UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 29, 2002
Commission File Number: 001-9249
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GRACO INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
- ----------------------- ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
88 - 11th Avenue N.E.
Minneapolis, Minnesota 55413
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(612) 623-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------ -------
31,657,000 common shares were outstanding as of April 26, 2002.
GRACO INC. AND SUBSIDIARIES
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-11
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBITS
2002 Corporate & SBU Bonus Plan Exhibit 10
2002 Executive Officer Annual Incentive Bonus Plan Exhibit 10.1
Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to
executive officers under the Graco Inc. Stock
Incentive Plan with schedule of awards current
as of March 29, 2002 Exhibit 10.2
Computation of Net Earnings per Common Share Exhibit 11
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
Thirteen Weeks Ended
March 29, 2002 March 30, 2001
-------------- --------------
Net Sales $107,857 $109,814
Cost of products sold 52,694 54,676
-------------- --------------
Gross Profit 55,163 55,138
Product development 4,161 6,287
Selling, marketing and distribution 19,792 20,672
General and administrative 7,717 7,696
-------------- --------------
Operating Earnings 23,493 20,483
Interest expense 150 450
Other expense (income), net (3) 213
-------------- --------------
Earnings before Income Taxes 23,346 19,820
Income taxes 7,800 6,700
-------------- --------------
Net Earnings $ 15,546 $ 13,120
============== ==============
Basic Net Earnings Per Common Share $ .50 $ .43
============== ==============
Diluted Net Earnings Per Common Share $ .49 $ .42
============== ==============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 29, 2002 Dec. 28, 2001
-------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 44,226 $ 26,531
Accounts receivable, less allowances
of $5,200 and $4,500 91,129 85,440
Inventories 31,653 30,333
Deferred income taxes 12,115 11,710
Prepaid expenses 1,454 1,483
-------------- -------------
Total current assets 180,577 155,497
Property, Plant and Equipment:
Cost 212,838 211,523
Accumulated depreciation (116,223) (112,579)
-------------- -------------
96,615 98,944
Intangible Assets, net 13,633 14,274
Other Assets 7,508 7,398
-------------- -------------
$298,333 $276,113
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 11,296 $ 9,512
Current portion of long-term debt 500 550
Trade accounts payable 10,638 10,676
Salaries, wages and commissions 7,571 10,620
Accrued insurance liabilities 10,936 10,380
Accrued warranty and service liabilities 6,258 6,091
Income taxes payable 10,485 6,014
Other current liabilities 14,546 19,410
-------------- -------------
Total current liabilities 72,230 73,253
Retirement Benefits and Deferred Compensation 27,388 27,359
Deferred Income Taxes 1,873 1,761
Shareholders' Equity
Common stock 31,629 31,113
Additional paid-in capital 65,359 54,269
Retained earnings 100,625 89,155
Other, net (771) (797)
-------------- -------------
Total shareholders' equity 196,842 173,740
-------------- -------------
$298,333 $276,113
============== =============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Thirteen Weeks
--------------
March 29, 2002 March 30, 2001
-------------- --------------
Cash Flows from Operating Activities
Net Earnings $ 15,546 $ 13,120
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 4,592 4,240
Deferred income taxes (332) (182)
Tax benefit related to stock options
exercised 2,500 -
Change in:
Accounts receivable (6,015) 4,065
Inventories (1,319) (5,510)
Trade accounts payable (19) (358)
Salaries, wages and commissions (3,029) (6,569)
Retirement benefits and deferred (9) 272
compensation
Other accrued liabilities 403 2,832
Other 40 (789)
-------------- --------------
12,358 11,121
-------------- --------------
Cash Flows from Investing Activities
Property, plant and equipment additions (1,639) (6,203)
Proceeds from sale of property, plant and equipment 13 45
Acquisition of business, net of cash acquired - (15,949)
-------------- --------------
(1,626) (22,107)
-------------- --------------
Cash Flows from (for) Financing Activities
Borrowings on notes payable and lines of credit 8,512 41,274
Payments on notes payable and lines of credit (6,632) (42,307)
Borrowings on long-term debt - 18,000
Payments on long-term debt (50) (15,810)
Common stock issued 9,151 6,320
Common stock retired (686) (177)
Cash dividends paid (3,424) (3,044)
-------------- --------------
6,871 4,256
-------------- --------------
Effect of exchange rate changes on cash 92 341
-------------- --------------
Net increase (decrease) in cash and cash equivalents 17,695 (6,389)
Cash and cash equivalents
Beginning of year 26,531 11,071
-------------- --------------
End of period $ 44,226 $ 4,682
============== ==============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company)
as of March 29, 2002 and the related statements of earnings and cash flows
for the thirteen weeks then ended have been prepared by the Company without
being audited.
