NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graco Inc. and Subsidiaries
Years Ended December 31, 2004, December 26, 2003, and December 27, 2002
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 year ended December 31, 2004, was a 53-week year. Years ended December 26, 2003, and December 27, 2002, were 52-week years.
Basis of Statement Presentation. The consolidated financial statements include the accounts of the parent company and its subsidiaries after elimination of all significant intercompany balances and transactions. As of December 31, 2004, all subsidiaries are 100 percent owned. Certain prior year amounts have been reclassified to conform with 2004 presentation, but had no effect on previously reported net earnings or shareholders’ equity.
Foreign Currency Translation. The U.S. dollar is the functional currency for all foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and transactions of foreign subsidiaries are included in other expense, net.
Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents. All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents.
Inventory Valuation. Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO) cost method.
Property, Plant and Equipment. For financial reporting purposes, plant and equipment are depreciated over their estimated useful lives, primarily by using the straight-line method as follows:
| | Buildings and improvements | 10 to 30 years | |
| | Leasehold improvements | lesser of 5 to 10 years or life of lease | |
| | Manufacturing equipment | 5 to 10 years | |
| | Office, warehouse and automotive equipment | 3 to 10 years | |
Intangible Assets. Goodwill has been assigned to reporting units, which have been determined to be the Company’s operating segments, as follows:
| (In thousands) | 2004 | 2003 |
|
| Industrial / Automotive | $1,260 | $1,260 |
| Contractor | 7,939 | 7,939 |
|
| | $9,199 | $9,199 |
|
The Company reviews goodwill for impairment annually in the fourth quarter. Results of testing indicated no impairment in 2004 and 2003.
Components of other intangible assets were:
| | | December 31, 2004 | December 26, 2003 |
|
| (Dollars in thousands) | Estimated
Life (Years) | Original
Cost | Amorti-
zation | Book
Value | Original
Cost | Amorti-
zation | Book
Value |
|
| Subject to Amortization |
| Customer lists and distribution network | 5 | $ 3,765 | $1,543 | $2,222 | $ 8,336 | $4,980 | $ 3,356 |
| Trademarks, trade names and non- |
| compete agreements | 2 - 10 | 1,494 | 667 | 827 | 2,803 | 1,622 | 1,181 |
| Patents and other | 3 - 15 | 1,241 | 611 | 630 | 1,241 | 436 | 805 |
|
| | | 6,500 | 2,821 | 3,679 | 12,380 | 7,038 | 5,342 |
| Not Subject to Amortization |
| Brand Name | | 5,280 | -- | 5,280 | 5,280 | -- | 5,280 |
|
| | | $11,780 | $2,821 | $8,959 | $17,660 | $7,038 | $10,622 |
|
Amortization of intangibles was $1.7 million in 2004 and $2.2 million in 2003. Estimated future annual amortization is as follows: $1.1 million in 2005, $0.9 million in 2006, $0.9 million in 2007, $0.4 million in 2008, $0.2 million in 2009 and $0.2 million thereafter. The Company tests other intangible assets not subject to amortization for impairment annually in the fourth quarter. Results of testing indicated no impairment in 2004 and 2003.
Capitalized Software. The Company capitalizes certain external application development and purchased software costs. Capitalized software is included in Other Assets and is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. There have been no write-downs of any long-lived assets in the periods presented.
Other Current Liabilities. Components of other current liabilities were:
| | (In thousands) | 2004 | 2003 | |
| |
| |
| Accrued insurance liabilities | $ 9,139 | $ 9,939 | |
| | Accrued warranty and service liabilities | 9,409 | 9,227 | |
| | Accrued trade promotions | 6,574 | 3,090 | |
| | Payable for employee stock purchases | 4,913 | 4,250 | |
| | Income taxes payable | 2,188 | 5,981 | |
| | Other | 11,136 | 8,831 | |
|
|
| | Total | $43,359 | $41,318 | |
|
|
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 insurance liabilities 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 customer warranty issues. Following is a summary of activity in accrued warranty and service liabilities:
| | (In thousands) | 2004 | 2003 | |
| |
| |
| | Balance, beginning of year | $ 9,227 | $ 9,939 | |
| | Charged to expense | 8,066 | 9,490 | |
| | Margin on parts sales reversed | 2,516 | 4,697 | |
| | Reductions for claims settled | (10,400) | (11,254) | |
| |
| |
| | Balance, end of year | $ 9,409 | $ 9,227 | |
| |
| |
Revenue Recognition. Sales are recognized when revenue is realized or realizable and has been earned. The Company’s policy is to recognize revenue when risk and title passes to the customer. This is generally on the date of shipment, however certain sales are shipped FOB destination and revenue is recognized when received by the customer. Where there are multiple deliverables, the transactions are separated and a portion of the sale deferred until earned. The Company records provisions for anticipated returns and warranty claims at the time revenue is recognized. Historically, sales returns have been between 2 and 3 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.
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 coupons. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company’s products. Estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. Rebates are accrued based on the program rates and progress toward the estimated annual sales amount, and are recorded as a reduction of sales. The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense, unless such promotion is considered a transaction with multiple deliverables.
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, minimum pension liability adjustments and changes in the value of available-for-sale securities.
Stock-Based Compensation. The Company accounts for its stock option and purchase plans using the intrinsic value method and has adopted the “disclosure only” provisions of Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” No compensation cost has been recognized for the Employee Stock Purchase Plan and stock options granted under the various stock incentive plans.
Had compensation cost for these stock plans been determined based upon fair value at the grant date for awards under these plans, the Company’s net earnings and earnings per share would have been reduced as follows:
| (In thousands, except per share amounts) | 2004 | | 2003 | | 2002 | |
|
| Net earnings | | |
| As reported | | | $ | 108,681 | | $ | 86,713 | | $ | 75,625 | |
| Stock-based compensation, net of related tax effects | | | | (3,637 | ) | | (4,108 | ) | | (4,233 | ) |
|
| Pro forma | | | $ | 105,044 | | $ | 82,605 | | $ | 71,392 | |
|
| Net earnings per common share | | |
| Basic as reported | | | $ | 1.57 | | $ | 1.25 | | $ | 1.06 | |
| Diluted as reported | | | | 1.55 | | | 1.23 | | | 1.05 | |
| Pro forma basic | | | | 1.52 | | | 1.19 | | | 1.00 | |
| Pro forma diluted | | | | 1.50 | | | 1.17 | | | .99 | |
|
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:
| | 2004 | 2003 | 2002 |
|
| Expected life in years | 6.0 | 6.5 | 6.5 |
| Interest rate | 4.2% | 3.9% | 5.0% |
| Volatility | 21.5% | 25.1% | 31.3% |
| Dividend yield | 1.3% | 1.2% | 1.1% |
| Reduction for non-transferability | 10.0% | 10.0% | 10.0% |
| Weighted average fair value per share of options granted | $6.79 | $4.65 | $6.18 |
|
The fair value of the 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:
| | 2004 | 2003 | 2002 |
|
| Expected life in years | 1.0 | 1.0 | 1.0 |
| Interest rate | 4.2% | 4.0% | 4.9% |
| Volatility | 22.3% | 25.2% | 32.1% |
| Dividend yield | 1.5% | 1.2% | 1.1% |
| Reduction for non-transferability | 10.0% | 10.0% | 10.0% |
| Weighted average fair value per share of options granted | $6.47 | $4.19 | $4.64 |
|
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004), “Share-Based Payment” that requires compensation costs related to share-based payment transactions to be recognized in the financial statements. This standard will be effective for the Company starting with the third quarter of 2005. Future compensation cost, net of tax effects, related to unvested stock compensation as of December 31, 2004 is approximately $2.7 million in 2005, $1.8 million in 2006 and $1.3 million in 2007 (as valued and calculated under SFAS 123 for pro forma disclosures.) The Company has not yet determined how it will value future grants or whether it will elect to adjust prior periods upon adoption of SFAS No. 123 (Revised 2004).
