit Index ....................................................32
<PAGE>
Schedule II - Valuation and Qualifying Accounts
GRACO Inc. & Subsidiaries
<TABLE>
<CAPTION>
(In thousands)
- --------------
Additions
Balance at charged to Deductions Change<F3> Balance
beginning costs and From Add at end of
Description of year expenses Reserves (Deduct) year
- ----------------------------------- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts $ 2,600 $ 300 $ 600<F1> $ 200 $ 2,500
Allowance for returns and credits 1,800 6,000 5,800<F2> 2,000
---------- ---------- ---------- -------- ---------
$ 4,400 $ 6,300 $ 6,400 $ 200 $ 4,500
========== ========== ========== ======== =========
Year ended December 25, 1998:
Allowance for doubtful accounts $ 2,200 $ 900 $ 500<F1> $ 2,600
Allowance for returns and credits 1,900 3,400 3,500<F2> 1,800
---------- ---------- ---------- -------- ---------
$ 4,100 $ 4,300 $ 4,000 $ 4,400
========== ========== ========== ======== =========
Year ended December 26, 1997:
Allowance for doubtful accounts $ 2,400 $ 500 $ 700<F1> $ 2,200
Allowance for returns and credits 2,300 3,700 4,100<F2> 1,900
Valuation allowance for tax benefits 1,995 -- 1,995 --
---------- ---------- ---------- -------- ---------
$ 6,695 $ 4,200 $ 6,795 $ 4,100
========== ========== ========== ======== =========
<FN>
<F1>
1 Accounts determined to be uncollectible and charged against reserve, net of
collections on accounts previously charged against reserves.
<F2>
2 Credits issued and returns processed.
<F3>
3 Assumed or established in connection with acquisition
</FN>
</TABLE>
<PAGE>
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 20, 2000
------------------------------------
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 20, 2000
------------------------------------
George Aristides
Chief Executive Officer
(Principal Executive Officer)
/s/MARK W. SHEAHAN March 20, 2000
------------------------------------
Mark W. Sheahan
Vice President and Treasurer
(Principal Financial Officer)
/s/JAMES A. GRANER March 20, 2000
------------------------------------
James A. Graner
Vice President and Controller
(Principal Accounting Officer)
D. A. Koch Director, Chairman of the Board
G. Aristides Director
R. O. Baukol Director
R. G. Bohn Director
W. J. Carroll 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 20, 2000
------------------------------------
George Aristides
(For himself and as attorney-in-fact)
<PAGE>
Exhibit Index
Exhibit
Number Description
3.1 Restated Articles of Incorporation as amended June 18, 1999.
(Incorporated by reference to Exhibit 3.1 to the Company's
1997 Annual Report on Form 10-K.)
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 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.)
4.2 Credit Agreement dated July 2, 1998, between the Company and
U.S. Bank National Association, as Agent for a combination of
banks. (Incorporated by reference to Exhibit 4 to the
Company's Report on Form 10-Q for the thirty-nine weeks ended
September 25, 1998.)
4.3 Amendment dated August 31, 1999 to Credit Agreement dated June
26, 1998 between the Company and Wachovia Bank, N.A.
(Incorporated by reference to Exhibit 4 to the Company's
Report on Form 10-Q for the thirty-nine weeks ended September
24, 1999.)
*10.1 1999 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 26,
1999.)
*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 and restated
December 10, 1999.
*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.)
*10.7 Restoration Plan 1998 Restatement. (Incorporated by reference
to Exhibit 10.8 to the Company's 1997 Annual Report on Form
10-K.)
*10.8 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.)
*10.9 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.)
*10.10 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.)
*10.11 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.)
*10.12 Non-employee Director Stock Option Plan, as amended and
restated November 6, 1997. (Incorporated by reference to
Exhibit 10.18 to the Company's 1997 Annual Report on Form
10-K.)
*10.13 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to non-employee 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.)
*10.14 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.)
*10.15 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.)
*10.16 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.)
*10.17 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.)
*10.18 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.)
*10.19 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.)
*10.20 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.)
*10.21 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to non-employee 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.)
*10.22 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.)
*10.23 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.)
*10.24 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to non-employee 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.)
*10.25 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.)
*10.26 Key Employee Agreement Amendment. Form of amendment dated
January 9, 1998, revising payment reduction provisions.
(Incorporated by reference to Exhibit 10.33 to the Company's
1997 Annual Report on Form 10-K.)
*10.27 Non-employee Director Stock Plan, as amended and restated June
18, 1999. (Incorporated by reference to Exhibit 10 to the
Company's Report on Form 10-Q for the twenty-six weeks ended
June 25, 1999.)
*10.28 Retirement and Release Agreement between Clayton R. Carter and
the Company dated June 26, 1999. (Incorporated by reference to
Exhibit 10 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 24, 1999.)
*10.29 Separation and Release Agreement between Roger L. King and the
Company dated August 10, 1999. (Incorporated by reference to
Exhibit 10.1 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 24, 1999.)
*10.30 Separation and Release Agreement between James A. Earnshaw
and the Company dated December 31, 1999.
*10.31 Stock Option Agreement. Form of agreement under the Long Term
Stock Incentive Plan dated December 12, 1997. (Incorporated by
reference to Exhibit 10.1 to the Company's Report on Form 10-Q
for the thirteen weeks ended March 26, 1999.)
*10.32 Executive Long Term Incentive Agreement between the Company
and one executive officer dated February 22, 1999.
(Incorporated by reference to Exhibit 10.2 to the Company's
Report on Form 10-Q for the thirteen weeks ended March 26,
1999.)
*10.33 Key Employee Agreement between the Company and one executive
officer dated March 1, 1999. (Incorporated by reference to
Exhibit 10.3 to the Company's Report on Form 10-Q for the
thirteen weeks ended March 26, 1999.)
*10.34 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to one executive officer, dated
March 1, 1999. (Incorporated by reference to Exhibit 10.4 to
the Company's Report on Form 10-Q for the thirteen weeks ended
March 26, 1999.)
*10.35 Executive Officer Annual Incentive Bonus Plan.
