GRACO INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 25, 2009, or
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for
the transition period from
to
.
Commission File No. 001-09249
Graco Inc.
(Exact name of Registrant as specified in its charter)
|
Minnesota
(State or other jurisdiction of incorporation or organization) |
41-0285640
(I.R.S. Employer Identification No.) |
88 —11th Avenue Northeast
Minneapolis, MN 55413
(Address of principal executive offices) (Zip Code)
Minneapolis, MN 55413
(Address of principal executive offices) (Zip Code)
(612) 623-6000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
Shares registered on the New York Stock Exchange.
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
Shares registered on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
o
No
þ
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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data file required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Act).
Yes
o
No
þ
The aggregate market value of approximately 60,000,000 shares of common stock held by
non-affiliates of the registrant was approximately $1.3 billion as of June 26, 2009.
60,080,211 shares of common stock were outstanding as of February 8, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders to be
held on April 23, 2010, are incorporated by reference into Part III, as specifically set forth in
said Part III.
INDEX TO ANNUAL REPORT
ON FORM 10-K
ON FORM 10-K
ACCESS TO REPORTS
Investors may obtain access free of charge to the Graco Inc. annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports and
amendments to those reports by visiting the Graco website at www.graco.com. These
reports will be available as soon as reasonably practicable following electronic
filing with, or furnishing to, the Securities and Exchange Commission.
2
Table of Contents
Our Company began business as a Minneapolis, Minnesota-based manufacturer of grease guns and
lubricating pumps primarily for servicing vehicles. It was originally incorporated in the state of
South Dakota in 1926 as Gray Company, Inc. and reincorporated in the state of Minnesota in 1947.
Our Company changed its name to Graco Inc. and first offered its common stock to the public in
1969. Today we provide fluid handling solutions to customers in the manufacturing, processing,
construction and maintenance industries throughout the world.
Graco Inc. and its subsidiaries (which we refer to in this Form 10-K as “us,” “we,” “our Company”
or the “Company”) sell a full line of products in each of the following geographic markets: the
Americas (North and South America), Europe (including the Middle East and Africa), and Asia
Pacific. Sales in the Americas represent approximately 57 percent of our Company’s total sales;
sales in Europe approximately 25 percent; and sales in Asia Pacific approximately 18 percent. Part
II, Item 7,
Results of Operations
and Note B to the Consolidated Financial Statements of this Form
10-K contain financial information about these geographic areas. Our Company provides marketing,
product design and application assistance to, and employs sales personnel in, each of these
geographic markets. Subsidiaries located in Belgium, the People’s Republic of China (“P.R.C.”),
Australia, Japan, and Korea distribute our Company’s products in their local geographies. The
majority of our manufacturing occurs in the United States, but limited lines of products are
assembled in the P.R.C. and Belgium.
For more information about our Company and its products, services and solutions, visit our website
at www.graco.com. The information on the website is not part of this report nor any other report
filed or furnished to the Securities and Exchange Commission (“SEC”).
Business Segments
Our Company classifies its business into three reportable segments, each with a world-wide focus:
Industrial, Contractor and Lubrication. Financial information concerning these segments is set
forth in Part II, Item 7,
Results of Operations
and Note B to the Consolidated Financial Statements
of this Form 10-K.
The equipment developed, manufactured and distributed by our Company’s segments is broadly
described as fluid handling equipment. It is used to pump, meter, mix, dispense, and spray a wide
variety of fluids and semi-solids in a wide variety of applications in the manufacturing,
processing, construction and maintenance industries. Our Company’s products enable customers to
reduce their use of labor, material and energy, improve quality and achieve environmental
compliance. Our equipment is sold primarily through third-party distributors with approximately
30,000 outlets worldwide.
The development of technologically superior, multi-featured, high-quality products is a key
strategy of our Company. All segments have been charged with expanding our product offerings
through organic growth and targeted acquisitions. We are continually on the lookout for new
applications of our core technologies in adjacent markets. Our Company strives to generate 30
percent of its annual sales from products introduced in the prior three years. In 2009, we
generated 26 percent of our sales from new products. In 2008, the percentage of sales represented
by new products was 26 percent and in 2007 it was 21 percent. Major product development efforts
are carried out in facilities located in Minneapolis, Anoka and Rogers, Minnesota, and North
Canton, Ohio. Design and development of several limited lines of equipment occur in Suzhou, P.R.C.
The product development and engineering group in each segment focuses on new product design,
product improvements, new applications for existing products, and strategic technologies for its
specific customer base. Total product development expenditures for all segments were $38 million
in 2009, $37 million in 2008 and $30 million in 2007.
Manufacturing is a key competency of Graco. Our Company invests significant resources in
maximizing the quality, responsiveness and cost-effectiveness of our production operations by
purchasing state-of-the-art equipment and doing most machining, assembly and testing in-house.
Principal products are manufactured in focused factories and product cells. Raw materials and
purchased components are sourced from suppliers around the world. The segments manage certain
operations devoted to the manufacture of their product lines. Oversight and strategic direction of
our manufacturing resources are provided by our Vice President of Manufacturing, Information
Systems and Distribution Operations. He also manages those factories not fully aligned with a
single segment as well as our warehouses, customer service, and other shared corporate
manufacturing functions.
Our other primary objectives include the expansion of distribution outlets, the penetration of
developing markets and the successful completion of strategic acquisitions. These subjects are
discussed below in the context of each segment’s business operations.
3
Table of Contents
Our Company’s headquarters are located in a 142,000 sq. ft. facility in Minneapolis, Minnesota.
The facility is also occupied by the management, marketing and product development personnel for
the Industrial segment. Information systems, accounting services and purchasing for our Company
are housed in a 42,000 sq. ft. office building nearby.
A large percentage of our Company’s facilities are devoted to the manufacturing and distribution of
the various products offered for sale by the business segments.
Products marketed by the Industrial segment are manufactured in owned facilities in Minneapolis,
Minnesota (405,000 sq. ft. manufacturing/warehouse/office), Sioux Falls, South Dakota (149,000 sq.
ft. manufacturing/office), and North Canton, Ohio (132,000 sq. ft. manufacturing/office). Limited
lines of products are assembled in owned facilities in Suzhou, P.R.C. (79,000 sq. ft.
assembly/warehouse/office), and Maasmechelen, Belgium (175,000 sq. ft. assembly/warehouse/office).
The Maasmechelen facility also functions as the site of our European headquarters. During 2009 a
new European Training, Testing and Education Center (8,600 sq. ft.) was constructed in the
Maasmechelen facility. The Center, which opened in April, includes a classroom, hands-on training
area, demonstration spray booth, and lab space for future product testing and development. Liquid
Control Ltd. and its Wellingborough facility (12,500 sq. ft. manufacturing/office) were sold to a
Graco distributor in February 2009. The assembly of mobile spray rigs was discontinued during the
third quarter of 2009.
Products marketed by the Contractor segment are manufactured primarily in owned facilities in
Rogers, Minnesota (333,000 sq. ft. manufacturing/warehouse/office). Segment management, marketing,
engineering, customer service, warehouse, shipping, sales and training are also located at the
Rogers facility. The Company has leased space in Rogers, Minnesota to store inventory and
assemble a limited line of small electric sprayers (33,000 sq. ft. warehouse/assembly). Our Sioux
Falls, South Dakota plant manufactures spray guns and accessories for the Contractor segment. The
Company has announced that it will cease the manufacture and warehousing of Airlessco
®
-branded
sprayers and spray guns at its leased facility in Moorpark, California (32,778 sq. ft.
manufacturing/warehouse/office) and vacate the building by the end of first quarter 2010. In the
future, Airlessco products will be manufactured in existing facilities in Sioux Falls, South
Dakota, Rogers, Minnesota and Suzhou, P.R.C. and warehoused in and distributed from Sioux Falls,
South Dakota and Maasmechelen, Belgium.
The Lubrication segment conducts its manufacturing operations in an owned facility located in
Anoka, Minnesota (207,000 sq. ft. manufacturing/office). Management, marketing, engineering,
customer service, warehouse, sales and training functions for the segment are also housed in this
building. A limited line of Lubrication products is being assembled in our owned facility in
Suzhou, P.R.C. In October 2009, the Suzhou plant began distributing a hose reel designed and
assembled at the facility directly to Graco subsidiaries in Asia and in Maasmechelen, Belgium.
Some Industrial and Contractor products are distributed to the P.R.C. market out of a warehouse
located in the Waigaoqiao section of Shanghai, P.R.C. (13,730 sq. ft. warehouse). This facility
will be closed during 2010 and distribution to markets in the P.R.C. is expected to be moved to a
foreign-invested commercial enterprise located in Suzhou, P.R.C.
Our Australian subsidiary has a third-party logistics arrangement with a global supplier to handle
storage and order fulfillment for Graco products sold to Australian and New Zealand distributors.
The operations, accounting, customer service and administrative staff of the subsidiary are housed
in leased office space in Melbourne, Australia.
Industrial Segment
The Industrial segment is the largest of our Company’s businesses and represents approximately 54
percent of our total sales. This segment includes the Industrial Products and the Applied Fluid
Technologies divisions. End users of our industrial equipment require solutions to their
manufacturing and maintenance challenges and are driven by the return on investment that our
products provide. The Industrial Products division markets its equipment and services to customers
who manufacture, assemble, maintain, repair and refinish products such as appliances, vehicles,
airplanes, electronics, cabinets and furniture, and other articles. In addition to marketing its
equipment to customers in similar industries, the Applied Fluid Technology division also sells to
contractors who use its plural component systems to apply foam insulation and protective coatings
to buildings and other structures such as ships and bridges.
Most Industrial segment equipment is sold worldwide through general and specialized third-party
distributors, integrators, design centers and original equipment manufacturers. We also work with
material suppliers to develop or adapt our equipment for use with specialized and hard-to-handle
materials. Distributors promote and sell the equipment, hold inventory, provide product
application expertise and offer on-site service, technical support and integration capabilities.
Integrators implement large individual installations in manufacturing plants where products and
services from a number of different vendors are aggregated into a single system. Design centers
engineer systems for their customers using our products. Original equipment
manufacturers incorporate our Company’s Industrial segment products into systems and assemblies
that they then supply to their customers.
4
Table of Contents
Industrial Products
The Industrial Products division focuses its product development and sales efforts on two main
product applications: equipment to apply paint and other coatings to products such as motor
vehicles, appliances, furniture and other industrial and consumer products (“Liquid Finishing”);
and equipment to move and dispense chemicals and liquid and semi-solid foods (“Process Pumps”).
Liquid finishing equipment includes paint circulating and paint supply pumps, plural component
coating proportioners, various accessories to filter, transport, agitate and regulate the fluid,
spare parts such as spray tips, seals and filter screens. We also offer a variety of applicators
that use different methods of atomizing and spraying the paint or other coating depending on the
viscosity of the fluid, the type of finish desired, and the need to maximize transfer efficiency,
minimize overspray and prevent the release of volatile organic compounds (VOCs) into the air.
Liquid finishing equipment is used in the automotive, automotive feeder, truck/bus/recreational
vehicle, military and utility vehicle, aerospace, farm and construction, wood and general metals
industries. Graco introduced a new family of electronic proportioners in 2009 with modular
components that can be configured in many different ways. ProMix
®
2KS offers precise and reliable
electronic proportioning for a broad range of solventborne and waterborne epoxies, polyurethanes
and acid catalyzed materials. These versatile machines are available in manual and automatic
configurations and provide the highest degree of ratio assurance, multiple sequential dose sizes,
process feedback and material tracking and reporting capabilities.
Our process pumps are used in food and beverage, dairy, pharmaceutical, cosmetic, oil and gas,
electronics, waste water, mining and ceramics applications. We offer double diaphragm and piston
transfer pumps to the chemical, petroleum, general manufacturing and food processing industries,
pumps for sanitary applications including FDA-compliant 3-A sanitary pumps for use in dairies,
diaphragm pumps, transfer pumps and drum and bin unloaders. The first in a new series of
air-operated double diaphragm pumps, the Husky™ 1050 one-inch pump, is significantly more efficient
than competitive product, has diaphragms that last significantly longer and is capable of
delivering higher fluid flow. The Husky 1050 is currently available in aluminum, polypropylene and
stainless steel and will be available in PVDF, conductive polypropylene and hastelloy shortly,
allowing the pump to be used with a wide variety of different fluids and chemicals. The pump has a
one-piece ungasketed center section for easier repair and maintenance and a modular air valve for
smooth changeover.
Applied Fluid Technologies
The Applied Fluid Technologies division directs its engineering, sales and marketing efforts toward
two broad product applications: equipment to apply high performance protective coatings and foam
(“Protective Coatings and Foam”) and equipment to apply sealants and adhesives and create molded
polyurethane parts (“Advanced Fluid Dispense”).
Our Company offers a full line of air-operated airless sprayers and plural component proportioning
equipment to apply foam and protective coatings to a wide variety of surfaces. The Reactor
®
line
of plural components pumps is used to apply foam to insulate walls, water heaters, refrigeration,
and hot tubs, create commercial roofing membranes and for packaging, architectural design and
cavity filling. Reactors also apply polyurea to cover tanks, pipes, roofs, truck beds and
foundations with protective coatings and linings where accurate temperatures and pressures are
required to achieve optimal results. Key distributors install Reactors in mobile spray rigs to
provide portability and accessibility to remote job sites. In June 2009 the Company released the
XM Series high-solids plural-component sprayers for corrosion-control applications such as tank and
pipeline coatings, shipbuilding, marine and railcar maintenance, wind tower coating, bridge and
infrastructure projects and coating structural steel. The XM sprayers provide precise ratio
control in a highly configurable system. User controls provide a real-time display of ratio and a
USB port for downloading data on spray pressures, temperatures, actual ratio and total flow output.
To the base unit, customers can add accessories, including material hoppers, hopper heaters,
transfer pumps, agitators, hose rack kits and casters, depending on the material used and the
application method.
Our Company offers a complete line of pumps, meters, applicators and valves for the metering,
mixing and dispensing of precision beads of sealant and adhesive to bond, mold, seal, vacuum
encapsulate, pot, laminate and gasket parts and devices in a wide variety of industrial
applications, including the electronics and automotive industries. The PR70 and the PR70v, a
variable ratio version of the PR70, are the first meter, mix and dispense plural component systems
having Graco Control Architecture™ with built-in diagnostics and multiple levels of user interface
for providing more data to the end-user.
5
Table of Contents
The Company has established an application development laboratory in our North Canton, Ohio
facility where we work with distributors, materials suppliers and end users to test new materials
and reconfigure existing equipment for use in new applications. The lab has data collection and
reporting capabilities and can heat, remove air from resins through vacuum degassing, agitate and
bulk transfer materials in preparation for testing.
In October 2009, the PCF metering and dispense system for sealants and adhesives was released. The
PCF dispenses a precise, continuous flow of a wide variety of single-component sealants and
adhesives in automotive and industrial applications. The beads, dots and spray pattern dispensed
by this system are smooth and consistent because of a closed-loop technology that allows changes in
material temperatures, viscosities, dispense rates or robot speeds to feed back to the control,
resulting in decreased material usage and rework.
Graco entered the composites market with the acquisition of GlasCraft Inc. in 2008. In 2009, Graco
focused design and marketing effort on the growing demand for high-performance composites which are
used in the manufacture of vehicles and aircraft, wind turbines and bridge materials.
High-performance composites are light-weight, corrosion-resistant, strong, structurally simple and
have an extended life. Graco equipment moves, dispenses, and applies fluids in all phases of
composites manufacturing from precision flow control and resin pumping for blending to continuous
meter-mix supply, from molding processes and tooling fabrication to assembly processes and
manufacturing products with carbon fiber impregnated fabric.
There are a variety of applications for Graco equipment throughout the alternative energy markets.
Graco’s sealant and adhesive application equipment is widely used by manufacturers and material
suppliers serving the solar energy market, through the application of primary and secondary seals
to solar panels, potting or encapsulating junction boxes, inverters and charge controllers,
gasketing or sealing junction box lids, solar module frames, battery cell plates and battery lids,
thermal management of solar cells, inverters and charge controllers and the bonding of solar cells
and solar mirrors. In addition, we offer durable reliable fluid-handling systems for the
manufacture and maintenance of wind power components from spraying protective foam and other
coatings on wind turbine towers to the manufacture of rotor blades, from the automatic lubrication
of bearings, gears, and generators to the evacuation and dispensing of oil, grease, anti-freeze and
hydraulic fluids. Our equipment is used worldwide by wind turbine manufacturers to supply a
catalyzed plastic resin for the formation of the blades used on turbines and to apply an adhesive
for cementing parts of the blades together.
Contractor Segment
The Contractor segment generated approximately 36 percent of our Company’s 2009 total sales. The
Contractor segment directs its product development, sales and marketing efforts toward three broad
applications: paint, texture, and pavement marking. This segment markets a complete line of
airless paint and texture sprayers (air, gas, hydraulically- and electrically-powered), accessories
such as spray guns, hoses and filters and spare parts such as tips and seals, to professional and
semi-professional painters in the construction and maintenance industries. The products are
distributed primarily through stores whose main products are paint and other coatings. Contractor
products are also sold through general equipment distributors. Airlessco
®
and ASM
®
products are
sold by Graco employees and independent sales representatives to a distribution network that
includes paint stores, wholesalers and rental yards. A limited line of sprayers and accessories
are distributed globally through the home center channel.
Contractor equipment encompasses a wide variety of sprayers, including sprayers that apply markings
on roads, parking lots, fields and floors; texture to walls and ceilings; highly viscous coatings
to roofs; and paint to walls and structures. Many of these sprayers and their accessories contain
one or more advanced technological features such as micro-processor-based controls for consistent
spray and protective shut-down, a pump that may be removed and re-installed without tools, an easy
clean feature, gas/electric convertibility, and a durable pump finish. Continual technological
innovation and broad product families with multiple offerings are characteristic of our Contractor
segment. Painters are encouraged to upgrade their equipment regularly to take advantage of the new
and/or more advanced features.
During 2009, the Tradeworks™ line of small electric sprayers for do-it-yourself home owners,
handymen, remodelers and rental property owners was extended with the addition of several new
sprayers. The Tradeworks sprayers, spray guns and accessories are offered exclusively through a
world leader in the manufacture and sale of coatings and related products to professional,
commercial and retail customers. After a successful test program in 2008, we extended our
placement of a line of electric paint sprayers in a large number of the stores of a major home
center chain in the United States. Our Airlessco line of spray equipment is used by a major home
center chain as its primary tool rental offering.
In August 2009, we introduced the ThermoLazer™ an innovative striper that applies thermoplastic
lines to pavement. The ThermoLazer can be connected to a Graco LineDriver™ for ride-on comfort,
ease of handling, improved quality and increased
6
Table of Contents
productivity. The unit, an advancement over thermoplastic stripers currently on the market, offers
precise material flow control with the pull of a lever, a more efficient method of mixing the
material, an electronic ignition system, a quick system for line width changes and a system for
protecting the springs.
A new portable sprayer for the application of a wide range of texture materials in addition to
paint — from thick concrete-based filler to finish coat — was introduced during 2009. The
TexSpray™ HXT™ 2030 features an interchangeable displacement pump system that allows users to
alternate between a high-output piston pump for the heavy aggregate and a smaller pump for the
finer materials, paint and primer.
A large percentage of our Contractor sales come from the North American market, although Contractor
products are marketed and sold in all major geographic areas. In recent years, the segment has
increased its effort to appeal to customers outside of North America by developing products
specifically for these markets, like the TexSpray HXT 2030 texture sprayer designed for
applications in countries where the use of concrete in residential construction is more prevalent.
Another product with a marketing focus outside of the United States is the Ultra
®
Max II Platinum
sprayer introduced in Europe during 2009. The Platinum has an integrated hose reel, a wireless
pressure remote control (E-Control™) to adjust pressure at any time without having to approach the
unit, and the E-Lock™ mechanism to deter theft by electronically locking the sprayer.
In Europe and Asia Pacific, we are pursuing a broad strategy of converting contractors accustomed
to the manual application of paint and other coatings by brush and roller to spray technology.
This requires extensive in-person demonstration of the productivity advantages, cost savings and
finish quality of our spray equipment. This also requires the conversion of local paint
distributors who may have a different method of selling their product. For example, in the P.R.C.
some paint companies include spray application in the price they charge for their paint.