In the opinion of management, these consolidated statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of Graco Inc. and Subsidiaries as of
March 29, 2002, and the results of operations and cash flows for all
periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Therefore, these statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 2001 Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Major components of inventories were as follows (in thousands):
March 29, 2002 Dec. 28, 2001
-------------- -------------
Finished products and components $26,583 $23,863
Products and components in various stages
of completion 18,250 18,827
Raw materials and purchased components 18,154 18,899
-------------- -------------
62,987 61,589
Reduction to LIFO cost (31,334) (31,256)
-------------- -------------
$31,653 $30,333
============== =============
3. The Company has three reportable segments; Industrial/Automotive,
Contractor and Lubrication. The Company does not identify assets by
segment. Sales and operating earnings by segment for the thirteen weeks
ended March 29, 2002 and March 30, 2001 were as follows (in thousands):
Thirteen Weeks Ended
--------------------
March 29, 2002 March 30, 2001
-------------- --------------
Net Sales
Industrial/Automotive $ 46,103 $ 47,649
Contractor 51,135 49,901
Lubrication 10,619 12,264
-------------- --------------
Total $107,857 $109,814
============== ==============
Operating Earnings
Industrial/Automotive $ 11,737 $ 9,394
Contractor 10,865 8,620
Lubrication 2,392 2,956
Unallocated corporate expenses (1,501) (487)
-------------- --------------
Total $ 23,493 $ 20,483
============== ==============
4. Total comprehensive income for the quarter was $15.6 million in 2002 and
$12.4 million in 2001. There have been no significant changes to the
components of comprehensive income from those noted on the 2001 Form 10-K
except as described in note 6 below, with respect to translation gains and
losses.
5. Effective at the beginning of fiscal year 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets." Upon adoption of SFAS No. 142, amortization of
goodwill ceased, and results of initial goodwill impairment testing
indicated no impairment. Had SFAS No. 142 been effective at the beginning
of 2001, the non-amortization provisions would have had no effect on first
quarter results.
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Components of intangible assets were (in thousands):
March 29, 2002 Dec. 28, 2001
-------------- -------------
Goodwill $ 7,939 $ 7,939
Other identifiable intangibles, net of
accumulated amortization of $7,000 and
$6,400 5,694 6,335
-------------- -------------
$13,633 $14,274
============== =============
Amortization of intangibles during the first quarter of 2002 was $642,000.
Estimated annual amortization is as follows: $2,400,000 in 2002, $1,600,000
in 2003, $800,000 in 2004, $400,000 in 2005 and $300,000 in 2006.
6. During the third quarter of 2001, the Company announced plans to relocate
the operations of its German subsidiary, Graco Verfahrenstechnik (GV) to
other Company facilities in Belgium and the U.S. This included termination
of approximately 50 employees, termination of leases and consolidation of
product lines.
General and administrative expense in the third quarter of 2001 included a
$1.4 million charge to establish a restructuring accrual for incremental
costs associated with relocating GV operations. Through the end of the
first quarter of 2002, there were no significant payments charged against
the accrual, but the Company expects that all amounts accrued will be paid
by the end of 2002.
The economic facts and circumstances considered in determining the
functional currency of GV changed as a result of relocating GV operations.
Consequently, the Company determined that the functional currency of GV
changed from the euro to the U.S. dollar. Effective at the beginning of
2002, adjustments resulting from the translation of GV financial statements
into U.S. dollars are no longer charged or credited to shareholders'
equity, but are now included in other expense (income).
7. Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" was effective for the
Company at the beginning of fiscal year 2002. This standard provides for a
single accounting model to be used for long-lived assets to be disposed of,
and broadens the presentation of discontinued operations to include more
disposal transactions. The adoption of SFAS No. 144 had no effect on the
Company's first quarter financial position or operating results.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Sales are down compared to the prior year, but net earnings are up due to an
improved gross margin rate and lower expenses.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Thirteen Weeks Ended
--------------------
March 29, 2002 March 30, 2001
-------------- --------------
Net Sales 100.0% 100.0%
Cost of products sold 48.9 49.8
Product development 3.9 5.7
Selling, marketing and distribution 18.3 18.8
General and administrative 7.1 7.0
-------------- --------------
Operating Earnings 21.8 18.7
Interest expense 0.2 0.4
Other (income) expense, net 0.0 0.2
-------------- --------------
Earnings Before Income Taxes 21.6 18.1
Income taxes 7.2 6.1
-------------- --------------
Net Earnings 14.4% 12.0%
============== ==============
Net Sales
- ---------
Sales in the Industrial / Automotive segment were down 3 percent compared to
last year, and continue to be affected by weak economic conditions in North
America, Europe and Japan. Contractor segment sales are up 2 percent, mostly
from home center channel and ASM products. The Company acquired ASM at the end
of the first quarter of 2001. Lubrication segment sales were down, as large
orders received in 2001 were not repeated in 2002.
Sales by geographic area were as follows (in thousands):
Thirteen Weeks Ended
--------------------
March 29, 2002 March 30, 2001
-------------- --------------
Americas $ 78,578 $ 78,993
Europe 19,802 20,722
Asia Pacific 9,477 10,099
-------------- --------------
Consolidated $107,857 $109,814
============== =============-
Sales in Europe declined 4 percent, but would have been flat if translated at
consistent exchange rates. Sales in the Asia Pacific region were down 6 percent,
but were down only 2 percent when translated at consistent exchange rates.