11 Statement of Computation of Earnings per share included in
Note I on page 26.
21 Subsidiaries of the Registrant included herein on page 36.
23 Independent Auditors' 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.
<PAGE>
Exhibit 21
Subsidiaries of Graco Inc.
The following are subsidiaries of the Company:
Jurisdiction Percentage of Voting
of Securities Owned by
Subsidiary Organization the Company
---------------------------- ------------ --------------------
Equipos Graco Argentina S.A. Argentina 100%*
Graco Barbados FSC Limited Barbados 100%
Graco Canada Incorporated Canada 100%
Graco Chile Limitada Chile 100%*
Graco do Brasil Limitada Brazil 100%*
Graco Europe N.V. Belgium 100%*
Graco GmbH Germany 100%
Graco Hong Kong Limited Hong Kong 100%*
Graco K.K. Japan 100%
Graco Korea Inc. Korea 100%
Graco Limited England 100%*
Graco N.V. Belgium 100%*
Graco S.A. France 100%*
Graco S.r.l. Italy 100%*
Graco Verfahrenstechnik GmbH Germany 100%**
---------------------------- ------------ --------------------
* Includes shares held by selected directors and/or executive officers of the
Company or the relevant subsidiary to satisfy the requirements of local law.
** Shares 100% held by Graco N.V.
Exhibit 23
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statements No.
333-17691, No. 333-17787, No. 33-54205, No. 333-03459, and No. 333-7530 on Form
S-8 of our report dated January 24, 2000, appearing in this Annual Report on
Form 10-K of Graco Inc. for the year ended December 31, 1999.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
March 29, 2000
<PAGE>
Exhibit 24
Power of Attorney
Know all by these presents, that each person whose signature appears below
hereby constitutes and appoints George Aristides or Mark W. Sheahan, that
person's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for that person and in that person's name, place
and stead, in any and all capacities, to sign the Report on Form 10-K for the
year ended December 31, 1999, of Graco Inc. (and any and all amendments thereto)
and to file the same with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as that person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In witness whereof, this Power of Attorney has been signed by the following
persons on the date indicated.
Date
/s/G. ARISTIDES February 25, 2000
------------------------ -----------------
G. Aristides
/s/R. O. BAUKOL February 25, 2000
------------------------ -----------------
R. O. Baukol
/s/R. G. BOHN February 25, 2000
------------------------ -----------------
R. G. Bohn
/s/W. J. CARROLL February 25, 2000
------------------------ -----------------
W. J. Carroll
/s/D. A. KOCH February 25, 2000
------------------------ -----------------
D. A. Koch
/s/L. R. MITAU February 25, 2000
------------------------ -----------------
L. R. Mitau
/s/M. A.M. MORFITT February 25, 2000
------------------------ -----------------
M. A.M. Morfitt
/s/D. R. OLSETH February 25, 2000
------------------------ -----------------
D. R. Olseth
/s/J. L. SCOTT February 25, 2000
------------------------ -----------------
J. L. Scott
/s/W. G. VAN DYKE February 25, 2000
------------------------ -----------------
W. G. Van Dyke
December 10, 1999
LONG TERM STOCK INCENTIVE PLAN
1. Purpose. The purpose of the Graco Inc. Long Term Stock Incentive Plan
(the "Plan") is to further the growth in earnings and market appreciation of
Graco Inc. (the "Company"). The Plan provides substantial contributions to the
Company through ability, performance, industry and invention. The Company
intends that the Plan will thereby facilitate securing, retaining and motivating
officers and key employees of high caliber and good potential.
2. Administration. The Plan shall be administered by a committee (the
"Committee") selected by the Board of Directors of the Company (the "Board").
The Committee shall consist of two or more members who are members of the Board
and who are "Non-Employee Directors" within the meaning of Rule 16b-3
promulgated by the Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), which term "Non-Employee
Director" is defined in this paragraph for purposes of describing the members of
the Committee only and is not intended to define such term as it may be used
elsewhere in the Plan. The Committee may delegate to one or more officers of the
Company or a committee of such officers the authority, subject to such terms and
limitations as the Committee shall determine to grant awards to employees of the
Company who are not officers or directors of the Company for purposes of Section
16 of the Exchange Act.
The Committee shall have full and final authority, in its discretion, to
interpret the provisions of the Plan and to decide all questions of fact arising
in its application; to determine the employees to whom awards shall be made
under the Plan; to determine the type of award to be made and the amount, size,
terms and conditions of each such award; to determine and establish additional
terms and conditions not inconsistent with the Plan and for any agreements
entered into with participants in connection with the Plan; to determine the
time when awards will be granted and when rights may be exercised, which may be
after termination of employment; and to make all other determinations necessary
or advisable for the administration of the Plan.
The Committee shall select one of its members as its Chairman and shall
hold its meetings at such times and places as it may determine. A majority of
its members shall constitute a quorum. All determinations of the Committee shall
be made by not less than a majority of its members. Any decision or
determination reduced to writing and signed by all of the members of the
Committee shall be fully effective as if it had been made by a majority vote at
a meeting duly called and held. The granting of a stock option or restricted
stock award pursuant to the Plan shall be effective only if a written agreement
shall have been duly executed and delivered by and on behalf of the Company and,
in the case of a restricted stock award, by the employee to whom such right is
granted. The Committee may appoint a Secretary and may make such rules and
regulations for the conduct of its business as it shall deem advisable.
3. Participants. Persons eligible to participate in the Plan shall be
those officers and key employees of the Company or its subsidiaries who are in
positions in which their decisions, actions and counsel significantly impact the
performance of the Company or its subsidiaries. Directors of the Company who are
not otherwise salaried employees of the Company shall not be eligible to receive
awards under the Plan. For the purpose of awards of incentive stock options (as
hereinafter defined) made under the Plan, the term "subsidiary" shall have the
meaning given to it by Section 424 of the Internal Revenue Code of 1986, as
amended (the "Code"). For the purpose of all other awards made under the Plan,
the term "subsidiary" shall have the meaning given to it by Rule 405 promulgated
under the Securities Act of 1933, as amended. References to "the Company" in
this Plan or in any option or other award granted pursuant to the Plan shall be
deemed references to a subsidiary if appropriate.
