UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    for the fiscal year endedDecember 27, 201326, 2014, or

 

[  ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  for the transition period from                    to                    .

Commission File No. 001-09249

Graco Inc.

(Exact name of Registrant as specified in its charter)

Minnesota

41-0285640

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

88 –11th Avenue Northeast

Minneapolis, MN 55413

(Address of principal executive offices) (Zip Code)

(612) 623-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $1.00 per share

Shares registered on the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  X   No    

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      No  X 

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    X    No    

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   X   No    

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation 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 thisForm 10-K or any amendment to thisForm 10-K. [X]

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   X    Accelerated filer    Non-accelerated filer    Smaller reporting company    

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).

Yes     No   X 

The aggregate market value of 60,501,32959,350,426 shares of common stock held by non-affiliates of the registrant was $3,824,289,015$4,615,089,158 as of June 28, 2013.27, 2014.

60,862,15458,991,622 shares of common stock were outstanding as of February 4, 2014.3, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 25, 2014,24, 2015, are incorporated by reference into Part III, as specifically set forth in said Part III.

 


INDEX TO ANNUAL REPORT

ON FORM 10-K

 

 

 

 

  Page 

Part I

Item 1

Business

 3  

Item 1A

Risk Factors

 76  

Item 1B

Unresolved Staff Comments

 9  

Item 2

Properties

 109  

Item 3

Legal Proceedings

 1211  

Item 4

Mine Safety Disclosures

 1211  

Executive Officers of Our Company

 12  

Part II

Item 5

Market for the Company’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 14  

Item 6

Selected Financial Data

 15  

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 16  

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

 27  

Item 8

Financial Statements and Supplementary Data

 2829  

Management’s Report on Internal Control Over Financial Reporting

 2829  

Reports of Independent Registered Public Accounting Firm

 2930  

Consolidated Statements of Earnings

 3132  

Consolidated Statements of Comprehensive Income

31

Consolidated Balance Sheets

 32  

Consolidated Balance Sheets

33

Consolidated Statements of Cash Flows

 3334  

Consolidated Statements of Shareholders’ Equity

 3435  

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 5658  

Item 9A

Controls and Procedures

 5658  

Item 9B

Other Information

 5658  

Part III

Item 10

Directors, Executive Officers and Corporate Governance

 5759  

Item 11

Executive Compensation

 5759  

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 5759  

Item 13

Certain Relationships and Related Transactions, and Director Independence

 5759  

Item 14

Principal Accounting Fees and Services

 5759  

Part IV

Item 15

Exhibits, Financial Statement Schedule

 5860  

Exhibit Index

 6163  

 

ACCESS TO REPORTS

Investors may obtain access free of charge to the Graco Inc. Annual Report onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, other reports and amendments to the 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.

PART I

Item 1. Business

Graco Inc. and, together with its subsidiaries (“Graco,” “us,” “we,” or “our Company”), is a multi-national manufacturing company. We design, manufacture and market premium equipment to pump, meter, mix and dispense a wide variety of fluids and coatings. Our equipment is used aroundin the world in a broad range of industries, including construction; automotive;construction, automotive, industrial, and machinery; mining, oil and gas;natural gas, process, public works and other industries.

We sellclassify our business into three reportable segments, each with a worldwide focus: Industrial, Contractor and Lubrication (more details below). Financial information concerning these segments is set forth in Part II, Item 7,Results of Operationsand Note B to the Consolidated Financial Statements of this Form 10-K.

Each segments sells its products in the following geographic markets: North, Central and South America (the Americas);“Americas”), Europe, Middle East and Africa (EMEA);(“EMEA”), and Asia Pacific. Sales in the Americas represent approximately 5456 percent of our Company’s total sales; salessales. Sales in EMEA represent approximately 26 percent; and sales25 percent. Sales in Asia Pacific represent approximately 2019 percent. Part II, Item 7,Results of Operationsand Note B to the Consolidated Financial Statements of this Form 10-K contain financial information about these geographic markets. We provide marketing and product design in each of these geographic regions. Our Company also provides application assistance to distributors and employs sales personnel in each of these geographic regions.

We classifyspecialize in providing equipment solutions for difficult-to-handle materials with high viscosities, abrasive or corrosive properties and multiple component materials that require precise ratio control. We aim to serve niche markets, providing high customer value through product differentiation. Our products enable customers to reduce their use of labor, material and energy, improve quality and achieve environmental compliance. We have particularly strong manufacturing and engineering capabilities.

We make significant investments in developing innovative, high quality products. We strive to grow into new geographic markets by strategically adding commercial resources and third party distribution in growing and emerging markets. We have grown our business intothird party distribution to have specialized experience in particular end user applications. We leverage our product technologies for new applications and industries. We make targeted acquisitions, completing three reportable segments, each with a worldwide focus: Industrial, Contractoracquisitions in fiscal year 2014 and Lubrication. Financial information concerningthree acquisitions in early fiscal year 2015. Together, these segments is set forth in Part II, Item 7,Results of Operationscomprise our long-term growth strategies, which we coordinate and Note B to the Consolidated Financial Statements of this Form 10-K.drive across our geographic regions.

Graco Inc. is a Minnesota corporation and was incorporated in 1926. For more information about our Company and our 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”).

Our Company’s Strengths and Objectives

We specialize in providing fluid handling equipment solutions for difficult-to-handle materials with high viscosities, abrasive or corrosive properties and multiple component materials that require precise ratio control. We aim to serve niche markets, providing high customer value through product differentiation. Our products enable customers to reduce their use of labor, material and energy, improve quality and achieve environmental compliance.

We strive for, and we believe we achieve, manufacturing and engineering excellence. We centralize our manufacturing operations, which allows for leveraging overhead. Graco has a continuous improvement culture, and we make ongoing capital investments in our manufacturing facilities. Our high quality manufacturing and engineering drive cost savings, reliability and quality in our products.

Our strategies for long-term growth include investing in new products, expanding geographically, targeting new industries and making acquisitions. We make significant investments in developing innovative, high quality products. We strategically add commercial resources focused on expanding third party distribution in growing and emerging markets. We leverage our product technologies for new applications and markets. We make targeted acquisitions, including one small acquisition in 2013 and a second small acquisition in early fiscal year 2014. We coordinate and drive these long-term growth strategies across our geographic regions.

We have strong relationships with material suppliers, end users and channel partners. Our channel partners, which include independent distributors and selective retailers, are present and active throughout our geographic regions. We have been successful in growing third party distribution with experience in specialized end user applications. We intend to further add and develop specialized third party distribution in all geographic regions to reach the new end user markets and applications that are the focus of many of our new product development initiatives.

Our Company’s financial performance has been consistently strong, in part due to an ability to leverage our operations. Our management strives to provide excellent returns for our shareholders.

Manufacturing and Distribution

We manufacture mosta majority of our products in the United States. We also manufacture some of our products in Belgium, Romania, Switzerland and(Industrial segment), the United Kingdom (Industrial segment), the People’s Republic of China (“P.R.C.”) (all segments), Belgium (all segments), and Romania (Industrial segment). Our manufacturing is aligned with our business segments and isco-located with product development to accelerate technology improvements and improve our cost structure. We doperform critical machining, assembly and testing in-house for most of our products to control quality, improve response time and maximizecost-effectiveness. We make our products in focused factories and product cells. We source raw materials and components from suppliers around the world.

WeFor all segments, we primarily sell our equipment primarily through third party distributors worldwide.worldwide, positioned throughout our geographic regions. We also sell to selective retailers. We primarily distribute our products from our warehouses to distributors or retailers, who sell our products to end users. Outside of the United States, our subsidiaries located in Australia,

Belgium, Japan, Italy, Korea, Mexico, the P.R.C., Switzerland and Switzerlandthe United Kingdom distribute our Company’s products. Significant operationsOperations in Maasmechelen, Belgium; St. Gallen, Switzerland; and Shanghai, P.R.C.; and Montevideo, Uruguay reinforce our commitment to their regions.

During 2013,2014, 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.

For more details on our facilities, see Item 2,Properties.

Product Development

Our primary product development efforts are carried out in facilities located in Minneapolis, Anoka and Rogers, Minnesota; North Canton, Ohio; St. Gallen, Switzerland; and Suzhou, P.R.C.; and Brighouse, United Kingdom. The product development and engineering

groups focus on new product design, product improvements, new applications for existing products and strategic technologies for their specific customer base. Our product development efforts focus on bringing new and supplemental return-on-investment value to end users of our products. Total product development expenditures for all segments were $54 million in 2014, $51 million in 2013, and $49 million in 2012, and $42 million in 2011.2012.

Our Company consistently makes significant investments in new products, and in 20132014 we invested $51$54 million, or 4.64.4 percent of sales, in our product development activities. Our product development activities are focused both on upgrades to our current product lines to provide features and benefits that will provide a return-on-investment to our end user customers and on development of products that will reach into new industries and applications to incrementally grow our sales. Sales of products that refresh and upgrade our product lines are measured and compared to planned results. Sales of products that provide entry into new industries and applications are also measured, with additional focus on commercial resources and activities to build specialized third party distribution and market acceptance by end users.

Business Segments

Industrial Segment

The Industrial segment is theour largest of our Company’s businessessegment and represents approximately 59 percent of our total sales. This segmentsales in 2014. It includes the Applied Fluid Technologies division, Industrial Products division and Process division. The Industrial segment primarily makes products for industrial customers that manufacture their own products (such as appliances, vehicles, airplanes and furniture).

Most Industrial segment equipment is sold worldwide through specialized third party distributors, integrators, design centers, original equipment manufacturers and material suppliers. Some products are sold directly to end users. We 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 manufacturers 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.

Applied Fluid Technologies

In addition to making productsThe Applied Fluid Technologies division designs and sells equipment for use by industrial customers the Applied Fluid Technologies division also sellsand specialty contractors. This equipment for use by construction contractors. The Applied Fluid Technologies division makes equipmentincludes two component proportioning systems that are used to pump, meter, mix and dispense high performance protective coatings andspray polyurethane foam (protective coatings(spray foam) and foam); and equipment to pump, meter, mix and dispense sealants and adhesives and composites (advanced fluid dispense).

We make plural component proportioning equipment that applies polyurethanepolyurea coatings. Spray foam to insulateis commonly used for insulating building walls, roofing,roofs, water heaters, refrigerators, hot tubs and other items. This equipment is used in packaging, architectural design and cavity filling. We also make equipment that applies two-component polyureaPolyurea coatings toare applied on storage tanks, pipes, roofs, truck beds, concrete and concrete. In 2013, we purchased EcoQuip Inc. EcoQuipother items. We offer a complete line of pumps and proportioning equipment that sprays specialty coatings on a variety of surfaces for protection and fireproofing. This division also manufactures vapor-abrasive blasting equipment, which is a product category complementary to protective coatings equipment.

as well as equipment that pumps, meters, mixes and dispenses sealant, adhesive and composite materials. Our advanced fluid dispense products include pumps, meters, applicators and valves that meter, mix and dispense sealant and adhesives. Thiscomposite equipment bonds, molds, seals, vacuum encapsulates, laminates and gaskets parts and devices in a wide variety of industrial applications. We also offer advanced composites equipment, which includes gel coat equipment, chop and wet-out systems, resin transfer molding systems and applicators. This equipment is used, for example,bonds, molds, seals, vacuum encapsulates, and laminates parts and devices in the manufacturea wide variety of vehicles, aircraft, boats, wind turbines and bridge materials.

A key product strategy of the Applied Fluid Technologies division is to create and sell technologically superior equipment. We also strive to offer a full range of best-value standard products by using a standardized, modular product structure, with pre-engineered products to cover a broad range of configurations andindustrial applications.

Industrial Products

The Industrial Products division makes finishing equipment that applies paint and other coatings to products such as motor vehicles, appliances, furniture and other industrial and consumer products. OurA majority of this division’s business is outside of North America.

This division’s products include liquid finishing equipment includes liquid and powder finishing products. Our finishing equipment pumps, meters andthat applies liquids on wood, metals and plastics, and coats powder finish on metals. Finishing strategies include creating and selling technologically superior equipment, providing environmental compliance solutions and providing excellent end user service through specialized third party distribution.

Our liquid finishingplastics. This equipment includes paint circulating and paint supply pumps, paint circulating advanced control systems, plural component coating proportioners, various accessories to filter, transport, agitate and regulate fluid, and 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 coatings depending on the viscosity of the fluid, the type of finish desired, and the need to maximize transfer efficiency, minimize overspray and minimize the release of volatile organic compounds into the air. Manufacturers in the automotive, automotive feeder, commercial and recreational vehicle, military and utility vehicle, aerospace, farm, construction, wood and general metals industries use our liquid finishing products.

OurWe make powder finishing products that coat powder finishing on metals. These products are sold under the Gema®Gema® trademark. Gema powder systems coat window frames, metallic furniture, automotive components and sheet metal. Primary end-usersend users of our Gema powder finishing products include manufacturers in the construction, home appliance, automotive component and custom coater industries. We strive to provide innovative production solutions in powder coating for end users in emerging and developed markets.

Process

Our Process division makes pumps of various technologies that move chemicals, water, waste water, petroleum, food and other fluids. The Process division strives to provide high quality, long lasting products with differentiated technology for specified applications. Manufacturers and processors in the food and beverage, dairy, pharmaceutical, cosmetic, oil and gas, electronics, wastewater,waste water, mining and ceramics industries use ourthese pumps. We offer pumps for sanitary applications including FDA-compliant 3-A sanitary pumps, diaphragm pumps, transfer pumps and drum and bin unloaders. Our pumps provide a mechanized solution to a traditionally manual process in a factory of moving fluids from large barrels into equipment that dispenses the fluid into jars or other containers. Subsequent to the 2013 fiscal year end, we purchased QED Environmental Systems, Inc. QED Environmental Systems is a manufacturer of fluid management solutions for theThis division makes environmental monitoring and remediation industries, an industryequipment that is used to conduct ground water sampling and ground water remediation, and for landfill liquid and gas management.

In 2014, we acquired the stock of Alco Valves Group. Alco Valves Group is based in the United Kingdom and manufactures high pressure valves used in the oil and natural gas industry. Subsequent to the 2014 fiscal year-end, we acquired High Pressure Equipment (HiP) company with facilities in the United States and the United Kingdom. HiP manufactures valves, fittings and other flow control equipment for use in ultra-high pressure environments such as the oil and natural gas industry. Also subsequent to the 2014 fiscal year-end, we purchased the White Knight Fluid Handling business, which we have had little previous presence.is based in the United States and makes pumps that are used in a variety of chemical applications.

Contractor Segment

The Contractor segment generated approximately 31 percent of our Company’s 20132014 total sales. The ContractorThrough this segment, directs its product development, sales and marketing efforts toward three broad applications:we offer sprayers that apply paint texture and pavement maintenance. The Contractor segment markets airless paint and texture sprayers (air, gas, hydraulically- and electrically-powered), accessories (spray guns, hoses and filters) and spare parts (tips and seals) to professional painters in the construction and maintenance industries, tradesmen and do-it-yourselfers. The products are distributed primarily through distributor outlets whose main products are paintwalls and other coatings. Contractor products arestructures. We offer several models of professional grade handheld paint sprayers. We also sold through general equipment distributors outside of North America. Certainmake sprayers that apply texture to walls and accessories are distributed globally through the home center channel.

ceilings, and sprayers that apply highly viscous coatings to roofs. Contractor equipment also includes a wide variety of sprayers, such as sprayers that apply markings on roads, parking lots, fields, bike paths, crosswalks and floors; texture to wallsfloors.

This segment’s end users are primarily professional painters in the construction and ceilings; highly viscous coatings to roofs;maintenance industries, tradesmen and paint to walls and structures. Contractor equipment includes scarifiers that remove markings on roads and other surfaces. We also offer several models of professional grade handheld paint sprayers.

Our Contractor segment sells broad product families with multiple offerings. Our Contractor segment strives for technological innovation in its products. Painters are encouraged to upgrade their equipment regularly to take advantage of the new and/or more advanced features. The Contractor segment strives to expand base markets using new and core technologies.

do-it-yourselfers. Contractor products are marketed and sold in all major geographic areas. We continue to add distributors throughout the world that specialize in the sale of Contractor products. Throughout the world, we are pursuing a broad strategy of converting contractors accustomed to manually applying paint and other coatings by brush-and-roller to spray technology.

Our Contractor products are distributed primarily through distributor outlets whose main products are paint and other coatings. Contractor products are also sold through general equipment distributors outside of North America. Certain sprayers and accessories are distributed globally through the home center channel.

Lubrication Segment

The Lubrication segment represented approximately 10 percent of our Company’s sales during 2013.2014. The bulk of the Lubrication segment’s sales comes from North America.

Through the Lubrication segment, focuses its engineering, marketing and sales efforts on two main applications:we offer equipment for use in vehicle services and industrial lubrication. The Lubrication segment markets and sells our lubrication equipment worldwide, although the bulk of its sales come from North America. Our lubrication products are sold through independent third party distributors and directly to original equipment manufacturers. Our key Lubrication segment strategies are to provide products with differentiated features that are unique to the industries served and to develop products for geographic expansion.servicing. We continue to expand our Lubrication segment sales and marketing resources in EMEA, Asia Pacific, and South and Central America.

In vehicle services, we supply pumps, hose reels, meters, valves and accessories. Our customers includeaccessories for use by fast oil change facilities, service garages, fleet service centers, automobile dealerships, auto parts stores, service truck builders and heavy equipment service centers.

In industrial lubrication, weWe offer systems, components and accessories for the automatic lubrication of industrial and commercial equipment, compressors, turbines and on- and off-road vehicles. We offer products that automatically lubricate bearings, gears and generators, and products that evacuate and dispense lubricants. Industries served include gas transmission and petrochemical, pulp and paper, mining and construction, agricultural equipment, food and beverage, material handling, metal manufacturing, wind energy and oil and gas exploration. In 2013, we introduced new electric grease pumps for the mining and heavy equipment industries.

Raw Materials

The primary materials and components in our products are steel of various alloys, sizes and hardness; specialty stainless steel and aluminum bar stock, tubing and castings; tungsten carbide; electric and gas motors; injection molded plastics; sheet metal; forgings; powdered metal; hoses; and electronic components. The materials and components that we use are generally adequately available through multiple sources of supply. To manage cost, we engage insource significant global sourcingamounts of materials and components from outside the United States, primarily in the Asia Pacific region.

In 2013,2014, our raw material and purchased component availability was strong, and our costs were fairly stable, although westable. We experienced price decreases in copper and rubber commodities, but had some significant increases in stainless steel, aluminum, plastics and rare earth metals. These price decreases were somewhat offset by price increases in certain specialty resins and steels. We did not experience any significant shortages of materials in 2013.chrome.

We endeavor to address fluctuations in the price and availability of various materials and components through adjustable surcharges and credits, close management of current suppliers, price negotiations and an intensive search for new suppliers. We have performed risk assessments of our key suppliers, and we factor the risks identified into our commodity plans.

Intellectual Property

We own a number of patents across our segments 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,” “Gema,” several forms of a capital “G,” and various product trademarks that are material to our business, inasmuch as they identify Graco and our products to our customers.

Competition

We encounter a wide variety of competitors that vary by product, industry and geographic area. Each of our segments generally has several competitors. Our competitors are both U.S. and foreign companies and range in size. We believe that our ability to compete depends upon product quality, product reliability, innovation, design, customer support and service, personal relationships, specialized engineering and competitive pricing. 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 may offer competitive products at lower prices. We may have to refresh our product line and continue development of our distribution channel to stay competitive. We are also facing competitors who illegally sell counterfeits of our products or otherwise infringe on our intellectual property rights. We may have to increase our intellectual property enforcement activities.

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 27, 2013.26, 2014.

Employees

As of December 27, 2013,26, 2014, we employed approximately 2,7003,100 persons, excluding the employees of the held separate Liquid Finishing businesses (see below). Of this total, approximately 8501,050 were employees based outside the United States, and 800900 were hourly factory workers in the United States. None of our Company’s United States 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 our operations.

Acquisition and Planned Divestiture of ITW Liquid Finishing Businesses

WeIn April 2012, we purchased the finishing businesses of Illinois Tool Works Inc. (“ITW Finishing Group”) in April 2012 (the “Finishing Brands Acquisition”ITW”). The acquisition included powder finishing and liquid finishing equipment operations, technologies and brands. In liquid finishing, brands include Binks® spray finishing equipment, DeVilbiss® spray guns(separately, the “Powder Finishing” and accessories, Ransburg® electrostatic equipment and accessories and BGK curing technology (“Liquid“Liquid Finishing”) businesses). In powder finishing, we acquiredResults of the Gema® business (“Powder Finishing”).Finishing businesses have been included in the Industrial segment since the date of acquisition. In March 2012, the United States Federal Trade Commission (“FTC”) issued an order for our Company to hold the Liquid Finishing assets separate from our other businesses. In May 2012, the FTC issued a proposed decision and order that requiresrequired us to sell the held separate Liquid Finishing business assets no later than 180 days from the date the order becomes final. The FTC has not yet issuedapproved a final decision and order. We believeorder that became effective on October 9, 2014.

Pursuant to the FTC will require us tofinal order, Graco must sell all of the Liquid Finishing business assets that are currently held separate. We have retainedwithin 180 days of the serviceseffective date. On October 8, 2014, the Company announced it had signed a definitive agreement to sell the Liquid Finishing business assets for $590 million cash, subject to regulatory approval and other customary closing conditions. The sale transaction is expected to close in the first half of an investment bank2015. Graco will continue to help us markethold the heldLiquid Finishing businesses separate businesses and identify potential buyers.maintain them as viable and competitive until the sale process is complete.

Item 1A. Risk FactorsRiskFactors

Changes in Laws and Regulations – Changes may impact how we can do business and the cost of doing business around the world.

The speed and frequency of implementation and the complexity of new or revised laws and regulations globally appear to be increasing. In addition, as our business grows and/or geographically expands, we may become subject to laws and regulations previously inapplicable to our business. These laws and regulations increase our costs of doing business, may affect the manner in which our products will be produced or delivered and may impact our long-term ability to provide returns to our shareholders.

Economic Environment – Demand for our products depends on the level of commercial and industrial activity worldwide.

An economic downturn or financial market turmoil may depress demand for our equipment in all major geographies and markets. If our distributors and original equipment manufacturers are 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. An economic downturn may affect our ability to satisfy the financial covenants in the terms of our financing arrangements.

Growth Strategies and Acquisitions – Our growth strategies may not provide the return on investment desired if we are not successful in implementation of these strategies.

Making acquisitions, investing in new products, expanding geographically and targeting new industries are among our growth strategies. We may not obtain the return on investment desired if we are not successful in implementing these growth strategies. Suitable acquisitions must be located, completed and effectively integrated into or added to our existing businesses or corporate structure for this growth strategy to be successful. We may not be able to obtain financing at a reasonable cost. We may be unsuccessful in acquiring and effectively integrating into or adding businesses to our current operations or corporate structure, and structure. We

may not realize projected efficiencies and cost-savings from the businesses we acquire. We cannot predict how customers, competitors, suppliers and employees will react to the acquisitions that we make. If acquired businesses do not meet performance expectations, assets acquired could be subject to impairment. We make significant investments in developing products that have innovative features and differentiated technology in their industries and in niche markets. We are expandingadding to the geographies in which we do business with third party distributors. We cannot predict whether and when we will be able to realize the expected financial results and accretive effect of the acquisitions that we make, the new products that we develop and the channel expansions that we make.

AcquisitionDivestiture - Our acquisition of the finishing businesses of ITW includes a requirement that we divest the acquired Liquid Finishing businesses, which has not been completed and remains subject to FTC approval.