Lubrication Segment
The Lubrication segment represented approximately 10 percent of our Company’s sales during 2009.
The Lubrication segment focuses its engineering, marketing and sales efforts on two main
lubrication markets: vehicle services and industrial. We supply pumps, applicators and
accessories, such as meters and hose reels, to the motor vehicle lubrication market where our
customers include fast oil change facilities, service garages, fleet service centers, automobile
dealerships, and auto parts stores. In the industrial lubrication market, we offer systems for the
automatic lubrication of factory machine tools, compressors and pumps used in petrochemical and gas
transmissions plants; bearings and gears on equipment in metal, pulp and paper mills; conveyors and
material handling equipment; and off-road and over-the-road trucks. We are also developing
products for the wind power market, offering automatic lubrication systems for the lubrication of
turbines on site and factory-based lubrication dispense equipment to transfer, unload and evacuate
bulk oil and grease and meter and dispense various lubricants. Our lubrication products are sold
through independent third party distributors, oil jobbers and directly to original equipment
manufacturers.
The Company expects that LubeSci™ automated lubrication systems and components, injectors and
metering systems will be fully integrated into our industrial lubrication equipment business by the
end of the first half of 2010.
Our Company introduced a new line of hose reels in 2009, ranging from entry-level for standard duty
applications to high performance for heavy-duty jobs. These reels can handle a wide variety of
fluids including air, water, anti-freeze, windshield washer fluid, petroleum- and synthetic-based
oils and grease. The LD Series Enclosed reel was designed by engineers in our Asia Pacific group
for light-duty applications and is being manufactured in our factory in Suzhou, P.R.C. The spring
tension on this reel is easy to adjust and the reel is compact, lightweight, easy to install and
enclosed in a polypropylene enclosure for operator safety and protection from dirty environments.
The SD Series Composite reel, which can tolerate moderate indoor and outdoor use, features a
composite spool and is designed to fit in small indoor spaces in tire/muffler shops, small fast
lubes and maintenance shops.
The GLC 4400, a multi-purpose controller for the pumps used in automatic lubrication systems, was
released for sale in June 2009. The GLC 4400 is versatile and works with all major automatic
metering systems: single line resistive, single line parallel, series progressive and dual line
systems. The lubrication time, pressure, cycle and machine counts of the lubrication cycle can be
easily customized.
The segment is responsible for world-wide marketing and sales of our lubrication equipment,
although the bulk of its sales come from North America. Products are distributed in each of our
Company’s major geographic markets, primarily through independent distributors serviced by
independent sales representatives, a dedicated sales force in the automatic lubrication systems
market and direct sales generalists in foreign markets. Some automatic lubrication systems are
marketed to original equipment manufacturers (“OEM“s). Fuel and oil transfer pumps are marketed
through OEMs, select home centers, auto parts stores and our traditional distribution channel.
Beginning in 2009, a market development specialist was added to the
lubrication sales team in Europe to locate new customers and help establish product development and
marketing plans for the Company’s lubrication equipment in this geography.
7
Table of Contents
Raw Materials
The primary materials and components used in the manufacturing process are steel of various alloys,
sizes and hardness; specialty stainless steel and aluminum bar stock, tubing and castings; tungsten
carbide; electric motors; injection molded plastics; sheet metal; forgings; powdered metal; hoses;
and electronic components. In general, the raw materials and components used are adequately
available through multiple sources of supply. In order to manage cost, our Company continues to
increase its global sourcing of materials and components, primarily in the Asia Pacific region.
During 2009, our Company was able to take advantage of a downturn in the price of some commodities,
like aluminum, nickel, copper, steel and natural gas, that occurred at the end of 2008. Nickel,
copper and aluminum experienced significant price increases over the course of 2009. The price of
oil is expected to continue putting pressure on the cost of transportation and the price of all
commodities was trending upward at the end of the year. In the tough economic conditions existing
during much of 2009, a small number of our first and second tier suppliers entered bankruptcy or
closed facilities. Our Company endeavors to address fluctuations in the price and availability of
various materials and components through adjustable surcharges and credits, close management of
current suppliers, agreements and an intensive search for new suppliers. We have performed risk
assessments of our key suppliers and are factoring the risks identified into our commodity plans.
Intellectual Property
We own a number of patents and have patent applications pending both in the United States and in
other countries, license our patents to others, and are a licensee of patents owned by others. In
our opinion, our business is not materially dependent upon any one or more of these patents or
licenses. Our Company also owns a number of trademarks in the United States and foreign countries,
including registered trademarks for “GRACO,” several forms of a capital “G,” “Airlessco,” “ASM,”
and various product trademarks which are material to our business, inasmuch as they identify Graco
and our products to our customers.
Competition
We face substantial competition in all of our markets. The nature and extent of this competition
varies in different markets due to the depth and breadth of our Company’s product lines. Product
quality, reliability, design, customer support and service, personal relationships, specialized
engineering and pricing are the major competitive factors in our markets. Although no competitor
duplicates all of our products, some competitors are larger than our Company, both in terms of
sales of directly competing products and in terms of total sales and financial resources. We also
face competitors with different cost structures and expectations of profitability and these
companies offer competitive products at lower prices. We believe we are one of the world’s leading
producers of high-quality specialized fluid handling equipment in the markets we serve.
Environmental Protection
Our compliance with federal, state and local environmental laws and regulations did not have a
material effect upon our capital expenditures, earnings or competitive position during the fiscal
year ended December 25, 2009.
Employees
As of December 25, 2009, we employed approximately 2050 persons. Of this total, approximately 420
were employees based outside the United States, and 730 were hourly factory workers in the United
States. None of our Company’s U.S. employees are covered by a collective bargaining agreement.
Various national industry-wide labor agreements apply to certain employees in various countries
outside the United States. Compliance with such agreements has no material effect on our Company
or its operations. In an effort to adapt to the difficult economic environment during the first
half of 2009, we implemented several reductions in force in our US businesses. Many of our factory
and warehouse employees affected by these reductions had returned to work by year end.
8
Table of Contents
Economic Environment — Demand for our products depends on the level of commercial and industrial
activity worldwide.
The current economic downturn and financial market turmoil has depressed demand for our equipment
in all major geographies and in all major markets. If our distributors and OEMs remain unable to
purchase our products because of unavailable credit or unfavorable credit terms or are simply
unwilling to purchase our products, our net sales and earnings will be adversely affected.
Major Customers — Our Contractor segment depends on a few large customers for a significant
portion of its sales. Significant declines in the level of purchases by these customers could
reduce our sales.
Our Contractor segment derives a significant amount of revenue from a few large customers.
Substantial decreases in purchases by these customers, difficulty in collecting amounts due or the
loss of their business would adversely affect the profitability of this segment. The business of
these customers is dependent upon the economic vitality of the construction and home maintenance
markets. If these markets decline, the business of our customers could be adversely affected and
their purchases of our equipment could decrease.
Acquisitions — Our growth strategy includes acquisitions. Suitable acquisitions must be located,
completed and effectively integrated into our existing businesses in order for this strategy to be
successful.
We have identified acquisitions as one of the strategies by which we intend to grow our business.
If we are unable to obtain financing at a reasonable cost, are unsuccessful in acquiring and
integrating businesses into our current business model, or do not realize projected efficiencies
and cost-savings from the businesses we acquire, we may be unable to meet our growth or profit
objectives.
Foreign Operations — Conditions in foreign countries and changes in foreign exchange rates may
impact our sales volume, rate of growth or profitability.
In 2009, approximately 52 percent of our sales was generated by customers located outside the
United States. Sales to customers located outside the United States expose us to special risks,
including the risk of terrorist activities, civil disturbances, environmental catastrophes, supply
chain disruptions, and special taxes, regulations and restrictions. We are increasing our presence
in Asia Pacific, South America, Eastern Europe and the Middle East and our revenues and net income
may be adversely affected by the more volatile economic and political conditions prevalent in these
regions. We assemble limited lines of products at our factory in Suzhou, P.R.C. and source an
increasing number of the components and materials used in the assembly process from the local
market. Changes in exchange rates between the U.S. dollar and other currencies will impact our
reported sales and earnings and may make it difficult for some of our distributors to purchase
products.
Foreign Suppliers — Our Company has increased its sourcing of raw materials and components from
vendors located outside the United States. Interruption or delays in delivery may adversely affect
our profitability.
We are sourcing an increasing percentage of our materials and components from suppliers outside the
United States. Long lead times may reduce our flexibility and make it more difficult to respond
promptly to fluctuations in demand or respond quickly to product quality problems. Changes in
exchange rates between the U.S. dollar and other currencies and fluctuations in the price of oil
may impact the manufacturing costs of our products and affect our profitability. Protective
tariffs may make certain foreign-sourced parts no longer competitively priced. Long supply chains
may be disrupted by environmental events.
Natural Disasters — Our operations are at risk of damage or destruction by natural disasters, such
as earthquakes, tornadoes or unusually heavy precipitation.
The loss of, or substantial damage to, one of our facilities could make it difficult to supply our
customers with product and provide our employees with work. Our manufacturing and distribution
facility in Minneapolis is on the banks of the Mississippi River where it is exposed to flooding.
Flooding could also damage our European headquarters and warehouse in Maasmechelen, Belgium or our
factory in Suzhou, P.R.C. Tornadoes could damage or destroy our facilities in Sioux Falls, Rogers,
Minneapolis or Anoka and a typhoon could do the same to our facility in Suzhou. An earthquake may
adversely impact our operations in Suzhou.
9
Table of Contents
Competition — Demand for our products may be affected by new entrants who copy our products and
infringe on our intellectual property
From time to time, our Company has been faced with instances where competitors have intentionally
infringed our intellectual property and/or taken advantage of our design and development efforts.
In some instances, these competitors have launched broad marketing campaigns. The inability of our
Company to effectively meet these challenges could adversely affect our revenues and profits and
hamper our ability to grow.
None.
The information concerning the location and general character of the physical properties of our
Company contained under the heading “BUSINESS-Business Segments” in Part I of this 2009 Annual
Report on Form 10-K is incorporated herein by reference.
Sales activities in the country of Japan are conducted out of a leased facility in Yokohama, Japan
(18,500 gross sq. ft. office) and warehousing is provided by a third-party logistics supplier.
Sales and distribution activities in Korea are provided out of leased facilities in Gwangju-Gun,
Korea (15,750 sq. ft. total for two separate facilities-warehouse and office). Our Company also
leases space for liaison offices in the P.R.C., Vietnam and India.
Our Company’s facilities are in satisfactory condition, suitable for their respective uses and are
generally adequate to meet current needs. During 2009, manufacturing capacity met business demand.
Production requirements in the immediate future are expected to be met through existing
facilities, the installation of new automatic and semi-automatic machine tools, efficiency and
productivity improvements, the use of leased space and available subcontract services.
Our Company is engaged in routine litigation incident to our business, which management believes
will not have a material adverse effect upon our operations or consolidated financial position.
No issues were submitted to a vote of security holders during the fourth quarter of 2009.
Executive Officers of Our Company
The following are all the executive officers of Graco Inc. as of February 15, 2009:
Patrick J. McHale, 48,
is President and Chief Executive Officer, a position he has held since June
2007. He served as Vice President and General Manager, Lubrication Equipment Division from June
2003 to June 2007. He was Vice President of Manufacturing and Distribution Operations from April
2001 to June 2003. He served as Vice President, Contractor Equipment Division from February 2000
to March 2001. Prior to becoming Vice President, Lubrication Equipment Division in September 1999,
he held various manufacturing management positions in Minneapolis, Minnesota; Plymouth, Michigan;
and Sioux Falls, South Dakota. Mr. McHale joined the Company in December 1989.
David M. Ahlers, 51
, became Vice President, Human Resources in September 2008. Prior to joining
Graco, Mr. Ahlers held various human resources positions, including, most recently, Chief Human
Resources Officer and Senior Managing Director of GMAC Residential Capital, from August 2003 to
August 2008. He joined the Company in September 2008.
Caroline M. Chambers, 45,
became Vice President and Controller in December 2006 and has served as
the Company’s principal accounting officer since September 2007. She was Corporate Controller from
October 2005 to December 2006 and Director of Information Systems from July 2003 through September
2005. Prior to becoming Director of Information Systems, she held various management positions in
the internal audit and accounting departments. Prior to joining Graco, Ms. Chambers was an auditor
with Deloitte & Touche in Minneapolis, Minnesota and Paris, France. Ms. Chambers joined the
Company in 1992.
10
Table of Contents
Karen Park Gallivan, 53
, became Vice President, General Counsel and Secretary in September 2005.
She was Vice President, Human Resources from January 2003 to September 2005. Prior to joining
Graco, she was Vice President of Human Resources and Communications at Syngenta Seeds, Inc., from
January 1999 to January 2003. From 1988 through January 1999, she was the general counsel of
Novartis Nutrition Corporation. Prior to joining Novartis, Ms. Gallivan was an attorney with the
law firm of Rider, Bennett, Egan and Arundel. She joined the Company in January 2003.
James A. Graner, 65,
became Chief Financial Officer and Treasurer in September 2005. He was Vice
President and Controller from March 1994 to September 2005. He was Treasurer from May 1993 through
February 1994. Prior to becoming Treasurer, he held various managerial positions in the treasury,
accounting and information systems departments. He joined the Company in 1974.
Dale D. Johnson, 55,
became Vice President and General Manager, Contractor Equipment Division in
April 2001. From January 2000, through March 2001, he served as President and Chief Operating
Officer. From December 1996 to January 2000, he was Vice President, Contractor Equipment Division.
Prior to becoming the Director of Marketing, Contractor Equipment Division, in June 1996, he held
various marketing and sales positions in the Contractor Equipment Division and the Industrial
Equipment Division. He joined the Company in 1976.
Jeffrey P. Johnson
,
50
, is Vice President and General Manager, Asia Pacific, a position he has held
since February 2008. He served as Director of Sales and Marketing, Applied Fluid Technologies
Division, from June 2006 until February 2008. Prior to joining Graco, he held various sales and
marketing positions, including, most recently, President of Johnson Krumwiede Roads, a full-service
advertising agency, and European sales manager at General Motors Corp. He joined the Company in
2006.
David M. Lowe, 54,
became Vice President and General Manager, Industrial Products Division in
February 2005. He was Vice President and General Manager, European Operations from September 1999
to February 2005. Prior to becoming Vice President, Lubrication Equipment Division in December
1996, he was Treasurer. Mr. Lowe joined the Company in February 1995.
Simon J. W. Paulis, 62,
became Vice President and General Manager, Europe in September 2005. From
February 2005 to September 2005, he served as Director and General Manager, Europe. He served as
Sales and Marketing Director, Contractor Equipment Europe from January 1999 to September 2005.
Prior to joining Graco, he served as business unit manager for Black & Decker N.V., general sales
manager for Alberto Culver, and marketing manager for Ralston Purina/Quaker Oats. Mr. Paulis
joined the Company in January 1999.
Charles L. Rescorla, 58,
became Vice President of Manufacturing, Information Systems and
Distribution Operations in April 2009. He served as Vice President, Manufacturing and
Distribution Operations from September 2005 to April 2009. From June 2003 to until September 2005,
he was Vice President, Manufacturing/Distribution Operations and Information Systems. From April
2001 until June 2003, he was Vice President of the Industrial/Automotive Equipment Division. Prior
to June 2003, he held various positions in manufacturing and engineering management. Mr. Rescorla
joined the Company in June 1988.
Mark W. Sheahan
,
45
, became Vice President and General Manager, Applied Fluid Technologies Division
in February 2008. He served as Chief Administrative Officer from September 2005 until February
2008, and was Vice President and Treasurer from December 1998 to September 2005. Prior to becoming
Treasurer in December 1996, he was Manager, Treasury Services, where he was responsible for
strategic and financial activities. He joined the Company in September 1995.
Brian J. Zumbolo, 40,
became Vice President and General Manager, Lubrication Equipment Division in
August 2007. He was Director of Sales and Marketing, Lubrication Equipment and Applied Fluid
Technologies, Asia Pacific, from November 2006 through July 2007. From February 2005 to November
2006, he was the Director of Sales and Marketing, High Performance Coatings & Foam, Applied Fluid
Technologies Division. Mr. Zumbolo was the Director of Sales and Marketing, Finishing Equipment
from May 2004 to February 2005. Prior to May 2004, he held various marketing positions in the
Industrial Equipment Division. Mr. Zumbolo joined the Company in 1999.
The Board of Directors re-elected each of the above executive officers to their current
position on April 24, 2009.
11
Table of Contents
Graco Common Stock
Graco common stock is traded on the New York Stock Exchange under the ticker symbol “GGG.” As of
February 8, 2010, the share price was $26.38 and there were 60,080,211 shares outstanding and 2,845
common shareholders of record, which includes nominees or broker dealers holding stock on behalf of
an estimated 43,000 beneficial owners.
The graph below compares the cumulative total shareholder return on the common stock of the Company
for the last five fiscal years with the cumulative total return of the S&P 500 Index and the Dow
Jones Industrial Machinery Index over the same period (assuming the value of the investment in
Graco common stock and each index was $100 on December 31, 2003, and all dividends were
reinvested).
12
Table of Contents
Quarterly Financial Information (Unaudited)
(In thousands, except per share amounts)
(In thousands, except per share amounts)
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
2009
|
||||||||||||||||
|
Net sales
|
$ | 137,880 | $ | 147,712 | $ | 147,308 | $ | 146,312 | ||||||||
|
Gross profit
|
64,328 | 73,008 | 78,141 | 77,339 | ||||||||||||
|
Net earnings
|
2,768 | 11,634 | 17,336 | 17,229 | ||||||||||||
|
|
||||||||||||||||
|
Per common share
|
||||||||||||||||
|
Basic net earnings
|
$ | 0.05 | $ | 0.19 | $ | 0.29 | $ | 0.29 | ||||||||
|
Diluted net earnings
|
0.05 | 0.19 | 0.29 | 0.28 | ||||||||||||
|
Dividends declared
|
0.19 | 0.19 | 0.19 | 0.20 | ||||||||||||
|
|
||||||||||||||||
|
Stock price (per share)
|
||||||||||||||||
|
High
|
$ | 25.98 | $ | 24.82 | $ | 30.66 | $ | 30.70 | ||||||||
|
Low
|
14.48 | 17.34 | 20.91 | 26.41 | ||||||||||||
|
Close
1
|
17.07 | 22.02 | 27.87 | 28.57 | ||||||||||||
|
|
||||||||||||||||
|
Volume (# of shares)
|
44,750 | 44,217 | 29,086 | 22,551 | ||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
2008
|
||||||||||||||||
|
Net sales
|
$ | 204,120 | $ | 239,230 | $ | 207,231 | $ | 166,689 | ||||||||
|
Gross profit
|
111,853 | 128,763 | 110,160 | 81,401 | ||||||||||||
|
Net earnings
|
35,566 | 42,459 | 32,772 | 10,082 | ||||||||||||
|
|
||||||||||||||||
|
Per common share
|
||||||||||||||||
|
Basic net earnings
|
$ | 0.58 | $ | 0.70 | $ | 0.55 | $ | 0.17 | ||||||||
|
Diluted net earnings
|
0.57 | 0.69 | 0.54 | 0.17 | ||||||||||||
|
Dividends declared
|
0.19 | 0.19 | 0.19 | 0.19 | ||||||||||||
|
|
||||||||||||||||
|
Stock price (per share)
|
||||||||||||||||
|
High
|
$ | 36.98 | $ | 41.84 | $ | 40.45 | $ | 35.03 | ||||||||
|
Low
|
32.37 | 36.88 | 34.48 | 17.67 | ||||||||||||
|
Close
1
|
36.26 | 38.07 | 35.61 | 23.73 | ||||||||||||
|
|
||||||||||||||||
|
Volume (# of shares)
|
33,416 | 30,260 | 39,776 | 52,431 | ||||||||||||
| 1 | As of the last trading day of the calendar quarter. |
13
Table of Contents
Issuer Purchases of Equity Securities
On September 28, 2007, the Board of Directors authorized the Company to purchase up to
7,000,000 shares of its outstanding common stock, primarily through open-market transactions.
This authorization expired on September 30, 2009.