4. Awards under the Plan. Awards by the Committee under the Plan may be in
the form of stock options intended to qualify as "incentive stock options" under
the provision of Section 422 of the Code, stock options which do not qualify for
special tax treatment under Section 422, restricted stock and other stock awards
pursuant to such bonus and incentive plans as the Committee may deem
appropriate.
4.1 Award Limitation. In any calendar year beginning with January
31, 1997, the Committee may not award stock options or stock appreciation rights
on more than 300,000 Shares in the aggregate to any Participant who is an
employee of the Company at the time of such award. This award limit may be
adjusted in accordance with the provisions of Section 15. This limitation is
intended to qualify the award of options and stock appreciation rights as
performance-based compensation within the meaning of Section 162(m) of the Code.
5. Shares Subject to Plan. The shares that may be issued under the Plan
shall not exceed in the aggregate 5,212,500 common shares, $1.00 par value, of
the Company. Except as otherwise provided herein, any shares subject to an
option or right or other awards which for any reason expires or terminates
without issuance or final vesting of such shares shall again be available under
the Plan. No fractional shares shall be issued under the Plan.
6. Stock Options. Stock options shall be evidenced by stock option
agreements in such form not inconsistent with the Plan as the Committee shall
approve from time to time, which agreements shall contain in substance the
following terms and conditions.
6.1. Option Price. The purchase price per common share deliverable
upon the exercise of an option shall not be less than 100% of the fair market
value of the stock on the day the option is granted, as determined by the
Committee.
6.2. Exercise of Option. Each stock option agreement shall state the
period or periods of time within which the option may be exercised by the
participant, in whole or in part, which shall be such period or periods of time
as may be determined by the Committee, provided that the option period shall not
end later than ten years after the date of the grant of the option.
6.3. Payment of Shares. An optionee electing to exercise an option
shall give written notice to the Company of such election and of the number of
shares subject to such exercise. The full purchase price of such shares shall be
tendered with such notice of exercise or, at the discretion of the Committee,
pursuant to any arrangements satisfactory to the Committee which provide that
the Company will be paid at the time the shares are delivered to the optionee or
his designee. Payment shall be made either in cash (including check, bank draft
or money order) or, at the discretion of the Committee, (i) by delivering the
Company's common shares already owned by the optionee having a fair market value
equal to the full purchase price of the shares, or (ii) a combination of cash
and such shares.
6.4. Special Rule for Incentive Stock Options. The aggregate fair
market value (determined as of the time the option is granted) of the common
shares with respect to which all incentive stock options granted after January
1, 1987 are exercisable for the first time by any individual during any calendar
year (under all option plans of the Company and its parent and subsidiary
corporations) shall not exceed $100,000.
7. Restricted Stock Awards. Restricted stock awards shall be evidenced by
restricted stock agreements in such form not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall contain in
substance the following terms and conditions.
7.1. Restriction Period. Shares awarded pursuant to restricted stock
awards shall be subject to such conditions, terms and restrictions (including
continued employment, achievement of performance targets, forfeiture and
transfer) and for such period or periods as shall be determined by the
Committee. The Committee shall have the power, in its discretion, to permit an
acceleration of the expiration of the applicable restriction period with respect
to any part of all of the shares awarded to a participant.
7.2 Restrictions Upon Transfer. The common shares subject to an
award, may not be sold, assigned, transferred, exchanged, pledged, hypothecated,
or otherwise encumbered, except as herein provided, during the restriction
period applicable to such shares, but a participant shall have all the other
rights of a stockholder, including the right to receive cash dividends and the
right to vote such shares, until such time as the restrictions have lapsed or
the shares have been forfeited.
7.3 Certificates. Each certificate issued in respect of common
shares awarded to a participant shall be deposited with the Company, or its
designee, and shall bear an appropriate legend noting the existence of
restrictions upon the transfer of such Common Stock.
7.4 Lapse of Restrictions. The agreement governing the awards shall
specify the conditions and terms upon which any restrictions upon shares awarded
under the Plan shall lapse, as determined by the Committee. Upon lapse of such
restrictions, common shares free of any restrictive legend, other than as may be
required under Section 9 hereof, shall be issued and delivered to the
participant of his legal representative.
8. Fair Market Value. The fair market value of a share of the Company's
common stock is the last sale price reported on the composite tape by the New
York Stock Exchange on the business day immediately preceding the date as of
which fair market value is being determined or, if there were no sales of shares
of the Company's common stock reported on the composite tape on such day, on the
most recently preceding day on which there were sales, or if the shares of the
Company's stock are not listed or admitted to trading on the New York Stock
Exchange on the day as of which the determination is made, the amount determined
by the Board or its delegate to be the fair market value of a share on such day.
9. General Restrictions. Each award under the Plan shall be subject to the
requirement that, if at anytime the Committee shall determine that (a) the
listing, registration or qualification of the common shares subject or related
thereto upon any securities exchange or under any state or federal law, or (b)
the consent or approval of any government regulatory body, or (c) an agreement
by the recipient of an award with respect to the disposition of common shares,
is necessary or desirable in connection with, the granting of such award or the
issue or purchase of common shares thereunder, such award may not be consummated
in whole or in part unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Committee. A participant shall agree, as a
condition of receiving any award under the Plan, to execute any documents, make
any representations, agree to restrictions on stock transferability and take any
actions which in the opinion of legal counsel to the Company is required by any
applicable law, ruling or regulation.
10. Rights of a Shareholder. The recipient of any award under the Plan,
unless otherwise provided by the Plan, shall have no rights as a shareholder
with respect thereto unless and until certificates for common shares are issued
to the recipient.
11. Right to Terminate Employment. Nothing in the Plan or in any agreement
entered into pursuant to the Plan shall confer upon any participant the right to
continue in the employment of the Company or its subsidiaries, or affect any
right which the Company or such subsidiaries may have to terminate the
employment of the participant.