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 uses currency hedges and interest rate swaps to hedge known market exposures. Terms of derivative instruments are structured to match the terms of the risk being hedged 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 hedges and net monetary positions are recorded at current market values and the gains and losses are included in other expense, net. The Company believes it uses strong financial counterparts in these transactions and that the resulting credit risk under these hedging strategies is not significant.
The Company may periodically hedge anticipated transactions, generally with forward exchange contracts, which are designated as cash flow hedges. Gains and losses representing effective hedges are initially recorded as a component of other comprehensive income and are subsequently reclassified into earnings when the hedged exposure affects earnings. Gains and losses on such transactions were not significant in 2004, 2003 and 2002, and there were no such transactions outstanding as of December 31, 2004, and December 26, 2003.
Recent Accounting Pronouncements. In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” This standard clarifies the accounting for abnormal inventory costs and requires the allocation of fixed production overheads to inventory to be based on the normal capacity of the production facilities. The new standard is effective for the Company starting in 2006 and is expected to have no significant impact on operating results or financial condition.
In December 2004, the FASB issued Staff Position (FSP) No. 109-1, “Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” and FSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004.” The Company expects the benefits from the provisions of the American Jobs Creation Act of 2004 addressed by these FSP’s to be similar to the Extra Territorial Income Exclusion rules in place for 2004.
B. Segment Information
The Company has three reportable segments: Industrial/Automotive, Contractor and Lubrication. The Industrial/Automotive segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and truck assembly and components plants, wood products, rail, marine, aerospace, farm, construction, bus, recreational vehicles, and various other industries. The Contractor segment markets sprayers for architectural coatings for painting, roofing, texture, corrosion control and line striping and also high-pressure washers. The Lubrication segment markets products to move and dispense lubricants for fast oil change facilities, service garages, fleet service centers, automobile dealerships, the mining industry and industrial lubrication. All segments market parts and accessories for their products.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The cost of manufacturing for each segment is based on product cost, and expenses are based on actual costs incurred along with cost allocations of shared and centralized functions based on activities performed, sales or space utilization. Certain products are sold across segments, in which case the segment marketing the product is credited with the sale. Assets of the Company are not tracked along reportable segment lines. 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 and type of customer. Segments are responsible for the sales, marketing and development of their products and market channel. This allows for focused marketing and efficient product development. The segments share common purchasing, manufacturing, distribution and administration functions.
| (In thousands) |
| Reportable Segments | | | | 2004 | | | 2003 | | | 2002 | |
|
| Sales | | |
| Industrial / Automotive | | | $ | 274,574 | | $ | 231,743 | | $ | 204,206 | |
| Contractor | | | | 278,713 | | | 256,441 | | | 238,027 | |
| Lubrication | | | | 51,745 | | | 46,914 | | | 44,815 | |
|
| Total | | | $ | 605,032 | | $ | 535,098 | | $ | 487,048 | |
|
| Segment operating earnings | | |
| Industrial / Automotive | | | $ | 88,271 | | $ | 65,931 | | $ | 54,247 | |
| Contractor | | | | 68,381 | | | 59,433 | | | 53,756 | |
| Lubrication | | | | 11,807 | | | 9,855 | | | 9,587 | |
| Unallocated corporate expenses | | | | (6,928 | ) | | (6,386 | ) | | (4,744 | ) |
|
| Total | | | $ | 161,531 | | $ | 128,833 | | $ | 112,846 | |
|
Unallocated corporate expenses are not included in management’s measurement of segment performance and include such items as bad debt expense, amortization of intangibles, charitable contributions and certain other expenses driven by corporate decisions.
| (In thousands) | | | |
| Geographic Information | 2004 | 2003 | 2002 |
|
| Sales (based on customer location) |
| United States | $363,417 | $336,575 | $315,858 |
| Other countries | 241,615 | 198,523 | 171,190 |
|
| Total | $605,032 | $535,098 | $487,048 |
|
| Long-lived assets |
| United States | $137,243 | $133,794 | $106,382 |
| Belgium | 4,855 | 6,124 | 7,496 |
| Other countries | 2,390 | 1,366 | 1,448 |
|
| Total | $144,488 | $141,284 | $115,326 |
|
Sales to Major Customers
In 2004, sales to a home center retailer totaled 10 percent of consolidated sales, and sales to a paint retailer totaled 10 percent of consolidated sales. In 2003 and 2002, sales to a home center retailer totaled 11 percent of consolidated sales, and sales to a paint retailer totaled 10 percent of consolidated sales.
C. Inventories
Major components of inventories were as follows:
| (In thousands) | | | | 2004 | | | 2003 | |
|
| Finished products and components | | | $ | 29,263 | | $ | 25,548 | |
| Products and components in various stages of completion | | | | 18,656 | | | 16,464 | |
| Raw materials and purchased components | | | | 19,929 | | | 15,408 | |
|
| | | | | 67,848 | | | 57,420 | |
| Reduction to LIFO cost | | | | (27,629 | ) | | (28,402 | ) |
|
| Total | | | $ | 40,219 | | $ | 29,018 | |
|
Inventories valued under the LIFO method were $28.4 million for 2004 and $15.6 million for 2003. All other inventory was valued on the FIFO method.
In 2003 certain inventory quantities were reduced, resulting in liquidation of LIFO inventory quantities carried at lower costs from prior years. The effect on net earnings was not significant.
D. Property, Plant and Equipment
Property, plant and equipment were as follows:
| (In thousands) | | | | 2004 | | | 2003 | |
|
| Land and improvements | | | $ | 6,139 | | $ | 5,771 | |
| Buildings and improvements | | | | 66,067 | | | 61,627 | |
| Manufacturing equipment | | | | 132,099 | | | 123,181 | |
| Office, warehouse and automotive equipment | | | | 25,804 | | | 24,535 | |
| Additions in progress | | | | 1,710 | | | 6,119 | |
|
| Total property, plant and equipment | | | | 231,819 | | | 221,233 | |
| Accumulated depreciation | | | | (137,309 | ) | | (126,916 | ) |
|
| Net property, plant and equipment | | | $ | 94,510 | | $ | 94,317 | |
|
Depreciation expense was $15.9 million in 2004, $16.5 million in 2003 and $15.7 million in 2002.