On September 18, 2009, the Board of Directors authorized the Company to purchase up to an
additional 6,000,000 shares. The new authorization expires on September 30, 2012.
In addition to shares purchased under the Board authorization, the Company purchases shares of
common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax
withholding on stock option exercises.
Information on issuer purchases of equity securities follows:
| Maximum Number | ||||||||||||||||
| Total Number of | of Shares that May | |||||||||||||||
| Total | Average | Shares Purchased | Yet Be Purchased | |||||||||||||
| Number | Price | as Part of Publicly | Under the Plans | |||||||||||||
| of Shares | Paid per | Announced Plans | or Programs | |||||||||||||
| Period | Purchased | Share | or Programs | (at end of period) | ||||||||||||
|
Sep 26, 2009 - Oct 23, 2009
|
— | $ | — | — | 6,000,000 | |||||||||||
|
Oct 24, 2009 - Nov 20, 2009
|
— | $ | — | — | 6,000,000 | |||||||||||
|
Nov 21, 2009 - Dec 25, 2009
|
1,121 | $ | 28.17 | — | 6,000,000 | |||||||||||
Graco Inc. and Subsidiaries (in thousands, except per share amounts)
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Net sales
|
$ | 579,212 | $ | 817,270 | $ | 841,339 | $ | 816,468 | $ | 731,702 | ||||||||||
|
Net earnings
|
48,967 | 120,879 | 152,836 | 149,766 | 125,854 | |||||||||||||||
|
Per common share
|
||||||||||||||||||||
|
Basic net earnings
|
$ | 0.82 | $ | 2.01 | $ | 2.35 | $ | 2.21 | $ | 1.83 | ||||||||||
|
Diluted net earnings
|
0.81 | 1.99 | 2.32 | 2.17 | 1.80 | |||||||||||||||
|
Cash dividends declared
|
0.77 | 0.75 | 0.68 | 0.60 | 0.54 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 476,434 | $ | 579,850 | $ | 536,724 | $ | 511,603 | $ | 445,630 | ||||||||||
|
Long-term debt (including current
portion)
|
86,260 | 180,000 | 107,060 | — | — | |||||||||||||||
14
Table of Contents
The following Management’s Discussion and Analysis reviews significant factors affecting the
Company’s consolidated results of operations, financial condition and liquidity. This discussion
should be read in conjunction with our financial statements and the accompanying notes to the
financial statements. The discussion is organized in the following sections:
| • | Overview | ||
| • | Results of Operations | ||
| • | Segment Results | ||
| • | Financial Condition | ||
| • | Critical Accounting Estimates | ||
| • | Outlook |
Overview
Graco designs, manufactures and markets systems and equipment to move, measure, control, dispense
and spray fluid materials used in many different applications. Graco’s business is classified by
management into three reportable segments, each responsible for product development, manufacturing,
marketing and sales of their products. The segments are headquartered in North America. They have
responsibility for sales and marketing in the Americas and joint responsibility with Europe and
Asia Pacific regional management for sales and marketing in those geographic areas.
Graco’s key strategies include development and marketing new products, expanding distribution
globally, opening new markets with technology and channel expansion and completing strategic
acquisitions. Long-term financial growth targets accompany these strategies, including 10 percent
revenue growth and 12 percent net earnings growth.
Manufacturing is a key competency of the Company. Our management team in Minneapolis provides
strategic manufacturing expertise, and is also responsible for factories not fully aligned with a
single division. Our primary manufacturing facilities are in the United States and distribution
facilities are located in the United States, Belgium, Japan, Korea, China and Australia.
Results of Operations
Net sales, net earnings and earnings per share were as follows (in millions except per share
amounts):
| 2009 | 2008 | 2007 | ||||||||||
|
Net Sales
|
$ | 579 | $ | 817 | $ | 841 | ||||||
|
Operating Earnings
|
74 | 187 | 232 | |||||||||
|
Net Earnings
|
49 | 121 | 153 | |||||||||
|
Diluted Net Earnings per Common Share
|
$ | 0.81 | $ | 1.99 | $ | 2.32 | ||||||
2009 Summary:
| • | Weak economic conditions worldwide affected the Company’s operating results. Although sales strengthened in the second half as compared to the first half of 2009, sales decreased in all segments and regions as compared to last year. By region, the sales decline was 28 percent in the Americas, 39 percent in Europe and 17 percent in Asia Pacific. Sales in the Industrial segment declined by 32 percent; sales in the Contractor segment declined by 22 percent and sales in the Lubrication segment declined by 34 percent. | ||
| • | Unfavorable currency translation decreased net sales by approximately $10 million and decreased net earnings by approximately $4 million in 2009. | ||
| • | The Company incurred $5 million of cost related to workforce reductions, mostly in the first quarter. The decrease in cost structure resulting from cost reduction actions contributed to improvements in net earnings in the last three quarters of the year. | ||
| • | Gross profit margin as a percentage of sales decreased by 2 percentage points from 2008. The favorable effects of pricing, product mix, lower material costs and other cost reduction activities partially offset the effects of low production volumes and increased pension costs. | ||
| • | Investment in new product development was $38 million or 6 1 / 2 percent of sales in 2009. | ||
| • | Overall, total operating expenses were 11 percent lower than the prior year, due to lower workforce reduction costs and lower volume-related expenses. Expense reductions were partially offset by higher pension costs. |
15
Table of Contents
| • | The effective tax rate was 29 percent as compared to 32 percent in 2008. The effect of federal business credits and the domestic production deduction was greater in 2009 as a percentage of pre-tax earnings as compared to the prior year. | ||
| • | Cash flows from operations remained strong at $147 million. |
2008 Summary:
| • | Incoming order rates declined substantially in the fourth quarter of 2008, affecting all segments and regions. | ||
| • | Sales declined by 3 percent as compared to the prior year as growth in Europe and Asia Pacific of 8 percent and 3 percent, respectively, did not offset declines in the Americas. Sales in the Industrial segment grew 4 percent worldwide, while sales in the Contractor and Lubrication segments declined by 13 percent and 3 percent, respectively, from the prior year. | ||
| • | Three businesses were acquired in 2008 (Glascraft, Airlessco and LubeSci), increasing net sales by $13 million or 2 percent. | ||
| • | Favorable currency translation increased net sales by approximately $12 million and increased net earnings by approximately $4 million in 2008. | ||
| • | Investment in new product development grew to 4 1 / 2 percent of sales in 2008 from 3 1 / 2 percent of sales in 2007. | ||
| • | Incremental costs associated with the programs to introduce new entry-level sprayers in the Contractor segment to additional paint and home center outlets were approximately $12 million. | ||
| • | A workforce reduction affecting approximately 150 people or 6 percent of the global employee base was communicated in December 2008. Early retirement and severance costs were approximately $5 million. The number of temporary and contract workers was reduced in earlier months. | ||
| • | Impairment charges of approximately $4 million were recorded, primarily due to reduced expectations with respect to future sales of certain branded products within the Industrial segment. | ||
| • | Positive cash flows from operations were $162 million, down 8 percent as compared to the prior year. |
The following table presents net sales by geographic region (in millions).
| 2009 | 2008 | 2007 | ||||||||||
|
Americas
1
|
$ | 329 | $ | 455 | $ | 500 | ||||||
|
Europe
2
|
143 | 232 | 216 | |||||||||
|
Asia Pacific
|
107 | 130 | 125 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 579 | $ | 817 | $ | 841 | ||||||
|
|
||||||||||||
| 1 | North and South America, including the United States. Sales in the United States were $280 million in 2009, $384 million in 2008 and $434 million in 2007. | |
| 2 | Europe, Africa and Middle East |
In 2009, sales in the Americas declined by 28 percent overall, with declines of 32 percent in the
Industrial segment, 19 percent in the Contractor segment and 34 percent in the Lubrication segment
as compared to the prior year. Despite the severity of the global recession, commercial resources
were maintained and new distribution outlets were opened in all regions and segments.
In 2008, sales in the Americas declined by 9 percent overall and by 22 percent and 7 percent
in the Contractor and Lubrication segments, respectively, as compared to the prior year.
Industrial sales increased by 3 percent in the Americas, primarily due to the Glascraft
acquisition. Sales grew in Europe and Asia Pacific in all three segments as a result of continued
emphasis on expanding sales and marketing resources and focus on new distribution and acquisitions.
16
Table of Contents
The following table presents components of net sales change:
| 2009 | ||||||||||||||||||||||||||||
| Segment | Region | |||||||||||||||||||||||||||
| Industrial | Contractor | Lubrication | Americas | Europe | Asia Pacific | Consolidated | ||||||||||||||||||||||
|
Volume and Price
|
(31) | % | (23) | % | (33) | % | (28) | % | (36) | % | (17) | % | (29) | % | ||||||||||||||
|
Acquisitions
|
— | % | 3 | % | — | % | 1 | % | 1 | % | — | % | 1 | % | ||||||||||||||
|
Currency
|
(1) | % | (2) | % | (1) | % | (1) | % | (4) | % | — | % | (1) | % | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
(32) | % | (22) | % | (34) | % | (28) | % | (39) | % | (17) | % | (29) | % | ||||||||||||||
|
|
||||||||||||||||||||||||||||
| 2008 | ||||||||||||||||||||||||||||
| Segment | Region | |||||||||||||||||||||||||||
| Industrial | Contractor | Lubrication | Americas | Europe | Asia Pacific | Consolidated | ||||||||||||||||||||||
|
Volume and Price
|
— | % | (15) | % | (4) | % | (11) | % | 2 | % | 1 | % | (6) | % | ||||||||||||||
|
Acquisitions
|
2 | % | 1 | % | 1 | % | 2 | % | 1 | % | 2 | % | 2 | % | ||||||||||||||
|
Currency
|
2 | % | 1 | % | — | % | — | % | 5 | % | — | % | 1 | % | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
4 | % | (13) | % | (3) | % | (9) | % | 8 | % | 3 | % | (3) | % | ||||||||||||||
|
|
||||||||||||||||||||||||||||
The following table presents an overview of components of operating earnings as a percentage of net
sales:
| 2009 | 2008 | 2007 | ||||||||||
|
Net Sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost of products sold
|
49.4 | 47.1 | 46.8 | |||||||||
|
|
||||||||||||
|
Gross profit
|
50.6 | 52.9 | 53.2 | |||||||||
|
Product development
|
6.5 | 4.5 | 3.6 | |||||||||
|
Selling, marketing and distribution
|
19.9 | 17.0 | 14.8 | |||||||||
|
General and administrative
|
11.3 | 8.5 | 7.2 | |||||||||
|
|
||||||||||||
|
Operating earnings
|
12.9 | 22.9 | 27.6 | |||||||||
|
Interest expense
|
0.8 | 0.9 | 0.4 | |||||||||
|
Other expense, net
|
0.2 | 0.1 | — | |||||||||
|
|
||||||||||||
|
Earnings before income taxes
|
11.9 | 21.9 | 27.2 | |||||||||
|
Income taxes
|
3.4 | 7.1 | 9.0 | |||||||||
|
|
||||||||||||
|
Net Earnings
|
8.5 | % | 14.8 | % | 18.2 | % | ||||||
|
|
||||||||||||
2009 Compared to 2008
Gross profit margin as a percentage of sales was 51 percent in 2009 as compared to 53 percent in
2008. Lower production volumes accounted for approximately 4 percentage points of the reduction
and increased pension costs accounted for an additional 1 percentage point of the reduction.
Favorable effects of pricing, product mix, lower material costs and other cost reduction activities
partially offset the effects of low production volumes and increased pension costs.
Although operating expenses in 2009 declined to $218 million compared to $245 million in the prior
year, the reduction in expense as a percentage of net sales was not as great as the change in sales
volume. Product development spending was $38 million as compared to $37 million in the prior year,
reflecting the Company’s strategic decision to continue investing in new product development.
Selling, marketing and distribution costs were $116 million in 2009 as compared to $139 million in
2008. General and administrative costs were $65 million in 2009 as compared to $70 million in the
prior year. Included in operating expenses was an increase in pension cost of $11 million as
compared to 2008.
Consolidated operating earnings decreased 60 percent to $74 million, or 13 percent of sales in
2009, reflecting the effects of lower sales volumes, unfavorable currency translation and increased
pension costs, partially offset by spending reductions and lower volume-related expenses.
Interest expense was $5 million in 2009 as compared to $8 million in 2008. Debt was reduced by
$100 million in 2009 from the prior year.
17
Table of Contents
The Company’s effective tax rate was 29 percent in 2009, lower than the effective tax rate of 32
percent in 2008. The rate is lower than the U.S. federal statutory rate of 35 percent due
primarily to U.S. business credits and the Domestic Production Deduction (DPD). The effect of the
business credits and the DPD was greater in 2009 as a percentage of pre-tax earnings as compared to
the prior year.
2008 Compared to 2007
Gross profit margin as a percentage of sales was 53 percent in 2008 and 2007. The gross profit
margin in 2008 was affected by lower volume and cost reduction actions taken in the fourth quarter
of 2008.
Operating expenses in 2008 were $245 million compared to $215 million in the prior year. The
increase includes $8 million related to the rollout of entry-level paint sprayers to additional
paint and home center stores, $7 million from acquired operations, $4 million of impairment charges
and $3 million related to workforce reductions. During 2008, investment in new product development
increased by $6 million as compared to the prior year, to 4
1
/
2
percent of sales. Total operating
expenses as a percentage of sales was 30 percent as compared to 26 percent in the prior year.
Consolidated operating earnings decreased 19 percent to $187 million, or 23 percent of sales in
2008, with a decrease in sales of 3 percent as compared to the prior year and increased expenses.
Gross profit margin as a percentage of sales was slightly down from the prior year, as the
unfavorable impact of material costs and volume were greater than the impact of favorable currency
translation rates and manufacturing productivity improvements.
Interest expense in 2008 was $4 million higher than in 2007 as the Company increased utilization of
credit lines for acquisitions and purchases of Company stock.
The Company’s effective tax rate was 32 percent in 2008, lower than the effective tax rate of 33
percent in 2007. The rate is lower than the U. S. federal statutory rate of 35 percent due
primarily to U.S. business credits and the DPD.
Segment Results
The following table presents net sales and operating earnings by business segment (in millions):
| 2009 | 2008 | 2007 | ||||||||||
|
Sales
|
||||||||||||
|
Industrial
|
$ | 313 | $ | 463 | $ | 445 | ||||||
|
Contractor
|
208 | 267 | 306 | |||||||||
|
Lubrication
|
58 | 87 | 90 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 579 | $ | 817 | $ | 841 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating Earnings
|
||||||||||||
|
Industrial
|
$ | 68 | $ | 138 | $ | 152 | ||||||
|
Contractor
|
29 | 47 | 82 | |||||||||
|
Lubrication
|
(3 | ) | 13 | 9 | ||||||||
|
Unallocated corporate
|
(20 | ) | (11 | ) | (11 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 74 | $ | 187 | $ | 232 | ||||||
|
|
||||||||||||
Management looks at economic and financial indicators relevant to each segment and geography to
gauge the business environment, as noted in the discussion below for each segment.
18
Table of Contents
Industrial
The following table presents net sales, components of net sales change and operating earnings for
the Industrial segment (dollars in millions).
| 2009 | 2008 | 2007 | ||||||||||
|
Sales
|
||||||||||||
|
Americas
|
$ | 149 | $ | 220 | $ | 213 | ||||||
|
Europe
|
89 | 148 | 138 | |||||||||
|
Asia Pacific
|
75 | 95 | 94 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 313 | $ | 463 | $ | 445 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Components of Net
Sales Change
|
||||||||||||
|
Volume and Price
|
(31 | )% | — | % | 4 | % | ||||||
|
Acquisitions
|
— | % | 2 | % | — | % | ||||||
|
Currency
|
(1 | )% | 2 | % | 3 | % | ||||||
|
|
||||||||||||
|
Total
|
(32 | )% | 4 | % | 7 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating Earnings as a
Percentage of Sales
|
22 | % | 30 | % | 34 | % | ||||||
|
|
||||||||||||
In 2009, sales in the Industrial segment decreased by 32 percent, with declines in all regions.
Sales declined by 32 percent in the Americas, 40 percent in Europe (36 percent at consistent
exchange rates) and 21 percent in Asia Pacific. Although still below the prior year, sales improved
in the fourth quarter of 2009 as compared to earlier quarters.
In 2009, operating earnings in the Industrial segment were $68 million, or 22 percent of sales
in 2009 as compared to $138 million, or 30 percent the prior year. One percentage point of the
change in operating earnings is attributable to unfavorable currency translation and 4 percentage
points of the change in operating earnings is attributable to greater unabsorbed manufacturing
costs. The favorable effects of reductions in product cost, mix and price partially offset the
effects of volume on operating earnings.
In 2008, sales in the Industrial segment increased by 4 percent, with sales growth in all regions.
Sales in the Americas increased 3 percent. Sales in Europe grew by 7 percent, including 5
percentage points related to favorable currency translation rates. The sales growth in Asia
Pacific was 2 percent and the effect of currency translation was not significant.
In 2008, operating earnings in the Industrial segment declined 9 percent and were affected by
impairment charges of $4 million, selling and product development initiatives, costs and expenses
resulting from acquisition and integration related activities, workforce reduction costs and
unabsorbed manufacturing costs.
In this segment, sales in each geographic region are significant and management looks at economic
and financial indicators in each region, including gross domestic product, industrial production,
capital investment rates, automobile production, building construction and the level of the U.S.
dollar versus the euro, the Canadian dollar and various Asian currencies.
19
Table of Contents
Contractor
The following table presents net sales, components of net sales change and operating earnings for
the Contractor segment (dollars in millions).
| 2009 | 2008 | 2007 | ||||||||||
|
Sales
|
||||||||||||
|
Americas
|
$ | 133 | $ | 165 | $ | 211 | ||||||
|
Europe
|
50 | 77 | 71 | |||||||||
|
Asia Pacific
|
25 | 25 | 25 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 208 | $ | 267 | $ | 307 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Components of
Net Sales Change
|
||||||||||||
|
Volume and Price
|
(23 | )% | (15 | )% | (6 | )% | ||||||
|
Acquisitions
|
3 | % | 1 | % | — | % | ||||||
|
Currency
|
(2 | )% | 1 | % | 2 | % | ||||||
|
|
||||||||||||
|
Total
|
(22 | )% | (13 | )% | (4 | )% | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating Earnings
as a Percentage of Sales
|
14 | % | 18 | % | 27 | % | ||||||
|
|
||||||||||||
In 2009, sales in the Contractor segment decreased by 22 percent, with declines of 19 percent and
35 percent (31 percent at consistent exchange rates) in the Americas and Europe, respectively.
Sales in Asia Pacific were steady compared to last year. In the Americas, sales declined in both
the professional paint store and home center channels.
In 2009, operating earnings in the Contractor segment were $29 million or 14 percent of sales in
2009 as compared to $47 million or 18 percent the prior year. One percentage point of the change
in operating earnings is attributable to unfavorable currency translation and 2 percentage points
of the change is attributable to greater unabsorbed manufacturing costs in 2009. The favorable
effects of reductions in product cost, mix and price partially offset the effects of volume on
operating earnings.
In 2008, sales in the Contractor segment decreased by 13 percent. While sales in the Americas
decreased by 22 percent, sales in Europe and Asia Pacific grew by 8 percent and 1 percent,
respectively. Sales in the Americas reflected sales declines in both the home center and
professional paint store channels. Sales growth in both Europe and Asia Pacific is attributed to
continued focus on converting professional contractors from manual to spray applications and new
distribution.
In 2008, operating earnings in the Contractor segment declined by 42 percent. Approximately $12
million of incremental cost and expense relates to the production and launch of new paint sprayer
lines into existing and new paint store and home center outlets. Operating earnings were also
affected by increased product development spending, costs of the workforce reduction, costs and
lower profit levels of the acquired business and unabsorbed manufacturing costs.
In this segment, sales in the Americas and Europe are significant and management reviews economic
and financial indicators in each region, including levels of residential, commercial and
institutional construction, remodeling rates and interest rates. Management also reviews gross
domestic product for the regions and the level of the U.S. dollar versus the euro.
