NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graco Inc. and Subsidiaries
Years Ended December 29, 2006, December 30, 2005 and December 31, 2004
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 29, 2006, and December 30, 2005, were 52-week years and the year ended December 31, 2004, was a 53-week year
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 29, 2006, all subsidiaries are 100 percent owned.
Foreign Currency Translation.The functional currency of certain subsidiaries in Great Britain and Spain, each acquired in 2005, is 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. 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, 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 are the Company’s divisions. The amounts of goodwill for each reportable segment were:
| (In thousands) | 2006 | 2005 |
|
| Industrial | $42,191 | $40,971 |
| Contractor | 7,939 | 7,939 |
| Lubrication | 17,044 | 3,099 |
|
| Total | $67,174 | $52,009 |
|
Components of other intangible assets were:
| (Dollars in thousands) | Estimated Life
(Years) | Original Cost | | Amortization | | Foreign
Currency
Translation | | Book Value | |
|
| December 29, 2006 | | | | | | | | | | | | | | | | | |
| Customer relationships and distribution network | | | | 4 - 8 | | $ | 26,102 | | $ | (7,335 | ) | $ | 6 | | $ | 18,773 | |
| Patents, proprietary technology and product | | |
| documentation | | | | 5 - 15 | | | 22,243 | | | (4,443 | ) | | 5 | | | 17,805 | |
| Trademarks, trade names and other | | | | 3 - 10 | | | 5,114 | | | (1,641 | ) | | 14 | | | 3,487 | |
|
| | | | | | | | 53,459 | | | (13,419 | ) | | 25 | | | 40,065 | |
| Not Subject to Amortization | | |
| Brand names | | | | | | | 10,260 | | | -- | | | -- | | | 10,260 | |
|
| Total | | | | | | $ | 63,719 | | $ | (13,419 | ) | $ | 25 | | $ | 50,325 | |
|
| December 30, 2005 | | | | | | | | | | | | | | | | | |
| Customer relationships and distribution network | | | | 4 - 8 | | $ | 22,965 | | $ | (4,419 | ) | $ | (427 | ) | $ | 18,119 | |
| Patents, proprietary technology and product | | |
| documentation | | | | 3 - 15 | | | 12,266 | | | (2,065 | ) | | (174 | ) | | 10,027 | |
| Trademarks, trade names and other | | | | 3 - 10 | | | 1,774 | | | (837 | ) | | -- | | | 937 | |
|
| | | | | | | | 37,005 | | | (7,321 | ) | | (601 | ) | | 29,083 | |
| Not Subject to Amortization | | |
| Brand names | | | | | | | 10,550 | | | -- | | | (151 | ) | | 10,399 | |
|
| Total | | | | | | $ | 47,555 | | $ | (7,321 | ) | $ | (752 | ) | $ | 39,482 | |
|
Amortization of intangibles was $6.9 million in 2006 and $4.7 million in 2005. Estimated future annual amortization is as follows: $8.3 million in 2007, $7.8 million in 2008, $6.9 million in 2009, $5.8 million in 2010, $4.9 million in 2011 and $6.4 million thereafter. In 2006, the useful life of certain brand names was determined to be no longer indefinite. The original cost of such brand names, totaling $3.5 million, is being amortized over a three-year period beginning July 1, 2006.
Capitalized Software.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.In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal 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 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) | 2006 | 2005 |
|
| Accrued insurance liabilities | $ 7,833 | $ 7,848 |
| Accrued warranty and service liabilities | 6,675 | 7,649 |
| Accrued trade promotions | 7,265 | 6,584 |
| Payable for employee stock purchases | 5,846 | 5,710 |
| Income taxes payable | 3,920 | 4,075 |
| Other | 14,227 | 13,323 |
|
| Total | $45,766 | $45,189 |
|
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 product warranty issues. Following is a summary of activity in accrued warranty and service liabilities:
| (In thousands) | | | | 2006 | | | 2005 | |
|
| Balance, beginning of year | | | $ | 7,649 | | $ | 9,409 | |
| Charged to expense | | | | 4,442 | | | 6,045 | |
| Margin on parts sales reversed | | | | 1,944 | | | 1,201 | |
| Reductions for claims settled | | | | (7,360 | ) | | (9,006 | ) |
|
| Balance, end of year | | | $ | 6,675 | | $ | 7,649 | |
|
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. In cases where there are specific customer acceptance provisions, revenue is recognized at the later of customer acceptance or shipment (subject to FOB 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.
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. Payment of incentives may take the form of cash, trade credit, promotional merchandise or free product. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company’s products. Estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. Rebates are accrued based on the program rates and progress toward the estimated annual sales amount, and are recorded as a reduction of sales (cash, trade credit) or cost of products sold (free goods). The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense or cost of products sold, depending on the type of incentive offered.
Stock Compensation.SFAS No. 123(R), “Share-Based Payment,” became effective for the Company at the beginning of 2006. This standard requires compensation costs related to share-based payment transactions to be recognized in the financial statements. The Company adopted the standard using the modified prospective transition method, whereby compensation cost related to unvested awards as of the effective date are recognized as calculated for pro forma disclosures under SFAS No. 123, and cost related to new awards are recognized in accordance with SFAS No. 123(R). The Company continues to use the Black-Scholes option-pricing model to value option grants.
The Company recognized share-based compensation cost of $8.4 million in 2006, which reduced net income by $6.1 million, or $0.09 per weighted common share. As of December 29, 2006 there was $8.9 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of approximately two years.
Had share-based compensation cost for the Employee Stock Purchase Plan and stock options granted under various stock incentive plans been recognized prior to 2006, the Company’s net earnings and earnings per share would have been reduced as follows (in thousands, except per share amounts):
| (In thousands, except per share amounts) | | | | 2005 | | | 2004 | |
|
| Net earnings | | |
| As reported | | | $ | 125,854 | | $ | 108,681 | |
| Stock compensation, net of related tax effects | | | | (4,636 | ) | | (3,637 | ) |
|
| Pro forma | | | $ | 121,218 | | $ | 105,044 | |
|
| Net earnings per common share | | |
| Basic as reported | | | $ | 1.83 | | $ | 1.57 | |
| Diluted as reported | | | | 1.80 | | | 1.55 | |
| Pro forma basic | | | | 1.76 | | | 1.52 | |
| Pro forma diluted | | | | 1.74 | | | 1.50 | |
|
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:
| | 2006 | 2005 | 2004 |
|
| Expected life in years | | 6 | .3 | 6 | .3 | 6 | .0 |
| Interest rate | | 4 | .6% | 4 | .2% | 4 | .2% |
| Volatility | | 27 | .8% | 18 | .7% | 21 | .5% |
| Dividend yield | | 1 | .4% | 1 | .4% | 1 | .3% |
| Weighted average fair value per share | | $12 | .97 | $ 8 | .24 | $ 6 | .79 |
|
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. For 2006, expected volatility is based on historical volatility over a period commensurate with the expected life of options. Prior to 2006, volatility was based on historical volatility over a three-year period.