12. Withholding.
12.1. Payment of Withholding Taxes. Whenever the Company proposes or
is required to issue or transfer common shares under the Plan, the Company shall
have the right to require the recipient to remit to the Company, or provide
indemnification satisfactory to the Company for, an amount sufficient to satisfy
any federal, state or local withholding tax requirements prior to the issuance
or delivery of any certificate or certificates for such shares.
12.2. Use of Common Shares to Satisfy Tax Obligation. In order to
assist an optionee or grantee in paying all federal, state and local taxes to be
withheld or collected upon exercise of an option or the grant of a stock award
or the lapse of restrictions relating to a restricted stock award hereunder, the
Committee in its sole discretion and subject to such rules as it may adopt, may
permit the optionee or grantee to satisfy such tax obligation, in whole or in
part, by (i) electing to have the Company withhold common shares otherwise to be
delivered with a fair market value equal to the amount of such tax obligation,
or (ii) electing to surrender to the Company previously owned common shares with
a fair market value equal to the amount of such tax obligation. The election
must be made on or before the date that the amount of tax to be withheld is
determined.
13. Non-Assignability. No award under the Plan shall be assignable or
transferable by the participant except by will or by laws of descent and
distribution. During the life of a participant, such award shall be exercisable
only by the participant or by the participant's guardian or legal
representative.
14. Non-Uniform Determinations. The Committee's determinations under the
Plan (including, without limitation, determinations of the persons to receive
awards, the form, amount and timing of such awards, the terms and provisions of
awards and the agreements evidencing the awards, and the establishment of values
and performance targets) need not be uniform and may be made by it selectively
among persons who receive, or are eligible to receive, awards under the Plan
whether or not such persons are similarly situated.
15. Adjustments in Shares. In the event of any change in the outstanding
common shares of the Company by reason of a stock dividend or distribution,
recapitalization, merger, consolidation, split-up, combination, exchange of
shares or otherwise, the Board shall adjust the number of shares which may be
issued under the Plan and the Board shall provide for an equitable adjustment of
any shares issuable pursuant to awards outstanding under the Plan.
16. Adoption, Amendment and Termination.
16.1. Adoption. This Plan was originally adopted in February 1982
as the Graco Inc. Incentive Stock Option Plan. The Plan was amended and restated
as the Graco Inc. Long Term Stock Incentive Plan by the Board of Directors on
March 4, 1988 and was further amended by the Board on December 13, 1991,
February 21, 1992, February 23, 1996 and May 7, 1996, which amendments requiring
shareholder approval were approved by the shareholders on May 5, 1992 and May 7,
1996, respectively.
16.2 Amendment. The Board may amend, suspend, or terminate the Plan
at any time, but without shareholder approval, no amendment shall materially
increase the maximum number of shares which may be issued under the Plan (other
than increases pursuant to Section 15 hereof), materially increase the benefits
accruing to participants under the Plan, materially modify the requirements as
to eligibility for participation, or extend the term of the Plan.
16.3. Termination. Unless the Plan shall have been discontinued at
an earlier date, the Plan shall terminate on December 13, 2001. No option,
restricted stock award or stock awards may be granted after such termination,
but termination of the Plan shall not, without the consent of the optionee or
grantee, alter or impair any rights or obligations under any award theretofore
granted.
SEPARATION AND RELEASE AGREEMENT
THIS AGREEMENT is effective the 31st day of December, 1999, by and between
Graco Inc., a Minnesota corporation ("Graco"), with its principal offices at
4050 Olson Memorial Highway, Golden Valley, Minnesota 55422 and James A.
Earnshaw, an individual, residing at 6407 Oxbow Bend, Chanhassen, MN. 55317
("Mr. Earnshaw").
WHEREAS, Mr. Earnshaw is now employed by Graco; and
WHEREAS, Mr. Earnshaw has resigned as an officer and employee of Graco
effective December 31, 1999, and his employment relationship with Graco will be
terminated 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 January 15, 2000, Graco will pay to Mr. Earnshaw in a
lump sum as a separation payment the amount of eight hundred forty
thousand dollars ($840,000) dollars, subject to tax withholding and
deductions required by law.
2. Annual Bonus Plan
Mr. Earnshaw shall be entitled to payment of a bonus for the year 1999
under the 1999 Corporate Annual Bonus Plan, in accordance with said
Plan and when the bonuses thereunder are normally paid.
3. Benefits
Mr. Earnshaw's entitlement to, continuation or cessation of employee
benefits following the termination of his employment is described in a
letter from the Graco Benefits Department to Mr. Earnshaw's attention,
attached hereto as Exhibit A and incorporated herein by reference.
4. Stock Options
The stock options granted to Mr. Earnshaw in accordance with the stock
option agreements between Mr. Earnshaw and Graco dated March 1, 1999,
shall vest in full and be exercisable for a period of six months after
the termination of Mr. Earnshaw's employment in accordance with
Section 3.A.(ii) of each of said agreements.
5. Outplacement Assistance
Graco shall assume the cost of an outplacement agency used by Mr.
Earnshaw to seek other employment, for a period not to exceed one (1)
year or upon Mr. Earnshaw securing other employment, whichever first
occurs. Said agency, and the costs incurred, shall be mutually agreed
upon by Graco and Mr. Earnshaw, and shall be customary for seeking
employment at the level of the position Mr. Earnshaw held at Graco.
6. Cooperation
Mr. Earnshaw 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. Earnshaw for any reasonable out-of-pocket expenses (including
attorneys' fees, if necessary) incurred by him in connection with
rendering such cooperation.
7. Confidentiality
a. Mr. Earnshaw hereby agrees that, for a period of three (3) years
after December 31, 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 his business or
employment during said period.
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. Earnshaw 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. Earnshaw 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. Earnshaw or information which Mr. Earnshaw is
required to disclose in a court or other judicial proceeding or
is otherwise legally required to disclose.
c. The provisions of this Section 7 are in addition to, and not in
lieu of, the fiduciary and other duties and obligations of Mr.
Earnshaw as an employee, officer and director of Graco, and this
Section 7 does not limit said obligations in any way, by time or
otherwise.
8. Release
a. Except with respect to the provisions of this Agreement Mr.