E. Income Taxes
Earnings before income tax expense consist of:
| (In thousands) | 2004 | 2003 | 2002 |
|
| Domestic | $144,603 | $110,631 | $ 94,214 |
| Foreign | 16,178 | 17,282 | 17,511 |
|
| Total | $160,781 | $127,913 | $111,725 |
|
Income tax expense consists of:
| (In thousands) | | | | 2004 | | | 2003 | | | 2002 | |
|
| Current: | | |
| Domestic: | | |
| Federal | | | $ | 45,738 | | $ | 31,025 | | $ | 29,571 | |
| State and local | | | | 2,200 | | | 3,100 | | | 2,600 | |
| Foreign | | | | 2,938 | | | 2,548 | | | 4,350 | |
|
| | | | | 50,876 | | | 36,673 | | | 36,521 | |
|
| Deferred: | | |
| Domestic | | | | 1,449 | | | 4,363 | | | (1,025 | ) |
| Foreign | | | | (225 | ) | | 164 | | | 604 | |
|
| | | | | 1,224 | | | 4,527 | | | (421 | ) |
|
| Total | | | $ | 52,100 | | $ | 41,200 | | $ | 36,100 | |
|
Income taxes paid were $48.4 million, $32.6 million and $32.6 million in 2004, 2003 and 2002.
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:
| | 2004 | 2003 | 2002 |
|
| Statutory tax rate | 35% | 35% | 35% |
| Earnings from non-U.S. sales at lower | (2) | (3) | (3) |
| tax rates |
| State taxes, net of federal effect | 1 | 1 | 2 |
| U.S. general business tax credits | (1) | (1) | (2) |
| Other | (1) | --; | -- |
|
| Effective tax rate | 32% | 32% | 32% |
|
Deferred income taxes are provided for all temporary differences between the financial reporting and the tax basis of assets and liabilities. The deferred tax assets (liabilities) resulting from these differences are as follows:
| (In thousands) | | | | 2004 | | | 2003 | |
|
| Inventory valuations | | | $ | 4,845 | | $ | 3,957 | |
| Insurance accruals | | | | 2,826 | | | 3,091 | |
| Warranty reserves | | | | 3,118 | | | 3,094 | |
| Vacation accruals | | | | 1,386 | | | 1,412 | |
| Bad debt reserves | | | | 1,570 | | | 1,554 | |
| Other | | | | 1,886 | | | 1,801 | |
|
| Current | | | | 15,631 | | | 14,909 | |
|
| Unremitted earnings of consolidated foreign subsidiaries | | | | (2,000 | ) | | (2,100 | ) |
| Excess of tax over book depreciation | | | | (9,806 | ) | | (9,120 | ) |
| Postretirement benefits | | | | 6,469 | | | 6,142 | |
| Pension and deferred compensation | | | | (6,544 | ) | | (5,032 | ) |
| Other | | | | 869 | | | 1,044 | |
|
| Non-current | | | | (11,012 | ) | | (9,066 | ) |
|
| Net deferred tax assets | | | $ | 4,619 | | $ | 5,843 | |
|
Total deferred tax assets were $24.5 million and $23.4 million, and total deferred tax liabilities were $19.9 million and $17.5 million on December 31, 2004, and December 26, 2003.
F. Debt
Interest paid on debt during 2004, 2003 and 2002 was $0.5 million, $0.5 million and $0.7 million.
On December 31, 2004, the Company entered into a credit agreement with Wachovia Bank, National Association providing credit up to $50 million, expiring on December 30, 2005. Outstanding balances bear interest at the London Interbank Offered Rate plus a spread of up to 0.8 percent. This spread changes as the ratio of total debt to earnings before interest, taxes and depreciation and amortization declines. The agreement requires the Company to maintain certain financial ratios as to cash flow leverage and fixed charge coverage.
On December 31, 2004, the Company had lines of credit with U.S. and foreign banks of $91 million, including the $50 million Wachovia credit facility. The unused portion of these credit lines was $89 million at December 31, 2004. Borrowing rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit and the London Interbank market. The weighted average short-term borrowing rates were 2.5 percent, 2.1 percent, and 1.8 percent for the years ended December 31, 2004, December 26, 2003, and December 27, 2002. The Company pays commitment fees of up to 0.2 percent per annum on the daily average unused amounts on certain of these lines. No compensating balances are required.
The Company is in compliance with the financial covenants of its debt agreements.
G. Shareholders’ Equity
In March 2003, the Company repurchased 2.2 million shares of its common stock for $54.8 million from David A. Koch, a former Chairman and Chief Executive Officer of the Company, his wife, a family trust and a family foundation. The per share purchase price represented a discount of 5.5 percent from the ten-day average closing price of the Company’s stock immediately prior to the date of the transaction. The Company used available cash balances to fund the repurchase.
On December 12, 2003, the Company’s Board of Directors approved a special dividend of $1.50 per common share payable on March 25, 2004 to shareholders of record as of March 11, 2004. Dividends payable at December 26, 2003 include the special dividend and the regular quarterly dividend declared on December 12, 2003, payable on February 4, 2004.
Three-for-two stock splits were distributed in March 2004 and in June 2002. All stock option, share and per share data reflect these splits.
At December 31, 2004, the Company had 22,549 authorized, but not issued, cumulative preferred shares, $100 par value. The Company also has authorized, but not issued, a separate class of 3 million shares of preferred stock, $1 par value.
The Company maintains a plan in which one preferred share purchase right (Right) exists for each common share of the Company. Each Right will entitle its holder to purchase one four-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $180, subject to adjustment. The Rights are exercisable only if a person or group acquires beneficial ownership of 15 percent or more of the Company’s outstanding common stock. The Rights expire in March 2010 and may be redeemed earlier by the Board of Directors for $.001 per Right.
H. Stock Option and Purchase Plans
Stock Option and Award Plans. The Company has various stock incentive plans under which it grants stock options and restricted share awards to officers and other employees. Option price is the market price on the date of grant. Options become exercisable at such time 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 plans, including 1,800 common shares with a grant-date value of $36,000 in 2003 and 55,125 shares with a grant-date value of $1,069,000 in 2002. The market value of restricted stock at the date of grant is recorded as unearned compensation, a component of shareholders’equity, and is charged to operations over the vesting period. Compensation cost charged to operations for restricted share awards was $340,000 in 2004, $407,000 in 2003 and $319,000 in 2002.
Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below:
| | | Weighted Average | Options | Weighted Average |
| | Options | Exercise Price | Exercisable | Exercise Price |
|
| Outstanding, December 28, 2001 | 4,477,182 | $ 8.58 | 1,355,101 | $ 5.72 |
| Granted | 853,875 | 18.43 |
| Exercised | (1,196,834) | 7.00 |
| Canceled | (150,986) | 11.33 |
|
| Outstanding, December 27, 2002 | 3,983,237 | $11.06 | 1,533,686 | $ 7.21 |
| Granted | 374,925 | 17.61 |
| Exercised | (786,605) | 7.23 |
| Canceled | (80,511) | 15.16 |
|
| Outstanding, December 26, 2003 | 3,491,046 | $12.51 | 1,460,930 | $ 9.60 |
| Granted | 1,127,667 | 29.66 |
| Exercised | (930,305) | 10.24 |
| Canceled | (66,064) | 21.26 |
|
| Outstanding, December 31, 2004 | 3,622,344 | $18.28 | 1,804,328 | $11.87 |
|
The following table summarizes information for options outstanding and exercisable at December 31, 2004:
Range of
Prices | Options
Outstanding | Options
Outstanding
Weighted Avg.
Remaining Life | Options
Outstanding
Weighted Avg.
Exercise Price | Options
Exercisable | Options
Exercisable
Weighted Avg.