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:
| | 2006 | 2005 | 2004 |
|
| Expected life in years | | 1 | .0 | 1 | .0 | 1 | .0 |
| Interest rate | | 4 | .6% | 4 | .4% | 4 | .2% |
| Volatility | | 24 | .0% | 18 | .9% | 22 | .3% |
| Dividend yield | | 1 | .4% | 1 | .4% | 1 | .5% |
| Weighted average fair value per share | | $10 | .18 | $ 8 | .26 | $ 6 | .47 |
|
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 and pension liability adjustments.
Pension and Other Postretirement Plans.In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires the recognition of the funded status of a defined benefit plan in the statement of financial position, requires that changes in the funded status be recognized through comprehensive income and expands disclosures. SFAS No. 158 was effective for the Company for year-end 2006 financial statements. The following table shows the incremental effect of SFAS No. 158 on the consolidated balance sheet as of December 29, 2006:
| (In thousands) | Before
Application of
SFAS No. 158 | Adjustments | After
Application of
SFAS No. 158 |
|
| Deferred income taxes, current | | | $ | 19,820 | | $ | 862 | | $ | 20,682 | |
| Total current assets | | | | 238,121 | | | 862 | | | 238,983 | |
| Prepaid pension | | | | 31,303 | | | (4,400 | ) | | 26,903 | |
| Total assets | | | | 515,141 | | | (3,538 | ) | | 511,603 | |
| Other current liabilities | | | | 43,435 | | | 2,331 | | | 45,766 | |
| Total current liabilities | | | | 126,598 | | | 2,331 | | | 128,929 | |
| Retirement benefits and deferred compensation | | | | 37,521 | | | (575 | ) | | 36,946 | |
| Deferred income taxes, non-current | | | | 16,140 | | | (1,416 | ) | | 14,724 | |
| Accumulated other comprehensive income | | | | (1,246 | ) | | (3,878 | ) | | (5,124 | ) |
| Total shareholders' equity | | | | 334,882 | | | (3,878 | ) | | 331,004 | |
| Total liabilities and shareholders' equity | | | | 515,141 | | | (3,538 | ) | | 511,603 | |
|
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 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 2006, 2005 and 2004, and there were no such transactions outstanding as of December 29, 2006, and December 30, 2005.
Recent Accounting Pronouncements.In July 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB 109” (FIN 48). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including whether or not to file a tax return in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 beginning in the first quarter of 2007 and does not anticipate that it will have a material effect on its consolidated results of operations or financial condition. The cumulative effect, if any, of applying the provisions of FIN 48 upon initial adoption will be accounted for as an adjustment to retained earnings.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement establishes a consistent framework for measuring fair value and expands disclosures on fair value measurements. SFAS No. 157 is effective for the Company starting in fiscal 2008. The Company has not determined the impact, if any, the adoption of this statement will have on its consolidated financial statements.
B. Segment Information
The Company has three reportable segments: Industrial, Contractor and Lubrication. The Industrial segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and truck assembly and components plants, wood products, rail, marine, aerospace, farm, construction, bus, recreational vehicles, and various other industries. The Contractor segment markets sprayers for architectural coatings for painting, roofing, texture, corrosion control and line striping and also high-pressure washers. The Lubrication segment markets products to move and dispense lubricants for fast oil change facilities, service garages, fleet service centers, automobile dealerships, the mining industry and industrial lubrication. All segments market parts and accessories for their products.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The cost of manufacturing for each segment is based on product cost, and expenses are based on actual costs incurred along with cost allocations of shared and centralized functions based on activities performed, sales or space utilization. Assets of the Company are not tracked along reportable segment lines. Depreciation expense is charged to the manufacturing or operating cost center that utilizes the asset, and is then allocated to segments on the same basis as other expenses within that cost center.
Reportable segments are defined by product. Segments are responsible for 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 | | | | 2006 | | | 2005 | | | 2004 | |
|
| Net sales | | |
| Industrial | | | $ | 416,498 | | $ | 367,119 | | $ | 274,574 | |
| Contractor | | | | 320,476 | | | 305,298 | | | 278,713 | |
| Lubrication | | | | 79,494 | | | 59,285 | | | 51,745 | |
|
| Total | | | $ | 816,468 | | $ | 731,702 | | $ | 605,032 | |
|
| Operating earnings | | |
| Industrial | | | $ | 128,460 | | $ | 98,330 | | $ | 86,975 | |
| Contractor | | | | 89,064 | | | 77,598 | | | 68,013 | |
| Lubrication | | | | 18,744 | | | 15,633 | | | 11,807 | |
| Unallocated corporate | | | | (10,269 | ) | | (491 | ) | | (5,264 | ) |
|
| Total | | | $ | 225,999 | | $ | 191,070 | | $ | 161,531 | |
|
Unallocated corporate is not included in management’s measurement of segment performance and includes such items as stock compensation, bad debt expense, charitable contributions and certain other charges or credits driven by corporate decisions.
| (In thousands) | | | |
| Geographic Information | 2006 | 2005 | 2004 |
|
| Net sales (based on customer location) |
| United States | $474,366 | $435,091 | $363,417 |
| Other countries | 342,102 | 296,611 | 241,615 |
|
| Total | $816,468 | $731,702 | $605,032 |
|
| Long-lived assets |
| United States | $240,341 | $202,601 | $137,243 |
| Spain | 12,473 | 14,053 | -- |
| Other countries | 19,806 | 15,078 | 7,245 |
|
| Total | $272,620 | $231,732 | $144,488 |
|
Sales to Major Customers
Sales to a paint retailer were 10 percent of consolidated sales in each of the years 2006, 2005 and 2004. Sales to a home center retailer were 11 percent of consolidated sales in 2004.
C. Inventories
Major components of inventories were as follows:
| (In thousands) | | | | 2006 | | | 2005 | |
|
| Finished products and components | | | $ | 44,969 | | $ | 40,444 | |
| Products and components in various stages of completion | | | | 26,841 | | | 21,788 | |
| Raw materials and purchased components | | | | 35,258 | | | 22,690 | |
|
| | | | | 107,068 | | | 84,922 | |
| Reduction to LIFO cost | | | | (30,757 | ) | | (28,375 | ) |
|
| Total | | | $ | 76,311 | | $ | 56,547 | |
|
Inventories valued under the LIFO method were $49.5 million for 2006 and $28.5 million for 2005. All other inventory was valued on the FIFO method.
