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Acquisitions
 9 Months Ended
Sep. 28, 2012
Acquisitions [Abstract]  
Acquisitions Text Block

12.       On April 2, 2012, the Company completed the purchase of the finishing businesses of Illinois Tool Works Inc. (the “ITW Finishing Group”), first announced in April 2011. The acquisition includes powder and liquid finishing equipment operations, technologies and brands. In powder finishing, Graco acquired the Gema® businesses (the “Powder Finishing” business). Gema is a global leader in powder coating technology, a market in which Graco had no previous product offerings, with global manufacturing and distribution capabilities. Results of the Powder Finishing business, including sales of $62 million and net operating earnings of $4.1 million, have been included in the Industrial segment since the date of acquisition. In liquid finishing, Graco acquired the Binks® spray finishing equipment businesses, DeVilbiss® spray guns and accessories businesses, Ransburg® electrostatic equipment and accessories businesses, and BGK curing technology businesses (collectively known as the “Liquid Finishing” business or the “Hold Separate” business).

 

Sales of the ITW Finishing Group were $375 million in 2011, of which Powder Finishing contributed approximately one-third and Liquid Finishing contributed approximately two-thirds. Acquisition-related expenses are included in general and administrative expense in the Company's consolidated statements of earnings, and totaled $8 million for the year 2011 and $15 million for 2012 year-to-date.

 

In December 2011, the United States Federal Trade Commission (“FTC”) filed a formal complaint to challenge the proposed acquisition on the grounds that the addition of the Liquid Finishing business to Graco would be anti-competitive, a position which Graco denied. In March 2012, the FTC issued an order (the “Hold Separate Order”) that allowed the acquisition to proceed to closing on April 2, 2012, subject to certain conditions, while it evaluated a settlement proposal from Graco. Pursuant to the Hold Separate Order, the Liquid Finishing business was to be held separate from the rest of Graco's businesses until the FTC determined which portions of the Liquid Finishing business Graco must divest.

 

In May 2012, the FTC issued a proposed decision and order (the “Decision and Order”) which requires Graco to sell the Liquid Finishing business assets, including business activities related to the development, manufacture, and sale of products under the Binks, DeVilbiss, Ransburg and BGK brand names, no later than 180 days from the date the order becomes final. The FTC has not yet issued its final Decision and Order.

 

The Company has retained the services of an investment bank to help it market the Liquid Finishing business and identify potential buyers. While it seeks a buyer, Graco must continue to hold the Liquid Finishing business assets separate from its other businesses and maintain them as viable and competitive. In accordance with the Hold Separate Order, the Liquid Finishing business is managed independently by experienced Liquid Finishing business managers, under the supervision of a trustee appointed by the FTC, who reports directly to the FTC.

 

The Hold Separate Order requires the Company to provide sufficient resources to maintain the viability, competitiveness and marketability of the Liquid Finishing business, including general funds, capital, working capital and reimbursement of losses. To the extent that the Liquid Finishing business generates funds in excess of financial resources needed, the Company has access to such funds consistent with practices in place prior to the acquisition.

 

As a result of the Hold Separate Order, the Company does not have the power to direct the activities of the Liquid Finishing businesses that most significantly impact the economic performance of those businesses. Therefore, the Company has determined that the Liquid Finishing businesses are variable interest entities for which the Company is not the primary beneficiary, and that they should not be consolidated. Under terms of the Hold Separate Order, the Company does not have a controlling interest in the Liquid Finishing business, nor is it able to exert significant influence over the Liquid Finishing business. Consequently, the Company's investment in the shares of the Liquid Finishing business, totaling $427 million, has been reflected as a cost-method investment on our Consolidated Balance Sheet as of September 28, 2012, and its results of operations have not been consolidated with those of the Company. The Company's maximum exposure to loss as a result of its involvement with the Liquid Finishing business would include the entirety of its investment of $427 million and reimbursement of losses of the operations of the Liquid Finishing business in accordance with the Hold Separate Order, which cannot be quantified. The operating earnings of the Liquid Finishing business total $28 million since the date of acquisition, and no additional financial resources were required to be funded by the Company. As a cost-method investment, income is recognized based on dividends received from current earnings of Liquid Finishing. Dividends of $4 million received in the third quarter and $8 million received year-to-date are included in other expense (income) on the Consolidated Statements of Earnings for the periods ended September 28, 2012. The Company will evaluate its cost-method investment for other-than-temporary impairment at each reporting period. As of September 28, 2012, the Company evaluated its investment in Liquid Finishing and determined that there is no impairment.

