UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 27, 2002
Commission File Number: 001-9249
--------
GRACO INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
- ------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
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
------ -------
47,611,000 common shares were outstanding as of October 25, 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 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Item 4. Controls and Procedures 14
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATIONS 17-19
EXHIBITS
Separation and Release Agreement between Stephen L.
Bauman and the Company dated July 25, 2002 Exhibit 10
Computation of Net Earnings per Common Share Exhibit 11
Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002:
President and Chief Executive Officer Exhibit 99
Vice President and Controller Exhibit 99.1
Vice President and Treasurer Exhibit 99.2
PART I
GRACO INC. AND SUBSIDIARIES
Item 1. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands except per share amounts)
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- ----------------------------
Sept 27, 2002 Sept 28, 2001 Sept 27, 2002 Sept 28, 2001
------------- ------------- ------------- -------------
Net Sales $125,832 $118,651 $366,485 $359,338
Cost of products sold 60,418 59,495 178,767 180,791
------------- ------------- ------------- -------------
Gross Profit 65,414 59,156 187,718 178,547
Product development 4,813 4,666 13,501 16,664
Selling, marketing and distribution 21,426 20,285 63,314 61,398
General and administrative 8,438 8,813 24,940 26,106
------------- ------------- ------------- -------------
Operating Earnings 30,737 25,392 85,963 74,379
Interest expense 122 261 382 1,066
Other expense 321 171 525 985
------------- ------------- ------------- -------------
Earnings Before Income Taxes 30,294 24,960 85,056 72,328
Income taxes 9,800 8,200 27,500 24,200
Net Earnings $ 20,494 $ 16,760 $ 57,556 $ 48,128
============= ============= ============= =============
Basic Net Earnings
Per Common Share $ .43 $ .36 $ 1.21 $ 1.04
============= ============= ============= =============
Diluted Net Earnings
Per Common Share $ .42 $ .35 $ 1.19 $ 1.02
============= ============= ============= =============
Cash Dividends Declared
Per Common Share $ .07 $ .07 $ .22 $ .20
============= ============= ============= =============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
Sept 27, 2002 Dec 28, 2001
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 93,803 $ 26,531
Accounts receivable, less allowances
of $5,700 and $4,500 93,010 85,440
Inventories 28,376 30,333
Deferred income taxes 11,768 11,710
Prepaid expenses 1,716 1,483
------------- ------------
Total current assets 228,673 155,497
Property, Plant and Equipment:
Cost 215,938 211,523
Accumulated depreciation (122,264) (112,579)
------------- ------------
93,674 98,944
Intangible Assets, net 12,411 14,274
Other Assets 8,380 7,398
------------- ------------
$343,138 $276,113
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 12,626 $ 9,512
Current portion of long-term debt 500 550
Trade accounts payable 13,078 10,676
Salaries, wages and commissions 12,634 10,620
Accrued insurance liabilities 10,112 10,380
Accrued warranty and service liabilities 6,287 6,091
Income taxes payable 6,834 6,014
Other current liabilities 17,284 19,410
------------- ------------
Total current liabilities 79,355 73,253
Retirement Benefits and Deferred Compensation 28,260 27,359
Deferred Income Taxes 2,096 1,761
Shareholders' Equity
Common stock 47,599 31,113
Additional paid-in capital 69,931 54,269
Retained earnings 117,517 89,155
Other, net (1,620) (797)
------------- ------------
Total shareholders' equity 233,427 173,740
------------- ------------
$343,138 $276,113
============= ============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Thirty-nine Weeks
------------------------------
Sept 27, 2002 Sept 28, 2001
------------- -------------
Cash Flows from Operating Activities
Net Earnings $57,556 $ 48,128
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 13,876 13,573
Deferred income taxes 344 766
Tax benefit related to stock options exercised 3,400 -
Change in:
Accounts receivable (5,615) 1,745
Inventories 2,248 (1,506)
Trade accounts payable 2,299 (2,380)
Salaries, wages and commissions 1,830 (4,643)
Retirement benefits and deferred (348) (1,871)
compensation