D. Property, Plant and Equipment
Property, plant and equipment were as follows:
| (In thousands) | | | | 2006 | | | 2005 | |
|
| Land and improvements | | | $ | 8,028 | | $ | 7,618 | |
| Buildings and improvements | | | | 76,485 | | | 73,356 | |
| Manufacturing equipment | | | | 149,603 | | | 140,272 | |
| Office, warehouse and automotive equipment | | | | 26,335 | | | 29,313 | |
| Additions in progress | | | | 17,867 | | | 4,904 | |
|
| Total property, plant and equipment | | | | 278,318 | | | 255,463 | |
| Accumulated depreciation | | | | (153,794 | ) | | (148,965 | ) |
|
| Net property, plant and equipment | | | $ | 124,524 | | $ | 106,498 | |
|
Depreciation expense was $18.2 million in 2006, $18.3 million in 2005 and $15.9 million in 2004.
E. Income Taxes
Earnings before income tax expense consist of:
| (In thousands) | 2006 | 2005 | 2004 |
|
| Domestic | $197,410 | $172,164 | $144,603 |
| Foreign | 26,956 | 17,190 | 16,178 |
|
| Total | $224,366 | $189,354 | $160,781 |
|
Income tax expense consists of:
| (In thousands) | | | | 2006 | | | 2005 | | | 2004 | |
|
| Current | | |
| Domestic | | |
| Federal | | | $ | 65,652 | | $ | 51,103 | | $ | 45,738 | |
| State and local | | | | 4,520 | | | 5,000 | | | 2,200 | |
| Foreign | | | | 7,206 | | | 5,958 | | | 2,938 | |
|
| | | | | 77,378 | | | 62,061 | | | 50,876 | |
|
| Deferred | | |
| Domestic | | | | (2,611 | ) | | 973 | | | 1,449 | |
| Foreign | | | | (167 | ) | | 466 | | | (225 | ) |
|
| | | | | (2,778 | ) | | 1,439 | | | 1,224 | |
|
| Total | | | $ | 74,600 | | $ | 63,500 | | $ | 52,100 | |
|
Income taxes paid were $77.6 million, $57.0 million and $48.4 million in 2006, 2005 and 2004.
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:
| | | | | 2006 | | | 2005 | | | 2004 | |
|
| Statutory tax rate | | | | 35 | % | | 35 | % | | 35 | % |
| Earnings from non-U.S. sales at lower tax rates | | | | (2 | ) | | (2 | ) | | (2 | ) |
| State taxes, net of federal effect | | | | 2 | | | 2 | | | 1 | |
| U.S. general business tax credits | | | | (1 | ) | | (1 | ) | | (1 | ) |
| Domestic production deduction | | | | (1 | ) | | (1 | ) | | -- | |
| Other | | | | -- | | | -- | | | (1 | ) |
|
| Effective tax rate | | | | 33 | % | | 33 | % | | 32 | % |
|
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) | | | | 2006 | | | 2005 | |
|
| Inventory valuations | | | $ | 7,963 | | $ | 4,326 | |
| Insurance accruals | | | | 2,510 | | | 2,556 | |
| Warranty reserves | | | | 2,131 | | | 2,626 | |
| Vacation accruals | | | | 2,047 | | | 1,758 | |
| Bad debt reserves | | | | 1,715 | | | 1,669 | |
| Stock, pension and deferred compensation | | | | 3,114 | | | -- | |
| Other | | | | 1,202 | | | 1,103 | |
|
| Current | | | | 20,682 | | | 14,038 | |
|
| Unremitted earnings of consolidated foreign subsidiaries | | | | (2,400 | ) | | (2,100 | ) |
| Excess of tax over book depreciation | | | | (14,324 | ) | | (9,711 | ) |
| Postretirement benefits | | | | 7,372 | | | 7,424 | |
| Pension and deferred compensation | | | | (5,816 | ) | | (7,506 | ) |
| Other | | | | 444 | | | 1,035 | |
|
| Non-current | | | | (14,724 | ) | | (10,858 | ) |
|
| Net deferred tax assets | | | $ | 5,958 | | $ | 3,180 | |
|
Total deferred tax assets were $32.6 million and $24.2 million, and total deferred tax liabilities were $26.6 million and $21.0 million on December 29, 2006, and December 30, 2005.
F. Debt
On April 1, 2006, the Company entered into a credit agreement with Wachovia Bank, National Association providing credit up to $25 million, expiring on March 31, 2007. On July 10, 2006 the Company entered into a credit agreement with US Bank, National Association providing credit up to $25 million, expiring on July 31, 2007. 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 agreements require the Company to maintain certain financial ratios as to cash flow leverage and fixed charge coverage.
On December 29, 2006, the Company had $150 million in lines of credit, including the $50 million in committed credit facilities described above and uncommitted lines of credit totaling $75 million with U.S. banks and $25 million with foreign banks. The unused portion of these credit lines was $134 million at December 29, 2006. 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 5.2 percent, 4.3 percent and 2.5 percent for the years ended December 29, 2006, December 30, 2005 and December 31, 2004. The Company pays facility fees of up to 0.15 percent per annum on certain of these lines. No compensating balances are required.
The Company is in compliance with the financial covenants of its debt agreements.
Interest paid on debt during 2006, 2005 and 2004 was $0.9 million, $1.3 million and $0.5 million.
G. Shareholders’ Equity
At December 29, 2006, 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. Share-Based Awards and Purchase Plans
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 recorded as unearned compensation, a component of shareholders’ equity, and is charged to operations over the vesting period. There was no compensation cost related to restricted shares in 2006. Compensation cost charged to operations for restricted share awards was $116,000 in 2005 and $340,000 in 2004. 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. Under this arrangement, the Company issued 10,955 shares in 2006, 12,933 shares in 2005 and 11,577 shares in 2004. The expense related to this arrangement is not significant.
Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except per share amounts):
| Options | Weighted Average
Exercise Price | Options
Exercisable | Weighted Average
Exercise Price |
|
| Outstanding, December 26, 2003 | | | | 3,491 | | $ | 12.51 | | | 1,461 | | $ | 9.60 | |
| Granted | | | | 1,127 | | | 29.66 | |
| Exercised | | | | (930 | ) | | 10.24 | |
| Canceled | | | | (66 | ) | | 21.26 | |
|
| Outstanding, December 31, 2004 | | | | 3,622 | | $ | 18.28 | | | 1,804 | | $ | 11.87 | |
| Granted | | | | 389 | | | 37.95 | |
| Exercised | | | | (341 | ) | | 11.57 | |
| Canceled | | | | (55 | ) | | 29.93 | |
|
| Outstanding, December 30, 2005 | | | | 3,615 | | $ | 20.85 | | | 2,017 | | $ | 14.28 | |
| Granted | | | | 703 | | | 41.11 | |
| Exercised | | | | (324 | ) | | 15.11 | |
| Canceled | | | | (38 | ) | | 34.29 | |
|
| Outstanding, December 29, 2006 | | | | 3,956 | | $ | 24.79 | | | 2,272 | | $ | 16.94 | |
|
The aggregate intrinsic value of options exercised was $8.9 million in 2006, $8.6 million in 2005 and $18.1 million in 2004. The aggregate intrinsic value of options outstanding and options exercisable as of December 29, 2006 was $59.7 million and $51.5 million, respectively. The weighted average contractual term of vested options and options expected to vest as of December 29, 2006 was 6 years. The weighted average contractual term of exercisable options as of December 29, 2006 was 5 years. Cash received from exercise of stock options was $4.9 million in 2006, $3.9 million in 2005 and $9.5 million in 2004. Tax benefit realized from stock options exercised was approximately $3.2 million in 2006, $3.0 million in 2005 and $6.3 million in 2004.