Sales and operating earnings of the Liquid Finishing business were as follows (in thousands):

   Thirteen Weeks Ended Thirty-nine Weeks Ended
   Sep 28, Sep 30, Sep 28, Sep 30,
   2012 2011 2012 2011
              
 Net Sales$ 69,554 $ 67,443 $ 206,061 $ 195,635
 Operating Earnings  15,379   13,072   40,314   36,923

The Company transferred cash purchase consideration of $660 million to the seller on April 2, 2012. In July 2012, the Company transferred additional cash purchase consideration of $8 million, representing the difference between cash balances acquired and the amount estimated at the time of closing. The purchase consideration was allocated to assets acquired and liabilities assumed based on estimated fair values as follows (in thousands):

 Cash and cash equivalents$ 6,007
 Accounts receivable  17,835
 Inventories  21,733
 Other current assets  2,534
 Property, plant and equipment  18,359
 Other non-current assets  50
 Identifiable intangible assets  150,500
 Goodwill  78,122
 Total assets acquired  295,140
 Current liabilities assumed  (27,434)
 Non-current liabilities assumed  (7,984)
 Deferred income taxes  (18,171)
 Net assets acquired, Powder Finishing  241,551
 Investment in businesses held separate  426,813
 Total purchase consideration$ 668,364

Identifiable intangible assets and estimated useful life are as follows (dollars in thousands):

     Estimated
     Life (years)
 Customer relationships$ 103,500 14
 Developed technology  9,600 11
 Trade names  37,400 Indefinite
 Total identifiable intangible assets$ 150,500  

The following pro forma information reflects the combined results of Graco and Powder Finishing operations as if the acquisition had occurred at the beginning of 2011 (in thousands, except per share amounts):

   Thirteen Weeks Ended Thirty-nine Weeks Ended
   Sep 28, Sep 30, Sep 28, Sep 30,
   2012 2011 2012 2011
              
 Net Sales$ 256,472 $ 265,681 $ 789,023 $ 776,463
 Operating Earnings  59,916   65,205   191,005   183,142
 Net Earnings  35,605   41,232   114,252   113,597
 Basic earnings per share  0.59   0.68   1.89   1.88
 Diluted earnings per share  0.58   0.67   1.85   1.84

For the quarter, Powder Finishing sales of $30 million were included in net sales in 2012 and $38 million (approximately $35 million at consistent translation rates) were included in pro forma net sales in 2011.

 

Additional depreciation and amortization of $2 million per quarter are reflected in the pro forma results as if the acquisition of Powder Finishing had occurred at the beginning of 2011. Non-recurring acquisition expenses of $4 million for the third quarter and $15 million year-to-date were eliminated from the 2012 pro forma results, and $3 million for the quarter and $6 million for the year-to-date were eliminated from the 2011 pro forma results. Purchase accounting effects of $7 million related to inventory were removed from year-to-date 2012 and reflected in 2011.

 

To the extent that the Liquid Finishing business generates funds in excess of financial resources needed, the Company has access to such funds consistent with practices in place prior to the acquisition. Net earnings of the Liquid Finishing business, from which dividends could have been paid, subject to funds availability, were $12 million and $27 million for the quarter and year-to-date, respectively, in 2012, and $9 million and $24 million for the quarter and year-to-date, respectively, in 2011. For pro forma purposes, dividend income from Liquid Finishing of $4 million for the quarter and $8 million for the year-to-date was eliminated from other income in 2012.