Other accrued liabilities (2,055) 5,227
Other 153 526
------------- -------------
73,688 59,565
------------- -------------
Cash Flows from Investing Activities
Property, plant and equipment additions (7,255) (23,033)
Proceeds from sale of property, plant and equipment 284 103
Acquisition of business, net of cash acquired - (15,949)
------------- -------------
(6,971) (38,879)
------------- -------------
Cash Flows from Financing Activities
Borrowings on notes payable and lines of credit 16,418 148,255
Payments on notes payable and lines of credit (13,771) (151,365)
Borrowings on long-term debt - 21,000
Payments on long-term debt (50) (38,810)
Common stock issued 12,114 11,381
Common stock retired (3,162) (3,600)
Cash dividends paid (10,398) (9,232)
------------- -------------
1,151 (22,371)
------------- -------------
Effect of exchange rate changes on cash (596) 1,045
------------- -------------
Net increase (decrease) in cash and cash equivalents 67,272 (640)
Cash and cash equivalents
Beginning of year 26,531 11,071
------------- -------------
End of period $93,803 $ 10,431
============= =============
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 September 27, 2002, and the related statements of earnings
for the thirteen and thirty-nine weeks ended September 27, 2002 and
September 28, 2001, and cash flows for the thirty-nine weeks ended
September 27, 2002 and September 28, 2001 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
September 27, 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):
Sept 27, 2002 Dec 28, 2001
------------- ------------
Finished products and components $26,025 $23,863
Products and components in various
stages of completion 16,614 18,827
Raw materials and purchased components 16,519 18,899
------------- ------------
59,158 61,589
Reduction to LIFO cost (30,782) (31,256)
------------- ------------
$28,376 $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 and
thirty-nine weeks ended September 27, 2002 and September 28, 2001 were as
follows (in thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------ ------------------------------
Sept 27, 2002 Sept 28, 2001 Sept 27, 2002 Sept 28, 2001
------------- ------------- ------------- -------------
Net Sales
Industrial/Automotive $ 52,624 $ 48,583 $149,486 $147,681
Contractor 62,990 58,918 182,718 175,595
Lubrication 10,218 11,150 34,281 36,062
------------- ------------- ------------- -------------
Consolidated $125,832 $118,651 $366,485 $359,338
============= ============= ============= =============
Operating Earnings
Industrial/Automotive $ 14,438 $ 2,500 $ 39,398 $ 34,007
Contractor 15,412 12,695 43,520 36,852
Lubrication 1,869 2,807 7,390 8,835
Unallocated corporate
expenses (982) (2,610) (4,345) (5,315)
------------- ------------- ------------- -------------
Consolidated Operating
Earnings $ 30,737 $ 25,392 $ 85,963 $ 74,379
============= ============= ============= =============
4. Total comprehensive income in 2002 was $20.5 million in the third quarter
and $57.6 million year-to-date. In 2001, comprehensive income was $17.8
million for the third quarter and $47.8 million for the nine-month period.
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 State-
ment 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 increased net earnings
by $140,000 for the third quarter and by $280,000 for the nine months
ended September 28, 2001.
Components of intangible assets were (in thousands):
Sept 27, 2002 Dec 28, 2001
------------- ------------
Goodwill $ 7,939 $ 7,939
Other identifiable intangibles, net of
accumulated amortization of $8,300
and $6,400 4,472 6,335
------------- ------------
$12,411 $14,274
============= ============
Amortization of intangibles was $598,000 in the third quarter of 2002 and
$1,864,000 year-to-date. 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 certain costs
associated with relocating GV operations. Most of the amounts accrued were
paid during the third quarter of 2002. As of September 27, 2002 the
balance of $100,000 remaining in the restructuring accrual relates to
termination of leases, which 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 2002 financial position or operating results.
8. On May 7, 2002, the Board of Directors declared a three-for-two split of
the Company's common stock, distributed on June 6, 2002 to shareholders of
record on May 21, 2002. Share and per share amounts for all periods
presented reflect the stock split.