The following table summarizes information for options outstanding and exercisable at December 29, 2006 (in thousands, except per share and contractual term amounts):
Range of
Prices | Options
Outstanding | Options
Outstanding
Weighted Avg.
Remaining
Contractual Term | Options
Outstanding
Weighted Avg
Exercise Price | Options
Exercisable | Options
Exercisable
Weighted Avg
Exercise Price |
|
| $ 5-12 | 732 | 3 | $ 9.07 | 732 | $ 9.07 |
| 12-21 | 1,164 | 5 | 16.59 | 1,088 | 16.52 |
| 27-36 | 1,010 | 7 | 29.74 | 343 | 28.28 |
| 36-49 | 1,050 | 9 | 40.06 | 109 | 38.34 |
|
| $ 5-49 | 3,956 | 6 | $24.79 | 2,272 | $16.94 |
|
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 204,478 shares under this Plan in 2006, 245,303 shares in 2005 and 343,913 shares in 2004.
Authorized Shares.Shares authorized for issuance under the various stock option and purchase plans are shown below:
| (In thousands) | Total Shares
Authorized | Available for Future
Issuance as of
December 29, 2006 |
|
| Stock Incentive Plan (2006) | 7,375 | 4,597 |
| Employee Stock Purchase Plan | 19,744 | 550 |
|
| Total | 27,119 | 5,147 |
|
Amounts available for future issuance exclude outstanding options. Options outstanding as of December 29, 2006, include options granted under three plans that were replaced by the Stock Incentive Plan in 2001 and 2006. No shares are available for future grants under those plans. Shares authorized under the Stock Incentive Plan (2006) include an increase of 4 million shares approved by shareholders at the annual meeting of shareholders in April 2006. At the same meeting, shareholders approved the 2006 Employee Stock Purchase Plan, which authorizes 2 million shares of common stock. The new plan will become effective in March 2007, at which time any shares remaining authorized and unissued by the old plan will be cancelled.
I. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
| (In thousands, except per share amounts) | 2006 | 2005 | 2004 |
|
| Numerator |
| Net earnings available to common shareholders | $149,766 | $125,854 | $108,681 |
|
| Denominators |
| Weighted average shares outstanding for basic earnings per share | 67,807 | 68,766 | 69,142 |
| Dilutive effect of stock options computed based on the treasury |
| stock method using the average market price | 1,170 | 1,096 | 1,109 |
|
| Denominator for diluted earnings per share | 68,977 | 69,862 | 70,251 |
|
| Basic earnings per share | $ 2.21 | $ 1.83 | $ 1.57 |
|
| Diluted earnings per share | $ 2.17 | $ 1.80 | $ 1.55 |
|
Stock options to purchase 615,000 and 374,000 common shares were not included in the 2006 and 2005 calculations 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 elect to participate, the Company matches employee contributions at a 100 percent rate, up to 3 percent of the employee’s compensation. For employees not covered by a defined benefit plan, the Company contributes an amount equal to 1.5 percent of the employee’s compensation. Employer contributions totaled $2.6 million in 2006, $2.3 million in 2005 and $2.4 million in 2004.
The Company’s postretirement medical plan provides certain medical benefits for retired U.S. employees. Employees hired before January 1, 2005 are eligible for these benefits upon retirement and fulfillment of other eligibility requirements as specified by the plan.
The Company has both funded and unfunded noncontributory defined benefit pension plans that together cover most U.S. employees hired before January 1, 2006, certain directors and some of the employees of the Company’s non-U.S. subsidiaries. For U.S. plans, benefits are based on years of service and the highest five consecutive years’ earnings in the ten years preceding retirement. The Company funds annually in amounts consistent with minimum funding requirements and maximum tax deduction limits. 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 $13.8 million at December 29, 2006, and $12.7 million at December 30, 2005.
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:
| | 2006 | 2005 |
|
| Graco common stock | 7% | 7% |
| Other equity securities | 77% | 74% |
| Debt securities | 10% | 13% |
| Real estate | 5% | 5% |
| Cash | 1% | 1% |
|
| 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 29, 2006, and December 30, 2005, and a statement of the funded status as of the same dates.
| | | | Pension Benefits | Postretirement Medical Benefits |
|
| (In thousands) | | | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
| Change in benefit obligation | | |
| Obligation, beginning of year | | | $ | 191,261 | | $ | 167,933 | | $ | 30,555 | | $ | 27,413 | |
| Pension obligation of acquired business | | | | 4,531 | | | -- | | | -- | | | -- | |
| Service cost | | | | 5,444 | | | 4,648 | | | 849 | | | 841 | |
| Interest cost | | | | 10,541 | | | 9,931 | | | 1,511 | | | 1,620 | |
| Assumption changes | | | | -- | | | 12,306 | | | -- | | | 2,211 | |
| Plan amendments | | | | 211 | | | -- | | | (8,164 | ) | | -- | |
| Actuarial loss (gain) | | | | (3,265 | ) | | 3,767 | | | (1,254 | ) | | (127 | ) |
| Exchange rate changes | | | | 865 | | | (1,059 | ) | | -- | | | -- | |
| Benefit payments | | | | (7,010 | ) | | (6,265 | ) | | (2,081 | ) | | (1,403 | ) |
|
| Obligation, end of year | | | $ | 202,578 | | $ | 191,261 | | $ | 21,416 | | $ | 30,555 | |
|
| Change in plan assets | | |
| Fair value, beginning of year | | | $ | 185,330 | | $ | 175,951 | | $ | -- | | $ | -- | |
| Pension assets of acquired business | | | | 4,907 | | | -- | | | -- | | | -- | |
| Actual return on assets | | | | 28,815 | | | 15,119 | | | -- | | | -- | |
| Employer contributions | | | | 777 | | | 525 | | | 2,081 | | | 1,403 | |
| Benefit payments | | | | (7,010 | ) | | (6,265 | ) | | (2,081 | ) | | (1,403 | ) |
|
| Fair value, end of year | | | $ | 212,819 | | $ | 185,330 | | $ | -- | | $ | -- | |
|
| Funded status | | |
| Funded status over (under) | | | $ | 10,241 | | $ | (5,931 | ) | $ | (21,416 | ) | $ | (30,555 | ) |
| Unrecognized prior service cost | | | | -- | | | 926 | | | -- | | | -- | |
| Unrecognized loss | | | | -- | | | 22,268 | | | -- | | | 10,489 | |
| Minimum pension liability | | | | -- | | | (1,997 | ) | | -- | | | -- | |
|
| Net | | | $ | 10,241 | | $ | 15,266 | | $ | (21,416 | ) | $ | (20,066 | ) |
|