Gross Profit
- ------------
Gross profit percentage of sales increased to 51.1 percent from 50.2 percent due
to manufacturing efficiencies, cost reduction initiatives, price increases and
product mix.
Operating Expenses
- ------------------
Total operating expenses decreased by 9 percent compared to last year. The
largest part of the decrease came from reduced product development expenses,
which dropped by 34 percent due to actions taken during 2001. Actions to contain
spending were also successful in reducing selling and general and administrative
expenses from the prior year. General and administrative expenses included a
$700,000 contribution to the Graco Foundation. No similar contribution was made
in the first quarter of 2001.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations and from issuance of common stock in the first
quarter of 2002 increased cash and cash equivalent balances by $18 million,
after cash dividend payments of $3 million. In the first quarter of 2001, the
primary uses of cash included the acquisition of ASM Company and fixed asset
additions. Accounts receivable increased during the first quarter due to
extended terms on selected accounts.
The Company had unused lines of credit available at March 29, 2002 totaling $41
million. The available credit facilities and internally generated funds provide
the Company with the financial flexibility to meet liquidity needs.
Outlook
- -------
Predictions of a general economic recovery have not yet translated into
incremental sales in the Industrial / Automotive segment, but management
believes that a broad-based economic recovery would have a positive effect on
its business. While internal sales growth may be challenged by continued
difficult economic conditions, management remains committed to high
profitability while funding the Company's long-term growth strategies of
introducing new products, entering new markets, expanding distribution coverage
and pursuing strategic acquisitions. Management is cautiously optimistic that
2002 will be a year of higher net earnings for the Company.
SAFE HARBOR CAUTIONARY STATEMENT
- --------------------------------
A forward-looking statement is any statement made in this report and other
reports that the Company files periodically with the Securities and Exchange
Commission, as well as in press or earnings releases, analyst briefings and
conference calls, which reflects the Company's current thinking on market trends
and the Company's future financial performance at the time they are made. All
forecasts and projections are forward-looking statements.
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 by making cautionary statements
concerning any forward-looking statements made by or on behalf of the Company.
The Company cannot give any assurance that the results forecasted in any
forward-looking statement will actually be achieved. Future results could differ
materially from those expressed, due to the impact of changes in various
factors. These risk factors include, but are not limited to: economic conditions
in the United States and other major world economies, currency fluctuations,
political instability, changes in laws and regulations, and changes in product
demand. Please refer to Exhibit 99 to the Company's Annual Report on Form 10-K
for fiscal year 2001 for a more comprehensive discussion of these and other risk
factors.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 2002 Corporate & SBU Bonus Plan
10.1 2002 Executive Officer Annual Incentive Bonus Plan
10.2 Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to executive
officers under the Graco Inc. Stock Incentive Plan
with schedule of awards current as of March 29, 2002
11 Computation of Net Earnings per Common Share
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRACO INC.
Date: April 30, 2002 By: /s/David A. Roberts
----------------------------------
David A. Roberts
President & Chief Executive Officer
Date: April 30, 2002 By: /s/James A. Graner
-----------------------------------
James A. Graner
Vice President & Controller
Chief Accounting Officer
Date: April 30, 2002 By: /s/Mark W. Sheahan
-----------------------------------
Mark W. Sheahan
Vice President & Treasurer
Principal Financial Officer
Exhibit 10
2002 CORPORATE & SBU BONUS PLAN
Objectives
- ----------
o To create shareholder value through achievement of annual financial
objectives.
o To motivate and retain those key executives and managers who work in
positions where they can impact the Company's annual financial objectives.
Plan Design
- -----------
The Plan links the size of each individual's award to specific financial
objectives. These objectives are tailored for the Corporation and for each
Business Unit. These objectives are:
o Corporation
o Corporate Sales and/or Net Earnings objectives
o Business Units
o Sales and/or Contribution Growth objectives
Eligibility Requirements
- ------------------------
Only those positions which carry clear managerial responsibility for directly
contributing to Graco's Corporate Sales and/or Net Earnings objective and
Business Unit Sales and/or Contribution Growth objectives are eligible to be
included in this Plan.
Only those individuals in eligible positions who have demonstrated and are
maintaining a performance level that meets the supervisor's normal expectations
for that position are eligible for annual participation in this Plan as well as
the receipt of any annual Bonus Payments.
Participation
- -------------
The top executive in each organizational unit may nominate managers for
participation in this Plan when the established position and individual
eligibility requirements have been met.
The Management Organization and Compensation Committee of the Graco Inc. Board
of Directors has sole authority to approve the participation of the Chief
Executive Officer in the Plan.
The Chief Executive Officer of Graco Inc. has sole authority to select and
approve all other Plan participants.