Also on May 7, 2002, the Company issued 36,750 shares of restricted common
stock to key employees under the Stock Incentive Plan. Compensation cost
totaling $1,069,000 related to the restricted shares will be charged to
operations over the three-year vesting period.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Increased sales and improved gross profit rate resulted in higher net earnings
for the third quarter. Year-to-date, sales and gross profit rate are up and
expenses are down. Resulting net earnings increased by 20% over last year.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- -----------------------------
Sept 27, 2002 Sept 28, 2001 Sept 27, 2002 Sept 28, 2001
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 48.0 50.1 48.8 50.3
Product development 3.8 4.0 3.7 4.6
Selling, marketing and distribution 17.1 17.1 17.2 17.1
General and administrative 6.7 7.4 6.8 7.3
------------- ------------- ------------- -------------
Operating Earnings 24.4 21.4 23.5 20.7
Interest expense 0.1 0.2 0.1 0.3
Other expense 0.2 0.2 0.2 0.3
------------- ------------- ------------- -------------
Earnings Before Income Taxes 24.1 21.0 23.2 20.1
Income taxes 7.8 6.9 7.5 6.7
------------- ------------- ------------- -------------
Net Earnings 16.3% 14.1% 15.7% 13.4%
============= ============= ============= =============
Net Sales
Sales by segment were as follows (in thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- -----------------------------
Sept 27, 2002 Sept 28, 2001 Sept 27, 2002 Sept 28, 2001
------------- ------------- ------------- -------------
Industrial/Automotive $ 52,624 $ 48,583 $149,486 $147,681
Contractor 62,990 58,918 182,718 175,595
Lubrication 10,218 11,150 34,281 36,062
------------- ------------- ------------- -------------
Consolidated $125,832 $118,651 $366,485 $359,338
============= ============= ============= =============
Sales for the quarter in the Industrial/Automotive segment were higher than the
prior year for the first time since the second quarter of 2000. Much of the
sales growth in that segment came from the Asia Pacific region, mostly from
China. Sales in the home center channel of the Contractor segment continued to
show strong increases over the prior year, accounting for most of the
year-to-date sales increase in the Contractor segment. Sales in the Lubrication
segment continued to trail last year's sales, which included large sales to key
customers.
Sales by geographic area were as follows (in thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- ----------------------------
Sept 27, 2002 Sept 28, 2001 Sept 27, 2002 Sept 28,2001
------------- ------------- ------------- ------------
Americas $ 89,654 $ 86,513 $265,452 $262,601
Europe 21,793 20,851 64,537 62,430
Asia Pacific 14,385 11,287 36,496 34,307
------------- ------------- ------------- -------------
Consolidated $125,832 $118,651 $366,485 $359,338
============= ============= ============= =============
For the third quarter, the strengthening of the euro versus the dollar had a
favorable effect - sales in Europe increased 5 percent but would have been 5
percent lower than last year if translated at consistent exchange rates.
Year-to-date, sales in Europe increased 3 percent but would have been flat if
translated at consistent exchange rates. The year-to-date increase in Asia
Pacific sales would not be significantly different if translated at consistent
exchange rates.
Gross Profit
Price increases, changes in exchange rates and manufacturing cost improvement
activities all contributed to higher gross profit rates compared to the same
periods last year. Changes in exchange rates have less impact on the cost of
products sold than on sales because most product costs are incurred in U.S.
dollars, which had the effect of increasing gross profit rate in 2002.
Operating Expenses
Product development expenses for the quarter were up slightly from last year,
but year-to-date expenses decreased due to actions taken during 2001. Selling,
marketing and distribution expenses were higher compared to last year due in
part to increased sales incentives and marketing programs. General and
administrative expenses included a $1.4 million restructuring charge in the
third quarter of 2001. Excluding the restructuring charge, general and
administrative expenses increased compared to last year due in large part to
higher sales and earnings-based incentive accruals.
Year-to-date operations include a $.8 million pension credit related to the
Company's U.S. defined benefit pension plan, compared to a $2.5 million credit
in the same period last year. These credits resulted from recognition of
investment gains attributable to pension plan assets, and are included in cost
of products sold and operating expenses based on salaries and wages. Other
payroll related expenses including medical and workers' compensation costs have
increased in 2002 and are also included in cost of products sold and operating
expenses based on salaries and wages.