| Amounts recognized in consolidated balance sheets | | |
| Non-current assets | | | $ | 26,903 | | $ | 29,616 | | $ | -- | | $ | -- | |
| Current liabilities | | | | 839 | | | -- | | | 1,492 | | | -- | |
| Non-current liabilities | | | | 15,823 | | | 14,350 | | | 19,924 | | | 20,066 | |
|
| Net | | | $ | 10,241 | | $ | 15,266 | | $ | (21,416 | ) | $ | (20,066 | ) |
|
The accumulated benefit obligation for all defined benefit pension plans was $182 million and $171 million as of year-end 2006 and 2005, respectively. Information for plans with an accumulated benefit obligation in excess of plan assets follows:
| (In thousands) | 2006 | 2005 |
|
| Projected benefit obligation | $16,662 | $15,280 |
| Accumulated benefit obligation | 14,530 | 13,232 |
| Fair value of plan assets | -- | -- |
|
The components of net periodic benefit cost for the plans for 2006, 2005 and 2004 were as follows:
| | Pension Benefits | Postretirement Medical Benefits |
|
| (In thousands) | | | | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | |
|
| Service cost - benefits earned during the period | | | $ | 5,444 | | $ | 4,648 | | $ | 4,136 | | $ | 849 | | $ | 841 | | $ | 771 | |
| Interest cost on projected benefit obligation | | | | 10,541 | | | 9,931 | | | 8,707 | | | 1,511 | | | 1,620 | | | 1,501 | |
| Expected return on assets | | | | (16,582 | ) | | (15,549 | ) | | (14,095 | ) | | -- | | | -- | | | -- | |
| Amortization of transition obligation (asset) | | | | -- | | | (11 | ) | | (15 | ) | | -- | | | -- | | | -- | |
| Amortization of prior service cost | | | | 147 | | | 144 | | | 144 | | | (161 | ) | | -- | | | -- | |
| Amortization of net loss (gain) | | | | 535 | | | 92 | | | (69 | ) | | 595 | | | 526 | | | 452 | |
| Cost of pension plans which are not significant | | |
| and have not adopted SFAS No. 87 | | | | 320 | | | 370 | | | 284 | | | N/A | | | N/A | | | N/A | |
|
| Net periodic benefit cost (credit) | | | $ | 405 | | $ | (375 | ) | $ | 908 | | $ | 2,794 | | $ | 2,987 | | $ | 2,724 | |
|
Amounts included in accumulated other comprehensive income as of December 29, 2006, that have not yet been recognized as components of net periodic benefit cost, were as follows:
| | | | Pension Benefits | Postretirement Medical Benefits |
|
| (In thousands) | | | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | |
|
| Prior service cost (credit) | | | $ | 996 | | $ | 627 | | $ | (8,002 | ) | $ | (5,041 | ) |
| Net loss | | | | 6,407 | | | 4,036 | | | 8,639 | | | 5,442 | |
|
| Net | | | $ | 7,403 | | $ | 4,663 | | $ | 637 | | $ | 401 | |
|
Amounts included in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit cost in 2007 were as follows (in thousands):
| | | | Pension Benefits | Postretirement Medical Benefits |
|
| (In thousands) | | | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | |
|
| Prior service cost (credit) | | | $ | 251 | | $ | 158 | | $ | (766 | ) | $ | (483 | ) |
| Net loss | | | | 102 | | | 64 | | | 597 | | | 376 | |
|
| Net | | | $ | 353 | | $ | 222 | | $ | (169 | ) | $ | (107 | ) |
|
Assumptions used to determine the Company’s benefit obligations are shown below:
| | Pension Benefits | Postretirement Medical Benefits |
|
| Weighted average assumptions | 2006 | 2005 | 2006 | 2005 |
|
| Discount rate | 5.7% | 5.5% | 5.8% | 5.5% |
| Rate of compensation increase | 3.8% | 3.8% | N/A | N/A |
|
Assumptions used to determine the Company’s net periodic benefit cost are shown below:
| | Pension Benefits | Postretirement Medical Benefits |
|
| Weighted average assumptions | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
|
| Discount rate | 5.5% | 5.9% | 5.9% | 5.5% | 6.0% | 6.0% |
| Expected return on assets | 9.0% | 9.0% | 9.0% | N/A | N/A | N/A |
| Rate of compensation increase | 3.8% | 3.8% | 3.2% | 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 2006, the annual cost increase limitation was changed to 5 percent for 2007, 4 percent for 2008 and 3 percent thereafter. In measuring the accumulated postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed to be 9.5 percent for 2007, decreasing by one-half percentage point each year to a constant rate of 5 percent in 2016 and thereafter, subject to the plan’s annual increase limitation.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. In 2005, it was determined that certain provisions of the retirement medical plan are eligible for the Medicare subsidy under the Act. The projected subsidy had no significant effect on the accumulated benefit obligation and periodic cost.
At December 29, 2006, a one percent change in assumed health care cost trend rates would have no impact on the service and interest cost components of net periodic postretirement health care benefit cost or the APBO for health care benefits.
The Company expects to contribute $0.7 million to its unfunded pension plans and $1.5 million to the postretirement medical plan in 2007. No contribution to the funded pension plan is expected in 2007. Estimated future benefit payments are as follows:
| (In thousands) | Pension Benefits | Postretirement Medical Benefits |
|
| 2007 | $ 7,700 | $1,500 |
| 2008 | 8,200 | 1,400 |
| 2009 | 8,900 | 1,400 |
| 2010 | 10,300 | 1,400 |
| 2011 | 10,600 | 1,400 |
| Years 2012 - 2016 | 64,300 | 7,500 |
|
K. Commitments and Contingencies
Lease Commitments.Aggregate annual rental commitments under operating leases with noncancelable terms of more than one year were $5 million at December 29, 2006, payable as follows:
| (In thousands) | Buildings | Vehicles &
Equipment | Total |
|
| 2007 | $1,183 | $1,127 | $2,310 |
| 2008 | 510 | 689 | 1,199 |
| 2009 | 204 | 327 | 531 |
| 2010 | 63 | 98 | 161 |
| 2011 | 22 | 42 | 64 |
| Thereafter | 700 | -- | 700 |
|
| Total | $2,682 | $2,283 | $4,965 |
|
Total rental expense was $1.8 million for 2006, $1.7 million for 2005 and $1.3 million for 2004.
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 $17 million at December 29, 2006. 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. The Company has also committed up to $3 million under capital expenditure plans for facility construction and improvements. In addition, the Company could be obligated to perform under standby letters of credit totaling $2.2 million at December 29, 2006. The Company has also guaranteed the debt of its subsidiaries for up to $15 million.