OnIn April 2, 2012, the Company closed its $650 million acquisitionwe completed our purchase of the ITW finishing businesses.businesses of ITW. The acquisition added the Gema business, a global leader in powder coating technology, which represented approximately one-thirdincluded Powder Finishing and Liquid Finishing equipment operations, technologies and brands. Results of the businesses purchased. The remaining two-thirds of the acquisition is a collection of LiquidPowder Finishing businesses whichhave been included in the FTC has orderedIndustrial segment since the date of acquisition. Pursuant to be held separate

from Gema and other Graco businesses while the FTC investigates and considers a settlement proposal from Graco. In compliance with the FTC’sMarch 2012 order, the Liquid Finishing businesses are being run independently by existing management underwere to be held separate from the supervisionrest of a trustee who reports directly to the FTC. In May 2012,Graco’s businesses while the FTC issuedconsidered a proposedsettlement with Graco and determined which portions of the Liquid Finishing business Graco must divest. The FTC approved a final decision and order subjecton October 6, 2014, which became effective on October 9, 2014. Pursuant to the final order, Graco must sell the Liquid Finishing business assets within 180 days of the effective date. On October 8, 2014, the Company announced it had signed a 30-day comment period, which requires Gracodefinitive agreement to sell the Liquid Finishing business assets including business activities relatedfor $590 million cash, subject to regulatory approval and other customary closing conditions. The sale transaction is expected to close in the development, manufacture, and salefirst half of Liquid Finishing products under the Binks®, DeVilbiss®, Ransburg® and BGK brand names, no later than 180 days from the date the order becomes final. The FTC has not yet issued its final decision and order. The Company has retained the services of an investment bank to help it market the Liquid Finishing businesses and identify potential buyers. Until the sale of the Liquid Finishing business assets is completed, Graco must continue to hold the Liquid Finishing business assets separate from its other businesses and maintain them as viable and competitive. The hold separate order requires the Company to provide sufficient resources to maintain the viability, competitiveness and marketability of the Liquid Finishing businesses, including general funds, capital, working capital and reimbursement of losses. We2015. Nonetheless, we cannot predictbe certain to what extent or when the required regulatory approvalsapproval of a buyer and terms of the sale will be obtained. We cannot predict the extent of the acquired businesses required to be divested, although we believe that the FTC will require us to sell all of the Liquid Finishing business assets that are currently held separate. Additional risk factors include whether the Company will be able to find a suitable purchaser(s) and structure the divestiture on acceptable terms, andobtained, or whether the Company will be able to complete a divestiture in a time frame that is satisfactory to the FTC. Graco will continue to hold the Liquid Finishing businesses separate and maintain them as viable and competitive until the sale process is complete.

Political InstabilityEconomic EnvironmentUncertainty surrounding political leadershipDemand for our products depends on the level of commercial and industrial activity worldwide.

An economic downturn or financial market turmoil may limitdepress demand for our growth opportunities.

Domestic political instability, including government shut downs,equipment in all major geographies and markets. If our distributors and original equipment manufacturers are 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. An economic downturn may limitaffect our ability to growsatisfy the financial covenants in the terms of our financing arrangements.

Currency – Changes in currency translation rates could adversely impact our revenue and earnings.

Changes in exchange rates will impact our reported sales and earnings. A majority of our manufacturing and cost structure is based in the United States. In addition, decreased value of local currency may make it difficult for some of our distributors to purchase products.

Changes in Laws and Regulations – Changes may impact how we can do business and the cost of doing business around the world.

The speed and frequency of implementation and the complexity of new or revised laws and regulations globally appear to be increasing. In addition, as our business grows and/or geographically expands, we may become subject to laws and regulations previously inapplicable to our business. International political instabilityThese laws and regulations increase our costs of doing business, may prevent us from expandingaffect the manner in which our business into certain geographiesproducts will be produced or delivered and may also limitimpact our long-term ability to growprovide returns to our business. Terrorist activitiesshareholders.

Anti-Corruption Laws – We may incur costs and civil disturbancessuffer damages if our employees, agents, distributors or suppliers violate anti-bribery, anti-corruption or trade laws and regulations.

Bribery, corruption and trade laws and regulations, and enforcement thereof, is increasing in frequency, complexity and severity on a global basis. If our internal controls and compliance program do not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may harm our business.incur defense costs, fines, penalties and reputational damage.

Intellectual Property – Demand for our products may be affected by new entrants who copy our products and/or infringe on our intellectual property.

From time to time, our Company haswe have been faced with instances where competitors have infringed or improperly used our intellectual property and/or taken advantage of our design and development efforts. The ability to protect and enforce intellectual property rights varies across jurisdictions. Asian copiersCompetitors who copy our products are becoming more prevalent.prevalent in Asia. If our Company iswe are unable to effectively meet these challenges, they could adversely affect our revenues and profits and hamper our ability to grow.

Foreign Operations – Conducting business internationally exposes our Company to risks that could harm our business.

In 2014, approximately 53 percent of our sales were generated by customers located outside the United States. We are increasing our presence in advancing economies. Operating and selling outside of the United States exposes us to certain risks that could adversely impact our sales volume, rate of growth or profitability. These risks include: complying with foreign legal and regulatory requirements, international trade factors (export controls, trade sanctions, duties, tariff barriers and other restrictions), protection of our proprietary technology in certain countries, potentially burdensome taxes, potential difficulties staffing and managing local operations, and changes in exchange rates.

Competition – Our success depends upon our ability to develop, market and sell new products that meet our customers’ needs, and anticipate industry changes.

Our profitability will be affected if we do not develop new products and technologies that meet our customers’ needs. Our ability to develop, market and sell products that meet our customers’ needs depends upon a number of factors, including anticipating the features and products that our customers will need in the future, identifying and entering into new markets, and training our distributors. Changes in industries in which we participate, including consolidation of competitors and customers, could affect our success. Price competition and competitor strategies could affect our success.

Suppliers – Risks associated with foreign sourcing, supply interruption, delays in raw material or component delivery, supply shortages and counterfeit components may adversely affect our production or profitability.

We are sourcing an increasing percentage of our materials and components from suppliers outside the United States, and from suppliers within the United States who engage in foreign sourcing. Long lead times or supply interruptions associated with a global supply base 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 commodities may impact the manufacturing costs of our products and affect our profitability. Protective tariffs, unpredictable changes in duty rates, and trade regulation changes may make certain foreign-sourced parts no longer competitively priced. Long supply chains may be disrupted by environmental events or other political factors. Raw materials may become limited in availability from certain regions. Port labor disputes may delay shipments. We source a large volume and a variety of electronic components, which exposes us to an increased risk of counterfeit components entering our supply chain. If counterfeit components unknowingly become part of our products, we may need to stop delivery and rebuild our products. We may be subject to warranty claims and may need to recall products.

Foreign OperationsSecurity BreachesConductingIntrusion into our information systems may impact our business.

Security breaches or intrusion into our information systems, and the breakdown, interruption in or inadequate upgrading or maintenance of our information processing software, hardware or networks may adversely affect our business. Security breaches or intrusion into the systems or data of the third parties with whom we conduct business internationally exposes our Company to risks that couldmay also harm our business.

In 2013, approximately 55 percent ofPolitical Instability – Uncertainty surrounding political leadership may limit our sales were generated by customers located outside the United States. We are increasing our presence in advancing economies. Operating and selling outside of the United States exposes us to certain risks that could adversely impact our sales volume, rate of growth or profitability. These risks include: complying with foreign legal and regulatory requirements, international trade factors (export controls, trade sanctions, duties, tariff barriers and other restrictions), protection of our proprietary technology in certain countries, potentially burdensome taxes, potential difficulties staffing and managing local operations, and changes in exchange rates. Changes in exchange rates will impact our reported sales and earnings andopportunities.

Domestic political instability, including government shut downs, may make it difficult for some of our distributors to purchase products.

Competition – Our success depends uponlimit our ability to develop, marketgrow our business. International political instability may prevent us from expanding our business into certain geographies and sell new products that meetmay also limit our customers’ needs, and anticipate industry changes.

Our profitability will be affected if we do not develop new products and technologies that meet our customers’ needs. Our ability to develop, marketgrow our business. Terrorist activities and sell products that meetcivil disturbances may harm our customers’ needs depends upon a number of factors, including anticipating the

features and products that our customers will need in the future, identifying and entering into new markets, and training our distributors. Changes in industries in which we participate, including consolidation of competitors and customers, could affect our success. Price competition and competitor strategies could affect our success.business.

Legal Proceedings – Costs associated with claims, litigation, administrative proceedings and regulatory reviews, and potentially adverse outcomes, may affect our profitability.

As our Company grows, we are at an increased risk of being a target in litigation, administrative proceedings and regulatory reviews. The cost of defending such matters appears to be increasing, particularly in the United States. We may also need to pursue claims or litigation to protect our interests. Such costs may adversely affect our Company’s profitability. Our businesses expose us to potential toxic tort, product liability and commercial claims. Successful claims against the Company may adversely affect our results.

Anti-Corruption Laws – We may incur costs and suffer damages if our employees, agents, distributors or suppliers violate anti-bribery, anti-corruption or trade laws and regulations.

Bribery, corruption and trade laws and regulations, and enforcement thereof, is increasing in frequency and severity on a global basis. If our internal controls and compliance program do not successfully prevent our employees, agents, distributors, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties and reputational damage.

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 and impact segment profitability.

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.

Variable Industries – Our success may be affected by variations in the construction and automotive industries.

Our business may be affected by fluctuations in residential, commercial and institutional building and remodeling activity. Changes in construction materials and techniques may also impact our business. Our business may also be affected by fluctuations of activity in the automotive industry.

Security Breaches – Intrusion into our information systems may impact our business.

Security breaches or intrusion into our information systems, and the breakdown, interruption in or inadequate upgrading or maintenance of our information processing software, hardware or networks may impact our business. Security breaches or intrusion into the systems or data of the third parties with whom we conduct business may also harm our business.

Natural Disasters – Our operations are at risk of damage or destruction by natural disasters.disasters or fire.

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. Flooding, tornadoes, typhoons, unusually heavy precipitation, earthquakes or earthquakesfire could adversely impact our operations.

Item  1B. Unresolved Staff Comments

None.

Item 2. Properties

Our facilities are in satisfactory condition, suitable for their respective uses, and are generally adequate to meet current needs. A description of our principal facilities as of February 17, 2015, is set forth in the chart below. Facilities are used by all segments, unless otherwise noted.

 

Facility

 

Owned or
Leased

Leased

Square
Footage
 

Square

Footage

Facility Activities

 

North America

 

Dunnville, Ontario, Canada

Leased3,200 Manufacturing for Industrial segment
Guelph, Ontario, CanadaLeased3,300

Warehouse and office for Industrial segment

Tlalnepantla, State of Mexico, MexicoLeased 4,000 

Manufacturing, warehouse and office for Industrial segment

 

   Oakland, California, United StatesLeased1,500

Warehouse for Industrial segment

San Leandro, California, United StatesLeased 12,100 

Manufacturing, warehouse and office for Industrial segment

 

Indianapolis, Indiana, United StatesOwned 63,500 

Warehouse, office, product development and application laboratory for Industrial segment

Dexter, Michigan, United StatesLeased 31,300 

Manufacturing, warehouse, office and product development for Industrial segment

 

Minneapolis, Minnesota, United StatesOwned 142,000 

Corporate office; office and product development for Industrial segment

 

Minneapolis, Minnesota, United StatesOwned 42,000 

Office for Information Systems, Accounting Services and Purchasing DepartmentsCorporate office

 

Minneapolis, Minnesota, United StatesOwned 405,000 

Manufacturing, warehouse and office for Industrial segment

 

Minneapolis, Minnesota, United StatesOwned 86,700 

Warehouse and assembly for Industrial segment

 

Anoka, Minnesota, United StatesOwned 207,000 

Manufacturing, warehouse, office and product development for Lubrication segment

Rogers, Minnesota, United StatesOwned 333,000 

Manufacturing, warehouse, office and product development for Contractor segment

 

Rogers, Minnesota, United StatesLeased 227,100 

Warehouse and office

 

   Rogers, Minnesota, United StatesLeased42,900

Warehouse and office

North Canton, Ohio, United StatesOwned 132,000 

Manufacturing, warehouse, office, product development and application laboratory for Industrial segment

 

Erie, Pennsylvania, United StatesLeased43,000 

Manufacturing, warehouse, office and product development for Industrial segment

Sioux Falls, South Dakota, United StatesOwned 149,000 

Manufacturing warehouse and office for Industrial and Contractor segment spray guns and accessories

 

Houston, Texas, United States

   Chesapeake, Virginia, United StatesLeased Leased9,6004,500 

Warehouse and office for Industrial segment

Kamas, Utah, United States

Leased20,000

Manufacturing and office for Industrial segment

 

Chesapeake, Virginia, United States

Leased 9,600

Manufacturing and office for Industrial segment

Chesapeake, Virginia, United States

Leased 3,300 

Warehouse for Industrial segment

 

South America

Porto Alegre, Rio Grande do Sul, Brazil

Leased4,000Manufacturing, office and product development for Industrial segment

Porto Alegre, Rio Grande do Sul, Brazil

Leased2,900

Manufacturing and warehouse for Industrial segment

Uruguay Free Zone, Montevideo, Uruguay

Leased1,800

Office

Europe

 

Maasmechelen, BelgiumOwned 175,000 

Warehouse, office and assembly; European training, testing and education center

Valence, France

Leased
   Valence, FranceLeased 3,900 

Office for Industrial segment

 

Rödermark, Germany

LeasedLeased 8,600 

Warehouse and office for Industrial segment

 

Milan, Italy

LeasedLeased 7,500 

Office and warehouse for Industrial segment

 

Sibiu, Romania

LeasedLeased 31,000 

Manufacturing for Industrial segment

 

St. Gallen, Switzerland

OwnedOwned 78,000 

Manufacturing, warehouse, office, product development and application laboratory for Industrial segment

 

St. Gallen, Switzerland

LeasedLeased 9,000 

Manufacturing for Industrial segment

 

Poole, Dorset, United Kingdom

LeasedLeased 3,500 

Office and warehouse for Industrial segment

Asia Pacific

   Bundoora, AustraliaDenton, Manchester, United KingdomLeasedLeased 2,500 

Manufacturing, warehouse and office for Industrial segment

Stoke-on-Trent, Staffordshire, United KingdomLeased7,300

Manufacturing, warehouse, office and product development for Industrial segment

Brighouse, West Yorkshire, United KingdomLeased18,000

Manufacturing, warehouse, office and product development for Industrial segment

Brighouse, West Yorkshire, United KingdomLeased10,800

Manufacturing, warehouse and office for Industrial segment

Brighouse, West Yorkshire, United KingdomLeased6,000

Warehouse for Industrial segment

Asia Pacific

Bundoora, AustraliaLeased2,500

Office

 

Derrimut, AustraliaLeased 7,500 

Warehouse

 

Shanghai, P.R.C.Leased Leased29,400 29,000

Office; Asia Pacific training, testing and education center

 

Shanghai Waiqaoqiao Pilot Free Trade Zone, P.R.C.

Leased Leased30,700 13,700

Warehouse

 

Shanghai, P.R.C.

LeasedLeased 27,000 

Office and warehouse for Industrial segment

Suzhou, P.R.C.Owned 79,000 

Manufacturing, warehouse, office and product development

 

Yokohama, Japan

LeasedLeased 18,500 

Office

 

Boon Lay Way, Singapore

Leased 
   Anyang, South Korea2,100 Warehouse and office for Industrial segment

Anyang, South Korea

Leased 5,100 

Office

 

Gwangjoo, South KoreaLeased 10,700 

Warehouse

Item 3. Legal Proceedings

Our Company is engaged in routine litigation, administrative proceedings and regulatory reviews incident to our business. It is not possible to predict with certainty the outcome of these unresolved matters, but management believes that they will not have a material effect upon our operations or consolidated financial position.

Item 4. Mine Safety DisclosuresSafetyDisclosures

Not applicable.

Executive Officers of Our Company

The following are all the executive officers of Graco Inc. as of February 18, 2014:17, 2015:

Patrick J. McHale, 52,53, 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, Manufacturing and Distribution Operations from April 2001 to June 2003. He served as Vice President, Contractor Equipment Division from February 2000 to April 2001. From September 1999 to February 2000, he was Vice President, Lubrication Equipment Division. Prior to September 1999, he held various manufacturing management positions in Minneapolis, Minnesota; Plymouth, Michigan; and Sioux Falls, South Dakota. Mr. McHale joined the Company in 1989.

David M. Ahlers, 55,56, became Vice President, Human Resources and Corporate Communications in April 2010. From September 2008 through March 2010, he served as the Company’s Vice President, Human Resources. 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 2008.

Caroline M. Chambers, 49,50, was elected Vice President, Corporate Controller and Information Systems on December 6, 2013. She has also served as the Company’s principal accounting officer since September 2007. From April 2009 to December 2013, she was Vice President and Corporate Controller. She served as Vice President and Controller from December 2006 to April 2009. 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.

Mark D. Eberlein, 53,54, is Vice President and General Manager, Process Division, a position he has held since January 2013. From November 2008 to December 2012, he was Director, Business Development, Industrial Products Division. He was Director, Manufacturing Operations, Industrial Products Division from January to October 2008. From 2001 to 2008, he was Manufacturing Operations Manager of a variety of Graco business divisions. Prior to joining Graco, Mr. Eberlein worked as an engineer at Honeywell and at Sheldahl. He joined the Company in 1996.

Karen Park Gallivan, 57,58, 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 & Arundel, L.L.P. She joined the Company in 2003.

James A. Graner, 69,70,became Chief Financial Officer in September 2005, a position he held in conjunction with Treasurer from September 2005 to June 2011. He served as 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. Mr. Graner has announced his intention to retire in 2015.

Dale D. Johnson, 59,60,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, 54,55, became Vice President and General Manager, EMEA in January 2013. From February 2008 to December 2012 he was Vice President and General Manager, Asia Pacific. 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, 58,59, became Executive Vice President, Industrial Products Division in April 2012. From February 2005 to April 2012, he was Vice President and General Manager, Industrial Products Division. 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 1995.

Bernard J. Moreau, 53,54, is Vice President and General Manager, South and Central America, a position he has held since January 2013. From November 2003 to December 2012, he was Sales and Marketing Director, EMEA, Industrial/Automotive Equipment Division. From January 1997 to October 2003, he was Sales Manager, Middle East, Africa and East Europe. Prior to 1997, he

worked in various Graco sales engineering and sales management positions, mainly to support Middle East, Africa and southern Europe territories. He joined the Company in 1985.

Peter J. O’Shea, 49,50,became Vice President and General Manager, Asia Pacific in January 2013. From January 2012 until December 2012, he was Director of Sales and Marketing, Industrial Products Division, and from 2008 to 2012, he was Director of Sales and Marketing, Industrial Products Division and Applied Fluid Technologies Division. He was Country Manager, Australia - New Zealand from 2005 to 2008, and from 2002 to 2005 he served as Business Development Manager, Australia - New Zealand. Prior to becoming Business Development Manager, Australia - New Zealand, he worked in various Graco sales management positions. Mr. O’Shea joined the Company in 1995.

Charles L. Rescorla, 62,63,was elected Vice President, Corporate Manufacturing, Distribution Operations and Corporate Development on December 6, 2013. From June 2011 to December 2013, he was Vice President, Corporate Manufacturing, Information Systems and Distribution Operations. He was Vice President, Manufacturing, Information Systems and Distribution Operations from April 2009 to June 2011. He served as Vice President, Manufacturing and Distribution Operations from September 2005 to April 2009. From June 2003 to September 2005, he was Vice President, Manufacturing/Distribution Operations and Information Systems. From April 2001 until June 2003, he was Vice President and General Manager, Industrial/Automotive Equipment Division. Prior to April 2001, he held various positions in manufacturing and engineering management. Mr. Rescorla joined the Company in 1988.

Christian E. Rothe, 40,41,became Vice President and Treasurer in June 2011. Prior to joining Graco, he held various positions in business development, accounting and finance, including, most recently, at Gardner Denver, Inc., a manufacturer of highly engineered products, as Vice President, Treasurer from January 2011 to June 2011, Vice President - Finance, Industrial Products Group from October 2008 to January 2011, and Director, Strategic Planning and Development from October 2006 to October 2008. Mr. Rothe joined the Company in 2011.

Mark W. Sheahan, 49,50, 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. He joined the Company in 1995.

Brian J. Zumbolo, 44,45, 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 and 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.

Except as otherwise noted above, the Board of Directors elected or re-elected the above executive officers to their current positions on December 7, 2012, effective January 1, 2013.

PART II

Item 5. Market for the Company’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Graco Common Stock

Graco common stock is traded on the New York Stock Exchange under the ticker symbol “GGG.” As of February 4, 2014,3, 2015, the share price was $67.67$71.65 and there were 60,862,15458,991,622 shares outstanding and 2,7672,788 common shareholders of record, which includes nominees or broker dealers holding stock on behalf of an estimated 42,00078,000 beneficial owners.

High and low sales prices for the Company’s common stock and dividends declared for each quarterly period in the past two years were as follows:

 

First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

2014

Stock price per share

High

$78.97 $77.82 $79.88 $81.93 

Low

 65.18  70.39  72.29  67.06 

Dividends declared per share

 0.28  0.28  0.28  0.30 
  First
    Quarter    
   Second
    Quarter    
   Third
    Quarter    
   Fourth
    Quarter    
 

2013

        

Stock price per share

        

High

  $59.81    $65.43    $74.70    $79.66  $59.81 $65.43 $74.70 $79.66 

Low

   52.45     53.90     62.84     72.39   52.45  53.90  62.84  72.39 

Dividends declared per share

   0.25     0.25     0.25     0.28   0.25  0.25  0.25  0.28 

2012

        

Stock price per share

        

High

  $53.25    $56.66    $52.69    $53.25  

Low

   39.79     43.19     41.09     44.91  

Dividends declared per share

   0.23     0.23     0.23     0.25  

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 US Industrial Machinery Index over the same period (assuming the value of the investment in Graco common stock and each index was $100 on December 26, 2008,25, 2009, and all dividends were reinvested).

 

     2008        2009        2010        2011        2012        2013   

2009

2010

2011

2012

2013

2014

Dow Jones Industrial Machinery

  100  141  192  182  223  326

Dow Jones US Industrial Machinery

100136129158231228

S&P 500

  100  126  146  149  172  228100115117136180205

Graco Inc.

  100  138  186  197  250  388100135143181281299

Issuer Purchases of Equity Securities

On September 14, 2012, the Board of Directors authorized the Company to purchase up to 6,000,000 shares of its outstanding common stock, primarily through open-market transactions. The authorization expires on September 30, 2015.

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:

 

Period

  

Total

Number

of Shares

  Purchased  

    Average 
Price
Paid per
Share
   

Total Number of

Shares Purchased

  as Part of Publicly  

Announced Plans

or Programs

   

 Maximum Number 

of Shares that May

Yet Be Purchased

Under the Plans

or Programs

(at end of period)

 

Sep 28, 2013 - Oct 25, 2013

   100,000    $75.70     100,000     5,469,918  

Oct 26, 2013 - Nov 22, 2013

   200,000    $77.63     200,000     5,269,918  

Nov 23, 2013 - Dec 27, 2013

   229,800    $76.59     229,800     5,040,118  

Period

Total
Number
of Shares
Purchased
 Average
Price
Paid per
Share
 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
(at end of period)
 

Sep 27, 2014 - Oct 24, 2014

 277,035 $71.11  277,035  2,887,377 

Oct 25, 2014 - Nov 21, 2014

 200,000 $78.52  200,000  2,687,377 

Nov 22, 2014 - Dec 26, 2014

 230,000 $79.59  230,000  2,457,377 

Item 6. Selected Financial Data

Graco Inc. and Subsidiaries (in thousands, except per share amounts)

 

  2013   2012   2011   2010   2009 2014 2013 2012 2011 2010 

Net sales

  $   1,104,024    $   1,012,456    $   895,283    $   744,065    $   579,212  $  1,221,130 $  1,104,024 $  1,012,456 $  895,283 $  744,065 

Net earnings

   210,822     149,126     142,328     102,840     48,967   225,573  210,822  149,126  142,328  102,840 

Per common share

          

Basic net earnings

  $3.44    $2.47    $2.36    $1.71    $0.82  $3.75 $3.44 $2.47 $2.36 $1.71 

Diluted net earnings

   3.36     2.42     2.32     1.69     0.81   3.65  3.36  2.42  2.32  1.69 

Cash dividends declared

   1.03     0.93     0.86     0.81     0.77   1.13  1.03  0.93  0.86  0.81 

Total assets

  $1,327,228    $1,321,734    $874,309    $530,474    $476,434  $1,544,778 $1,327,228 $1,321,734 $874,309 $530,474 

Long-term debt (including current portion)

   408,370     556,480     300,000     70,255     86,260   615,000  408,370  556,480  300,000  70,255 

Net sales in 2012 included $93 million from Powder Finishing operations acquired in April 2012. The Company used long-term borrowings and available cash balances to complete the $668 million purchase of Powder Finishing and Liquid Finishing businesses in 2012.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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
Acquisition and Planned Divestiture
Results of Operations
Segment Results
Financial Condition and Cash Flow
Critical Accounting Estimates
Recent Accounting Pronouncements

Overview

Graco designs, manufactures and markets systems and equipment to pump, meter, mix and dispense a wide variety of fluids and coatings. The Company specializes in equipment for applications that involve difficult-to-handle materials with high viscosities, materials with abrasive or corrosive properties and multiple-component materials that require precise ratio control. Graco sells primarily through independent third-party distributors worldwide to industrial and contractor end-users.end users. More than half of our sales are outside of the United States. Graco’s business is classified by management into three reportable segments, each responsible for product development, manufacturing, marketing and sales of their products.