20
Table of Contents
Lubrication
The following table presents net sales, components of net sales change and operating earnings for
the Lubrication segment (dollars in millions).
| 2009 | 2008 | 2007 | ||||||||||
|
Sales
|
||||||||||||
|
Americas
|
$ | 47 | $ | 71 | $ | 76 | ||||||
|
Europe
|
4 | 8 | 7 | |||||||||
|
Asia Pacific
|
7 | 9 | 7 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 58 | $ | 88 | $ | 90 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Components of Net Sales Change
|
||||||||||||
|
Volume and Price
|
(33 | )% | (4 | )% | (2 | )% | ||||||
|
Acquisitions
|
— | % | 1 | % | 14 | % | ||||||
|
Currency
|
(1 | )% | — | % | 1 | % | ||||||
|
|
||||||||||||
|
Total
|
(34 | )% | (3 | )% | 13 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating
Earnings as a Percentage of Sales
|
(5 | )% | 14 | % | 10 | % | ||||||
|
|
||||||||||||
In 2009, sales in the Lubrication segment decreased by 34 percent, with declines of 34 percent in
the Americas, 45 percent (44 percent at consistent exchange rates) in Europe and 26 percent (27
percent at consistent exchange rates) in Asia Pacific, with declines in both the petroleum
management and industrial lubrication channels.
In 2009, the operating loss in the Lubrication segment was $3 million or 5 percent of sales in 2009
as compared to operating earnings of $12 million or 14 percent of sales the prior year. The
segment continued to invest in new product development and growth in international commercial
capabilities, but was severely affected by low volumes and unabsorbed manufacturing costs.
In 2008, sales in the Lubrication segment decreased by 3 percent. Although sales in the Americas
decreased by 7 percent, sales in Europe and Asia Pacific grew by 13 percent and 34 percent,
respectively. Sales in the Americas reflected sales declines in the petroleum management product
line. Sales growth in Europe and Asia Pacific is attributed to additional sales and marketing
resources, new distribution and growth in industrial lubrication products in Asia Pacific.
In 2008, operating earnings in the Lubrication segment increased by 35 percent. Improvement in
operating profitability is related to the integration and consolidation of Lubrication activities
in Anoka, Minnesota in 2007. The Lubrication segment incurred costs in 2008 related to the
workforce reduction, unabsorbed manufacturing costs and higher investment in new product
development.
The Americas represent the substantial majority of sales for the Lubrication segment and indicators
in that region are the most important. The indicators used by management include levels of capital
investment, industrial production and gross domestic product.
Unallocated corporate
(in millions)
| 2009 | 2008 | 2007 | ||||||||||
|
Unallocated corporate (expense)
|
$ | (20 | ) | $ | (11 | ) | $ | (11 | ) | |||
Unallocated corporate includes items such as stock compensation, bad debt expense, contributions to
the Company’s charitable foundation and certain other charges or credits driven by corporate
decisions. In 2009, unallocated corporate included $9 million related to the non-service cost
portion of pension expense and $9 million of stock compensation.
In 2008, unallocated corporate included $9 million of stock compensation and $2 million of
contributions to the Company’s charitable foundation.
21
Table of Contents
Financial Condition
Working Capital.
The following table highlights several key measures of asset performance (dollars
in millions).
| 2009 | 2008 | |||||||
|
Working capital
|
$ | 85 | $ | 139 | ||||
|
Current ratio
|
1.8 | 2.2 | ||||||
|
Days of sales in receivables outstanding
|
63 | 57 | ||||||
|
Inventory turnover (LIFO)
|
3.9 | 4.4 | ||||||
The Company’s financial condition and cash flows from operations remain strong. Cash flows from
operations totaled $147 million in 2009. The primary uses of cash included repayment of debt of
$100 million, dividends of $45 million, capital expenditures of $11 million and a contribution of
$15 million into the funded pension plan. Accounts receivable decreased by $27 million due mostly
to lower sales during the year as compared to the prior year. Inventories decreased by $33
million.
In 2008, the Company used cash for capital expenditures of $29 million, acquisitions of $55
million, dividends of $45 million and share repurchases of $115 million. Accounts receivable
decreased by $13 million (9 percent) due mostly to lower sales in the fourth quarter of 2008
compared to the same period in the prior year. Inventories increased $17 million, including $8
million from acquired operations and increases to support new distribution initiatives
internationally.
Capital Structure.
At December 25, 2009, the Company’s capital structure included current debt of
$12 million, long-term debt of $86 million and shareholders’ equity of $210 million.
Shareholders’ equity increased by $42 million in 2009. The key components of changes in
shareholders’ equity include current year earnings of $49 million and other comprehensive income of
$23 million (mostly due to improvements in the funded status of pension obligations); reduced by
$46 million of dividends declared.
Liquidity and Capital Resources
. At December 25, 2009, the Company had various lines of credit
totaling $272 million, including a $250 million, five year credit facility entered into in 2007 and
$22 million with foreign banks. At year-end, long-term debt outstanding was $86 million. The
unused portion of committed credit lines was $175 million at year-end. In addition, the Company
has unused, uncommitted lines of credit totaling $12 million. Internally generated funds and
unused financing sources are expected to provide the Company with the flexibility to meet its
liquidity needs in 2010, including its capital expenditure plan of approximately $15 million,
planned dividends (estimated at $48 million) and acquisitions.
In December 2009, the Company’s Board of Directors increased the Company’s regular common dividend
from an annual rate of $0.76 to $0.80 per share, a 5 percent increase.
Cash Flow
A summary of cash flow follows (in millions):
| 2009 | 2008 | 2007 | ||||||||||
|
Operating Activities
|
$ | 147 | $ | 162 | $ | 177 | ||||||
|
Investing Activities
|
(13 | ) | (85 | ) | (38 | ) | ||||||
|
Financing Activities
|
(139 | ) | (71 | ) | (138 | ) | ||||||
|
Effect of exchange rates on cash
|
(2 | ) | 1 | (2 | ) | |||||||
|
|
||||||||||||
|
Net cash provided (used)
|
(7 | ) | 7 | (1 | ) | |||||||
|
|
||||||||||||
|
Cash and cash equivalents at year-end
|
$ | 5 | $ | 12 | $ | 5 | ||||||
|
|
||||||||||||
Cash Flows Provided by Operating Activities
. During 2009, $147 million was generated from
operating cash flows, compared to $162 million in 2008. The effect of lower net earnings on cash
flow was partially offset by cash provided by decreases in accounts receivable and inventory of $28
million and $33 million, respectively.
During 2008, $162 million was generated from operating cash flows, compared to $177 million in
2007. Although net earnings decreased by $32 million in 2008 as compared to the prior year,
non-cash items such as depreciation and amortization, deferred income taxes and share-based
compensation totaled $42 million, an increase of $10 million as compared to the prior year.
22
Table of Contents
Cash Flows Used in Investing Activities.
During 2009, cash was used to fund $11 million of
additions to property, plant and equipment. During 2008, cash was used to fund $55 million for
business acquisitions and $29 million of additions to property, plant and equipment.
Cash Flows Used in Financing Activities
.
During 2009, $139 million was used in financing
activities as compared to $71 million in 2008. Net payments on borrowings totaled $100 million.
Cash dividends paid totaled $45 million, consistent with the prior year. During 2008, net
borrowings totaled $72 million and cash was used for share repurchases totaling $115 million.
In September 2009, the Board of Directors authorized the Company to purchase up to 6 million shares
of its outstanding stock, primarily through open-market transactions. This authorization will
expire on September 30, 2012 and the entire 6 million shares remain available under this
authorization as of December 25, 2009. Although the Company decided to suspend share repurchases
in the fourth quarter of 2008, the Company may make opportunistic share repurchases in the future.
Off-Balance Sheet Arrangements and Contractual Obligations
.
As of December 25, 2009, the Company
is obligated to make cash payments in connection with its long-term debt, operating leases and
purchase obligations in the amounts listed below. The Company has no significant off-balance sheet
debt or other unrecorded obligations other than the items noted in the following table. In addition
to the commitments noted in the following table, the Company could be obligated to perform under
standby letters of credit totaling $2 million at December 25, 2009. The Company has also
guaranteed the debt of its subsidiaries for up to $30 million. All debt of subsidiaries is
reflected in the consolidated balance sheets.
The total liability for uncertain tax positions at December 25, 2009 was approximately $3 million.
The Company is not able to reasonably estimate the timing of future payments relating to
non-current unrecognized tax benefits.
| Payments due by period (in millions) | ||||||||||||||||||||
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Total | 1 year | years | years | 5 years | ||||||||||||||||
|
Long-term debt
|
$ | 86 | $ | — | $ | 86 | $ | — | $ | — | ||||||||||
|
Operating leases
|
4 | 2 | 1 | — | 1 | |||||||||||||||
|
Purchase obligations
1
|
35 | 35 | — | — | — | |||||||||||||||
|
Interest on long-term debt
|
2 | 1 | 1 | — | — | |||||||||||||||
|
Fixed rate payments on interest swaps
|
4 | 4 | — | — | — | |||||||||||||||
|
Unfunded pension and postretirement medical benefits
2
|
28 | 3 | 5 | 5 | 15 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 159 | $ | 45 | $ | 93 | $ | 5 | $ | 16 | ||||||||||
|
|
||||||||||||||||||||
| 1 | The Company is committed to pay suppliers under the terms of open purchase orders issued in the normal course of business. The Company also has commitments with certain suppliers to purchase minimum quantities, and under the terms of certain agreements, the Company is committed for certain portions of the supplier’s inventory. The Company does not purchase, or commit to purchase, quantities in excess of normal usage or amounts that cannot be used within one year. | |
| 2 | The amounts and timing of future Company contributions to the funded qualified defined benefit pension plan are unknown because they are dependent on pension fund asset performance. The Company expects that no contribution to the funded pension plan will be required in 2010. |
Critical Accounting Estimates
The Company prepares its consolidated financial statements in conformity with generally accepted
accounting principles in the United States of America (“U.S. GAAP”). The Company’s most
significant accounting policies are disclosed in Note A to the consolidated financial statements.
The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires
management to make estimates and judgments that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual amounts will differ from those estimates. The
Company considers the following policies to involve the most judgment in the preparation of the
Company’s consolidated financial statements.
Sales Returns.
An allowance is established for possible returns of products from distributors.
The written agreements with distributors typically limit the amount that may be returned. In its
arrangements with certain home center customers, the Company may agree to accept returns from the
retailer’s end-user customers. The amount of the allowance for sales returns is
an estimate, which is based on the historical ratios of returns to sales, the historical average
length of time between the sale and the return and other factors.
23
Table of Contents
From time to time, the Company may choose to terminate a distributor relationship and may take back
inventory or may promote the sale of new products by agreeing to accept returns of superseded
products. These are considered period events and are not included in the allowance for returns.
Although management considers these balances adequate, changes in customers’ behavior versus
historical experience or changes in the Company’s return policies are among the factors that would
result in materially different amounts for this item.
Excess and Discontinued Inventory
. The Company’s inventories are valued at the lower of cost or
market. Reserves for excess and discontinued products are estimated. The amount of the reserve is
determined based on projected sales information, plans for discontinued products and other factors.
Though management considers these balances adequate, changes in sales volumes due to unanticipated
economic or competitive conditions are among the factors that would result in materially different
amounts for this item.
Goodwill and Other Intangible Assets.
The company performs impairment testing for goodwill and
other intangible assets annually, or more frequently if events or changes in circumstances indicate
that the asset might be impaired. For goodwill, the Company performs impairment reviews for the
Company’s reporting units, which have been determined to be the Company’s divisions using a
fair-value method based on management’s judgments and assumptions. The Company estimates the fair
value of the reporting units by an allocation of market capitalization value, cross-checked by a
present value of future cash flows calculation. The estimated fair value is then compared with the
carrying amount of the reporting unit, including recorded goodwill. The Company also performs a
separate impairment test for each other intangible asset with indefinite life, based on estimated
future use and discounting estimated future cash flows. A considerable amount of management
judgment and assumptions are required in performing the impairment tests. Though management
considers its judgments and assumptions to be reasonable, changes in product offerings or marketing
strategies could change the estimated fair values and result in impairment charges.
Product Warranty.
A liability is established for estimated warranty claims to be paid in the
future that relate to current and prior period sales. The Company estimates these costs based on
historical claim experience, changes in warranty programs and other factors, including evaluating
specific product warranty issues. The establishment of reserves requires the use of judgment and
assumptions regarding the potential for losses relating to warranty issues. Though management
considers these balances adequate, changes in the Company’s warranty policy or a significant change
in product defects versus historical averages are among the factors that would result in materially
different amounts for this item.
Self-Insured Retentions
. The Company purchases insurance for products liability, workers
compensation and employee medical benefits with high deductibles. Third party insurance is carried
for what is believed to be the major portion of potential exposures that would exceed the Company’s
self-insured retentions. The Company has established liabilities for potential uninsured claims,
including estimated costs and legal fees. The Company employs actuaries to assist in evaluating
its potential uninsured claims and then considers factors such as known outstanding claims,
historical experience, sales trends and other relevant factors in setting the liabilities. Though
management considers these balances adequate, a substantial change in the number and/or severity of
claims would result in materially different amounts for this item.
Income Taxes.
In the preparation of the Company’s consolidated financial statements, management
calculates income taxes. This includes estimating current tax liability as well as assessing
temporary differences resulting from different treatment of items for tax and financial statement
purposes. These differences result in deferred tax assets and liabilities, which are recorded on
the balance sheet using statutory rates in effect for the year in which the differences are
expected to reverse. These assets and liabilities are analyzed regularly and management assesses
the likelihood that deferred tax assets will be recoverable from future taxable income. A
valuation allowance is established to the extent that management believes that recovery is not
likely. Liabilities for uncertain tax positions are also established for potential and ongoing
audits of federal, state and international issues. The Company routinely monitors the potential
impact of such situations and believes that liabilities are properly stated. Valuations related to
amounts owed and tax rates could be impacted by changes to tax codes, changes in statutory rates,
the Company’s future taxable income levels and the results of tax audits.
Retirement Obligations.
The measurements of the Company’s pension and postretirement medical
obligations are dependent on a number of assumptions including estimates of the present value of
projected future payments, taking into consideration future events such as salary increase and
demographic experience. These assumptions may have an impact on the expense and timing of future
contributions.
The assumptions used in developing the required estimates for pension obligations include discount
rate, inflation, salary increases, retirement rates, expected return on plan assets and mortality
rates. The assumptions used in developing the required
estimates for postretirement medical obligations include discount rates, rate of future increase in
medical costs and participation rates.
24
Table of Contents
For U.S. plans, the Company establishes its discount rate assumption by reference to the “Citigroup
Pension Liability Index”, a published index commonly used as a benchmark. For plans outside the
U.S., the Company establishes a rate by country by reference to highly rated corporate bonds.
These reference points have been determined to adequately match expected plan cash flows. The
Company bases its inflation assumption on an evaluation of external market indicators. The salary
assumptions are based on actual historical experience, the near-term outlook and assumed inflation.
Retirement rates are based on experience. The investment return assumption is based on the
expected long-term performance of plan assets. In setting this number, the Company considers the
input of actuaries and investment advisors, its long-term historical returns, the allocation of
plan assets and projected returns on plan assets. The Company maintained its investment return
assumption at 8.5 percent for 2010. Mortality rates are based on a common group mortality table
for males and females.
Net pension cost in 2009 was $15 million and was allocated to cost of products sold and operating
expenses based on salaries and wages. At December 25, 2009, a one-half percentage point decrease
in the indicated assumptions would have the following effects (in millions):
| Assumption | Funded Status | Expense | ||||||
|
Discount rate
|
$ | (15 | ) | $ | 2 | |||
|
Expected return on assets
|
— | 1 | ||||||
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued a new accounting standard
that established a consistent framework for measuring fair value and expanded disclosures on fair
market value measurements. It was effective for the Company starting in fiscal 2008 for financial
assets and liabilities. With respect to non-financial assets and liabilities, it was effective for
the Company starting in fiscal 2009. The adoption of this standard as it pertains to non-financial
assets and liabilities had no significant impact on the consolidated financial statements.
The Company sells and purchases products and services in currencies other than the U.S. dollar and
pays variable interest rates on borrowings under its primary credit facility. Consequently, the
Company is subject to profitability risk arising from exchange and interest rate movements. The
Company may use a variety of financial and derivative instruments to manage foreign currency and
interest rate risks. The Company does not enter into any of these instruments for trading purposes
to generate revenue. Rather, the Company’s objective in managing these risks is to reduce
fluctuations in earnings and cash flows associated with changes in foreign currency exchange and
interest rates.
The Company may use forward exchange contracts, options and other hedging activities to hedge the
U.S. dollar value resulting from anticipated currency transactions and net monetary asset and
liability positions. At December 25, 2009, the currencies to which the Company had the most
significant balance sheet exchange rate exposure were the euro, Canadian dollar, British pound and
various Asian currencies. It is not possible to determine the true impact of currency rate
changes; however, the direct translation effect on net sales and net earnings can be estimated.
When compared to 2008 results, the stronger U.S. dollar versus other currencies decreased sales and
net earnings. For the year ended December 25, 2009, the impact of currency translation resulted in
a calculated decrease in net sales and net earnings of approximately $10 million and $4 million,
respectively. For the year ended December 26, 2008, the calculated impact of currency translation
resulted in an increase in net sales and net earnings of approximately $12 million and $4 million,
respectively.
In 2007 the Company entered into interest rate swap contracts that effectively fix the rates paid
on a total of $80 million of variable rate borrowings under the Company’s primary credit facility.
The contracts fix the rates at approximately 4.7 percent through 2010.
2010 Outlook
Management believes that economic conditions will continue to present a challenging operating
environment in the coming year. The Company will continue to closely manage working capital,
headcount, discretionary spending and capital expenditures.
25
Table of Contents
The Company has continued to invest in new product engineering and in development of global
commercial capabilities, and expects to see growth through the launch of new products and expanded
distribution coverage around the world in the coming year. The Company expects those investments
will allow the Company to grow with the recovery and to deliver strong incremental operating
margins. The Company will pursue strategic acquisitions to expand product offerings and to
leverage current technologies in new markets and channels.
The Company’s backlog is typically small compared to annual sales and is not a good indicator of
future business levels. Although the strength of the recovery is uncertain and may be uneven, the
Company believes that many key end markets will gradually improve throughout 2010. In addition to
economic growth, the sales outlook is dependent on many factors, including the successful launch of
new products, expanding distribution coverage, realization of price increases and stable foreign
currency exchange rates.
Forward-Looking Statements
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, conference calls and the Company’s Annual Report to shareholders,
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 undertakes no obligation to update these statements in light of new
information or future events.
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 Item 1A of, and Exhibit 99 to, this
Annual Report on Form 10-K for fiscal year 2009 for a more comprehensive discussion of these and
other risk factors.
Investors should realize that factors other than those identified above and in Item 1A and Exhibit
99 might prove important to the Company’s future results. It is not possible for management to
identify each and every factor that may have an impact on the Company’s operations in the future as
new factors can develop from time to time.
| Page | ||||
|
•
Selected Quarterly Financial Data (See Part II, Item 5, Market for the
Company’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities)
|
12 | |||
|
•
Management’s Report on Internal Control Over Financial Reporting
|
27 | |||
|
•
Reports of Independent Registered Public Accounting Firm
|
28 | |||
|
•
Consolidated Statements of Earnings for fiscal years 2009, 2008 and 2007
|
30 | |||
|
•
Consolidated Statements of Comprehensive Income for fiscal years 2009, 2008 and 2007
|
30 | |||
|
•
Consolidated Balance Sheets for fiscal years 2009 and 2008
|
31 | |||
|
•
Consolidated Statements of Cash Flows for fiscal years 2009, 2008 and 2007
|
32 | |||
|
•
Consolidated Statements of Shareholders’ Equity for fiscal years 2009, 2008 and 2007
|
33 | |||
|
•
Notes to Consolidated Financial Statements
|
34 | |||
26
Table of Contents
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. The internal control system was designed to provide reasonable assurance to management
and the board of directors regarding the reliability of financial reporting and preparation of
financial statements in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as
of December 25, 2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management believes the Company’s internal control over
financial reporting is effective as of December 25, 2009.
The Company’s independent auditors have issued an attestation report on the Company’s internal
control over financial reporting. That report appears in this Form 10-K.
