Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The following Managements Discussion and Analysis reviews significant factors affecting the Companys consolidated
results of operations, financial condition and liquidity. This discussion should be read in conjunction with our financial statements and the accompanying notes to the financial statements. The discussion is organized in the following sections:
||Acquisition and Planned Divestiture |
||Financial Condition and Cash Flow |
||Critical Accounting Estimates |
||Recent Accounting Pronouncements |
Graco designs, manufactures and markets systems and equipment to pump, meter, mix and dispense a wide variety of fluids and coatings. The Company specializes
in equipment for applications that involve difficult-to-handle materials with high viscosities, materials with abrasive or corrosive properties and multiple-component materials that require precise ratio control. Graco sells primarily through
independent third-party distributors worldwide to industrial and contractor end users. More than half of our sales are outside of the United States. Gracos business is classified by management into three reportable segments, each responsible
for product development, manufacturing, marketing and sales of their products.
Gracos key strategies include developing and marketing new products,
leveraging products and technologies into additional, growing end user markets, expanding distribution globally and completing strategic acquisitions that provide additional channel and technologies. Long-term financial growth targets accompany
these strategies, including our expectation of 10 percent revenue growth and 12 percent consolidated net earnings growth. We continued to develop new products in each operating division including products that are expected to drive incremental sales
growth, such as the development of equipment for packaging applications as well as continued refresh and upgrades of existing product lines.
2014, the Company paid $65 million cash to acquire QED Environmental Systems, a manufacturer of fluid management solutions for environmental monitoring and remediation, markets where Graco had little or no previous exposure. Results of operations
are included in the Companys Industrial segment starting from the date of acquisition.
In October 2014, we acquired the stock of Alco Valves Group
(Alco) for £72 million cash. Alco is a United Kingdom based manufacturer of high quality, high pressure valves used in the oil and natural gas industry and in other industrial processes. Alcos products and business
relationships will enhance Gracos position in the oil and natural gas industry and complement Gracos core competencies of designing and manufacturing advanced flow control technologies. Results of Alco operations are included in the
Companys Industrial segment starting from the date of acquisition.
Manufacturing is a key competency of the Company. Our management team in
Minneapolis provides strategic manufacturing expertise, and is also responsible for factories not fully aligned with a single division. Our primary manufacturing facilities are in the United States and Switzerland, and our primary distribution
facilities are located in the United States, Belgium, Switzerland, United Kingdom, P.R.C., Japan, Korea and Australia.
Acquisition and Planned
Divestiture of ITW Liquid Finishing Businesses
In April 2012, we purchased the finishing businesses of ITW. The acquisition included finishing
equipment operations, technologies and brands of the Powder Finishing and Liquid Finishing businesses. Results of the Powder Finishing businesses have been included in the Industrial segment since the date of acquisition. In March 2012, the FTC
issued an order to hold the Liquid Finishing assets separate from our other businesses. In May 2012, the FTC issued a proposed decision and order that required us to sell the held separate Liquid Finishing business assets no later than 180 days from
the date the order becomes final. The FTC approved a final decision and order that became effective on October 9, 2014.
Pursuant to the final order,
Graco must sell the Liquid Finishing business assets within 180 days of the effective date. On October 8, 2014, the Company announced it had signed a definitive agreement to sell the Liquid Finishing business assets for $590 million cash,
subject to regulatory approval and other customary closing conditions. The sale transaction is expected to close in the first half of 2015, in compliance with the FTCs final decision and order. Graco will continue to hold the Liquid Finishing
businesses separate and maintain them as viable and competitive until the sale process is complete.