Earnshaw 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), or any right or claim Mr. Earnshaw 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 8 shall not
affect Mr. Earnshaw'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 resignation date.
b. Mr. Earnshaw certifies, represents and agrees that:
(i) this Agreement is written in a manner that he understands;
(ii) he understands that this Section 8 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 should 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 January 15, 2000, 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. Earnshaw
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. Earnshaw expressly agrees that the waiver of his
rights pursuant to the Agreement is knowing and voluntary
on his part.
9. 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.
10. 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, including but not limited to the letter agreement
between Mr. Earnshaw and Graco dated December 22, 1998. This Agreement
may not be amended except in a writing signed by authorized
representatives of both parties.
11. 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/David A. Koch
------------------------------------
David A. Koch
Chairman
JAMES A. EARNSHAW
/s/James A. Earnshaw
- ------------------------------
<PAGE>
Exhibit A
January 5, 2000
Mr. James A. Earnshaw
6407 Oxbow Bend
Chanhassen, MN 55317
Dear Jim:
This letter will review the status of your Graco benefit programs following your
termination of employment with the Company, and advise you of decisions that
need to be made concerning these programs. In summarizing the benefits in this
letter, December 31, 1999 was used as your last day of employment.
Health Coverage
Your group Health coverage through HealthPartners would normally end December
31, 1999. You have the option to retain family coverage until you are eligible
for coverage through a new employer, or for a period of 18 months, whichever is
shorter. Coverage can be extended from January, 2000 through June, 2001. You
have the option of continuing coverage for three months at the employee rate of
$84.44 per month. You may then extend coverage for an additional 15 months by
paying the full monthly premium of $538.40. Premium rates and benefit levels are
subject to future changes. You have 60 days from the date of your separation or
the date of this letter, whichever is longer, to elect continuation coverage.
It will be your responsibility to pay the monthly premium to Graco to continue
your Health coverage. Your first check or money order should be made payable to
Graco Inc., and sent to the Benefits Department on or before January 17, 2000,
to guarantee uninterrupted medical coverage. Subsequent checks should be
received by the Payroll Department no later than the first of each month.
Failure to make timely payments will result in the automatic termination of
coverage. You will not receive any statements or reminders. Please indicate on
the enclosed form whether you elect to continue your Health coverage. If you
elect to continue coverage, continuation coupons will be sent to you indicating
your monthly premium amount.
Please note: If you elect continuation coverage after the date your coverage
would normally end, you must submit premium payments retroactive to the time
your coverage as an employee ceased. In addition, any medical expenses you incur
during this period will be delayed in processing until coverage is reinstated.
Dental Coverage
Your Dental coverage through Prudential would normally end December 31, 1999.
You have the option to retain family coverage until you are eligible for
coverage through a new employer, or for a period of 18 months, whichever is
shorter. Your coverage can be extended from January, 2000 through June, 2001.
You have the option of continuing coverage for three months at the employee rate
of $25.08 per month. You may then extend coverage for an additional 15 months by
paying the full monthly premium of $79.89. This continuation coverage will be
through Delta Dental. Premium rates and benefit levels are subject to future
changes. Payment is handled in the same manner as Health coverage. Please
indicate on the enclosed form whether you elect to continue your Dental
coverage.
Business Travel Accident, Seatbelt Accident, Dependent Life Insurance, and
Disability Coverages
Your Business Travel Accident, Seatbelt Accident, Dependent Life Insurance, and
Disability coverages ended on December 31, 1999. There are no provisions to
extend coverages.
Life Coverage
Your Basic and Supplemental Life coverage would normally end on December 31,
1999. You have the option of extending your $200,000 Basic Life coverage and
your $360,000 Supplemental Life coverage until you are eligible for coverage
through a new employer, or for a period of 18 months, whichever is shorter.
Coverage can be extended from January, 2000 through June, 2001, by paying the
following monthly premium:
o Basic Life Coverage $54.00
o Supplemental Life Coverage 187.20
------
Total $241.20 Per Month
Premium rates are subject to future changes. Please indicate on the enclosed
form whether you elect to continue your Life coverage.
Conversion to a private policy is available either when your coverage as an
employee ends or after you complete the full 18 month extension. You may convert
any increment of $1,000, from a minimum of $5,000 up to a maximum of your total
coverage through Graco. If you convert now, conversion is to a whole life policy
with the rate set for the life of the policy. Payments can be established on a
quarterly, semi-annual or annual basis. If you convert after your 18 month
extension, conversion is to a three year renewable term policy. Your premium
will be adjusted every three years to reflect your new age. Premiums are paid on
an annual basis only. If you wish to convert to a private policy, it is your
responsibility to contact us for a conversion form. You have 31 days from the
date your coverage would normally end to make this conversion.
Executive Long Term Disability Policy
Your Executive Long Term Disability Policy with Graco will end on December 31,
1999. Chaffee and Westenberg Companies, brokers for the Plan, will contact you
regarding conversion rights.
Expense Reimbursement Account
You were enrolled in Graco's health care expense reimbursement account for the
1999 plan year. Claims on expenses incurred prior to leaving Graco may be filed
between now and February 29, 2000. Thereafter, remaining funds will be
forfeited.
Vacation
Payment for any hours of unused vacation will be forwarded to you.
Graco Employee Investment Plan
You are eligible for a distribution from your Employee Investment Plan account.
As of January 3, 2000, your account balances are as follows:
Pre-Tax Account $7,929.98
Employer Account 1,941.43
---------
Total EIP Account $9,871.41
=========
You may elect one of the following distribution options:
o Single lump sum distributed in cash.
o Installment payments paid annually, quarterly, or monthly, in cash.
o Defer distribution until the close of the calendar year in which you reach
age 70 1/2. (Note: This is the maximum age to which distribution can be
deferred. Distribution may be deferred to an earlier date.)
o Rollover of Pre-Tax and Employer contributions and investment earnings to
Individual Retirement Account (IRA) or new employer plan. A rollover may
be made directly to your IRA or new employer plan, without withholding
taxes being applicable. Graco stock may be distributed in cash or stock,
depending on the requirements of the new employer plan. A rollover may be
distributed to you for transmission to a new plan, but a 20% withholding
will apply (see the enclosed Special Tax Notice).
You have not paid taxes on any of these funds, and the entire account balance
will be taxable to you when funds are distributed. You should note that the
taxable portion of your account balance is subject to federal income tax. If you
receive any payment before you reach age 59 1/2, an additional 10% income tax
penalty will apply to all taxable amounts. These include your Pre-Tax
contributions, Employer contributions, and earnings on all accounts.
A request for distribution of Employee Investment Plan assets can be made 30
days after your employment separation date. Please contact the Plan's Helpline
at (888) 319-9451, or (612) 316-1355 in Minneapolis/St. Paul. You will receive a
form from Norwest to access a total distribution in either a single lump sum
cash payment, or a direct rollover to another employer plan or qualified IRA.
Complete and return the form to Norwest for processing. An application received
prior to 30 days after separation from employment cannot be processed.
If you decide to defer distribution of your account, you do not need to take any
action at this time.
Graco Employee Retirement Plan
The Employee Retirement Plan provides a vested benefit at retirement age for
employees who have completed five years of service with the Company. Your period
of service with Graco was less than five years, therefore, you are not entitled
to a retirement benefit.
We advise you review the enclosed Special Tax Notice for information regarding
the federal tax implications of decisions made with respect to Graco Employee
Benefit Plans.
Please complete and return the enclosed paperwork at your earliest convenience.
If you have any questions concerning your benefits, please contact me at (612)
623-6628.
Sincerely,
/s/Carolyn Haeger
Carolyn Haeger
Benefits Technician
<PAGE>
CERTIFICATE OF GROUP HEALTH PLAN COVERAGE
* IMPORTANT - This certificate provides evidence of your prior health coverage.
You may need to furnish this certificate if you become eligible under a group
health plan that excludes coverage for certain medical conditions that you have
before you enroll. This certificate may need to be provided if medical advice,
diagnosis, care, or treatment was recommended or received for the condition
within the 6-month period prior to your enrollment in the new plan. If you
become covered under another group health plan, check with the plan
administrator to see if you need to provide this certificate. You may also need
this certificate to buy, for yourself or your family, an insurance policy that
does not exclude for medical conditions that are present before you enroll.
1. Date of this certificate: January 5, 2000
2. Name of group health plan: HealthPartners
3. Name of participant: James Earnshaw
4. Social Security Number of participant: ###-##-####
5. Name of any dependents to whom this certificate applies: Judith, Emilie,
and Alexander Earnshaw
6. Name, address, and telephone number of plan administrator or Issuer
responsible for providing this certificate:
Graco, Inc.
P.O. Box 1441
Minneapolis, MN 55440
7. For further information, call: (612) 623-6628
8. If the individual(s) identified in line 3 and line 5 has at least 18 months
of creditable coverage (disregarding periods of coverage before a 63-day
break), check here __ and skip lines 9 and 10.
9. Date waiting period or affiliation period (if any) began: March 1, 1999
10. Date coverage began: March 1, 1999
11. Date coverage ended: December 31, 1999
Note: separate certificates will be furnished if information is not identical
for the participant and each beneficiary.
February 1999
EXECUTIVE OFFICER
ANNUAL INCENTIVE BONUS PLAN
1. Definitions. When the following terms are used herein with initial capital
letters, they shall have the following meanings:
1.1 Base Salary - a specific dollar amount for each Participant as
identified in Schedule A
1.2 Compensation Committee - the Management Organization and Compensation
Committee of the Board of Directors of Graco Inc.; it is intended that
the Compensation Committee will satisfy the requirements of Section
162(m) of the Code by being comprised of two or more "outside
directors."
1.3 Code - the Internal Revenue Code of 1986, as it may be amended from
time to time, and any proposed, temporary or final Treasury
Regulations promulgated thereunder.
1.4 Company - Graco Inc., a Minnesota corporation, and any of its
affiliates that adopt the Plan.
1.5 Eligible Employee - the chief executive officer and any executive
officer of the Company designated by the Compensation Committee.
1.6 Participant - an Eligible Employee designated by the Compensation
Committee, at any time ending on or before the 90th day of each
Performance Period, as subject to the Plan.
1.7 Performance Period - the Company's fiscal year.
1.8 Plan - this Executive Officer Annual Incentive Bonus Plan.
1.9 Maximum Targeted Bonus Percentage - the maximum potential bonus payout
expressed as a percentage of Participant's Base Salary as identified
in Schedule B.
1.10 Company Performance Target(s) - the financial growth target(s)
established by the Compensation Committee for a Performance Period and
reflected in the percentages identified in Schedule C. The Company
Performance Target(s) shall be directly and specifically tied to one
or more of the following financial measures: consolidated pre-tax
earnings, net revenues, net earnings, operating income, earnings
before interest and taxes, cash flow, return on equity, return on net
assets employed or earnings per share [hereinafter "Financial
Measure(s)"]for the applicable Performance Period, all as computed in
accordance with generally accepted accounting principles as in effect
from time to time and as applied by the Company in the preparation of
its financial statements and subject to other special rules and
conditions as the Compensation Committee may establish at any time
ending on or before the 90th day of the applicable Performance Period.
Any Financial Measure may be stated in absolute terms or as compared
to another company or companies. Such Financial Measures shall
constitute the sole bases upon which the Company Performance Targets
shall be based.
2. Administration.
2.1 Determinations must be made prior to each Performance Period - At any
time ending on or before the 90th day of each Performance Period, the
Compensation Committee shall:
(a) designate the Participants in the Plan for that Performance
Period;
(b) indicate the Base Pay of each Participant for the Performance
Period by amending Schedule A in writing;
(c) establish Targeted Bonus Percentages for the Performance Period
by amending Schedule B in writing;
(d) establish Company Performance Target(s)s for the Performance
Period by amending Schedule C in writing.
2.3 Certification - Following the close of each Performance Period and
prior to payment of any bonus under the Plan, the Compensation
Committee must certify in writing that the Company Performance
Target(s) and all other factors upon which a bonus is based have been
attained.
2.4 Shareholder Approval - The material terms of the Plan shall be
disclosed to and approved by shareholders of the Company in accordance
with Section 162(m) of the Code. No bonus shall be paid under the Plan
unless such shareholder approval has been obtained.
3. Bonus Payment
3.1 Maximum - Each Participant shall receive a bonus payment for each
Performance Period calculated in accordance with the formula set forth
in subparagraph 3.2 and in an amount not greater than the
Participant's Maximum Targeted Bonus Percentage multiplied by the
Participant's Base Salary.
3.2 Formula - Subject to other provisions of this Plan, each Participant
shall receive a bonus payment for each Performance Period calculated
as follows:
(a) Each of the Company Performance Targets shall be assigned a
weight expressed as a percent of the Participant's Maximum
Targeted Bonus Percentage.
(b) At the conclusion of each Performance Period, the percent of the
Participant's Maximum Targeted Bonus Percentage achieved for each
applicable Financial Measure shall be calculated.
(c) The percentages achieved by performing the calculation described
in subparagraph 3.2(b) shall be added together and this sum shall
be multiplied by the Participant's Maximum Targeted Bonus
Percentage.
(d) The amount obtained by performing the calculation described in
subparagraph 3.2(c) shall be multiplied by the Participant's Base
Salary.
3.3 Limitations
(a) No payment if Company Performance Targets not achieved - In no
event shall any Participant receive a bonus payment hereunder if
the Company Performance Targets and all other factors on which
the bonus payment is based are not achieved during the
Performance Period.
(b) No payment in excess of preestablished amount - No Participant
shall receive a payment under the Plan for any Performance Period
in excess of One Million Dollars ($1,000,000).
(c) Pro-ration or elimination of Bonus payment - Participation in the
Plan ceases with resignation, termination, retirement, death or
long-term disability. A Participant who resigns or is terminated
effective during the Performance Period is ineligible for a bonus
payment. A Participant who retires, dies or becomes eligible for
long-term disability benefits under the Company's long-term
disability benefit plan during the Performance Period will be
paid a bonus based on a calculation performed in accordance with
the provisions of subparagraph 3.2, provided, however, the
Participant's Base Salary shall be pro-rated to the date of
retirement, death or eligibility for long-term disability
benefits.
4. Time and Form of Payments; Taxability - Subject to any deferred
compensation election pursuant to any such plans of the Company, a bonus
payment shall be made to the Participant in one or more cash payments as
soon as determined by the Compensation Committee after it has certified
that the Company Performance Target(s) and all other factors upon which the
bonus payment for the Participant is based have been achieved.
4.1 Nontransferability - Participants and beneficiaries shall not have the
right to assign, encumber or otherwise anticipate the payments to be
made under the Plan, and the benefits provided hereunder shall not be
subject to seizure for payment of any debts or judgments against any
Participant or any beneficiary.
4.2 Tax Withholding - In order to comply with all applicable federal or
state income tax laws or regulations, the Company may take such action
as it deems appropriate to ensure that all applicable federal or state
payroll, withholding, income or other taxes, which are the sole and
absolute responsibility of a Participant, are withheld or collected
from such Participant.
5. Amendment and Termination - The Compensation Committee may amend the Plan
prospectively at any time and for any reason deemed sufficient by it
without notice to any person affected by the Plan and may likewise
terminate or curtail the benefits of the Plan, both with regard to persons
expecting to receive benefits hereunder in the future and persons already
receiving benefits at the time of such action, provided that no amendment
to the Plan shall be effective which would increase the maximum amount
payable to a Participant under paragraph 3.3(b), which would change the
Financial Measures upon which Company Performance Targets must be based as
set forth in subparagraph 1.10 of this Plan or which would modify the
requirements for eligibility under subparagraph 1.5, unless the
shareholders of the Company shall have approved such change in accordance
with the requirements of Section 162(m).
6. Miscellaneous
6.1 Effective Date - January 1, 1999
6.2 Term of the Plan - Unless the Plan shall have been discontinued or
terminated, the Plan shall terminate on December 31, 2003. No bonus
shall be granted after the termination of the Plan; provided, however,
that a payment with respect to a Performance Period which begins
before such termination may be made thereafter. In addition, the
authority of the Compensation Committee to amend the Plan shall extend
beyond the termination of the Plan.
6.3 Headings - Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings
shall not be deemed in any way material or relevant to the
construction or interpretation of the Plan or any provision thereof.
6.4 Applicability to Successors - The Plan shall be binding upon and inure
to the benefit of the Company and each Participant, the successors and
assigns of the Company, and the beneficiaries, personal
representatives and heirs of each Participant. If the Company becomes
a party to any merger, consolidation or reorganization, this Plan
shall remain in full force and effect as an obligation of the Company
or its successors in interest.
6.5 Employment Rights and Other Benefit Programs - The provisions of the
Plan shall not give any Participant any right to be retained in the
employment of the Company. In the absence of any specific agreement to
the contrary, the Plan shall not affect any right of the Company, or
of any affiliate of the Company, to terminate, with or without cause,
the Participant's employment at any time. The Plan shall not replace
any contract of employment, whether oral or written, between the
Company and any Participant, but shall be considered a supplement
thereto. The Plan is in addition to, and not in lieu of, any other
employee benefit plan or program in which any Participant may be or
become eligible to participate by reason of employment with the
Company. Receipt of benefits hereunder shall have such effect on
contributions to and benefits under such other plans or programs as
the provisions of each such other plan or program may specify.
6.6 No Trust or Fund Created - The Plan shall not create or be construed
to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any affiliate and a Participant or
any other person. To the extent that any person acquires a right to
receive payments from the Company or any affiliate pursuant to the
Plan, such right shall be no greater than the right of any unsecured
general creditor of the Company or of any affiliate.
6.7 Governing Law - The validity, construction and effect of the Plan or
any bonus payable under the Plan shall be determined in accordance
with the laws of the State of Minnesota.