27
Table of Contents
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Internal Control Over Financial Reporting
To the Shareholders and Board of Directors of
Graco Inc.
Minneapolis, Minnesota
Graco Inc.
Minneapolis, Minnesota
We have audited the internal control over financial reporting of Graco Inc. and Subsidiaries (the
“Company”) as of December 25, 2009, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 25, 2009, based on the criteria established in
Internal Control
— Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended December 25, 2009, of the Company and our report dated February 15, 2010
expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 15, 2010
February 15, 2010
28
Table of Contents
Consolidated Financial Statements
To the Shareholders and Board of Directors of
Graco Inc.
Minneapolis, Minnesota
Graco Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Graco Inc. and Subsidiaries (the
“Company”) as of December 25, 2009 and December 26, 2008, and the related consolidated statements
of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three years
in the period ended December 25, 2009. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and financial statement schedule are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Graco Inc. and Subsidiaries as of December 25, 2009 and December 26,
2008, and the results of their operations and their cash flows for each of the three years in the
period ended December 25, 2009, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 25,
2009, based on the criteria established in
Internal Control—Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15,
2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 15, 2010
February 15, 2010
29
Table of Contents
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
| Years Ended | ||||||||||||
| December 25, | December 26, | December 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net Sales
|
$ | 579,212 | $ | 817,270 | $ | 841,339 | ||||||
|
Cost of products sold
|
286,396 | 385,093 | 393,913 | |||||||||
|
|
||||||||||||
|
Gross Profit
|
292,816 | 432,177 | 447,426 | |||||||||
|
Product development
|
37,538 | 36,558 | 30,277 | |||||||||
|
Selling, marketing and distribution
|
115,550 | 138,665 | 124,508 | |||||||||
|
General and administrative
|
65,261 | 69,589 | 60,161 | |||||||||
|
|
||||||||||||
|
Operating Earnings
|
74,467 | 187,365 | 232,480 | |||||||||
|
Interest expense
|
4,854 | 7,633 | 3,433 | |||||||||
|
Other expense, net
|
946 | 1,153 | 211 | |||||||||
|
|
||||||||||||
|
Earnings Before Income Taxes
|
68,667 | 178,579 | 228,836 | |||||||||
|
Income taxes
|
19,700 | 57,700 | 76,000 | |||||||||
|
|
||||||||||||
|
Net Earnings
|
$ | 48,967 | $ | 120,879 | $ | 152,836 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic Net Earnings per Common Share
|
$ | 0.82 | $ | 2.01 | $ | 2.35 | ||||||
|
|
||||||||||||
|
Diluted Net Earnings per Common Share
|
$ | 0.81 | $ | 1.99 | $ | 2.32 | ||||||
|
|
||||||||||||
|
Cash Dividends Declared per Common Share
|
$ | 0.77 | $ | 0.75 | $ | 0.68 | ||||||
See notes to consolidated financial statements.
(In thousands)
| Years Ended | ||||||||||||
| December 25, | December 26, | December 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net Earnings
|
$ | 48,967 | $ | 120,879 | $ | 152,836 | ||||||
|
Other comprehensive income (loss)
|
||||||||||||
|
Cumulative translation adjustment
|
234 | (1,105 | ) | 108 | ||||||||
|
Pension and postretirement medical liability adjustment
|
34,576 | (102,741 | ) | (875 | ) | |||||||
|
Gain (loss) on interest rate hedge contracts
|
1,214 | (3,236 | ) | (1,700 | ) | |||||||
|
Income taxes
|
(13,263 | ) | 39,290 | 895 | ||||||||
|
|
||||||||||||
|
Other comprehensive income (loss)
|
22,761 | (67,792 | ) | (1,572 | ) | |||||||
|
|
||||||||||||
|
Comprehensive Income
|
$ | 71,728 | $ | 53,087 | $ | 151,264 | ||||||
|
|
||||||||||||
See notes to consolidated financial statements.
30
Table of Contents
GRACO INC. AND SUBSIDIARIES
(In thousands, except share and per share amounts)
| December 25, | December 26, | |||||||
| 2009 | 2008 | |||||||
|
ASSETS
|
||||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 5,412 | $ | 12,119 | ||||
|
Accounts receivable, less allowances of $6,500 and $6,600
|
100,824 | 127,505 | ||||||
|
Inventories
|
58,658 | 91,604 | ||||||
|
Deferred income taxes
|
20,380 | 23,007 | ||||||
|
Other current assets
|
3,719 | 6,360 | ||||||
|
|
||||||||
|
Total current assets
|
188,993 | 260,595 | ||||||
|
|
||||||||
|
Property, Plant and Equipment, net
|
139,053 | 149,754 | ||||||
|
Goodwill
|
91,740 | 91,740 | ||||||
|
Other Intangible Assets, net
|
40,170 | 52,231 | ||||||
|
Deferred Income Taxes
|
8,372 | 18,919 | ||||||
|
Other Assets
|
8,106 | 6,611 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 476,434 | $ | 579,850 | ||||
|
|
||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current Liabilities
|
||||||||
|
Notes payable to banks
|
$ | 12,028 | $ | 18,311 | ||||
|
Trade accounts payable
|
17,983 | 18,834 | ||||||
|
Salaries and incentives
|
14,428 | 17,179 | ||||||
|
Dividends payable
|
12,003 | 11,312 | ||||||
|
Other current liabilities
|
47,373 | 55,524 | ||||||
|
|
||||||||
|
Total current liabilities
|
103,815 | 121,160 | ||||||
|
|
||||||||
|
Long-term Debt
|
86,260 | 180,000 | ||||||
|
Retirement Benefits and Deferred Compensation
|
73,705 | 108,656 | ||||||
|
Uncertain Tax Positions
|
3,000 | 2,400 | ||||||
|
Commitments and Contingencies (Note K)
|
||||||||
|
|
||||||||
|
Shareholders’ Equity
|
||||||||
|
Common stock, $1 par value; 97,000,000 shares authorized;
59,999,158 and 59,516,201 shares outstanding in 2009 and 2008
|
59,999 | 59,516 | ||||||
|
Additional paid-in-capital
|
190,261 | 174,161 | ||||||
|
Retained earnings
|
11,121 | 8,445 | ||||||
|
Accumulated other comprehensive income (loss)
|
(51,727 | ) | (74,488 | ) | ||||
|
|
||||||||
|
Total shareholders’ equity
|
209,654 | 167,634 | ||||||
|
|
||||||||
|
Total Liabilities and Shareholders’ Equity
|
$ | 476,434 | $ | 579,850 | ||||
|
|
||||||||
See notes to consolidated financial statements.
31
Table of Contents
GRACO INC. AND SUBSIDIARIES
(In thousands)
| Years Ended | ||||||||||||
| December 25, | December 26, | December 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows From Operating Activities
|
||||||||||||
|
Net earnings
|
$ | 48,967 | $ | 120,879 | $ | 152,836 | ||||||
|
Adjustments to reconcile net earnings to
net cash provided by operating activities
|
||||||||||||
|
Depreciation, amortization and impairment
|
35,140 | 35,495 | 28,665 | |||||||||
|
Deferred income taxes
|
(69 | ) | (160 | ) | (1,590 | ) | ||||||
|
Share-based compensation
|
9,369 | 9,051 | 8,583 | |||||||||
|
Excess tax benefit related to share-based payment arrangements
|
(375 | ) | (2,873 | ) | (4,508 | ) | ||||||
|
Change in
|
||||||||||||
|
Accounts receivable
|
28,420 | 14,965 | (1,844 | ) | ||||||||
|
Inventories
|
32,663 | (9,937 | ) | 2,045 | ||||||||
|
Trade accounts payable
|
(701 | ) | (6,806 | ) | (2,314 | ) | ||||||
|
Salaries and incentives
|
(2,893 | ) | (3,169 | ) | (6,527 | ) | ||||||
|
Retirement benefits and deferred compensation
|
(848 | ) | (2,672 | ) | (2,290 | ) | ||||||
|
Other accrued liabilities
|
(2,838 | ) | 5,658 | 4,666 | ||||||||
|
Other
|
(303 | ) | 2,047 | (625 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
146,532 | 162,478 | 177,097 | |||||||||
|
|
||||||||||||
|
Cash Flows From Investing Activities
|
||||||||||||
|
Property, plant and equipment additions
|
(11,463 | ) | (29,102 | ) | (36,869 | ) | ||||||
|
Proceeds from sale of property, plant and equipment
|
770 | 1,768 | 296 | |||||||||
|
Investment in life insurance
|
(1,499 | ) | (1,499 | ) | (1,499 | ) | ||||||
|
Capitalized software and other intangible asset additions
|
(602 | ) | (1,327 | ) | (85 | ) | ||||||
|
Acquisition of businesses, net of cash acquired
|
— | (55,186 | ) | — | ||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(12,794 | ) | (85,346 | ) | (38,157 | ) | ||||||
|
|
||||||||||||
|
Cash Flows From Financing Activities
|
||||||||||||
|
Net borrowings (payments) on short-term lines of credit
|
(6,385 | ) | (1,329 | ) | (312 | ) | ||||||
|
Borrowings on long-term line of credit
|
77,996 | 242,849 | 158,351 | |||||||||
|
Payments on long-term line of credit
|
(171,736 | ) | (169,909 | ) | (51,295 | ) | ||||||
|
Excess tax benefit related to share-based payment arrangements
|
375 | 2,873 | 4,508 | |||||||||
|
Common stock issued
|
6,571 | 13,701 | 24,055 | |||||||||
|
Common stock retired
|
(187 | ) | (114,836 | ) | (230,412 | ) | ||||||
|
Cash dividends paid
|
(45,444 | ) | (44,702 | ) | (43,188 | ) | ||||||
|
|
||||||||||||
|
Net cash used in financing activities
|
(138,810 | ) | (71,353 | ) | (138,293 | ) | ||||||
|
|
||||||||||||
|
Effect of exchange rate changes on cash
|
(1,635 | ) | 1,418 | (1,596 | ) | |||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(6,707 | ) | 7,197 | (949 | ) | |||||||
|
Cash and Cash Equivalents
|
||||||||||||
|
Beginning of year
|
12,119 | 4,922 | 5,871 | |||||||||
|
|
||||||||||||
|
End of year
|
$ | 5,412 | $ | 12,119 | $ | 4,922 | ||||||
|
|
||||||||||||
See notes to consolidated financial statements.
32
Table of Contents
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(In thousands)
| Years Ended | ||||||||||||
| December 25, | December 26, | December 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Common Stock
|
||||||||||||
|
Balance, beginning of year
|
$ | 59,516 | $ | 61,964 | $ | 66,805 | ||||||
|
Shares issued
|
491 | 645 | 1,077 | |||||||||
|
Shares retired
|
(8 | ) | (3,093 | ) | (5,918 | ) | ||||||
|
|
||||||||||||
|
Balance, end of year
|
59,999 | 59,516 | 61,964 | |||||||||
|
|
||||||||||||
|
Additional Paid-In Capital
|
||||||||||||
|
Balance, beginning of year
|
174,161 | 156,420 | 130,621 | |||||||||
|
Shares issued
|
6,080 | 13,056 | 24,093 | |||||||||
|
Stock compensation cost
|
9,369 | 9,051 | 8,583 | |||||||||
|
Tax benefit related to stock options exercised
|
674 | 3,473 | 5,808 | |||||||||
|
Restricted stock cancelled (issued)
|
— | 254 | (1,115 | ) | ||||||||
|
Shares retired
|
(23 | ) | (8,093 | ) | (11,570 | ) | ||||||
|
|
||||||||||||
|
Balance, end of year
|
190,261 | 174,161 | 156,420 | |||||||||
|
|
||||||||||||
|
Retained Earnings
|
||||||||||||
|
Balance, beginning of year
|
8,445 | 32,986 | 138,702 | |||||||||
|
Net earnings
|
48,967 | 120,879 | 152,836 | |||||||||
|
Dividends declared
|
(46,135 | ) | (44,539 | ) | (43,609 | ) | ||||||
|
Shares retired
|
(156 | ) | (100,881 | ) | (214,943 | ) | ||||||
|
|
||||||||||||
|
Balance, end of year
|
11,121 | 8,445 | 32,986 | |||||||||
|
|
||||||||||||
|
Accumulated Other Comprehensive Income (Loss)
|
||||||||||||
|
Balance, beginning of year
|
(74,488 | ) | (6,696 | ) | (5,124 | ) | ||||||
|
Other comprehensive income (loss)
|
22,761 | (67,792 | ) | (1,572 | ) | |||||||
|
|
||||||||||||
|
Balance, end of year
|
(51,727 | ) | (74,488 | ) | (6,696 | ) | ||||||
|
|
||||||||||||
|
Total Shareholders’ Equity
|
$ | 209,654 | $ | 167,634 | $ | 244,674 | ||||||
|
|
||||||||||||
See notes to consolidated financial statements.
33
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graco Inc. and Subsidiaries
Years Ended December 25, 2009, December 26, 2008 and December 28, 2007
Graco Inc. and Subsidiaries
Years Ended December 25, 2009, December 26, 2008 and December 28, 2007
A. Summary of Significant Accounting Policies
Fiscal Year
.
The fiscal year of Graco Inc. and Subsidiaries (the Company) is 52 or 53 weeks,
ending on the last Friday in December. The years ended December 25, 2009, December 26, 2008 and
December 28, 2007, were 52-week years.
Basis of Statement Presentation
.
The consolidated financial statements include the accounts of the
parent company and its subsidiaries after elimination of all significant intercompany balances and
transactions. As of December 25, 2009, all subsidiaries are 100 percent owned.
Foreign Currency Translation
.
The U.S. dollar is the functional currency for all foreign
subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and
transactions of those subsidiaries are included in other expense, net.
Accounting Estimates
.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Such estimates and assumptions also affect the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents
.
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents.
Inventory Valuation
.
Inventories are stated at the lower of cost or market. The last-in, first-out
(LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries
are valued using the first-in, first-out (FIFO) cost method.
Other Current Assets.
Amounts included in other current assets were (in thousands):
| 2009 | 2008 | |||||||
|
Prepaid income taxes
|
$ | 1,928 | $ | 4,534 | ||||
|
Prepaid expenses and other
|
1,791 | 1,826 | ||||||
|
|
||||||||
|
Total
|
$ | 3,719 | $ | 6,360 | ||||
|
|
||||||||
Property, Plant and Equipment
.
For financial reporting purposes, plant and equipment are
depreciated over their estimated useful lives, primarily by using the straight-line method as
follows:
|
Buildings and improvements
|
10 to 30 years | |
|
Leasehold improvements
|
lesser of 5 to 10 years or life of lease | |
|
Manufacturing equipment
|
lesser of 5 to 10 years or life of equipment | |
|
Office, warehouse and automotive equipment
|
3 to 10 years |
Intangible Assets.
Goodwill has been assigned to reporting units, which are the Company’s
divisions. The amounts of goodwill for each reportable segment were (in thousands):
| 2009 | 2008 | |||||||
|
Industrial
|
$ | 59,511 | $ | 59,511 | ||||
|
Contractor
|
12,732 | 12,732 | ||||||
|
Lubrication
|
19,497 | 19,497 | ||||||
|
|
||||||||
|
Total
|
$ | 91,740 | $ | 91,740 | ||||
|
|
||||||||
34
Table of Contents
Components of other intangible assets were (dollars in thousands):
| Estimated | Foreign | |||||||||||||||||||
| Life | Accumulated | Currency | Book | |||||||||||||||||
| (years) | Cost | Amortization | Translation | Value | ||||||||||||||||
|
December 25, 2009
|
||||||||||||||||||||
|
Customer relationships
|
3-8 | $ | 41,075 | $ | (18,655 | ) | $ | (181 | ) | $ | 22,239 | |||||||||
|
Patents, proprietary technology
and product documentation
|
3-10 | 22,862 | (13,708 | ) | (87 | ) | 9,067 | |||||||||||||
|
Trademarks, trade names and other
|
3-10 | 8,154 | (2,470 | ) | — | 5,684 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
72,091 | (34,833 | ) | (268 | ) | 36,990 | ||||||||||||||
|
Not Subject to Amortization
Brand names
|
3,180 | — | — | 3,180 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 75,271 | $ | (34,833 | ) | $ | (268 | ) | $ | 40,170 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
December 26, 2008
|
||||||||||||||||||||
|
Customer relationships
|
3-8 | $ | 41,075 | $ | (12,470 | ) | $ | (181 | ) | $ | 28,424 | |||||||||
|
Patents, proprietary technology
and product documentation
|
3-15 | 23,780 | (11,290 | ) | (87 | ) | 12,403 | |||||||||||||
|
Trademarks, trade names and other
|
3-10 | 5,514 | (3,908 | ) | (12 | ) | 1,594 | |||||||||||||
|
|
||||||||||||||||||||
|
|
70,369 | (27,668 | ) | (280 | ) | 42,421 | ||||||||||||||
|
Not Subject to Amortization
Brand names
|
9,810 | — | — | 9,810 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 80,179 | $ | (27,668 | ) | $ | (280 | ) | $ | 52,231 | ||||||||||
|
|
||||||||||||||||||||
Amortization of intangibles was $12.3 million in 2009 and $10.5 million in 2008. Estimated future
annual amortization is as follows: $11.8 million in 2010, $10.7 million in 2011, $8.8 million in
2012, $4.1 million in 2013 and $1.6 million thereafter.
In 2009, the useful life of certain brand names was determined to be no longer indefinite. After
impairment charges totaling $0.5 million, reflected above as a reduction of cost, the remaining
cost of such brand names, totaling $6.1 million, is being amortized over a three-year period. In
2008, the Company recorded impairment charges totaling $3.6 million, primarily due to reduced
expectations with respect to future sales of certain branded products within the industrial
segment. Impairment charges in 2008 were reflected above as reductions of cost, reducing brand
names by $3.1 million, customer relationships by $0.3 million and proprietary technology by $0.2
million.
Other Assets.
Components of other assets were (in thousands):
| 2009 | 2008 | |||||||
|
Cash surrender value of life insurance
|
$ | 4,409 | $ | 2,678 | ||||
|
Capitalized software
|
945 | 1,436 | ||||||
|
Deposits and other
|
2,752 | 2,497 | ||||||
|
|
||||||||
|
Total
|
$ | 8,106 | $ | 6,611 | ||||
|
|
||||||||
The Company paid $1.5 million in 2009 for contracts insuring the lives of certain employees who are
eligible to participate in certain non-qualified pension and deferred compensation plans. These
insurance contracts will be used to fund the non-qualified pension and deferred compensation
arrangements. The insurance contracts are held in a trust and are available to general creditors
in the event of the Company’s insolvency. Changes in cash surrender value are recorded in
operating expense and were not significant in 2009, 2008 and 2007.
Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning
at date of implementation.
Impairment of Long-Lived Assets.
The Company evaluates long-lived assets (including property and
equipment, goodwill and other intangible assets) for impairment whenever events or changes in
business circumstances indicate the carrying value of the assets may not be recoverable. Goodwill
and other intangible assets not subject to amortization are also reviewed for
35
Table of Contents
impairment annually
in the fourth quarter. Except for the impairment of certain intangibles noted above, there have
been no significant write-downs of any long-lived assets in the periods presented.
Other Current Liabilities.
Components of other current liabilities were (in thousands):
| 2009 | 2008 | |||||||
|
Accrued self-insurance retentions
|
$ | 7,785 | $ | 7,896 | ||||
|
Accrued warranty and service liabilities
|
7,437 | 8,033 | ||||||
|
Accrued trade promotions
|
2,953 | 9,001 | ||||||
|
Payable for employee stock purchases
|
5,115 | 5,473 | ||||||
|
Income taxes payable
|
1,550 | 904 | ||||||
|
Other
|
22,533 | 24,217 | ||||||
|
|
||||||||
|
Total
|
$ | 47,373 | $ | 55,524 | ||||
|
|
||||||||
Self-Insurance.
The Company is self-insured for certain losses and costs relating to product
liability, workers’ compensation and employee medical benefits claims. The Company has purchased
stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insured
retentions are based on claims filed and estimates of claims incurred but not reported.
Product Warranties.