Exercise Price |
|
| $ 3-11 | 832,178 | 4 | $ 8.14 | 815,303 | $ 8.12 |
| 11-21 | 1,687,591 | 7 | 15.83 | 971,025 | 14.69 |
| 27-35 | 1,102,575 | 9 | 29.68 | 18,000 | 29.59 |
|
| $ 3-35 | 3,622,344 | 7 | $18.28 | 1,804,328 | $11.87 |
|
Stock Purchase Plans. 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 343,913 shares under this Plan in 2004, 297,758 shares in 2003 and 427,490 shares in 2002.
Individual nonemployee directors of the Company may elect to receive 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. The Company issued 11,577 shares under this arrangement in 2004, 14,548 shares in 2003, and 14,521 shares in 2002. Such shares were issued under the Stock Incentive Plan in 2004. In 2003 and 2002, the shares were issued under the Nonemployee Director Stock Plan, which expired on December 31, 2003. The expense related to this arrangement is not significant.
Authorized Shares. Shares authorized for issuance under the various stock option and purchase plans are shown below:
| | Total Shares
Authorized | Available for Future
Issuance as of
December 31, 2004 |
|
| Employee Stock Incentive Plan | 3,375,000 | 1,589,079 |
| Stock Incentive Plan | 3,375,000 | 1,340,257 |
| Employee Stock Purchase Plan | 19,743,750 | 1,000,142 |
|
| Total | 26,493,750 | 3,929,478 |
|
Amounts available for future issuance exclude outstanding options. Options outstanding as of December 31, 2004, include options granted under two plans that were replaced by the Stock Incentive Plan in 2001. No shares are available for future grants under those two plans.
I.Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
| (In thousands, except per share amounts) | 2004 | 2003 | 2002 |
|
| Numerator |
| Net earnings available to common shareholders | $108,681 | $86,713 | $75,625 |
|
| Denominators |
| Weighted average shares outstanding for basic earnings per share | 69,142 | 69,284 | 71,136 |
| Dilutive effect of stock options computed based on the treasury |
| stock method using the average market price | 1,109 | 1,131 | 1,172 |
|
| Denominator for diluted earnings per share | 70,251 | 70,415 | 72,308 |
|
| Basic earnings per share | $ 1.57 | $ 1.25 | $ 1.06 |
|
| Diluted earnings per share | $ 1.55 | $ 1.23 | $ 1.05 |
|
Stock options to purchase 786,000 common shares were not included in the 2002 calculation of diluted earnings per share 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 all U.S. employees who elect to participate. The Company matches employee contributions at a 100 percent rate, up to 3 percent of the employee’s compensation. Employer contributions were $2.4 million in 2004 and $2.2 million each year for 2003 and 2002.
The Company’s postretirement medical plan provides certain medical benefits for retired U.S. employees. Employees 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 substantially all U.S. employees, certain directors and some of the employees of the Company’s non-U.S. subsidiaries. For U.S. plans, benefits are based on years of service and the highest five consecutive years’ earnings in the ten years preceding retirement. The Company funds annually in amounts consistent with minimum funding requirements and maximum tax deduction limits. In 2003, the Company made a voluntary $20 million tax-deductible contribution to the funded defined benefit plan. The plan invests primarily in common stocks and bonds, including the Company’s common stock. The market value of the plan’s investment in the common stock of the Company was $13.0 million at December 31, 2004, and $9.3 million at December 26, 2003.
The Company uses a December 31 measurement date for all of its plans.
For the funded pension plan, asset allocations at year-end were as follows:
| | 2004 | 2003 |
|
| Graco common stock | 7% | 6% |
| Other equity securities | 74% | 76% |
| Debt securities | 13% | 8% |
| Real estate | 5% | 5% |
| Cash | 1% | 5% |
|
| Total | 100% | 100% |
|
Investment policies and strategies of the funded pension plan are based on a long-term view of economic growth and heavily weighted toward equity securities.
The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the periods ending December 31, 2004, and December 26, 2003, and a statement of the funded status as of the same dates.
| Pension Benefits | Postretirement Medical Benefits |
|
| (In thousands) | | | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
|
| Reconciliation of accumulated benefit obligation | | |
| Obligation, beginning of year | | | $ | 147,226 | | $ | 130,380 | | $ | 25,898 | | $ | 23,223 | |
| Service cost | | | | 4,136 | | | 3,544 | | | 771 | | | 685 | |
| Interest cost | | | | 8,707 | | | 8,204 | | | 1,501 | | | 1,483 | |
| Assumption changes | | | | 10,731 | | | 8,726 | | | 798 | | | 1,572 | |
| Actuarial loss | | | | 2,647 | | | 1,482 | | | 235 | | | 497 | |
| Benefit payments | | | | (5,514 | ) | | (5,110 | ) | | (1,790 | ) | | (1,562 | ) |
|
| Obligation, end of year | | | $ | 167,933 | | $ | 147,226 | | $ | 27,413 | | $ | 25,898 | |
|
| Reconciliation of fair value of plan assets | | |
| Fair value, beginning of year | | | $ | 156,774 | | $ | 109,458 | | $ | -- | | $ | -- | |
| Actual return on assets | | | | 24,037 | | | 31,799 | | | -- | | | -- | |
| Employer contributions | | | | 654 | | | 20,627 | | | 1,790 | | | 1,562 | |
| Benefit payments | | | | (5,514 | ) | | (5,110 | ) | | (1,790 | ) | | (1,562 | ) |
|
| Fair value, end of year | | | $ | 175,951 | | $ | 156,774 | | $ | -- | | $ | -- | |
|
| Funded status | | |
| Funded status over (under), end of year | | | $ | 8,018 | | $ | 9,548 | | $ | (27,413 | ) | $ | (25,898 | ) |
| Unrecognized transition obligation (asset) | | | | (11 | ) | | (25 | ) | | -- | | | -- | |
| Unrecognized prior service cost | | | | 1,070 | | | 1,214 | | | -- | | | -- | |
| Unrecognized loss (gain) | | | | 5,929 | | | 3,472 | | | 8,931 | | | 8,350 | |
|
| Net | | | $ | 15,006 | | $ | 14,209 | | $ | (18,482 | ) | $ | (17,548 | ) |
|
The following table provides the amounts included in the consolidated balance sheets as of December 31, 2004, and December 26, 2003.