Interest Expense and Other Expense
Interest expense decreased due to reduced debt levels and interest income
(included in Other Expense) increased due to higher interest-bearing cash
balances.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations in the first nine months of 2002 resulted in a
$67 million increase in cash and cash equivalents. Accounts receivable increased
in 2002 due to extended terms on selected accounts and higher sales. In 2001,
significant uses of cash included the construction of expanded manufacturing,
warehouse and office facilities in Minneapolis, Minnesota and Sioux Falls, South
Dakota, the acquisition of ASM, and reduction of debt.
The Company had unused lines of credit available at September 27, 2002 totaling
$19 million. During the third quarter, the Company terminated its revolving
credit facility with U.S. Bank National Association as the lead bank. Cash
balances of $94 million at September 27, 2002, internally generated funds and
available credit lines provide the Company with the financial flexibility to
meet liquidity needs.
Outlook
Management expects modest growth in its served markets for the remainder of 2002
and into 2003. The Contractor Equipment segment continues to benefit from a
strong housing market in North America and the Industrial / Automotive segment
is well positioned to post higher sales and profits with a recovery in North
American capital equipment spending. While the Company continues to obtain cost
and expense savings through process improvements, year-over-year cost pressures
in areas such as insurance and pension expenses are expected to continue for the
rest of 2002 and into 2003. With all of these factors in mind, management is
planning for higher sales and improved profitability for the remainder of 2002
and in 2003. The Company continues to make substantial investments in its
strategies including introducing new products, entering new markets, expanding
distribution coverage and other initiatives that support the objective of
delivering sustained long-term profitable growth.
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.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
- ------------------------------------------------
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's President and Chief Executive Officer, Vice President and Controller,
Vice President and Treasurer, and Vice President, General Counsel and Secretary.
Based upon that evaluation, they concluded that the Company's disclosure
controls and procedures are effective in gathering, analyzing and disclosing
information needed to satisfy the Company's disclosure obligations under the
Exchange Act.
Changes in internal controls
- ----------------------------
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
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 Separation and Release Agreement between Stephen L.
Bauman and the Company dated July 25, 2002
11 Computation of Net Earnings per Common Share
99 Certification of President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.1 Certification of Vice President and Controller pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Vice President and Treasurer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(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: October 31, 2002 By: /s/David A. Roberts
-------------------------------- ---------------------------------
David A. Roberts
President and Chief Executive
Officer
Date: October 31, 2002 By: /s/James A. Graner
-------------------------------- ---------------------------------
James A. Graner
Vice President and Controller
Date: October 31, 2002 By: /s/Mark W. Sheahan
-------------------------------- ---------------------------------
Mark W. Sheahan
Vice President and Treasurer
CERTIFICATIONS
I, David A. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Graco Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared.
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 31, 2002 /s/David A. Roberts
-------------------------------- ----------------------------------
David A. Roberts
President and Chief Executive
Officer
CERTIFICATIONS
I, James A. Graner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Graco Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared.
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 31, 2002 /s/James A. Graner
-------------------------------- ----------------------------------
James A. Graner
Vice President and Controller
CERTIFICATIONS
I, Mark W. Sheahan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Graco Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared.
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 31, 2002 /s/Mark W. Sheahan
-------------------------------- ----------------------------------
Mark W. Sheahan
Vice President and Treasurer
SEPARATION AND RELEASE AGREEMENT
THIS AGREEMENT is effective the 25th day of July 2002, by and between Graco
Inc., a Minnesota corporation ("Graco"), with its principal offices at 88 11th
Ave. N.E., Minneapolis, Minnesota, 55413, and Stephen L. Bauman, an individual,
with a residence at 16817 Blenheim Way, Minnetonka, MN. 55345 ("Mr. Bauman").
WHEREAS, Mr. Bauman was employed by Graco; and
WHEREAS, the parties have agreed that Mr. Bauman has ceased to be an officer and
employee of Graco effective July 8, 2002, (the "Separation Date"), and will
complete and terminate his employment relationship with Graco in accordance with
the terms of this Agreement.