A liability is established for estimated future warranty and service claims
that relate to current and prior period sales. The Company estimates warranty costs based on
historical claim experience and other factors including evaluating specific product warranty
issues. Following is a summary of activity in accrued warranty and service liabilities (in
thousands):
| 2009 | 2008 | |||||||
|
Balance, beginning of year
|
$ | 8,033 | $ | 7,084 | ||||
|
Charged to expense
|
4,548 | 6,793 | ||||||
|
Margin on parts sales reversed
|
2,876 | 3,698 | ||||||
|
Reductions for claims settled
|
(8,020 | ) | (9,542 | ) | ||||
|
|
||||||||
|
Balance, end of year
|
$ | 7,437 | $ | 8,033 | ||||
|
|
||||||||
Revenue Recognition
.
Sales are recognized when revenue is realized or realizable and has been
earned. The Company’s policy is to recognize revenue when risk and title passes to the customer.
This is generally on the date of shipment, however certain sales are shipped with terms requiring
recognition when received by the customer. In cases where there are specific customer acceptance
provisions, revenue is recognized at the later of customer acceptance or shipment (subject to
shipping terms). Payment terms are established based on the type of product, distributor
capabilities and competitive market conditions. Rights of return are typically contractually
limited, amounts are estimable, and the Company records provisions for anticipated returns and
warranty claims at the time revenue is recognized. Historically, sales returns have been
approximately 2 percent of sales. Provisions for sales returns are recorded as a reduction of net
sales, and provisions for warranty claims are recorded in selling, marketing and distribution
expenses. From time to time, the Company may promote the sale of new products by agreeing to
accept returns of superseded products. In such cases, provisions for estimated returns are
recorded as a reduction of net sales.
Trade promotions are offered to distributors and end users through various programs, generally with
terms of one year or less. Such promotions include cooperative advertising arrangements, rebates
based on annual purchases, coupons and reimbursement for competitive products. Payment of
incentives may take the form of cash, trade credit, promotional merchandise or free product. Under
cooperative advertising arrangements, the Company reimburses the distributor for a portion of its
advertising costs related to the Company’s products; estimated costs are accrued at the time of
sale and classified as selling, marketing and distribution expense. Rebates are accrued based on
the program rates and progress toward the estimated annual sales amount, and are recorded as a
reduction of sales (cash, trade credit) or cost of products sold (free goods). The estimated costs
related to coupon programs are accrued at the time of sale and classified as selling, marketing and
distribution expense or cost of products sold, depending on the type of incentive offered.
Earnings Per Common Share
.
Basic net earnings per share is computed by dividing earnings
available to common shareholders by the weighted average number of shares outstanding during the
year. Diluted net earnings per share is computed after giving effect to the exercise of all
dilutive outstanding option grants.
36
Table of Contents
Comprehensive Income.
Comprehensive income is a measure of all changes in shareholders’
equity except those resulting from investments by and distributions to owners, and includes such
items as net earnings, certain foreign currency translation items, changes in the value of
qualifying hedges and pension liability adjustments.
Derivative Instruments and Hedging Activities
.
The Company accounts for all derivatives, including
those embedded in other contracts, as either assets or liabilities and measures those financial
instruments at fair value. The accounting for changes in the fair value of derivatives depends on
their intended use and designation.
As part of its risk management program, the Company may periodically use forward exchange contracts
and interest rate swaps to manage known market exposures. Terms of derivative instruments are
structured to match the terms of the risk being managed and are generally held to maturity. The
Company does not hold or issue derivative financial instruments for trading purposes. All other
contracts that contain provisions meeting the definition of a derivative also meet the requirements
of, and have been designated as, normal purchases or sales. The Company’s policy is to not enter
into contracts with terms that cannot be designated as normal purchases or sales.
In 2007, the Company entered into interest rate swap contracts that effectively fix the rates paid
on a total of $80 million of variable rate borrowings. One contract fixed the rate on $40 million
of borrowings at 4.7 percent plus the applicable spread (depending on cash flow leverage ratio)
until December 2010. The second contract fixed an additional $40 million of borrowings at 4.6
percent plus the applicable spread until January 2011. Both contracts have been designated as cash
flow hedges against interest rate volatility. Consequently, changes in the fair market value are
recorded in accumulated other comprehensive income (loss) (AOCI). Amounts included in AOCI will be
reclassified to earnings as interest rates increase and as the swap contracts approach their
expiration dates. Net amounts paid or payable under terms of the contracts were charged to
interest expense and totaled $3.0 million in 2009 and $0.9 million in 2008.
The Company periodically evaluates its monetary asset and liability positions denominated in
foreign currencies. The Company enters into forward contracts or options, or borrows in various
currencies, in order to hedge its net monetary positions. These instruments are recorded at current
market values and the gains and losses are included in other expense, net. There were seven
contracts outstanding as of December 25, 2009, with notional amounts totaling $16 million. There
were 62 contracts outstanding during all or part of 2009, with net losses of $1.5 million
offsetting $0.9 million of exchange gains on net monetary positions, included in other expense,
net. The Company believes it uses strong financial counterparts in these transactions and that the
resulting credit risk under these hedging strategies is not significant.
The Company uses significant other observable inputs to value the derivative instruments used to
hedge interest rate volatility and net monetary positions. The fair market value and balance sheet
classification of such instruments follows (in thousands):
| Balance Sheet Classification | 2009 | 2008 | ||||||||
|
Gain (loss) on interest rate hedge contracts
|
Other current liabilities | $ | (3,722 | ) | $ | (4,936 | ) | |||
|
|
||||||||||
|
Gain (loss) on foreign currency forward contracts
|
||||||||||
|
Gains
|
$ | 207 | $ | 1,868 | ||||||
|
Losses
|
(249 | ) | (670 | ) | ||||||
|
|
||||||||||
|
Net
|
Accounts receivable | $ | 1,198 | |||||||
|
|
||||||||||
| Other current liabilities | $ | (42 | ) | |||||||
|
|
||||||||||
The Company may periodically hedge other anticipated transactions, generally with forward exchange
contracts, which are designated as cash flow hedges. Gains and losses representing effective
hedges are initially recorded as a component of other comprehensive income and are subsequently
reclassified into earnings when the hedged exposure affects earnings. There were no gains or
losses on such transactions in 2009, 2008 and 2007, and there were no such transactions outstanding
as of December 25, 2009, and December 26, 2008.
Recent Accounting Pronouncements.
In September 2006, the Financial Accounting Standards Board
(FASB) issued a new accounting standard that established a consistent framework for measuring fair
value and expanded disclosures on fair market value measurements. It was effective for the Company
starting in fiscal 2008 for financial assets and liabilities. With respect to non-financial assets
and liabilities, it was effective for the Company starting in fiscal 2009. The adoption of this
standard as it pertains to non-financial assets and liabilities had no significant impact on the
consolidated financial statements.
37
Table of Contents
Subsequent Events.
The company has evaluated subsequent events through the time the financial
statements were approved for issuance on February, 15, 2010.
B. Segment Information
The Company has three reportable segments: Industrial, Contractor and Lubrication. The Industrial
segment markets equipment and pre-engineered packages for moving and applying paints, coatings,
sealants, adhesives and other fluids. Markets served include automotive and truck assembly and
components plants, wood products, rail, marine, aerospace, farm, construction, bus, recreational
vehicles, and various other industries. The Contractor segment markets sprayers for architectural
coatings for painting, roofing, texture, corrosion control and line striping and also high-pressure
washers. The Lubrication segment markets products to move and dispense lubricants for fast oil
change facilities, service garages, fleet service centers, automobile dealerships, the mining
industry and industrial lubrication. All segments market parts and accessories for their products.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The cost of manufacturing for each segment is based on product
cost, and expenses are based on actual costs incurred along with cost allocations of shared and
centralized functions based on activities performed, sales or space utilization. Assets of the
Company are not tracked along reportable segment lines. Depreciation expense is charged to the
manufacturing or operating cost center that utilizes the asset, and is then allocated to segments
on the same basis as other expenses within that cost center.
Reportable segments are defined by product. Segments are responsible for development,
manufacturing, marketing and sales of their products. This allows for focused marketing and
efficient product development. The segments share common purchasing, certain manufacturing,
distribution and administration functions.
| Reportable Segments (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Net Sales
|
||||||||||||
|
Industrial
|
$ | 312,935 | $ | 462,941 | $ | 444,725 | ||||||
|
Contractor
|
208,544 | 266,772 | 306,703 | |||||||||
|
Lubrication
|
57,733 | 87,557 | 89,911 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 579,212 | $ | 817,270 | $ | 841,339 | ||||||
|
|
||||||||||||
|
Operating Earnings
|
||||||||||||
|
Industrial
|
$ | 68,310 | $ | 138,240 | $ | 152,278 | ||||||
|
Contractor
|
28,952 | 47,156 | 81,528 | |||||||||
|
Lubrication
|
(2,907 | ) | 12,475 | 9,252 | ||||||||
|
Unallocated corporate (expense)
|
(19,888 | ) | (10,506 | ) | (10,578 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 74,467 | $ | 187,365 | $ | 232,480 | ||||||
|
|
||||||||||||
Unallocated corporate is not included in management’s measurement of segment performance and
includes such items as stock compensation, bad debt expense, charitable contributions and certain
other charges or credits driven by corporate decisions. In 2009, unallocated corporate also
included $9.4 million related to the non-service portion of pension expense.
| Geographic Information (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Net sales (based on customer location)
|
||||||||||||
|
United States
|
$ | 279,814 | $ | 384,221 | $ | 434,012 | ||||||
|
Other countries
|
299,398 | 433,049 | 407,327 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 579,212 | $ | 817,270 | $ | 841,339 | ||||||
|
|
||||||||||||
|
Long-lived assets
|
||||||||||||
|
United States
|
122,035 | 132,036 | ||||||||||
|
Other countries
|
17,018 | 17,718 | ||||||||||
|
|
||||||||||||
|
Total
|
$ | 139,053 | $ | 149,754 | ||||||||
|
|
||||||||||||
Sales to Major Customers
There were no customers that accounted for 10 percent or more of consolidated sales in 2009, 2008
or 2007.
38
Table of Contents
C. Inventories
Major components of inventories were as follows (in thousands):
| 2009 | 2008 | |||||||
|
Finished products and components
|
$ | 36,665 | $ | 50,703 | ||||
|
Products and components in various stages of
completion
|
22,646 | 24,938 | ||||||
|
Raw materials and purchased components
|
31,826 | 51,348 | ||||||
|
|
||||||||
|
|
91,137 | 126,989 | ||||||
|
Reduction to LIFO cost
|
(32,479 | ) | (35,385 | ) | ||||
|
|
||||||||
|
Total
|
$ | 58,658 | $ | 91,604 | ||||
|
|
||||||||
Inventories valued under the LIFO method were $36.7 million for 2009 and $58.1 million for 2008.
All other inventory was valued on the FIFO method.
Certain inventory quantities were reduced in 2009, resulting in liquidation of LIFO inventory
quantities carried at lower costs from prior years. The effect on net earnings was not
significant.
D. Property, Plant and Equipment
Property, plant and equipment were as follows (in thousands):
| 2009 | 2008 | |||||||
|
Land and improvements
|
$ | 10,303 | $ | 10,303 | ||||
|
Buildings and improvements
|
102,222 | 101,445 | ||||||
|
Manufacturing equipment
|
188,225 | 177,044 | ||||||
|
Office, warehouse and automotive equipment
|
31,442 | 31,619 | ||||||
|
Additions in progress
|
2,248 | 6,318 | ||||||
|
|
||||||||
|
Total property, plant and equipment
|
334,440 | 326,729 | ||||||
|
Accumulated depreciation
|
(195,387 | ) | (176,975 | ) | ||||
|
|
||||||||
|
Net property, plant and equipment
|
$ | 139,053 | $ | 149,754 | ||||
|
|
||||||||
Depreciation expense was $21.7 million in 2009, $20.9 million in 2008 and $19.5 million in 2007.
E. Income Taxes
Earnings before income tax expense consist of (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
Domestic
|
$ | 55,749 | $ | 159,972 | $ | 203,795 | ||||||
|
Foreign
|
12,918 | 18,607 | 25,041 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 68,667 | $ | 178,579 | $ | 228,836 | ||||||
|
|
||||||||||||
39
Table of Contents
Income tax expense consists of (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
Current
|
||||||||||||
|
Domestic
|
||||||||||||
|
Federal
|
$ | 17,002 | $ | 50,483 | $ | 67,255 | ||||||
|
State and local
|
(133 | ) | 2,300 | 4,600 | ||||||||
|
Foreign
|
2,953 | 4,741 | 6,023 | |||||||||
|
|
||||||||||||
|
|
19,822 | 57,524 | 77,878 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Deferred
|
||||||||||||
|
Domestic
|
(448 | ) | (436 | ) | (1,874 | ) | ||||||
|
Foreign
|
326 | 612 | (4 | ) | ||||||||
|
|
||||||||||||
|
|
(122 | ) | 176 | (1,878 | ) | |||||||
|
|
||||||||||||
|
Total
|
$ | 19,700 | $ | 57,700 | $ | 76,000 | ||||||
|
|
||||||||||||
Income taxes paid were $15.3 million, $55.8 million and $74.6 million in 2009, 2008 and 2007.
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Statutory tax rate
|
35 | % | 35 | % | 35 | % | ||||||
|
Earnings from non-U.S. sales at
lower tax rates
|
(1 | ) | (1 | ) | (1 | ) | ||||||
|
State taxes, net of federal effect
|
— | 1 | 2 | |||||||||
|
U.S. general business tax credits
|
(3 | ) | (1 | ) | (1 | ) | ||||||
|
Domestic production deduction
|
(2 | ) | (2 | ) | (2 | ) | ||||||
|
|
||||||||||||
|
Effective tax rate
|
29 | % | 32 | % | 33 | % | ||||||
|
|
||||||||||||
Deferred income taxes are provided for temporary differences between the financial reporting and
the tax basis of assets and liabilities. The deferred tax assets (liabilities) resulting from these
differences are as follows (in thousands):
| 2009 | 2008 | |||||||
|
Inventory valuations
|
$ | 7,532 | $ | 8,723 | ||||
|
Self-insurance retention accruals
|
2,403 | 2,356 | ||||||
|
Warranty reserves
|
2,370 | 2,628 | ||||||
|
Vacation accruals
|
2,025 | 2,036 | ||||||
|
Bad debt reserves
|
1,730 | 1,858 | ||||||
|
Stock compensation
|
2,000 | 2,000 | ||||||
|
Interest rate swaps
|
1,397 | 1,827 | ||||||
|
Other
|
923 | 1,579 | ||||||
|
|
||||||||
|
Total Current
|
20,380 | 23,007 | ||||||
|
|
||||||||
|
Unremitted earnings of consolidated foreign subsidiaries
|
(1,800 | ) | (1,900 | ) | ||||
|
Excess of tax over book depreciation
|
(22,114 | ) | (22,307 | ) | ||||
|
Pension liability
|
16,951 | 29,751 | ||||||
|
Postretirement medical
|
7,587 | 7,932 | ||||||
|
Stock compensation
|
5,947 | 3,864 | ||||||
|
Deferred compensation
|
833 | 806 | ||||||
|
Other
|
968 | 773 | ||||||
|
|
||||||||
|
Total Non-current
|
8,372 | 18,919 | ||||||
|
|
||||||||
|
Net deferred tax assets
|
$ | 28,752 | $ | 41,926 | ||||
|
|
||||||||
Total deferred tax assets were $65.1 million and $78.6 million, and total deferred tax liabilities
were $36.3 million and $36.7 million on December 25, 2009, and December 26, 2008.
40
Table of Contents
The Company files income tax returns in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.
The Company records penalties and accrued interest related to uncertain tax positions in income tax
expense. Total reserves for uncertain tax positions were not material.
In July 2007, the Company entered into an agreement with a syndicate of lenders providing an
unsecured credit facility for 5 years. This credit facility provides $250 million of committed
credit, available for general corporate purposes, working capital needs, share repurchases and
acquisitions. Borrowings under the facility bear interest at either the bank’s prime rate, the
federal funds rate plus 0.5 percent or the London Interbank Offered Rate plus a spread of between
0.23 percent and 0.57 percent, depending on the Company’s cash flow leverage ratio (debt to
earnings before interest, taxes, depreciation and amortization). The weighted average interest
rate on borrowings against the credit facility was 0.6 percent as of December 25, 2009. The
Company is also required to pay a facility fee on the full amount of the loan commitment at an
annual rate ranging from 0.07 percent to 0.15 percent, depending on the Company’s cash flow
leverage ratio. The agreement requires the Company to maintain certain financial ratios as to cash
flow leverage and interest coverage.
On December 25, 2009, the Company had $272 million in lines of credit, including the $250 million
in committed credit facilities described above and $22 million with foreign banks. The unused
portion of committed credit lines was $175 million as of December 25, 2009. In addition, the
Company has unused, uncommitted lines of credit with foreign banks totaling $12 million. Borrowing
rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit
and the London Interbank market. The weighted average cost of borrowing (including the effect of
interest rate swaps) was 3.3 percent, 3.9 percent and 5.3 percent for the years ended December 25,
2009, December 26, 2008 and December 28, 2007. The Company pays facility fees of up to 0.15
percent per annum on certain of these lines. No compensating balances are required.
The Company is in compliance with all financial covenants of its debt agreements.
Interest paid on debt during 2009, 2008 and 2007 was $4.8 million, $8.1 million and $2.6 million.
G. Shareholders’ Equity
At December 25, 2009, the Company had 22,549 authorized, but not issued, cumulative preferred
shares, $100 par value. The Company also has authorized, but not issued, a separate class of 3
million shares of preferred stock, $1 par value.
The Company maintains a plan in which one preferred share purchase right (Right) exists for each
common share of the Company. Each Right will entitle its holder to purchase one four-hundredth of a
share of a new series of junior participating preferred stock at an exercise price of $180, subject
to adjustment. The Rights are exercisable only if a person or group acquires beneficial ownership
of 15 percent or more of the Company’s outstanding common stock. The Rights expire in March 2010
and may be redeemed earlier by the Board of Directors for $.001 per Right. In February 2010, the
Board of Directors approved a new share rights plan with features similar to the expiring plan,
effective March 2010.
Components of accumulated other comprehensive income (loss) were (in thousands):
| 2009 | 2008 | |||||||
|
Pension and postretirement medical liability adjustment
|
$ | (48,560 | ) | $ | (70,322 | ) | ||
|
Gain (loss) on interest rate hedge contracts
|
(2,344 | ) | (3,109 | ) | ||||
|
Cumulative translation adjustment
|
(823 | ) | (1,057 | ) | ||||
|
|
||||||||
|
Total
|
$ | (51,727 | ) | $ | (74,488 | ) | ||
|
|
||||||||
H. Share-Based Awards, Purchase Plans and Compensation Cost
Stock Option and Award Plan.
The Company has a stock incentive plan under which it grants stock
options and share awards to directors, officers and other employees. Option price is the market
price on the date of grant. Options become exercisable at such time, generally over three or four
years, and in such installments as set by the Company, and expire ten years from the date of grant.
41
Table of Contents
Restricted share awards have been made to certain key employees under the plan. The market value
of restricted stock at the date of grant is charged to operations over the vesting period.