Bonus Maximum
- -------------
Taken in conjunction with base salary market comparisons, bonus maximum for all
positions will be:
o Commensurate with the position's ability to impact the annual Corporate
Sales and/or Net Earnings objective and Business Unit Sales and/or
Contribution Growth objectives.
o Consistent with total compensation levels prevalent for similar positions
in the market place.
Based on these criteria, bonus maximums ranging from 10% to 90% have been
established for each individual.
Bonus Payment
- -------------
The determination of a participant's annual Bonus Payment will be calculated by
adding the bonus results attained for Corporate Sales and/or Net Earnings
performance (expressed in percent) to the bonus results attained for any
applicable Business Unit's Sales and/or Contribution Growth performance
(expressed in percent). These bonus results are then multiplied by the
participant's Maximum Bonus Percentage and then multiplied by the participant's
Base Salary for the Plan Year, to determine the total Bonus Payment.
Example:
- ------------- --------------
|Annual Annual | Participant's Participant's
|Corporate Business | Maximum Annual
|Performance + Unit | x Bonus x Base = Bonus
|Results Performance | Salary Salary
| Results |
| (if |
| applicable) |
| |
| % % | $ $ $
- ------------- --------------
Administration
- --------------
The following rules have been established to ensure equitable administration of
Graco's Annual Bonus Plan (the Plan):
1. The Plan will be administered by the Management Organization and
Compensation Committee of the Board of Directors. The Committee may cancel
the Plan and interpret the Plan.
2. The Management Organization and Compensation Committee shall establish the
Annual Corporate Bonus Plan financial objectives. Within the basic
framework of the Plan, the Chief Executive Officer may establish the annual
bonus plan financial objectives for individual Business Units. The CEO may
also establish deadlines for filing administrative forms and adopt other
administrative rules.
The CEO has established the Bonus Administrative Committee consisting of
the CEO, the Vice President, Human Resources, and the Compensation Manager.
This Committee is responsible for making approval recommendations on all
Annual Bonus Program administrative matters, such as participation award
payments, performance measures, and performance results. All requests for
adjustments or exceptions are to be formally submitted to this Committee
for review through the Compensation Manager.
3. Key executives and managers selected to participate in the Plan after its
annual effective date (January 1st) may be included on a pro-rata basis.
4. Participation in the Plan one year does not necessarily assure
participation in subsequent years. Eligibility requirements for both the
position and individual performance must be met continually.
5. Participation continues during any paid time off such as short-term
disability (up to six months). Participation ceases with retirement, death,
or long-term disability (over six months). In the event participation
ceases due to retirement, death, or long term disability, the Participant
will be eligible for a Bonus Payment, calculated using the Maximum Bonus
Percent and Base Salary up to the time of retirement, death, or long-term
disability and the annual performance results for the year in which
retirement, death, or long-term disability occurs.
6. A participant who transfers to a position (e.g. through job posting or job
elimination) that is not eligible for inclusion in the Plan will be
eligible for a pro-rata award based on the actual time employed in the
eligible position during the year.
If, due to unique skills possessed by a participant, the company requests
that the participant accept a transfer to a non-bonus eligible position,
the participant will remain on the Plan. The participant's eligibility will
be reviewed annually as noted in Administrative Rule #4.
7. A participant must be an employee in good standing on 12/31 of the Plan
Year in order to receive a bonus. A participant who resigns or is
terminated effective during the Plan Year is ineligible for a bonus.
Participants must maintain satisfactory performance throughout the Plan
year in order to be eligible to receive a bonus award payment.
In addition, a participant whose employment termination has been requested
due to job elimination, performance or otherwise for cause will be
ineligible for a bonus payment even though the participant is still
employed at year-end.
8. Targets and actual performance for Corporate and Division measures will be
at actual exchange rates. Targets and actual performance for international
measures where business is conducted in foreign currency will be at prior
year's actual rates.
9. Acquisitions and divestitures not included in the annual business plan for
the Plan Year will be excluded from the Corporate Sales and/or Net Earnings
calculations.
10. Significant changes in historical FASB accounting practices or income tax
rates will be included in corporate earnings calculations at the discretion
of the Management Organization and Compensation Committee of the Board of
Directors.
11. Payments will be made by March 15th of the year following each successive
Corporate and Business Unit performance year.
These Administrative Rules indicate Graco's intent. Situations may arise which
are not specifically covered by these rules and will require the use of judgment
and discretion. Final responsibility for interpretation of these Administrative
Rules rests solely with the Vice President, Human Resources.
Exhibit 10.1
2002 EXECUTIVE OFFICER ANNUAL INCENTIVE BONUS PLAN
Objectives
- ----------
o To create shareholder value through achievement of annual financial
objectives.
o To motivate and retain those key executives and managers who work in
positions where they can impact the Company's annual financial objectives.