Graco’s key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end user markets, expanding distribution globally and completing strategic acquisitions that provide additional channel and technologies. Long-term financial growth targets accompany these strategies, including our expectation of 10 percent revenue growth and 12 percent consolidated net earnings growth. In 2013, the Process division was created within the Industrial segment to provide specific focus on development of product and channel related to industrial in-plant applications. In addition, a regional management team was formed to focus on building commercial resources in South and Central America. We continued to develop new products in each operating division including products that are expected to drive incremental sales growth, such as the development of equipment for packaging applications as well as continued refresh and upgrades of existing product lines. We

In January 2014, the Company paid $65 million cash to acquire QED Environmental Systems, a manufacturer of fluid management solutions for environmental monitoring and remediation, markets where Graco had little or no previous exposure. Results of operations are included in the Company’s Industrial segment starting from the date of acquisition.

In October 2014, we acquired EcoQuipthe stock of Alco Valves Group (“Alco”) for £72 million cash. Alco is a United Kingdom based manufacturer of high quality, high pressure valves used in the oil and QED, with combined annual revenuesnatural gas industry and in other industrial processes. Alco’s products and business relationships will enhance Graco’s position in the oil and natural gas industry and complement Graco’s core competencies of approximately $30 million. Both acquisitions were completeddesigning and manufacturing advanced flow control technologies. Results of Alco operations are included in December 2013, although the QED acquisition closed subsequent to fiscal year end.Company’s Industrial segment starting from the date of acquisition.

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 Switzerland, and our primary distribution facilities are located in the United States, Belgium, Switzerland, United Kingdom, P.R.C., Japan, Korea and Australia.

Acquisition and Planned Divestiture of ITW Liquid Finishing Brands AcquisitionBusinesses

OnIn April 2, 2012, we completedpurchased the Finishing Brandsfinishing businesses of ITW. The acquisition includingincluded finishing equipment operations, technologies and brands of the Powder Finishing operations and Liquid Finishing operations.businesses. Results of the Powder Finishing businessbusinesses have been included in the Industrial segment since the date of acquisition. In March 2012, the FTC issued an order to hold the Liquid Finishing assets separate from our other businesses. In May 2012, the FTC issued a proposed decision and order that required us to sell the held separate Liquid Finishing business assets no later than 180 days from the date the order becomes final. The FTC approved a final decision and order that became effective on October 9, 2014.

Pursuant to the hold separatefinal order, issued by the FTC,Graco must sell the Liquid Finishing business is being held separate fromassets within 180 days of the rest of Graco’s businesses untileffective date. On October 8, 2014, the FTC has issued its final order and the divestiture ofCompany announced it had signed a definitive agreement to sell the Liquid Finishing business assets for $590 million cash, subject to regulatory approval and other customary closing conditions. The sale transaction is completed.

We have retainedexpected to close in the servicesfirst half of an investment bank to help us market2015, in compliance with the Liquid Finishing businessesFTC’s final decision and identify potential buyers. While we seek a buyer, we mustorder. Graco will continue to hold the Liquid Finishing business assetsbusinesses separate from our other businesses and maintain them as viable and competitive. In accordance withcompetitive until the hold separate order, the Liquid Finishing businesses are managed independently by experienced Liquid Finishing business managers, under the supervision of a trustee appointed by the FTC, who reports directly to the FTC.sale process is complete.

Under terms of the hold separate order, the Company does not have the power to direct the activities of the Liquid Finishing businesses that most significantly impact the economic performance of those businesses. Therefore, we have determined that the Liquid Finishing businesses are variable interest entities for which the Company is not the primary beneficiary and that they should not be consolidated. Furthermore, the Company does not have a controlling interest in the Liquid Finishing businesses, nor is it able to exert significant influence over the Liquid Finishing businesses. Consequently, our investment in the shares of the Liquid Finishing businesses has been reflected as a cost-method investment on our Consolidated Balance Sheets as of December 27, 201326, 2014 and December 28, 2012,27, 2013, and their results of operations have not been consolidated with those of the Company. As a cost-method investment, income is recognized based on dividends received from current earnings of Liquid Finishing. Dividends of $28 million

received in 2014, $28 million received in 2013 and $12 million received in 2013 and 2012 respectively, are included in other expense (income) on the Consolidated Statements of Earnings. We evaluate our cost-method investment for other-than-temporary impairment at each reporting period. As of December 27, 2013,26, 2014, we evaluated our investment in the Liquid Finishing businesses and determined that there was no impairment.

Results of Operations

Net sales, operating earnings, net earnings and earnings per share were as follows (in millions except per share amounts):

 

  2013   2012   2011 2014 2013 2012 

Net Sales

   $    1,104     $    1,012     $895  $  1,221 $  1,104 $  1,012 

Operating Earnings

   280     225     220   309  280  225 

Net Earnings

   211     149     142   226  211  149 

Diluted Net Earnings per Common Share

   $3.36     $2.42     $    2.32  $3.65 $3.36 $2.42 

2014 Summary:

Net sales grew by 11 percent, representing growth in all reportable segments and regions, including double digit growth in the Americas.
Sales from acquired operations totaled $41 million for 2014, contributing 4 percentage points of the growth for the year.
Changes in currency translation rates reduced sales and net earnings by approximately $3 million and $2 million, respectively.
Gross profit margin, expressed as a percentage of sales, was 55 percent for the year, slightly lower than 2013 due to the effects of purchase accounting ($2.5 million) and lower margins from acquired operations.
Investment in new product development was $54 million or 4 percent of sales in 2014.
Operating expenses increased $30 million over 2013; approximately 75 percent of the increase relates to acquired operations and spending on regional and product growth initiatives.
Operating earnings were consistent in 2014 and 2013 at 25 percent of sales.
Other expense (income) included dividends received from the Liquid Finishing businesses that are held separate from the Company’s other businesses. Dividends for 2014 and 2013 were $28 million in each year.
The effective tax rate was 28 12 percent, up from 27 percent in 2013. The effective rate was lower in 2013 primarily because it included two years of federal R&D credit as the credit was reinstated in the first quarter of 2013 retroactive to the beginning of 2012.
Cash flows from operations totaled $241 million, compared to $243 million in the prior year; increases in accounts receivable and inventories were in line with volume growth.
Long-term debt was $615 million at December 26, 2014, compared to $408 million at December 27, 2013.
Dividends paid totaled $66 million in 2014.
The Company repurchased $195 million of its stock in 2014 compared to $68 million in 2013.

2013 Summary:

Net sales grew by 9 percent, including increases of 11 percent in the Americas, 10 percent in EMEA and 3 percent in Asia Pacific. Sales in the Industrial segment grew by 8 percent,percent; sales in the Contractor segment grew by 15 percent and sales in the Lubrication segment decreased by 1 percent.
First quarter 2013 sales from acquired Powder Finishing operations acquired in April 2012 contributed approximately 3 percentage points to full-year 2013 sales growth.
Changes in currency translation rates did not have a significant impact on sales or earnings in 2013.
Gross profit margin as a percentage of sales increased to 55 percent from 54 percent. The effects of realized price increases and higher production volume offset the unfavorable effect of changes in product mix, including the effect of increased Powder Finishing equipment and Contractor segment sales. In 2012, non-recurring purchase accounting effects reduced gross margin for the year by approximately 1 percentage point.
Investment in new product development was $51 million or 5 percent of sales in 2013.

Total operating expenses increased $2 million over 2012, with increases in product development and selling and marketing activities largely offset by decreases in general and administrative expenses, including a $14 million decrease in acquisition and divestiture costs.
Operating earnings were 25 percent of sales in 2013 as compared to 22 percent in 2012.
Other expense (income) included dividends received from the Liquid Finishing businesses that are held separate from the Company’s other businesses. Dividends for 2013 and 2012 totaled $28 million and $12 million, respectively.
The effective tax rate was 27 percent, down from 31 percent in 2012. The lower rate for 2013 reflected the effects of higher after-tax dividend income received from the Liquid Finishing businesses and the federal R&D credit that was renewed in 2013, effective retroactive to the beginning of 2012. There was no R&D credit recognized in 2012.
Cash flows from operations grew to $243 million compared to $190 million in the prior year, with increases in working capital in line with volume growth.
Long-term debt was $408 million at December 27, 2013, compared to $556 million at December 28, 2012.
Dividends paid totaled $61 million in 2013.
The Company repurchased $68 million of its stock in 2013 compared to $1 million in 2012.

2012 Summary:

Our net sales grew by 13 percent, including increases of 13 percent in the Americas, 22 percent in EMEA and 5 percent in Asia Pacific. Sales in the Industrial segment grew by 20 percent, sales in the Contractor segment grew by 3 percent and sales in the Lubrication segment increased by 7 percent.
Sales from acquired Powder Finishing operations totaled $93 million since April 2012, or 10 percentage points of our total growth in 2012 sales, and included $19 million in the Americas, $52 million in EMEA and $22 million in Asia Pacific.
Foreign currency translation rates decreased sales by approximately $15 million and decreased earnings by approximately $5 million when compared to 2011 rates.

Operating earnings were 22 percent of sales in 2012 as compared to 25 percent in 2011.
Gross profit margin as a percentage of sales decreased 1 12 percentage points. Non-recurring purchase accounting effects related to acquired inventory totaled $7 million, reducing gross margin percentage for the year by approximately 1 percentage point. The effects of strong operational performance in legacy businesses offset the unfavorable effect of lower margin rates on acquired Powder Finishing operations.
Investment in new product development was $49 million or 5 percent of sales in 2012.
Total operating expenses were $45 million higher than 2011, including $25 million from Powder Finishing operations, an $8 million increase in acquisition and divestiture costs, $5 million from additional product development expenditures and an increase of $5 million in pension costs.

The April purchase of Powder Finishing and Liquid Finishing operations had significant impacts on interest expense, an increase of $10 million for the year, and other expense (income), which included dividend income of $12 million received from the Liquid Finishing businesses held as a cost-method investment.
The effective tax rate was 31 percent as compared to 32 percent in 2011. The rate in 2012 was reduced by the effect of after-tax dividend income received from the Liquid Finishing investment.
Cash flows from operations grew to $190 million compared to $162 million in the prior year, with modest changes in working capital.
We paid $668 million to complete the Finishing Brands acquisition, which included the Powder Finishing operations that have been included in the Industrial segment since the date of acquisition and the Liquid Finishing operations that are held separate, using available cash and $350 million of borrowings on a new credit agreement.
Dividends paid totaled $54 million in 2012.

The following table presents net sales by geographic region (in millions):

  2013   2012   2011 2014 2013 2012 

Americas1

   $595     $536     $476  $684 $595 $536 

EMEA2

   283     257     211   305  283  257 

Asia Pacific

   226     219     208   232  226  219 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   $    1,104     $    1,012     $    895  $  1,221 $  1,104 $  1,012 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

1North, South and Central America, including the United States. Sales in the United States were $577 million in 2014, $498 million in 2013 and $441 million in 2012 and $394 million in 2011.2012.
2Europe, Middle East and Africa

In 2014, sales in the Americas increased by 15 percent in total, with increases of 18 percent in the Industrial segment, 12 percent in the Contractor segment and 13 percent in the Lubrication segment as compared to the prior year. Sales from acquired operations totaled $32 million in the Americas, contributing 6 percentage points of growth. All of the growth from acquisitions is included the Industrial segment. Excluding acquisitions the Industrial segment grew by 7 percent in the region, with strength broadly across industrial end user markets and successful new product launches. The Contractor segment continues to benefit from the recovery of the U.S. housing and construction markets. Sales in the Lubrication segment reflected double digit growth in both vehicle service applications and industrial lubrication customers.

In 2014, sales in EMEA increased by 8 percent (7 percent at consistent translation rates). Sales in the Industrial segment increased by 9 percent (8 percent at consistent translation rates). Sales increased by 5 percent in the Contractor segment (4 percent at consistent translation rates) and decreased by 1 percent in the Lubrication segment (2 percent at consistent translation rates). Growth in EMEA came primarily from the developed economies in the West. The emerging markets increased slightly over 2013, with gains in Eastern Europe and the Middle East, partially offset by declines in Russia.

In 2014, sales in Asia Pacific grew by 3 percent. Sales increased by 3 percent in the Industrial segment (4 percent at consistent translation rates). Sales in the Contractor segment decreased by 3 percent (4 percent at consistent translation rates) and sales in the Lubrication segment decreased by 7 percent (4 percent at consistent translation rates). China grew by 3 12 percent, with good growth in the automotive industry. However, we continue to see lack of growth in a number of other markets throughout the region and continue to see variability in bookings and billings by country and product line.

In 2013, sales in the Americas increased by 11 percent in total, with increases of 6 percent in the Industrial segment, 22 percent in the Contractor segment and flat in the Lubrication segment as compared to the prior year. The increase in the Americas was led by the Contractor segment, which benefited from growth in U.S. housing starts and construction spending. Increased sales in the Industrial segment were driven by improvement in a variety of general industrial, construction and process-related end-markets. Sales in the Lubrication segment reflected modest demand growth in vehicle service applications and a low rate of investment by industrial lubrication customers.

In 2013, sales in EMEA increased by 10 percent (8 percent at consistent translation rates). Sales in the Industrial segment increased by 12 percent (9 percent at consistent translation rates). Sales increased by 4 percent in the Contractor segment (2 percent at consistent translation rates) and increased by 14 percent in the Lubrication segment (12 percent at consistent translation rates). We continued to seesaw growth during 2013 in the emerging markets of EMEA, though end-markets in many industries remained weak in Western Europe throughout much of the year.

In 2013, sales in Asia Pacific grew by 3 percent (5 percent at consistent translation rates). Sales increased by 7 percent in the Industrial segment (10 percent at consistent translation rates). Sales in the Contractor segment decreased by 4 percent (3 percent at consistent translation rates) and sales in the Lubrication segment decreased by 13 percent (10 percent at consistent translation rates). Industrial project activity was strong in the fourth quarter, which brought the Industrial segment back to modest growth for the year. However, we continue to seesaw lack of growth in a number of end user markets throughout Asia Pacific, including shipyards, container manufacturing, heavy machinery, general manufacturing, housing, paint and mining, and we face an increased level of competition in the region.

In 2012, sales in the Americas increased by 13 percent, with increases of 19 percent in the Industrial segment, 5 percent in the Contractor segment and 13 percent in the Lubrication segment as compared to the prior year. Growth related to the acquired Powder Finishing business was 4 percentage points. The increase in the Americas reflected strength across a range of product lines with growth in a number of industrial end-markets as well as growth in the housing and construction industries.

In 2012, sales in EMEA increased by 22 percent (28 percent at consistent translation rates), primarily due to the sales from Powder Finishing of $52 million since the acquisition. Sales of legacy Graco products in the Industrial segment decreased by 2 percent during 2012 (increased by 3 percent at consistent translation rates). Sales decreased by 5 percent in the Contractor segment (flat at consistent translation rates) and increased by 2 percent in the Lubrication segment (7 percent at consistent translation rates). We continued to see growth during 2012 in the emerging markets of Eastern Europe and the Middle East, though end-markets in many industries remained weak in Western Europe.

In 2012, sales in Asia Pacific grew by 5 percent overall. Sales of Powder Finishing equipment were $22 million from the date of acquisition. Sales decreased by 7 percent in 2012 for legacy Graco products in the Industrial segment. Sales in the Contractor

segment grew by 4 percent and sales in the Lubrication segment decreased by 10 percent. Activity levels in many end-markets remained challenging throughout the region and across product categories throughout 2012.mining.

The following table presents components of net sales change:

 

 2013 2014 
 Segment    Region        Segment Region   
   Industrial       Contractor      Lubrication       Americas       Europe     Asia Pacific       Consolidated Industrial Contractor Lubrication Americas Europe Asia Pacific Consolidated 

Volume and Price

  3  %       14  %       -  %        10  %      2  %      1  %         6  %     6 %   10 %   9 %   10 %   5 %   2 %   7 %  

Acquisitions

  5  %       -  %       -  %        1  %      6  %      4  %         3  %     6 %   -  %   -  %   6 %   2 %   2 %   4 %  

Currency

  -  %       1  %       (1) %        -  %      2  %      (2) %         -  %     -  %   -  %   (1)%   (1)%   1 %   (1)%   -  %  
 

 

   

 

   

 

    

 

  

 

  

 

     

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  8  %       15  %       (1) %        11  %      10  %      3  %         9  %     12 %   10 %   8 %   15 %   8 %   3 %   11 %  
 

 

   

 

   

 

    

 

  

 

  

 

     

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
 2012 2013 
 Segment    Region        Segment Region   
 Industrial   Contractor   Lubrication    Americas Europe Asia Pacific      Consolidated Industrial Contractor Lubrication Americas Europe Asia Pacific Consolidated 

Volume and Price

  3  %       4  %       8  %        9  %      2  %      (5) %         4  %     3 %   14 %   -  %   10 %   2 %   1 %   6 %  

Acquisitions

  19  %       -  %       -  %        4  %      26  %      10  %         10  %     5 %   -  %   -  %   1 %   6 %   4 %   3 %  

Currency

  (2) %       (1) %       (1) %        -  %      (6) %      -  %         (1) %     -  %   1 %   (1)%   -  %   2 %   (2)%   -  %  
 

 

   

 

   

 

    

 

  

 

  

 

     

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  20  %       3  %       7  %        13  %      22  %      5  %         13  %     8 %   15 %   (1)%   11 %   10 %   3 %   9 %  
 

 

   

 

   

 

    

 

  

 

  

 

     

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The following table presents an overview of components of operating earnings as a percentage of net sales:

 

  2013   2012   2011 2014 2013 2012 

Net Sales

     100.0 %         100.0 %         100.0 %     100.0 %  100.0  100.0 

Cost of products sold

   45.0          45.6          44.1        45.4  45.0  45.6 
  

 

   

 

   

 

   

 

  

 

  

 

 

Gross profit

   55.0          54.4          55.9        54.6  55.0  54.4 

Product development

   4.7          4.8          4.7        4.4  4.7  4.8 

Selling, marketing and distribution

   16.1          16.2          16.9        16.0  16.1  16.2 

General and administrative

   8.9          11.2          9.8        8.9  8.9  11.2 
  

 

   

 

   

 

   

 

  

 

  

 

 

Operating earnings

   25.3          22.2          24.5        25.3  25.3  22.2 

Interest expense

   1.6          1.9          1.0        1.5  1.6  1.9 

Other expense (income), net

   (2.5)          (1.1)          0.1        (2.0)   (2.5)   (1.1)  
  

 

   

 

   

 

   

 

  

 

  

 

 

Earnings before income taxes

   26.2          21.4          23.4        25.8  26.2  21.4 

Income taxes

   7.1          6.7          7.5        7.3  7.1  6.7 
  

 

   

 

   

 

   

 

  

 

  

 

 

Net Earnings

   19.1 %       14.7 %       15.9 %     18.5 %  19.1  14.7 
  

 

   

 

   

 

   

 

  

 

  

 

 

2014 Compared to 2013

Operating earnings as a percentage of sales were 25 percent in 2014, consistent with 2013. The impact of purchase accounting, acquisition and divestiture costs, and spending on regional and product expansion offset the improvement in operating expense leverage from higher sales.

Gross profit margin as a percentage of sales decreased approximately one-half percentage point from 2013. Acquisitions negatively impacted the margin rate in 2014, decreasing the rate by 0.2 percentage point for purchase accounting, and 0.3 percentage point for lower margins in the acquired businesses. The favorable effect of realized price increases and higher production volume offset the unfavorable effect of changes in product mix.

Operating expenses for 2014 increased $30 million. The increase included $15 million from acquired operations, $8 million from regional and product expansion initiatives and a $2 million increase in divestiture and acquisition costs. Product development spending increased $3 million (including approximately $1 million from acquired operations), and represents 4 percent of sales, down slightly from 2013.

Interest expense was $19 million in 2014, compared to $18 million in 2013. Other expense (income) included dividends received from the Liquid Finishing businesses that are held separate from the Company’s other businesses. These dividends totaled $28 million for the year, consistent with 2013.

The effective income tax rate was 28 12 percent in 2014, compared to 27 percent in 2013. Last year’s effective rate was lower primarily because it included two years of federal R&D credit as the credit was reinstated in the first quarter of 2013 retroactive to the beginning of 2012.

2013 Compared to 2012

Operating earnings as a percentage of sales were 25 percent in 2013 as compared to 22 percent in 2012. Expense leverage and reductions of acquisition and divestiture costs led to the improvements in operating earnings as a percentage of sales.

Gross profit margin as a percentage of sales was 55 percent in 2013 as compared to 54 percent in 2012. The favorable effect of realized price increases and higher production volume offset the unfavorable effect of changes in product mix, including increased sales of powder finishing equipment and Contractor segment sales. For 2012, non-recurring purchase accounting effects reduced the gross margin percentage by approximately 1 percentage point.

Operating expenses for the year increased $2 million over 2012 with business activity-related increases largely offset by decreases in acquisition and divestiture costs in 2013. Acquisition and divestiture costs were $2 million in 2013, as compared to $16 million in 2012. Overall, product development spending was 5 percent of sales in 2013, consistent with 2012.

Interest expense was $18 million in 2013, a decrease of $1 million from 2012. Other expense (income) included dividends received from the Liquid Finishing businesses that are held separate from the Company’s other businesses. Dividends for the year totaled $28 million in 2013 and $12 million in 2012.

The effective income tax rate was 27 percent for the year as compared to 31 percent in 2012. The lower rate for 2013 reflected the effects of higher after-tax dividend income received from the Liquid Finishing businesses and the federal R&D credit that was renewed in 2013, effective retroactive to the beginning of 2012. There was no R&D credit recognized in 2012.

2012 Compared to 2011

Operating earnings as a percentage of sales were 22 percent in 2012 as compared to 25 percent in 2011. The impact of purchase accounting related to the Powder Finishing acquisition, higher acquisition/divestiture costs and an increase in pension costs were partially offset by other operating improvements.

Gross profit margin as a percentage of sales was 54 percent in 2012 as compared to 56 percent in 2011. Non-recurring purchase accounting effects totaling $7 million related to acquired inventory with the Powder Finishing operations reduced the gross margin percentage by approximately 1 percentage point. Strong operating performance and cost management improved margins on the legacy Graco operations, partially offsetting the lower margin rates on acquired Powder Finishing operations.

Operating expenses for the year increased $45 million, including $25 million from Powder Finishing operations, an increase of $8 million for acquisition and divestiture costs, an increase of $5 million in product development spending and an increase of $5 million in pension expense. Overall, product development spending was 5 percent of sales in 2012, consistent with 2011.

The purchase of Powder Finishing and Liquid Finishing operations had significant impacts on interest expense (an increase of $10 million for the year) and other expense (income), which included dividend income of $12 million received from the Liquid Finishing businesses held as a cost-method investment.

The effective income tax rate was 31 percent for the year as compared to 32 percent in 2011. The 2012 effective tax rate was reduced by the effect of the investment income from the Liquid Finishing businesses held separate and the effect of a tax rate change on deferred liabilities related to a tax holiday received in a foreign jurisdiction.

Segment Results

The following table presents net sales and operating earnings by business segment (in millions):

 

  2013   2012   2011 2014 2013 2012 

Sales

      

Industrial

  $652    $603    $502  $727 $652 $603 

Contractor

   343     299     291   376  343  299 

Lubrication

   109     110     102   118  109  110 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $    1,104    $    1,012    $    895  $  1,221 $  1,104 $  1,012 
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating Earnings

      

Industrial

  $211    $186    $174  $225 $211 $186 

Contractor

   72     54     51   82  72  54 

Lubrication

   23     23     19   26  23  23 

Unallocated corporate

   (26)     (38)     (24)   (24 (26 (38
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $280    $225    $220  $309 $280 $225 
  

 

   

 

   

 

   

 

   

 

   

 

 

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.

Industrial

The following table presents net sales, components of net sales change and operating earnings as a percentage of sales for the Industrial segment (dollars in millions):

 

  2013   2012   2011 2014 2013 2012 

Sales

    

Americas

  $    276    $    261    $    220  $327 $276 $261 

EMEA

   206     184     135   224  206  184 

Asia Pacific

   170     158     147   176  170  158 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $    652    $603    $502  $727 $652 $603 
  

 

   

 

   

 

   

 

   

 

   

 

 

Components of Net Sales Change

      

Volume and Price

   3  %       3  %       20  %     6 %   3 %   3 %  

Acquisitions

   5  %       19  %       -  %     6 %   5 %   19 %  

Currency

   -  %       (2) %       3  %     -  %   -  %   (2)%  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   8  %       20  %       23  %     12 %   8 %   20 %  
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating Earnings as a Percentage of Sales

   32  %       31  %       35  %     31 %   32 %   31 %  
  

 

   

 

   

 

   

 

   

 

   

 

 

In 2014, sales in the Industrial segment totaled $727 million, an increase of 12 percent from the prior year. Sales for the year increased 18 percent in the Americas, 9 percent in EMEA and 3 percent in Asia Pacific. Results for 2014 included the operations of EcoQuip, acquired at the end of 2013, QED Environmental Systems, acquired at the beginning of fiscal 2014, and Alco, acquired at the beginning of the fourth quarter. Acquired operations contributed $41 million (6 percentage points of growth) in the Industrial segment for the year.

Operating margin rates for 2014 decreased by 1 percentage point compared to last year due to lower margins on acquired operations, including the impact of acquisition-related inventory valuation adjustments, acquisition expense and spending on regional and product expansion.

In 2013, sales in the Industrial segment totaled $652 million, an increase of 8 percent from the prior year. First quarter 2013 sales from the acquired Powder Finishing operations contributed approximately 5 percentage points to the 2013 sales growth. Overall for the Industrial segment, sales increased by 6 percent in the Americas, increased 12 percent in EMEA (9 percent at consistent translation rates) and increased 7 percent in Asia Pacific (10 percent at consistent translation rates).

Operating earnings as a percentage of sales were 32 percent in 2013 as compared to 31 percent in 2012. The effects of purchase accounting related to inventory reduced the operating margin rate for 2012 by approximately 1 percentage point.

In 2012, sales in the Industrial segment totaled $603 million, an increase of 20 percent from the prior year, including $93 million from Powder Finishing operations acquired in April 2012. Without Powder Finishing, sales increased by 10 percent in the Americas, decreased 2 percent in EMEA (3 percent increase at consistent translation rates) and decreased 7 percent in Asia Pacific.

Operating earnings as a percentage of sales were 31 percent in 2012 as compared to 35 percent in 2011. Powder Finishing operations contributed to segment earnings, but at a lower rate on sales, which drove the decrease in the operating margin for the Industrial segment.

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 Swiss franc, the Canadian dollar, the Australian dollar and various Asian currencies.

Contractor

The following table presents net sales, components of net sales change and operating earnings as a percentage of sales for the Contractor segment (dollars in millions):

 

  2013   2012   2011 2014 2013 2012 

Sales

    

Americas

  $      237    $      194    $      184  $265 $237 $194 

EMEA

   67     64     68   71  67  64 

Asia Pacific

   39     41     39   40  39  41 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $343    $299    $291  $376 $343 $299 
  

 

   

 

   

 

   

 

   

 

   

 

 

Components of Net Sales Change

      

Volume and Price

   14  %       4  %       11  %     10 %   14 %   4 %  

Currency

   1  %       (1) %       2  %     -  %   1 %   (1)%  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   15  %       3  %       13  %     10 %   15 %   3 %  
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating Earnings as a Percentage of Sales

   21  %       18  %       17  %     22 %   21 %   18 %  
  

 

   

 

   

 

   

 

   

 

   

 

 

Sales in the Contractor segment increased 10 percent for the year, which included increases of 12 percent in the Americas, 5 percent in EMEA and 3 percent in Asia Pacific. The growth in the Contractor segment was led by the Americas, which continued to benefit from the recovery of the U.S. housing and construction markets.

Operating earnings as a percentage of sales were 22 percent, up 1 percentage point from 2013. Higher sales and the leverage on expenses drove improvements in operating earnings in the Contractor Segment.

In 2013, sales in the Contractor segment increased 15 percent as compared to 2012. By geography, sales increased by 22 percent in the Americas, increased 4 percent in Europe (2 percent at consistent translation rates) and decreased 4 percent in Asia Pacific.

Operating earnings as a percentage of sales were 21 percent in 2013 as compared to 18 percent in 2012. Higher sales and the leveraging of expenses drove the improvement of operating earnings as a percentage of sales.

In 2012, sales in the Contractor segment increased 3 percent. By geography, sales increased by 5 percent in the Americas, decreased 5 percent in Europe (flat at consistent translation rates) and increased 4 percent in Asia Pacific.

Higher sales and the leveraging of expenses led to improvements in operating earnings as a percentage of sales.

In this segment, sales in all regions 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 and other currencies.

Lubrication

The following table presents net sales, components of net sales change and operating earnings as a percentage of sales for the Lubrication segment (dollars in millions):

 

  2013   2012   2011 2014 2013 2012 

Sales

    

Americas

  $82    $81    $72  $92 $82 $81 

EMEA

   10           10  10  9 

Asia Pacific

   17     20     22   16  17  20 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $      109    $      110    $      102  $118 $109 $110 
  

 

   

 

   

 

   

 

   

 

   

 

 

Components of Net Sales Change

      

Volume and Price

   -  %       8  %       30  %     9 %   -  %   8 %  

Currency

   (1) %       (1) %       2  %     (1)%   (1)%   (1)%  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   (1) %       7  %       32  %     8 %   (1)%   7 %  
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating Earnings as a Percentage of Sales

   21  %       20  %       18  %     22 %   21 %   20 %  
  

 

   

 

   

 

   

 

   

 

   

 

 

In 2014, sales in the Lubrication segment increased by 8 percent for the year. Sales increased 13 percent in the Americas, decreased 1 percent in EMEA and 7 percent in Asia Pacific.

Operating earnings increased by 1 percentage point in 2014. Higher sales volume and expense leverage led to higher operating margin in the Lubrication segment.

In 2013, sales in the Lubrication segment decreased by 1 percentage point compared to 2012. By geography, sales were flat in the Americas, increased 14 percent in EMEA, and decreased 13 percent in Asia Pacific.

In 2012, sales in the Lubrication segment increased 7 percent. By geography, sales increased by 13 percent in the Americas, 2 percent in Europe (7 percent at consistent translation rates) and decreased 10 percent in Asia Pacific.

Operating earnings were $23 million or 20 percent of sales as compared to $19 million or 18 percent of sales in 2011. Improved gross margin rates and leveraging of expenses led to improvement in operating earnings as a percentage of sales.

Although the Americas represent the substantial majority of sales for the Lubrication segment, and indicators in that region are the most significant, management monitors indicators such as levels of gross domestic product, capital investment, industrial production and mining activity worldwide.

Unallocated corporate

(in millions)

 

   2013   2012   2011 

Unallocated corporate (expense)

  $      (26)    $      (38)    $      (24)  
 2014 2013 2012 

Unallocated corporate (expense)

$(24$(26$(38

Unallocated corporate includes such items such as stock compensation, non-service portiondivestiture and certain acquisition transaction costs, bad debt expense, charitable contributions, certain portions of pension expense, bad debtand in 2014, central warehouse startup expenses. In 2014, unallocated corporate expenses included $17 million of stock compensation expense, $3 million of acquisition and divestiture costs, and $2 12 million of contributions to the Company’s charitable foundation, and certain other charges or credits driven by corporate decisions, including expense$1 12 million related to acquisition/divestiture activities.the new central warehouse. In 2013, unallocated corporate included $16 million of stock compensation, $6 million related to the non-service cost portion of pension expense, $2 million related to acquisition/divestiture activities, and $2 million of contributions to the Company’s charitable foundation. In 2012, acquisition/divestiture expense totaled $16 million, stock compensation totaled $12 million, the non-service portion of pension expense was $8 million and contributions to the Company’s charitable foundation totaled $2 million.

Financial Condition and Cash Flow

Working Capital.The following table highlights several key measures of asset performance (dollars in millions):

 

  2013   2012 2014 2013 

Working capital

  $      624    $      625  $  685 $  624 

Current ratio

   4.7     5.1   4.9  4.7 

Days of sales in receivables outstanding

   60     62   64  60 

Inventory turnover (LIFO)

   3.8     4.0   3.8  3.8 

InAccounts receivable and inventory balances increased in both 2014 and 2013 the Company’s financial condition was strong. Cash flows from operations were $243 million, a 28 percent increase over 2012. due to increases in business activity.

Changes in receivables and inventories increased in line with volume growth. Primary uses of cash included net payments on long-term debt of $148 million, share repurchases of $68 million, dividends of $61 million, capital expenditures of $23 million and business acquisitions of $12 million.

Cash flows from operations totaled $190 million in 2012. Changes in receivables and inventories moderated during 2012 after increasing in 2011. Primary uses of cash included investments in businesses held separately of $427 million, business acquisitions of $240 million, payments on long-term lines of credit of $393 million, capital expenditures of $18 million and dividends of $54 million.

Capital Structure.At December 26, 2014, the Company’s capital structure included current notes payable of $5 million, long-term debt of $615 million and shareholders’ equity of $596 million. At December 27, 2013, the Company’s capital structure included current notes payable of $10 million, long-term debt of $408 million and shareholders’ equity of $634 million. At December 28, 2012, the Company’s capital structure included current notes payable of $8 million, long-term debt of $556 million and shareholders’ equity of $454 million.

Shareholders’ equity increaseddecreased by $180$38 million in 2013.2014. The key components of changesdecreases in shareholders’ equity include current year earnings of $211 million, reduced by $70$195 million of shares repurchased, and $63$67 million of dividends declared, and increased by $42decreases of $54 million for shares issued and increases in other comprehensive income (loss) due mainly to pension and post-retirement medical liability adjustments.adjustments and foreign currency translation. The decreases in shareholders’ equity were offset by current year earnings of $226 million and $30 million for shares issued.

Liquidity and Capital Resources. The Company had cash totaling $24 million at December 26, 2014 and $20 million at December 27, 2013, and $31 million at December 28, 2012, held in deposit accounts.

There wereIn January 2014, the Company paid $65 million cash to acquire QED Environmental Systems, a manufacturer of fluid management solutions for environmental monitoring and remediation, markets where Graco had little or no changes toprevious exposure. The acquired business will expand and complement the Company’s credit agreements during 2013. Industrial segment.

On March 27, 2012,June 26, 2014, the Company’s $250 millionCompany executed an amendment to its revolving credit agreement, was terminated in connection withextending the executionexpiration date to June 26, 2019, and increasing the amount of credit available to $500 million, a new unsecured revolving$50 million increase. The credit agreement. The current credit agreementfacility is with a syndicate of

lenders and expires in March 2017. It provides up to $450 million of committed credit,

is available for general corporate purposes, working capital needs, share repurchases and acquisitions. The Company may borrow up to $50 million under the swingline portion of the facility for daily working capital needs.

Under terms of the revolving creditamended agreement, loans denominated in U.S. dollars bear interest, at the Company’s option, at either a base rate or a LIBOR-based rate. Loans denominated in currencies other than U.S. dollars bear interest at a LIBOR-based rate. The base rateapplied to borrowings is an annual rate equal to a margin ranging from zero percent to 0.875 percent (down from zero to 1 percent under the prior agreement), depending on the Company’s cash flow leverage ratio, (debt to earnings before interest, taxes, depreciation, amortization and extraordinary non-operating or non-cash charges and expenses) plus the highest of (i) the bank’s prime rate, (ii) the federal funds rate plus 0.5 percent or (iii) one-month LIBOR plus 1.5 percent. In general, LIBOR-based loans bear interest at LIBOR plus 1 percent to 1.875 percent (down from 1 to 2 percent,percent), depending on the Company’s cash flow leverage ratio. The Company is also required to pay a feeFees on the undrawn amount of the loan commitment at an annual rate rangingdecreased to a range of 0.15 percent to 0.30 percent (down from 0.15 percent to 0.40 percent,percent), depending on the Company’s cash flow leverage ratio.

The agreement requiresOn October 1, 2014, the Company used proceeds from its revolving line of credit to maintain certain financial ratios asacquire the stock of Alco Valves Group for £72 million cash, subject to cash flow leverage and interest coverage. The Companynormal post-closing purchase price adjustments. Alco is in compliance with all financial covenantsa United Kingdom based manufacturer of its debt agreements.

On April 2, 2012, the Company paid $660 million to complete the Finishing Brands acquisition, using available cash and $350 million of borrowings on the new credit agreement. In July 2012, the Company made an additional payment of $8 million, representing the difference between cash balances acquired and the amount estimated at the time of closing. Assets acquiredhigh quality, high pressure valves used in the acquisitionoil and natural gas industry and in other industrial processes. Alco’s products and business relationships will enhance Graco’s position in the oil and natural gas industry and complement Graco’s core competencies of designing and manufacturing advanced flow control technologies. Alco revenues for the most recent trailing twelve months were approximately £19 million. Results of Alco operations have been included $18 millionin the Company’s Industrial segment starting from the date of cash, of which $6 million was availableacquisition.

Pursuant to Powder Finishing operations.

In May 2012,a final order from the FTC issued a proposed decision and order which requiresthat became effective on October 9, 2014, Graco tomust sell the Liquid Finishing business assets including Liquid Finishing business activities related to the development, manufacture, and sale of products under the Binks, DeVilbiss, Ransburg and BGK brand names, no later thanacquired in 2012 within 180 days fromof the date the order becomes final. The FTC has not yet issued its final decision and order. The Company has retained the services of an investment bankeffective date. Graco will continue to help it markethold the Liquid Finishing businesses separate and identify potential buyers.maintain them as viable and competitive until a sale process is complete. The Company believes its investment in the Liquid Finishing businesses, carried atbusiness assets are held as a costcost-method investment on Graco’s balance sheet, and income is recognized based on dividends received from current earnings. Since the date of $422 million, is not impaired.

Under terms of the FTC’s hold separate order, the Company is required to provide sufficient resources to maintain the viability, competitiveness and marketability of the Liquid Finishing businesses, including general funds, capital, working capital and reimbursement of losses. To the extent that the Liquid Finishing businesses generate funds in excess of financial resources needed, the Company has access to such funds consistent with practices in place prior to the acquisition. During 2013 and 2012,acquisition, the Company received a total of $28$68 million and $12 million, respectively, of dividends from current earnings of the Liquid Finishing businesses.businesses, including $28 million in 2014. Once the Company completes the sale of its investment, there will be no further dividends from Liquid Finishing.

On October 8, 2014, the Company announced it had signed a definitive agreement to sell the Liquid Finishing business assets for $590 million cash, subject to regulatory approval and other customary closing conditions. The sale transaction is expected to close in the first half of 2015, in compliance with the FTC’s final decision and order. Graco expects to use the proceeds from the sale of the Liquid Finishing assets for reduction of outstanding debt, ongoing share repurchases, and to make investments in strategic acquisitions that provide synergistic opportunities.

On December 27, 2013,26, 2014, the Company had $502$550 million in lines of credit, including the $500 million revolving credit agreement noted above, of which $355$200 million was unused. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2014,2015, including its capital expenditure plan of approximately $25-30$35 million, planned dividends (estimated at $67$70 million) and acquisitions. In January 2015, the Company used proceeds from its revolving line of credit to acquire High Pressure Equipment Holdings, LLC (HiP) for $160 million. The Company completed two additional business acquisitions in January 2015, for cash consideration totaling approximately $20 million. If acquisition opportunities increase, the Company believes that reasonable financing alternatives are available for the Company to execute on those opportunities.

In December 2013,2014, the Company’s Board of Directors increased the Company’s regular common dividend from an annual rate of $1.00$1.10 to $1.10$1.20 per share, a 109 percent increase.

Cash Flow.A summary of cash flow follows (in millions):

 

   2013   2012   2011 

Operating Activities

  $243    $190    $162  

Investing Activities

   (31)     (695)     (28)  

Financing Activities

   (226)     233     160  

Effect of exchange rates on cash

            
  

 

 

   

 

 

   

 

 

 

Net cash provided (used)

         (11)           (272)     294  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at year-end

  $20    $31    $      303  
  

 

 

   

 

 

   

 

 

 

 2014 2013 2012 

Operating Activities

$241 $243 $190 

Investing Activities

 (217 (31 (695

Financing Activities

 (23 (226 233 

Effect of exchange rates on cash

 3  3  -   
  

 

 

   

 

 

   

 

 

 

Net cash provided (used)

 4  (11 (272
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at year-end

$24 $20 $31 
  

 

 

   

 

 

   

 

 

 

Cash Flows From Operating Activities. Net cash provided by operating activities was $241 million in 2014 and $243 million in 2013. The increase in accounts receivable and inventories was $20 million higher in 2014 than the increase in the comparable period of 2013. Accounts receivable and inventory balances have increased since the end of 2013 due to increases in business activity.

Net cash provided by operating activities was $243 million in 2013 and $190 million in 2012. During 2013, changes in receivables and inventories increased in line with volume growth. Net cash provided by operating activities in 2013 was driven by net income of $211 million and adjustments for depreciation and amortization and share-based compensation.

Net cash provided by operating activities was $190 million in 2012 and $162 million in 2011. During 2012, changes in receivables and inventories moderated after increasing in 2011.

Cash Flows Used in Investing Activities. Cash flows used in investing activities totaled $217 million in 2014, compared to $31 million in 2013. During 2014, cash outflows consisted of acquisitions of $185 million and additions to property, plant and equipment of $31 million. During 2013, cash used in investing activities was $31 million compared to $695 million in 2012. During 2013, cash outflows consisted of $23 million of additions to property, plant and equipment, and business acquisitions of $12 million. During 2012, cash outflows included an investment in businesses held separate of $427 million, business acquisitions of $240 million and $18 million of additions of property, plant and equipment.

Cash Flows Used in Financing Activities. Cash flows used in financing activities totaled $24 million in 2014, compared to $226 million in 2013. Cash inflows were generated by borrowings on outstanding lines of credit of $202 million and share issuances of $30 million. This was offset by share repurchases of $195 million and dividends paid of $66 million. During 2013, cash used in financing activities was $226 million. Net payments on outstanding lines of credit were $148 million, share repurchases totaled $68 million and cash dividends paid were $61 million in 2013. These cash uses were offset by the issuance of stock of $42 million. During 2012, cash provided by financing activities was $233 million. We used $350 million of borrowings on a $450 million revolving credit facility to fund business acquisitions and investments. Net payments on outstanding lines of credit, subsequent to the acquisition transaction, were $94 million in 2012 and cash dividends paid totaled $54 million.

In September 2012, 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, 2015. Under the current authorization, 52.5 million shares remain available for purchase as of December 27, 2013.26, 2014.

The Company repurchased and retired 2.6 million shares at a cost of $195 million in 2014, compared to repurchasing nearly 1 million shares at a cost of $68 million in 2013. We made2013 and $1 million and $43 million of share repurchases in 2012 and 2011, respectively.2012. Share repurchases willare expected to continue in 2014.2015 with a goal of weighted average dilutive shares outstanding at or below 60 million shares.

Off-Balance Sheet Arrangements and Contractual Obligations. As of December 27, 2013,26, 2014, 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 $3$2 million at December 27, 2013.26, 2014. The Company has also guaranteed the debt of its subsidiaries up to $10$9 million. All debt of subsidiaries is reflected in the consolidated balance sheets.

 

  Payments due by period (in millions) Payments due by period (in millions) 
  Total   Less than
1 year
   1-3
years
   3-5
years
   More than
5 years
 Total Less than
1 year
 1-3
years
 3-5
years
 More than
5 years
 

Long-term debt

  $      408    $   $   $183    $225  $615 $- $- $390 $225 

Operating leases

   24                   29  6  9  6  8 

Purchase obligations1

   100     100               112  112  -  -  - 

Interest on long-term debt

   127     16     32     27     52   125  18  37  30  40 

Unfunded pension and postretirement medical benefits2

   30                 17   30  2  5  6  17 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $689    $123    $      44    $      220    $302  $  911 $  138 $  51 $  432 $  290 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

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.

2The 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.

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.

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 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. Based on our most recent goodwill impairment assessment performed during the fourth quarter of 2013,2014, the fair value of each reporting unit significantly exceeded its carrying value.value, except for the businesses acquired in 2014. The fair value of those businesses still exceeded their carrying value, and the results related to the analyses for those businesses are in line with management’s expectations given the recent date of appraisal and purchase price allocation. Accordingly, step two of the impairment analysis was not required.

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 economic or market conditions, 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.

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.

For U.S. plans, the Company establishes its discount rate assumption by reference to a yield curve published by an actuary and projected plan cash flows. 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 maintainedchanged its investment return assumption for its U.S. plan at 8.5to 7.8 percent for 2014 and set the return assumption for its Swiss plan at 2.0 percent.2015. Mortality rates are based on acurrent common group mortality tabletables for males and females.

Net pension cost in 20132014 was $14$7 million and was allocated to cost of products sold and operating expenses based on salaries and wages. At December 27, 2013,26, 2014, a one-half percentage point decrease in the indicated assumptions would have the following effects (in millions):

 

Assumption

  

  Funded Status  

   

      Expense      

 Funded Status Expense 

Discount rate

  $ (25)    $ $(29$2 

Expected return on assets

         -    1 

Recent Accounting Pronouncements

The accounting standards updates issued by TheIn May 2014, the Financial Accounting Standards Board (FASB) that will beissued a final standard on revenue from contracts with customers. The new standard sets forth a single comprehensive model for recognizing and reporting revenue. The new standard is effective for the Company in 2014 will not haveits fiscal year 2017, and permits the use of either a significant impactretrospective or cumulative effect transition method. The Company is evaluating the effect of the new standard on the Company’sits consolidated financial statements.statements and related disclosures, and has not yet selected a transition method.

Item 7A. Quantitative and QualitativeandQualitative Disclosures About Market Risk

The Company sells and purchases products and services in currencies other than the U.S. dollar and pays variable interest rates on borrowings under certain credit facilities. 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 27, 2013,26, 2014, the currencies to which the Company had the most significant balance sheet exchange rate exposure were the euro, Swiss franc, Canadian dollar, British pound, Japanese yen, Australian dollar, Chinese yuan renminbi and South Korean won. 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. In 2014, changes in currency translation rates reduced sales and earnings by approximately $3 million and $2 million, respectively. Changes in translation rates had no significant effect on 2013 net sales or earnings. In 2012, the effect of the stronger U.S. dollar compared to other currencies (primarily the euro) resulted in a decrease in sales and net earnings of approximately $15 million and $5 million, respectively. In 2011, the calculated translation effect resulted

2015 Outlook

Worldwide demand levels were resilient throughout 2014. We expect demand levels in an increase in net sales and net earnings2015 will continue to be supportive of approximately $17 million and $7 million, respectively.

2014 Outlook

We expect growth in every region ofreportable segment and geography, although currency fluctuations and ongoing geopolitical instability remain a concern. Our long-term growth initiatives continue to be our priority, providing a cornerstone for our mid-single digit organic growth expectations for the worldfirst quarter and full year 2015. Acquisitions completed in 2014. Inrecent months are expected to add approximately 5 percentage points to the Americas, the continued recovery in the construction market should provide a tailwind for both our Contractor and Industrial segments. Further, we expect the general economic environment for industrial manufacturing to remain stable in the United States through 2014. Although the economies of Western Europe are still struggling to find their footing, we expect growth from the emerging markets of Eastern Europe to drive moderateCompany’s sales growth in 2015 and provide earnings accretion of 13 to 15 cents per share for the EMEA regionfull year before purchase accounting and transaction costs. At current exchange rates, unfavorable movement in 2014. While our Asia Pacific region will continue to face weak economic conditionsforeign currencies would be a headwind of approximately 4 percent on sales and difficult comparables into the first half of 2014, we are hopeful that the business will gain momentum as the year progresses. With a modest increase10 percent on earnings in volumes, we expect factory performance in 2014 to remain solid and continue to drive profitability. The Graco team is focused on executing our strategies for growth in 2014.2015.

The Company’s backlog is typically small compared to annual sales and is not a good indicator of future business levels. In addition to economic growth, the successful launch of new products and expanded distribution coverage, the sales outlook is dependent on many factors, including realization of price increases and stable foreign currency exchange rates.

Forward-Looking Statements

The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including this Form 10-K and our Form 10-Qs and Form 8-Ks, and other disclosures, including our 20132014 Overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.

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: changes in laws and regulations; economic conditions in the United States and other major world economies; our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; whether we are able to effectively complete a divestiture of the acquired Liquid Finishing businesses, which has not been completed and remains subject to FTC approval; political instability;economic conditions in the United States and other major world economies; changes in currency translation rates; changes in laws and regulations; compliance with anti-corruption laws; new entrants who copy our products or infringe on our intellectual property; supply interruptions or delays; risks incident to conducting business internationally; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; political instability; results of and costs associated with, litigation, administrative proceedings and regulatory reviews incident to our business; compliance with anti-corruption laws; the possibility of decline in purchases from few large customers of the Contractor segment; variations in activity in the construction and automotive industries; security breaches and natural disasters. Please refer to Item 1A of this Annual Report on Form 10-K for fiscal year 20132014 for a more comprehensive discussion of these and other risk factors. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above and in Item 1A 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.

Item 8. Financial Statements and Supplementary Data

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 27, 2013.26, 2014. 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(1992)(2013).

Based on our assessment and those criteria, management believes the Company’s internal control over financial reporting is effective as of December 27, 2013.26, 2014.

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.

REPORTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Internal Control Over Financial Reporting

To the Shareholders and Board of Directors of

Graco Inc.

We have audited the internal control over financial reporting of Graco Inc. and Subsidiaries (the “Company”) as of December 27, 2013,26, 2014, based on criteria established inInternal Control — Integrated Framework(1992)(2013) 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 27, 2013,26, 2014, based on the criteria established inInternal Control — Integrated Framework(1992)(2013) 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 27, 2013,26, 2014, of the Company and our report dated February 18, 2014,17, 2015, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

February 18, 201417, 2015

Consolidated Financial StatementsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Graco Inc.

We have audited the accompanying consolidated balance sheets of Graco Inc. and Subsidiaries (the “Company”) as of December 27, 201326, 2014 and December 28, 2012,27, 2013, 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 27, 2013.26, 2014. 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 27, 201326, 2014 and December 28, 2012,27, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 2013,26, 2014, 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 27, 2013,26, 2014, based on the criteria established inInternal Control—Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2014,17, 2015, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

February 18, 201417, 2015

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands except per share amounts)

 

 Years Ended Years Ended 
  December 27,
2013
 December 28,
2012
 December 30, 
2011
 December 26,
2014
 December 27,
2013
 December 28,
2012
 

Net Sales

  $1,104,024    $1,012,456    $895,283  $1,221,130 $1,104,024 $1,012,456 

Cost of products sold

  496,569    461,926    395,078   554,394  496,569  461,926 
 

 

  

 

  

 

   

 

  

 

  

 

 

Gross Profit

  607,455    550,530    500,205   666,736  607,455  550,530 

Product development

  51,428    48,921    41,554   54,246  51,428  48,921 

Selling, marketing and distribution

  177,853    163,523    151,276   194,751  177,853  163,523 

General and administrative

  98,405    113,409    87,861   108,814  98,405  113,409 
 

 

  

 

  

 

   

 

  

 

  

 

 

Operating Earnings

  279,769    224,677    219,514   308,925  279,769  224,677 

Interest expense

  18,147    19,273    9,131   18,733  18,147  19,273 

Other expense (income), net

  (27,200)    (11,922)    655   (24,881 (27,200 (11,922
 

 

  

 

  

 

   

 

  

 

  

 

 

Earnings Before Income Taxes

  288,822    217,326    209,728   315,073  288,822  217,326 

Income taxes

  78,000    68,200    67,400   89,500  78,000  68,200 
 

 

  

 

  

 

   

 

  

 

  

 

 

Net Earnings

  $210,822    $149,126    $142,328  $225,573 $210,822 $149,126 
 

 

  

 

  

 

   

 

  

 

  

 

 

Basic Net Earnings per Common Share

  $3.44    $2.47    $2.36  $3.75 $3.44 $2.47 

Diluted Net Earnings per Common Share

  $3.36    $2.42    $2.32  $3.65 $3.36 $2.42 

Cash Dividends Declared per Common Share

  $1.03    $0.93    $0.86  $1.13 $1.03 $0.93 

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 Years Ended Years Ended 
  December 27,
2013
 December 28,
2012
 December 30,  
2011
 December 26,
2014
 December 27,
2013
 December 28,
2012
 

Net Earnings

  $210,822    $149,126    $142,328  $225,573 $210,822 $149,126 

Other comprehensive income (loss)

   

Cumulative translation adjustment

  7,812    (3,206)      (27,935 7,812  (3,206

Pension and postretirement medical liability adjustment

  46,955    (6,171)    (36,760)   (39,164 46,955  (6,171

Gain (loss) on interest rate hedge contracts

        454  

Income taxes

   

Pension and postretirement medical liability adjustment

  (17,371)    2,113    12,436   12,712  (17,371 2,113 

Gain (loss) on interest rate hedge contracts

        (168)  
 

 

  

 

  

 

   

 

  

 

  

 

 

Other comprehensive income (loss)

  37,396    (7,264)    (24,038)   (54,387 37,396  (7,264
 

 

  

 

  

 

   

 

  

 

  

 

 

Comprehensive Income

  $248,218    $141,862    $118,290  $171,186 $248,218 $141,862 
 

 

  

 

  

 

   

 

  

 

  

 

 

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

December 26, December 27, 
 December 27,
2013
 December 28,
2012
 2014 2013 

ASSETS

  

Current Assets

  

Cash and cash equivalents

  $19,756    $31,120  $23,656 $19,756 

Accounts receivable, less allowances of $6,300 and $6,600

  183,293    172,143  

Accounts receivable, less allowances of $8,100 and $6,300

 214,944  183,293 

Inventories

  133,787    121,549   159,797  133,787 

Deferred income taxes

  18,827    17,742   19,969  18,827 

Investment in businesses held separate

  422,297    426,813   421,767  422,297 

Other current assets

  14,633    7,629   19,374  14,633 
 

 

  

 

   

 

  

 

 

Total current assets

  792,593    776,996   859,507  792,593 

Property, Plant and Equipment, net

  151,717    151,544   161,230  151,717 

Goodwill

  189,967    181,228   292,574  189,967 

Other Intangible Assets, net

  147,940    151,773   176,278  147,940 

Deferred Income Taxes

  20,366    38,550   28,982  20,366 

Other Assets

  24,645    21,643   26,207  24,645 
 

 

  

 

   

 

  

 

 

Total Assets

  $1,327,228    $1,321,734  $1,544,778 $1,327,228 
 

 

  

 

   

 

  

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current Liabilities

  

Notes payable to banks

  $9,584    $8,133  $5,016 $9,584 

Trade accounts payable

  34,282    28,938   39,306  34,282 

Salaries and incentives

  38,939    34,001   40,775  38,939 

Dividends payable

  16,881    15,206   17,790  16,881 

Other current liabilities

  69,167    65,393   71,593  69,167 
 

 

  

 

   

 

  

 

 

Total current liabilities

  168,853    151,671   174,480  168,853 

Long-term Debt

  408,370    556,480   615,000  408,370 

Retirement Benefits and Deferred Compensation

  94,705    137,779   136,812  94,705 

Deferred Income Taxes

  20,935    21,690   22,454  20,935 

Commitments and Contingencies (Note K)

  

Shareholders’ Equity

  

Common stock, $1 par value; 97,000,000 shares authorized; 61,003,203 and 60,766,849 shares outstanding in 2013 and 2012

  61,003    60,767  

Common stock, $1 par value; 97,000,000 shares authorized; 59,198,527 and 61,003,203 shares outstanding in 2014 and 2013

 59,199  61,003 

Additional paid-in-capital

  347,058    287,795   384,704  347,058 

Retained earnings

  272,653    189,297   252,865  272,653 

Accumulated other comprehensive income (loss)

  (46,349)    (83,745)   (100,736 (46,349
 

 

  

 

   

 

  

 

 

Total shareholders’ equity

  634,365    454,114   596,032  634,365 
 

 

  

 

   

 

  

 

 

Total Liabilities and Shareholders’ Equity

  $1,327,228    $1,321,734  $1,544,778 $1,327,228 
 

 

  

 

   

 

  

 

 

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

  Years Ended   Years Ended 
   December 27, 
2013
    December 28, 
2012
    December 30, 
2011
   December 26,
2014
 December 27,
2013
 December 28,
2012
 

Cash Flows From Operating Activities

          

Net earnings

   $    210,822     $    149,126     $    142,328    $225,573  $210,822  $149,126 

Adjustments to reconcile net earnings to net cash provided by operating activities

      

Depreciation and amortization

   37,316     38,762     32,483  

Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization

   35,515  37,316  38,762 

Deferred income taxes

   (1,715)     (10,786)     (1,814)     329  (1,715 (10,786

Share-based compensation

   16,545     12,409     10,994     17,249  16,545  12,409 

Excess tax benefit related to share-based payment arrangements

   (8,347)     (4,217)     (2,195)     (6,634 (8,347 (4,217

Change in

          

Accounts receivable

   (11,880)     (2,752)     (26,767)     (26,557 (11,880 (2,752

Inventories

   (10,186)     5,941     (13,440)     (15,079 (10,186 5,941 

Trade accounts payable

   2,436     (952)     5,974     450  2,436  (952

Salaries and incentives

   2,022     (4,251)     (3,469)     1,520  2,022  (4,251

Retirement benefits and deferred compensation

   3,629  ��  3,209     7,228     5,052  3,629  3,209 

Other accrued liabilities

   5,556     3,288     8,148     6,151  5,556  3,288 

Other

   (3,143)     (95)     2,574     (2,314 (3,143 (95
  

 

   

 

   

 

   

 

  

 

  

 

 

Net cash from operating activities

   243,055     189,682     162,044  241,255  243,055  189,682 
  

 

   

 

   

 

   

 

  

 

  

 

 

Cash Flows From Investing Activities

      

Property, plant and equipment additions

   (23,319)     (18,234)     (23,854)   (30,636 (23,319 (18,234

Acquisition of businesses, net of cash acquired

   (11,560)     (240,068)     (2,139)   (185,462 (11,560 (240,068

Investment in businesses held separate

   4,516     (426,813)       530  4,516  (426,813

Proceeds from sale of assets

   1,600           -    1,600  -   

Other

   (2,475)     (9,405)     (2,004)   (1,163 (2,475 (9,405
  

 

   

 

   

 

   

 

  

 

  

 

 

Net cash used in investing activities

   (31,238)     (694,520)     (27,997)   (216,731 (31,238 (694,520
  

 

   

 

   

 

   

 

  

 

  

 

 

Cash Flows From Financing Activities

      

Borrowings (payments) on short-term lines of credit, net

   1,280     (619)     497   (4,459 1,280  (619

Borrowings on notes and long-term line of credit

   419,905     649,325     402,175   717,845  419,905  649,325 

Payments on long-term line of credit

   (568,122)     (392,845)     (172,430)   (511,215 (568,122 (392,845

Payments of debt issuance costs

       (1,921)     (1,131)   (890 -    (1,921

Excess tax benefit related to share-based payment arrangements

   8,347     4,217     2,195   6,634  8,347  4,217 

Common stock issued

   41,664     30,194     22,231   30,199  41,664  30,194 

Common stock repurchased

   (67,827)     (1,378)     (43,250)   (195,326 (67,827 (1,378

Cash dividends paid

   (61,139)     (54,302)     (50,646)   (66,362 (61,139 (54,302
  

 

   

 

   

 

   

 

  

 

  

 

 

Net cash from (used in) financing activities

   (225,892)     232,671     159,641   (23,574 (225,892 232,671 
  

 

   

 

   

 

   

 

  

 

  

 

 

Effect of exchange rate changes on cash

   2,711     137     (129)   2,950  2,711  137 
  

 

   

 

   

 

   

 

  

 

  

 

 

Net increase (decrease) in cash and cash equivalents

   (11,364)     (272,030)     293,559   3,900  (11,364 (272,030

Cash and Cash Equivalents

      

Beginning of year

   31,120     303,150     9,591   19,756  31,120  303,150 
  

 

   

 

   

 

   

 

  

 

  

 

 

End of year

   $19,756     $31,120     $303,150  $23,656 $19,756 $31,120 
  

 

   

 

   

 

   

 

  

 

  

 

 

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

      Common     
Stock
      Additional    
Paid-In
Capital
         Retained      
Earnings
   Accumulated
Other
Compre-
hensive
 Income (Loss)  
         Total         

Balance December 31, 2010

   $    60,048     $    212,073     $    44,436     $(52,443)     $    264,114  

Shares issued

   898     22,360             23,258  

Shares repurchased

   (1,199)     (4,236)     (37,815)         (43,250)  

Stock compensation cost

       10,142             10,142  

Tax benefit related to stock options exercised

       2,695             2,695  

Restricted stock issued

       (1,027)             (1,027)  

Net earnings

           142,328         142,328  

Dividends declared

           (51,482)         (51,482)  

Other comprehensive income (loss)

               (24,038)     (24,038)  
  

 

   

 

   

 

   

 

   

 

 Common
Stock
 Additional
Paid-In
Capital
 Retained
Earnings
 Accumulated
Other
Compre-
hensive
Income (Loss)
 Total 

Balance December 30, 2011

   59,747     242,007     97,467     (76,481)     322,740  $59,747 $242,007 $97,467 $(76,481$322,740 

Shares issued

   1,048     29,146             30,194   1,048  29,146  -    -    30,194 

Shares repurchased

   (28)     (116)     (1,234)         (1,378)   (28 (116 (1,234 -    (1,378

Stock compensation cost

       11,941             11,941   -    11,941  -    -    11,941 

Tax benefit related to stock options exercised

       4,817             4,817   -    4,817  -    -    4,817 

Net earnings

           149,126         149,126   -    -    149,126  -    149,126 

Dividends declared

           (56,062)         (56,062)   -    -    (56,062 -    (56,062

Other comprehensive income (loss)

               (7,264)     (7,264)   -    -    -    (7,264 (7,264
  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Balance December 28, 2012

   60,767    287,795     189,297     (83,745)     454,114   60,767  287,795  189,297  (83,745 454,114 

Shares issued

   1,196    41,146             42,342   1,196  41,146  -    -    42,342 

Shares repurchased

   (960)     (4,545)     (64,652)         (70,157)   (960 (4,545 (64,652 -    (70,157

Stock compensation cost

       14,693             14,693   -    14,693  -    -    14,693 

Tax benefit related to stock options exercised

       8,647             8,647   -    8,647  -    -    8,647 

Restricted stock issued

       (678)             (678)   -    (678 -    -    (678

Net earnings

           210,822         210,822   -    -    210,822  -    210,822 

Dividends declared

           (62,814)         (62,814)   -    -    (62,814 -    (62,814

Other comprehensive income (loss)

               37,396     37,396   -    -    -    37,396  37,396 
  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Balance December 27, 2013

   $61,003     $347,058     $272,653     $(46,349)     $634,365   61,003  347,058  272,653  (46,349 634,365 

Shares issued

 789  29,410  -    -    30,199 

Shares repurchased

 (2,593 (14,751 (178,090 -    (195,434

Stock compensation cost

 -    16,253  -    -    16,253 

Tax benefit related to stock options exercised

 -    6,734  -    -    6,734 

Net earnings

 -    -    225,573  -    225,573 

Dividends declared

 -    -    (67,271 -    (67,271

Other comprehensive income (loss)

 -    -    -    (54,387 (54,387
  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Balance December 26, 2014

$59,199 $384,704 $252,865 $(100,736$596,032 
  

 

  

 

  

 

  

 

  

 

 

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Graco Inc. and Subsidiaries

Years Ended December 26, 2014, December 27, 2013 and December 28, 2012 and December 30, 2011

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 26, 2014, December 27, 2013 and December 28, 2012, and December 30, 2011, 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 intercompany balances and transactions. As of December 27, 2013,26, 2014, all subsidiaries are 100 percent owned.

As more fully described in Note L, the Company purchased the Powder Finishing and Liquid Finishing businesses in April 2012. The FTC issued an order requiring the Company to hold the Liquid Finishing businesses separate from the rest of the Company’s businesses until the FTC determines which portions of the businesses must be divested.businesses. Under terms of the hold separate order, the Company does not have the power to direct the activities of the Liquid Finishing businesses that most significantly impact the economic performance of those businesses. Therefore, the Company has determined that the Liquid Finishing businesses are variable interest entities for which the Company is not the primary beneficiary, and that they should not be consolidated. Furthermore, the Company does not have a controlling interest in the Liquid Finishing businesses, nor is it able to exert significant influence over the Liquid Finishing businesses. Consequently, the Company’s investment in the shares of the Liquid Finishing businesses, totaling $422 million, has been reflected as a cost-method investment on the Consolidated Balance Sheet as of December 27, 2013,26, 2014, and their results of operations have not been consolidated with those of the Company.

Foreign Currency Translation.The functional currency of certain subsidiaries is the local currency. Accordingly, adjustments resulting from the translation of those subsidiaries’ financial statements into U.S. dollars are charged or credited to accumulated other comprehensive income (loss). The U.S. dollar is the functional currency for all other foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and transactions of those subsidiaries are included in other expense (income), 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.

Fair Value Measurements. The three levels of inputs in the fair value measurement hierarchy are as follows:

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

Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):

 

       Level              2013                  2012         

Assets

      

Cash surrender value of life insurance

  2   $12,611     $9,483  

Forward exchange contracts

  2   291     491  
    

 

 

   

 

 

 

Total assets at fair value

     $12,902     $9,974  
    

 

 

   

 

 

 

Liabilities

      

Deferred compensation

  2   $2,296     $1,759  
    

 

 

   

 

 

 

   Level  2014 2013 

Assets

Cash surrender value of life insurance

2$13,187 $12,611 

Forward exchange contracts

2 280  291 
    

 

 

   

 

 

 

Total assets at fair value

$  13,467 $  12,902 
    

 

 

   

 

 

 

Liabilities

Deferred compensation

2$2,676 $2,296 
    

 

 

   

 

 

 

Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.

The Company’s policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities.

Disclosures related to non-recurringother fair value measurements are included below in Impairment of Long-Lived Assets, in Note F (Debt) and in Note J (Retirement Benefits).

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.

Accounts Receivable.Accounts receivable includes trade receivables of $207 million in 2014 and $178 million in 2013 and $161 million in 2012.2013. Other receivables totaled $8 million in 2014 and $5 million in 2013 and $11 million in 2012.2013.

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):

 

         2013                2012        2014 2013 

Prepaid income taxes

  $7,894    $2,155  $10,849 $7,894 

Prepaid expenses and other

   6,739     5,474   8,525  6,739 
  

 

   

 

   

 

   

 

 

Total

  $14,633    $7,629  $  19,374 $  14,633 
  

 

   

 

   

 

   

 

 

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 improvements10 to 30 years
Leasehold improvementslesser of 5 to 10 years or life of lease
Manufacturing equipmentlesser of 5 to 10 years or life of equipment
Office, warehouse and automotive equipment3 to 10 years

Goodwill and Other Intangible Assets. Goodwill has been assigned to reporting units. Changes in the carrying amounts of goodwill for each reportable segment were (in thousands):

 

Industrial Contractor Lubrication Total 

December 26, 2014

        

Beginning balance

$157,738 $12,732 $19,497 $189,967 

Additions from business acquisitions

 114,331  -  -  114,331 

Foreign currency translation

 (11,724 -  -  (11,724
  

 

   

 

   

 

   

 

 

Ending balance

$260,345 $12,732 $19,497 $292,574 
  

 

   

 

   

 

   

 

 
      Industrial           Contractor       Lubrication            Total       

December 27, 2013

                        

Beginning balance

  $148,999    $12,732    $19,497    $181,228  $148,999 $12,732 $19,497 $181,228 

Additions from business acquisitions

   6,626             6,626   6,626  -  -  6,626 

Foreign currency translation

   2,998             2,998   2,998  -  -  2,998 

Other

   (885)             (885)   (885 -  -  (885
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance

  $157,738    $12,732    $19,497    $189,967  $157,738 $12,732 $19,497 $189,967 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 28, 2012

                

Beginning balance

  $61,171    $12,732    $19,497    $93,400  

Additions from business acquisitions

   89,044             89,044  

Foreign currency translation

   (1,216)             (1,216)  
  

 

   

 

   

 

   

 

 

Ending balance

  $148,999    $12,732    $19,497    $181,228  
  

 

   

 

   

 

   

 

 

Components of other intangible assets were (dollars in thousands):

 

Estimated
Life
(years)
Cost Accumulated
Amortization
 Foreign
Currency
Translation
 Book
Value
 

December 26, 2014

         

Customer relationships

3 - 14$143,144 $(21,948$(7,334$113,862 

Patents, proprietary technology and product documentation

3 - 11 18,268  (7,126 (655 10,487 

Trademarks, trade names and other

5 175  (44 -  131 
    

 

   

 

  

 

  

 

 
 161,587  (29,118 (7,989 124,480 

Not Subject to Amortization Brand names

 55,265  -  (3,467 51,798 
    

 

   

 

  

 

  

 

 

Total

$216,852 $(29,118$(11,456$176,278 
    

 

   

 

  

 

  

 

 
    Estimated  
Life
(years)
         Cost          Accumulated
Amortization
   Foreign
Currency
  Translation  
   Book
     Value     
 

December 27, 2013

                            

Customer relationships

  3 - 14  $121,205    $(26,377)    $1,458    $96,286  3 - 14$121,205 $(26,377$1,458 $96,286 

Patents, proprietary technology and product documentation

  3 - 11   16,125     (5,869)     118     10,374  3 - 11 16,125  (5,869 118  10,374 

Trademarks, trade names and other

  5   175     (9)         166  5 175  (9 -  166 
    

 

   

 

   

 

   

 

     

 

   

 

  

 

  

 

 
     137,505     (32,255)     1,576     106,826   137,505  (32,255 1,576  106,826 

Not Subject to Amortization

          

Brand names

     40,400         714     41,114  

Not Subject to Amortization Brand names

 40,400  -  714  41,114 
    

 

   

 

   

 

   

 

     

 

   

 

  

 

  

 

 

Total

    $177,905    $(32,255)    $2,290    $147,940  $177,905 $(32,255$2,290 $147,940 
    

 

   

 

   

 

   

 

     

 

   

 

  

 

  

 

 

December 28, 2012

                   

Customer relationships

  2 - 14  $132,245    $(30,041)    $(1,510)    $100,694  

Patents, proprietary technology and product documentation

  3 - 11   20,830     (9,679)     (147)     11,004  

Trademarks, trade names and other

  1 - 5   85     (27)         58  
    

 

   

 

   

 

   

 

 
     153,160     (39,747)     (1,657)     111,756  

Not Subject to Amortization

          

Brand names

     40,580         (563)     40,017  
    

 

   

 

   

 

   

 

 

Total

    $193,740    $(39,747)    $(2,220)    $151,773  
    

 

   

 

   

 

   

 

 

Amortization of intangibles was $11.6 million in 2014, $12.5 million in 2013 and $15.0 million in 2012 and $10.9 million in 2011.2012. Estimated future annual amortization is as follows: $10.0 million in 2014, $9.5follows (excluding amounts related to businesses acquired subsequent to the end of 2014): $12.4 million in 2015, $9.2$12.1 million in 2016, $9.0$11.8 million in 2017, $8.9$11.7 million in 2018, $11.6 million in 2019 and $60.2$64.9 million thereafter.

Other Assets. Components of other assets were (in thousands):

 

        2013                 2012        2014 2013 

Cash surrender value of life insurance

  $12,611    $9,483  $13,187 $12,611 

Capitalized software

   3,448     3,291   3,596  3,448 

Equity method investment

   5,569     5,224   5,859  5,569 

Deposits and other

   3,017     3,645   3,565  3,017 
  

 

   

 

   

 

   

 

 

Total

  $24,645    $21,643  $  26,207 $  24,645 
  

 

   

 

   

 

   

 

 

The Company paid $1.5 million in each of 2013 and 2012 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 20122014 and 2011.2012. In 2013, increases in cash surrender value totaled $1.6 million and were offset by expenses related to the non-qualified pension and deferred compensation plans funded by the insurance contracts.

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 impairment annually in the fourth quarter. There were no write-downs of long-lived assets in the periods presented.

Other Current Liabilities.Components of other current liabilities were (in thousands):

 

        2013                2012        
2014 2013 

Accrued self-insurance retentions

  $6,381    $6,952  $7,089 $6,381 

Accrued warranty and service liabilities

   7,771     7,943   7,609  7,771 

Accrued trade promotions

   7,245     5,669   7,697  7,245 

Payable for employee stock purchases

   7,908     7,203   9,126  7,908 

Customer advances and deferred revenue

   11,693     10,617   8,918  11,693 

Income taxes payable

   4,561     4,305   5,997  4,561 

Other

   23,608     22,704   25,157  23,608 
  

 

   

 

   

 

   

 

 

Total

  $69,167    $65,393  $  71,593 $  69,167 
  

 

   

 

   

 

   

 

 

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):

 

        2013                 2012         2014 2013 

Balance, beginning of year

  $7,943    $6,709  $7,771 $7,943 

Assumed in business acquisition

        1,121   12  - 

Charged to expense

   6,119     6,182   6,069  6,119 

Margin on parts sales reversed

   3,819     2,244   1,920  3,819 

Reductions for claims settled

   (10,110)     (8,313)   (8,163 (10,110
  

 

   

 

   

 

   

 

 

Balance, end of year

  $7,771    $7,943  $7,609 $7,771 
  

 

   

 

   

 

   

 

 

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 have 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 and sales growth, 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 sales growth, 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.

Shipping and Handling.Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold in the accompanying Consolidated Statements of Income. Amounts billed to customers for shipping and handling are included in net sales.

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.

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.

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 fair value and the gains and losses are included in other expense, net. The notional amounts of contracts outstanding as of December 27, 201326, 2014 totaled $22 million. The Company believes it uses strong financial counterpartscounterparties in these transactions and that the resulting credit risk under these hedging strategies is not significant.

The Company uses significant other observable inputs (level 2 in the fair value hierarchy) to value the derivative instruments used to hedge interest rate volatility and net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. The fair market value and balance sheet classification of such instruments follows (in thousands):

 

   Balance Sheet Classification         2013                 2012          Balance Sheet Classification       2014               2013         

Gain (loss) on foreign currency forward contracts

      

Gains

    $306    $553  $280  $306 

Losses

     (15)     (62)   -  (15)  
    

 

   

 

     

 

   

 

 

Net

  Accounts receivable  $291    $491  Accounts receivable$280 $291 
    

 

   

 

     

 

   

 

 

Recent Accounting Pronouncements. The accounting standards updates issued by TheIn May 2014, the Financial Accounting Standards Board (FASB) that will beissued a final standard on revenue from contracts with customers. The new standard sets forth a single comprehensive model for recognizing and reporting revenue. The new standard is effective for the Company in 2014 will not haveits fiscal year 2017, and permits the use of either a significant impactretrospective or a cumulative effect transition method. The Company is evaluating the effect of the new standard on the Company’sits consolidated financial statements.statements and related disclosures, and has not yet selected a transition method.

B. Segment Information

The Company has three reportable segments: Industrial (which aggregates foursix operating segments), 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 truckvehicle assembly and components plants,production, wood and metal products, process, rail, marine, aerospace, farm, construction, bus, recreational vehicles, oil and natural gas, and various other industries. The Contractor segment markets sprayers for architectural coatings for painting, corrosion control, texture, and line striping. 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 applications. 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. 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)

  

      2013        

   

      2012        

   

      2011        

 

      2014        

 

      2013        

 

      2012        

 

Net Sales

      

Industrial

   $652,344     $603,398     $501,841  $727,389 $652,344 $603,398 

Contractor

   342,546     298,811     290,732   375,574  342,546  298,811 

Lubrication

   109,134     110,247     102,710   118,167  109,134  110,247 
  

 

   

 

   

 

   

 

  

 

  

 

 

Total

   $1,104,024     $1,012,456     $895,283  $1,221,130 $1,104,024 $1,012,456 
  

 

   

 

   

 

   

 

  

 

  

 

 

Operating Earnings

      

Industrial

   $211,265     $186,129     $173,694  $225,337 $211,265 $186,129 

Contractor

   72,245     54,310     50,581   81,892  72,245  54,310 

Lubrication

   22,512     22,535     18,928   26,403  22,512  22,535 

Unallocated corporate (expense)

   (26,253)     (38,297)     (23,689)   (24,707 (26,253 (38,297
  

 

   

 

   

 

   

 

  

 

  

 

 

Total

   $279,769     $224,677     $219,514  $308,925 $279,769 $224,677 
  

 

   

 

   

 

   

 

  

 

  

 

 

Assets

      

Industrial

   $591,135     $567,879    $770,623 $591,135 

Contractor

   152,300     141,094     176,757  152,300 

Lubrication

   82,503     84,079 ��   83,148  82,503 

Unallocated corporate

   501,290     528,682     514,250  501,290 
  

 

   

 

     

 

  

 

  

Total

   $1,327,228     $1,321,734    $1,544,778 $1,327,228 
  

 

   

 

     

 

  

 

  

Unallocated corporate (expense) is not included in management’s measurement of segment performance and includes such items as acquisitionstock compensation, divestiture and divestiturecertain acquisition transaction costs, stock compensation, bad debt expense, charitable contributions, and certain portions of pension expense.expense and in 2014, central warehouse startup expenses. Unallocated assets include cash, allowances and valuation reserves, deferred income taxes, certain capital items and other assets.

 

Geographic Information (in thousands)

  

      2013        

   

      2012        

   

      2011        

 

      2014        

 

      2013        

 

      2012        

 

Net Sales (based on customer location)

      

United States

  $498,478    $440,757    $394,318  $577,359 $498,478 $440,757 

Other countries

   605,546     571,699     500,965   643,771  605,546  571,699 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $1,104,024    $1,012,456    $895,283  $1,221,130 $1,104,024 $1,012,456 
  

 

   

 

   

 

   

 

   

 

   

 

 

Long-lived Assets

      

United States

  $120,262    $119,331    $131,131 $120,262 

Other countries

   31,455     32,213     30,099  31,455 
  

 

   

 

     

 

   

 

   

Total

  $151,717    $151,544    $161,230 $151,717 
  

 

   

 

     

 

   

 

   

Sales to Major Customers

There were no customers that accounted for 10 percent or more of consolidated sales in 2014, 2013 2012 or 2011.2012.

C. Inventories

Major components of inventories were as follows (in thousands):

 

        2013                 2012         
2014 2013 

Finished products and components

  $65,963    $58,703  $87,384 $65,963 

Products and components in various stages of completion

   41,458     44,001   47,682  41,458 

Raw materials and purchased components

   69,051     59,190   69,212  69,051 
  

 

   

 

   

 

   

 

 
   176,472     161,894   204,278  176,472 

Reduction to LIFO cost

   (42,685)     (40,345)   (44,481 (42,685
  

 

   

 

   

 

   

 

 

Total

  $133,787    $121,549  $  159,797 $  133,787 
  

 

   

 

   

 

   

 

 

Inventories valued under the LIFO method were $84.0 million in 2014 and $76.9 million in 2013 and $72.6 million in 2012.2013. All other inventory was valued on the FIFO method.

D. Property, Plant and Equipment

Property, plant and equipment were as follows (in thousands):

 

        2013                 2012         2014 2013 

Land and improvements

   $16,506     $16,261  $16,311 $16,506 

Buildings and improvements

   118,460     115,774   123,126  118,460 

Manufacturing equipment

   222,810     214,073   242,978  222,810 

Office, warehouse and automotive equipment

   35,887     33,388   39,219  35,887 

Additions in progress

   14,224     9,571   12,117  14,224 
  

 

   

 

   

 

   

 

 

Total property, plant and equipment

   407,887     389,067   433,751  407,887 

Accumulated depreciation

   (256,170)     (237,523)   (272,521 (256,170
  

 

   

 

   

 

   

 

 

Net property, plant and equipment

   $151,717     $151,544  $161,230 $151,717 
  

 

   

 

   

 

   

 

 

Depreciation expense was $24.1 million in 2014, $23.4 million in 2013 and $22.2 million in 2012 and $20.6 million in 2011.2012.

E. Income Taxes

Earnings before income tax expense consist of (in thousands):

 

        2013                 2012                 2011         2014 2013 2012 

Domestic

  $238,928    $184,132    $186,374  $266,627 $238,928 $184,132 

Foreign

   49,894     33,194     23,354   48,446  49,894  33,194 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $288,822    $217,326    $209,728  $  315,073 $  288,822 $  217,326 
  

 

   

 

   

 

   

 

   

 

   

 

 

Income tax expense consists of (in thousands):

 

         2013                 2012                 2011         

Current

      

Domestic

      

Federal

  $64,753   $61,989   $58,192 

State and local

   2,470    5,180    3,920 

Foreign

   11,569    11,218    7,161 
  

 

 

   

 

 

   

 

 

 
   78,792    78,387    69,273 
  

 

 

   

 

 

   

 

 

 

Deferred

      

Domestic

   (553)     (5,431)     (1,496)  

Foreign

   (239)     (4,756)     (377)  
  

 

 

   

 

 

   

 

 

 
   (792)     (10,187)     (1,873)  
  

 

 

   

 

 

   

 

 

 

Total

  $78,000   $68,200   $67,400 
  

 

 

   

 

 

   

 

 

 

 2014 2013 2012 

Current

Domestic

Federal

$73,584 $64,753 $61,989 

State and local

 2,775  2,470  5,180 

Foreign

 12,263  11,569  11,218 
  

 

 

   

 

 

   

 

 

 
 88,622  78,792  78,387 
  

 

 

   

 

 

   

 

 

 

Deferred

Domestic

 2,497  (553 (5,431

Foreign

 (1,619 (239 (4,756
  

 

 

   

 

 

   

 

 

 
 878  (792 (10,187
  

 

 

   

 

 

   

 

 

 

Total

$89,500 $78,000 $68,200 
  

 

 

   

 

 

   

 

 

 

Income taxes paid were $92.1 million, $78.0 million and $71.7 million in 2014, 2013 and $61.3 million in 2013, 2012 and 2011.2012.

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:

 

         2013                 2012                 2011         

Statutory tax rate

   35 %       35 %       35 %    

Tax effect of international operations

   (1)           (1)           -        

State taxes, net of federal effect

   1           1           1        

U.S. general business tax credits

   (2)           -           (2)        

Domestic production deduction

   (3)           (2)           (3)        

Dividends from Liquid Finishing

   (3)           (2)           -        

Other

   -           -           1        
  

 

 

   

 

 

   

 

 

 

Effective tax rate

   27 %       31 %       32 %    
  

 

 

   

 

 

   

 

 

 

 2014 2013 2012 

Statutory tax rate

 35 35 35

Tax effect of international operations

 (1 (1 (1

State taxes, net of federal effect

 1   1   1 

U.S. general business tax credits

 (1 (2 -   

Domestic production deduction

 (3 (3 (2

Dividends from Liquid Finishing

 (3 (3 (2
  

 

 

  

 

 

  

 

 

 

Effective tax rate

 28 27 31
  

 

 

  

 

 

  

 

 

 

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):

 

        2013                 2012         2014 2013 

Inventory valuations

  $8,825    $8,289  $9,163 $8,825 

Self-insurance retention accruals

   1,887     2,035   2,098  1,887 

Warranty reserves

   2,089     2,091   2,074  2,089 

Vacation accruals

   2,740     2,406   3,023  2,740 

Bad debt reserves

   1,961     1,753   2,409  1,961 

Other

   1,325     1,168   1,202  1,325 
  

 

   

 

   

 

   

 

 

Deferred income taxes, current

   18,827     17,742   19,969  18,827 

Included in other current liabilities

   (1,095)     (1,042)   (1,743 (1,095
  

 

   

 

   

 

   

 

 

Total Current

   17,732     16,700   18,226  17,732 
  

 

   

 

   

 

   

 

 

Unremitted earnings of consolidated foreign subsidiaries

   (6,316)     (4,016)   (7,316 (6,316

Excess of tax over book depreciation

   (42,322)     (42,195)   (50,664 (42,322

Pension liability

   20,798     36,821   35,247  20,798 

Postretirement medical

   8,097     7,998   7,743  8,097 

Acquisition costs

   3,644     4,024   3,369  3,644 

Stock compensation

   14,401     13,046   16,657  14,401 

Deferred compensation

   1,193     982   1,350  1,193 

Other

   (64)     200   142  (64
  

 

   

 

   

 

   

 

 

Total Non-current

   (569)     16,860   6,528  (569
  

 

   

 

   

 

   

 

 

Net deferred tax assets

  $17,163    $33,560  $24,754 $17,163 
  

 

   

 

   

 

   

 

 

Total deferred tax assets were $78.6$95.3 million and $93.2$78.6 million, and total deferred tax liabilities were $61.4$70.6 million and $59.6$61.4 million on December 27, 201326, 2014 and December 28, 2012.27, 2013. The difference between the deferred income tax provision and the change in net deferred income taxes is due to the change in other comprehensive income (loss) items and the impact of acquisitions.

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 2007.2008.

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.

F. Debt

A summary of debt follows (dollars in thousands):

 

   Average
Interest Rate
   December 27,   
2013
         Maturity                 2013                   2012         

Private placement unsecured fixed-rate notes

        

Series A

   4.00 %       March 2018      $75,000      $75,000  

Series B

   5.01 %       March 2023     75,000     75,000  

Series C

   4.88 %       January 2020     75,000     75,000  

Series D

   5.35 %       July 2026     75,000     75,000  

Unsecured revolving credit facility

   1.42 %       March 2017     108,370     256,480  

Notes payable to banks

   0.81 %       2014     9,584     8,133  
      

 

 

   

 

 

 

Total debt, including current portion

        $417,954      $564,613  
      

 

 

   

 

 

 

 Average
Interest Rate
December 26,
2014
 Maturity 2014 2013 

Private placement unsecured fixed-rate notes

Series A

 4.00 March 2018  $75,000 $75,000 

Series B

 5.01 March 2023   75,000  75,000 

Series C

 4.88 January 2020   75,000  75,000 

Series D

 5.35 July 2026   75,000  75,000 

Unsecured revolving credit facility

 1.28 June 2019   315,000  108,370 

Notes payable to banks

 0.85 2015   5,016  9,584 
     

 

 

   

 

 

 

Total debt, including current portion

$  620,016 $  417,954 
     

 

 

   

 

 

 

The estimated fair value of debt with fixed interest rates was $330 million on December 26, 2014 and $320 million on December 27, 2013 and $330 million on December 28, 2012.2013. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.

On March 27, 2012,June 26, 2014, the Company’s $250 million credit agreement was terminated in connection with the execution ofCompany executed an amendment to a new unsecuredits revolving credit agreement.agreement, extending the expiration date to June 26, 2019. The newamended agreement is with a syndicate of lenders and expires in March 2017. It provides up to $450$500 million of committed credit, available for general corporate purposes, working capital needs, share repurchases and acquisitions. The Company may borrow up to $50 million under the swingline portion of the facility for daily working capital needs.

Under terms of the amended revolving credit agreement, loans denominated in U.S. dollars bear interest, at the Company’s option, at either a base rate or a LIBOR-based rate. Loans denominated in currencies other than U.S. dollars bear interest at a LIBOR-based rate. The base rate is an annual rate equal to a margin ranging from zero percent to 10.875 percent, depending on the Company’s cash flow leverage ratio (debt to earnings before interest, taxes, depreciation, amortization and extraordinary non-operating or non-cash charges and expenses) plus the highest of (i) the bank’s prime rate, (ii) the federal funds rate plus 0.5 percent or (iii) one-month LIBOR plus 1.5 percent. In general, LIBOR-based loans bear interest at LIBOR plus 1 percent to 21.875 percent, depending on the Company’s cash flow leverage ratio. The Company is also required to pay a fee on the undrawn amount of the loan commitment at an annual rate ranging from 0.15 percent to 0.400.30 percent, depending on the Company’s cash flow leverage ratio.

On December 27, 2013,26, 2014, the Company had $502$550 million in lines of credit, including the $450$500 million in committed credit facilities described above and $52$50 million with foreign banks. The unused portion of committed credit lines was $355$200 million as of December 27, 2013.26, 2014. In addition, the Company has unused, uncommitted lines of credit with foreign banks totaling $32$31 million. Borrowing rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit and the London Interbank market. The Company pays facility fees of up to 0.15 percent per annum on certain of these lines. No compensating balances are required.

Various debt agreements require the Company to maintain certain financial ratios as to cash flow leverage and interest coverage. The Company is in compliance with all financial covenants of its debt agreements.

Annual maturities of debt are as follows (in thousands):

 

       
 

          2014

  $        9,584 
 

          2015

   - 
 

          2016

   - 
 

          2017

   108,370 
 

          2018

   75,000 
 

Thereafter

   225,000 
       
 

          2015

  $5,016 
 

          2016

   -   
 

          2017

   -   
 

          2018

   75,000 
 

          2019

   315,000 
 

Thereafter

   225,000 

Interest paid on debt during 2014, 2013 and 2012 and 2011 was $18.6 million, $18.3 million $19.0 million and $8.7$19.0 million.

G. Shareholders’ Equity

At December 27, 2013,26, 2014, 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 maintained a plan in which one preferred share purchase right (“Right”) existed for each common share of the Company. Each Right entitled its holder to purchase one one-thousandth of a share of a new series of junior participating preferred stock at an exercise price of $150, subject to adjustment. The Rights were exercisable only if a person or group acquired beneficial ownership of 15 percent or more of the Company’s outstanding common stock. On February 15, 2013, the Company terminated the plan and all of the Rights expired.

Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):

 

  Pension
and Post-
  retirement  
Medical
   Cumulative
Translation
 Adjustment 
   Gain (Loss)
on Interest
  Rate Hedge  
Contracts
         Total       

2011

                

Beginning balance

  $(51,334)    $(823)    $(286)    $(52,443)  

Other comprehensive income (loss) before reclassifications

   (28,112)             (28,112)  

Amounts reclassified from accumulated other comprehensive income

   3,788         286     4,074  
  

 

   

 

   

 

   

 

 

Ending balance

  $(75,658)    $(823)    $   $(76,481)  
  

 

   

 

   

 

   

 

 
  Pension
and Post-
retirement
Medical
   Cumulative
Translation
Adjustment
   Total 

2012

                            

Beginning balance

  $(75,658)    $(823)    $   $(76,481)    $(75,658  $(823  $(76,481

Other comprehensive income (loss) before reclassifications

   (10,993)     (3,206)         (14,199)     (10,993   (3,206   (14,199

Amounts reclassified from accumulated other comprehensive income

   6,935             6,935     6,935    -      6,935 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance

  $(79,716)    $(4,029)    $   $(83,745)  $(79,716$(4,029$(83,745
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

2013

                      

Beginning balance

  $(79,716)    $(4,029)    $   $(83,745)  $(79,716$(4,029$(83,745

Other comprehensive income (loss) before reclassifications

   23,103     7,812         30,915   23,103  7,812  30,915 

Amounts reclassified from accumulated other comprehensive income

   6,481             6,481   6,481  -    6,481 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance

  $(50,132)    $3,783    $   $(46,349)  $(50,132$3,783 $(46,349
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

2014

      

Beginning balance

$(50,132$3,783 $(46,349

Other comprehensive income (loss)
before reclassifications

 (29,563 (27,935 (57,498

Amounts reclassified from accumulated
other comprehensive income

 3,111  -    3,111 
  

 

   

 

   

 

 

Ending balance

$(76,584$(24,152$(100,736
  

 

   

 

   

 

 

Amounts related to pension and postretirement medical adjustments are reclassified to pension cost, which is allocated to cost of products sold and operating expenses based on salaries and wages, approximately as follows (in thousands):

 

         2013                 2012                 2011         

Cost of products sold

   $3,635     $3,900     $2,122  

Product development

   1,699     1,728     901  

Selling, marketing and distribution

   2,828     2,886     1,636  

General and administrative

   2,124     2,032     1,065  
  

 

 

   

 

 

   

 

 

 

Total before tax

   $10,286     $10,546     $5,724  

Income tax (benefit)

   (3,805)     (3,611)     (1,936)  
  

 

 

   

 

 

   

 

 

 

Total after tax

   $6,481     $6,935     $3,788  
  

 

 

   

 

 

   

 

 

 

 2014 2013 2012 

Cost of products sold

$1,701 $3,635 $3,900 

Product development

 714  1,699  1,728 

Selling, marketing and distribution

 1,371  2,828  2,886 

General and administrative

 820  2,124  2,032 
  

 

 

   

 

 

   

 

 

 

Total before tax

$4,606 $10,286 $10,546 

Income tax (benefit)

 (1,495 (3,805 (3,611
  

 

 

   

 

 

   

 

 

 

Total after tax

$3,111 $6,481 $6,935 
  

 

 

   

 

 

   

 

 

 

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.

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 $528,000$0.3 million in 2014, $0.5 million in 2013 $408,000and $0.4 million in 2012 and $291,000 in 2011.2012. 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 4,867 shares in 2014, 6,079 shares in 2013 and 7,656 shares in 2012 and 8,190 shares in 2011.2012. The expense related to this arrangement is not significant. The Company has a stock appreciation plan that provides for payments of cash to eligible foreign employees based on the change in the market price of the Company’s common stock over a period of time. Compensation cost related to this plan was $1,900,000$1.0 million in 2014, $1.9 million in 2013 $470,000and $0.5 million in 2012 and $851,000 in 2011.2012.

Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except per share amounts)exercise prices):

 

                                                                                        
  Option
  Shares  
     Weighted    
Average
Exercise
Price
   Options
Exercisable 
     Weighted    
Average
Exercise
Price
 

Outstanding, December 31, 2010

   5,509    $30.42     2,980    $31.99  

Granted

   569     43.15      

Exercised

   (553)     26.19      

Canceled

   (47)     35.55      
  

 

   

 

   

 

   

 

 Option
Shares
Weighted
Average
Exercise
Price
 Options
Exercisable
Weighted
Average
Exercise
Price

Outstanding, December 30, 2011

   5,478     32.12     3,211     32.27   5,478 $32.12   3,211  $32.27  

Granted

   566     50.33       566  50.33  

Exercised

   (805)     27.14       (805 27.14  

Canceled

   (47)     35.24       (47 35.24  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

  

 

Outstanding, December 28, 2012

   5,192     34.85     3,194     32.99   5,192  34.85   3,194   32.99  

Granted

   969     65.97       969  65.97  

Exercised

   (990)     33.04       (990 33.04  

Canceled

   (22)     40.71       (22 40.71  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

  

 

Outstanding, December 27, 2013

   5,149    $41.03     3,311    $33.20   5,149  41.03   3,311   33.20  

Granted

 475  74.62  

Exercised

 (607 35.73  

Canceled

 (42 61.35  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

  

 

Outstanding, December 26, 2014

 4,975 $44.72   3,318  $34.86  
  

 

  

 

   

 

  

 

The following table summarizes information for options outstanding and exercisable at December 27, 201326, 2014 (in thousands, except per shareexercise prices and contractual term amounts):

 

  Range of  
Prices

  

Options
   Outstanding   

  

Options
Outstanding
Weighted Avg.
Remaining
Contractual Term
in Years

 

Options
Outstanding
 Weighted Avg. 
Exercise Price

  

Options
  Exercisable  

  

Options
Exercisable
 Weighted Avg. 
Exercise Price

 
  $16-30    1,469   5 $23.62    1,295   $23.16  
  $30-45    2,062   5  38.97    1,805    38.50  
  $45-60    1,211   8  53.97    211    49.44  
  $60-76    407   10  75.88        

 

 

  

 

 

  

 

 

 

 

  

 

 

  

 

 

 
  $16-76    5,149   6 $41.03    3,311   $33.20  

 

 

  

 

 

  

 

 

 

 

  

 

 

  

 

 

 

  Range of  
Prices

Options
Outstanding
 Options
Outstanding
Weighted Avg.
Remaining
Contractual Term
in Years
Options
Outstanding
Weighted Avg.
Exercise Price
 Options
Exercisable
 Options
Exercisable
Weighted Avg.
Exercise Price
 
$  16-30 1,352 4$23.60  1,352 $23.60 
$  30-45 1,585 4 39.31  1,458  39.01 
$  45-60 1,177 7 53.99  491  52.24 
$  60-76 861 9 75.19  17  74.89 

 

 

 

 

  

 

 

 

 

  

 

 

  

 

 

 
$  16-76 4,975 6$44.72  3,318 $34.86 

 

 

 

 

  

 

 

 

 

  

 

 

  

 

 

 

The aggregate intrinsic value of exercisable option shares was $147.7$154.5 million as of December 27, 2013,26, 2014, with a weighted average contractual term of 4.94.6 years. There were approximately 5.14.9 million vested share options and share options expected to vest as of December 27, 2013,26, 2014, with an aggregate intrinsic value of $71.3$182.2 million, a weighted average exercise price of $40.71$44.50 and a weighted average contractual term of 6.25.8 years.

Information related to options exercised follows (in thousands):

 

          2013                   2012                   2011         2014 2013 2012 

Cash received

  $32,630    $21,687    $14,476  $  20,343 $  33,630 $  21,687 

Aggregate intrinsic value

   33,028     18,195     10,485   25,284  33,028  18,195 

Tax benefit realized

   11,200     6,200     3,500   8,200  11,200  6,200 

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 196,913193,084 shares under this plan in 2014, 196,913 shares in 2013 and 238,621 shares in 2012 and 313,013 shares in 2011.2012.

Authorized Shares.Shares authorized for issuance under the stock option and purchase plans are shown below (in thousands):

 

        Total Shares      
Authorized
   Available for Future
Issuance as of
December 27, 2013
 Total Shares
Authorized
 Available for Future
Issuance as of
December 26, 2014
 

Stock Incentive Plan (2010)

   5,100     2,473   5,100  2,031 

Employee Stock Purchase Plan (2006)

   7,000     5,288   7,000  5,094 
  

 

   

 

   

 

   

 

 

Total

   12,100     7,761   12,100  7,125 
  

 

   

 

   

 

   

 

 

Amounts available for future issuance exclude outstanding options. Options outstanding as of December 27, 2013,26, 2014, include options granted under three plans that were replaced by subsequent plans. No shares are available for future grants under those plans.

Share-based Compensation.The Company recognized share-based compensation cost of $17.2 million in 2014, $16.5 million in 2013 and $12.4 million in 2012, and $11.0 million in 2011, which reduced net income by $12.8 million, or $0.21 per weighted diluted common share in 2014, $12.6 million, or $0.20 per weighted diluted common share in 2013 and $9.5 million, or $0.15 per weighted diluted common share in 2012 and $8.4 million, or $0.14 per weighted common share in 2011.2012. As of December 27, 2013,26, 2014, there was $15.2$13.7 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of approximately two1.6 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:

 

          2013                   2012                   2011         2014 2013 2012 

Expected life in years

   5.9           6.5           6.5         6.5  5.9  6.5 

Interest rate

   1.3 %       1.3 %       2.8 %     2.0 1.3 1.3

Volatility

   35.4 %       36.6 %       33.7 %     36.1 35.4 36.6

Dividend yield

   1.6 %       1.8 %       2.0 %     1.5 1.6 1.8

Weighted average fair value per share

  $19.44          $15.60          $13.35        $  24.83 $  19.44 $  15.60 

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:

 

           2013                   2012                   2011         

Expected life in years

   1.0           1.0           1.0        

Interest rate

   0.2 %       0.2 %       0.3 %    

Volatility

   26.0 %       40.6 %       27.8 %    

Dividend yield

   1.7 %       1.7 %       2.1 %    

Weighted average fair value per share

  $14.16          $15.58          $10.05        

 2014 2013 2012 

Expected life in years

 1.0  1.0  1.0 

Interest rate

 0.1 0.2 0.2

Volatility

 21.4 26.0 40.6

Dividend yield

 1.4 1.7 1.7

Weighted average fair value per share

$  17.81 $  14.16 $  15.58 

I. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

        2013                 2012                 2011         2014 2013 2012 

Net earnings available to common shareholders

  $210,822    $149,126    $142,328  $  225,573 $  210,822 $  149,126 
  

 

   

 

   

 

   

 

   

 

   

 

 

Weighted average shares outstanding for basic earnings per share

   61,203     60,451     60,286   60,148  61,203  60,451 

Dilutive effect of stock options computed based on the treasury stock method using the average market price

   1,587     1,260     1,084   1,597  1,587  1,260 
  

 

   

 

   

 

   

 

   

 

   

 

 

Weighted average shares outstanding for diluted earnings per share

   62,790     61,711     61,370   61,745  62,790  61,711 
  

 

   

 

   

 

   

 

   

 

   

 

 

Basic earnings per share

  $3.44    $2.47    $2.36  $3.75 $3.44 $2.47 

Diluted earnings per share

  $3.36    $2.42    $2.32  $3.65 $3.36 $2.42 

Stock options to purchase 0.6 million, 0.4 million 0.6 million and 1.60.6 million shares were not included in the 2014, 2013 2012 and 20112012 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 $6.9 million in 2014, $6.3 million in 2013 and $5.6 million in 2012 and $4.2 million in 2011.2012.

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 levels and maximum tax deduction limits.

In 2012, theThe Company assumed the obligations and assets ofmaintains a defined contribution plan with a guaranteed return that coverscovering employees of an acquired business in Switzerland. Thea Swiss plan issubsidiary, funded by companyCompany and employee contributions. In 2013, the Company transferred responsibility for pension coverage under Swiss law to ana reputable Swiss insurance company. To effect the change, plan assets were converted to cash and deposited with the insurance company for investment under an insurance contract. Assetscontract that guarantees a federally mandated annual rate of return. The value of the plan are valued atassets is effectively the amount of benefits liabilityvalue of the insurance contract. The performance of the underlying assets held by the insurance company has no direct impact on the surrender value of the insurance contract. The insurance backed assets have no active market and are classified in the “other” assets category, level 23 in the fair value hierarchy. The transfer of responsibility for current retirees to the new plan carrier was treated as a settlement under ASC 715 and resulted in a reduction of plan obligations and assets, and a small settlement gain.gain in 2013.

Investment policies and strategies of the U.S. 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 domestic and international equities, fixed income securities, which include treasuries, highly-rated corporate bonds and high-yield bonds and real estate. The midpoints of the ranges of strategic target allocations for plan assets are 6558 percent equity securities, 2231 percent fixed income securities and 1311 percent real estate and alternative investments.

Plan assets are held in a trust for the benefit of plan participants and are invested in various commingled funds, most of which are sponsored by the trustee. Equity securities are valued using quoted prices in active markets. The fair values for commingled equity and fixed-income funds, international equity funds, and real estate investments are measured using net asset values, which take into consideration the value of underlying fund investments, as well as the other accrued assets and liabilities of a fund, in order to determine a per share market value. Commingled fund and international equity funds are classified as level 2 because the net asset value is not directly traded on an active exchange. Certain trustee-sponsored funds allow redemptions monthly or quarterly, with 10 or 60 days advance notice, while most of the funds allow redemptions daily.

Level 3 assets in the U.S. funded pension plan consist primarily of investments in real estate investment trust funds whose assets are valued at least annually by independent appraisal firms, using market, income and cost approaches. Significant unobservable quantitative inputs used in determining the fair

value of each investment include cash flow assumptions, capitalization rates and discount rates. These inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in cash flows, discount rates and terminal capitalization rates will result in increases or decreases in the fair values of these investments. It is not possible for us to predict the effect of future economic or market conditions on the estimated fair values of plan assets.

Plan assets by category and fair value measurement level were as follows (in thousands):

 

Total Level 1 Level 2 Level 3 

December 26, 2014

        

Equity

U.S. Large Cap

$92,272 $-   $92,272 $-   

U.S. Small/Mid Cap

 14,948  -    14,948  -   

International

 45,958  -    45,958  -   
  

 

   

 

   

 

   

 

 

Total Equity

 153,178  -    153,178  -   

Fixed income

 53,548  -    40,693  12,855 

Insurance contract

 28,899  -    -    28,899 

Real estate and other

 41,583  1,356  15,008  25,219 
  

 

   

 

   

 

   

 

 

Total

$277,208 $1,356 $208,879 $66,973 
  

 

   

 

   

 

   

 

 
          Total               Level 1               Level 2               Level 3       

December 27, 2013

                        

Equity

        

U.S. Large Cap

  $95,025    $   $95,025    $ $95,025 $-   $95,025 $-   

U.S. Small/Mid Cap

   18,020         18,020       18,020  -    18,020  -   

International

   69,140         69,140       69,140  -    69,140  -   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Equity

   182,185         182,185       182,185  -    182,185  -   

Fixed income

   48,718         40,158     8,560   48,718  -    40,158  8,560 

Real estate and other

   49,704     1,149     31,271     17,284   49,704  1,149  31,271  17,284 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $280,607    $1,149    $253,614    $25,844  $  280,607 $  1,149 $  253,614 $  25,844 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 28, 2012

                

Equity

        

Graco common stock

  $7,196    $7,196    $    $  

U.S. Large Cap

   78,263          78,263       

U.S. Small/Mid Cap

   12,282          12,282       

International

   67,459          67,459       
  

 

   

 

   

 

   

 

 

Total Equity

   165,200     7,196     158,004       

Fixed income

   63,592          63,592       

Real estate and other

   17,814     2,676          15,138  
  

 

   

 

   

 

   

 

 

Total

  $246,606    $9,872    $221,596    $15,138  
  

 

   

 

   

 

   

 

 

A reconciliation of the beginning and ending balances of level 3 plan assets follows:

 

        2013                 2012         2014 2013 

Balance, beginning of year

    $15,138        $9,247    $25,844 $15,138 

Pension assets of acquired businesses

   -       5,216    

Transfer from level 2 (insurance contract)

 31,271  -   

Purchases

   14,277       4,443     12,914  14,277 

Redemptions

   (5,351)       (4,891)     (3,849 (5,351

Change in unrealized gains (losses)

   1,780       1,123     793  1,780 
  

 

   

 

   

 

   

 

 

Balance, end of year

    $25,844        $15,138    $66,973 $25,844 
  

 

   

 

   

 

   

 

 

The Company uses a fiscal 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 27, 2013,26, 2014, and December 28, 2012,27, 2013, and a statement of the funded status as of the same dates (in thousands):

 

  Pension Benefits   Postretirement Medical Benefits Pension Benefits Postretirement Medical Benefits 
          2013                   2012                   2013                   2012         2014 2013 2014 2013 

Change in benefit obligation

        

Obligation, beginning of year

  $359,701    $278,611    $23,472    $23,445  $352,271 $359,701 $21,342 $23,472 

Pension obligation of acquired businesses

       39,139          

Service cost

   7,447     6,414     626     589   6,846  7,447  486  626 

Interest cost

   14,149     13,729     961     986   15,944  14,149  981  961 

Actuarial loss (gain)

   (15,653)     31,869     (2,582)     (294)   44,290  (15,653 1,037  (2,582

Plan changes

   3,197               -    3,197  -    -   

Benefit payments

   (10,762)     (9,717)     (1,135)     (1,254)   (23,593 (10,762 (1,082 (1,135

Settlements

   (7,430)               -    (7,430 -    -   

Exchange rate changes

   1,622     (344)           (6,066 1,622  -    -   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Obligation, end of year

  $352,271    $359,701    $21,342    $23,472  $389,692 $352,271 $22,764 $21,342 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Change in plan assets

        

Fair value, beginning of year

  $246,606    $181,319    $   $ $280,607 $246,606 $-   $-   

Pension assets of acquired businesses

       32,132          

Actual return on assets

   40,280     30,861           21,622  40,280  -    -   

Employer contributions

   10,728     12,437     1,135     1,254   1,814  10,728  1,082  1,135 

Benefit payments

   (10,762)     (9,717)     (1,135)     (1,254)   (23,593 (10,762 (1,082 (1,135

Settlements

   (7,241)               -    (7,241 -    -   

Exchange rate changes

   996     (426)           (3,242 996  -    -   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Fair value, end of year

  $280,607    $246,606    $   $ $277,208 $280,607 $-   $-   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Funded status

  $(71,664)    $(113,095)    $(21,342)    $(23,472)  $(112,484$(71,664$(22,764$(21,342
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Amounts recognized in consolidated balance sheets

        

Current liabilities

  $1,116    $850    $1,256    $1,254  $1,308 $1,116 $1,165 $1,256 

Non-current liabilities

   70,548     112,245     20,086     22,218   111,176  70,548  21,599  20,086 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total liabilities

  $71,664    $113,095    $21,342    $23,472  $112,484 $71,664 $22,764 $21,342 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The accumulated benefit obligation as of year-end for all defined benefit pension plans was $361 million for 2014 and $326 million for 2013 and $330 million for 2012.2013. Information for plans with an accumulated benefit obligation in excess of plan assets follows (in thousands):

 

        2013                2012        2014 2013 

Projected benefit obligation

  $352,271    $359,701  $  389,692 $  352,271 

Accumulated benefit obligation

   326,030     329,530   360,945  326,030 

Fair value of plan assets

   280,607     246,606   277,208  280,607 

The components of net periodic benefit cost for the plans for 2013, 2012 and 2011 were as follows (in thousands):

   Pension Benefits   Postretirement Medical Benefits 
        2013              2012              2011              2013              2012              2011       

Service cost-benefits earned during the period

  $7,447    $6,414    $4,429    $626    $589    $602  

Interest cost on projected benefit obligation

   14,149     13,729     13,072     961     986     1,219  

Expected return on assets

   (18,508)     (15,907)     (15,802)              

Amortization of prior service cost (credit)

       (5)     (5)     (658)     (658)     (658)  

Amortization of net loss (gain)

   10,456     10,814     5,819     480     395     568  

Cost of pension plans which are not significant and have not adopted ASC 715

   94     121     97     N/A     N/A     N/A  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $13,646    $15,166    $7,610    $1,409    $1,312    $1,731  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in other comprehensive (income) loss in2014, 2013 and 2012 were as follows (in thousands):

 

   Pension Benefits    Postretirement Medical Benefits  
           2013                     2012                     2013                     2012           

Net loss (gain) arising during the period

  $(37,284)    $17,011    $(2,582)    $   (294)  

Prior service cost (credit) arising during the period

   3,197              

Amortization of net gain (loss)

   (10,456)     (10,814)     (480)     (395)  

Amortization of prior service credit (cost)

   (8)         658     658  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $(44,551)    $6,202    $(2,404)    $(31)  
  

 

 

   

 

 

   

 

 

   

 

 

 
 Pension Benefits Postretirement Medical Benefits 
 2014 2013 2012 2014 2013 2012 

Service cost-benefits earned during the period

$6,846 $7,447 $6,414 $486 $626 $589 

Interest cost on projected benefit obligation

 15,944  14,149  13,729  981  961  986 

Expected return on assets

 (21,253 (18,508 (15,907 -    -    -   

Amortization of prior service cost (credit)

 320  8  (5 (658 (658 (658

Amortization of net loss (gain)

 4,929  10,456  10,814  15  480  395 

Cost of pension plans which are not significant and have not adopted ASC 715

 80  94  121  N/A   N/A   N/A  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic benefit cost

$6,866 $13,646 $15,166 $824 $1,409 $1,312 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Amounts recognized in other comprehensive (income) loss in 2014 and 2013 were as follows (in thousands):

 Pension Benefits Postretirement Medical Benefits 
 2014 2013 2014 2013 

Net loss (gain) arising during the period

$42,733 $(37,284$1,037 $(2,582

Prior service cost (credit) arising during the period

 -  3,197  -  -  

Amortization of net gain (loss)

 (4,929 (10,456 (15 (480

Amortization of prior service credit (cost)

 (320 (8 658  658 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

$37,484 $(44,551$1,680 $(2,404
  

 

 

  

 

 

  

 

 

  

 

 

 

Amounts included in accumulated other comprehensive (income) loss as of December 27, 201326, 2014 and December 28, 2012,27, 2013, that had not yet been recognized as components of net periodic benefit cost, were as follows (in thousands):

 

  Pension Benefits    Postretirement Medical Benefits  Pension Benefits Postretirement Medical Benefits 
          2013                     2012                     2013                     2012           2014 2013 2014 2013 

Prior service cost (credit)

  $3,271    $(123)    $(2,444)    $(3,101)  $2,658 $3,271 $(1,786$(2,444

Net loss

   73,200     121,146     3,325     6,385   111,298  73,200  4,347  3,325 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

Net before income taxes

   76,471     121,023     881     3,284   113,956  76,471  2,561  881 

Income taxes

   (26,903)     (43,409)     (317)     (1,182)   (39,011 (26,903 (922 (317
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

Net

  $49,568    $77,614    $564    $2,102  $74,945 $49,568 $1,639 $564 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

Amounts included in accumulated other comprehensive (income) loss that are expected to be recognized as components of net periodic benefit cost in 20142015 were as follows (in thousands):

 

  Pension
      Benefits      
    Postretirement 
Medical
Benefits
 Pension
Benefits
 Postretirement
Medical
Benefits
 

Prior service cost (credit)

  $330        $(658)      $295 $(676

Net loss (gain)

   4,883         149       8,922  271 
  

 

   

 

   

 

   

 

 

Net before income taxes

   5,213         (509)       9,217  (405

Income taxes

   (1,877)         183       (3,318 146 
  

 

   

 

   

 

   

 

 

Net

  $3,336        $(326)      $5,899 $(259
  

 

   

 

   

 

   

 

 

Assumptions used to determine the Company’s benefit obligations are shown below:

 

  Pension Benefits    Postretirement Medical Benefits  Pension Benefits Postretirement Medical Benefits 

Weighted average assumptions

  

        2013        

   

        2012        

   

        2013        

   

        2012        

     2014         2013         2014     2013 

U.S. Plans

        

Discount rate

   5.0  %       4.2  %       5.0  %       4.2  %     4.2 5.0 4.2 5.0 

Rate of compensation increase

   3.0  %       3.0  %       N/A           N/A         3.0 3.0 N/A   N/A  

Non-U.S. Plans

        

Discount rate

   2.5  %       2.3  %       N/A           N/A         1.5 2.5 N/A   N/A  

Rate of compensation increase

   1.3  %       1.3  %       N/A           N/A         1.3 1.3 N/A   N/A  

Assumptions used to determine the Company’s net periodic benefit cost are shown below:

 

 Pension Benefits Postretirement Medical Benefits Pension Benefits Postretirement Medical Benefits 

Weighted average assumptions

 

      2013      

 

      2012      

 

      2011      

 

      2013      

 

      2012      

 

      2011      

     2014         2013         2012         2014         2013         2012     

U.S. Plans

      

Discount rate

  4.2  %      4.6  %      5.5  %      4.2  %      4.6  %      5.5  %     5.0  4.2  4.6  5.0  4.2  4.6 

Rate of compensation increase

  3.0  %      3.0  %      3.8  %      N/A          N/A          N/A         3.0  3.0  3.0  N/A   N/A   N/A  

Expected return on assets

  8.5  %      8.5  %      8.5  %      N/A          N/A          N/A         8.5  8.5  8.5  N/A   N/A   N/A  

Non-U.S. Plans

      

Discount rate

  2.3  %      2.9  %      4.7  %      N/A          N/A          N/A         2.5  2.3  2.9  N/A   N/A   N/A  

Rate of compensation increase

  1.2  %      1.2  %      3.0  %      N/A          N/A          N/A         1.3  1.2  1.2  N/A   N/A   N/A  

Expected return on assets

  3.0  %      3.0  %      N/A          N/A          N/A          N/A        ��2.0  3.0  3.0 % 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.

The Company’s U.S. retirement medical plan limits the annual cost increase that will be paid by the Company to 3 percent. In measuring the accumulated postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed to be 7.47.0 percent for 2014,2015, decreasing each year to a constant rate of 4.5 percent for 2026 and thereafter, subject to the plan’s annual increase limitation.

At December 27, 2013,26, 2014, a one percent change in assumed health care cost trend rates would not have a 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 $2.3 million to its unfunded pension plans and $1.3$1.2 million to the postretirement medical plan in 2014.2015. The Company expects thatwill not be required to make contributions to the funded pension plan under minimum funding requirements for 2014 will not exceed $9 million, and that the amounts payable in 2014 may be eliminated by available credits.2015. Estimated future benefit payments are as follows (in thousands):

 

  Pension
      Benefits      
    Postretirement 
Medical
Benefits
 Pension
Benefits
 Postretirement
Medical
Benefits
 

2014

  $13,999       $1,256      

2015

   15,045        1,314      $15,290 $1,165 

2016

   17,926        1,361       17,085  1,259 

2017

   16,675        1,395       16,299  1,310 

2018

   18,007        1,458       17,417  1,373 

Years 2019 - 2023

   104,174        8,032      

2019

 18,248  1,440 

Years 2020 - 2024

 105,418  7,873 

K. Commitments and Contingencies

Lease Commitments. Aggregate annual rental commitments under operating leases with noncancelable terms of more than one year were $13.2 millionas follows at December 27, 2013, payable as follows26, 2014 (in thousands):

 

     Buildings        Vehicles &  
Equipment
          Total        Buildings Vehicles &
Equipment
 Total 

2014

  $2,170    $3,214    $5,384  

2015

   1,914     2,083     3,997  $3,472 $2,896 $6,368 

2016

   1,350     1,250     2,600   2,556  2,086  4,642 

2017

   1,338     841     2,179   2,307  1,481  3,788 

2018

   1,360     555     1,915   1,983  882  2,865 

2019

 2,023  607  2,630 

Thereafter

   7,655     764     8,419   7,942  442  8,384 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $15,787    $8,707    $24,494  $20,283 $8,394 $28,677 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total rental expense was $5.0 million for 2014, $3.6 million for 2013 and $3.3 million for 2012 and $3.0 million for 2011.2012.

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 $57$76 million at December 27, 2013.26, 2014. 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 $43$36 million. In addition, the Company could be obligated to perform under standby letters of credit totaling $3$2 million at December 27, 2013.26, 2014. The Company has also guaranteed the debt of its subsidiaries for up to $10$9 million. All debt of subsidiaries is reflected in the consolidated balance sheets.

Contingencies. The Company is party to various legal proceedings arising in the normal course of business. The Company is actively pursuing and 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.

As more fully described in Note L, under terms of orders issued by the FTC, the Company is required to separately maintain the Liquid Finishing businesses as viable and competitive while it seeks a buyer for those businesses. The Company’s maximum exposure to loss as a result of its involvement with the Liquid Finishing businesses would include the entirety of its investment of $422 million and reimbursement of losses of the operations of the Liquid Finishing businesses in accordance with the hold separate order, which cannot be quantified. The operating earnings of the Liquid Finishing businesses exceed $100$160 million (unaudited) since the date of acquisition, and no additional financial resources were required to be funded by the Company.

L. Acquisitions and Divestitures

On October 1, 2014, the Company acquired the stock of Alco Valves Group for £72 million cash, subject to normal post-closing purchase price adjustments. Alco is a United Kingdom based manufacturer of high quality, high pressure valves used in the oil and natural gas industry and in other industrial processes. Alco’s products and business relationships will enhance Graco’s position in the oil and natural gas industry and complement Graco’s core competencies of designing and manufacturing advanced flow control technologies. Alco revenues for the twelve months preceding the acquisition were approximately £19 million. Results of Alco operations, including $6 million of sales, have been included in the Company’s Industrial segment starting from the date of acquisition.

Purchase consideration was allocated to assets acquired and liabilities assumed based on estimated fair values as follows (in thousands):

       
 

Cash and cash equivalents

  $1,929 
 

Accounts receivable

   9,821 
 

Inventories

   9,565 
 

Other current assets

   343 
 

Property, plant and equipment

   1,047 
 

Other non-current assets

   225 
 

Identifiable intangible assets

   30,348 
 

Goodwill

   73,445 
   

 

 

 

Total assets acquired

 126,723 

Current liabilities assumed

 (3,291)  

Deferred income taxes

 (6,266)  
   

 

 

 

Net assets acquired

$117,166 
   

 

 

 

None of the goodwill acquired with Alco is deductible for tax purposes.

Identifiable intangible assets and estimated useful life are as follows (dollars in thousands):

           
       Estimated
Life (years)
  

Customer relationships

  $22,883   10  

Trade names

   7,465   Indefinite  
  

 

 

     

Total identifiable intangible assets

$30,348 
  

 

 

     

In the first quarter of 2014, the Company paid $65 million cash to acquire a manufacturer of fluid management solutions for environmental monitoring and remediation, markets where Graco had little or no previous exposure. The acquired business expands and complements the Company’s Industrial segment. The purchase price was allocated based on estimated fair values, including $37 million of goodwill, $22 million of other identifiable intangible assets and $6 million of net tangible assets.

In April 2, 2012, the Company completed the purchase of the finishing businesses of Illinois Tool Works Inc. The acquisition includes powder and liquidincluded finishing equipment operations, technologies and brands. Inbrands of the Powder Finishing Graco acquired the Gema®and Liquid Finishing businesses. Gema is a global leader in powder coating technology, a market in which Graco had no previous product offerings, with global manufacturing and distribution capabilities. Results of the Powder Finishing businesses have been included in the Industrial segment since the date of acquisition. In Liquid Finishing, Graco acquired the Binks® spray finishing equipment businesses, DeVilbiss® spray guns and accessories businesses, Ransburg® electrostatic equipment and accessories businesses, and BGK curing technology businesses.

Sales of the ITW Finishing Group were $375 million in 2011, of which Powder Finishing contributed approximately one-third and Liquid Finishing contributed approximately two-thirds. Acquisition and divestiture-related expenses are included in general and administrative expense in the Company’s consolidated statements of earnings, and totaled $2 million in 2013, $16 million in 2012 and $8 million in 2011.

In December 2011, the FTC filedPursuant to a formal complaint to challenge the proposed acquisition on the grounds that the addition of the Liquid Finishing businesses to Graco would be anti-competitive, a position which Graco denied. In March 2012 the FTC issued an order that allowed the acquisition to proceed to closing on April 2, 2012, subject to certain conditions, while it evaluated a settlement proposal from Graco. Pursuant to the order, the Liquid Finishing businesses were to be held separate from the rest of Graco’s businesses untilwhile the FTC considered a settlement with Graco and determined which portions of the Liquid Finishing businessesbusiness Graco must divest.