| Pension Benefits | Postretirement Medical Benefits |
|
| (In thousands) | | | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
|
| Prepaid benefit, funded plan | | | $ | 27,566 | | $ | 25,444 | | $ | — | | $ | — | |
| Accrued benefit, unfunded plans | | | | (12,550 | ) | | (11,235 | ) | | (18,482 | ) | | (17,548 | ) |
|
| Net | | | $ | 15,006 | | $ | 14,209 | | $ | (18,482 | ) | $ | (17,548 | ) |
|
The accumulated benefit obligation for all defined benefit pension plans was $151 million and $135 million as of December 31, 2004, and December 26, 2003. Information for plans with an accumulated benefit obligation in excess of plan assets follows:
| (In thousands) | 2004 | 2003 |
|
| Projected benefit obligation | $13,668 | $12,509 |
| Accumulated benefit obligation | 12,275 | 11,267 |
| Fair value of plan assets | -- | -- |
|
The components of net periodic benefit cost for the plans for 2004, 2003 and 2002 were as follows:
| | | | Pension Benefits | Postretirement Medical Benefits |
|
| (In thousands) | | | | 2004 | | | 2003 | | | 2002 | | | 2004 | | | 2003 | | | 2002 | |
|
| Service cost - benefits earned during the period | | | $ | 4,136 | | $ | 3,544 | | $ | 3,450 | | $ | 771 | | $ | 685 | | $ | 594 | |
| Interest cost on projected benefit obligation | | | | 8,707 | | | 8,204 | | | 7,961 | | | 1,501 | | | 1,483 | | | 1,378 | |
| Expected return on assets | | | | (14,095 | ) | | (9,990 | ) | | (11,445 | ) | | -- | | | -- | | | -- | |
| Amortization of transition obligation (asset) | | | | (15 | ) | | (15 | ) | | (15 | ) | | -- | | | -- | | | -- | |
| Amortization of prior service cost | | | | 144 | | | 144 | | | 149 | | | -- | | | -- | | | -- | |
| Amortization of net loss (gain) | | | | (69 | ) | | 384 | | | (565 | ) | | 452 | | | 358 | | | 160 | |
| Cost of pension plans which are not significant | | |
| and have not adopted SFAS No. 87 | | | | 284 | | | 337 | | | 218 | | | N/A | | | N/A | | | N/A | |
|
| Net periodic benefit cost (credit) | | | $ | (908 | ) | $ | 2,608 | | $ | (247 | ) | $ | 2,724 | | $ | 2,526 | | $ | 2,132 | |
|
Assumptions used to determine the Company’s benefit obligations are shown below:
|
| | Pension Benefits | Postretirement Medical Benefits |
|
| Weighted average assumptions | 2004 | 2003 | 2004 | 2003 |
|
| Discount rate | 5.9% | 5.9% | 6.0 | 6.0 |
| Rate of compensation increase | 3.7% | 3.2% | N/A | N/A |
|
Assumptions used to determine the Company’s net periodic benefit cost are shown below:
| | Pension Benefits | Postretirement Medical Benefits |
|
| Weighted average assumptions | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 |
|
| Discount rate | 5.9% | 6.4% | 6.9% | 6.0 | 6.5 | 7.0 |
| Expected return on assets | 9.0% | 9.0% | 9.0% | N/A | N/A | N/A |
| Rate of compensation increase | 3.2% | 3.2% | 3.7% | 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. In measuring the accumulated postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed to be 9 percent for 2005, decreasing by one percentage point each year to a constant rate of 5 percent in 2009 and thereafter, subject to the plan’s 6 percent annual increase limitation.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Company’s retirement medical plan is not eligible for the Medicare subsidy under the Act.
At December 31, 2004, a one percent change in assumed health care cost trend rates would have the following effects:
| (In thousands) | 1% Increase | 1% Decrease |
|
| Effect on total of service and interest cost components of |
| net periodic postretirement health care benefit cost | $ 41 | $ (238) |
| |
| Effect on the health care component of the accumulated |
| postretirement benefit obligation | 354 | (2,369) |
|
The Company expects to contribute $0.5 million to its unfunded pension plans and $1.4 million to the retirement medical plan in 2005. No contribution to the funded pension plan is expected in 2005. Estimated future benefit payments are as follows:
| (In thousands) | Pension Benefits | Postretirement Medical Benefits |
|
| 2005 | $ 6,000 | $1,400 |
| 2006 | 6,500 | 1,500 |
| 2007 | 7,300 | 1,500 |
| 2008 | 7,700 | 1,600 |
| 2009 | 8,400 | 1,600 |
| Years 2010 - 2014 | 55,200 | 9,500 |
|
K. Commitments and Contingencies
Lease Commitments. Aggregate annual rental commitments under operating leases with noncancelable terms of more than one year were $3.4 million at December 31, 2004, payable as follows:
| (In thousands) | Buildings | Vehicles &
Equipment | Total |
|
| 2005 | $ 850 | $ 974 | $1,824 |
| 2006 | 465 | 590 | 1,055 |
| 2007 | 206 | 265 | 471 |
| 2008 | -- | 50 | 50 |
| 2009 | -- | 9 | 9 |
| Thereafter | -- | -- | -- |
|
| Total | $1,521 | $1,888 | $3,409 |
|
Total rental expense was $1.3 million for 2004, $2.1 million for 2003 and $1.8 million for 2002.
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 $10 million at December 31, 2004. 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 $13 million. In addition, the Company could be obligated to perform under standby letters of credit totaling $2.5 million at December 31, 2004. The Company has also guaranteed the debt of its subsidiaries for up to $22.2 million.
Contingencies. The Company has been named as a defendant in a number of lawsuits alleging bodily injury as a result of exposure to asbestos or silica. None of the suits make any allegations specifically regarding the Company or any of its products. Management does not know why the Company was included in the suits along with hundreds of other defendants. The Company is also party to various other legal proceedings arising in the normal course of business. The Company is actively defending these matters and has recorded an estimate of the probable costs. Management does not expect that resolution of these matters will have a material adverse effect on the Company, although the ultimate outcome cannot be determined based on available information.
L. Acquisition
At the beginning of the second quarter of 2003, the Company purchased certain assets and assumed certain liabilities of Sharpe Manufacturing Company for $13.5 million cash. Sharpe manufactures spray guns and related parts and accessories for the automotive refinishing market, where the Company had no previous presence. Sharpe had sales of approximately $11 million in 2002. Results of Sharpe’s operations have been included in the Industrial/Automotive segment since the date of acquisition.
The purchase price was allocated as follows (in thousands):
| | Accounts receivable | $ 1,300 | |
| | Inventories | 3,000 | |
| | Property, plant and equipment | 600 | |
| | Identifiable intangible assets | 8,900 | |
| | Goodwill | 1,300 | |
| |
| |
| | Total Purchase Price | 15,100 | |
| | Liabilities Assumed | (1,600) | |
| |
| |
| | Net assets acquired | $13,500 | |
| |
| |
Included in identifiable intangible assets is $5.3 million assigned to the Sharpe brand name, which has an indefinite useful life. Remaining identifiable intangible assets mainly consist of Sharpe’s distribution network, which is being amortized over an estimated useful life of 5 years. Goodwill is expected to be fully deductible for tax purposes.
M. Subsequent Event
Effective January 1, 2005, the Company purchased the stock of Liquid Control Corporation, Inc. and its affiliated company Profill Corp. for approximately $35 million cash. The purchase price will be allocated based on a valuation of assets acquired and liabilities assumed. Liquid Control designs and manufactures highly engineered precision resin dispensing equipment and had sales of approximately $26 million in 2004.
In February 2005, the Company purchased the stock of Gusmer Corporation and Gusmer Europe S.L. for $65 million cash. The purchase price will be allocated based on a valuation of assets acquired and liabilities assumed. Gusmer designs and manufactures specialized two-component dispense equipment systems and had sales of approximately $43 million in 2004.
The products, brands, distribution channels and engineering capabilities of Liquid Control and Gusmer will expand and complement the Company’s Industrial/Automotive business.
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; Vice President and Controller; Vice President and Treasurer; and Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company’s disclosure obligations under the Exchange Act.
Management’s 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 2004 Annual Report on Form 10-K is incorporated herein by reference.
Report 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 2004 Annual Report on Form 10-K is incorporated herein by reference.
Changes in internal control
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 Information
Not applicable.
PART III
Item 10.Directors and Executive Officers of the Company
The information under the heading “Executive Officers of the Company” in Part I of this 2004 Annual Report on Form 10-K and the information under the headings “Election of Directors, Nominees and Other Directors” and under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders, to be held on April 22, 2005, (the “Proxy Statement”), are incorporated herein by reference.