Plan Design
- -----------
The Plan links the size of each individual's award to specific financial
objectives. These objectives are tailored for the Corporation and for each
Business Unit. These objectives are:
o Corporation
o Corporate Sales and/or Net Earnings objectives
o Business Units
o Sales and/or Contribution Growth objectives
Eligibility Requirements
- ------------------------
Only those positions which carry clear managerial responsibility for directly
contributing to Graco's Corporate Sales and/or Net Earnings objective and
Business Unit Sales and/or Contribution Growth objectives are eligible to be
included in this Plan.
Only those individuals in eligible positions who have demonstrated and are
maintaining a performance level that meets the supervisor's normal expectations
for that position are eligible for annual participation in this Plan as well as
the receipt of any annual Bonus Payments.
Participation
- -------------
The top executive in each organizational unit may nominate managers for
participation in this Plan when the established position and individual
eligibility requirements have been met.
The Management Organization and Compensation Committee of the Graco Inc. Board
of Directors has sole authority to approve the participation of the Chief
Executive Officer in the Plan.
The Chief Executive Officer of Graco Inc. has sole authority to select and
approve all other Plan participants.
Bonus Maximum
- -------------
Taken in conjunction with base salary market comparisons, bonus maximum for all
positions will be:
o Commensurate with the position's ability to impact the annual Corporate
Sales and/or Net Earnings objective and Business Unit Sales and/or
Contribution Growth objectives.
o Consistent with total compensation levels prevalent for similar positions
in the market place.
Based on these criteria, bonus maximums ranging from 10% to 90% have been
established for each individual.
Bonus Payment
- -------------
The determination of a participant's annual Bonus Payment will be calculated by
adding the bonus results attained for Corporate Sales and/or Net Earnings
performance (expressed in percent) to the bonus results attained for any
applicable Business Unit's Sales and/or Contribution Growth performance
(expressed in percent). These bonus results are then multiplied by the
participant's Maximum Bonus Percentage and then multiplied by the participant's
Base Salary for the Plan Year, to determine the total Bonus Payment.
Example:
- ------------- --------------
|Annual Annual | Participant's Participant's
|Corporate Business | Maximum Annual
|Performance + Unit | x Bonus x Base = Bonus
|Results Performance | Salary Salary
| Results |
| (if |
| applicable) |
| |
| % % | $ $ $
- ------------- --------------
Administration
- --------------
The following rules have been established to ensure equitable administration of
Graco's Annual Bonus Plan (the Plan):
1. The Plan will be administered by the Management Organization and
Compensation Committee of the Board of Directors. The Committee may cancel
the Plan and interpret the Plan.
2. The Management Organization and Compensation Committee shall establish the
Annual Corporate Bonus Plan financial objectives. Within the basic
framework of the Plan, the Chief Executive Officer may establish the annual
bonus plan financial objectives for individual Business Units. The CEO may
also establish deadlines for filing administrative forms and adopt other
administrative rules.
The CEO has established the Bonus Administrative Committee consisting of
the CEO, the Vice President, Human Resources, and the Compensation Manager.
This Committee is responsible for making approval recommendations on all
Annual Bonus Program administrative matters, such as participation award
payments, performance measures, and performance results. All requests for
adjustments or exceptions are to be formally submitted to this Committee
for review through the Compensation Manager.
3. Key executives and managers selected to participate in the Plan after its
annual effective date (January 1st) may be included on a pro-rata basis.
4. Participation in the Plan one year does not necessarily assure
participation in subsequent years. Eligibility requirements for both the
position and individual performance must be met continually.
5. Participation continues during any paid time off such as short-term
disability (up to six months). Participation ceases with retirement, death,
or long-term disability (over six months). In the event participation
ceases due to retirement, death, or long term disability, the Participant
will be eligible for a Bonus Payment, calculated using the Maximum Bonus
Percent and Base Salary up to the time of retirement, death, or long-term
disability and the annual performance results for the year in which
retirement, death, or long-term disability occurs.
6. A participant who transfers to a position (e.g. through job posting or job
elimination) that is not eligible for inclusion in the Plan will be
eligible for a pro-rata award based on the actual time employed in the
eligible position during the year.
If, due to unique skills possessed by a participant, the company requests
that the participant accept a transfer to a non-bonus eligible position,
the participant will remain on the Plan. The participant's eligibility will
be reviewed annually as noted in Administrative Rule #4.
7. A participant must be an employee in good standing on 12/31 of the Plan
Year in order to receive a bonus. A participant who resigns or is
terminated effective during the Plan Year is ineligible for a bonus.
Participants must maintain satisfactory performance throughout the Plan
year in order to be eligible to receive a bonus award payment.
In addition, a participant whose employment termination has been requested
due to job elimination, performance or otherwise for cause will be
ineligible for a bonus payment even though the participant is still
employed at year-end.
8. Targets and actual performance for Corporate and Division measures will be
at actual exchange rates. Targets and actual performance for international
measures where business is conducted in foreign currency will be at prior
year's actual rates.
9. Acquisitions and divestitures not included in the annual business plan for
the Plan Year will be excluded from the Corporate Sales and/or Net Earnings
calculations.