NOW, THEREFORE, it is hereby mutually agreed by and between the parties for good
and valuable consideration as follows:
1. Severance Payment
-----------------
Beginning on August 15, 2002 (but no sooner than the expiration of the 15
day waiting period specified in Section 7 below, whichever is later) on the
15th day of each of the next twelve months Graco will pay to Mr. Bauman, in
monthly installments of $13,433.33 each, the aggregate amount of $161,200,
which is equal to one year of his annual base salary immediately prior to
the Separation Date. Such payment shall be subject to tax withholding and
deductions required by law. At any time before the last installment is paid
Mr. Bauman may request that Graco pay the entire remaining amount owed,
which Graco will do on the next regular payment date.
2. Stock Options and Restricted Stock Grant
----------------------------------------
All stock options and restricted stock granted to Mr. Bauman under the
Graco Long Term Incentive Plan or Graco Stock Incentive Plan shall be
governed by the provisions of said plans and the agreements executed
between Graco and Mr. Bauman pursuant to said plans.
3. Insurance Premiums
------------------
For a period not to exceed 12 months following the Separation Date, Graco
shall, if Mr. Bauman so chooses, continue to cover Mr. Bauman under its
standard medical and dental insurance coverages for employees to the same
extent as Mr. Bauman was covered immediately prior to the Separation Date,
and Mr. Bauman shall pay to Graco, monthly by check, an amount equal to the
employee paid portion of the premium for such insurance. In the event that
Mr. Bauman has or acquires comparable insurance coverage through a new
employer or spouse coverage, Mr. Bauman shall so notify Graco and the
coverage under the Graco plans provided herein shall cease.
4. Outplacement Assistance
-----------------------
Graco shall provide an outplacement agency that may be used by Mr. Bauman
to seek other employment, for a period not to exceed one (1) year or upon
Mr. Bauman securing other employment, whichever first occurs. Said agency
shall be mutually agreed upon by Graco and Mr. Bauman, and the services
provided shall be customary for seeking employment at the level of the
position Mr. Bauman held at Graco.
5. Cooperation
-----------
For a period of three (3) years after the Separation Date, Mr. Bauman 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. Bauman for any reasonable
out-of-pocket expenses (including attorneys' fees, if necessary) incurred
by him in connection with rendering such cooperation.
6. Confidentiality
---------------
a. Mr. Bauman hereby agrees that, for a period of three (3) years after
the Separation Date, he will not, directly or indirectly, disclose any
Confidential Information, as defined in subsection (b) below, to any
other party, and will not in any way use such Confidential Information
in the course of any future employment.
b. As used herein, the term "Confidential Information" shall mean all
information which is treated as confidential or proprietary by Graco
in the normal course of its business, including, without limitation,
documents so marked, or is a trade secret of Graco, which has been
disclosed by Graco to Mr. Bauman, including, without limitation,
information relating to Graco employees, officers, directors,
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. Bauman 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. Bauman, or infor-
mation which Mr. Bauman is required to disclose in a court or other
judicial proceeding or is otherwise legally required to disclose.
c. The provisions of this Section 6 are in addition to, and not in lieu
of, the fiduciary and other duties and obligations of Mr. Bauman as an
employee and officer of Graco, and this Section 6 does not limit said
obligations in any way, by time or otherwise.
7. Release
-------
a. Except with respect to the provisions of this Agreement, Mr. Bauman
hereby releases and forever discharges Graco and its officers,
employees, agents, successors, and assigns from any and all claims,
causes of action, demands, damages, liability and responsibility
whatsoever, arising prior to the Separation Date, including without
limitation, any rights or claims for further compensation, including
without limitation any bonus payment for the year 2002, 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.
Bauman may have or assert under the common law or any state,
municipal, federal, or other statute or regulation regarding the
rights of employees generally or based on discrimination on the basis
of race, creed, gender, age, or other protected status. This Section 7
shall not affect Mr. Bauman's rights to indemnification as an officer
and employee of Graco under Graco's by-laws and applicable Minnesota
law nor any rights which he has accrued by participating in any Graco
benefit plan, subject to the provisions of this Agreement and the
terms and conditions set forth in such plan as of the Separation Date.
b. Mr. Bauman certifies, represents and agrees that:
(i) this Agreement is written in a manner that he understands;
(ii) he understands that this Section 7 specifically waives any
rights or claims he may have arising under federal, state, and
local laws prohibiting employment discrimination, such as the
Age Discrimination in Employment Act, the Minnesota Human
Rights Act, Title VII of the Civil Rights Act of 1964, the
Rehabilitation Act of 1973, the Americans with Disabilities Act
and/or any claims for damages or for injuries based on common
law theories of contract, quasi-contract or tort;
(iii) the waiver herein of rights or claims are to those which may
have arisen prior to the execution date of this Agreement.
(iv) a portion of the consideration set out in this Agreement is in
addition to compensation that he may already have been entitled
to;
(v) he has been specifically advised in writing to consult with an
attorney prior to executing this Agreement;
(vi) he has been informed that he has a period of at least twenty-
one (21) calendar days within which to consider this Agreement;
which period may be waived by him executing this Agreement;
(vii) he specifically understands that he may revoke this Agreement
for a period of at least fifteen (15) calendar days following
his execution of this Agreement, and that this Agreement is not
effective or enforceable until the fifteen (15) day revocation
period has expired;
(viii) if he decides to revoke this Agreement within said fifteen (15)
day period, he must provide written notice to the Vice
President, General Counsel and Secretary, delivered in person
or by mail. If his revocation is sent by mail, it must be post-
marked within the fifteen (15) day period, 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.
Bauman understands that Graco will have no obligation under
this Agreement if he revokes his acceptance within the time
limit specified.
(ix) Mr. Bauman expressly agrees that the waiver of his rights
pursuant to the Agreement is knowing and voluntary on his part.
8. Applicable Law
--------------
Except to the extent governed by federal law, this Agreement and any
controversies between the parties shall be governed by and construed in
accordance with the laws of the State of Minnesota.
9. Entire Agreement
----------------
This Agreement constitutes the entire agreement and understanding between
the parties with respect to the subject matter hereof, and, except as
otherwise specifically provided herein, specifically supersedes and
replaces any and all prior written or oral agreements or understandings.
This Agreement may not be amended except in a writing signed by authorized
representatives of both parties.
10. Headings
--------
The headings of the paragraphs herein are included solely for the
convenience of reference and shall not control the meaning or
interpretation of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
GRACO INC.
By: /s/David A. Roberts
-------------------------------------
DAVID A. ROBERTS
President and Chief Executive Officer
July 25, 2002
By: /s/Stephen L. Bauman
------------------------------
STEPHEN L. BAUMAN
Date: July 25, 2002
-----------------------------
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------- -----------------------
Sept 27, Sept 28, Sept 27, Sept 28,
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands except per share amounts)
Net earnings applicable to
common shareholders for basic
and diluted earnings per share $20,494 $16,760 $57,556 $48,128
Weighted average shares out-
standing for basic earnings
per share 47,604 46,662 47,376 46,262
Dilutive effect of stock options
computed using the treasury
stock method and the average
market price 682 861 804 867
Weighted average shares out-
standing for diluted earnings
per share 48,286 47,523 48,180 47,129
Basic earnings per share $ 0.43 $ 0.36 $ 1.21 $ 1.04
Diluted earnings per share $ 0.42 $ 0.35 $ 1.19 $ 1.02
Exhibit 99
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Graco Inc. (the "Company") on Form
10-Q for the period ending September 27, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, David A. Roberts,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350,
as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/David A. Roberts
- -------------------
David A. Roberts
President and Chief Executive Officer
October 31, 2002
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Graco Inc. (the "Company") on Form
10-Q for the period ending September 27, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, James A. Graner, Vice
President and Controller of the Company, certify, pursuant to 18 U.S.C. (S)
1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/James A Graner
- ----------------------
James A. Graner
Vice President and Controller
October 31, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Graco Inc. (the "Company") on Form
10-Q for the period ending September 27, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Mark W. Sheahan, Vice
President and Treasurer of the Company, certify, pursuant to 18 U.S.C. (S) 1350,
as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Mark W. Sheahan
- -----------------------
Mark W. Sheahan
Vice President and Treasurer
October 31, 2002