New York Stock Exchange Rule 303A.12
The Company's Annual CEO Certification as required by NYSE Rule 303A.12(a) was filed with the New York Stock Exchange on or about may 13, 2004. The certifications of the Chief Executive Officer, the Controller and the Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of the company's disclosure in this Annual Report on Form 10-K, have been filed as exhibits 31.1, 31.2 and 31.3 hereto.
Audit Committee Members and Audit Committee Financial Expert
The information under the headings “Committees of the Board of Directors” and “Audit Committee Report” of the Company’s Proxy Statement are incorporated herein by reference.
Corporate Governance Guidelines, Committee Charters and Code of Ethics
Graco Inc. has adopted Corporate Governance Guidelines and Charters for the Audit, Governance, and Management Organization and Compensation Committees. Graco Inc. also has in place Conduct of Business Guidelines (Code of Ethics) that apply to the Company’s principal executive officer, principal financial officer, principal accounting officer, all officers, directors, and employees of Graco Inc. and all of its subsidiaries and branches worldwide. The Corporate Governance Guidelines, Committee Charters, and Conduct of Business Guidelines, with any amendments or waivers thereto, may be accessed free of charge by visiting the Graco website at www.graco.com. Copies of these documents are also available in print by written request directed to Secretary, Graco Inc., P.O. Box 1441, Minneapolis, MN 55440-1441.
The Company intends to post on the Graco website any amendment to, or waiver from, a provision of the Conduct of Business Guidelines that applies to its principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions within five business days following the date of such amendment or waiver.
Item 11.Executive Compensation
The information contained under the heading “Executive Compensation” of the Proxy Statement is incorporated herein by reference, other than the subsection thereunder entitled “Report of the Management Organization and Compensation Committee” and “Comparative Stock Performance Graph.”
Item 12.Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading “Beneficial Ownership of Shares” and under the heading “Equity Compensation Plan Information” of the Proxy Statement is incorporated herein by reference.
Item 13.Certain Relationships and Related Transactions
The information under the heading “Certain Business Relationships” of the Proxy Statement is incorporated herein by reference.
Item 14.Principal Accounting Fees and Services
The information under the heading “Principal Accounting Fees and Services” of the Proxy Statement is incorporated herein by reference.
PART IV
Item 15.Exhibits, Financial Statement Schedule
| | | | | |
| (a) | The following documents are filed as part of this report: |
| | | | | |
| | (1) | Financial Statements |
| | | See Part II |
| | | | | |
| | (2) | Financial Statement Schedule | Page |
| | | • | Schedule II - Valuation and Qualifying Accounts | 50 |
| | | | | |
| | | All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto. | |
| | | | | |
| | (3) | Management Contract, Compensatory Plan or Arrangement. (See Exhibit Index) | 52 |
| | | Those entries marked by an asterisk are Management Contracts, Compensatory Plans or Arrangements. | |
Schedule II - Valuation and Qualifying Accounts
Graco Inc. and Subsidiaries
|
| Description | | | Balance at
beginning
of year | | Additions
charged to
costs and
expenses | | Deductions
From
Reserves | | Other3
Add
(Deduct) | | Balance
at end of
year | |
|
| Year ended December 31, 2004 | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | $ | 2,600 | | $ | 200 | | $ | 500 | 1 | | | | $ | 2,300 | |
| Allowance for returns and credits | | | | 3,100 | | | 6,400 | | | 6,200 | 2 | | | | | 3,300 | |
|
| | | | $ | 5,700 | | $ | 6,600 | | $ | 6,700 | | | | | $ | 5,600 | |
|
| Year ended December 26, 2003 | | |
| Allowance for doubtful accounts | | | $ | 2,300 | | $ | 700 | | $ | 600 | 1 | $ | 200 | | $ | 2,600 | |
| Allowance for returns and credits | | | | 3,300 | | | 5,500 | | | 5,700 | 2 | $ | -- | | | 3,100 | |
|
| | | | $ | 5,600 | | $ | 6,200 | | $ | 6,300 | | $ | 200 | | $ | 5,700 | |
|
| Year ended December 27, 2002 | | |
| Allowance for doubtful accounts | | | $ | 2,000 | | $ | 700 | | $ | 400 | 1 | | | | $ | 2,300 | |
| Allowance for returns and credits | | | | 2,500 | | | 7,000 | | | 6,200 | 2 | | | | | 3,300 | |
|
| | | | $ | 4,500 | | $ | 7,700 | | $ | 6,600 | | | | | $ | 5,600 | |
|
| 1 | Accounts determined to be uncollectible and charged against reserve, net of collections on accounts previously charged against reserves. |
| 2 | Credits issued and returns processed. |
| 3 | Assumed or established in connection with acquisition. |
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.
| \David A. Roberts | February 24, 2005 |
| David A. Roberts | |
| 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.
| \David A. Roberts | February 24, 2005 |
| David A. Roberts | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| \Mark W. Sheahan | February 24, 2005 |
| Mark W. Sheahan | |
| Vice President and Treasurer | |
| (Principal Financial Officer) | |
| \James A. Graner | February 24, 2005 |
| James A. Graner | |
| Vice President and Controller | |
| (Principal Accounting Officer) | |
| L. R. Mitau | Director, Chairman of the Board |
| R. G. Bohn | Director |
| W. J. Carroll | Director |
| J. W. Eugster | Director |
| J. K. Gilligan | Director |
| J. H. Moar | Director |
| M. A. Morfitt | Director |
| M. H. Rauenhorst | Director |
| D. A. Roberts | Director |
| W. G. Van Dyke | Director |
| R. W. Van Sant | Director |
David A. Roberts, 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.
| \David A. Roberts | February 24, 2005 |
| David A. Roberts | |
| (For himself and as attorney-in-fact) | |
Exhibit Index
Exhibit
Number | |
Description
|
| | | |
| 2.1 | | Stock Purchase Agreement By and Among PMC Global, Inc. Gusmer Machinery Group, Inc. and Graco Inc., dated as of February 4, 2005 (Incorporated by reference to exhibit 2.1 to the Company's Report on Form 8-K dated February 10, 2005.) |
| | | |
| 2.2 | | Stock Purchase Agreement By and Among PMC Europe Investments, S.L. and Graco Inc. dated as of February 4, 2005 (Incorporated by reference to Exhibit 2.2 to the Company's Report on Form 8-K dated February 10, 2005.) |
| | | |
| 3.1 | | Restated Articles of Incorporation as amended September 24, 2004. |
| | | |
| 3.2 | | Restated Bylaws as amended June 13, 2002. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 10-Q for the thirteen weeks ended June 28, 2002.) |
| | | |
| 4.1 | | Rights Agreement dated as of February 25, 2000, between the Company and Wells Fargo, formerly known as Norwest Bank Minnesota, National Association, as Rights Agent, including as Exhibit A the form of the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Shares. (Incorporated by reference to Exhibit 4 to the Company's Report on Form 8-K dated February 25, 2000.) |
| | | |
| 4.2 | | Credit agreement dated December 31, 2004, between the Company and Wachovia Bank, N.A. |
| | | |
| *10.1 | | 2004 Corporate and Business Unit Annual Bonus Plan. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the thirteen weeks ended March 26, 2004.) |
| | | |
| *10.2 | | Executive Officer Annual Incentive Bonus Plan. |
| | | |
| *10.3 | | Nonemployee Director Stock Option Plan, as amended and restated February 23, 2001. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the thirteen weeks ended March 30, 2001.) |
| | | |
| *10.4 | | Long Term Stock Incentive Plan, as amended and restated December 10, 1999. (Incorporated by reference to Exhibit 10.5 to the Company's 1999 Annual Report on Form 10-K.) |
| | | |
| *10.5 | | Graco Inc. Stock Incentive Plan dated May 1, 2001. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the thirteen weeks ended June 29, 2001.) |
| | | |
| 10.6 | | Employee Stock Incentive Plan as adopted by the Board of Directors in February 1999. (Incorporated by reference to Exhibit 10.23 to the Company's 2002 Annual Report on Form 10-K.) |
| | | |
| *10.7 | | Deferred Compensation Plan Restated, effective December 1, 1992. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated March 11, 1993.) Amendment 1 dated September 1, 1996. (Incorporated by reference to the Company's Report on Form 10-Q for the twenty-six weeks ended June 27, 1997, File No. 001-09249.) |
| | | |
| *10.8 | | CEO Award Program. (Incorporated by reference to Exhibit 10.9 of the Company's 2004 Annual Report on Form 10-K.) |
| | | |
| *10.9 | | 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, File No. 001-09249.) |
| | | |
| *10.10 | | Restoration Plan 1998 Restatement. (Incorporated by reference to Exhibit 10.8 to the Company's 1997 Annual Report on Form 10-K, File No. 001-09249.) First Amendment to Restoration Plan 1998 Restatement. (Incorporated by reference to Exhibit 10.11 of the Company's 2003 Annual Report on Form 10-K.) |
| | | |
| *10.11 | | Summary of Compensation of the Non-Employee Members of the Board of Directors of Graco Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K dated February 25, 2005.) |
| | | |
| *10.12 | | Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Nonemployee Director Stock Option Plan (Incorporated by reference to Exhibit 10.11 to the Company's 2001 Annual Report on Form 10-K.) |
| | | |
| *10.13 | | Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.22 to the Company's 2002 Annual Report on Form 10-K.) Amended form of agreement for awards made to nonemployee directors. (Incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the thirteen weeks ended March 26, 2004.) |
| | | |
| *10.14 | | Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 10.12 to the Company's 2001 Annual Report on Form 10-K.) |
| | | |
| *10.15 | | Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the thirteen weeks ended March 29, 2002.) Amended form of agreement for awards made to Chief Executive Officer in 2001 and 2002. Amended form of agreement for awards made to executive officers in 2003. (Incorporated by reference to Exhibit 10.15 of the Company's 2004 Annual Report on Form 10-K.) Amended form of agreement for awards made to Chief Executive Officer in 2004. Amended form of agreement for awards made to executive officers in 2004. (Incorporated by reference to Exhibit 10.2 and 10.4 to the Company's Report on Form 10-Q for the thirteen weeks ended March 26, 2004.) |
| | | |
| *10.16 | | Executive Deferred Compensation Agreement. Form of supplementary agreement entered into by the Company which provides a retirement benefit to selected executive officers, as amended by Amendment 1, effective September 1, 1990. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 8-K dated March 11, 1993, File No.001-09249.) |
| | | |
| *10.17 | | Election Form. Form of agreement used for the issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Stock Incentive Plan. |
| | | |
| *10.18 | | Key Employee Agreement. Form of agreement with officers and other key employees relating to change of control. (Incorporated by reference to Exhibit 10.15 to the Company's 2001 Annual Report on Form 10-K.) |
| | | |
| *10.19 | | Executive Long Term Incentive Agreement (Restricted Stock). Form of agreement used for award of restricted stock to executive officers under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10 to the Company's Report on Form 10-Q for the thirteen weeks ended June 28, 2002.) |
| | | |
| *10.20 | | Trust Agreement for Nonemployee Director Deferred Stock Account dated September 30, 1997, between the Company and Wells Fargo, formerly known as Norwest Bank Minnesota, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the thirty-nine weeks ended September 26, 1997, File No. 001-09249.) |
| | | |
| *10.21 | | Letter Agreement with President and Chief Executive Officer, dated June 5, 2001. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the thirteen weeks ended June 29, 2001.) |
| | | |
| *10.22 | | Form of salary protection arrangement between the Company and executive officers. (Incorporated by reference to Exhibit 10.21 to the Company's 1995 Annual Report on Form 10-K, File No. 001-09249.) |
| | | |
| *10.23 | | Executive Group Long-Term Disability Policy. |
| | | |
| 11 | | Statement of Computation of Earnings per share included in Note 1 on page 42. |
| | | |
| 21 | | Subsidiaries of the Registrant included herein on page 55. |
| | | |
| 23 | | Independent Auditors' Consent included herein on page 56X. |
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| 24 | | Power of Attorney included herein on page 57. |
| | | |
| 31.1 | | Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) included herein on page 58. |
| | | |
| 31.2 | | Certification of Vice President and Controller pursuant to Rule 13a-14(a) included herein on page 59. |
| | | |
| 31.3 | | Certification of Vice President and Treasurer pursuant to Rule 13a-14(a) included herein on page 60. |
| | | |
| 32 | | Certification of President and Chief Executive Officer; Vice President and Controller, and Vice President and Treasurer pursuant to Section 1350 of Title 18, U.S.C. included herein on page 61. |
| | | |
| 99 | | Cautionary Statement Regarding Forward-Looking Statements included herein on page 62. |
| | *Management Contracts, Compensatory Plans or Arrangements. |
| | Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain long-term debt of the Company and its subsidiaries are not filed as exhibits because the amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries. The Company agrees to furnish copies thereof to the Securities and Exchange Commission upon request. |
Exhibit 21
Subsidiaries of Graco Inc.
The following are subsidiaries of the Company as of December 31, 2004:
| Subsidiary | Jurisdiction
of
Organization | Percentage of Voting
Securities Owned by
the Company | |
|
| Equipos Graco Argentina S.A. | Argentina | 100%* | |
| Graco Canada Inc. | Canada | 100% | |
| Graco do Brasil Limitada | Brazil | 100%* | |
| Graco Europe N.V. | Belgium | 100%* | |
| Graco Fluid Equipment (Shanghai) Co., Ltd. | China (PRC) | 100% | |
| Graco GmbH | Germany | 100% | |
| Graco Hong Kong Limited | Hong Kong | 100%* | |
| Graco K.K. | Japan | 100% | |
| Graco Korea Inc. | Korea | 100% | |
| Graco Limited | England | 100%* | |
| Graco Minnesota Inc. | United States | 100% | |
| Graco N.V. | Belgium | 100%* | |
| Graco S.A.S. | France | 100% | |
| Graco South Dakota** | United States | 100% | |
|
| * | Includes shares held by selected directors and/or executive officers of the Company or the relevant subsidiary to satisfy the requirements of local law. |
| ** | Shares 100% held by Graco Minnesota Inc. |
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements No. 333-17691, No. 333-17787, No. 33-54205, No. 333-03459, No. 333-75307, and No. 333-63128 on Form S-8 of our report dated February 25, 2005, relating to the financial statements and financial statement schedule of Graco Inc. and management's report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Graco Inc. for the year ended December 31, 2004.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 25, 2005
Exhibit 24
Power of Attorney
Know all by these presents, that each person whose signature appears below hereby constitutes and appoints David A. Roberts or Mark W. Sheahan, that person’s true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for that person and in that person’s name, place and stead, in any and all capacities, to sign the Report on Form 10-K for the year ended December 31, 2004, of Graco Inc. (and any and all amendments thereto) and to file the same with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as that person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In witness whereof, this Power of Attorney has been signed by the following persons on the date indicated.