Contingencies.The Company has been named as a defendant, along with hundreds of other defendants, 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. Orders of dismissal have been received for many of those lawsuits and additional dismissals are pending. 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. Acquisitions
Lubriquip. In July 2006, the Company purchased the stock of Lubriquip, Inc. for approximately $31 million cash. Lubriquip, with sales of approximately $30 million in 2005, is a manufacturer of centralized and automated oil and grease lubrication systems, force-feed lubricators, metering devices and related electronic controls and accessories. The products, brands and distribution channels of Lubriquip will expand and complement the Company’s Lubrication Equipment business. Results of Lubriquip operations have been included in the Lubrication segment since the date of acquisition.
Lubriquip has manufacturing facilities in Warrensville Heights, Ohio and Madison, Wisconsin. The Company plans to close both facilities in 2007 and combine those operations with the Company’s existing lubrication businesses in a new facility in Anoka, Minnesota.
The purchase price was allocated based on estimated fair values as follows (in thousands):
| Accounts receivable and prepaid expenses | | | $ | 2,400 | |
| Inventories | | | | 3,700 | |
| Deferred income taxes | | | | 600 | |
| Property, plant and equipment | | | | 3,000 | |
| Prepaid pension | | | | 400 | |
| Identifiable intangible assets | | | | 17,000 | |
| Goodwill | | | | 14,000 | |
|
| Total purchase price | | | | 41,100 | |
| Current liabilities assumed | | | | (3,600 | ) |
| Deferred income taxes | | | | (6,800 | ) |
|
| Net assets acquired | | | $ | 30,700 | |
|
Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):
| Product documentation (8 years) | $ 8,500 |
| Customer relationships (7 years) | 3,700 |
| Proprietary technology (5 years) | 1,600 |
|
| Total (7 years) | 13,800 |
| Brand names (indefinite useful life) | 3,200 |
|
| Total identifiable intangible assets | $17,000 |
|
None of the goodwill or identifiable intangible assets is expected to be deductible for tax purposes.
Liquid Control.Effective January 1, 2005, the Company purchased the stock of Liquid Control Corporation and its affiliated company Profill Corp. for approximately $35 million cash. Liquid Control designs and manufactures highly engineered precision resin dispensing equipment, which will expand and complement the Company’s Industrial business. Liquid Control had sales of approximately $26 million in 2004. Results of Liquid Control’s operations have been included in the Industrial segment since the date of acquisition.
The purchase price was allocated based on estimated fair values as follows (in thousands):
| Accounts receivable and prepaid expenses | | | $ | 2,900 | |
| Inventories | | | | 4,900 | |
| Property, plant and equipment | | | | 7,800 | |
| Identifiable intangible assets | | | | 16,100 | |
| Goodwill | | | | 8,600 | |
|
| Total purchase price | | | | 40,300 | |
| Liabilities assumed | | | | (4,900 | ) |
|
| Net assets acquired | | | $ | 35,400 | |
|
Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):
| Customer relationships (8 years) | $10,100 |
| Proprietary technology (8 years) | 3,500 |
|
| Total (8 years) | 13,600 |
| Brand names (indefinite useful life) | 2,500 |
|
| Total identifiable intangible assets | $16,100 |
|
Gusmer. Effective February 4, 2005, the Company purchased the stock of Gusmer Corporation and Gusmer Europe, S.L. for approximately $68 million cash. Gusmer designs and manufactures specialized two-component dispense equipment systems, which will expand and complement the Company’s Industrial business. Gusmer had sales of approximately $43 million in 2004. Results of Gusmer’s operations have been included in the Industrial segment since the date of acquisition.
The purchase price was allocated based on estimated fair values as follows (in thousands):
| Cash and cash equivalents | | | $ | 500 | |
| Accounts receivable | | | | 7,400 | |
| Inventories | | | | 15,600 | |
| Property, plant and equipment | | | | 2,900 | |
| Identifiable intangible assets | | | | 15,800 | |
| Goodwill | | | | 32,200 | |
|
| Total purchase price | | | | 74,400 | |
| Liabilities assumed | | | | (6,500 | ) |
|
| Net assets acquired | | | $ | 67,900 | |
|
Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):
| Customer relationships (7 years) | $ 6,500 |
| Proprietary technology (8 years) | 4,400 |
| Product documentation (5 years) | 1,800 |
| Favorable lease (3 years) | 400 |
|
| Total (7 years) | 13,100 |
| Brand names (indefinite useful life) | 2,700 |
|
| Total identifiable intangible assets | $15,800 |
|
PBL.Effective November 28, 2005, the Company purchased the assets and assumed certain liabilities of PBL Industries for approximately $8 million cash. PBL manufactured fuel transfer pumps, oil transfer pumps and related parts and accessories and had annual sales of $5 million. The Company has employed the PBL assets to expand and complement its Lubrication segment business.
The purchase price was allocated based on estimated fair values as follows (in thousands):
| Accounts receivable and prepaid expenses | | | $ | 700 | |
| Inventories | | | | 600 | |
| Property, plant and equipment | | | | 100 | |
| Identifiable intangible assets | | | | 3,800 | |
| Goodwill | | | | 3,100 | |
|
| Total purchase price | | | | 8,300 | |
| Liabilities assumed | | | | (100 | ) |
|
| Net assets acquired | | | $ | 8,200 | |
|
Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):
| Customer relationships (7 years) | $2,600 |
| Proprietary technology (5 years) | 1,200 |
|
| Total (6 years) | $3,800 |
|
For tax purposes, each of the acquisitions in 2005 was treated as a purchase of assets, and goodwill is expected to be fully deductible.
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 Chairman, President and Chief Executive Officer, Chief Financial Officer 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 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 2006 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 2006 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 Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under the heading “Executive Officers of the Company” in Part I of this 2006 Annual Report on Form 10-K and the information under the headings “Election of Directors-Nominees and Other Directors,” “Election of Directors — Nominating Process” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Company’s Proxy Statement for its 2007 Annual Meeting of Shareholders, to be held on April 20, 2007 (the “Proxy Statement”), are incorporated herein by reference.
New York Stock Exchange Rule 303A.12
Our 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 22, 2006. The certifications of the Chairman, President and Chief Executive Officer and Chief Financial Officer and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of our Company’s disclosure in this 2006 Annual Report on Form 10-K, have been filed as exhibits 31.1 and 31.2 hereto.
Audit Committee Members and Audit Committee Financial Expert
The information under the heading “Committees of the Board of Directors” of our Company’s Proxy Statement is incorporated herein by reference.
Corporate Governance Guidelines, Committee Charters and Code of Ethics
Our Company has adopted Corporate Governance Guidelines and Charters for the Audit, Governance, and Management Organization and Compensation Committees of the Board of Directors. We have also issued Conduct of Business Guidelines (Code of Ethics) that apply to our principal executive officer, principal financial 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.