10. Significant changes in historical FASB accounting practices or income tax
rates will be included in corporate earnings calculations at the discretion
of the Management Organization and Compensation Committee of the Board of
Directors.
11. Payments will be made by March 15th of the year following each successive
Corporate and Business Unit performance year.
These Administrative Rules indicate Graco's intent. Situations may arise which
are not specifically covered by these rules and will require the use of judgment
and discretion. Final responsibility for interpretation of these Administrative
Rules rests solely with the Vice President, Human Resources.
Exhibit 10.2
STOCK OPTION AGREEMENT
(NON-ISO)
THIS AGREEMENT, made this day of , 2 , by and
------- ------------------- ---
between Graco Inc., a Minnesota corporation (the "Company") and
-----------------
(the "Employee").
WITNESSETH THAT:
WHEREAS, the Company pursuant to the Graco Inc. Stock Incentive Plan (the
"Plan") wishes to grant this stock option to Employee;
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto hereby agree as follows:
1. Grant of Option
---------------
The Company hereby grants to Employee, the right and option
(hereinafter called the "option") to purchase all or any part of an
aggregate of shares of Common Stock of the Company, par value
-------
$1.00 per share, at the price of $ per share on the terms and
---------
conditions set forth herein.
2. Duration and Exercisability
---------------------------
A. This option may not be exercised by Employee until the expiration
of one (1) year from the date of grant, and this option shall in
all events terminate ten (10) years after the date of grant.
During the first year from the date of grant of this option, no
portion of this option may be exercised. Thereafter this option
shall become exercisable in four cumulative installments of 25% as
follows:
Total Portion of Option
Date Which is Exercisable
------------------------------ -----------------------
One Year after Date of Grant 25%
Two Years after Date of Grant 50%
Three Years after Date of Grant 75%
Four Years after Date of Grant 100%
In the event that Employee does not purchase in any one year the
full number of shares of Common Stock of the Company to which
he/she is entitled under this option, he/she may, subject to the
terms and conditions of Section 3 hereof, purchase such shares of
Common Stock in any subsequent year during the term of this
option.
B. During the lifetime of the Employee, the option shall be
exercisable only by him/her and shall not be assignable or
transferable by him/her otherwise than by will or the laws of
descent and distribution.
3. Effect of Termination of Employment
-----------------------------------
A. In the event that Employee shall cease to be employed by the
Company or its subsidiaries for any reason other than his/her
gross and willful misconduct, death, retirement (as defined in
Section 3. D. below), or disability (as defined in Section 3. D.
below), Employee shall have the right to exercise the option at
any time within one month after such termination of employment to
the extent of the full number of shares he/she was entitled to
purchase under the option on the date of termination, subject to
the condition that no option shall be exercisable after the
expiration of the term of the option.
B. In the event that Employee shall cease to be employed by the
Company or its subsidiaries by reason of his/her gross and willful
misconduct during the course of his/her employment, including but
not limited to wrongful appropriation of Company funds or the
commission of a felony, the option shall be terminated as of the
date of the misconduct.
C. If the Employee shall die while in the employ of the Company or a
subsidiary or within one month after termination of employment for
any reason other than gross and willful misconduct and shall not
have fully exercised the option, all remaining shares shall become
immediately exercisable and such option may be exercised at any
time within twelve months after his/her death by the executors or
administrators of the Employee or by any person or persons to whom
the option is transferred by will or the applicable laws of
descent and distribution, and subject to the condition that no
option shall be exercisable after the expiration of the term of
the option.
D. If the Employee's termination of employment is due to retirement
(either after attaining age 55 with 10 years of service, or
attaining age 65), or due to disability within the meaning of the
provisions of the Graco Long-Term Disability Plan subject to the
conditions that no option shall be exercisable after the
expiration of the terms of the option, all remaining shares shall
become immediately exercisable and the option may be exercised by
the Employee at any time within three years of the Employee's
retirement, subject to the condition that no option shall be
exercisable after the expiration of the term of the option. In the
event of the death of the Employee within the three-year period
after retirement, the option may be exercised at any time within
twelve months after his/her death by the executors or
administrators of the Employee or by any person or persons to whom
the option is transferred by will or the applicable laws of
descent and distribution, to the extent of the full number of
shares he/she was entitled to purchase under the option on the
date of death, and subject to the condition that no option shall
be exercisable after the expiration of the term of the option.
E. Notwithstanding anything to the contrary contained in this Section
3, if the Employee chooses to terminate his/her employment by
retirement (as defined in Section 3. D. above) and has not given
the Company written notice, by correspondence to his/her immediate
supervisor and the Chief Executive Officer, of said intention to
retire not less than six (6) months prior to the date of his/her
retirement, then in such event for purposes of this Agreement said
termination of employment shall be deemed to be not a retirement
but a termination subject to the provisions of Section 3. A.
above, provided, however, that in the event that the Chief
Executive Officer, in his/her sole discretion and judgement,
determines that termination of employment by retirement of the
Employee without six (6) months prior written notice is in the
best interests of the Company, then such retirement shall be
subject to Section 3. D. above.