| | | Date |
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| | \R. G. Bohn | February 18, 2005 |
| | R. G. Bohn | |
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| | | |
| | \W. J. Carroll | February 18, 2005 |
| | W. J. Carroll | |
| | | |
| | | |
| | | |
| | \J. W. Eugster | February 18, 2005 |
| | J. W. Eugster | |
| | | |
| | | |
| | | |
| | \J. K. Gilligan | February 18, 2005 |
| | J. K. Gilligan | |
| | | |
| | | |
| | | |
| | \L. R. Mitau | February 18, 2005 |
| | L. R. Mitau | |
| | | |
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| | \J. H. Moar | February 18, 2005 |
| | J. H. Moar | |
| | | |
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| | | |
| | \M. A. Morfitt | February 18, 2005 |
| | M. A. Morfitt | |
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| | | |
| | \M. H. Rauenhorst | February 18, 2005 |
| | M. H. Rauenhorst | |
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| | | |
| | | |
| | \D. A. Roberts | February 18, 2005 |
| | D. A. Roberts | |
| | | |
| | | |
| | | |
| | \W. G. Van Dyke | February 18, 2005 |
| | W. G. Van Dyke | |
| | | |
| | | |
| | | |
| | \R. W. Van Sant | February 18, 2005 |
| | R. W. Van Sant | |
Exhibit 31.1
Certifications
I, David A. Roberts, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Graco Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| | c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors: |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 24, 2005 | \David A. Roberts |
| | David A. Roberts |
| | President and Chief Executive Officer |
Exhibit 31.2
Certifications
I, James A. Graner, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Graco Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| | c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors: |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 24, 2005 | \James A. Graner |
| | James A. Graner |
| | Vice President and Controller |
Exhibit 31.3
Certifications
I, Mark W. Sheahan, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Graco Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| | c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors: |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 24, 2005 | \Mark W. Sheahan |
| | Mark W. Sheahan |
| | Vice President and Treasurer |
Exhibit 32
Certification Under Section 1350
Pursuant to Section 1350 of Title 18 of the United States Code, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of Graco Inc.
| Date: February 24, 2005 | \David A. Roberts |
| | David A. Roberts |
| | President and Chief Executive Officer |
| Date: February 24, 2005 | \James A. Graner |
| | James A. Graner |
| | Vice President and Controller |
| Date: February 24, 2005 | \Mark W. Sheahan |
| | Mark W. Sheahan |
| | Vice President and Treasurer |
Exhibit 99
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Graco Inc. (the “Company”) wishes to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so.
From time to time various forms filed by the Company with the Securities and Exchange Commission, including the Company’s Form 10-K, Form 10-Q and Form 8-K, its Annual Report to Shareholders, and press releases, other written documents or oral statements released by the Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will”, and similar expressions, and reflect the Company’s expectations concerning the future. Such statements are based upon currently available information, but various risks and uncertainties may cause the Company’s actual results to differ materially from those expressed in these statements. Among the factors which management believes could affect the Company’s operating results are the following:
| | • | With respect to the Company’s business as a whole, the Company’s prospects and operating results may be affected by: |
| | — | changes in world economies, including expansions, downturns or recessions and fluctuations in capital goods investment activity, interest rates, and foreign currency exchange rates; |
| | — | the ability of the Company to successfully integrate acquisitions, in particular the recent acquisitions of Liquid Control Corporation and Gusmer Corporation; |
| | — | international trade factors, including changes in international trade policy, such as export controls, trade sanctions; increased tariff barriers and other restrictions; weaker protection of the Company’s proprietary technology in certain foreign countries; the burden of complying with foreign laws and standards; and potentially burdensome taxes; |
| | — | the ability of the Company to: develop new products and technologies; maintain and enhance its market position relative to its competitors; maintain and enhance its distribution channels; identify and enter into new markets; realize productivity and product quality improvements; offset cost pressures from labor, materials and overhead with price increases; and control expenses; |
| | — | disruption in operations, transportation, communication, customer operations, distribution, payment or sources of supply, including the cost and availability of skilled labor, materials and energy, caused by political or economic instability, acts of God, labor disputes, war, embargo, weather, flood, fire, infectious disease, or other cause beyond its reasonable control, including military conflict in the Middle East or on the Korean peninsula and terrorist activity throughout the world; |
| | — | pricing pressure and lack of availability of key materials used in the manufacture of products; |
| | — | worldwide competition from low-cost manufacturers, including those that copy the Company's products; |
| | — | breakdown, interruption in or inadequate upgrading of the Company's information processing software, hardware or networks; |
| | — | successful implementation of a new enterprise resource planning (“ERP”) software system throughout the Company; |
| | — | changes in the markets in which the Company participates, including consolidation of competitors and major customers, price competition, and products demanded; |
| | — | changes in accounting standards or in the application by the Company of critical accounting policies; |
| | — | compliance with corporate governance requirements; |
| | — | growth in either the severity or magnitude of the products liability claims against the Company, particularly with respect to silica or asbestos; and |
| | — | changes in the return on investments in the Company's retirement plan. |
| | • | The prospects and operating results of the Company’s Contractor Equipment segment may be affected by: variations in the level of residential, commercial and institutional building and remodeling activity; the loss of, or significant reduction in sales to large customers; the pricing power of large customers; the availability and cost of construction financing; changes in the environmental regulation of coatings; consolidation in the paint equipment manufacturing industry and paint manufacturing industry; changes in the technology of paint and coating applications; changes in the buying and channel preferences of the end user; the Company’s success in converting painters outside North America from brush and roller to spray equipment; changes in the business practices (including inventory management) of the major distributors of contractor equipment; changes in construction materials and techniques; changes in the cost of labor in foreign markets; the regional market strength of certain competitors; the level of government spending on infrastructure development and road construction, maintenance and repair; and the nature and extent of highway safety regulation. |
| | • | The prospects and operating results of the Company’s Industrial/ Automotive Equipment segment may be affected by: the capital equipment spending levels of customers; the availability and cost of financing; changes in the environmental regulation of coatings; changes in the technical and performance characteristics of materials, including powder; changes in application technology; the ability of the Company to meet changing customer requirements; consolidation or other change in the channels of distribution; the pricing strategies of competitors; consolidation in the fluid handling equipment manufacturing industry; changes in the worldwide procurement practices of the major automobile manufacturers; changes in automotive manufacturing processes; and consolidation in the automobile manufacturing industry worldwide. |
| | • | The prospects and operating results of the Company’s Lubrication Equipment segment may be affected by: consolidation in the oil production industry; the development of extended life lubricants for vehicles; the reduction in the need for changing vehicle lubricants; consumer trends in “do-it-yourself” vs. “do-it-for-me” oil changes; the successful development of vehicles that use power sources other than the internal combustion engine; consolidation of automotive dealerships; trends in spending by state and local governments; and variations in the equipment spending levels of the major oil companies. |
