With the exception of Patrick J. McHale, Brian J. Zumbolo, Caroline M. Chambers, Jeffrey P. Johnson, Mark W. Sheahan and David M. Ahlers, the Board of Directors elected each of the above executive officers on April 21, 2006. Mr. McHale was elected President and Chief Executive Officer effective June 11, 2007; Mr. Zumbolo was elected Vice President and General Manager, Lubrication Equipment Division, effective August 1, 2007; Ms. Chambers was elected Vice President and Controller, effective December 8, 2006; Jeffrey P. Johnson was elected Vice President and General Manager, Asia Pacific, effective February 15, 2008; Mark W. Sheahan was elected Vice President and General Manager, Applied Fluid Technologies Division, effective February 15, 2008; and David M. Ahlers was appointed Vice President, Human Resources, effective September 22, 2008.
Graco common stock is traded on the New York Stock Exchange under the ticker symbol “GGG.” As of February 9, 2009, the share price was $22.26 and there were 59,545,500 shares outstanding and 2,874 common shareholders of record, which includes nominees or broker dealers holding stock on behalf of an estimated 31,500 beneficial owners.
The graph below compares the cumulative total shareholder return on the common stock of the Company for the last five fiscal years with the cumulative total return of the S&P 500 Index and the Dow Jones Industrial Machinery Index over the same period (assuming the value of the investment in Graco common stock and each index was $100 on December 31, 2003, and all dividends were reinvested).
Quarterly Financial Information (Unaudited)
(In thousands, except per share amounts)
2008 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
Net sales | $204,120 | $239,230 | $207,231 | $166,689 | |
Gross profit | 111,853 | 128,763 | 110,160 | 81,401 | |
Net earnings | 35,566 | 42,459 | 32,772 | 10,082 | |
Per common share | | | | | |
Basic net earnings | .58 | .70 | .55 | .17 | |
Diluted net earnings | .57 | .69 | .54 | .17 | |
Dividends declared | .19 | .19 | .19 | .19 | |
Stock price (per share) | | | | | |
High | $36.98 | $41.84 | $40.45 | $35.03 | |
Low | 32.37 | 36.88 | 34.48 | 17.67 | |
Close1 | 36.26 | 38.07 | 35.61 | 23.73 | |
Volume (# of shares) | 33,416 | 30,260 | 39,776 | 52,431 | |
| | | | | |
2007 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
Net sales | $197,495 | $231,384 | $207,270 | $205,190 | |
Gross profit | 104,862 | 122,232 | 110,646 | 109,686 | |
Net earnings | 33,735 | 44,180 | 39,263 | 35,658 | |
Per common share | | | | | |
Basic net earnings | .51 | .67 | .61 | .57 | |
Diluted net earnings | .50 | .66 | .60 | .56 | |
Dividends declared | .17 | .17 | .17 | .19 | |
Stock price (per share) | | | | | |
High | $42.27 | $42.07 | $46.07 | $40.50 | |
Low | 38.44 | 38.27 | 37.84 | 36.25 | |
Close1 | 39.16 | 40.28 | 39.11 | 37.26 | |
Volume (# of shares) | 22,604 | 40,254 | 46,605 | 28,941 | |
1 As of the last trading day of the calendar quarter.
Issuer Purchases of Equity Securities
On September 28, 2007, the Board of Directors authorized the Company to purchase up to 7,000,000 shares of its outstanding common stock. This authorization expires on September 30, 2009.
In addition to shares purchased under the Board authorization, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax withholding on stock option exercises.
Information on issuer purchases of equity securities follows:
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (at end of period) |
| | | | |
Sep 27, 2008 – Oct 24, 2008 | 15,000 | $33.02 | 15,000 | 3,068,234 |
| | | | |
Oct 25, 2008 – Nov 21, 2008 | — | — | — | 3,068,234 |
| | | | |
Nov 22, 2008 – Dec 26, 2008 | — | — | — | 3,068,234 |
| | | | |
Item 6. Selected Financial Data
Graco Inc. and Subsidiaries
(In thousands, except per share amounts) | 2008 | 2007 | 2006 | 2005 | 2004 |
Net sales | $817,270 | $841,339 | $816,468 | $731,702 | $605,032 |
Net earnings | 120,879 | 152,836 | 149,766 | 125,854 | 108,681 |
Per common share | | | | | |
Basic net earnings | $ 2.01 | $ 2.35 | $ 2.21 | $ 1.83 | $ 1.57 |
Diluted net earnings | 1.99 | 2.32 | 2.17 | 1.80 | 1.55 |
Total assets | $579,850 | $536,724 | $511,603 | $445,630 | $371,714 |
Long-term debt (including current portion) | 180,000 | 107,060 | — | — | — |
Cash dividends declared | | | | | |
per common share | .75 | .68 | .60 | .54 | .41 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (MD&A) reviews significant factors affecting the Company’s consolidated results of operations, financial condition and liquidity. This discussion should be read in conjunction with our financial statements and the accompanying notes to the financial statements (“Notes”). The discussion is organized in the following sections:
| § | Significant Accounting Policies and Estimates |
Overview
Our Company’s key strategies include offering new products, expanding distribution, opening new markets and completing strategic acquisitions. Long-term financial growth targets accompany these strategies, including 10 percent revenue growth and 12 percent net earnings growth.
Graco’s business is classified by management into three reportable segments, each responsible for product development, manufacturing, marketing and sales of their products. The segments are headquartered in North America. They have responsibility for sales and marketing in the Americas and joint responsibility with Europe and Asia Pacific regional management for sales and marketing in those geographic areas.
Manufacturing is a key competency of the Company. Strategic manufacturing expertise is provided by our management team in Minneapolis, which is also responsible for factories not fully aligned with a single division. Our primary manufacturing facilities are in the United States and distribution facilities are located in the United States, Belgium, Japan, Korea, China and Australia. In 2007, Lubrication division manufacturing activities were consolidated in Anoka, Minnesota and in 2006, an assembly operation in Suzhou, China began production.
Results of Operations
(In millions, except per share amounts) | 2008 | 2007 | 2006 |
Net Sales | $817.3 | $841.3 | $816.5 |
Operating Earnings | 187.4 | 232.5 | 226.0 |
Net Earnings | 120.9 | 152.8 | 149.8 |
Diluted Net Earnings per Common Share | $ 1.99 | $ 2.32 | $ 2.17 |
2008 Summary:
| § | Sales decline of 3 percent as growth in Europe and Asia Pacific of 8 percent and 3 percent, respectively, did not offset declines in the Americas. Sales in the Industrial segment grew 4 percent worldwide, while sales in the Contactor and Lubrication segments declined by 13 percent and 3 percent, respectively, from the prior year. |
| § | Net sales increased by approximately $12 million from favorable currency translation. Net earnings declined by 21 percent from the prior year. Currency translation increased net earnings by approximately $4 million in 2008. |
| § | Incoming order rates declined substantially in the fourth quarter, affecting all segments and regions. |
| § | A workforce reduction affecting approximately 150 people or 6 percent of the global employee base was communicated in December 2008. Early retirement and severance costs were approximately $5 million. The number of temporary and contract workers was reduced in earlier months. |
| § | Impairment charges of approximately $4 million were recorded, primarily due to reduced expectations with respect to future sales of certain branded products within the Industrial segment. |
| § | Incremental costs associated with the programs to introduce a new entry-level sprayer in the Contractor segment to additional paint and home center outlets were approximately $12 million. The programs are expected to provide future returns in the form of market share growth. |
| § | Three businesses were acquired in 2008: GlasCraft, Airlessco and LubeSci, increasing net sales by $13 million or 2 percent. |
| § | Investment in product development grew to 4.5 percent of sales in 2008 from 3.6 percent of sales in 2007. |
| § | Positive cash flows from operations were $162 million, down 8 percent as compared to the prior year. |
2007 Summary:
| § | Sales growth of 3 percent in 2007, with strong growth in Europe and Asia Pacific of 23 percent and 18 percent, respectively. Sales in the Americas decreased by 6 percent, primarily due to the weak housing and construction industries. |
| § | Sales were higher in the Industrial and Lubrication segments, with growth of 7 percent and 13 percent respectively, offset by a 4 percent decline in Contractor. |
| § | Net sales increased by approximately $17 million from favorable currency translation. |
| § | Net earnings grew 2 percent. Currency translation increased net earnings by approximately $7 million. |
| § | Investment in new products was 3.6 percent of sales in 2007 and 3.7 percent of sales in 2006. |
| § | The full year impact of the Lubriquip acquisition increased net sales by $11 million or 1 percent in 2007. |
| § | Increased cash flows from operations. |
The following table presents net sales by geographic region.
(In millions) | 2008 | 2007 | 2006 | |
Geographic Sales | | | | |
Americas1 | $455.5 | $500.4 | $534.9 | |
Europe2 | 232.3 | 215.5 | 175.7 | |
Asia Pacific | 129.5 | 125.4 | 105.9 | |
Total | $817.3 | $841.3 | $816.5 | |
1North and South America, including the United States. Sales in the United States were $384 million in 2008, $434 million in 2007 and $474 million in 2006. |
2Europe, Africa and Middle East |
Sales in the Americas declined by 9 percent overall and by 22 percent and 7 percent in the Contractor and Lubrication segments, respectively, in 2008 as compared to the prior year. Industrial sales increased by 3 percent in the Americas, primarily due to the Glascraft acquisition. Sales grew in Europe and Asia Pacific in all three segments as a result of continued emphasis on expanding sales and marketing resources and focus on new distribution and acquisitions.
The following table presents components of net sales change:
| 2008 |
| Industrial | Contractor | Lubrication | Consolidated | | Americas | Europe | Asia Pacific | Consolidated |
Volume & price | 0% | (15%) | (4%) | (6%) | | (11%) | 2% | 1% | (6%) |
Acquisitions | 2% | 1% | 1% | 2% | | 2% | 1% | 2% | 2% |
Currency | 2% | 1% | 0% | 1% | | 0% | 5% | 0% | 1% |
Total | 4% | (13%) | (3%) | (3%) | | (9%) | 8% | 3% | (3%) |
| | | | | | | | | |
| 2007 |
| Industrial | Contractor | Lubrication | Consolidated | | Americas | Europe | Asia Pacific | Consolidated |
Volume & price | 4% | (6%) | (2%) | 0% | | (8%) | 13% | 16% | 0% |
Acquisitions | 0% | 0% | 14% | 1% | | 2% | 1% | 1% | 1% |
Currency | 3% | 2% | 1% | 2% | | 0% | 9% | 1% | 2% |
Total | 7% | (4%) | 13% | 3% | | (6%) | 23% | 18% | 3% |
The following table presents an overview of components of operating earnings as a percentage of net sales:
| 2008 | 2007 | 2006 |
Net Sales | 100.0 | 100.0 | 100.0 |
Cost of products sold | 47.1 | 46.8 | 46.8 |
Gross profit | 52.9 | 53.2 | 53.2 |
Product development | 4.5 | 3.6 | 3.7 |
Selling, marketing and distribution | 17.0 | 14.8 | 14.6 |
General and administrative | 8.5 | 7.2 | 7.2 |
Operating earnings | 22.9 | 27.6 | 27.7 |
Interest expense | 0.9 | 0.4 | 0.1 |
Other expense, net | 0.1 | 0.0 | 0.1 |
Earnings before income taxes | 21.9 | 27.2 | 27.5 |
Income taxes | 7.1 | 9.0 | 9.2 |
Net Earnings | 14.8 | 18.2 | 18.3 |
Operating expenses in 2008 were $245 million compared to $215 million in the prior year. The increase includes $8 million related to the rollout of entry-level paint sprayers to additional paint and home center stores, $7 million from acquired operations, $4 million of impairment charges and $3 million related to workforce reductions. During 2008, investment in new product development increased by $6 million as compared to the prior year, to 4.5 percent of sales. Total operating expenses as a percentage of sales was 30 percent as compared to 26 percent in the prior year.
Operating expenses in 2007 were $215 million versus $208 million in 2006. Although spending increased for selling, marketing and distribution (increase of $5 million) and general and administrative (increase of $1 million), total operating expenses as a percentage of sales was consistent with the prior year at 26 percent. Included in cost of goods sold and operating expenses were costs and expenses totaling $2.3 million in 2007 related to the closure and move of the Lubriquip operations in Cleveland, Ohio and Madison, Wisconsin to the Anoka, Minnesota factory.
Consolidated operating earnings decreased 19 percent to $187 million, or 23 percent of sales in fiscal 2008, with decrease in sales of 3 percent as compared to the prior year and increased expenses. Gross profit margin as a percentage of sales was slightly down from the prior year, as the unfavorable impact of material costs and volume were greater than the impact of favorable currency translation rates and manufacturing productivity improvements.
Consolidated operating earnings increased 3 percent to $232 million, or 28 percent of sales in fiscal 2007, compared to $226 million, or 28 percent of sales in fiscal 2006, reflecting growth in sales of 3 percent as compared to the prior year and consistent gross profit margins and expenses. Gross profit margin as a percentage was consistent with the prior year, as the favorable impact of pricing and foreign currency translation offset higher spending and material costs.
Interest expense increased by $4 million in 2008 and $2.5 million in 2007 as the Company increased its utilization of credit lines for acquisitions and to purchase Company stock.
The Company’s effective tax rate was 32 percent in 2008, lower than the effective tax rate of 33 percent in both 2007 and 2006. The rate is lower than the U.S. federal statutory rate of 35 percent due primarily to U.S. business credits and the Domestic Production Deduction (DPD).
Segment Results
The following table presents net sales and operating earnings by business segment:
(In millions) | 2008 | 2007 | 2006 |
Segment Sales | | | |
Industrial | $462.9 | $444.7 | $416.5 |
Contractor | 266.8 | 306.7 | 320.5 |
Lubrication | 87.6 | 89.9 | 79.5 |
Consolidated | $817.3 | $841.3 | $816.5 |
| | | |
Segment Operating Earnings | | | |
Industrial | $138.2 | $152.3 | $128.5 |
Contractor | 47.2 | 81.5 | 89.1 |
Lubrication | 12.5 | 9.3 | 18.7 |
Unallocated corporate | (10.5) | (10.6) | (10.3) |
Consolidated | $187.4 | $232.5 | $226.0 |
Management looks at economic and financial indicators relevant to each segment and geography to gauge the business environment, as noted in the discussion below for each segment.
Industrial
The following table presents net sales, components of net sales change and operating earnings for the Industrial segment.
(In millions) | 2008 | 2007 | 2006 |
Sales | | | |
Americas | $219.6 | $213.1 | $221.4 |
Europe | 148.1 | 138.0 | 115.9 |
Asia Pacific | 95.2 | 93.6 | 79.2 |
Total | $462.9 | $444.7 | $416.5 |
| | | |
Components of Net Sales Change | | | |
Volume & Price | 0% | 4% | 12% |
Acquisitions | 2% | 0% | 1% |
Currency | 2% | 3% | 1% |
Total | 4% | 7% | 14% |
| | | |
Operating Earnings as a Percentage of Sales | 30% | 34% | 31% |
In 2008, sales in the Industrial segment increased by 4 percent, with sales growth in all regions. Sales in the Americas increased 3 percent. Sales in Europe grew by 7 percent, including 5 percentage points related to favorable currency translation rates. The sales growth in Asia Pacific was 2 percent and the effect of currency translation rates was not significant.
In 2008, operating earnings in the Industrial segment declined 9 percent and were affected by impairment charges of $4 million, selling and product development initiatives, costs and expenses resulting from acquisition and integration related activities, workforce reduction costs and unabsorbed manufacturing costs.
In 2007, sales in the Industrial segment increased by 7 percent, with sales growth in Europe and Asia offsetting sales declines in the Americas. Sales in Europe grew by 19 percent, including 9 percentage points related to favorable currency translation rates. The sales growth in Asia Pacific was 18 percent and the effect of currency translation rates was not significant.
In 2007, operating earnings in the Industrial segment were up 19 percent due to the increase in sales, improvements in gross profit margins and lower spending as percentage of sales. The lower spending is primarily the result of efficiencies obtained following the move of Gusmer operations into the Minneapolis, Sioux Falls and Ohio facilities and closure of the New Jersey facility in 2006.
In this segment, sales in each geographic region are significant and management looks at economic and financial indicators in each region, including gross domestic product, industrial production, capital investment rates, automobile production, building construction and the level of the U.S. dollar versus the euro, the Canadian dollar and various Asian currencies.
Contractor
The following table presents net sales, components of net sales change and operating earnings for the Contractor segment.
(In millions) | 2008 | 2007 | 2006 |
Sales | | | |
Americas | $165.0 | $210.9 | $244.0 |
Europe | 76.8 | 71.0 | 55.3 |
Asia Pacific | 25.0 | 24.8 | 21.2 |
Total | $266.8 | $306.7 | $320.5 |
| | | |
Components of Net Sales Change | | | |
Volume & Price | (15%) | (6%) | 4% |
Acquisitions | 1% | 0% | 0% |
Currency | 1% | 2% | 1% |
Total | (13%) | (4%) | 5% |
| | | |
Operating Earnings as a Percentage of Sales | 18% | 27% | 28% |
In 2008, sales in the Contractor segment decreased by 13 percent. While sales in the Americas decreased by 22 percent, sales in Europe and Asia Pacific grew by 8 percent and 1 percent, respectively. Sales in the Americas reflected sales declines in both the home center and professional paint store channels. Sales growth in both Europe and Asia Pacific is attributed to continued focus on converting professional contractors from manual to spray applications and new distribution.
In 2008, operating earnings in the Contractor segment decreased by 42 percent. Approximately $12 million of incremental cost and expense relates to the production and launch of new paint sprayer lines into existing and new paint store and home center outlets. Operating earnings were also affected by increased product development spending, costs of the workforce reduction, costs and lower profit levels of the acquired business and unabsorbed manufacturing costs.
In 2007, sales in the Contractor segment decreased by 4%. Although sales in the Americas decreased by 14 percent, sales in Europe and Asia Pacific grew by 28 percent and 17 percent, respectively. Sales in the Americas were lower due to declines in both the home center and professional paint store channels. Sales growth in both Europe and Asia Pacific is attributed to continued focus on converting professional contractors from manual to spray applications and new distribution.
In 2007, operating earnings in the Contractor segment decreased by 9 percent. Operating earnings include approximately $1 million of incremental expense related to the launch and production of a new paint sprayer line for the home center channel. Gross profit margins and spending levels were otherwise consistent with the prior year.
In this segment, sales in the Americas and Europe are significant and management reviews economic and financial indicators in each region, including levels of residential, commercial and institutional building, remodeling rates and interest rates. Management also reviews gross domestic product for the regions and the level of the U.S. dollar versus the euro.
Lubrication
The following table presents net sales, components of net sales change and operating earnings for the Lubrication segment.
(In millions) | 2008 | 2007 | 2006 |
Sales | | | |
Americas | $70.8 | $76.4 | $69.5 |
Europe | 7.5 | 6.6 | 4.5 |
Asia Pacific | 9.3 | 6.9 | 5.5 |
Total | $87.6 | $89.9 | $79.5 |
| | | |
Components of Net Sales Change | | | |
Volume & Price | (4%) | (2%) | 8% |
Acquisitions | 1% | 14% | 25% |
Currency | 0% | 1% | 1% |
Total | (3%) | 13% | 34% |
| | | |
Operating Earnings as a Percentage of Sales | 14% | 10% | 24% |
In 2008, sales in the Lubrication segment decreased by 3 percent. Although sales in the Americas decreased by 7 percent, sales in Europe and Asia Pacific grew by 13 percent and 34 percent, respectively. Sales in the Americas reflected sales declines in the vehicle services product line. Sales growth in both Europe and Asia Pacific is attributed to additional sales and marketing resources, new distribution and growth in industrial lubrication products in Asia Pacific.
In 2008, operating earnings increased by 35 percent. Improvement in operating profitability is related to the integration and consolidation of Lubrication operations in Anoka, Minnesota in 2007. The Lubrication segment incurred costs in 2008 related to the workforce reduction, unabsorbed manufacturing costs and higher investment in new product development.
In 2007, sales in the Lubrication segment increased by 13 percent. Sales in the Americas increased by $7 million, with full year effect of the Lubriquip acquisition of $9 million for the region. Sales in Europe increased by 46 percent, including 7 percentage points related to favorable currency translation rates. Sales in Asia Pacific increased by 26 percent; the effect of currency translation was not significant.
In 2007, operating earnings decreased by $9 million, including $2.3 million of expenses related to the integration of the Lubriquip manufacturing operations, closure of the Lubriquip facilities in Madison, Wisconsin and Cleveland, Ohio and the transfer of Lubrication manufacturing from the facility in Minneapolis to the new facility in Anoka, Minnesota. The segment also had higher spending in 2007 than the prior year in new product development, marketing and warranty expense, partially due to the full year impact of the Lubriquip acquisition.
The Americas represent the vast majority of sales for the Lubrication Equipment segment and indicators in that region are the most important. The indicators used by management include levels of capital investment, industrial production and gross domestic product.
Unallocated corporate
(In millions) | 2008 | 2007 | 2006 |
Unallocated corporate (expenses) | $(10.5) | $(10.6) | $(10.3) |
Unallocated corporate includes items such as stock compensation, bad debt expense, contributions to the Company’s charitable foundation and certain other charges or credits driven by corporate decisions. In 2008, unallocated corporate included $9 million of stock compensation and $2 million of contributions to the Company’s charitable foundation.
In 2007, unallocated corporate included $9 million of stock compensation and $1 million of contributions to the Company’s charitable foundation.
Financial Condition
Working Capital. The following table highlights several key measures of asset performance.
(Dollars in millions) | 2008 | 2007 |
Working capital | $139.4 | $123.0 |
Current ratio | 2.2 | 2.0 |
Days of sales in receivables outstanding | 57 | 61 |
Inventory turnover (LIFO) | 4.4 | 5.0 |
The Company’s financial condition and cash flows from operations remain strong. Cash flows from operations totaled $162 million in 2008. The primary uses of cash included capital expenditures of $29 million, acquisitions of $55 million, dividends of $45 million and share repurchases of $115 million. Accounts receivable decreased by $13 million (9 percent) due mostly to lower sales in the fourth quarter compared to the same period in the prior year. Inventories increased $17 million, including $8 million from acquired operations and increases to support new distribution initiatives internationally.
In 2007, the Company used cash and long-term borrowings for share repurchases of $230 million and dividend payments of $43 million. Accounts receivable increased by $6 million to $140 million. The 5 percent increase was primarily due to higher sales (increase of 3 percent) compared to the prior year. Inventories decreased $2 million in 2007 to $75 million.
Capital Structure. At December 26, 2008, the Company’s capital structure included current debt of $18 million, long-term debt of $180 million and shareholders’ equity of $168 million.
Shareholders’ equity decreased by $77 million in 2008. The key components of changes in shareholders’ equity include current year earnings of $121 million and common stock issued of $14 million, reduced by $45 million of dividends declared, $112 million of shares repurchased and $68 million of other comprehensive loss (mostly from changes in the funded status of pension obligations).
Liquidity and Capital Resources. At December 26, 2008, the Company had various lines of credit totaling $283 million, including a $250 million, 5 year credit facility entered into in 2007. At year-end, long-term debt outstanding under this facility was $180 million. The unused portion of committed credit lines was $87 million at year-end. In addition, the Company has an unused, uncommitted line of credit for $20 million. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2009, including its capital expenditure plan of approximately $20 million, planned dividends (estimated at $45 million) and acquisitions.
In December 2008, the Company’s Board of Directors increased the Company’s regular common dividend from an annual rate of $0.74 to $0.76 per share, a 3 percent increase.
Cash Flow
A summary of cash flow follows:
(In millions) | 2008 | 2007 | 2006 |
Operating Activities | $162 | $177 | $156 |
Investing Activities | (85) | (38) | (65) |
Financing Activities | (71) | (138) | (103) |
Effect of exchange rates on cash | 1 | (2) | (1) |
Net cash provided (used) | $ 7 | $ (1) | $ (13) |
Cash and cash equivalents at year-end | $ 12 | $ 5 | $ 6 |
Cash Flows Provided by Operating Activities. During 2008, $162 million was generated from operating cash flows, compared to $177 million in 2007. Although net earnings decreased by $32 million in 2008 as compared to the prior year, non-cash items such as depreciation and amortization, deferred income taxes and share-based compensation totaled $42 million, an increase of $10 million as compared to the prior year.
During 2007, $177 million was generated from operating cash flows, compared to $156 million in 2006. The higher cash flows from operating activities in 2007 were primarily due to changes in inventories (decreased $2 million in 2007 and increased $16 million in 2006) and the $3 million increase in net earnings.
Cash Flows Used in Investing Activities. During 2008, cash was used to fund $55 million for business acquisitions and $29 million of additions to property, plant and equipment. During 2007, cash was used to fund $37 million of additions to property, plant and equipment including expansion of manufacturing facilities in North Canton, Ohio and Sioux Falls, South Dakota.
Cash Flows Used in Financing Activities. During 2008, $71 million was used in financing activities compared to $138 million in 2007. Net borrowings on the long-term line of credit totaled $73 million. Cash was used for share repurchases totaling $115 million, a decrease of $116 million from the prior year. Cash dividends paid totaled $45 million, an increase of $2 million from the prior year.
In September 2007, the Board of Directors authorized the Company to purchase up to 7 million shares of its outstanding stock, primarily through open-market transactions. This authorization will expire on September 30, 2009. Although the Company decided to suspend share repurchases early in the fourth quarter of 2008, 3 million shares remain available under the current board authorization and the Company may decide to resume share repurchases in the future.
Off-Balance Sheet Arrangements and Contractual Obligations. As of December 26, 2008, the Company is obligated to make cash payments in connection with its long-term debt, capital leases, operating leases and purchase obligations in the amounts listed below. The Company has no significant off-balance sheet debt or other unrecorded obligations other than the items noted in the following table. In addition to the commitments noted in the following table, the Company could be obligated to perform under standby letters of credit totaling $2 million at December 26, 2008. The Company has also guaranteed the debt of its subsidiaries for up to $7 million. All debt of subsidiaries is reflected in the consolidated balance sheets.
The total liability for uncertain tax positions under FIN 48 at December 26, 2008 was approximately $2 million. The Company is not able to reasonably estimate the timing of future payments relating to non-current unrecognized tax benefits.
(In millions) | Payments due by period |
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Long-term debt | $ 180 | $ — | $ — | $ 180 | $ — |
Capital lease obligations | — | — | — | — | — |
Operating leases | 7 | 3 | 2 | 1 | 1 |
Purchase obligations1 | 35 | 35 | — | — | — |
Interest on long-term debt | 14 | 4 | 8 | 2 | — |
Fixed rate payments on interest swap | 8 | 4 | 4 | — | — |
Unfunded pension and postretirement medical benefits2 | 29 | 3 | 6 | 5 | 15 |
Total | $ 273 | $ 49 | $ 20 | $ 188 | $ 16 |
1 The Company is committed to pay suppliers under the terms of open purchase orders issued in the normal course of business. The Company also has commitments with certain suppliers to purchase minimum quantities, and under the terms of certain agreements, the Company is committed for certain portions of the supplier’s inventory. The Company does not purchase, or commit to purchase, quantities in excess of normal usage or amounts that cannot be used within one year.
2 The amounts and timing of future Company contributions to the funded qualified defined benefit pension plan are unknown because they are dependent on pension fund asset performance. The Company expects that no contribution to the funded pension plan will be required in 2009.
Critical Accounting Estimates
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company’s most significant accounting policies are disclosed in Note A to the consolidated financial statements. The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts will differ from those estimates. The Company considers the following policies to involve the most judgment in the preparation of the Company’s consolidated financial statements.
Sales Returns. An allowance is established for possible return of products from distributors. The written agreements with distributors typically limit the amount that may be returned. In its arrangements with certain home center customers, the Company may agree to accept returns from the retailer’s end-user customers. The amount of the allowance for sales returns is an estimate, which is based on historical ratios of returns to sales, the historical average length of time between the sale and the return and other factors.
From time to time, the Company may choose to terminate a distributor relationship and may take back inventory or may promote the sale of new products by agreeing to accept returns of superseded products. These are considered period events and are not included in the allowance for returns. Although management considers these balances adequate, changes in customers’ behavior versus historical experience or changes in the Company’s return policies are among the factors that would result in materially different amounts for this item.
Excess and Discontinued Inventory. The Company’s inventories are valued at the lower of cost or market. Reserves for excess and discontinued products are estimated. The amount of the reserve is determined based on projected sales information, plans for discontinued products and other factors. Though management considers these balances adequate, changes in sales volumes due to unanticipated economic or competitive conditions are among the factors that would result in materially different amounts for this item.
Product Warranty. A liability is established for estimated warranty claims to be paid in the future that relate to current and prior period sales. The Company estimates these costs based on historical claim experience, changes in warranty programs and other factors, including evaluating specific product warranty issues. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses relating to warranty issues. Though management considers these balances adequate, changes in the Company’s warranty policy or a significant change in product defects versus historical averages are among the factors that would result in materially different amounts for this item.
Goodwill and Other Intangible Assets. The Company performs impairment testing for goodwill and other intangible assets annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. For goodwill, the Company performs impairment reviews for the Company’s reporting units, which have been determined to be the Company’s divisions using a fair-value method based on management’s judgments and assumptions. The Company estimates the fair value of the reporting units by an allocation of market capitalization value, cross-checked by a present value of future cash flows calculation. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company also performs a separate impairment test for each other intangible asset with indefinite life, based on estimated future use and discounting estimated future cash flows. A considerable amount of management judgment and assumptions are required in performing the impairment tests. Though management considers its judgments and assumptions to be reasonable, changes in product offerings or marketing strategies could change the estimated fair values and result in impairment charges.
Self-Insured Retentions. The Company purchases insurance for products liability, workers compensation and employee medical benefits with high deductibles. Third party insurance is carried for what is believed to be the major portion of potential exposures that would exceed the Company’s self-insured retentions. The Company has established liabilities for potential uninsured claims, including estimated costs and legal fees. The Company employs actuaries to assist in evaluating its potential ultimate exposure for uninsured claims and then considers factors such as known outstanding claims, historical experience, sales trends and other relevant factors in setting the liabilities. Though management considers these balances adequate, a substantial change in the number and/or severity of claims would result in materially different amounts for this item.
Income Taxes. In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet using statutory rates in effect for the year in which the differences are expected to reverse. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be recoverable from future taxable income. A valuation allowance is established to the extent that management believes that recovery is not likely. Liabilities for uncertain tax positions are also established for potential and ongoing audits of federal, state and international issues. The Company routinely monitors the potential impact of such situations and believes that liabilities are properly stated. Valuations related to amounts owed and tax rates could be impacted by changes to tax codes, changes in statutory tax rates, the Company’s future taxable income levels and the results of tax audits.
Retirement Obligations. The measurements of the Company’s pension and postretirement medical obligations are dependent on a number of assumptions including estimates of the present value of projected future payments, taking into consideration future events such as salary increases and demographic experience. These assumptions may have an impact on the expense and timing of future contributions.
The assumptions used in developing the required estimates for pension obligations include discount rates, inflation, salary increases, retirement rates, expected return on plan assets and mortality rates. The assumptions used in developing the required estimates for postretirement medical obligations include discount rates, rate of future increase in medical costs and participation rates.
For U.S. plans, the Company establishes its discount rate assumption by reference to the “Citigroup Pension Liability Index,” a published index commonly used as a benchmark. For plans outside of the U.S., the Company establishes a rate by country by reference to highly rated corporate bonds. These reference points have been determined to adequately match expected plan cash flows. The Company bases its inflation assumption on an evaluation of external market indicators. The salary assumptions are based on actual historical experience, the near-term outlook and assumed inflation. Retirement rates are based on experience. The investment return assumption is based on the expected long-term performance of plan assets. In setting this number, the Company considers the input of actuaries and investment advisors, its long-term historical returns, the allocation of plan assets, and projected returns on plan assets. The Company reduced its investment return assumption by one-half percentage point, to 8.5 percent for 2009. Mortality rates are based on a common group mortality table for males and females.
Net pension credit in 2008 was $0.7 million and was allocated to cost of products sold and operating expenses based on salaries and wages. At December 26, 2008, a one-half percentage point decrease in the indicated assumptions would have the following effects (in millions):
Assumption | Funded Status | | Expense |
Discount rate | $ (14.9) | | $ 0.5 |
Expected return on assets | $ — | | $ 1.1 |
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This statement establishes a consistent framework for measuring fair value and expands disclosures on fair market value measurements. SFAS No. 157 was effective for the Company starting in fiscal 2008 for financial assets and liabilities. The impact of the initial adoption of SFAS No. 157 in 2008 had no impact on the consolidated financial statements. With respect to non-financial assets and liabilities, the statement is effective for the Company starting in fiscal 2009. The Company expects the adoption of this statement as it pertains to non-financial assets and liabilities will not have a significant impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This statement expands disclosures but does not change accounting for derivative instruments and hedging activities. The statement is effective for the Company starting in fiscal 2009.
SFAS No. 141 (revised 2007), “Business Combinations,” is effective for acquisitions completed by the Company after fiscal 2008, and had no impact on the 2008 consolidated financial statements. This statement retains the fundamental requirements in SFAS No. 141 that the acquisition method (purchase method) of accounting be used for all business combinations. It provides new guidance for valuation of acquisitions and accounting for such items as transaction costs, contingent consideration, contingent liabilities and in-process R&D.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company sells and purchases products and services in currencies other than the U.S. dollar and pays variable interest rates on borrowings under its primary credit facility. Consequently, the Company is subject to profitability risk arising from exchange and interest rate movements. The Company may use a variety of financial and derivative instruments to manage foreign currency and interest rate risks. The Company does not enter into any of these instruments for trading purposes to generate revenue. Rather, the Company’s objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange and interest rates.
The Company may use forward exchange contracts, options and other hedging activities to hedge the U.S. dollar value resulting from anticipated currency transactions and net monetary asset and liability positions. At December 26, 2008, the currencies to which the Company had the most significant balance sheet exchange rate exposure were the euro, Canadian dollar, British pound and various Asian currencies. It is not possible to determine the true impact of currency rate changes; however, the direct translation effect on net sales and net earnings can be estimated. When compared to 2007 results, the weaker U.S. dollar versus other currencies helped to increase sales and net earnings. For the year ended December 26, 2008, the impact of currency translation resulted in a calculated increase in net sales and net earnings of approximately $12 million and $4 million, respectively. For the year ended December 28, 2007, the calculated impact of currency translation resulted in an increase in net sales and net earnings of approximately $17 million and $7 million, respectively.
In 2007 the Company entered into interest rate swap contracts that effectively fix the rates paid on a total of $80 million of variable rate borrowings under the Company’s primary credit facility. The contracts fix the rates at approximately 4.7 percent through 2010.
2009 Outlook
Management believes that economic conditions will present a challenging operating environment in the coming year. We will continue to manage capital expenditures, headcount and discretionary expenses closely. As a result of increased investment in new product development, significant new products/platforms are expected to be launched in 2009. Sales and marketing resources in Europe and Asia Pacific increased in 2008. We will continue to expand distribution coverage around the world in the coming year. The Company will continue to look for opportunities to acquire businesses where there is a strategic product or customer fit. An $18 million increase in pension cost and less favorable currency translation are expected in 2009. The Company’s backlog is typically small compared to annual sales and is not a good indicator of future business levels. In addition to economic growth, the sales outlook is dependent upon many factors, including the successful launch of new products, expanding distribution coverage, realization of price increases and stable foreign currency exchange rates.
Forward-Looking Statements
A forward-looking statement is any statement made in this report and other reports that the Company files periodically with the Securities and Exchange Commission, as well as in press or earnings releases, analyst briefings, conference calls and the Company’s Annual Report to shareholders, which reflects the Company’s current thinking on market trends and the Company’s future financial performance at the time they are made. All forecasts and projections are forward-looking statements. The Company undertakes no obligation to update these statements in light of new information or future events.
The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 by making cautionary statements concerning any forward-looking statements made by or on behalf of the Company. The Company cannot give any assurance that the results forecasted in any forward-looking statement will actually be achieved. Future results could differ materially from those expressed, due to the impact of changes in various factors. These risk factors include, but are not limited to: economic conditions in the United States and other major world economies, currency fluctuations, political instability, changes in laws and regulations, and changes in product demand. Please refer to Item 1A of, and Exhibit 99 to, this Annual Report on Form 10-K for fiscal year 2008 for a more comprehensive discussion of these and other risk factors.
Investors should realize that factors other than those identified above and in Item 1A and Exhibit 99 might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.
Item 8. Financial Statements and Supplementary Data
| • | Selected Quarterly Financial Data (See Part II, Item 5, Market for the Company's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities) 12 |
| • | Management’s Report on Internal Control Over Financial Reporting | 26 |
| • | Reports of Independent Registered Public Accounting Firm | 27 |
| • | Consolidated Statements of Earnings for fiscal years 2008, 2007 and 2006 | 29 |
| • | Consolidated Statements of Comprehensive Income for fiscal years 2008, 2007 and 2006 | 29 |
| • | Consolidated Balance Sheets for fiscal years 2008 and 2007 | 30 |
| • | Consolidated Statements of Cash Flows for fiscal years 2008, 2007 and 2006 | 31 |
| • | Consolidated Statements of Shareholders’ Equity for fiscal years 2008, 2007 and 2006 | 32 |
| • | Notes to Consolidated Financial Statements | 33 |
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control system was designed to provide reasonable assurance to management and the board of directors regarding the reliability of financial reporting and preparation of financial statements in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 26, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment and those criteria, management believes the Company’s internal control over financial reporting is effective as of December 26, 2008.
The Company’s independent auditors have issued an attestation report on the Company’s internal control over financial reporting. That report appears in this Form 10-K.
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Internal Control Over Financial Reporting
To the Shareholders and Board of Directors of
Graco Inc.
Minneapolis, Minnesota
We have audited the internal control over financial reporting of Graco Inc. and Subsidiaries (the “Company”) as of December 26, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 26, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement scheduleas of and for the year ended December 26, 2008, of the Company and our report dated February 16, 2009 expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 16, 2009
Consolidated Financial Statements
To the Shareholders and Board of Directors of
Graco Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Graco Inc. and Subsidiaries (the “Company”) as of December 26, 2008 and December 28, 2007, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 26, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Graco Inc. and Subsidiaries as of December 26, 2008 and December 28, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 26, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 16, 2009
CONSOLIDATED STATEMENTS OF EARNINGS Graco Inc. and Subsidiaries
| Years Ended |
(In thousands, except per share amounts) | December 26, 2008 | December 28, 2007 | December 29, 2006 |
Net Sales | $817,270 | $841,339 | $816,468 |
Cost of products sold | 385,093 | 393,913 | 382,511 |
Gross Profit | 432,177 | 447,426 | 433,957 |
Product development | 36,558 | 30,277 | 29,970 |
Selling, marketing and distribution | 138,665 | 124,508 | 119,122 |
General and administrative | 69,589 | 60,161 | 58,866 |
Operating Earnings | 187,365 | 232,480 | 225,999 |
Interest expense | 7,633 | 3,433 | 946 |
Other expense, net | 1,153 | 211 | 687 |
Earnings before Income Taxes | 178,579 | 228,836 | 224,366 |
Income taxes | 57,700 | 76,000 | 74,600 |
Net Earnings | $120,879 | $152,836 | $149,766 |
Basic Net Earnings per Common Share | $ 2.01 | $ 2.35 | $ 2.21 |
Diluted Net Earnings per Common Share | $ 1.99 | $ 2.32 | $ 2.17 |
Dividends Declared per Common Share | $ .75 | $ .68 | $ .60 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | Graco Inc. and Subsidiaries |
| Years Ended |
(In thousands) | December 26, 2008 | December 28, 2007 | December 29, 2006 |
Net Earnings | $120,879 | $152,836 | $149,766 |
Other comprehensive income (loss) | | | |
Cumulative translation adjustment | (1,105) | 108 | 2,693 |
Pension and postretirement medical liability adjustment | (102,741) | (875) | 115 |
Gain (loss) on interest rate hedge contracts | (3,236) | (1,700) | — |
Income taxes | 39,290 | 895 | (3) |
Other comprehensive income (loss) | (67,792) | (1,572) | 2,805 |
Comprehensive Income | $ 53,087 | $151,264 | $152,571 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS Graco Inc. and Subsidiaries
(In thousands, except share and per share amounts) | December 26, 2008 | December 28, 2007 |
ASSETS | | |
Current Assets | | |
Cash and cash equivalents | $ 12,119 | $ 4,922 |
Accounts receivable, less allowances of $6,600 and $6,500 | 127,505 | 140,489 |
Inventories | 91,604 | 74,737 |
Deferred income taxes | 23,007 | 21,650 |
Other current assets | 6,360 | 7,034 |
Total current assets | 260,595 | 248,832 |
Property, Plant and Equipment, net | 149,754 | 140,594 |
Prepaid Pension | — | 31,823 |
Goodwill | 91,740 | 67,204 |
Other Intangible Assets, net | 52,231 | 41,889 |
Deferred Income Taxes | 18,919 | — |
Other Assets | 6,611 | 6,382 |
Total Assets | $579,850 | $536,724 |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
Current Liabilities | | |
Notes payable to banks | $ 18,311 | $ 18,991 |
Trade accounts payable | 18,834 | 27,379 |
Salaries, wages and commissions | 17,179 | 20,470 |
Dividends payable | 11,312 | 11,476 |
Other current liabilities | 55,524 | 47,561 |
Total current liabilities | 121,160 | 125,877 |
Long-Term Debt | 180,000 | 107,060 |
Retirement Benefits and Deferred Compensation | 108,656 | 40,639 |
Uncertain Tax Positions | 2,400 | 5,400 |
Deferred Income Taxes | — | 13,074 |
Commitments and Contingencies (Note K) | | |
Shareholders’ Equity | | |
Common stock, $1 par value; 97,000,000 shares authorized;
59,516,201 and 61,963,962 shares outstanding in 2008 and 2007 | 59,516 | 61,964 |
Additional paid-in capital | 174,161 | 156,420 |
Retained earnings | 8,445 | 32,986 |
Accumulated other comprehensive income (loss) | (74,488) | (6,696) |
Total shareholders’ equity | 167,634 | 244,674 |
Total Liabilities and Shareholders’ Equity | $579,850 | $536,724 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Graco Inc. and Subsidiaries
| Years Ended |
(In thousands) | December 26, 2008 | December 28, 2007 | December 29, 2006 |
Cash Flows from Operating Activities | | | |
Net earnings | $120,879 | $152,836 | $149,766 |
Adjustments to reconcile net earnings to
net cash provided by operating activities | | | |
Depreciation, amortization and impairment | 35,495 | 28,665 | 26,046 |
Deferred income taxes | (160) | (1,590) | (6,597) |
Share-based compensation | 9,051 | 8,583 | 8,392 |
Excess tax benefit related to share-based
payment arrangements | (2,873) | (4,508) | (2,857) |
Change in | | | |
Accounts receivable | 14,965 | (1,844) | (3,584) |
Inventories | (9,937) | 2,045 | (15,587) |
Trade accounts payable | (6,806) | (2,314) | (74) |
Salaries, wages and commissions | (3,169) | (6,527) | 1,917 |
Retirement benefits and deferred compensation | (2,672) | (2,290) | (12) |
Other accrued liabilities | 5,658 | 4,666 | (2,302) |
Other | 2,047 | (625) | 521 |
Net cash provided by operating activities | 162,478 | 177,097 | 155,629 |
Cash Flows from Investing Activities | | | |
Property, plant and equipment additions | (29,102) | (36,869) | (33,652) |
Proceeds from sale of property, plant and equipment | 1,768 | 296 | 128 |
Investment in life insurance | (1,499) | (1,499) | — |
Capitalized software and other intangible asset additions | (1,327) | (85) | (202) |
Acquisitions of businesses, net of cash acquired | (55,186) | — | (30,676) |
Net cash used in investing activities | (85,346) | (38,157) | (64,402) |
Cash Flows from Financing Activities | | | |
Net borrowings (payments) on short-term lines of credit | (1,329) | (312) | 9,593 |
Borrowings on long-term line of credit | 242,849 | 158,351 | — |
Payments on long-term line of credit | (169,909) | (51,295) | — |
Excess tax benefit related to share-based
payment arrangements | 2,873 | 4,508 | 2,857 |
Common stock issued | 13,701 | 24,055 | 12,008 |
Common stock retired | (114,836) | (230,412) | (87,570) |
Cash dividends paid | (44,702) | (43,188) | (39,429) |
Net cash used in financing activities | (71,353) | (138,293) | (102,541) |
Effect of exchange rate changes on cash | 1,418 | (1,596) | (1,479) |
Net increase (decrease) in cash and cash equivalents | 7,197 | (949) | (12,793) |
Cash and cash equivalents | | | |
Beginning of year | 4,922 | 5,871 | 18,664 |
End of year | $ 12,119 | $ 4,922 | $ 5,871 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Graco Inc. and Subsidiaries
| Years Ended |
(In thousands) | December 26, 2008 | December 28, 2007 | December 29, 2006 |
Common Stock | | | |
Balance, beginning of year | $ 61,964 | $ 66,805 | $ 68,387 |
Shares issued | 645 | 1,077 | 539 |
Shares repurchased | (3,093) | (5,918) | (2,121) |
Balance, end of year | 59,516 | 61,964 | 66,805 |
Additional Paid-In Capital | | | |
Balance, beginning of year | 156,420 | 130,621 | 110,842 |
Shares issued | 13,056 | 24,093 | 11,469 |
Stock compensation cost | 9,051 | 8,583 | 8,392 |
Tax benefit related to stock options exercised | 3,473 | 5,808 | 3,357 |
Restricted stock cancelled (issued) | 254 | (1,115) | — |
Shares repurchased | (8,093) | (11,570) | (3,439) |
Balance, end of year | 174,161 | 156,420 | 130,621 |
Retained Earnings | | | |
Balance, beginning of year | 32,986 | 138,702 | 112,506 |
Net income | 120,879 | 152,836 | 149,766 |
Dividends declared | (44,539) | (43,609) | (40,554) |
Shares repurchased | (100,881) | (214,943) | (83,016) |
Balance, end of year | 8,445 | 32,986 | 138,702 |
Accumulated Other Comprehensive Income (Loss) | | |
Balance, beginning of year | (6,696) | (5,124) | (4,051) |
Other comprehensive income (loss) | (67,792) | (1,572) | 2,805 |
Adjustments to initially apply new accounting standard, net of tax | — | — | (3,878) |
Balance, end of year | (74,488) | (6,696) | (5,124) |
Total Shareholders’ Equity | $167,634 | $244,674 | $331,004 |
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graco Inc. and Subsidiaries
Years Ended December 26, 2008, December 28, 2007 and December 29, 2006
A. Summary of Significant Accounting Policies
Fiscal Year. The fiscal year of Graco Inc. and Subsidiaries (the Company) is 52 or 53 weeks, ending on the last Friday in December. The years ended December 26, 2008, December 28, 2007 and December 29, 2006, 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 26, 2008, all subsidiaries are 100 percent owned.
Foreign Currency Translation. The functional currency of one subsidiary in Great Britain is local currency. Accordingly, adjustments resulting from the translation of that subsidiary’s 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, including one subsidiary in Spain whose functional currency changed to the U.S. dollar from the euro effective at the beginning of 2007. Accordingly, gains and losses from the translation of foreign currency balances and transactions of those subsidiaries are included in other expense, net.
Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents. All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents.
Inventory Valuation. Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO) cost method.
Other Current Assets. Amounts included in other current assets were:
(In thousands) | 2008 | 2007 |
Prepaid income taxes | $4,534 | $4,936 |
Prepaid expenses and other | 1,826 | 2,098 |
Total | $6,360 | $7,034 |
Property, Plant and Equipment. For financial reporting purposes, plant and equipment are depreciated over their estimated useful lives, primarily by using the straight-line method as follows:
| Buildings and improvements | 10 to 30 years |
| Leasehold improvements | lesser of 5 to 10 years or life of lease |
| Manufacturing equipment | lesser of 5 to 10 years or life of equipment |
| Office, warehouse and automotive equipment | 3 to 10 years |
Intangible Assets. Goodwill has been assigned to reporting units, which are the Company’s divisions. The amounts of goodwill for each reportable segment were:
(In thousands) | 2008 | 2007 |
Industrial | $59,511 | $42,221 |
Contractor | 12,732 | 7,939 |
Lubrication | 19,497 | 17,044 |
Total | $91,740 | $67,204 |
Components of other intangible assets were:
(Dollars in thousands) | Estimated Life (Years) | Cost | Accumulated Amortization | Foreign Currency Translation | Book Value |
December 26, 2008 | | | | | |
Customer relationships | 3 – 8 | $41,075 | $(12,470) | $(181) | $28,424 |
Patents, proprietary technology and product documentation | 3 – 15 | 23,780 | (11,290) | (87) | 12,403 |
Trademarks, trade names and other | 3 – 10 | 5,514 | (3,908) | (12) | 1,594 |
| | 70,369 | (27,668) | (280) | 42,421 |
Not Subject to Amortization | | | | | |
Brand names | | 9,810 | — | — | 9,810 |
Total | | $80,179 | $(27,668) | $(280) | $52,231 |
| | | | | |
December 28, 2007 | | | | | |
Customer relationships and distribution network | 4 – 8 | $26,102 | $(11,092) | $ 29 | $15,039 |
Patents, proprietary technology and product documentation | 5 – 15 | 22,243 | (7,720) | 16 | 14,539 |
Trademarks, trade names and other | 3 – 10 | 4,684 | (2,555) | 22 | 2,151 |
| | 53,029 | (21,367) | 67 | 31,729 |
Not Subject to Amortization | | | | | |
Brand names | | 10,160 | — | — | 10,160 |
Total | | $63,189 | $(21,367) | $ 67 | $41,889 |
Amortization of intangibles was $10.5 million in 2008 and $8.5 million in 2007. Estimated future annual amortization is as follows: $10.7 million in 2009, $9.7 million in 2010, $8.6 million in 2011, $7.7 million in 2012 and $5.7 million thereafter.
The Company recorded impairment charges totaling $3.6 million in the fourth quarter of 2008, primarily due to reduced expectations with respect to future sales of certain branded products within the industrial segment. The impairment charges are reflected above as reductions of cost, reducing brand names by $3.1 million, customer relationships by $0.3 million and proprietary technology by $0.2 million.
Other Assets. Components of other assets were:
(In thousands) | 2008 | 2007 |
Cash surrender value of life insurance | $2,678 | $1,450 |
Assets held for sale | — | 1,138 |
Capitalized software | 1,436 | 1,019 |
Deposits and other | 2,497 | 2,775 |
Total | $6,611 | $6,382 |
The Company paid $1.5 million in 2008 and $1.5 million in 2007 for contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts will be used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company’s insolvency. Changes in cash surrender value are recorded in operating expense and were not significant in 2008 and 2007.
Operations in Cleveland, Ohio were moved to new facilities in Anoka, Minnesota in 2007. The property that formerly housed those operations was classified in other assets at estimated market value in 2007 and was sold in 2008.
Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation.
Impairment of Long-Lived Assets. The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Goodwill and other intangible assets not subject to amortization are also reviewed for impairment annually in the fourth quarter. Except for the impairment of certain intangibles noted above, there have been no significant write-downs of any long-lived assets in the periods presented.
Other Current Liabilities. Components of other current liabilities were:
(In thousands) | 2008 | 2007 |
Accrued self-insured retentions | $7,896 | $7,842 |
Accrued warranty and service liabilities | 8,033 | 7,084 |
Accrued trade promotions | 9,001 | 6,480 |
Payable for employee stock purchases | 5,473 | 5,829 |
Income taxes payable | 904 | 678 |
Other | 24,217 | 19,648 |
Total | $55,524 | $47,561 |
Self-Insurance. The Company is self-insured for certain losses and costs relating to product liability, workers’ compensation and employee medical benefits claims. The Company has purchased stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insured retentions are based on claims filed and estimates of claims incurred but not reported.
Product Warranties. A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities:
(In thousands) | 2008 | 2007 |
Balance, beginning of year | $ 7,084 | $ 6,675 |
Charged to expense | 6,793 | 6,053 |
Margin on parts sales reversed | 3,698 | 3,186 |
Reductions for claims settled | (9,542) | (8,830) |
Balance, end of year | $ 8,033 | $ 7,084 |
Revenue Recognition. Sales are recognized when revenue is realized or realizable and has been earned. The Company’s policy is to recognize revenue when risk and title passes to the customer. This is generally on the date of shipment, however certain sales are shipped with terms requiring recognition when received by the customer. In cases where there are specific customer acceptance provisions, revenue is recognized at the later of customer acceptance or shipment (subject to shipping terms). Payment terms are established based on the type of product, distributor capabilities and competitive market conditions. Rights of return are typically contractually limited, amounts are estimable, and the Company records provisions for anticipated returns and warranty claims at the time revenue is recognized. Historically, sales returns have been approximately 2 percent of sales. Provisions for sales returns are recorded as a reduction of net sales, and provisions for warranty claims are recorded in selling, marketing and distribution expenses. From time to time, the Company may promote the sale of new products by agreeing to accept returns of superseded products. In such cases, provisions for estimated returns are recorded as a reduction of net sales.
Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include cooperative advertising arrangements, rebates based on annual purchases, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or free product. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company’s products; estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. Rebates are accrued based on the program rates and progress toward the estimated annual sales amount, and are recorded as a reduction of sales (cash, trade credit) or cost of products sold (free goods). The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense or cost of products sold, depending on the type of incentive offered.
Share-based 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.
Earnings Per Common Share. Basic net earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the year. Diluted net earnings per share is computed after giving effect to the exercise of all dilutive outstanding option grants.
Comprehensive Income. Comprehensive income is a measure of all changes in shareholders’ equity except those resulting from investments by and distributions to owners, and includes such items as net earnings, certain foreign currency translation items, changes in the value of qualifying hedges and pension liability adjustments.
Derivative Instruments and Hedging Activities. The Company accounts for all derivatives, including those embedded in other contracts, as either assets or liabilities and measures those financial instruments at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation.
As part of its risk management program, the Company may periodically use forward exchange contracts and interest rate swaps to manage known market exposures. Terms of derivative instruments are structured to match the terms of the risk being managed and are generally held to maturity. The Company does not hold or issue derivative financial instruments for trading purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Company’s policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales.
In 2007, the Company entered into interest rate swap contracts that effectively fix the rates paid on a total of $80 million of variable rate borrowings. One contract fixed the rate on $40 million of borrowings at 4.7 percent plus the applicable spread (depending on cash flow leverage ratio) until December 2010. The second contract fixed an additional $40 million of borrowings at 4.6 percent plus the applicable spread until January 2011. Both contracts have been designated as cash flow hedges against interest rate volatility. Consequently, changes in the fair market value are recorded in accumulated other comprehensive income (loss). Net payments under terms of the contracts were charged to interest expense and totaled $0.9 million in 2008.
The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The Company enters into forward contracts or options, or borrows in various currencies, in order to hedge its net monetary positions. These instruments are recorded at current market values and the gains and losses are included in other expense, net. The Company believes it uses strong financial counterparts in these transactions and that the resulting credit risk under these hedging strategies is not significant.
The Company uses significant other observable inputs to value the derivative instruments used to hedge interest rate volatility and net monetary positions. The fair market value and balance sheet classification of such instruments follows:
(In thousands) | 2008 | 2007 |
Gain (loss) on interest rate hedge contracts, other current liabilities | $(4,936) | $(1,700) |
Gain (loss) on foreign currency forward contracts, accounts receivable | 1,198 | (282) |
Total | $(3,738) | $(1,982) |
The Company may periodically hedge other anticipated transactions, generally with forward exchange contracts, which are designated as cash flow hedges. Gains and losses representing effective hedges are initially recorded as a component of other comprehensive income and are subsequently reclassified into earnings when the hedged exposure affects earnings. There were no gains or losses on such transactions in 2008, 2007 and 2006, and there were no such transactions outstanding as of December 26, 2008, and December 28, 2007.
Recent Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 was effective for the Company starting in fiscal 2008 with respect to financial assets and liabilities. The impact of the initial adoption of SFAS No. 157 in 2008 had no impact on the consolidated financial statements. With respect to non-financial assets and liabilities, the statement is effective for the Company starting in fiscal 2009. The Company expects the adoption of this statement as it pertains to non-financial assets and liabilities will not have a significant impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This statement expands disclosures but does not change accounting for derivative instruments and hedging activities. The statement is effective for the Company starting in fiscal 2009.
SFAS No. 141 (revised 2007), “Business Combinations,” is effective for acquisitions completed by the Company after fiscal 2008, and had no impact on the 2008 consolidated financial statements. This statement retains the fundamental requirements in SFAS No. 141 that the acquisition method (purchase method) of accounting be used for all business combinations. It provides new guidance for valuation of acquisitions and accounting for such items as transaction costs, contingent consideration, contingent liabilities and in-process R&D.
B. Segment Information
The Company has three reportable segments: Industrial, Contractor and Lubrication. The Industrial segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and truck assembly and components plants, wood products, rail, marine, aerospace, farm, construction, bus, recreational vehicles, and various other industries. The Contractor segment markets sprayers for architectural coatings for painting, roofing, texture, corrosion control and line striping and also high-pressure washers. The Lubrication segment markets products to move and dispense lubricants for fast oil change facilities, service garages, fleet service centers, automobile dealerships, the mining industry and industrial lubrication. All segments market parts and accessories for their products.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The cost of manufacturing for each segment is based on product cost, and expenses are based on actual costs incurred along with cost allocations of shared and centralized functions based on activities performed, sales or space utilization. Assets of the Company are not tracked along reportable segment lines. Depreciation expense is charged to the manufacturing or operating cost center that utilizes the asset, and is then allocated to segments on the same basis as other expenses within that cost center.
Reportable segments are defined by product. Segments are responsible for development, manufacturing, marketing and sales of their products. This allows for focused marketing and efficient product development. The segments share common purchasing, certain manufacturing, distribution and administration functions.
(In thousands) | | | |
Reportable Segments | 2008 | 2007 | 2006 |
Net sales | | | |
Industrial | $462,941 | $444,725 | $416,498 |
Contractor | 266,772 | 306,703 | 320,476 |
Lubrication | 87,557 | 89,911 | 79,494 |
Total | $817,270 | $841,339 | $816,468 |
Operating earnings | | | |
Industrial | $138,240 | $152,278 | $128,460 |
Contractor | 47,156 | 81,528 | 89,064 |
Lubrication | 12,475 | 9,252 | 18,744 |
Unallocated corporate (expense) | (10,506) | (10,578) | (10,269) |
Total | $187,365 | $232,480 | $225,999 |
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 | 2008 | 2007 | 2006 |
Net sales (based on customer location) | | | |
United States | $384,221 | $434,012 | $474,366 |
Other countries | 433,049 | 407,327 | 342,102 |
Total | $817,270 | $841,339 | $816,468 |
Long-lived assets | | | |
United States | $295,860 | $266,722 | $240,341 |
Other countries | 23,395 | 21,170 | 32,279 |
Total | $319,255 | $287,892 | $272,620 |
Sales to Major Customers
There were no customers that accounted for 10 percent or more of consolidated sales in 2008 and 2007. Sales to a paint retailer were 10 percent of consolidated sales in 2006.
C. Inventories
Major components of inventories were as follows:
(In thousands) | 2008 | 2007 |
Finished products and components | $ 50,703 | $ 46,677 |
Products and components in various stages of completion | 24,938 | 24,805 |
Raw materials and purchased components | 51,348 | 37,311 |
| 126,989 | 108,793 |
Reduction to LIFO cost | (35,385) | (34,056) |
Total | $ 91,604 | $ 74,737 |
Inventories valued under the LIFO method were $58.1 million for 2008 and $46.6 million for 2007. All other inventory was valued on the FIFO method.
Certain inventory quantities were reduced in 2007, 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) | 2008 | 2007 |
Land and improvements | $ 10,303 | $ 10,066 |
Buildings and improvements | 101,445 | 92,145 |
Manufacturing equipment | 177,044 | 166,869 |
Office, warehouse and automotive equipment | 31,619 | 30,580 |
Additions in progress | 6,318 | 6,413 |
Total property, plant and equipment | 326,729 | 306,073 |
Accumulated depreciation | (176,975) | (165,479) |
Net property, plant and equipment | $149,754 | $140,594 |
Depreciation expense was $20.9 million in 2008, $19.5 million in 2007 and $18.2 million in 2006.
E. Income Taxes
Earnings before income tax expense consist of:
(In thousands) | 2008 | 2007 | 2006 |
Domestic | $159,972 | $203,795 | $197,410 |
Foreign | 18,607 | 25,041 | 26,956 |
Total | $178,579 | $228,836 | $224,366 |
Income tax expense consists of:
(In thousands) | 2008 | 2007 | 2006 |
Current | | | |
Domestic | | | |
Federal | $50,483 | $67,255 | $65,652 |
State and local | 2,300 | 4,600 | 4,520 |
Foreign | 4,741 | 6,023 | 7,206 |
| 57,524 | 77,878 | 77,378 |
Deferred | | | |
Domestic | (436) | (1,874) | (2,611) |
Foreign | 612 | (4) | (167) |
| 176 | (1,878) | (2,778) |
Total | $57,700 | $76,000 | $74,600 |
Income taxes paid were $55.8 million, $74.6 million and $77.6 million in 2008, 2007 and 2006.
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:
| 2008 | 2007 | 2006 |
Statutory tax rate | 35% | 35% | 35% |
Earnings from non-U.S. sales at lower tax rates | (1) | (1) | (2) |
State taxes, net of federal effect | 1 | 2 | 2 |
U.S. general business tax credits | (1) | (1) | (1) |
Domestic production deduction | (2) | (2) | (1) |
Effective tax rate | 32% | 33% | 33% |
Deferred income taxes are provided for temporary differences between the financial reporting and the tax basis of assets and liabilities. The deferred tax assets (liabilities) resulting from these differences are as follows:
(In thousands) | 2008 | 2007 |
Inventory valuations | $ 8,723 | $ 8,986 |
Self-insurance retention accruals | 2,356 | 2,298 |
Warranty reserves | 2,628 | 2,331 |
Vacation accruals | 2,036 | 1,917 |
Bad debt reserves | 1,858 | 1,888 |
Stock compensation | 2,000 | 2,000 |
Interest rate swaps | 1,827 | — |
Other | 1,579 | 2,230 |
Current | 23,007 | 21,650 |
Unremitted earnings of consolidated foreign subsidiaries | (1,900) | (1,800) |
Excess of tax over book depreciation | (22,307) | (14,483) |
Pension liability (asset) | 29,751 | (8,415) |
Postretirement medical | 7,932 | 7,462 |
Stock compensation | 3,864 | 1,862 |
Deferred compensation | 806 | 1,965 |
Other | 773 | 335 |
Non-current | 18,919 | (13,074) |
Net deferred tax assets | $41,926 | $ 8,576 |
Total deferred tax assets were $78.6 million and $36.8 million, and total deferred tax liabilities were $36.7 million and $28.2 million on December 26, 2008, and December 28, 2007.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service (IRS) completed the examination of the Company’s U.S. income tax returns for 2004 and 2005 in the first quarter of 2008. Resolution of the audit did not result in a material change to the Company’s financial position.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In thousands) | 2008 | 2007 |
Unrecognized tax benefits beginning balance | $4,700 | $4,900 |
Gross Increases – current period tax positions | 700 | 800 |
Settlements | (1,100) | — |
Lapse of statute of limitations | (2,300) | (1,000) |
Unrecognized tax benefits ending balance | $2,000 | $4,700 |
At the end of 2008, the Company’s liability for uncertain tax positions was $2.4 million, including $ 0.4 million of interest and penalties. Unrecognized tax benefits of $2.0 million would affect the Company’s effective tax rate if recognized. The Company records penalties and accrued interest related to uncertain tax positions in income tax expense.
There is a reasonable possibility that unrecognized tax benefits will decrease by approximately $0.5 to $1 million in the next twelve months pursuant to the following events: expiring statute of limitations and the closure of other tax jurisdiction audits.
F. Debt
In July 2007, the Company entered into an agreement with a syndicate of lenders providing an unsecured credit facility for 5 years. This credit facility provides $250 million of committed credit, available for general corporate purposes, working capital needs, share repurchases and acquisitions. Borrowings under the facility bear interest at either the bank’s prime rate, the federal funds rate plus 0.5 percent or the London Interbank Offered Rate plus a spread of between 0.23 percent and 0.57 percent, depending on the Company’s cash flow leverage ratio (debt to earnings before interest, taxes, depreciation and amortization). The weighted average interest rate on borrowings against the credit facility was 2.3 percent as of December 26, 2008. The Company is also required to pay a facility fee on the full amount of the loan commitment at an annual rate ranging from 0.07 percent to 0.15 percent, depending on the Company’s cash flow leverage ratio. The agreement requires the Company to maintain certain financial ratios as to cash flow leverage and interest coverage.
On December 26, 2008, the Company had $283 million in lines of credit, including the $250 million in committed credit facilities described above and $33 million with foreign banks. The unused portion of committed credit lines was $87 million as of December 26, 2008. In addition, the Company has an unused, uncommitted line of credit for $20 million. Borrowing rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit and the London Interbank market. The weighted average short-term borrowing rates were 3.9 percent, 5.3 percent and 5.2 percent for the years ended December 26, 2008, December 28, 2007 and December 29, 2006. 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 has received from its lenders a waiver with respect to compliance with certain aspects of a covenant requiring minimum pension funding levels. The Company is in compliance with all other financial covenants of its debt agreements.
Interest paid on debt during 2008, 2007 and 2006 was $8.1 million, $2.6 million and $0.9 million.
G. Shareholders’ Equity
At December 26, 2008, 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.
Components of accumulated other comprehensive income (loss) were:
(In thousands) | 2008 | 2007 |
Pension and postretirement medical liability adjustment | $(70,322) | $(5,672) |
Gain (loss) on hedge contracts | (3,109) | (1,072) |
Cumulative translation adjustment | (1,057) | 48 |
Total | $(74,488) | $(6,696) |
H. Share-Based Awards, Purchase Plans and Compensation Cost
Stock Option and Award Plan. The Company has a stock incentive plan under which it grants stock options and share awards to directors, officers and other employees. Option price is the market price on the date of grant. Options become exercisable at such time, generally over three or four years, and in such installments as set by the Company, and expire ten years from the date of grant.
Restricted share awards have been made to certain key employees under the plan. The market value of restricted stock at the date of grant is charged to operations over the vesting period. Compensation cost charged to operations for restricted share awards was $280,000 in 2008 and $31,000 in 2007. There was no compensation cost related to restricted shares in 2006. Individual nonemployee directors of the Company may elect to receive, either currently or deferred, all or part of their annual retainer, and/or payment for attendance at Board or Committee meetings, in the form of shares of the Company’s common stock instead of cash. Under this arrangement, the Company issued 10,228 shares in 2008, 10,338 shares in 2007 and 10,955 shares in 2006. 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 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 |
Granted | 1,037 | 40.08 | | |
Exercised | (836) | 19.96 | | |
Canceled | (378) | 38.98 | | |
Outstanding, December 28, 2007 | 3,779 | $28.63 | 2,228 | $21.41 |
Granted | 819 | 35.56 | | |
Exercised | (419) | 16.60 | | |
Canceled | (224) | 38.81 | | |
Outstanding, December 26, 2008 | 3,955 | $30.77 | 2,186 | $24.98 |
The following table summarizes information for options outstanding and exercisable at December 26, 2008 (in thousands, except per share and contractual term amounts):
The aggregate intrinsic value of exercisable option shares was $8.6 million as of December 26, 2008, with a weighted average contractual term of 4.2 years. There were approximately 3.9 million vested share options and share options expected to vest as of December 26, 2008, with an aggregate intrinsic value of $8.6 million, a weighted average exercise price of $30.71 and a weighted average contractual term of 6.1 years.
Information related to options exercised follows:
(In thousands) | 2008 | 2007 | 2006 |
Cash received | $6,950 | $16,688 | $4,889 |
Aggregate intrinsic value | 8,734 | 17,465 | 8,851 |
Tax benefit realized | 3,100 | 6,500 | 3,200 |
Stock Purchase Plan. Under the Company’s Employee Stock Purchase Plan, the purchase price of the shares is the lesser of 85 percent of the fair market value on the first day or the last day of the plan year. The Company issued 216,047 shares under this Plan in 2008, 202,096 shares in 2007 and 204,478 shares in 2006.
Authorized Shares. Shares authorized for issuance under the stock option and purchase plans are shown below:
(In thousands) | Total Shares Authorized | Available for Future Issuance as of December 26, 2008 |
Stock Incentive Plan (2006) | 7,375 | 3,228 |
Employee Stock Purchase Plan (2006) | 2,000 | 1,784 |
Total | 9,375 | 5,012 |
Amounts available for future issuance exclude outstanding options. Options outstanding as of December 26, 2008, include options granted under three plans that were replaced by the Stock Incentive Plan in 2001 and 2006. No shares are available for future grants under those plans.
Share-based Compensation. The Company recognized share-based compensation cost of $9.1 million in 2008 and $8.6 million in 2007, which reduced net income by $6.7 million, or $0.11 per weighted common share in 2008 and $6.4 million, or $0.10 per weighted common share in 2007. As of December 26, 2008, there was $8.6 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of approximately two years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:
| 2008 | 2007 | 2006 |
Expected life in years | 6.0 | 5.6 | 6.3 |
Interest rate | 3.2% | 4.2% | 4.6% |
Volatility | 25.1% | 25.1% | 27.8% |
Dividend yield | 2.1% | 1.7% | 1.4% |
Weighted average fair value per share | $8.28 | $10.55 | $12.97 |
Expected life is estimated based on vesting terms and exercise and termination history. Interest rate is based on the U.S Treasury rate on zero-coupon issues with a remaining term equal to the expected life of the option. Expected volatility is based on historical volatility over a period commensurate with the expected life of options.
The fair value of employees’ purchase rights under the Employee Stock Purchase Plan was estimated on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:
| 2008 | 2007 | 2006 |
Expected life in years | 1.0 | 1.0 | 1.0 |
Interest rate | 1.5% | 4.9% | 4.6% |
Volatility | 27.1% | 24.4% | 24.0% |
Dividend yield | 2.1% | 1.6% | 1.4% |
Weighted average fair value per share | $8.14 | $9.79 | $10.18 |
I. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
(In thousands, except per share amounts) | 2008 | 2007 | 2006 |
Numerator Net earnings available to common shareholders | $120,879 | $152,836 | $149,766 |
Denominators | | | |
Weighted average shares outstanding for basic earnings per share | 60,264 | 65,043 | 67,807 |
Dilutive effect of stock options computed based on the treasury | | | |
stock method using the average market price | 571 | 941 | 1,170 |
Denominator for diluted earnings per share | 60,835 | 65,984 | 68,977 |
Basic earnings per share | $ 2.01 | $ 2.35 | $ 2.21 |
Diluted earnings per share | $ 1.99 | $ 2.32 | $ 2.17 |
Stock options to purchase 2,941,000 and 1,142,000 common shares were not included in the 2008 and 2007 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 choose to participate, the Company matches employee contributions at a 100 percent rate, up to 3 percent of the employee’s compensation. For employees not covered by a defined benefit plan, the Company contributes an amount equal to 1.5 percent of the employee’s compensation. Employer contributions totaled $3.1 million in 2008, $3.0 million in 2007 and $2.6 million in 2006.
The Company’s postretirement medical plan provides certain medical benefits for retired U.S. employees. Employees hired before January 1, 2005, are eligible for these benefits upon retirement and fulfillment of other eligibility requirements as specified by the plan.
The Company has both funded and unfunded noncontributory defined benefit pension plans that together cover most U.S. employees hired before January 1, 2006, certain directors and some of the employees of the Company’s non-U.S. subsidiaries. For U.S. plans, benefits are based on years of service and the highest five consecutive years’ earnings in the ten years preceding retirement. The Company funds annually in amounts consistent with minimum funding requirements and maximum tax deduction limits.
Investment policies and strategies of the funded pension plan are based on a long-term view of economic growth and heavily weighted toward equity securities. The 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 $8.3 million at December 26, 2008, and $13.0 million at December 28, 2007. For the funded pension plan, asset allocations at year-end were as follows:
| 2008 | 2007 |
Graco common stock | 6% | 6% |
Other equity securities | 62% | 72% |
Debt securities | 20% | 15% |
Real estate | 9% | 6% |
Cash | 3% | 1% |
Total | 100% | 100% |
The Company uses a year-end measurement date for all of its plans. The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the periods ending December 26, 2008, and December 28, 2007, and a statement of the funded status as of the same dates.
| Pension Benefits | | Postretirement Medical Benefits |
(In thousands) | 2008 | 2007 | | 2008 | 2007 |
Change in benefit obligation | | | | | |
Obligation, beginning of year | $202,182 | $202,578 | | $ 23,596 | $ 21,416 |
Service cost | 4,968 | 5,618 | | 557 | 537 |
Interest cost | 12,223 | 11,504 | | 1,381 | 1,345 |
Actuarial loss (gain) | 4,960 | (10,615) | | 393 | 1,772 |
Plan amendments | 514 | — | | 385 | 873 |
Exchange rate changes | (317) | 914 | | — | — |
Benefit payments | (9,376) | (7,817) | | (2,530) | (2,347) |
Obligation, end of year | $215,154 | $202,182 | | $23,782 | $23,596 |
Change in plan assets | | | | | |
Fair value, beginning of year | $215,378 | $212,819 | | $ — | $ — |
Actual return on assets | (78,935) | 9,492 | | — | — |
Employer contributions | 1,653 | 884 | | 2,530 | 2,347 |
Benefit payments | (9,376) | (7,817) | | (2,530) | (2,347) |
Fair value, end of year | $128,720 | $215,378 | | $ — | $ — |
Funded status | $(86,434) | $ 13,196 | | $(23,782) | $(23,596) |
Amounts recognized in consolidated balance sheets | | | | | |
Non-current assets | $ — | $ 31,823 | | $ — | $ — |
Current liabilities | 726 | 645 | | 2,222 | 2,344 |
Non-current liabilities | 85,708 | 17,982 | | 21,560 | 21,252 |
Net assets (liabilities) | $(86,434) | $ 13,196 | | $(23,782) | $(23,596) |
The accumulated benefit obligation as of year-end for all defined benefit pension plans was $195 million for 2008 and $182 million for 2007. Information for plans with an accumulated benefit obligation in excess of plan assets follows:
(In thousands) | 2008 | 2007 |
Projected benefit obligation | $215,154 | $18,628 |
Accumulated benefit obligation | 195,307 | 15,806 |
Fair value of plan assets | 128,720 | — |
The components of net periodic benefit cost for the plans for 2008, 2007 and 2006 were as follows:
| Pension Benefits | | Postretirement Medical Benefits |
(In thousands) | 2008 | 2007 | 2006 | | 2008 | 2007 | 2006 |
Service cost – benefits earned during the period | $ 4,968 | $ 5,618 | $ 5,444 | | $ 557 | $ 537 | $ 849 |
Interest cost on projected benefit obligation | 12,223 | 11,504 | 10,541 | | 1,381 | 1,345 | 1,511 |
Expected return on assets | (18,981) | (18,795) | (16,582) | | — | — | — |
Early retirement incentives | 530 | — | — | | 385 | — | — |
Amortization of prior service cost (credit) | 232 | 244 | 147 | | (658) | (739) | (161) |
Amortization of net loss (gain) | 176 | 236 | 535 | | 641 | 811 | 595 |
Cost of pension plans which are not significant | | | | | | | |
and have not adopted SFAS No. 87 | 136 | 478 | 320 | | N/A | N/A | N/A |
Net periodic benefit cost (credit) | $ (716) | $ (715) | $ 405 | | $2,306 | $1,954 | $2,794 |
Amounts recognized in other comprehensive (income) loss in 2008 and 2007 were as follows:
| Pension Benefits | | Postretirement Medical Benefits |
(In thousands) | 2008 | 2007 | | 2008 | 2007 |
Prior service cost (credit) arising during the period | $ 514 | $ — | | $ 385 | $ 873 |
Net loss (gain) arising during the period | 102,755 | (1,218) | | 393 | 1,772 |
Amortization of prior service credit (cost) | (232) | (244) | | 658 | 739 |
Amortization of net gain (loss) | (706) | (236) | | (1,026) | (811) |
Total | $102,331 | $(1,698) | | $ 410 | $2,573 |
Amounts included in accumulated other comprehensive (income) loss as of December 26, 2008 and December 28, 2007, that had not yet been recognized as components of net periodic benefit cost, were as follows:
| Pension Benefits | Postretirement Medical Benefits |
(In thousands) | 2008 | 2007 | 2008 | 2007 |
Prior service cost (credit) | $ 431 | $ 742 | $(5,732) | $(6,390) |
Net loss | 107,605 | 4,963 | 9,352 | 9,600 |
Net before income taxes | 108,036 | 5,705 | 3,620 | 3,210 |
Income taxes | (39,995) | (2,055) | (1,338) | (1,188) |
Net | $ 68,041 | $3,650 | $2,282 | $2,022 |
Amounts included in accumulated other comprehensive (income) loss that are expected to be recognized as components of net periodic benefit cost in 2009 were as follows:
(In thousands) | Pension Benefits | Postretirement Medical Benefits |
Prior service cost (credit) | $ 182 | $(658) |
Net loss (gain) | 9,362 | 673 |
Net before income taxes | 9,544 | 15 |
Income taxes | (3,531) | (6) |
Net | $ 6,013 | $ 9 |
Assumptions used to determine the Company’s benefit obligations are shown below:
| Pension Benefits | Postretirement Medical Benefits |
Weighted average assumptions | 2008 | 2007 | 2008 | 2007 |
Discount rate | 6.0% | 6.2% | 6.0% | 6.3% |
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 | 2008 | 2007 | 2006 | | 2008 | 2007 | 2006 |
Discount rate | 6.2% | 5.7% | 5.5% | | 6.3% | 5.8% | 5.5% |
Expected return on assets | 9.0% | 9.0% | 9.0% | | N/A | N/A | N/A |
Rate of compensation increase | 3.8% | 3.8% | 3.8% | | N/A | N/A | N/A |
Several sources of information are considered in determining the expected rate of return assumption, including the allocation of plan assets, the input of actuaries and professional investment advisors, and historical long-term returns. In setting the return assumption, the Company recognizes that historical returns are not always indicative of future returns and also considers the long-term nature of its pension obligations.
The Company’s U.S. retirement medical plan limits the annual cost increase that will be paid by the Company. In 2006, the annual cost increase limitation was changed to 5 percent for 2007, 4 percent for 2008 and 3 percent thereafter. In 2007, the Company made changes in the administration of the plan to facilitate compliance with the cost limitation provisions. The Company also amended the plan to remove the 30-year service cap applied to the calculation of service-based credits provided to future retirees for postretirement health care costs. In measuring the accumulated postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed to be 9 percent for 2009, decreasing by one-half percentage point each year to a constant rate of 5 percent in 2017 and thereafter, subject to the plan’s annual increase limitation.
At December 26, 2008, a one percent change in assumed health care cost trend rates would have no significant impact on the service and interest cost components of net periodic postretirement health care benefit cost or the APBO for health care benefits.
The Company expects to contribute $0.7 million to its unfunded pension plans and $2.2 million to the postretirement medical plan in 2009. The Company expects that no contribution to the funded pension plan will be required in 2009. Estimated future benefit payments are as follows:
(In thousands) | Pension Benefits | Postretirement Medical Benefits |
2009 | $ 9,200 | $2,200 |
2010 | 9,900 | 2,100 |
2011 | 10,600 | 2,000 |
2012 | 11,300 | 1,800 |
2013 | 12,100 | 1,700 |
Years 2014 – 2018 | 73,500 | 8,000 |
K. Commitments and Contingencies
Lease Commitments. Aggregate annual rental commitments under operating leases with noncancelable terms of more than one year were $7.2 million at December 26, 2008, payable as follows:
| | Vehicles & | |
(In thousands) | Buildings | Equipment | Total |
2009 | $1,210 | $1,868 | $3,078 |
2010 | 745 | 1,010 | 1,755 |
2011 | 326 | 485 | 811 |
2012 | 300 | 179 | 479 |
2013 | 256 | 57 | 313 |
Thereafter | 728 | 43 | 771 |
Total | $3,565 | $3,642 | $7,207 |
Total rental expense was $2.6 million for 2008, $2.3 million for 2007 and $1.8 million for 2006.
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 $15 million at December 26, 2008. 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 $20 million. In addition, the Company could be obligated to perform under standby letters of credit totaling $2 million at December 26, 2008. The Company has also guaranteed the debt of its subsidiaries for up to $7 million.
Contingencies. The Company is party to various legal proceedings arising in the normal course of business. The Company is actively defending these matters and has recorded an estimate of the probable costs. Management does not expect that resolution of these matters will have a material adverse effect on the Company, although the ultimate outcome cannot be determined based on available information.
L. Acquisitions
In February 2008, the Company acquired GlasCraft Inc. for approximately $35 million cash. GlasCraft had sales of approximately $18 million in 2007. It designs, manufactures and sells spray systems for the composites manufacturing industry and high performance dispense systems for the polyurethane foam and polyurea coatings industries. The products, brands, distribution channels and engineering capabilities of GlasCraft expand and complement the Company’s Industrial Equipment business. GlasCraft operations were moved from Indiana to Company facilities in Ohio, South Dakota and Minnesota in 2008.
In September 2008, the Company acquired certain assets of Lubrication Scientifics, Inc. (LubeSci) for approximately $5 million cash. LubeSci designed and manufactured automated lubrication equipment used in industrial markets and had sales of approximately $3 million in 2007. LubeSci operations were moved to Company facilities in Minnesota from California in 2008.
In October 2008, the Company acquired the Airlessco assets of Durotech Co. in Moorpark, California, for approximately $15 million cash. Airlessco is a line of spray-painting equipment that generated approximately $14 million of sales in 2007, and complements the Company’s Contractor Equipment business.
The purchase price of each acquisition was allocated based on estimated fair values as follows:
(In thousands) | GlasCraft | LubeSci | Airlessco |
Accounts receivable and prepaid expenses | $ 2,200 | $ — | $ 2,400 |
Inventories | 3,700 | 500 | 3,000 |
Deferred income taxes | 700 | — | — |
Property, plant and equipment | 700 | 600 | 500 |
Identifiable intangible assets | 18,200 | 900 | 5,500 |
Goodwill | 17,700 | 2,500 | 4,800 |
Total purchase price | 43,200 | 4,500 | 16,200 |
Current liabilities assumed | (1,000) | — | (800) |
Deferred income taxes | (6,900) | — | —�� |
Net assets acquired | $35,300 | $4,500 | $15,400 |
Identifiable intangible assets and estimated useful life were as follows:
| GlasCraft | LubeSci | Airlessco |
Product documentation (5 years) | $ 900 | $ — | $ — |
Customer relationships (5 – 6 years) | 14,100 | 600 | 4,600 |
Proprietary technology (3 – 5 years) | 500 | 300 | — |
Tradenames and trademarks (3 years) | — | — | 800 |
Patents (3 years) | — | — | 100 |
Total (6 years, weighted average) | 15,500 | 900 | 5,500 |
Brand names (indefinite useful life) | 2,700 | — | — |
Total identifiable intangible assets | $18,200 | $900 | $5,500 |
None of the GlasCraft goodwill or identifiable intangible assets is deductible for tax purposes. Goodwill and identifiable intangible assets from the acquisitions of LubeSci and Airlessco are deductible for tax purposes.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal year covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer, the Chief Financial Officer and Treasurer, the Vice President and Controller, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective 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 2008 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 2008 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 2008 Annual Report on Form 10-K and the information under the headings “Election of Directors-Nominees and Other Directors,” “Director Qualifications and Selection Process” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders, to be held on April 24, 2009 (the “Proxy Statement”), is 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 15, 2008. The certifications of the 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 2008 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 Code of Ethics and Business Conduct (Code of Ethics) that applies to our principal executive officer, principal financial officer, principal accounting officer, all officers, directors, and employees of Graco Inc. and all of its subsidiaries and branches worldwide. The Corporate Governance Guidelines, Committee Charters, and Code of Ethics, with any amendments or waivers thereto, may be accessed free of charge by visiting the Graco website at www.graco.com. 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 Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions within four business days following the date of such amendment or waiver.
Section 16(a) Reporting Compliance
The information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement is incorporated herein by reference.
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 “Related Person Transaction Approval Policy” and “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 | |
| |
| |
| (2) Financial Statement Schedule | 51 |
Schedule II - Valuation and Qualifying Accounts | |
| |
| All other schedules are ommitted because they are not applicable, or are not required, or because the | |
required information is included in the Consolidated Financial Statements or Notes thereto. | |
| |
| |
| (3) Management Contract, Compensatory Plan or Arrangement (See Exhibit Index) | 53 |
| 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 reserves1 | Other add (deduct) 2 | Balance at end of year |
Year ended December 26, 2008 | | | | | |
Allowance for doubtful accounts | $2,500 | $ — | $ 400 | $ 100 | $2,200 |
Allowance for returns and credits | 4,000 | 12,000 | 11,600 | — | 4,400 |
| $6,500 | $12,000 | $12,000 | $ 100 | $6,600 |
Year ended December 28, 2007 | | | | | |
Allowance for doubtful accounts | $2,600 | $ 200 | $ 400 | $ 100 | $2,500 |
Allowance for returns and credits | 3,200 | 12,400 | 11,600 | — | 4,000 |
| $5,800 | $12,600 | $12,000 | $ 100 | $6,500 |
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 |
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/PATRICK J. MCHALE | February 16, 2009 |
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/PATRICK J. MCHALE | February 16, 2009 |
President and Chief Executive Officer
(Principal Executive Officer)
| /s/JAMES A. GRANER | February 16, 2009 |
| James A. Graner |
| Chief Financial Officer and Treasurer |
| (Principal Financial Officer) |
| /s/CAROLINE M. CHAMGERS | February 16, 2009 |
| Caroline M. Chambers |
| Vice President and Controller |
| (Principal Accounting Officer) |
Lee R. Mitau Director, Chairman of the Board
William J. Carroll | Director |
J. Kevin Gilligan | Director |
Patrick J. McHale | Director |
Mark H. Rauenhorst | Director |
William G. Van Dyke | Director |
R. William Van Sant | Director |
Patrick J. McHale, by signing his name hereto, does hereby sign this document on behalf of himself and each of the above named directors of the Registrant pursuant to powers of attorney duly executed by such persons.
| /s/PATRICK J. MCHALE | February 16, 2009 |
(For himself and as attorney-in-fact)
Exhibit Index
Exhibit
| 2.1 | Stock Purchase Agreement By and Among PMC Global, Inc. Gusmer Machinery Group, Inc. and Graco Inc., dated as of February 4, 2005 (Incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 8-K dated February 10, 2005.) |
| 2.2 | Stock Purchase Agreement By and Among PMC Europe Investments, S.L. and Graco Inc. dated as of February 4, 2005. (Incorporated by reference to Exhibit 2.2 to the Company’s Report on Form 8-K dated February 10, 2005.) |
| 3.1 | Restated Articles of Incorporation as amended June 14, 2007. (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) |
| 3.2 | Restated Bylaws as amended June 13, 2002. (Incorporated by reference to Exhibit 3 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 28, 2002.) |
| 4.1 | Share Rights Agreement dated as of February 25, 2000, between the Company and Wells Fargo, formerly known as Norwest Bank Minnesota, National Association, as Rights Agent. (Incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A dated March 9, 2000.) |
| 4.2 | Credit Agreement dated July 12, 2007, between the Company and U.S. Bank National Association, JPMorgan Chase Bank, N.A., Wells Fargo Bank, National Association, and Bank of America, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated July 12, 2007.) |
| *10.1 | Executive Officer Bonus Plan as amended and restated December 23, 2008. |
| *10.2 | Executive Officer Annual Incentive Bonus Plan as amended and restated December 23, 2008. |
| *10.3 | Graco Inc. Nonemployee Director Stock Option Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) |
| *10.4 | Long Term Stock Incentive Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) |
| *10.5 | Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed March 14, 2006.) |
| 10.6 | Employee Stock Incentive Plan, as amended and restated June 18, 2004. (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended April 1, 2005.) |
| *10.7 | Deferred Compensation Plan Restated, effective December 1, 1992. (Incorporated by reference to Exhibit 2 to the Company’s Report on Form 8-K dated March 11, 1993.) First Amendment dated September 1, 1996. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the twenty-six weeks ended June 27, 1997.) Second Amendment dated May 27, 2000. (Incorporated by reference to Exhibit 10.7 to the Company’s 2005 Annual Report on Form 10-K.) Third Amendment adopted on December 19, 2002. (Incorporated by reference to Exhibit 10.7 to the Company’s 2005 Annual Report on Form 10-K.) Fourth Amendment adopted June 14, 2007. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) |
| *10.8 | Deferred Compensation Plan (2005 Statement) as amended and restated on April 4, 2005. (Incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 10-Q for the thirteen weeks ended July 1, 2005.) Second Amendment dated November 1, 2005. (Incorporated by reference to Exhibit 10.8 to the Company’s 2005 Annual Report on Form 10-K.) Third Amendment adopted on December 29, 2008. |
| 10.9 | CEO Award Program. (Incorporated by reference to Exhibit 10.9 to the Company’s 2005 Annual Report on Form 10-K.) |
*10.10 | Retirement Plan for Nonemployee Directors. (Incorporated by reference to Attachment C to Item 5 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 29, 1991.) First Amendment adopted on December 29, 2008. |
*10.11 | Graco Restoration Plan (2005 Statement). (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 29, 2006.) First Amendment adopted December 8, 2006. (Incorporated by reference to Exhibit 10.12 to the Company’s 2006 Annual Report on Form 10-K.) Second Amendment adopted August 15, 2007. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended September 28, 2007.) Third Amendment adopted March 27, 2008. (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 28, 2008.) Fourth Amendment adopted December 29, 2008. |
*10.12 | Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Nonemployee Director Stock Option Plan. (Incorporated by reference to Exhibit 10.11 to the Company’s 2001 Annual Report on Form 10-K.) |
*10.13 | Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.22 to the Company’s 2002 Annual Report on Form 10-K.) Amended form of agreement for awards made to nonemployee directors. (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 26, 2004.) |
*10.14 | Stock Option Agreement. Form of agreement used for award of nonstatutory stock options to nonemployee directors under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) Amended form of agreement for awards made to nonemployee directors in 2008. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 27, 2008.) |
*10.15 | Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 10.12 to the Company’s 2001 Annual Report on Form 10-K.) |
*10.16 | Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 29, 2002.) Amended form of agreement for awards made to Chief Executive Officer in 2001 and 2002. Amended form of agreement for awards made to executive officers in 2003. (Incorporated by reference to Exhibit 10.15 of the Company’s 2003 Annual Report on Form 10-K.) Amended form of agreement for awards made to executive officers in 2004. Amended form of agreement for awards made to Chief Executive Officer in 2004. (Incorporated by reference to Exhibit 10.2 and 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 26, 2004.) |
*10.17 | Stock Option Agreement. Form of agreement used for award in 2007 of non-incentive stock options to executive officers under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2007.) Amended form of agreement for awards made to executive officers in 2008 (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 28, 2008.) |
*10.18 | Stock Option Agreement. Form of agreement used for award in 2007 of non-incentive stock options to chief executive officer under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 30, 2007.) Amended form of agreement for awards made to chief executive officer in 2008 (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 28, 2008.) |
*10.19 | Executive Deferred Compensation Agreement. Form of supplementary agreement entered into by the Company which provides a retirement benefit to one executive officer, as amended by First Amendment, effective September 1, 1990. (Incorporated by reference to Exhibit 3 to the Company’s Report on Form 8-K dated March 11, 1993.) As further amended by agreement, effective December 4, 2008. |
*10.20 | Executive Officer Restricted Stock Agreement. Form of agreement used to award restricted stock to selected executive officers. (Incorporated by reference to Exhibit 10.20 to the Company’s 2007 Annual Report on Form 10-K.) |
*10.21 | Election Form. Form of agreement used for the issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Stock Incentive Plan. (Incorporated by reference to Exhibit 10.17 to the Company’s 2004 Annual Report on Form 10-K.) Amended form of agreement used for the 2006 plan year. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) |
*10.22 | Election Form. Form of agreement used for the 2007 plan year for the issuance of stock or deferred stock in lieu of cash payment of retainer and/or meeting fees to nonemployee directors under the Graco Inc. Amended and Restated Stock Incentive Plan (2006). (Incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 10-Q for the thirteen weeks ended June 29, 2007.) Amended form of agreement used for the 2008 plan year. (Incorporated by reference to Exhibit 10.22 to the Company’s 2007 Annual Report on Form 10-K.) Amended form of agreement used for 2009 plan year. |
*10.23 | Key Employee Agreement. Form of agreement used with chief executive officer. (Incorporated by reference to Exhibit 10.24 to the Company’s 2007 Annual Report on Form 10-K.) |
*10.24 | Key Employee Agreement. Form of agreement used with executive officers reporting to the chief executive officer. (Incorporated by reference to Exhibit 10.25 to the Company’s 2007 Annual Report on Form 10-K.) |
*10.25 | Key Employee Agreement. Form of agreement used with executive officer reporting to an executive officer other than the chief executive officer. (Incorporated by reference to Exhibit 10.26 to the Company’s 2007 Annual Report on Form 10-K.) |
*10.26 | Executive Group Long-Term Disability Policy as revised in 1995. (Incorporated by reference to Exhibit 10.23 to the Company’s 2004 Annual Report on Form 10-K.) As enhanced by Supplemental Income Protection Plan in 2004. (Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K.) |
11 | Statement of Computation of Earnings per share included in Note I on page 43. |
| 21 | Subsidiaries of the Registrant included herein on page 56. |
| 23 | Independent Registered Public Accounting Firm’s Consent included herein on page 57. |
| 24 | Power of Attorney included herein on page 58. |
| 31.1 | Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) included herein on page 59. |
| 31.2 | Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) included herein on page 60. |
| 32 | Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C. included herein on page 61. |
| 99 | Cautionary Statement Regarding Forward-Looking Statements included herein on page 62. |
Except as otherwise noted, all documents incorporated by reference above relate 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 26, 2008.
| Subsidiary | Jurisdiction of Organization | Percentage of Voting Securities Owned by the Company |
| GlasCraft, Inc. | United States | 100%7 |
| Graco Australia Pty Ltd. | Australia | 100%3 |
| Graco California Inc. | United States | 100% |
| Graco Canada Inc. | Canada | 100% |
| Graco do Brasil Limitada | Brazil | 100%1 |
| Graco Fluid Equipment (Shanghai) Co., Ltd. | China (PRC) | 100% |
| Graco Fluid Equipment (Suzhou) Co., Ltd. | China (PRC) | 100%6 |
| Graco GmbH | Germany | 100% |
| Graco Hong Kong Ltd. | Hong Kong | 100% |
| Graco Indiana Inc. | United States | 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%1 |
| Graco Ohio Inc. | United States | 100% |
| Graco S.A.S. | France | 100% |
| Gusmer Corporation | United States | 100% |
| Gusmer Canada Ltd. | Canada | 100%4 |
| Gusmer Europe, S.L. | Spain | 100%4 |
| Gusmer Sudamerica S.A. | Argentina | 100%5 |
| Liquid Control Ltd. | England | 100%2 |
1 | Includes shares held by executive officer of the Company or the relevant subsidiary to satisfy the requirements of local law. |
| 2 | Shares 100% held by Graco Ohio Inc. |
| 3 | Shares 100% held by Graco Hong Kong Ltd. |
| 4 | Shares 100% held by Gusmer Corporation. |
| 5 | Shares held by Gusmer Corporation and by executive officer of the Company to satisfy the requirements of local law. |
| 6 | Shares 100% owned by Graco Minnesota Inc. |
| 7 | Shares 100% owned by Graco Indiana. |
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements No. 333-17691, No. 333-03459, No. 333-75307, No. 333-63128, No. 333-123813, No. 333-134162, and No. 333-140848 on Form S-8 of our reports dated February 16, 2009, relating to the financial statements and financial statement schedule of Graco Inc. and Subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Graco Inc. and Subsidiaries for the year ended December 26, 2008.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 16, 2009
Exhibit 24
Power of Attorney
Know all by these presents, that each person whose signature appears below hereby constitutes and appoints Patrick J. McHale 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 26, 2008, 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/WILLIAM J. CARROLL | February 13, 2009 |
| William J. Carroll | |
| |
| /s/JACK W. EUGSTER | February 13, 2009 |
| Jack W. Eugster | |
| |
| /s/J. KEVIN GILLIGAN | February 13, 2009 |
| J. Kevin Gilligan | |
| |
| /s/PATRICK J. MCHALE | February 13, 2009 |
| Patrick J. McHale | |
| |
| /s/LEE R. MITAU | February 13, 2009 |
| Lee R. Mitau | |
| |
| /s/MARTI MORFITT | February 13, 2009 |
| Marti Morfitt | |
| |
| /s/MARK H. RAUENHORST | February 13, 2009 |
| Mark H. Rauenhorst | |
| |
| /s/WILLIAM G. VAN DYKE | February 13, 2009 |
| William G. Van Dyke | |
| |
| /s/R. WILLIAM VAN SANT | February 13, 2009 |
| R. William Van Sant | |
| |
Exhibit 31.1
Certification
I, Patrick J. McHale, 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 16, 2009 | /s/PATRICK J. MCHALE |
| | Patrick J. McHale 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 16, 2009 | /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 16, 2009 | /s/PATRICK J. MCHALE |
| | Patrick J. McHale President and Chief Executive Officer |
Date: | February 16, 2009 | /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; |
| — | the ability of our Company to successfully divest or discontinue incompatible or unprofitable lines of business; |
| — | the ability to locate and access reasonably priced financing; |
| — | 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, hire and retain employees with required or desired skills, training and education; |
| — | 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 by adjusting our cost structure; 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 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; |
| — | implementation of an enterprise resource planning 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; 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 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 major manufacturers; changes in manufacturing processes; and consolidation in the 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; 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 develop and profitably market innovative high-quality products and meet competitive challenges in our industrial lubrication business. |