Our 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 our principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions within four business days following the date of such amendment or waiver.
Section 16(a) Reporting Compliance
The information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the headings “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Report of the Management Organization and Compensation Committee” of the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained under the headings “Equity Compensation Plan Information” and “Beneficial Ownership of Shares” of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information under the headings “Certain Business Relationships,” “Related Persons Transaction Approval Policy” and “Election of Directors — Director Independence” of the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information under the headings “Independent Registered Public Accounting Firm Fees and Services” and “Pre-Approval Policies” of the Proxy Statement is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedule
| | | |
| (a) | The following documents are filed as part of this report: | |
| | | | |
| | (1) | Financial Statements
See Part II | |
| | | | Page |
| | (2) | Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts | 48 |
| | | | |
| | | 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. (SeeExhibit Index)
Those entries marked by an asterisk are Management Contracts, Compensatory Plans or Arrangements. | 50 |
Schedule II — Valuation and Qualifying Accounts
Graco Inc. and Subsidiaries
|
| Description | | | Balance at
beginning
of year | Additions
charged to
costs and
expenses | Deductions
from
reserves1 | Other
add
(deduct)2 | Balance
at end of
year |
|
| Year ended December 29, 2006 | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | $ | 2,300 | | $ | -- | | $ | -- | | $ | 300 | | $ | 2,600 | |
| Allowance for returns and credits | | | | 3,600 | | | 10,400 | | | 10,900 | | | 100 | | | 3,200 | |
|
| | | | $ | 5,900 | | $ | 10,400 | | $ | 10,900 | | $ | 400 | | $ | 5,800 | |
|
| Year ended December 30, 2005 | | |
| Allowance for doubtful accounts | | | $ | 2,300 | | $ | 300 | | $ | 200 | | $ | (100 | ) | $ | 2,300 | |
| Allowance for returns and credits | | | | 3,300 | | | 8,100 | | | 7,700 | | | (100 | ) | | 3,600 | |
|
| | | | $ | 5,600 | | $ | 8,400 | | $ | 7,900 | | $ | (200 | ) | $ | 5,900 | |
|
| Year ended December 31, 2004 | | |
| Allowance for doubtful accounts | | | $ | 2,600 | | $ | 200 | | $ | 500 | | $ | -- | | $ | 2,300 | |
| Allowance for returns and credits | | | | 3,100 | | | 6,400 | | | 6,200 | | | -- | | | 3,300 | |
|
| | | | $ | 5,700 | | $ | 6,600 | | $ | 6,700 | | $ | -- | | $ | 5,600 | |
|
| (1) | For doubtful accounts, represents amounts determined to be uncollectible and charged against reserve, net of collections on accounts previously charged against reserves. For returns and credits, represents amounts of credits issued and returns processed. |
| (2) | Includes amounts assumed or established in connection with acquisitions and effects of foreign currency translation. |
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/David A. Roberts | February 19, 2007 |
| David A. Roberts | |
| Chairman, 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/David A. Roberts | February 19, 2007 |
| David A. Roberts | |
| Chairman, President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/James A. Graner | February 19, 2007 |
| James A. Graner | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | |
| D. A. Roberts | Director, Chairman of the Board |
| R. G. Bohn | Director |
| W. J. Carroll | Director |
| J. W. Eugster | Director |
| J. K. Gilligan | Director |
| L. R. Mitau | Director |
| M. A. Morfitt | Director |
| M. H. Rauenhorst | 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.
| /s/David A. Roberts | February 19, 2007 |
| David A. Roberts | |
| Chairman, President and Chief Executive Officer | |
| (For himself and as attorney-in-fact) | |
Exhibit Index
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. (Incorporated by reference to Exhibit 3.1 to the Company’s 2004 Annual Report on Form 10-K.) |
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 April 1, 2006, between the Company and Wachovia Bank, N.A. (Promissory Note and Offering Basis Loan Agreement) (Incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 31, 2006.) |
4.3 | | Credit Agreement dated July 10, 2006, between the Company and U.S. Bank N.A. (Incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 29, 2006.) |
*10.1 | | Executive Officer Bonus Plan. (Incorporated by reference to Exhibit 10.3 to the Company's Report on Form 8-K filed on February 25, 2005.) |
*10.2 | | Executive Officer Annual Incentive Bonus Plan. (Incorporated by reference to Exhibit 10.2 to the Company's 2004 Annual Report on Form 10-K.) |
*10.3 | | Graco Inc. Nonemployee Director Stock Option Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) |
*10.4 | | Long Term Stock Incentive Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) |
*10.5 | | Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to the Company's Definitive Proxy Statement on Schedule 14A filed March 14, 2006.) |
10.6 | | Employee Stock Incentive Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) |
*10.7 | | Deferred Compensation Plan Restated, effective December 1, 1992. (Incorporated by reference to Exhibit 2 to the Company’s Report on Form 8-K dated March 11, 1993.) 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.) Amendment 2 dated May 27, 2000. Amendment 3 dated May 27, 2002. |
*10.8 | | Deferred Compensation Plan (2005 Statement) as amended and restated on April 4, 2005. (Incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 10-Q for the thirteen weeks ended July 1, 2005.) Amendment 2 dated November 1, 2005. |
*10.10 | | Retirement Plan for Nonemployee Directors. (Incorporated by reference to Attachment C to Item 5 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 29, 1991.) |
*10.11 | | Restoration Plan 1998 Restatement. (Incorporated by reference to Exhibit 10.8 to the Company's 1997 Annual Report on Form 10-K.) 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.); Second Amendment to Restoration Plan 1998 Restatement. |
*10.12 | | 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. |
*10.13 | | 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.) |
*10.14 | | 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.) |
*10.15 | | Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 10.12 to the Company’s 2001 Annual Report on Form 10-K.) |
*10.16 | | Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 29, 2002.) Amended form of agreement for awards made to Chief Executive Officer in 2001 and 2002. Amended form of agreement for awards made to executive officers in 2003. (Incorporated by reference to Exhibit 10.15 of the Company’s 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.) |
*10.17 | | 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 filed March 11, 1993.) |
*10.18 | | Election Form. Form of agreement used for the issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.17 to the Company's 2004 Annual Report on Form 10-K.) |
*10.19 | | 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.) |
*10.21 | | 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.) |
*10.22 | | 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.) |
*10.23 | | Form of salary protection arrangement between the Company and executive officers. |
*10.24 | | Executive Group Long-Term Disability Policy. (Incorporated by reference to the Company's 2004 Annual Report on Form 10-K.) |
*10.25 | | Compensation arrangement with President and Chief Executive Officer, dated December 18, 2005. (Incorporated by reference to Item 1.01 to the Company’s Report on Form 8-K filed December 14, 2005.) |
11 | | Statement of Computation of Earnings per share included in Note I on page 38. |
21 | | Subsidiaries of the Registrant included herein on page 53. |
23 | | Independent Registered Public Accounting Firm’s Consent included herein on page 54. |
24 | | Power of Attorney included herein on page 55. |
31.1 | | Certification of Chairman, President and Chief Executive Officer pursuant to Rule 13a-14(a) included herein on page 56. |
31.2 | | Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) included herein on page 57. |
32 | | Certification of Chairman, President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C. included herein on page 58. |
99 | | Cautionary Statement Regarding Forward-Looking Statements included herein on page 59. |
Except as otherwise noted, all documents incorporated by reference above related to File No. 001-09249.
*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 29, 2006:
| Subsidiary | Jurisdiction
of
Organization | Percentage of Voting
Securities Owned by
the Company |
|
| Graco Australia Pty Ltd. | Australia | 100%*** |
| Graco Canada Inc. | Canada | 100% |
| Graco do Brasil Limitada | Brazil | 100%* |
| Graco Fluid Equipment (Shanghai) Co. Ltd. | China (PRC) | 100% |
| Graco Fluid Equipment (Suzhou) Co. Ltd. | China (PRC) | 100%***** |
| Graco GmbH | Germany | 100% |
| Graco Hong Kong Ltd. | Hong Kong | 100% |
| Graco K.K. | Japan | 100% |
| Graco Korea Inc. | Korea | 100% |
| Graco Ltd. | England | 100% |
| Graco Minnesota Inc. | United States | 100% |
| Graco N.V. | Belgium | 100%* |
| Graco S.A.S. | France | 100% |
| Gusmer Corporation | United States | 100% |
| Gusmer Canada Ltd. | Canada | 100%**** |
| Gusmer Europe, S.L. | Spain | 100%**** |
| Gusmer Sudamerica S.A. | Argentina | 100%**** |
| Liquid Control Corporation1 | United States | 100% |
| Liquid Control Ltd. | England | 100%** |
| Lubriquip, Inc. | 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 Liquid Control Corporation. |
| *** | Shares 100% held by Graco Hong Kong Limited. |
| **** | Shares 100% held by Gusmer Corporation. |
| ***** | Shares 100% owned by Graco Minnesota Inc. |
| 1 | Effective January 1, 2007, the name was changed to Graco Ohio 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. 333-03459, No. 333-75307, No. 333-63128, No. 333-123813 and No. 333-134162 on Form S-8 of our reports dated February 19, 2007, relating to the financial statements and financial statement schedule of Graco Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's change in the method of accounting for share-based compensation in 2006 described in Note A) 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 29, 2006.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 19, 2007
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 James A. Graner, that person's true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution 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 29, 2006, 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, the following persons have signed this Power of Attorney on the date indicated.
| | Date |
| | |
| | |
| | |
| /s/R. G. Bohn | February 16, 2007 |
| W. J. Carroll | |
| | |
| /s/W. J. Carroll | February 16, 2007 |
| W. J. Carroll | |
| | |
| /s/J. W. Eugster | February 16, 2007 |
| J. W. Eugster | |
| | |
| /s/J. K. Gilligan | February 16, 2007 |
| J. K. Gilligan | |
| | |
| /s/L. R. Mitau | February 16, 2007 |
| L. R. Mitau | |
| | |
| /s/M. A. Morfitt | February 16, 2007 |
| M. A. Morfitt | |
| | |
| /s/M. H. Rauenhorst | February 16, 2007 |
| M. H. Rauenhorst | |
| | |
| /s/D. A. Roberts | February 16, 2007 |
| D. A. Roberts | |
| | |
| /s/W. G. Van Dyke | February 16, 2007 |
| W. G. Van Dyke | |
| | |
| /s/R. W. Van Sant | February 16, 2007 |
| R. W. Van Sant | |
Exhibit 31.1
Certification
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 officer 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 officer 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 19, 2007 | /s/David A. Roberts |
| | David A. Roberts |
| | Chairman, President and Chief Executive Officer |
Exhibit 31.2
Certification
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 officer 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 officer 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 19, 2007 | /s/James A. Graner |
| | James A. Graner |
| | Chief Financial Officer 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 19, 2007 | /s/David A. Roberts |
| | David A. Roberts |
| | Chairman, President and Chief Executive Officer |
| | |
| | |
| | |
| Date: February 19, 2007 | /s/James A. Graner |
| | James A. Graner |
| | Chief Financial Officer and Treasurer |
Exhibit 99
Cautionary Statement Regarding Forward-Looking Statements
Graco Inc. (our “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 our Company with the Securities and Exchange Commission, including our 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 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. Such 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. Among the factors which management believes could affect our Company’s operating results are the following:
| | • | With respect to our Company’s business as a whole, our Company’s prospects and operating results may be affected by: |
| | — | changes in world economies, including expansions, downturns or recessions and fluctuations in gross domestic product, capital goods investment activity, interest rates, and foreign currency exchange rates; |
| | — | the ability of our Company to successfully integrate acquisitions, in particular the recent acquisitions of Liquid Control Corporation, Gusmer Corporation and Lubriquip, Inc.; |
| | — | the ability of our Company to successfully divest or discontinue incompatible or unprofitable lines of business; |
| | — | the ability of our Company to successfully maintain quality, customer service and inventory levels in light of the longer lead times created by the establishment of assembly operations in Suzhou, People’s Republic of China and the expanding use of foreign sources for materials and components, especially in Asia; |
| | — | the ability of our Company to successfully recruit and employ employees with required skills, training and education, such as machinists and engineers; |
| | — | international trade factors, including changes in international trade policy, such as export controls, trade sanctions, increased tariff barriers and other restrictions; weaker protection of our Company’s proprietary technology in certain foreign countries; the burden of complying with foreign laws and standards; and potentially burdensome taxes; |
| | — | the ability of our 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; react expeditiously to fluctuations in demand; 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; |
| | — | cost pressure and lack of availability of key materials and materials used in the manufacture of products; |
| | — | worldwide competition from low-cost manufacturers, including those that copy our Company's products; |
| | — | security breaches, breakdown, interruption in or inadequate upgrading or maintenance of our Company's information processing software, hardware or networks; |
| | — | successful implementation of an enterprise resource planning ("ERP") software system throughout our Company; |
| | — | changes in the markets in which our Company participates, including consolidation of competitors and major customers, price competition, and products demanded; |
| | — | changes in accounting standards or in the application by our Company of critical accounting policies; |
| | — | compliance with corporate governance requirements; |
| | — | growth in either the severity or magnitude of the products liability claims against our Company, particularly with respect to asbestos or silica claims; and |
| | — | changes in the return on investments in the Company's retirement plan. |
| | • | The prospects and operating results of our 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 our Company’s Industrial 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 coatings; changes in application technology; the ability of our 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 our 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” versus “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; variations in the equipment spending levels of the major oil companies; and the ability to profitably grow our newly acquired industrial lubrication business (Lubriquip). |