In May 2012, the FTC issued a proposed decision and order which requires Graco to sell the Liquid Finishing business assets, including business activities related to the development, manufacture, and sale of products under the Binks, DeVilbiss, Ransburg and BGK brand names, no later than 180 days from the date the order becomes final. The FTC has not yet issued its final decision and order.

The Company has retained the services of an investment bank to help it market the Liquid Finishing businesses and identify potential buyers. While it seeks a buyer, Graco must continue to hold the Liquid Finishing business assets separate from its other businesses and maintain them as viable and competitive. In accordance with the hold separate order, the Liquid Finishing business is managed independently by experienced Liquid Finishing business managers, under the supervision of a trustee appointed by the FTC, who reports directly to the FTC.

The hold separate order requires the Company to provide sufficient resources to maintain the viability, competitiveness and marketability of the Liquid Finishing businesses, including general funds, capital, working capital and reimbursement of losses. To the extent that the Liquid Finishing businesses generate funds in excess of financial resources needed, the Company has access to such funds consistent with practices in place prior to the acquisition.

Under terms of the hold separate order, the Company does not have a controlling interest in the Liquid Finishing businesses, nor is it able to exert significant influence over the Liquid Finishing businesses. Consequently, the Company’s investment in the shares of the Liquid Finishing businesses, totaling $422 million, has been reflected as a cost-method investment on the Consolidated Balance Sheet as of December 27, 2013, and its results of operations have not been consolidated with those of the Company.

As a cost-method investment, income is recognized based on dividends received from current earnings of Liquid Finishing. Dividends of $28 million received in 2013 and $12 million received in 2012 are included in other expense (income) on the Consolidated Statements of Earnings. Once the FTC issues its final decision and order, and the Company completes the sale of its investment, there will be no further dividends from Liquid Finishing.

The Company evaluates its cost-method investment for other-than-temporary impairment at each reporting period. As of December 27, 2013, the Company evaluated its investment in Liquid Finishing and determined that there is no impairment.

Sales and operating earnings of the Liquid Finishing businesses for the years 2013 and 2012 were as follows (unaudited, in thousands):

              2013                   2012         
      
  

Net Sales

  $278,543   $269,099  
  

Operating Earnings

   61,174    52,256  

The Company transferred cash purchase consideration of $660 million to the seller on April 2, 2012. In July 2012, the Company transferred additional cash purchase consideration of $8 million, representing the difference between cash balances acquired and the amount estimated at the time of closing. In 2013, the seller reimbursed Graco approximately $5 million for payments of pre-acquisition tax liabilities paid by Liquid Finishing businesses after the acquisition date. This reimbursement was recorded as a reduction of the cost-method investment.

Purchase consideration was allocated to assets acquired and liabilities assumed based on estimated fair values as follows (in thousands):

 

Cash and cash equivalents

 $6,007 

Accounts receivable

17,835 

Inventories

21,733 

Other current assets

2,534 

Property, plant and equipment

18,359 

Other non-current assets

50 

Identifiable intangible assets

150,500 

Goodwill

86,056 

Total assets acquired

303,074 

Current liabilities assumed

(27,434)

Non-current liabilities assumed

(7,984)

Deferred income taxes

(26,105)

Net assets acquired, Powder Finishing

241,551 

Investment in businesses held separate

426,813 

Total purchase consideration

 $        668,364 

       
 

Cash and cash equivalents

  $6,007 
 

Accounts receivable

   17,835 
 

Inventories

   21,733 
 

Other current assets

   2,534 
 

Property, plant and equipment

   18,359 
 

Other non-current assets

   50 
 

Identifiable intangible assets

   150,500 
 

Goodwill

   86,056 
   

 

 

 

Total assets acquired

 303,074 

Current liabilities assumed

 (27,434

Non-current liabilities assumed

 (7,984

Deferred income taxes

 (26,105
   

 

 

 

Net assets acquired, Powder Finishing

 241,551 

Investment in businesses held separate

 426,813 
   

 

 

 

Total purchase consideration

$  668,364 
   

 

 

 

Identifiable intangible assets and estimated useful life are as follows (dollars in thousands):

 

           
       Estimated
     Life (years)     
  

Customer relationships

  $103,500   14  

Developed technology

   9,600   11  

Trade names

   37,400   Indefinite  
  

 

 

     

Total identifiable intangible assets

$  150,500 
  

 

 

     

The Company adjusted the preliminary purchase price allocation in the fourth quarter of 2012 to recognize deferred tax liability on certain identifiable intangible assets, which resulted in an $8 million increase in goodwill. Substantially none of the goodwill acquired in 2012 is deductible for tax purposes.

In the fourth quarter of 2014, the FTC approved a final decision and order that became effective on October 9, 2014. Pursuant to the final order, Graco must sell the Liquid Finishing business assets within 180 days of the effective date. On October 8, 2014, the Company announced it had signed a definitive agreement to sell the Liquid Finishing business assets for $590 million cash, subject to regulatory approval and other customary closing conditions. The sale transaction is expected to close in the first half of 2015, in compliance with the FTC’s final decision and order. Graco will continue to hold the Liquid Finishing businesses separate and maintain them as viable and competitive until the sale process is complete.

The Liquid Finishing business assets are held as a cost-method investment on the Consolidated Balance Sheets. Income is recognized based on dividends received from after-tax earnings of Liquid Finishing and included in other expense (income) on the Consolidated Statements of Earnings. Dividends received totaled $28 million in 2014, $28 million in 2013 and $12 million in 2012. Once the Company completes the sale of its investment, there will be no further dividends from Liquid Finishing.

The Company evaluates its cost-method investment for other-than-temporary impairment at each reporting period. As of December 26, 2014, the Company evaluated its investment in Liquid Finishing and determined that there is no impairment.

Sales and operating earnings of the Liquid Finishing businesses were as follows (unaudited, in thousands):

  2014 2013 2012 

Net Sales

$  288,231 $  278,543 $  269,099 

Operating Earnings

 62,605  61,174  52,256 

The Company completed other business acquisitions in 2014, 2013 2012 and 20112012 that were not material to the consolidated financial statements.

Subsequent to the end of fiscal year 2013,events:In January 2015, the Company completed the acquisition of High Pressure Equipment Holdings, LLC (HiP) for $160 million. HiP designs and manufactures valves, fittings and other flow control equipment engineered to perform in ultra-high pressure environments. The Company also acquired White Knight Fluid Handling, a manufacturer of fluid management solutions for environmental monitoring and remediation, markets where Graco had little or no previous exposure. This business acquisition will not be material to the consolidated financial statements.

The following unaudited pro forma information reflects the combined results of Graco and Powder Finishing operations as if the acquisition had occurred at the beginning of 2011 (unaudited, in thousands, except per share amounts):

             2012                   2011         
     
 

Net Sales

  $1,042,701    $1,020,823  
 

Operating Earnings

   249,789     236,284  
 

Net Earnings

   153,008     147,290  
 

Basic earnings per share

   2.53     2.44  
 

Diluted earnings per share

   2.48     2.40  

Additional depreciation and amortization of $2 million and $8 million are reflectedhigh purity, metal free pumps used in the 2012production process of manufacturing semiconductors, solar panels, LED flat panel displays and 2011 pro forma results, respectively, as ifvarious other electronics, and Multimaq-Pistolas e Equipamentos Para Pintura Ltda., a manufacturer and distributor of finishing products in the acquisition of Powder Finishing had occurred at the beginning of 2011. Non-recurring acquisition expenses of $16 million were eliminated from the 2012 pro forma results, and $8 million were eliminated from the 2011 pro forma results. Purchase accounting effects of $7 million related to inventory were removed from 2012 and reflected in 2011. For pro forma purposes, dividend income from Liquid Finishing of $12 million was eliminated from other income in 2012.Brazilian market.

M. Quarterly Financial Information (unaudited)

 

First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

2014

Net Sales

$289,962 $322,549 $302,614 $306,005 

Gross Profit

 159,312  176,850  165,814  164,760 

Net Earnings

 50,745  66,236  59,551  49,041 

Basic Net Earnings per Common Share

$0.83 $1.10 $0.99 $0.83 

Diluted Net Earnings per Common Share

 0.81  1.07  0.97  0.80 

Cash Dividends Declared per Common Share

 0.28  0.28  0.28  0.30 
  First
    Quarter    
   Second
    Quarter    
   Third
    Quarter    
   Fourth
    Quarter    
 

2013

        

Net Sales

  $269,046    $286,020    $277,035    $271,923  $269,046 $286,020 $277,035 $271,923 

Gross Profit

   150,644     158,739     150,873     147,199   150,644  158,739  150,873  147,199 

Net Earnings

   52,130     57,843     56,101     44,748   52,130  57,843  56,101  44,748 

Basic Net Earnings per Common Share

  $0.86    $0.94    $0.91    $0.73  $0.86 $0.94 $0.91 $0.73 

Diluted Net Earnings per Common Share

   0.84     0.92     0.89     0.71   0.84  0.92  0.89  0.71 

Cash Dividends Declared per Common Share

   0.25     0.25     0.25     0.28   0.25  0.25  0.25  0.28 

2012

        

Net Sales

  $234,122    $268,184    $256,472    $253,678  

Gross Profit

   132,179     139,530     139,933     138,888  

Net Earnings

   35,381     34,352     37,131     42,262  

Basic Net Earnings per Common Share

  $0.59    $0.57    $0.61    $0.70  

Diluted Net Earnings per Common Share

   0.58     0.56     0.60     0.68  

Cash Dividends Declared per Common Share

   0.23     0.23     0.23     0.25  

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

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, the Vice President, Corporate Controller and Information Systems, 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 20132014 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 20132014 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.

Item  9B. Other InformationOtherInformation

On February 14, 2014, upon recommendation of the Governance Committee, the Board of Directors of our Company approved an amendment and restatement of our Company’s Restated Bylaws to reflect amendments to the Minnesota Business Corporation Act and modernize the Restated Bylaws.

The amendments include the following, among others: (i) providing the flexibility, but not the requirement, for our Company to hold “virtual” or “hybrid-virtual” shareholder meetings; (ii) requiring a shareholder who seeks to bring business before an annual shareholder meeting to disclose additional information regarding the proponent’s and any beneficial holder’s economic interests in our Company; (iii) clarifying that the role of Chairman of the Board is not itself an officer position; (iv) granting the Chief Executive Officer the power to appoint and remove certain corporate officers, other than the Chief Financial Officer and other executive officers; (v) clarifying certain procedural matters related to adjournment of shareholder meetings and setting of record dates for shareholder meetings; and (vi) clarifying that various notices and consents may be given by electronic communication.

The Restated Bylaws, as amended, are filed as Exhibit 3.2 hereto and incorporated herein by reference.Not applicable.

PART III

Item 10. Directors, Executive OfficersExecutiveOfficers and Corporate Governance

The information under the heading “Executive Officers of Our Company” in Part I of this 20132014 Annual Report on Form 10-K and the information under the heading “Board of Directors” in our Company’s Proxy Statement for its 20142015 Annual Meeting of Shareholders to be held on April 25, 201424, 2015 (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” in 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 each of the Audit, Governance, and Management Organization and Compensation Committees of the Board of Directors. We have also issued a 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, representative offices 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.

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” in the Company’s Proxy Statement is incorporated herein by reference.

Item 11. Executive Compensation

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” in the Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial OwnersBeneficialOwners and Management and Related Stockholder Matters

The information contained under the headings “Equity Compensation Plan Information” and “Beneficial Ownership of Shares” in the Proxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information under the headings “Related Person Transaction Approval Policy” and “Director Independence” in the Proxy Statement is incorporated herein by reference.

Item 14. Principal AccountingPrincipalAccounting Fees and Services

The information under the headings “Independent Registered Public Accounting Firm Fees and Services” and “Pre-Approval Policies” in the Proxy Statement is incorporated herein by reference.

PART IV

Item 15. Exhibits,Exhibits, Financial Statement Schedule

 

(a)The following documents are filed as part of this report:

 

(1) Financial Statements  

Financial Statements

 See Part II  

See Part II

(2) Financial Statement Schedule  Financial Statement Schedule
 Schedule II – Valuation and Qualifying Accounts   59  Schedule II – Valuation and Qualifying Accounts 61  
 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.   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.

   61  

Management Contract, Compensatory Plan or Arrangement. (See Exhibit Index)

Those entries marked by an asterisk are Management Contracts, Compensatory Plans

or Arrangements.

 
63
  

Schedule II - Valuation and Qualifying Accounts

Graco Inc. and Subsidiaries

(in thousands)

 

      Balance at    
beginning
of year
   Additions
    charged to    
costs and
expenses
       Deductions    
from
reserves1
   Other
add
    (deduct)    
       Balance at    
end
of year
 Balance at
beginning
of year
 Additions
charged to
costs and
expenses
 Deductions
from
reserves
 Other
add
(deduct)
 Balance
at end
of year
 

Year ended

          

December 26, 2014

Allowance for doubtful accounts

$1,300 $800 $300 $600 $2,400 

Allowance for returns and credits

 5,000  22,400  21,700  -    5,700 
  

 

   

 

   

 

   

 

   

 

 
$6,300 $23,200 $22,000 $600 $8,100 
  

 

   

 

   

 

   

 

   

 

 

December 27, 2013

          

Allowance for doubtful accounts

   $2,100    $600    $1,400    $    $1,300 $2,100 $600 $1,400 $-   $1,300 

Allowance for returns and credits

   4,500    17,300    16,800         5,000  4,500  17,300  16,800  -    5,000 
  

 

   

 

   

 

   

 

   

 

 
  

 

   

 

   

 

   

 

   

 

 $6,600 $17,900 $18,200 $-   $6,300 
   $6,600    $17,900    $18,200    $    $6,300   

 

   

 

   

 

   

 

   

 

 
  

 

   

 

   

 

   

 

   

 

 

December 28, 2012

          

Allowance for doubtful accounts

   $1,400    $500    $100    $300    $2,100 $1,400 $500 $100 $300 $2,100 

Allowance for returns and credits

   4,100    13,700    13,300         4,500  4,100  13,700  13,300  -    4,500 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
   $5,500    $14,200    $13,400    $300    $6,600 $5,500 $14,200 $13,400 $300 $6,600 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 30, 2011

          

Allowance for doubtful accounts

   $1,300    $500    $400    $    $1,400 

Allowance for returns and credits

   4,300    12,500    12,700         4,100 
  

 

   

 

   

 

   

 

   

 

 
   $5,600    $13,000    $13,100    $    $5,500 
  

 

   

 

   

 

   

 

   

 

 

 

1For 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.

 

2Includes amounts assumed or established in connection with acquisitions and effects of foreign currency translation.

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 18, 201417, 2015
   Patrick J. McHale
   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 18, 201417, 2015
   Patrick J. McHale
   President and Chief Executive Officer
   (Principal(Principal Executive Officer)

   /s/ JAMES A. GRANER

February 18, 201417, 2015
   James A. Graner
   Chief Financial Officer
   (Principal(Principal Financial Officer)

   /s/ CAROLINE M. CHAMBERS

February 18, 201417, 2015
   Caroline M. Chambers
   Vice President, Corporate Controller and    Information Systems
   (Principal(Principal Accounting Officer)

 

Lee R. MitauDirector, Chairman of the Board
William J. CarrollDirector
Jack W. EugsterDirector
Eric P. EtchartDirector
J. Kevin GilliganDirector
Patrick J. McHaleDirector
Martha A. MorfittDirector
William G. Van DykeDirector
R. William Van SantDirector

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 18, 201417, 2015
   Patrick J. McHale
   (For(For himself and as attorney-in-fact)

Exhibit Index

 

Exhibit
Number

Description

2.1

Asset Purchase Agreement, dated April 14, 2011, by and among Graco Inc., Graco Holdings Inc., Graco Minnesota Inc., Illinois Tool Works Inc. and ITW Finishing LLC (excluding schedules and exhibits, which the RegistrantCompany agrees to furnish supplementally to the Securities and Exchange Commission upon request). (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 8-K filed April 15, 2011.) First Amendment dated April 2, 2012. (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 8-K filed April 2, 2012.)

2.2

Asset Purchase Agreement, dated October 7, 2014, by and among Carlisle Companies Incorporated, Carlisle Fluid Technologies, Inc., Graco Inc. and Finishing Brands Holdings Inc. (excluding schedules and exhibits, which the Company agrees to furnish supplementally to the Securities and Exchange Commission upon request). (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 8-K filed October 9, 2014.)
**2.3Agreement relating to the sale and purchase of the entire issued share capital of Xamol Limited to acquire Alco Valves Group, dated as of October 1, 2014 (excluding certain schedules and exhibits, which the Company agrees to furnish supplementally to the Securities and Exchange Commission upon request). (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 26, 2014.)

2.4

Purchase and Sale Agreement, dated as of December 31, 2014, by and among High Pressure Equipment Holdings LLC, Wasserstein Partners III, LP, Wasserstein Partners III (Offshore), L.P., Wasserstein Partners III (Offshore), LTD, Audax Mezzanine Fund III, L.P., Audax Co-Invest III, L.P., Audax Trust Co-Invest, L.P., certain other Sellers, Wasserstein Partners III (GP), LP, Graco Fluid Handling (C) Inc. and Graco Inc. (excluding certain schedules and exhibits, which the Company agrees to furnish supplementally to the Securities and Exchange Commission upon request). (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 8-K filed January 6, 2015.)

3.1

Restated Articles of Incorporation as amended April 26, 2013.June 13, 2014. (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed April 30, 2013.June 16, 2014.)

3.2

Restated Bylaws as amended February 14, 2014. (Incorporated by reference to Exhibit 3.2 to the Company’s 2013 Annual Report on Form 10-K.)

 *10.1*10.1

Graco Inc. Incentive Bonus Plan. (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed March 7, 2012.)

 *10.2*10.2

Employee Stock Incentive Plan, as adopted by the Board of Directors on February 19, 1999. (Incorporated by reference to Exhibit 10.23 to the Company’s 2002 Annual Report on Form 10-K.) 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.)

 *10.3*10.3

Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2001.) Amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.)

 *10.4*10.4

Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed March 14, 2006.)

 *10.5*10.5

Graco Inc. 2010 Stock Incentive Plan. (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed March 11, 2010.)

 *10.6*10.6

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 thirteen 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 Form10-K.) Fourth Amendment adopted June 14, 2007. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form10-Q for the thirteen weeks ended June 29, 2007.)

 *10.7*10.7

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 Form10-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.) Second Amendment dated October 25, 2012. (Incorporated by reference to Exhibit 10.9 to the Company’s 2012 Annual Report on Form10-K.)

 *10.8

*10.8  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 Form10-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 Form10-K.) Fifth Amendment adopted September 16, 2010. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 24, 2010.)

 *10.9

*10.9  Graco Inc. 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.)

 *10.10

*10.10  Form of Amendment to Executive Officer and Non-Employee Director Stock Options to Permit Net Exercises, as adopted by the Board of Directors February 17, 2012. (Incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2012.)

 *10.11

*10.11  Stock Option Agreement. Form of agreement for award of nonstatutory stock options to nonemployee directors under the Graco Inc. Stock Incentive Plan.Plan in 2005 and 2006. (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 26, 2004.)

 *10.12

*10.12  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. (Incorporated by reference to Exhibit 10.14 to the Company’s 2009 Annual Report on Form 10-K/A.)

 *10.13

*10.13  Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Graco Inc. 2010 Stock Incentive Plan in 2011. (Incorporated by reference to Exhibit 10.16 to the Company’s 2010 Annual Report on Form 10-K.) Amended form of agreement for awards made to nonemployee directors commencing in 2012. (Incorporated by reference to Exhibit 10.4 of the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2012.)

 *10.14

*10.14  Stock Option Agreement. Form of agreement for award of non-incentive stock options to executive officers under the Graco Inc. Stock Incentive Plan in 2005 and 2006. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form10-Q for the thirteen weeks ended March 26, 2004.)

 *10.15

*10.15  Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. Amended and Restated Stock Incentive Plan (2006) in 2007. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form10-Q for the thirteen weeks ended March 30, 2007.) Amended form of agreement for awards made to executive officers in 2008, 2009 and 2010. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 28, 2008.)

 *10.16

*10.16  Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. 2010 Stock Incentive Plan in 2011. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2011.) Amended form of agreement for awards made to executive officers commencing in 2012. (Incorporated by reference to Exhibit 10.3 of the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2012.)

 *10.17

Stock Option Agreement. Form of agreement used for award of non-incentive stock options to Chief Executive Officer under the Graco Inc. Amended and Restated Stock Incentive Plan (2006) in 2007. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form10-Q for the thirteen weeks ended March 30, 2007.) Amended form of agreement for awards made to Chief Executive Officer in 2008, 2009 and 2010. (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

*10.17  Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. 2010 Stock Incentive Plan in 2011. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2011.) Amended form of agreement for awards made to executive officers commencing in 2012. (Incorporated by reference to Exhibit 10.3 of the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2012.)

*10.18Stock Option Agreement. Form of agreement used for award of non-incentive stock options to Chief Executive Officer under the Graco Inc. 2010 Stock Incentive Plan in 2011. (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2011.) Amended form of agreement for awards made to Chief Executive Officer commencing in 2012. (Incorporated by reference to Exhibit 10.2 of the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2012.)

 *10.19

*10.19  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.)

 *10.20

Chief Executive Officer Restricted Stock Agreement. Form of agreement used to award performance-based restricted stock to the Chief Executive Officer. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed March 2, 2011.)

 *10.21

Nonemployee Director Stock and Deferred Stock Program. (Incorporated by reference to Exhibit 10.22 to the Company’s 2009 Annual Report on Form 10-K/A.)

 *10.22

*10.20  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.)

 *10.23

*10.21  Key Employee Agreement. Form of agreement used with executive officers other than the Chief Executive Officer. (Incorporated by reference to Exhibit 10.25 to the Company’s 2007 Annual Report on Form 10-K.)

 *10.24

*10.22  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.) Enhanced by Supplemental Income Protection Plan in 2004. (Incorporated by reference to Exhibit 10.28 to the Company’s 2007 Annual Report on Form 10-K.)

 *10.25

*10.23  Amendment to the 2003 through 2006 Nonstatutory Stock Option Agreements of one nonemployee director. (Incorporated by reference to Exhibit 10.27 to the Company’s 2009 Annual Report on Form 10-K/A.)

   10.26

10.24  Omnibus Amendment, dated June 26, 2014, amending and restating the Credit Agreement dated May 23, 2011, among Graco Inc., the borrowing subsidiaries from time to time party thereto, the banks from time to time party thereto and U.S. Bank National Association, as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed May 26, 2011.) Amendment No.July 1, dated as of August 15, 2011 to Pledge Agreement. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 30, 2011.) First Amendment to Credit Agreement dated March 27, 2012. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed April 2, 2012.) Amendment No. 2 to Pledge Agreement dated as of April 2, 2012. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2012.) Amendment No. 3 to Pledge Agreement dated as of April 13, 2012. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2012.2014.)

   10.27

10.25  Note Agreement, dated March 11, 2011, between Graco Inc. and the Purchasers listed on the Purchaser Schedule attached thereto, which includes as exhibits the form of Senior Notes. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed March 16, 2011.) Amendment No. 1 dated May 23, 2011. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended July 1, 2011.) Amendment and Restatement No. 1 to Note Agreement dated as of March 27, 2012. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed April 2, 2012.) Amendment No. 2 dated as of June 26, 2014 to Note Agreement dated as of March 11, 2011. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q filed July 23, 2014.)

   10.28

10.26  Agreement between Graco Inc., Illinois Tool Works Inc., and ITW Finishing LLC, as the Respondents, and Counsel for the Federal Trade Commission. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed March 27, 2012.)

   10.29

10.27  Agreement Containing Consent Orders, by and between Graco Inc., Illinois Tool Works Inc., and ITW Finishing LLC, as the Respondents, and Counsel for the Federal Trade Commission. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed June 6, 2012.)

        11

10.28  Decision and Order by the U.S. Federal Trade Commission in the matter of Graco Inc., Illinois Tool Works Inc. and ITW Finishing LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed October 8, 2014.)
11Statement of Computation of Earnings per share included in Note I on page 47.48.

21

  Subsidiaries of the RegistrantCompany included herein on page 65.67.

23

  Independent Registered Public Accounting Firm’s Consent included herein on page 66.69.

24

  Power of Attorney included herein on page 67.70.

31.1

  Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) included herein on page 68.71.

31.2

  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) included herein on page 69.72.

32

  Certification of President and Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Title 18, U.S.C. included herein on page 70.73.

      101

    101Interactive Data File.

Except as otherwise noted, all documents incorporated by reference above relate to File No. 001-09249.

*Management Contracts, Compensatory Plans or Arrangements.

** Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.

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.

 

6466