Compensation cost charged to operations for restricted share awards was $287,000 in 2009, $280,000
in 2008 and $31,000 in 2007. Individual nonemployee directors of the Company may elect to receive,
either currently or deferred, all or part of their annual retainer, and/or payment for attendance
at Board or
Committee meetings, in the form of shares of the Company’s common stock instead of cash. Under this
arrangement, the Company issued 14,952 shares in 2009, 10,228 shares in 2008 and 10,338 shares in
2007. The expense related to this arrangement is not significant.
Options on common shares granted and outstanding, as well as the weighted average exercise price,
are shown below (in thousands, except per share amounts):
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Option | Exercise | Options | Exercise | |||||||||||||
| Shares | Price | Exercisable | Price | |||||||||||||
|
Outstanding, December 29, 2006
|
3,956 | $ | 24.79 | 2,272 | $ | 16.94 | ||||||||||
|
Granted
|
1,037 | 40.08 | ||||||||||||||
|
Exercised
|
(836 | ) | 19.96 | |||||||||||||
|
Canceled
|
(378 | ) | 38.98 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding, December 28, 2007
|
3,779 | $ | 28.63 | 2,228 | $ | 21.41 | ||||||||||
|
Granted
|
819 | 35.56 | ||||||||||||||
|
Exercised
|
(419 | ) | 16.60 | |||||||||||||
|
Canceled
|
(224 | ) | 38.81 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding, December 26, 2008
|
3,955 | $ | 30.77 | 2,186 | $ | 24.98 | ||||||||||
|
Granted
|
1,180 | 20.74 | ||||||||||||||
|
Exercised
|
(164 | ) | 10.59 | |||||||||||||
|
Canceled
|
(158 | ) | 31.57 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding, December 25, 2009
|
4,813 | $ | 28.98 | 2,445 | $ | 28.38 | ||||||||||
|
|
||||||||||||||||
The following table summarizes information for options outstanding and exercisable at December 25,
2009 (in thousands, except per share and contractual term amounts):
| Options | ||||||||||||||||||||||||
| Outstanding | ||||||||||||||||||||||||
| Weighted Avg. | Options | Options | ||||||||||||||||||||||
| Remaining | Outstanding | Exercisable | ||||||||||||||||||||||
| Range of | Options | Contractual Term | Weighted Avg. | Options | Weighted Avg. | |||||||||||||||||||
| Prices | Outstanding | in Years | Exercise Price | Exercisable | Exercise Price | |||||||||||||||||||
|
$
|
9-20 | 830 | 2 | $ | 14.55 | 825 | $ | 14.54 | ||||||||||||||||
|
|
20-30 | 1,582 | 8 | 22.58 | 427 | 27.42 | ||||||||||||||||||
|
|
30-40 | 1,508 | 7 | 36.37 | 627 | 35.60 | ||||||||||||||||||
|
|
40-49 | 893 | 6 | 41.22 | 566 | 41.25 | ||||||||||||||||||
|
$
|
9-49 | 4,813 | 6 | $ | 28.98 | 2,445 | $ | 28.38 | ||||||||||||||||
The aggregate intrinsic value of exercisable option shares was $13.8 million as of December 25,
2009, with a weighted average contractual term of 4.2 years. There were approximately 4.8 million
vested share options and share options expected to vest as of December 25, 2009, with an aggregate
intrinsic value of $24.3 million, a weighted average exercise price of $28.98 and a weighted
average contractual term of 6.3 years.
Information related to options exercised follows (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
Cash received
|
$ | 1,733 | $ | 6,950 | $ | 16,688 | ||||||
|
Aggregate intrinsic value
|
2,173 | 8,734 | 17,465 | |||||||||
|
Tax benefit realized
|
800 | 3,100 | 6,500 | |||||||||
42
Table of Contents
Stock Purchase Plan.
Under the Company’s Employee Stock Purchase Plan, the purchase price of the
shares is the lesser of 85 percent of the fair market value on the first day or the last day of
the plan year. The Company issued 312,424 shares under this Plan in 2009, 216,047 shares in 2008
and 202,096 shares in 2007.
Authorized Shares.
Shares authorized for issuance under the stock option and purchase plans are
shown below (in thousands):
| Available for Future | ||||||||
| Total Shares | Issuance as of | |||||||
| Authorized | December 25, 2009 | |||||||
|
Stock Incentive Plan (2006)
|
7,375 | 2,166 | ||||||
|
Employee Stock Purchase Plan (2006)
|
2,000 | 1,472 | ||||||
|
|
||||||||
|
Total
|
9,375 | 3,638 | ||||||
|
|
||||||||
Amounts available for future issuance exclude outstanding options. Options outstanding as of
December 25, 2009, include options granted under three plans that were replaced by the Stock
Incentive Plan in 2001 and 2006. No shares are available for future grants under those plans.
Share-based Compensation.
The Company recognized share-based compensation cost of $9.4 million in
2009, $9.1 million in 2008 and $8.6 million in 2007, which reduced net income by $7.3 million, or
$0.12 per weighted common share in 2009, $6.7 million, or $0.11 per weighted common share in 2008
and $6.4 million, or $0.10 per weighted common share in 2007. As of December 25, 2009, there was
$7.0 million of unrecognized compensation cost related to unvested options, expected to be
recognized over a weighted average period of approximately two years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions and results:
| 2009 | 2008 | 2007 | ||||||||||
|
Expected life in years
|
6.0 | 6.0 | 5.6 | |||||||||
|
Interest rate
|
2.1 | % | 3.2 | % | 4.2 | % | ||||||
|
Volatility
|
30.1 | % | 25.1 | % | 25.1 | % | ||||||
|
Dividend yield
|
3.7 | % | 2.1 | % | 1.7 | % | ||||||
|
Weighted average fair value per share
|
$ | 4.27 | $ | 8.28 | $ | 10.55 | ||||||
Expected life is estimated based on vesting terms and exercise and termination history. Interest
rate is based on the U.S Treasury rate on zero-coupon issues with a remaining term equal to the
expected life of the option. Expected volatility is based on historical volatility over a period
commensurate with the expected life of options.
The fair value of employees’ purchase rights under the Employee Stock Purchase Plan was estimated
on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market
value per common share on the first day and the last day of the plan year was added to the fair
value of the employees’ purchase rights determined using the Black-Scholes option-pricing model
with the following assumptions and results:
| 2009 | 2008 | 2007 | ||||||||||
|
Expected life in years
|
1.0 | 1.0 | 1.0 | |||||||||
|
Interest rate
|
0.7 | % | 1.5 | % | 4.9 | % | ||||||
|
Volatility
|
51.5 | % | 27.1 | % | 24.4 | % | ||||||
|
Dividend yield
|
4.5 | % | 2.1 | % | 1.6 | % | ||||||
|
Weighted average fair value per share
|
$ | 5.60 | $ | 8.14 | $ | 9.79 | ||||||
43
Table of Contents
I. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share amounts):
| 2009 | 2008 | 2007 | ||||||||||
|
Net earnings available to common shareholders
|
$ | 48,967 | $ | 120,879 | $ | 152,836 | ||||||
|
|
||||||||||||
|
Weighted average shares outstanding for basic earnings per share
|
59,865 | 60,264 | 65,043 | |||||||||
|
Dilutive effect of stock options computed based on the treasury
stock method using the average market price
|
364 | 571 | 941 | |||||||||
|
|
||||||||||||
|
Weighted average shares outstanding for diluted earnings per share
|
60,229 | 60,835 | 65,984 | |||||||||
|
|
||||||||||||
|
Basic earnings per share
|
$ | 0.82 | $ | 2.01 | $ | 2.35 | ||||||
|
Diluted earnings per share
|
$ | 0.81 | $ | 1.99 | $ | 2.32 | ||||||
Stock options to purchase 2.4 million, 2.9 million and 1.1 million shares were not included in the
2009, 2008 and 2007 computations of diluted earnings per share, respectively, because they would
have been anti-dilutive.
J. Retirement Benefits
The Company has a defined contribution plan, under Section 401(k) of the Internal Revenue Code,
which provides retirement benefits to most U.S. employees. For all employees who choose to
participate, the Company matches employee contributions at a 100 percent rate, up to 3 percent of
the employee’s compensation. For employees not covered by a defined benefit plan, the Company
contributes an amount equal to 1.5 percent of the employee’s compensation. Employer contributions
totaled $2.7 million in 2009, $3.1 million in 2008 and $3.0 million in 2007.
The Company’s postretirement medical plan provides certain medical benefits for retired U.S.
employees. Employees hired before January 1, 2005, are eligible for these benefits upon retirement
and fulfillment of other eligibility requirements as specified by the plan.
The Company has both funded and unfunded noncontributory defined benefit pension plans that
together cover most U.S. employees hired before January 1, 2006, certain directors and some of the
employees of the Company’s non-U.S. subsidiaries. For U.S. plans, benefits are based on years of
service and the highest five consecutive years’ earnings in the ten years preceding retirement.
The Company funds annually in amounts consistent with minimum funding requirements and maximum tax
deduction limits.
Investment policies and strategies of the funded pension plan are based on a long-term view of
economic growth and heavily weighted toward equity securities. The primary goal of the plan’s
investments is to ensure that the plan’s liabilities are met over time. In developing strategic
asset allocation guidelines, an emphasis is placed on the long-term characteristics of individual
asset classes, and the benefits of diversification among multiple asset classes. The plan invests
primarily in common stocks and bonds, including the Company’s common stock. Target allocations for
plan assets are 80 percent equity securities, 15 percent fixed income securities and 5 percent real
estate investments. Plan assets by category and fair value measurement level as of December 25,
2009 were as follows (in thousands):
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
|
Equity
|
||||||||||||||||
|
Graco common stock
|
$ | 10,448 | $ | 10,448 | $ | — | $ | — | ||||||||
|
U.S. Large Cap
|
58,836 | 21,597 | 37,239 | — | ||||||||||||
|
U.S. Small Cap
|
24,465 | 24,465 | — | — | ||||||||||||
|
International
|
28,731 | 2,063 | 26,668 | — | ||||||||||||
|
|
||||||||||||||||
|
Total Equity
|
122,480 | 58,573 | 63,907 | — | ||||||||||||
|
Fixed income
|
35,967 | 25,305 | 10,662 | — | ||||||||||||
|
Real estate and other
|
7,642 | 956 | — | 6,686 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 166,089 | $ | 84,834 | $ | 74,569 | $ | 6,686 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
Levels within fair value hierarchy:
Level 1 — based on quoted prices in active markets for identical assets
Level 2 — based on significant observable inputs
Level 3 — based on significant unobservable inputs
44
Table of Contents
The Company uses a year-end measurement date for all of its plans. The following provides a
reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the
periods ending December 25, 2009, and December 26, 2008, and a statement of the funded status as of
the same dates (in thousands):
| Pension Benefits | Postretirement Medical Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Change in benefit obligation
|
||||||||||||||||
|
Obligation, beginning of year
|
$ | 215,154 | $ | 202,182 | $ | 23,782 | $ | 23,596 | ||||||||
|
Service cost
|
4,718 | 4,968 | 565 | 557 | ||||||||||||
|
Interest cost
|
12,305 | 12,223 | 1,313 | 1,381 | ||||||||||||
|
Actuarial loss (gain)
|
(4,961 | ) | 4,960 | (848 | ) | 393 | ||||||||||
|
Plan amendments
|
— | 514 | — | 385 | ||||||||||||
|
Exchange rate changes
|
210 | (317 | ) | — | — | |||||||||||
|
Benefit payments
|
(9,229 | ) | (9,376 | ) | (2,086 | ) | (2,530 | ) | ||||||||
|
|
||||||||||||||||
|
Obligation, end of year
|
$ | 218,197 | $ | 215,154 | $ | 22,726 | $ | 23,782 | ||||||||
|
|
||||||||||||||||
|
Change in plan assets
|
||||||||||||||||
|
Fair value, beginning of year
|
$ | 128,720 | $ | 215,378 | $ | — | $ | — | ||||||||
|
Actual return on assets
|
30,757 | (78,935 | ) | — | — | |||||||||||
|
Employer contributions
|
15,841 | 1,653 | 2,086 | 2,530 | ||||||||||||
|
Benefit payments
|
(9,229 | ) | (9,376 | ) | (2,086 | ) | (2,530 | ) | ||||||||
|
|
||||||||||||||||
|
Fair value, end of year
|
$ | 166,089 | $ | 128,720 | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
|
Funded status
|
$ | (52,108 | ) | $ | (86,434 | ) | $ | (22,726 | ) | $ | (23,782 | ) | ||||
|
|
||||||||||||||||
|
Amounts recognized in consolidated balance sheets
|
||||||||||||||||
|
Current liabilities
|
$ | 672 | $ | 726 | $ | 2,006 | $ | 2,222 | ||||||||
|
Non-current liabilities
|
51,436 | 85,708 | 20,720 | 21,560 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities
|
$ | 52,108 | $ | 86,434 | $ | 22,726 | $ | 23,782 | ||||||||
|
|
||||||||||||||||
The accumulated benefit obligation as of year-end for all defined benefit pension plans was $202
million for 2009 and $195 million for 2008. Information for plans with an accumulated benefit
obligation in excess of plan assets follows (in thousands):
| 2009 | 2008 | |||||||
|
Projected benefit obligation
|
$ | 218,197 | $ | 215,154 | ||||
|
Accumulated benefit obligation
|
201,628 | 195,307 | ||||||
|
Fair value of plan assets
|
166,089 | 128,720 | ||||||
The components of net periodic benefit cost for the plans for 2009, 2008 and 2007 were as follows
(in thousands):
| Pension Benefits | Postretirement Medical Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Service cost-benefits earned during the period
|
$ | 4,718 | $ | 4,968 | $ | 5,618 | $ | 565 | $ | 557 | $ | 537 | ||||||||||||
|
Interest cost on projected benefit obligation
|
12,305 | 12,223 | 11,504 | 1,313 | 1,381 | 1,345 | ||||||||||||||||||
|
Expected return on assets
|
(10,857 | ) | (18,981 | ) | (18,795 | ) | — | — | — | |||||||||||||||
|
Early retirement incentives
|
— | 530 | — | — | 385 | — | ||||||||||||||||||
|
Amortization of prior service cost (credit)
|
183 | 232 | 244 | (658 | ) | (658 | ) | (739 | ) | |||||||||||||||
|
Amortization of net loss (gain)
|
8,757 | 176 | 236 | 598 | 641 | 811 | ||||||||||||||||||
|
Cost of pension plans which are not significant
and have not adopted SFAS No. 87
|
73 | 136 | 478 | N/A | N/A | N/A | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost (credit)
|
$ | 15,179 | $ | (716 | ) | $ | (715 | ) | $ | 1,818 | $ | 2,306 | $ | 1,954 | ||||||||||
|
|
||||||||||||||||||||||||
45
Table of Contents
Amounts recognized in other comprehensive (income) loss in 2009 and 2008 were as follows (in
thousands):
| Pension Benefits | Postretirement Medical Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Prior service cost (credit) arising during the period
|
$ | — | $ | 514 | $ | — | $ | 385 | ||||||||
|
Net loss (gain) arising during the period
|
(24,848 | ) | 102,755 | (848 | ) | 393 | ||||||||||
|
Amortization of prior service credit (cost)
|
(183 | ) | (232 | ) | 658 | 658 | ||||||||||
|
Amortization of net gain (loss)
|
(8,757 | ) | (706 | ) | (598 | ) | (1,026 | ) | ||||||||
|
|
||||||||||||||||
|
Total
|
$ | (33,788 | ) | $ | 102,331 | $ | (788 | ) | $ | 410 | ||||||
|
|
||||||||||||||||
Amounts included in accumulated other comprehensive (income) loss as of December 25, 2009 and
December 26, 2008, that had not yet been recognized as components of net periodic benefit cost,
were as follows (in thousands):
| Pension Benefits | Postretirement Medical Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Prior service cost (credit)
|
$ | 251 | $ | 431 | $ | (5,074 | ) | $ | (5,732 | ) | ||||||
|
Net loss
|
73,994 | 107,605 | 7,907 | 9,352 | ||||||||||||
|
|
||||||||||||||||
|
Net before income taxes
|
74,245 | 108,036 | 2,833 | 3,620 | ||||||||||||
|
Income taxes
|
(27,470 | ) | (39,995 | ) | (1,048 | ) | (1,338 | ) | ||||||||
|
|
||||||||||||||||
|
Net
|
$ | 46,775 | $ | 68,041 | $ | 1,785 | $ | 2,282 | ||||||||
|
|
||||||||||||||||
Amounts included in accumulated other comprehensive (income) loss that are expected to be
recognized as components of net periodic benefit cost in 2010 were as follows (in thousands):
| Postretirement | ||||||||
| Pension | Medical | |||||||
| Benefits | Benefits | |||||||
|
Prior service cost (credit)
|
$ | 113 | $ | (658 | ) | |||
|
Net loss (gain)
|
5,868 | 569 | ||||||
|
|
||||||||
|
Net before income taxes
|
5,981 | (89 | ) | |||||
|
Income taxes
|
(2,213 | ) | 33 | |||||
|
|
||||||||
|
Net
|
$ | 3,768 | $ | (56 | ) | |||
|
|
||||||||
Assumptions used to determine the Company’s benefit obligations are shown below:
| Pension Benefits | Postretirement Medical Benefits | |||||||||||||||
| Weighted average assumptions | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Discount rate
|
6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||
|
Rate of compensation increase
|
3.8 | % | 3.8 | % | N/A | N/A | ||||||||||
Assumptions used to determine the Company’s net periodic benefit cost are shown below:
| Pension Benefits | Postretirement Medical Benefits | |||||||||||||||||||||||
| Weighted average assumptions | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Discount rate
|
6.0 | % | 6.2 | % | 5.7 | % | 6.0 | % | 6.3 | % | 5.8 | % | ||||||||||||
|
Expected return on assets
|
8.5 | % | 9.0 | % | 9.0 | % | N/A | N/A | N/A | |||||||||||||||
|
Rate of compensation increase
|
3.8 | % | 3.8 | % | 3.8 | % | N/A | N/A | N/A | |||||||||||||||
Several sources of information are considered in determining the expected rate of return
assumption, including the allocation of plan assets, the input of actuaries and professional
investment advisors, and historical long-term returns. In setting the return assumption, the
Company recognizes that historical returns are not always indicative of future returns and also
considers the long-term nature of its pension obligations.
46
Table of Contents
The Company’s U.S. retirement medical plan limits the annual cost increase that will be paid by the
Company. In 2006, the annual cost increase limitation was changed to 5 percent for 2007, 4 percent
for 2008 and 3 percent thereafter. In 2007, the Company made changes in the administration of the
plan to facilitate compliance with the cost limitation provisions. The Company also amended the
plan to remove the 30-year service cap applied to the calculation of service-based credits provided
to future retirees for postretirement health care costs. In measuring the accumulated
postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed
to be 9 percent for 2010, decreasing ratably each year to a constant rate of 4.5 percent in 2025
and thereafter, subject to the plan’s annual increase limitation.
At December 25, 2009, a one percent change in assumed health care cost trend rates would have no
significant impact on the service and interest cost components of net periodic postretirement
health care benefit cost or the APBO for health care benefits.
The Company expects to contribute $0.7 million to its unfunded pension plans and $2.0 million to
the postretirement medical plan in 2010. The Company expects that no contribution to the funded
pension plan will be required in 2010. Estimated future benefit payments are as follows (in
thousands):
| Postretirement | ||||||||
| Pension | Medical | |||||||
| Benefits | Benefits | |||||||
|
2010
|
$ | 9,873 | $ | 2,006 | ||||
|
2011
|
10,489 | 1,909 | ||||||
|
2012
|
11,182 | 1,759 | ||||||
|
2013
|
11,942 | 1,682 | ||||||
|
2014
|
12,814 | 1,704 | ||||||
|
Years 2015 - 2019
|
75,269 | 9,262 | ||||||
K. Commitments and Contingencies
Lease Commitments
.
Aggregate annual rental commitments under operating leases with noncancelable
terms of more than one year were $3.9 million at December 25, 2009, payable as follows (in
thousands):
| Vehicles & | ||||||||||||
| Buildings | Equipment | Total | ||||||||||
|
2010
|
$ | 396 | $ | 1,256 | $ | 1,652 | ||||||
|
2011
|
85 | 839 | 924 | |||||||||
|
2012
|
28 | 408 | 436 | |||||||||
|
2013
|
22 | 136 | 158 | |||||||||
|
2014
|
22 | 57 | 79 | |||||||||
|
Thereafter
|
626 | — | 626 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 1,179 | $ | 2,696 | $ | 3,875 | ||||||
|
|
||||||||||||
Total rental expense was $3.1 million for 2009, $2.6 million for 2008 and $2.3 million for 2007.
Other Commitments.
The Company is committed to pay suppliers under the terms of open purchase
orders issued in the normal course of business totaling approximately $19 million at December 25,
2009. The Company also has commitments with certain suppliers to purchase minimum quantities, and
under the terms of certain agreements, the Company is committed for certain portions of the
supplier’s inventory. The Company does not purchase, or commit to purchase quantities in excess of
normal usage or amounts that cannot be used within one year. The Company estimates that the
maximum commitment amount under such agreements does not exceed $16 million. In addition, the
Company could be obligated to perform under standby letters of credit totaling $2 million at
December 25, 2009. The Company has also guaranteed the debt of its subsidiaries for up to $30
million.