4. Manner of Exercise
------------------
A. The option can be exercised only by Employee or other proper
party within the option period delivering written notice to the
Company at its principal office in Minneapolis, Minnesota,
stating the number of shares as to which the option is being
exercised and, except as provided in Section 4. C., accompanied
by payment-in-full of the option price for all shares designated
in the notice.
B. The Employee may, at Employee's election, pay the option price
either by check (bank check, certified check, or personal check)
or by delivering to the Company for cancellation shares of Common
Stock of the Company which have been held by the Employee for not
less than six (6) months with a fair market value equal to the
option price. For these purposes, the fair market value of the
Company's Common Stock shall be the closing price of the Common
Stock on the date of exercise on the New York Stock Exchange (the
"NYSE") or on the principal national securities exchange on which
such shares are traded if the shares are not then traded on the
NYSE. If there is not a quotation available for such day, then the
closing price on the next preceding day for which such a quotation
exists shall be determinative of fair market value. If the shares
are not then traded on an exchange, the fair market value shall be
the average of the closing bid and asked prices of the Common
Stock as reported by the National Association of Securities
Dealers Automated Quotation System. If the Common Stock is not
then traded on NASDAQ or on an exchange, then the fair market
value shall be determined in such manner as the Company shall deem
reasonable.
C. The Employee may, with the consent of the Company, pay the option
price by arranging for the immediate sale of some or all of the
shares issued upon exercise of the option by a securities dealer
and the payment to the Company by the securities dealer of the
option exercise price.
5. Payment of Withholding Taxes
----------------------------
Upon exercise of any portion of this option, Employee shall pay to the
Company an amount sufficient to satisfy any federal, state, or local
withholding tax requirements which arise as a result of the exercise
of the option or provide the Company with satisfactory indemnification
for such payment. Such amount may be paid by the Employee by
delivering to the Company for cancellation shares of Common Stock of
the Company with a fair market value equal to the minimum amount of
such withholding tax requirement by (i) electing to have the Company
withhold common shares otherwise to be delivered with a fair market
value equal to the minimum statutory amount of such taxes required to
be withheld by the Company, or (ii) electing to surrender to the
Company previously owned common shares with a fair market value equal
to the amount of such minimum tax obligation.
6. Change of Control
A. Notwithstanding Section 2(a) hereof, the entire option shall
become immediately and fully exercisable on the day following a
"Change of Control" and shall remain fully exercisable until
either exercised or expiring by its terms. A "Change of Control"
means:
(1) acquisition by any individual, entity, or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act
of 1934), (a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 under the 1934 Act) which results in
the beneficial ownership by such Person of 25% or more of
either
(a) the then outstanding shares of Common Stock of the
Company (the "Outstanding Company Common Stock") or
(b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company
Voting Securities");
provided, however, that the following acquisitions will not
result in a Change of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii) an acquisition by an employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company,
(iv) an acquisition by any Person who is deemed to have
beneficial ownership of the Company common stock
or other Company voting securities owned by the
Trust Under the Will of Clarissa L. Gray ("Trust
Person"), provided that such acquisition does not
result in the beneficial ownership by such Person
of 32% or more of either the Outstanding Company
Common Stock or the Outstanding Company Voting
Securities, and provided further that for purposes
of this Section 6, a Trust Person shall not be
deemed to have beneficial ownership of the Company
common stock or other Company voting securities
owned by The Graco Foundation or any employee
benefit plan of the Company, including, without
limitations, the Graco Employee Retirement Plan
and the Graco Employee Stock Ownership Plan,
(v) an acquisition by the Employee or any group that
includes the Employee, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b),
and (c) of subsection (4) below; and
provided, further, that if any Person's beneficial ownership
of the Outstanding Company Common Stock or Outstanding
Company Voting Securities is 25% or more as a result of a
transaction described in clause (i) or (ii) above, and such
Person subsequently acquires beneficial ownership of
additional Outstanding Company Common Stock or Outstanding
Company Voting Securities as a result of a transaction other
than that described in clause (i) or (ii) above, such
subsequent acquisition will be treated as an acquisition that
causes such Person to own 25% or more of the Outstanding
Company Common Stock or Outstanding Company Voting Securities
and be deemed a Change of Control; and provided further, that
in the event any acquisition or other transaction occurs
which results in the beneficial ownership of 32% or more of
either the Outstanding Company Common Stock or the
Outstanding Company Voting Securities by any Trust Person,
the Incumbent Board may by majority vote increase the
threshold beneficial ownership percentage to a percentage
above 32% for any Trust Person; or
(2) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of said Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board will be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial membership on the Board occurs as a result of an
actual or threatened election contest with respect to the
election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(3) The commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a Person of 25%
or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities; or
(4) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, or statutory exchange
of Outstanding Company Common Stock or Outstanding Company
Voting Securities or sale or other disposition of all or
substantially all of the assets of the Company ("Business
Combination") or, if consummation of such Business
Combination is subject, at the time of such approval by
stockholders, to the consent of any government or
governmental agency, the obtaining of such consent (either
explicitly or implicitly by consummation) excluding, however,
such a Business combination pursuant to which
(a) all or substantially all of the individuals and entities
who were the beneficial owners of the Outstanding
Company Common Stock or Outstanding Company Voting
Securities immediately prior to such Business
Combination beneficially own, directly or indirectly,
more than 80% of, respectively, the then outstanding
shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may
be, of the corporation resulting from such Business
Combination (including, without limitation, a
corporation that as a result of such transaction owns
the Company or all or substantially all of the Company's
assets either directly or through one or more
subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock or
Outstanding Company Voting Securities,
(b) no Person [excluding any employee benefit plan (or
related trust) of the Company or such corporation
resulting from such Business Combination] beneficially
owns, directly or indirectly, 25% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined
voting power of the then outstanding voting securities
of such corporation except to the extent that such
ownership existed prior to the Business Combination, and
(c) at least a majority of the members of the board of
directors of the corporation resulting from such
Business Combination were members of the Incumbent Board
at the time of the execution of the initial Agreement,
or of the action of the Board, providing for such
Business Combination; or
(5) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
B. A Change of Control shall not be deemed to have occurred with
respect to an Employee if:
(1) the acquisition of the 25% or greater interest referred to in
subparagraph A.(1) of this Section 6 is by a group, acting in
concert, that includes the Employee or
(2) if at least 25% of the then outstanding common stock or
combined voting power of the then outstanding Company voting
securities (or voting equity interests) of the surviving
corporation or of any corporation (or other entity) acquiring
all or substantially all of the assets of the Company shall
be beneficially owned, directly or indirectly, immediately
after a reorganization, merger, consolidation, statutory
share exchange, disposition of assets, liquidation or
dissolution referred to in subsections (4) or (5) of this
section by a group, acting in concert, that includes that
Employee.
7. Adjustments
If there shall be any change in the number or character of the Common
Stock of the Company through merger, consolidation, reorganization,
recapitalization, dividend in the form of stock (of whatever amount),
stock split or other change in the corporate structure of the Company,
and all or any portion of the option shall then be unexercised and not
yet expired, appropriate adjustments in the outstanding option shall
be made by the Company, in order to prevent dilution or enlargement of
option rights. Such adjustments shall include, where appropriate,
changes in the number of shares of Common Stock and the price per
share subject to the outstanding option.
8. Miscellaneous
A. This option is issued pursuant to the Plan and is subject to its
terms. A copy of the Plan has been given to the Employee. The
terms of the Plan are also available for inspection during
business hours at the principal offices of the Company.
B. This Agreement shall not confer on Employee any right with respect
to continuance of employment by the Company or any of its
subsidiaries, nor will it interfere in any way with the right of
the Company to terminate such employment at any time. Employee
shall have none of the rights of a shareholder with respect to
shares subject to this option until such shares shall have been
issued to him/her upon exercise of this option.
C. The Company shall at all times during the term of the option
reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
GRACO INC.
By Its Chief Executive Officer
---------------------------------------
---------------------------------------
Employee
Stock Incentive Plan
Schedule Identifying Non-ISO Stock Option Agreements Executed and
Material Details in which Executed Agreements Differ from Agreement Copy Filed
Current as of March 29, 2002
DATE NAME SHARES PRICE
- ----------------- ------------------- ------ ------
June 25, 2001 David A. Roberts* 50,000 $31.20
February 22, 2002 David M. Lowe 7,500 $41.38
February 22, 2002 David A. Roberts* 40,000 $41.38
February 22, 2002 James A. Graner 5,000 $41.38
February 22, 2002 D. Christian Koch 7,500 $41.38
February 22, 2002 Robert M. Mattison 5,000 $41.38
February 22, 2002 Mark W. Sheahan 5,000 $41.38
February 22, 2002 Steve L. Bauman 5,000 $41.38
February 22, 2002 Patrick J. McHale 7,500 $41.38
February 22, 2002 Fred A. Sutter 7,500 $41.38
February 22, 2002 Charles L. Rescorla 10,000 $41.38
February 22, 2002 Dale D. Johnson 10,000 $41.38
* Option agreement does not contain Section 3.E.
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended
--------------------
Mar. 29, 2002 Mar. 30, 2001
------------- -------------
(in thousands except per share amounts)
Net earnings applicable to common
shareholders for basic and
diluted earnings per share $15,546 $13,120
Weighted average shares outstanding
for basic earnings per share 31,306 30,561
Dilutive effect of stock options
computed using the treasury
stock method and the average
market price 614 568
Weighted average shares outstanding
for diluted earnings per share 31,920 31,129
Basic earnings per share $ 0.50 $ 0.43
Diluted earnings per share $ 0.49 $ 0.42