6.8 Severability - If any provision of the Plan is or becomes or is deemed
to be invalid, illegal or unenforceable in any jurisdiction such
provision shall be construed or deemed amended to conform to
applicable laws, or if it cannot be so construed or deemed amended
without, in the determination of the Compensation Committee,
materially altering the purpose or intent of the Plan, such provision
shall be stricken as to such jurisdiction, and the remainder of the
Plan shall remain in full force and effect.
6.9 Qualified Performance-Based Compensation - All of the terms and
conditions of the Plan shall be interpreted in such a fashion as to
qualify all compensation paid hereunder as qualified performance-based
compensation within the meaning of Section 162(m) of the Code.
<PAGE>
SCHEDULE A
BASE SALARY FOR PERFORMANCE PERIOD
BEGINNING ON AND ENDING ON
----------- ----------
Name Base Salary
---- -----------
Actual paid salary for the calendar
year that most closely coincides
with Company fiscal year but not in
excess of $1,250,000
<PAGE>
SCHEDULE B
TARGETED BONUS PERCENTAGE FOR PERFORMANCE PERIOD
BEGINNING ON AND ENDING ON
----------- ----------
Minimum Targeted Bonus Maximum Targeted Bonus
Percentage Percentage
as a Percentage of as a Percentage of
Name Base Salary Base Salary
---- ---------------------- ----------------------
<PAGE>
SCHEDULE C
COMPANY PERFORMANCE TARGETS
FOR PERFORMANCE PERIOD
BEGINNING ON AND ENDING ON
----------- ----------
Company Minimum Company Maximum Company
Performance Performance Performance
Target(s) Target(s) Target(s)
Financial Measure(s) Weight
-------------------- ----------- --------------- ---------------
% $ $
------ --------- --------
% $ $
------ --------- --------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial data schedule for the Year Ended 12/31/99
</LEGEND>
<CIK> 0000042888
<NAME> Graco Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,588
<SECURITIES> 0
<RECEIVABLES> 84,167
<ALLOWANCES> 4,471
<INVENTORY> 37,702
<CURRENT-ASSETS> 137,989
<PP&E> 182,156
<DEPRECIATION> 95,663
<TOTAL-ASSETS> 236,033
<CURRENT-LIABILITIES> 78,263
<BONDS> 66,910
0
0
<COMMON> 20,416
<OTHER-SE> 42,524
<TOTAL-LIABILITY-AND-EQUITY> 236,033
<SALES> 442,474
<TOTAL-REVENUES> 442,474
<CGS> 211,339
<TOTAL-COSTS> 211,339
<OTHER-EXPENSES> 142,294
<LOSS-PROVISION> 333
<INTEREST-EXPENSE> 7,016
<INCOME-PRETAX> 88,841
<INCOME-TAX> 29,500
<INCOME-CONTINUING> 59,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,341
<EPS-BASIC> 2.93
<EPS-DILUTED> 2.84
</TABLE>
Exhibit 99
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Graco Inc. (the "Company") wishes to take advantage of the "safe harbor"
provisions regarding forward-looking statements of the Private Securities
Litigation Reform Act of 1995 and is filing this Cautionary Statement in order
to do so.
From time to time various forms filed by the Company with the Securities
and Exchange Commission, including the Company's Form 10-K, Form 10-Q and Form
8-K, its Annual Report to Shareholders, and other written documents or oral
statements released by the Company, may contain forward-looking statements.
Forward-looking statements generally use words such as "expect," "foresee,"
"anticipate," "believe," "project," "should," "estimate," and similar
expressions, and reflect the Company's expectations concerning the future. Such
statements are based upon currently available information, but various risks and
uncertainties may cause the Company's actual results to differ materially from
those expressed in these statements. Among the factors which management believes
could affect the Company's operating results are the following:
o With respect to the Company's business as a whole, the Company's
prospects and operating results may be affected by:
- changing economic conditions in the United States and other major
world economies, including economic downturns or recessions and
foreign currency exchange rate fluctuations;
- international trade factors, including changes in international
trade policy, such as export controls, trade sanctions, increased
tariff barriers and other restrictions; weaker protection of the
Company's proprietary technology in certain foreign countries,
the burden of complying with foreign laws and standards; and
potentially burdensome taxes;
- the ability of the Company to develop new products and
technologies; maintain and enhance its market position relative
to its competitors; maintain and enhance its distribution
channels; realize productivity and product quality improvements;
and continue to control expenses.
- disruption in operations, transportation, communication, sources
of supply, customer operations or payment, caused by political or
economic instability, acts of God, labor disputes, war, embargo,
fire or other cause beyond its reasonable control.
- changes in the markets in which the Company participates,
including consolidation of competitors and major customers.
o The prospects and operating results of the Company's Contractor
Equipment Division may be affected by: variations in the level of
residential, commercial and institutional building and remodeling
activity; the availability and cost of financing; changes in the
environmental regulation of coatings; consolidation in the paint
equipment manufacturing industry; changes in construction materials
and techniques; the cost of labor in foreign markets; the regional
market strength of certain competitors; and the level of government
spending on infrastructure development and road construction,
maintenance and repair; and the nature and extent of highway safety
regulation.
o The prospects and operating results of the Company's
Industrial/Automotive Equipment Division may be affected by: the
capital equipment spending levels of industrial customers; the
availability and cost of customer financing; changes in the
environmental regulation of coatings; changes in the technical
characteristics of materials; changes in application technology; the
ability of the Company to meet changing customer requirements;
consolidation in the fluid handling equipment manufacturing industry;
the equipment purchase plans of major automobile manufacturers
worldwide (which are in turn impacted by the level of automotive sales
worldwide); changes in automotive manufacturing processes; the pricing
strategies of competitors; consolidation in the automobile
manufacturing industry worldwide; and the success of the Company in
moving its automotive customers from custom-designed systems purchased
directly from the Company to the purchase of package modules sold
through integrators and distributors.
o The prospects and operating results of the Company's Lubrication
Equipment Division may be affected by consolidation in the oil
industry; the development of extended life lubricants for vehicles;
the reduction in the need for changing vehicle lubricants; and
variations in the equipment spending levels of the major oil
companies.