Contingencies.
The Company is party to various legal proceedings arising in the normal course of
business. The Company is actively defending these matters and has recorded an estimate of the
probable costs. Management does not expect that resolution of these matters will have a material
adverse effect on the Company, although the ultimate outcome cannot be determined based on
available information.
47
Table of Contents
L. Acquisitions
In February 2008, the Company acquired GlasCraft Inc. for approximately $35 million cash.
GlasCraft had sales of approximately $18 million in 2007. It designed, manufactured and sold spray
systems for the composites manufacturing industry and high performance dispense systems for the
polyurethane foam and polyurea coatings industries. The products, brands, distribution channels
and engineering capabilities of GlasCraft expanded and complemented the Company’s Industrial
Equipment business. GlasCraft operations were moved from Indiana to Company facilities in Ohio,
South Dakota and Minnesota in 2008.
In September 2008, the Company acquired certain assets of Lubrication Scientifics, Inc. (LubeSci)
for approximately $5 million cash. LubeSci designed and manufactured automated lubrication
equipment used in industrial markets and had sales of approximately $3 million in 2007. LubeSci
operations were moved to Company facilities in Minnesota from California in 2008.
In October 2008, the Company acquired the Airlessco assets of Durotech Co. in Moorpark, California,
for approximately $15 million cash. Airlessco is a line of spray-painting equipment that generated
approximately $14 million of sales in 2007, and complements the Company’s Contractor Equipment
business. The move of Airlessco operations to other existing Company facilities will be completed
in 2010.
The purchase price of each acquisition was allocated based on estimated fair values as follows (in
thousands):
| GlasCraft | LubeSci | Airlessco | ||||||||||
|
Accounts receivable and prepaid expenses
|
$ | 2,200 | $ | — | $ | 2,400 | ||||||
|
Inventories
|
3,700 | 500 | 3,000 | |||||||||
|
Deferred income taxes
|
700 | — | — | |||||||||
|
Property, plant and equipment
|
700 | 600 | 500 | |||||||||
|
Identifiable intangible assets
|
18,200 | 900 | 5,500 | |||||||||
|
Goodwill
|
17,700 | 2,500 | 4,800 | |||||||||
|
|
||||||||||||
|
Total purchase price
|
43,200 | 4,500 | 16,200 | |||||||||
|
Current liabilities assumed
|
(1,000 | ) | — | (800 | ) | |||||||
|
Deferred income taxes
|
(6,900 | ) | — | — | ||||||||
|
|
||||||||||||
|
Net assets acquired
|
$ | 35,300 | $ | 4,500 | $ | 15,400 | ||||||
|
|
||||||||||||
Identifiable intangible assets and estimated useful life were as follows (in thousands):
| GlasCraft | LubeSci | Airlessco | ||||||||||
|
Product documentation (5 years)
|
$ | 900 | $ | — | $ | — | ||||||
|
Customer relationships (5 - 6 years)
|
14,100 | 600 | 4,600 | |||||||||
|
Proprietary technology (3 - 5 years)
|
500 | 300 | — | |||||||||
|
Tradenames and trademarks (3 years)
|
— | — | 800 | |||||||||
|
Patents (3 years)
|
— | — | 100 | |||||||||
|
|
||||||||||||
|
Total (6 years, weighted average)
|
15,500 | 900 | 5,500 | |||||||||
|
Brand names (indefinite useful life)
|
2,700 | — | — | |||||||||
|
|
||||||||||||
|
Total identifiable intangible assets
|
$ | 18,200 | $ | 900 | $ | 5,500 | ||||||
|
|
||||||||||||
None of the GlasCraft goodwill or identifiable intangible assets is deductible for tax purposes.
Goodwill and identifiable intangible assets from the acquisitions of LubeSci and Airlessco are
deductible for tax purposes.
48
Table of Contents
None.
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal year covered by this report, the Company carried out an evaluation of
the effectiveness of the design and operation of its disclosure controls and procedures. This
evaluation was done under the supervision and with the participation of the Company’s President and
Chief Executive Officer, the Chief Financial Officer and Treasurer, the Vice President and
Controller, and the Vice President, General Counsel and Secretary. Based upon that evaluation,
they concluded that the Company’s disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control Over Financial Reporting
The information under the heading “Management’s Report on Internal Control Over Financial
Reporting” in Part II, Item 8, of this 2009 Annual Report on Form 10-K is incorporated herein by
reference.
Reports of Independent Registered Public Accounting Firm
The information under the heading “Reports of Independent Registered Public Accounting Firm:
Internal Control Over Financial Reporting” in Part II, Item 8, of this 2009 Annual Report on Form
10-K is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
During the fourth quarter, there was no change in the Company’s internal control over financial
reporting that has materially affected or is reasonably likely to materially affect the Company’s
internal control over financial reporting.
Not applicable.
The information under the heading “Executive Officers of the Company” in Part I of this 2009 Annual
Report on Form 10-K and the information under the headings “Election of Directors,” and “Director
Qualifications and Selection Process” of our Company’s Proxy Statement for its 2010 Annual Meeting
of Shareholders, to be held on April 23, 2010 (the “Proxy Statement”), is incorporated herein by
reference.
Audit Committee Members and Audit Committee Financial Expert
The information under the heading “Committees of the Board of Directors” of our Company’s Proxy
Statement is incorporated herein by reference.
Corporate Governance Guidelines, Committee Charters and Code of Ethics
Our Company has adopted Corporate Governance Guidelines and Charters for the Audit, Governance, and
Management Organization and Compensation Committees of the Board of Directors. We have also issued
Code of Ethics and Business Conduct (Code of Ethics) that applies to our principal executive
officer, principal financial officer, principal accounting officer, all officers, directors, and
employees of Graco Inc. and all of its subsidiaries and branches worldwide. The Corporate
Governance Guidelines, Committee Charters, and Code of Ethics, with any amendments or waivers
thereto, may be accessed free of charge by visiting the Graco website at www.graco.com.
49
Table of Contents
Our Company intends to post on the Graco website any amendment to, or waiver from, a provision of
the Code of Ethics that applies to our principal executive officer, principal financial officer,
principal accounting officer, controller and other persons performing similar functions within four
business days following the date of such amendment or waiver.
Section 16(a) Reporting Compliance
The information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the
Company’s Proxy Statement is incorporated herein by reference.
The information contained under the headings “Director Compensation,” “Executive Compensation,”
“Compensation Committee Interlocks and Insider Participation” and “Report of the Management
Organization and Compensation Committee” of the Proxy Statement is incorporated herein by
reference.
The information contained under the headings “Equity Compensation Plan Information” and “Beneficial
Ownership of Shares” of the Proxy Statement is incorporated herein by reference.
The information under the headings “Related Person Transaction Approval Policy” and “Director
Independence” of the Proxy Statement is incorporated herein by reference.
The information under the headings “Independent Registered Public Accounting Firm Fees and
Services” and “Pre-Approval Policies” of the Proxy Statement is incorporated herein by reference.
50
Table of Contents
| (a) | The following documents are filed as part of this report: |
| (1 | ) |
Financial Statements
See Part II |
||||||
|
|
||||||||
| (2 | ) |
Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts |
52 | |||||
|
|
||||||||
|
All other schedules are omitted because they are not applicable, or are not required, or
because the required information is included in the Consolidated Financial Statements or Notes thereto.
|
||||||||
|
|
||||||||
| (3 | ) |
Management Contract, Compensatory Plan or Arrangement. (See Exhibit Index)
Those entries marked by an asterisk are Management Contracts, Compensatory Plans or Arrangements. |
54 |
51
Table of Contents
Schedule II — Valuation and Qualifying Accounts
Graco Inc. and Subsidiaries
(in thousands)
| Additions | ||||||||||||||||||||
| Balance at | charged to | Deductions | Other | Balance at | ||||||||||||||||
| beginning | costs and | from | add | end | ||||||||||||||||
| of year | expenses | reserves 1 | (deduct) 2 | of year | ||||||||||||||||
|
Year ended
|
||||||||||||||||||||
|
December 25, 2009
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 2,200 | $ | 900 | $ | 1,000 | $ | — | $ | 2,100 | ||||||||||
|
Allowance for returns and credits
|
4,400 | 8,900 | 8,900 | — | 4,400 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 6,600 | $ | 9,800 | $ | 9,900 | $ | — | $ | 6,500 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
December 26, 2008
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 2,500 | $ | — | $ | 400 | $ | 100 | $ | 2,200 | ||||||||||
|
Allowance for returns and credits
|
4,000 | 12,000 | 11,600 | — | 4,400 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 6,500 | $ | 12,000 | $ | 12,000 | $ | 100 | $ | 6,600 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
December 28, 2007
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 2,600 | $ | 200 | $ | 400 | $ | 100 | $ | 2,500 | ||||||||||
|
Allowance for returns and credits
|
3,200 | 12,400 | 11,600 | — | 4,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 5,800 | $ | 12,600 | $ | 12,000 | $ | 100 | $ | 6,500 | ||||||||||
|
|
||||||||||||||||||||
| 1 | For doubtful accounts, represents amounts determined to be uncollectible and charged against reserve, net of collections on accounts previously charged against reserves. For returns and credits, represents amounts of credits issued and returns processed. | |
| 2 | Includes amounts assumed or established in connection with acquisitions and effects of foreign currency translation. |
52
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Graco Inc.
|
/s/
Patrick J. McHale
|
February 15, 2010 | |
|
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
/s/
Patrick J. McHale
|
February 15, 2010 | |
|
President and Chief Executive Officer
|
||
|
(Principal Executive Officer)
|
||
|
|
||
|
/s/
James A. Graner
|
February 15, 2010 | |
|
Chief Financial Officer and Treasurer
|
||
|
(Principal Financial Officer)
|
||
|
|
||
|
/s/
Caroline M. Chambers
|
February 15, 2010 | |
|
Vice President and Controller
|
||
|
(Principal Accounting Officer)
|
|
Lee R. Mitau
|
Director, Chairman of the Board | |
|
William J. Carroll
|
Director | |
|
Jack W. Eugster
|
Director | |
|
J. Kevin Gilligan
|
Director | |
|
Patrick J. McHale
|
Director | |
|
Marti Morfitt
|
Director | |
|
William G. Van Dyke
|
Director | |
|
R. William Van Sant
|
Director |
Patrick J. McHale, by signing his name hereto, does hereby sign this document on behalf of himself
and each of the above named directors of the Registrant pursuant to powers of attorney duly
executed by such persons.
|
/s/
Patrick J. McHale
|
February 15, 2010 | |
|
(For himself and as attorney-in-fact)
|
53
Table of Contents
Exhibit Index
| Exhibit | ||
| Number | Description | |
|
2.1
|
Stock Purchase Agreement By and Among PMC Global, Inc. Gusmer Machinery Group, Inc. and Graco Inc., dated as of February 4, 2005 (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 8-K dated February 10, 2005.) | |
|
|
||
|
2.2
|
Stock Purchase Agreement By and Among PMC Europe Investments, S.L. and Graco Inc. dated as of February 4, 2005. (Incorporated by reference to Exhibit 2.2 to the Company’s Report on Form 8-K dated February 10, 2005.) | |
|
|
||
|
3.1
|
Restated Articles of Incorporation as amended June 14, 2007. (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) | |
|
|
||
|
3.2
|
Restated Bylaws as amended June 13, 2002. (Incorporated by reference to Exhibit 3 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 28, 2002.) | |
|
|
||
|
4.1
|
Share Rights Agreement dated as of February 25, 2000, between the Company and Wells Fargo, formerly known as Norwest Bank Minnesota, National Association, as Rights Agent. (Incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A dated March 9, 2000.) | |
|
|
||
|
4.2
|
Credit Agreement dated July 12, 2007, between the Company and U.S. Bank National Association, JPMorgan Chase Bank, N.A., Wells Fargo Bank, National Association, and Bank of America, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated July 12, 2007.) | |
|
|
||
|
*10.1
|
Executive Officer Bonus Plan as amended and restated December 23, 2008. (Incorporated by reference to Exhibit 10.1 to the Company’s 2008 Annual Report on Form 10-K.) | |
|
|
||
|
*10.2
|
Executive Officer Annual Incentive Bonus Plan as amended and restated December 23, 2008. (Incorporated by reference to Exhibit 10.2 to the Company’s 2008 Annual Report on Form 10-K.) | |
|
|
||
|
*10.3
|
Graco Inc. Nonemployee Director Stock Option Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) | |
|
|
||
|
*10.4
|
Long Term Stock Incentive Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) | |
|
|
||
|
*10.5
|
Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed March 14, 2006.) | |
|
|
||
|
10.6
|
Employee Stock Incentive Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) | |
|
|
||
|
*10.7
|
Deferred Compensation Plan Restated, effective December 1, 1992. (Incorporated by reference to Exhibit 2 to the Company’s Report on Form 8-K dated March 11, 1993.) First Amendment dated September 1, 1996. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the twenty-six weeks ended June 27, 1997.) Second Amendment dated May 27, 2000. (Incorporated by reference to Exhibit 10.7 to the Company’s 2005 Annual Report on Form 10-K.) Third Amendment adopted on December 19, 2002. (Incorporated by reference to Exhibit 10.7 to the Company’s 2005 Annual Report on Form 10-K.) Fourth Amendment adopted June 14, 2007. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) | |
|
|
||
|
*10.8
|
Deferred Compensation Plan (2005 Statement) as amended and restated on April 4, 2005. (Incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 10-Q for the thirteen weeks ended July 1, 2005.) Second Amendment dated November 1, 2005. (Incorporated by reference to Exhibit 10.8 to the Company’s 2005 Annual Report on Form 10-K.) Third Amendment adopted on December 29, 2008. (Incorporated by reference to Exhibit 10.8 to the Company’s 2008 Annual Report on Form 10-K.) | |
|
|
||
|
10.9
|
CEO Award Program. (Incorporated by reference to Exhibit 10.9 to the Company’s 2005 Annual Report on Form 10-K.) |
54
Table of Contents
| Exhibit | ||
| Number | Description | |
|
*10.10
|
Retirement Plan for Nonemployee Directors. (Incorporated by reference to Attachment C to Item 5 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 29, 1991.) First Amendment adopted on December 29, 2008. (Incorporated by reference to Exhibit 10.10 to the Company’s 2008 Annual Report on Form 10-K.) | |
|
|
||
|
*10.11
|
Graco Restoration Plan (2005 Statement). (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 29, 2006.) First Amendment adopted December 8, 2006. (Incorporated by reference to Exhibit 10.12 to the Company’s 2006 Annual Report on Form 10-K.) Second Amendment adopted August 15, 2007. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 28, 2007.) Third Amendment adopted March 27, 2008. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 28, 2008.) Fourth Amendment adopted December 29, 2008. (Incorporated by reference to Exhibit 10.11 to the Company’s 2008 Annual Report on Form 10-K.) | |
|
|
||
|
*10.12
|
Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Nonemployee Director Stock Option Plan. (Incorporated by reference to Exhibit 10.11 to the Company’s 2001 Annual Report on Form 10-K.) | |
|
|
||
|
*10.13
|
Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.22 to the Company’s 2002 Annual Report on Form 10-K.) Amended form of agreement for awards made to nonemployee directors. (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 26, 2004.) | |
|
|
||
|
*10.14
|
Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) Amended form of agreement for awards made to nonemployee directors in 2008. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 27, 2008.) Amended and restated form of agreement for awards made to nonemployee directors in 2009. | |
|
|
||
|
*10.15
|
Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 10.12 to the Company’s 2001 Annual Report on Form 10-K.) | |
|
|
||
|
*10.16
|
Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 29, 2002.) Amended form of agreement for awards made to Chief Executive Officer in 2001 and 2002. Amended form of agreement for awards made to executive officers in 2003. (Incorporated by reference to Exhibit 10.15 of the Company’s 2003 Annual Report on Form 10-K.) Amended form of agreement for awards made to executive officers in 2004. Amended form of agreement for awards made to Chief Executive Officer in 2004. (Incorporated by reference to Exhibit 10.2 and 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 26, 2004.) | |
|
|
||
|
*10.17
|
Stock Option Agreement. Form of agreement used for award in 2007 of non-incentive stock options to executive officers under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2007.) Amended form of agreement for awards made to executive officers in 2008 (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 28, 2008.) | |
|
|
||
|
*10.18
|
Stock Option Agreement. Form of agreement used for award in 2007 of non-incentive stock options to chief executive officer under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2007.) Amended form of agreement for awards made to chief executive officer in 2008 (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 28, 2008.) | |
|
|
||
|
*10.19
|
Executive Deferred Compensation Agreement. Form of supplementary agreement entered into by the Company which provides a retirement benefit to one executive officer, as amended by First Amendment, effective September 1, 1990. (Incorporated by reference to Exhibit 3 to the Company’s Report on Form 8-K dated March 11, 1993.) As |
55
Table of Contents
| Exhibit | ||
| Number | Description | |
|
|
further amended by agreement, effective December 4, 2008. (Incorporated by reference to Exhibit 10.19 to the Company’s 2008 Annual Report on Form 10-K.) | |
|
|
||
|
*10.20
|
Executive Officer Restricted Stock Agreement. Form of agreement used to award restricted stock to selected executive officers. (Incorporated by reference to Exhibit 10.20 to the Company’s 2007 Annual Report on Form 10-K.) | |
|
|
||
|
*10.21
|
Election Form. Form of agreement used for the issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.17 to the Company’s 2004 Annual Report on Form 10-K.) Amended form of agreement used for the 2006 plan year. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) | |
|
|
||
|
*10.22
|
Election Form. Form of agreement used for the 2007 plan year for the issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) Amended form of agreement used for the 2008 plan year. (Incorporated by reference to Exhibit 10.22 to the Company’s 2007 Annual Report on Form 10-K.) Amended form of agreement used for 2009 plan year. (Incorporated by reference to Exhibit 10.22 to the Company’s 2008 Annual Report on Form 10-K.) Amended form of agreement used for 2010 plan year. | |
|
|
||
|
*10.23
|
Key Employee Agreement. Form of agreement used with chief executive officer. (Incorporated by reference to Exhibit 10.24 to the Company’s 2007 Annual Report on Form 10-K.) | |
|
|
||
|
*10.24
|
Key Employee Agreement. Form of agreement used with executive officers reporting to the chief executive officer. (Incorporated by reference to Exhibit 10.25 to the Company’s 2007 Annual Report on Form 10-K.) | |
|
|
||
|
*10.25
|
Key Employee Agreement. Form of agreement used with executive officer reporting to an executive officer other than the chief executive officer. (Incorporated by reference to Exhibit 10.26 to the Company’s 2007 Annual Report on Form 10-K.) | |
|
|
||
|
*10.26
|
Executive Group Long-Term Disability Policy as revised in 1995. (Incorporated by reference to Exhibit 10.23 to the Company’s 2004 Annual Report on Form 10-K.) As enhanced by Supplemental Income Protection Plan in 2004. (Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K.) | |
|
|
||
|
*10.27
|
Amendment to the 2003 through 2006 Nonstatutory Stock Option Agreements of one nonemployee director. | |
|
|
||
|
11
|
Statement of Computation of Earnings per share included in Note I on page 44. | |
|
|
||
|
21
|
Subsidiaries of the Registrant included herein on page 58. | |
|
|
||
|
23
|
Independent Registered Public Accounting Firm’s Consent included herein on page 59. | |
|
|
||
|
24
|
Power of Attorney included herein on page 60. | |
|
|
||
|
31.1
|
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) included herein on page 61. | |
|
|
||
|
31.2
|
Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) included herein on page 62. | |
|
|
||
|
32
|
Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C. included herein on page 63. | |
|
|
||
|
99
|
Cautionary Statement Regarding Forward-Looking Statements included herein on page 64. |
Except as otherwise noted, all documents incorporated by reference above relate to File No.
001-09249.
| * | Management Contracts, Compensatory Plans or Arrangements. |
56
Table of Contents
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the
rights of holders of certain long-term debt of the Company and its subsidiaries are not filed as
exhibits because the amount of debt authorized under any such instrument does not exceed 10 percent
of the total assets of the Company and its subsidiaries. The Company agrees to furnish copies
thereof to the Securities and Exchange Commission upon request.
57
TABLE OF CONTENTS
Part IItem 1 BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For The Company S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedule