Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
General Information. Graco Inc. ("Graco" or "the Company") supplies technology and expertise for the management of fluids in both industrial and commercial settings. It manufactures and markets systems and equipment to move, measure, control, dispense and apply fluid materials. The Company helps customers solve difficult manufacturing problems, increase productivity, improve quality, conserve energy, save expensive materials, control environmental emissions and reduce labor costs. Primary uses of the Company's equipment include the application of coatings and finishes to various industrial and commercial products; the mixing, metering, dispensing and application of adhesive, chemical bonding, and sealant materials; the application of paint and other materials to architectural structures; the lubrication and maintenance of vehicles and industrial machinery; and the transferring and dispensing of various fluids. Graco is the successor to Gray Company, Inc., which was incorporated in 1926 as a manufacturer of auto lubrication equipment, and became a public company in 1969.
It is Graco's goal to become the highest quality, lowest cost, most responsive supplier in the world for its principal products. In working to achieve these goals to become a world class manufacturer, Graco has been converting its Minneapolis manufacturing operations to focused factories, organized around team-directed manufacturing cells, a process expected to be completed in 1997. Substantial investments in new manufacturing technology have reduced cycle time and improved quality.
The Company operates in one industry segment, namely, the design, manufacture, marketing, sale and installation of systems and equipment for the management of fluids. Financial information concerning geographic operations and export sales for the last three fiscal years is set forth in Note B of the Notes to Consolidated Financial Statements.
Recent Developments. During 1994, the Company began the restructuring and consolidation of its operations in Europe and Japan. The European customer service and distribution functions were relocated from the Company's facility in Rungis, France to the new facility in Maasmechelen, Belgium. In the fall of 1994, Graco announced that management of its European operations would be centralized in a new headquarters operation at the Company's recently expanded facility in Maasmechelen, Belgium during 1995. In June of 1994, Graco initiated an intensive evaluation of its domestic marketing and sales groups with the goal of maximizing effectiveness and substantially reducing the cost of sales. Implementation of the recommendations generated by this evaluation are currently underway. As of January 1, 1995, the majority of order entry, customer service, and accounting functions for Graco's Canadian subsidiary was being performed in the United States. In 1994, Graco began a construction project to more than double the size of the Russell J. Gray Technical Center to house additional testing and product development activities and personnel. Manufacturing in Minneapolis operated at near peak capacity during 1994.
Products. Graco Inc. manufactures a wide array of specialized pumps, applicators, regulators, valves, meters, atomizing devices, replacement parts, and accessories, which are used in industrial and commercial applications in the movement, measurement, control, dispensing and application of many fluids and semi-solids, including paints, adhesives, sealants, and lubricants. In addition, it offers an extensive line of portable equipment which is used in construction and maintenance businesses for the application of paint and other materials. Graco fluid systems incorporate sophisticated paint circulating and fluid application technology.
Commercial and industrial equipment offered by Graco includes specialized pumps, air and airless spray units, manual finishing equipment and fluid handling systems. A variety of pumps provide fluid pressures ranging from 20 to more than 6,000 pounds per square inch and flow rates from under 1 gallon to 140 gallons per minute.
The Company sells accessories for use with its equipment, including hoses, couplings, regulators, valves, filters, reels, meters, and gauges, as well as a complete line of spray guns, tips and applicators. These accessories increase the flexibility, efficiency and effectiveness of Graco equipment. Packings, seals, hoses and other parts, which must be replaced periodically in order to maintain efficiency and prevent loss of material, are also sold.
Sales of replacement parts and accessories have averaged 43 percent of the Company's consolidated net sales and approximately 49 percent of gross profits during the last three years. The following table summarizes the consolidated net sales and gross profits (net sales less cost of products sold) by the Company's principal product groups for that same period.
Product Group Sales and Gross Profit
Marketing and Distribution. Graco's operations are organized to allow its full line of fluid handling products and systems to be offered in each major geographic market: the Americas, Europe and Pacific. The Industrial Equipment Division, the Automotive Equipment Division, the Contractor Equipment Division, and the Lubrication Equipment Division provide worldwide marketing direction and product design and application assistance to each of these geographic markets.
Graco's equipment is sold worldwide principally through the Company's international sales subsidiaries, direct sales personnel and regional distributors. Manufacturers' representatives are used with some product lines. In the Americas, the Company maintains a specialized direct sales force which handles sales of large systems and sales to certain corporate accounts.
In 1994, Graco's net sales in the Americas were $241,169,000 or approximately 67 percent of the Company's consolidated net sales; in Europe (including the Middle East and Africa) net sales were $65,888,000 or approximately 18 percent; and in the Pacific region, net sales were $52,956,000 or approximately 15 percent.
Research, Product Development and Technical Services. Graco's research, development and engineering activities focus on new product design, product improvements, applied engineering and strategic technologies. A dedicated support group of application engineers and technicians also provides specialized technical assistance to customers in the design and evaluation of fluid transfer and application systems. It is one of Graco's financial goals to generate 30 percent of each year's sales from products introduced in the prior three years. To achieve this goal, Graco substantially increased its new product design and application engineering staff, and more than doubled the size of the Russell J. Gray Technical Center to provide expansion space for engineering, testing and laboratory activities during 1994. Occupancy of the new wing of the Technical Center will be completed by May 1995. Total research and development expenditures were $14,591,000, $12,382,000 and $10,616,000 for the 1994, 1993 and 1992 fiscal years, respectively.
Intellectual Property. Graco owns a number of patents and has patent applications pending both in the United States and in foreign countries, licenses its patents to others, and is licensed under patents owned by others. In the opinion of the Company, its business is not materially dependent upon any one or more of these patents or licenses. The Company also owns a number of trademarks in the United States and foreign countries, including the registered trademarks for "GRACO," several forms of a capital "G" and various product trademarks which are material to the business of the Company in that they identify Graco and its products to its customers.
Competition. Graco faces substantial competition in all of its markets. The nature and extent of this competition varies in different markets due to the diversity of the Company's products. Product quality, reliability, design, customer support and service, specialized engineering and pricing are the major competitive factors. Although no competitor duplicates all of Graco's products, some competitors are larger than the Company, both in terms of sales of directly competing products and in terms of total sales and financial resources. Graco believes it is one of the world's leading producers of high-quality specialized fluid management equipment and systems. It is impossible, because of the absence of reliable industry- wide figures, to determine its exact relative market position.
Environmental Protection. During the fiscal year ending December 30, 1994, the amounts incurred to comply with federal, state and local legislation pertaining to environmental standards did not have a material effect upon the capital expenditures or earnings of the Company.
Employees. As of December 30, 1994, the Company employed approximately 2,075 persons on a full-time basis. Of this total, approximately 390 were employees based outside the United States, and 815 were hourly factory workers in the United States. Although Graco's U.S. employees are not covered by collective bargaining agreements, various national industry-wide labor agreements apply to select employees in Europe. The Company believes it has a good relationship with its employees.
Item 2.



Item 2. Properties
The Company owns the four buildings which house its corporate offices, principal manufacturing, assembly and research and development activities. These buildings, located in Minneapolis, Minnesota, have an aggregate area of approximately 664,200 square feet. The Company's distribution operations are located in 123,800 square feet of space in a Minneapolis suburb under a lease which expires at the end of 1996. The Company's technical assistance, product service and technical publications departments are located in 18,200 square feet of space in Minneapolis, under a lease which will expire in 1996.
The Company owns a 106,000 square foot facility in Plymouth, Michigan, which contains manufacturing, engineering and administrative operations devoted primarily to sales to the automotive industry. A 55,000 square foot building in Farmington Hills, Michigan and a 57,000 square foot building in Wixom, Michigan are currently for sale.
Graco manufactures paint spray guns and other products and accessories in a Company-owned 55,000 square foot building in Sioux Falls, South Dakota. The Company owns an office and plant located in Franklin Park, Illinois, of approximately 82,000 square feet. Graco's Japanese subsidiary leases an office building which functions as its technical sales center which houses engineering, demonstration and test activities, customer service, information systems and administration and a warehouse, all under long-term leases with renewal options on favorable terms. Graco's Canadian subsidiary owns a 20,000 square foot facility in Mississaugua, Ontario, which contains office and warehouse space. With the exception of the Maasmechelen facility, which is owned by the Belgium subsidiary, the Company leases branch or subsidiary sales offices in the United States and abroad, some of which have demonstration areas and/or warehouse space.
During 1994, Graco built a 67,000 square foot warehouse, production and office building in Maasmechelen, Belgium. An expansion of 8,800 square feet was started in late 1994 to accommodate the European headquarters operations being relocated from France to Belgium, with completion expected the second quarter of 1995. European customer service, distribution and modular assembly functions formerly based in France and assembly operations previously carried on in Houthhalen, Belgium, were consolidated in 1994 at this location. In 1995, Graco plans to relocate its operations in the Midlands region of the United Kingdom to a better quality leased facility with office, systems assembly and warehouse space. In Minneapolis, an 80,000 square foot expansion of the Company's Russell J. Gray Technical Center is nearing completion, with occupancy expected to be complete by May, 1995.
Graco's facilities are in good operating condition, suitable for their respective uses and are sufficient and adequate to meet current needs, with the recent and planned expansions.
Item 3.

Item 3. Legal Proceedings
The Company is engaged in routine litigation incident to its business, which management believes will not have a material adverse effect upon its operations or consolidated financial position.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
No issues were submitted to a vote of security holders during the fourth quarter of 1994.
Executive Officers of the Company
The following are all the executive officers of the Company as of March 1, 1995. There are no family relationships between any of the officers named.
David A. Koch, 64, is Chairman and Chief Executive Officer, positions he has held since 1985. He joined the Company in 1956 and held various sales and marketing positions with the Company prior to assuming the office of President in 1962. For a five month period from January to June 1993, he also held the office of President. He has served as a director of the Company since 1962.
George Aristides, 59, was named President and Chief Operating Officer and was elected a director of the Company in June 1993. He became Executive Vice President, Industrial/Automotive Equipment Division, Manufacturing, Distribution and Eurafrican Operations, in March 1993. From 1985 until 1993, he was Vice President, Manufacturing Operations and Controller. He joined the Company in 1973 as Corporate Controller and became Vice President and Controller in 1980.
John L. Heller, 58, was named Senior Vice President and General Manager - Contractor Equipment Division in July 1993. He became Vice President, Far East Operations and Latin America, in 1992. Prior to becoming Vice President, Far East Operations in 1984, he held various management and staff positions in sales and human resources. He joined the Company in 1972.
Roger L. King, 49, was named Senior Vice President and General Manager - International Operations in July 1993. He is responsible for Graco's sales activities and operations outside North America. He became Senior Vice President and Chief Financial Officer in March 1993, and Vice President and Treasurer in 1987. Prior to becoming Vice President, Treasurer and Secretary in 1980, he held the position of Treasurer and Secretary and various treasury management positions with Graco. He joined the Company in 1970.
James A. Graner, 50, was elected Vice President and Controller in February 1994. He became Treasurer in May 1993. Prior to becoming Assistant Treasurer in 1988, he held various managerial positions in the treasury, accounting and information systems departments. He joined Graco in 1974 as an accountant.
Clyde W. Hansen, 62, was elected Vice President, Human Resources, in December 1993. He joined the Company in 1984 as Employee Relations Director, a position he held until his election.
David M. Lowe, 39, was elected to the position of Treasurer in February 1995. Prior to joining the Company, he was employed by Ecolab Inc. in St. Paul, Minnesota, where he held various positions in the Treasury Department, including Manager-Corporate Finance; Director, Corporate Finance and most recently Director, Corporate Development.
Robert M. Mattison, 47, was elected Vice President, General Counsel and Secretary, in January 1992. Prior to joining the Company, he held various legal positions with Honeywell Inc., most recently as Associate General Counsel.
Robert A. Wagner, 44, was elected Vice President, Asia Pacific of Graco Inc. and President, Graco K.K. effective January 1995. He became Vice President and Treasurer, Graco Inc., in February 1994. He joined the Company in December 1991, as Vice President, Corporate Development and Planning. Prior to joining the Company, he was employed by Texas Instruments for nearly five years, where he held various managerial positions, including Vice President and Manager, Corporate Development, a position which he held immediately prior to his departure.
Clayton R. Carter, 56, was appointed to the position of Vice President, Lubrication Equipment Division, effective January 1, 1995. He became Director, Vehicle Services Division, in February 1994. He joined the Company in 1962 and has held various sales management positions, most recently in the Contractor Equipment Division.
Thomas J. Fay, 44, is Vice President, European Operations, a position to which he was appointed on January 1, 1995. Prior to becoming General Manager of European Operations in March 1994, he held the position of General Manager, Region III, in Europe. Mr. Fay joined the Company in 1984 and held various sales management positions before moving to Europe in 1990.
Vincent C. Hren, 44, is Vice President and General Manager, Automotive Division, a position to which he was appointed in December 1994. Prior to joining the Company, he was employed by Fisher-Rosemount in various managerial positions in manufacturing, most recently as Vice President of Worldwide Operations.
Charles L. Rescorla, 43, is Vice President, Manufacturing Operations, a position to which he was appointed on January 1, 1995. Prior to becoming the Director of Manufacturing in March 1994, he was the Director of Engineering, Industrial Division, a position which he assumed in 1988 when he joined the Company.
With the exception of David M. Lowe, Clayton R. Carter, Thomas J. Fay, Vincent C. Hren, and Charles L. Rescorla, the officers identified were elected by the Board of Directors on May 3, 1994, to hold office until the next annual meeting of directors or until their successors are elected and qualify. In addition, effective January 1, 1995, Robert A. Wagner, who formerly held the position of Vice President and Treasurer, was elected to the office of Vice President, Asia Pacific, and on February 24, 1995, David M. Lowe was elected to the office of Vice President and Treasurer. Messrs. Carter, Fay, Hren, and Rescorla were appointed to their positions by management effective January 1, 1995, January 1, 1995, December 27, 1994, and January 1, 1995, respectively.
PART II
Item 5.

Item 5. Market for the Company's Common Stock and Related Stockholder Matters
Graco Common Stock. Graco common stock is traded on the New York Stock Exchange under the ticker symbol "GGG." As of March 6, 1995, there were 11,377,904 shares outstanding and 1,800 common shareholders of record, with another estimated 1,800 shareholders whose stock is held by nominees or broker dealers.
Item 6.

Item 6. Selected Financial Data
Above information includes Lockwood Technical, Inc. (LTI) and Graco Robotics Inc. (GRI), former wholly-owned subsidiaries, sold in 1992 and 1991, respectively.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S REVIEW AND DISCUSSION
The following is Management's Review and Discussion and is not covered by the Independent Auditors' Report.
Net earnings in 1994 of $15,326,000 were significantly higher than the $9,493,000 in 1993, and the $5,301,000 in 1992. The 61 percent increase in 1994 primarily reflects the impact of higher sales and the decline in operating costs as a percent of sales. Operating costs include increased product development costs and restructuring charges. The increase in net earnings between 1993 and 1992 principally resulted from the one-time net reduction in 1992 of $5,844,000 for the cumulative effect of changes in two accounting principles.
The following table indicates the percentage relationship of income and expense items, before changes in accounting principles, included in the Consolidated Statements of Earnings for the three most recent fiscal years and the percentage changes in those items for such years.
NET SALES
Graco achieved record sales in 1994. Net sales increased 12 percent to $360,013,000, principally as the result of significantly higher sales in the Americas in all divisions. Geographically, higher sales in the Americas, Europe and the Pacific were partially offset by a 14 percent sales decline in Japan. In 1993, sales increased 1 percent over 1992 as significant increases in the Americas and the Pacific were offset by declines in Europe and Japan. The impact of exchange rate movement on sales was not significant in 1994 when compared to 1993, or in 1993 when compared to 1992.
Consolidated backlog at December 30, 1994 was $25 million, compared to $20 million at year-end 1993 and $18 million at the end of 1992. The increased backlog at the end of 1994 resulted primarily from increased Automotive Equipment Division system orders in the Pacific.
Sales increased 12 percent in 1994 when compared to 1993 and 2 percent in 1993 from 1992, excluding operations divested in 1992.
COST OF PRODUCTS SOLD
Cost of products sold in 1994, as a percent of net sales, decreased to 51.7 from 52.6 in 1993, primarily due to manufacturing efficiencies gained from continued investment in technology and increased manufacturing volumes. Manufacturing efficiencies gained from continued investment in state-of-the- art manufacturing technology, principally in Minneapolis, Minnesota, and Sioux Falls, South Dakota, have more than offset increases in raw material and subcontract costs. Partially offsetting these factors were an increased proportion of lower-margin, engineered industrial and automotive system sales.
Periodic price increases have generally permitted the Company to recover increases in the cost of products sold. The Company's last U.S. price change was effective in January 1995, and represented an average 2 percent increase from its April 1994 price lists. The April 1994 price change was an average 2 percent increase from June 1992 prices.
OPERATING EXPENSES
Operating expenses in 1994 increased 8.4 percent from 1993, due primarily to continued investment in product development and ongoing restructuring initiatives. Restructuring and work force reduction costs worldwide accounted for approximately 50 percent of the increase.
Product development expenses in 1994 increased 18 percent to $14,591,000 as the Company added engineering personnel to achieve its goal of increasing sales of new products.
Included in 1993 selling and general and administrative expenses are $1,700,000 of non-recurring costs, including costs for the relocation of administrative and technical facilities in Japan.
Included in 1992 selling and general and administrative expenses were $5,200,000 in costs associated with the relocation and consolidation of the Company's Detroit-based operations, reductions in the U.S. sales force and European operations, and other personnel reductions.
FOREIGN CURRENCY EFFECTS
The costs of the Company's products are generally denominated in U.S. dollars, with approximately 17 percent sourced in non-U.S. currencies. A greater proportion of its sales, approximately 32 percent, is denominated in currencies other than the U.S. dollar. As a result, a weakening of the U.S. dollar increases sales more than costs and expenses, improving the Company's gross and operating profits. During 1994 when compared to 1993, the U.S. dollar was generally weaker against other major currencies. In 1993 when compared to 1992, it was stronger.
The gains and losses that result from the translation of the financial statements for all non-U.S. subsidiaries, except Japan, and the gains and losses on the forward and option contracts used to hedge these exposures, are included in Other (expense) income. For 1995, the translation gains or losses included in Other (expense) income will include Japan.
In total, the effect of the changes in exchange rates on operating profits and the gains and losses included in Other (expense) income increased earnings before income taxes by $2,300,000 in 1994, when compared to 1993, and decreased earnings before income taxes by $4,500,000 in 1993, when compared to 1992.
OTHER (EXPENSE) INCOME
The decrease in interest expense in 1994 reflects a reduction in the amount of and interest rate on long-term debt. This decrease was offset by higher floating rate borrowings used primarily to finance the Company's increased working capital requirements and investments in plant and equipment during the year. Increased product demand accelerated previously scheduled investments in manufacturing equipment.
Other (expense) income of ($1,040,000), ($821,000) and $1,293,000 for 1994, 1993 and 1992, respectively, includes, among other things, the exchange gains and losses discussed previously, and a $1,800,000 gain on the sale of Lockwood Technical, Inc. (LTI) in 1992.
INCOME TAXES
The Company's net effective tax rate for 1994 was at the U.S. federal tax rate of 35 percent. The increase from the 31 percent rate for 1993 results principally from a non-recurring tax benefit received in 1993 associated with the increase in value of deferred tax assets caused by the U.S. statutory tax rate change to 35 percent. The effective tax rate of 38 percent in 1992 was higher than the then U.S. federal rate of 34 percent with the difference resulting principally from state taxes and foreign earnings taxed at rates higher than the U.S. rate. Reconciliation of the U.S. federal rate to the effective rates is discussed in Note D to the Consolidated Financial Statements.
EARNINGS BEFORE CHANGES IN ACCOUNTING PRINCIPLES
Earnings during 1994 increased by 61 percent to $15,326,000, or $1.32 per share, as compared to 1993, when earnings decreased by 15 percent to $9,493,000, or $.82 per share, from 1992 before changes in accounting principles.
CHANGES IN ACCOUNTING PRINCIPLES
The Company recorded one-time adjustments in 1992 for the cumulative effect of its required adoption of Statements of Financial Accounting Standards (SFAS) No. 106 (Employers' Accounting for Postretirement Benefits Other Than Pensions) and No. 109 (Accounting for Income Taxes), as described in Note A to the Consolidated Financial Statements.
OUTLOOK
The Company anticipates higher sales in 1995 as the result of continued new product introductions, focus on specific industries, positive economic conditions in the Americas, improving conditions in Europe, and continued economic growth in the Pacific region, excluding Japan.
The restructuring efforts undertaken in recent years have positioned the Company to capitalize on future growth opportunities while benefiting from overall lower operating expenses as a percent of sales. The Company expects its restructuring efforts to continue, however, at a lower level than 1994. Full year gross profit margins are expected to improve moderately in 1995, as a result of manufacturing efficiencies and higher volumes, subject to the strength of the U.S. dollar (see Foreign Currency Effects). Operating expenses as a percent of sales are expected to decrease, even though the Company will continue to fund its long-term strategic initiatives in product development.
DIVIDEND ACTIONS
Over the last two years the Company has undertaken a number of measures to enhance shareholder value, broaden ownership, improve the liquidity of its common shares, and distribute excess cash balances:
- A three-for-two stock split distributed in 1994; - A special one-time dividend of $2.70 per post-split share declared in 1993($31,224,000 in total); - A 10 percent increase in the regular dividend in 1993; - A 14 percent increase in the regular dividend in 1994.
ASSETS
The following table highlights several key measures of asset performance.
Improved inventory management early in 1994 led to an increase in inventory turns to 4.3 compared to 4.0 in 1993. However, year-end inventory balances were 41 percent higher than 1993, principally due to new product introductions, increased volume and additional inventory carried to support customer service levels. Management is focusing its efforts to further improve inventory turns in 1995.
Overall, 1994 collection performance was flat at 71 average days receivables outstanding. The 22 percent increase in accounts receivable to $75,589,000, resulted primarily from increased fourth quarter sales compared to 1993.
LIABILITIES
At year-end, long-term debt (including current portion) was 28 percent of total capital (long-term debt plus shareholders' equity) compared to 21 percent in 1993 and 18 percent in 1992. The Company had $19 million in unused credit lines available at December 30, 1994. While the Company believes available credit lines plus operating cash flows are adequate to fund the Company's short and long-term initiatives, additional credit lines may be arranged from time to time as necessary.
SHAREHOLDERS' EQUITY
Shareholders' equity totaled $81,851,000 on December 30, 1994, $7,166,000 higher than 1993, but down from 1992, as the result of the Company's decision to pay the special one-time dividend of $2.70 per share as previously noted.
CASH FLOWS FROM OPERATING ACTIVITIES
In 1994, cash flow from operations was $8,587,000, substantially less than net earnings. This is primarily the result of increased working capital requirements for inventory and accounts receivable. Cash flow from operating activities in 1993 was $23,116,000, $2,986,000 less than the $26,102,000 recorded in 1992.
Cash flows from operating activities have been, and are expected to be, the principal source of funds required for future additions to property, plant and equipment, and working capital, as well as for other corporate purposes.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $23,100,000 in 1994, $16,178,000 in 1993 and $10,194,000 in 1992. These expenditures have enhanced the Company's engineering and manufacturing capabilities, improved product quality, increased capacity, and lowered costs. Expenditures in 1994 include the construction of an 80,000 square foot addition to the Company's technical center in Minneapolis, Minnesota and the acceleration of planned machinery purchases.
The Company expects to make approximately $25,000,000 in capital investments in 1995: $15,000,000 for machinery and equipment, $6,000,000 for the expansion of the Russell L. Gray Technical Center and $4,000,000 for manufacturing capacity expansion.
During 1994, the Company sold its marketable securities to fund the special one-time dividend of $31,224,000 paid to shareholders on March 21, 1994.
The Company realized cash proceeds of $8,569,000 on its sale of LTI in April 1992.
CASH FLOWS FROM FINANCING ACTIVITIES
The amount of common stock issued represents the funds received to purchase shares through the Company's dividend reinvestment plan, its Employee Stock Purchase Plan, and the distribution of shares pursuant to its Long Term Stock Incentive Plan, more fully described in Note F to the Consolidated Financial Statements.
Graco offers an Automatic Dividend Reinvestment Plan, which provides shareholders with a simple and convenient way to reinvest quarterly cash dividends in additional shares of Graco common stock. Brokerage and service charges are paid by the Company.
All Graco employees in the U.S. participate in the Graco Employee Stock Ownership Plan. Eligible employees may also purchase Graco common stock through the Company's Employee Stock Purchase Plan.
From time to time, the Company makes open market purchases of its common shares. These shares are available for issuance to satisfy grants under its Long Term Stock Incentive Plan and other plans, as well as for other corporate purposes. On February 25, 1994, the Company's Board of Directors authorized management to repurchase up to 400,000 shares. As of December 31, 1994, under this repurchase program, the Company had repurchased 253,400 shares at an average price per share of $17.94.
The Company is currently paying 16 cents per share as its regular quarterly dividend. Annual cash dividends paid on the Company's common and preferred stock, including a special one-time dividend of $31,224,000 paid on March 21, 1994, were $37,732,000 in 1994, $5,879,000 in 1993 and $5,484,000 in 1992. The Company expects to continue paying regular quarterly dividends to its common shareholders at amounts which will be adjusted periodically to reflect earnings and cash flow performance and expectations.
In 1994, debt increased by $21,444,000, reflecting increased working capital investment, primarily in inventory, receivables and capital expenditures.
Item 8.


Item 8. Financial Statements and Supplementary Data Page - Responsibility for Financial Reporting 14 - Independent Auditors' Report 14 - Consolidated Statements of Earnings for fiscal years 1994, 1993 and 1992 15 - Consolidated Statements of Changes in Shareholders' Equity Accounts (See Footnote F, Notes to Consolidated Financial Statements) 22 - Consolidated Balance Sheets for fiscal years 1994, 1993 and 1992 16 - Consolidated Statements of Cash Flows for fiscal years 1994, 1993 and 1992 17 - Notes to Consolidated Financial Statements 18 - Selected Quarterly Financial Data (See Part II, Item 5, Market for the Company's Common Stock and Related Stockholder Matters) 8
Responsibility For Financial Reporting
Management is responsible for the accuracy, consistency, and integrity of the information presented in this annual report on Form 10-K. The consolidated financial statements and financial statement schedules have been prepared in accordance with generally accepted accounting principles and, where necessary, include estimates based upon management's informed judgment.
In meeting this responsibility, management believes that its internal control structure provides reasonable assurance that the Company's assets are safeguarded and transactions are executed and recorded by qualified personnel in accordance with approved procedures. Internal auditors periodically review the internal control structure. Deloitte & Touche LLP, independent certified public accountants, are retained to audit the consolidated financial statements, and express an opinion thereon. Their opinion follows.
The Board of Directors pursues its oversight role through its Audit Committee. The Audit Committee, composed of directors who are not employees, meets twice a year with management, internal auditors, and Deloitte & Touche LLP to review the internal control structure, accounting practices, financial reporting, and the results of auditing activities.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors Graco Inc. Minneapolis, Minnesota
We have audited the accompanying Consolidated Balance Sheets of Graco Inc. and Subsidiaries (the "Company") as of December 30, 1994, December 31, 1993, and December 25, 1992, and the related statements of earnings and cash flows for each of the three years in the period ended December 30, 1994. Our audit also included the financial statement schedule listed in the Index at Item 14. 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 generally accepted auditing standards. 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 30, 1994, December 31, 1993, and December 25, 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 1994, in conformity with generally accepted accounting principles. Also, on 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.
As discussed in Note A to the Consolidated Financial Statements, the Company changed its method of accounting for income taxes and postretirement health care benefits during the year ended December 25, 1992.
Deloitte & Touche LLP Minneapolis, Minnesota February 7, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GRACO INC. & Subsidiaries Years Ended December 30, 1994, December 31, 1993, and December 25, 1992
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR. The Company's fiscal year is 52 or 53 weeks, ending on the last Friday in December.
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 30, 1994, all subsidiaries are 100 percent owned. Subsidiaries outside North America have been included principally on the basis of fiscal years ended November 30 to effect more timely consolidated financial reporting. The U.S. dollar was the functional currency for all foreign subsidiaries, except Graco K.K. (Japan), where the local currency was the functional currency.
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES. All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Marketable securities include debt securities of various maturities. Realized gains and losses are computed based on the specific identified cost method. At December 31, 1993, the securities were reported at fair value. At December 25, 1992, the securities were recorded at the lower of cost or market. Cost approximated market at both December 31, 1993 and December 25, 1992.
INVENTORY VALUATION. Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) cost method is used for valuing all U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO) cost method.
CURRENCY HEDGES. The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. Subsequently, the Company enters into forward contracts, borrowings in various currencies, or options in order to hedge its net monetary positions. Consistent with financial reporting requirements, these hedges and net monetary positions are marked to market. The Company believes it uses strong financial counterparties in these transactions and that the resulting credit risk under these hedging strategies is not significant. The amounts (which do not represent credit or market risk) of such contracts were (in U.S. dollars) $9,086,000, $15,258,000, and $16,709,000 at December 30, 1994, December 31, 1993, and December 25, 1992, respectively.
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 45 years Leasehold improvements 3 to 10 years Manufacturing equipment and tooling 3 to 10 years Office, warehouse and automotive equipment 4 to 10 years
REVENUE RECOGNITION. Revenue is recognized on large contracted systems using the percentage-of-completion method of accounting. The Company recognizes revenue on other products when title passes, which is usually upon shipment.
INCOME TAXES. Effective the beginning of 1992, the Company adopted SFAS No. 109 (Accounting for Income Taxessee Note D). The Company provides taxes on unremitted earnings of subsidiaries.
EARNINGS PER COMMON SHARE. On December 17, 1993, the Board of Directors approved a three-for-two stock split, effected in the form of a stock dividend, payable February 2, 1994, to shareholders of record on January 5, 1994. All share and per share data has been restated to reflect the split. Earnings per common share are computed on earnings reduced by dividend requirements on preferred stock and based upon the weighted average number of common shares and common equivalent shares, consisting of the dilutive effect of stock options outstanding during each year. Earnings per common share assuming full dilution are substantially the same.
RETIREE HEALTH CARE BENEFITS. Effective the beginning of 1992, the Company adopted SFAS No. 106 (Employers' Accounting for Postretirement Benefits Other Than Pensions). This Statement requires the accrual of postretirement benefit costs during the years an employee provides services. The Company elected to charge the entire unfunded obligation of $10,254,000
($6,768,000 after tax), against earnings as of the beginning of 1992, as a cumulative effect of a change in accounting principle. In addition, the effect of this change decreased 1992 earnings before income taxes by $848,000.
1992 SALE OF SUBSIDIARY. On April 24, 1992, the Company sold a wholly owned subsidiary, Lockwood Technical, Inc., (LTI) and a related Japanese joint venture affiliate (LTI-Graco K.K.). A gain on the sale of $1,792,000 is reflected in 1992 results.
B. INDUSTRY SEGMENT AND FOREIGN OPERATIONS
The Company operates in one industry segment, namely, the design, manufacture, marketing, sale and installation of systems and equipment for the management of fluids.
The Company's operations by geographical area for the last three years are shown below.
Net earnings (loss) for subsidiaries operating outside the U.S. were ($5,624,000), ($2,261,000), and $6,608,000 for 1994, 1993, and 1992, respectively.
Retained earnings for subsidiaries operating outside the U.S. were $8,860,000, $9,760,000, and $9,908,000 for 1994, 1993, and 1992, respectively.
Transaction and translation net gains or losses, included in Other income (expense), net were $366,000, ($1,294,000), and ($670,000) for 1994, 1993, and 1992, respectively.
C. INVENTORIES
Major components of inventories for the last three years were as follows:
Inventories valued under the LIFO method were $32,743,000, $19,700,000, and $30,309,000 for 1994, 1993, and 1992, respectively. The balance of the inventory was valued on the FIFO method.
In 1993, certain inventory quantities were reduced, resulting in liquidation of LIFO inventory quantities carried at lower costs from prior years. The effect was to increase net earnings by approximately $900,000 in 1993.
D. INCOME TAXES
The Company adopted SFAS No. 109 (Accounting for Income Taxes) as of the beginning of 1992.
Earnings before income tax expense and changes in accounting principles consist of:
Income tax expense, before the cumulative effect of changes in accounting principles, consists of:
Income taxes paid were $12,136,000, $4,620,000, and $6,186,000 in 1994, 1993, and 1992, respectively.
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:
Deferred income taxes are provided for all temporary differences between the financial reporting and the tax basis of assets and liabilities. The deferred tax assets (liabilities) resulting from these differences are as follows:
Net non-current deferred tax assets above are included in other assets. Total deferred tax assets were $22,506,000, $18,637,000 and $19,218,000, and total deferred tax liabilities were $6,801,000, $7,509,000, and $7,434,000 on December 30, 1994, December 31, 1993 and December 25, 1992, respectively. A valuation allowance of $6,893,000 and $2,740,000 has been recorded as of December 30, 1994 and December 31, 1993, respectively, primarily related to the uncertainty of obtaining tax benefits for subsidiary operating losses, which expire beginning in 1998 in Japan and in later years for other subsidiaries. The effect of these allowances has been considered in "Foreign earnings with higher tax rates" in the Company's tax rate reconciliation.
E. DEBT
Long-term debt consists of the following:
Aggregate annual scheduled maturities of long-term debt for the next five years are as follows: 1995, $5,685,000; 1996, $16,744,000; 1997, $1,886,000; 1998, $1,803,000; 1999, $2,763,000. Interest paid on debt during 1994, 1993, and 1992 amounted to $1,923,000, $3,230,000, and $1,910,000, respectively. The fair value of the Company's long-term debt at December 30, 1994, December 31, 1993 and December 25, 1992, is not materially different than its recorded value.
During 1992, the Company entered into an interest rate swap agreement whereby it fixed the interest rate of the remaining principal amounts of the Company's previously variable interest rate revenue bond debt at 4.65 percent through 1997, at which time the debt will revert back to a variable interest rate. The cash flows related to the swap agreement are recorded as income when received and expense when paid. Market and credit risk are not significant.
On December 30, 1994, the Company had lines of credit with U.S. and foreign banks of $44,280,000, including a $15,000,000 revolving credit agreement. The unused portion of these credit lines was $18,993,000 at December 30, 1994. Borrowing rates under these facilities vary with the prime rate, rates on domestic certificates of deposit, and the London interbank market. During the years ended December 30, 1994, December 31, 1993 and December 25, 1992, the Company's weighted average short term borrowing rates were 4.8 percent, 10.3 percent and 11.5 percent, respectively. The Company pays commitment fees of up to 3/16 percent per annum on the daily average unused amounts on certain of these lines. No compensating balances are required.
The Company is in compliance with the covenants of its debt agreements. Under the most restrictive terms of the agreements, approximately $7,378,000 of retained earnings were available for payment of cash dividends at December 30, 1994.
F. SHAREHOLDERS' EQUITY
The holders of cumulative preferred stock are entitled to fixed cumulative dividends of 5 percent per annum on the par value before cash dividends may be paid or declared on common stock. The preferred stock may be redeemed at the option of the Company at $105 per share plus accrued and unpaid dividends. Preferred stockholders are entitled to $105 per share in the event of voluntary liquidation of the Company or $100 per share for involuntary liquidation, plus all accrued and unpaid dividends. All required dividends have been paid.
The Company has authorized, but not issued, a separate class of 3,000,000 shares of preferred stock, $1 par value.
The Company has a leveraged Employee Stock Ownership Plan (ESOP) under which outstanding debt was $900,000, $1,200,000 and $1,500,000 at December 30, 1994, December 31, 1993 and December 25, 1992, respectively. This is also the remaining balance of a concurrent loan to the ESOP Trust from the Company on the same terms. The Company's loan is included in long-term debt with the receivable from the ESOP in a like amount recorded as a reduction of shareholders' equity reflected in the Other, net category. The Company is obligated to make annual contributions to the ESOP Trust through 1997 sufficient to repay the loan and interest thereon.
On May 3, 1994, the shareholders approved a Nonemployee Director Stock Plan which enables individual nonemployee directors of the Company to elect to receive all or part of a director's annual retainer in the form of shares of the Company's common stock instead of cash.
On December 17, 1993, the Board of Directors approved a three-for-two stock split, effected in the form of a stock dividend, payable February 2, 1994 to shareholders of record on January 5, 1994. Accordingly, December 31, 1993 balances reflect the split with an increase in common stock and a reduction in retained earnings of $3,817,000. All stock option, share and per share data have been restated to reflect the split. On December 17, 1993, the Board of Directors also approved a special one-time dividend of $2.70 per common share to be paid March 21, 1994, on post-split shares to shareholders of record on March 7, 1994. Dividends payable at December 31, 1993, reflect the special one-time dividend.
Under the Company's Employee Stock Purchase Plan, 2,100,000 common shares have been authorized for sale to employees, 434,546 of which remained unissued at the end of 1994. The purchase price of the shares under the Plan 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 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 one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $80, subject to adjustment. The Rights are exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the Company's outstanding common stock. The Rights expire in March 2000 and may be redeemed earlier by the Board of Directors for $.01 per Right.
The Company has a Long Term Stock Incentive Plan, under which a total of 1,650,000 common shares have been reserved for issuance, with 790,812 shares remaining reserved at December 30, 1994. Grants under this Plan are in the form of restrictive share awards and stock options. Restrictive share awards of 398,406 common shares have been made to certain key employees under the Plan, with 62,316 shares restricted for disposition, such restrictions lapsing from 1995 to 1997. Unearned compensation expense relating to the remaining restricted shares is $745,000 at December 30, 1994, and is included as a reduction of shareholders' equity in the Other, net category.
Stock options for 801,622 common shares have also been granted under the Plan. The option price is the market price at the date of grant. Options become exercisable at such time and in such installments as set by the Company, and expire in five to ten years from the date of grant.
In 1993, the Company granted Stock Appreciation Rights (SARs) to certain key employees, utilizing a portion of the above options. Upon the exercise of the SARs, the employee will surrender the unexercised related option and will receive a cash payment equal to the excess of the fair market value at the time of exercise over the price of the related option. Compensation expense related to the SARs is not significant.
Shares and options on common shares granted and exercisable, as well as the exercise price, are shown for the last three years in the table below:
The changes in shareholders' equity accounts are as follows:
G. RETIREMENT BENEFITS
The Company has a defined contribution plan, under Section 401(k) of the Internal Revenue Code, which provides additional retirement benefits to all U.S. employees who elect to participate. Currently, the Company matches employee contributions at a 50 percent rate, up to 3 percent of the employee's compensation. Employer contributions were $850,000 in 1994, $819,000 in 1993, and $813,000 in 1992.
The Company has non-contributory defined benefit pension plans covering substantially all U.S. employees and directors and most of the employees of the Company's non-U.S. subsidiairies. For the U.S. plans, the benefits are based on years of service and the highest five consecutive years' earnings in the ten years preceding retirement. The Company funds these plans annually in amounts consistent with minimum funding requirements and maximum tax deduction limits and invests primarily in common stocks and bonds. The expenses for these plans consist of the following components:
The status of the Company's plans and the amounts recognized in the financial statements are:
Major assumptions at year-end:
In addition to providing pension benefits, the Company pays part of the health insurance costs for its retired U.S. employees and their dependents.
The cost of retiree health benefit expense for 1994, 1993 and 1992 was as follows:
The Company's policy is to fund these benefits on a pay-as-you-go basis. The actuarial present value of these health benefit obligations and the amount recognized in the Consolidated Balance Sheets were as follows:
The Company's retirement medical benefit plan limits the annual cost increase that will be paid by the Company. Actuarial computations shown above have assumed the maximum cost increase. The discount rate assumption for 1994, 1993 and 1992 was 7.5 percent, 7.5 percent and 8.5 percent, respectively.
H. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS:
Aggregate rental commitments at December 30, 1994, under operating leases with noncancelable terms of more than one year, were $10,970,000, payable as follows:
Total rental expense was $4,103,000 for 1994, $4,276,000 for 1993, and $3,646,000 for 1992.
CONTINGENCIES:
On June 29, 1993, the U.S. District Court for the Southern District of Texas ruled that Binks Manufacturing Company of Franklin Park, Illinois deliberately infringed the patent covering Graco Inc.'s Glutton pumps. The court awarded compensatory damages, treble damages and attorneys' fees to Graco Inc., plus prejudgement interest, in a total amount of $2,750,000. Because Binks Manufacturing Company has appealed the decision, the Company will not recognize this award in the financial statements until the appeal reaches an appropriate state of resolution.
Item 9.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Part III, Items 10, 11, 12 and 13, except for certain information relating to Executive Officers included in Part I, is omitted as the Company intends to file with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended December 30, 1994, a definitive proxy statement containing such information pursuant to Regulation 14A of the Securities Exchange Act of 1934 and such information shall be deemed to be incorporated herein by reference from the date of filing such document.
The Company knows of no contractual arrangements which may, at a subsequent date, result in a change in control of the Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements See Part II
(2) Financial Statement Schedule Page - Schedule II - Valuation and Qualifying Accounts 28
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto.
(3) Management Contract, Compensatory Plan or Arrangement. (See Exhibit Index) 30 Those entries marked by an asterisk are Management Contracts, Compensatory Plans or Arrangements.
(b) Reports on Form 8-K There were no reports on Form 8-K for the fourteen weeks ended December 30, 1994.
(c) Exhibit Index. 30
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Graco Inc.
\David A. Koch March 20, 1995 David A. Koch Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
\David M. Lowe March 20, 1995 David M. Lowe Treasurer (Principal Financial Officer)
\James A. Graner March 20, 1995 James A. Graner Vice President and Controller (Principal Accounting Officer)
D. A. Koch Director, Chairman and Chief Executive Officer G. Aristides Director, President and Chief Operating Officer R. O. Baukol Director J. W. Lacey Director J. R. Lee Director L. R. Mitau Director R. D. McFarland Director D. R. Olseth Director G. C. Planchon Director C. B. Thompson Director
David A. Koch, by signing his name hereto, does hereby sign this document on behalf of himself and each of the above named directors of the Registrant pursuant to powers of attorney duly executed by such persons.
\David A. Koch March 20, 1995 David A. Koch (For himself and as attorney-in-fact)
Exhibit Index
Exhibit Number Description
3.1 Restated Articles of Incorporation. See also Exhibit 4.4. (Incorporated by reference to Exhibit 3.1 to the Company's 1993 Annual Report on Form 10-K.)
3.2 Restated Bylaws. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated January 12, 1988.)
3.3 Bylaws Amendment. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated March 1, 1990.)
4.1 Credit Agreement dated October 1, 1990, between the Company and First Bank National Association. (Incorporated by reference to Exhibit 5 to the Company's Report on Form 10- Q for the thirty-nine weeks ended September 28, 1990.)
4.2 Amendment 1 dated June 12, 1992, to Credit Agreement dated October 1, 1990, between the Company and First Bank National Association; and Amendment 2 dated December 31, 1992, to the same Agreement. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated March 11, 1993.) Amendment 3 dated November 8, 1993, and Amendment 4, dated February 8, 1994. (Incorporated by reference to Exhibit 4.2 to the Company's 1993 Annual Report on Form 10- K.)
4.3 Loan Agreement dated November 24, 1993, between the Company and Metropolitan Life Insurance Company, as amended on January 13, 1994.
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 and, in lieu thereof, the Company agrees to furnish copies thereof to the Securities and Exchange Commission upon request.
4.4 Rights Agreement dated as of March 9, 1990, between the Company and Norwest Bank Minnesota, National Association, as Rights Agent, including as Exhibit A the form of the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Shares. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated March 19. 1990.)
*10.1 1994 Corporate and Business Unit Annual Bonus Plan. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.2 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.)
*10.3 Executive Deferred Compensation Agreement. Form of supplementary agreement entered into by the Company which provides a retirement benefit to executive officers, as amended by Amendment 1, effective September 1, 1990. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 8-K dated March 11, 1993.)
*10.4 Chairman's Award Plan. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 8-K dated March 7, 1988.)
*10.5 Executive Long Term Incentive Agreements. Form of restricted stock award agreement used for awards to executive officers. (Incorporated by reference to Attachment B to Item 5 to the Company's Report on Form 10-Q for the thirteen weeks ended March 29, 1991.) Form of restricted stock award agreement used for awards to Chairman. (Incorporated by reference to Attachment A to Item 5 to the Company's Report on Form 10-Q for the twenty-six weeks ended June 28, 1991.)
*10.6 Executive Long Term Incentive Agreement. Form of agreement used for restricted stock awards to two new officers. (Incorporated by reference to Attachment B to Company's Report on Form 10-Q for the thirteen weeks ended March 27, 1992.)
*10.7 Executive Long Term Incentive Agreement. Form of agreement used for one year restricted stock award to one officer. (Incorporated by reference to Exhibit 2 to Company's Report on Form 10-Q for the twenty-six weeks ended June 25, 1993.)
*10.8 Long Term Stock Incentive Plan (Incorporated by reference to Attachment C to the Company's Report on Form 10- Q for the thirteen weeks ended March 27, 1992.)
*10.9 Retirement Plan for Non-Employee Directors. (Incorporated by reference to Attachment C to Item 5 to the Company's Report on Form 10-Q for the thirteen weeks ended March 29, 1991.)
*10.10 Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated March 7, 1988.)
*10.11 Restoration Plan, restating Excess Benefit Plan, effective as of July 1, 1988. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 10-Q for the thirteen weeks ended March 26, 1993.)
*10.12 Stock Option Agreement. Form of agreement used for incentive stock option/alternative stock appreciation right award to selected officers, dated February 25, 1993. (Incorporated by reference to Exhibit 10.14 to the Company's 1993 Annual Report on Form 10-K.)
*10.13 Stock Option Agreement. Form of agreement used for non-incentive stock option/alternative stock appreciation right award to selected officers, dated May 4, 1993. (Incorporated by reference to Exhibit 10.15 to the Company's 1993 Annual Report on Form 10-K.)
*10.14 Nonemployee Director Stock Plan (Incorporated by reference to Exhibit 1 to the Company's Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.15 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers, dated May 2, 1994. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.16 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to selected officers, dated December 15, 1994, December 27, 1994 and February 23, 1995.
*10.17 Separation and Supplemental Retirement Agreement between Barry A. Calhoon and the Company, dated January 3, 1995.
11 Statement of Computation of Earnings per share included herein on page 32.
21 Subsidiaries of the Registrant included herein on page 33.
23 Independent Auditor's Consent included herein on page 33.
24 Power of Attorney included herein on page 34.
27 Financial Data Schedule (EDGAR filing only).
*Management Contracts, Compensatory Plans or Arrangements.







Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements See Part II
(2) Financial Statement Schedule Page - Schedule II - Valuation and Qualifying Accounts 28
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto.
(3) Management Contract, Compensatory Plan or Arrangement. (See Exhibit Index) 30 Those entries marked by an asterisk are Management Contracts, Compensatory Plans or Arrangements.
(b) Reports on Form 8-K There were no reports on Form 8-K for the fourteen weeks ended December 30, 1994.
(c) Exhibit Index. 30
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Graco Inc.
\David A. Koch March 20, 1995 David A. Koch Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
\David M. Lowe March 20, 1995 David M. Lowe Treasurer (Principal Financial Officer)
\James A. Graner March 20, 1995 James A. Graner Vice President and Controller (Principal Accounting Officer)
D. A. Koch Director, Chairman and Chief Executive Officer G. Aristides Director, President and Chief Operating Officer R. O. Baukol Director J. W. Lacey Director J. R. Lee Director L. R. Mitau Director R. D. McFarland Director D. R. Olseth Director G. C. Planchon Director C. B. Thompson Director
David A. Koch, by signing his name hereto, does hereby sign this document on behalf of himself and each of the above named directors of the Registrant pursuant to powers of attorney duly executed by such persons.
\David A. Koch March 20, 1995 David A. Koch (For himself and as attorney-in-fact)
Exhibit Index
Exhibit Number Description
3.1 Restated Articles of Incorporation. See also Exhibit 4.4. (Incorporated by reference to Exhibit 3.1 to the Company's 1993 Annual Report on Form 10-K.)
3.2 Restated Bylaws. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated January 12, 1988.)
3.3 Bylaws Amendment. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated March 1, 1990.)
4.1 Credit Agreement dated October 1, 1990, between the Company and First Bank National Association. (Incorporated by reference to Exhibit 5 to the Company's Report on Form 10- Q for the thirty-nine weeks ended September 28, 1990.)
4.2 Amendment 1 dated June 12, 1992, to Credit Agreement dated October 1, 1990, between the Company and First Bank National Association; and Amendment 2 dated December 31, 1992, to the same Agreement. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated March 11, 1993.) Amendment 3 dated November 8, 1993, and Amendment 4, dated February 8, 1994. (Incorporated by reference to Exhibit 4.2 to the Company's 1993 Annual Report on Form 10- K.)
4.3 Loan Agreement dated November 24, 1993, between the Company and Metropolitan Life Insurance Company, as amended on January 13, 1994.
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 and, in lieu thereof, the Company agrees to furnish copies thereof to the Securities and Exchange Commission upon request.
4.4 Rights Agreement dated as of March 9, 1990, between the Company and Norwest Bank Minnesota, National Association, as Rights Agent, including as Exhibit A the form of the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Shares. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated March 19. 1990.)
*10.1 1994 Corporate and Business Unit Annual Bonus Plan. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.2 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.)
*10.3 Executive Deferred Compensation Agreement. Form of supplementary agreement entered into by the Company which provides a retirement benefit to executive officers, as amended by Amendment 1, effective September 1, 1990. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 8-K dated March 11, 1993.)
*10.4 Chairman's Award Plan. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 8-K dated March 7, 1988.)
*10.5 Executive Long Term Incentive Agreements. Form of restricted stock award agreement used for awards to executive officers. (Incorporated by reference to Attachment B to Item 5 to the Company's Report on Form 10-Q for the thirteen weeks ended March 29, 1991.) Form of restricted stock award agreement used for awards to Chairman. (Incorporated by reference to Attachment A to Item 5 to the Company's Report on Form 10-Q for the twenty-six weeks ended June 28, 1991.)
*10.6 Executive Long Term Incentive Agreement. Form of agreement used for restricted stock awards to two new officers. (Incorporated by reference to Attachment B to Company's Report on Form 10-Q for the thirteen weeks ended March 27, 1992.)
*10.7 Executive Long Term Incentive Agreement. Form of agreement used for one year restricted stock award to one officer. (Incorporated by reference to Exhibit 2 to Company's Report on Form 10-Q for the twenty-six weeks ended June 25, 1993.)
*10.8 Long Term Stock Incentive Plan (Incorporated by reference to Attachment C to the Company's Report on Form 10- Q for the thirteen weeks ended March 27, 1992.)
*10.9 Retirement Plan for Non-Employee Directors. (Incorporated by reference to Attachment C to Item 5 to the Company's Report on Form 10-Q for the thirteen weeks ended March 29, 1991.)
*10.10 Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated March 7, 1988.)
*10.11 Restoration Plan, restating Excess Benefit Plan, effective as of July 1, 1988. (Incorporated by reference to Exhibit 1 to the Company's Report on Form 10-Q for the thirteen weeks ended March 26, 1993.)
*10.12 Stock Option Agreement. Form of agreement used for incentive stock option/alternative stock appreciation right award to selected officers, dated February 25, 1993. (Incorporated by reference to Exhibit 10.14 to the Company's 1993 Annual Report on Form 10-K.)
*10.13 Stock Option Agreement. Form of agreement used for non-incentive stock option/alternative stock appreciation right award to selected officers, dated May 4, 1993. (Incorporated by reference to Exhibit 10.15 to the Company's 1993 Annual Report on Form 10-K.)
*10.14 Nonemployee Director Stock Plan (Incorporated by reference to Exhibit 1 to the Company's Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.15 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to executive officers, dated May 2, 1994. (Incorporated by reference to Exhibit 3 to the Company's Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.16 Stock Option Agreement. Form of agreement used for award of non-incentive stock options to selected officers, dated December 15, 1994, December 27, 1994 and February 23, 1995.
*10.17 Separation and Supplemental Retirement Agreement between Barry A. Calhoon and the Company, dated January 3, 1995.
11 Statement of Computation of Earnings per share included herein on page 32.
21 Subsidiaries of the Registrant included herein on page 33.
23 Independent Auditor's Consent included herein on page 33.
24 Power of Attorney included herein on page 34.
27 Financial Data Schedule (EDGAR filing only).
*Management Contracts, Compensatory Plans or Arrangements.