Graco Inc. - Company Profile, Information, Business Description, History, Background Information on Graco Inc.

4050 Olson Memorial Highway
Minneapolis, Minnesota 55422

Company Perspectives:

"Graco's mission is to serve its customers, employees, shareholders and communities by generating sustained profitable growth. Our goal is to be the world's leading supplier of fluid handling equipment and systems in the markets we serve."

History of Graco Inc.

Graco Inc. is a world leader in fluid-handling systems and components. The company designs and manufacturers products which move, measure, control, dispense, and apply a wide range of fluids and viscous materials for over 40 different industries, ranging from shipbuilding and aerospace to construction contracting and fast-lube outlets. According to Harlan S. Byrne in a February 1997 Barron's article, "Graco is one of those companies, nearly invisible to investors, that makes a steady living by supplying humdrum products--in its case, application systems for paint, sealants, adhesives and lubricants." Low-profile Graco Inc. serves such industry giants as Nissan and Pennzoil while quietly holding a number one position in a majority of its markets.

First Products: 1920s and 1930s

Graco traces its history to Gray Company, Inc., which was founded in 1926 by Leil and Russell Gray to manufacture and sell the air-powered grease gun the brothers had developed for use in automobile maintenance. The men, who worked in a downtown Minneapolis garage, found hand-operated grease guns cumbersome to operate, especially in the winter months when lubricants were more difficult to move. After field tests showed their invention was easier to handle and more effective than the hand-operated devises, the brothers hired three employees and began manufacturing "Graco" air-powered grease guns. First year sales were about $35,000.

Within two years of founding, the men added other products to the Graco line, such as an air-powered pumping unit which moved automotive fluids directly from shipping containers through a flexible hose to the service area. The company also began a nation-wide marketing program directed primarily to car dealers and service station owners.

Sales had reached $65,000 by 1931. The company continued to grow even during the Depression years, and in 1938, the business moved into a new plant, where Russell Gray further expanded the product line. Leil Gray, as company president, accelerated marketing and sales efforts; a branch office opened in New York, and salesmen carried Graco products in trailers bearing the company insignia. Sales topped $1 million in 1941.

Postwar Change of Focus and Rapid Growth

During World War II, Gray Company designed mobile lubrication equipment for use on the battlefield, while a tire retreading system helped extend limited resources at home. After the war the company turned its attention to industrial uses of the pumping technology it had been developing over the years. Spraying units, finishing equipment, and dispensing systems were designed for uses ranging from spreading adhesives to handling food.

By the mid-1950s, the 400-employee company had revenues in excess of $5 million. Driven by the needs of its customers, Gray Company continued play the role of innovator. The company was the first to use hydraulics for cleaning, and the first to develop cold airless atomization (a process which used pressure to separate liquid into fine particles) for spray painting and coating. The company also began to design automated systems for manufacturing plants and implement plans for international operations.

Airless-spray technology propelled the company's growth in the 1960s. In 1965, Gray Company developed an electrically-powered airless-spray system which freed painting contractors from bulky compressors. The company also introduced equipment which permitted hot airless pumping, proportionate mixing, and automatically controlled dispensing of fluids.

In 1962, Leil Gray's son-in-law, David A. Koch was named president, succeeding Harry A. Murphy, who had served in the position since 1958. In the early years of his tenure, Koch guided the company through a plant modernization program and an important period of growth. In 1969, Gray Company, Inc. was taken public and changed its name to Graco Inc. Sales for the year were $33 million up from about $12 million when Koch assumed company leadership.

International expansion moved forward with the purchase of majority interest in a French automobile servicing equipment and products manufacturer and with the establishment of a Canadian sales subsidiary. Domestically, Graco purchased Chicago-based H.G. Fischer & Co., a finishing and electrostatics business. Sales topped $50 million in 1971. The company experienced an annual growth rate of 17 percent in sales and about 20 percent in net earnings over the ten-year period from 1963 to 1973.

A Decade of Change: 1970s

Graco's rapid growth faltered in 1974. Financial analyst Ken Johnson, in a 1975 Corporate Report article, suggested that Graco was surprised by a weakening market which had been disguised by customer purchases made in response to rapidly rising raw material prices. Net sales for 1974 rose only 6.3 percent, and net earnings fell 50 percent. The slide continued in 1975 with a significant drop in revenues.

Nevertheless, Graco rebounded in 1976. Pumps and spray-painting equipment for the construction and decorating trades led the recovery. Graco sales more than doubled over four years, and earnings reached a high of $10 million or $4.45 per share in 1979. Concern regarding future growth prompted the company to develop technology acquired earlier in the decade.

Electrostatic painting, which required less paint and reduced emissions, had become a preferred finishing method in increasingly cost-conscious, competitive, and environmentally-concerned times. A heavy investment in the technology paid off: Graco developed a successful new line of sophisticated products and positioned itself as an electrostatic equipment supplier for automobile makers.

Robotics Venture

In 1981, the company established a joint-venture, Graco Robotics, Inc. (GRI), with Edon Finishing Systems of Troy, Michigan, in order to develop a robotics paint-finishing system. According to Eben Shapiro, in a June 1987 Minneapolis/St. Paul City Business article, Graco saw robotics as "a logical and necessary extension of its finishing business."

In 1982, Graco sales and earnings were hit by a combination of poor market and economic conditions, but the company continued to pump research and development dollars into the slowly progressing robotics venture and even increased its ownership from 51 to 80 percent. GRI sold its first robots in 1983 and became profitable in 1984. With 1985 sales around $20 million, GRI contributed about ten percent of total Graco sales.

David Koch stepped down as president of Graco in 1985. Walter Weyler, a vice-president with General Electric Co., succeeded him. Quoted in an April 1985 Minneapolis Star Tribune article, Koch remarked that he intended to focus on the strategic direction of the company as it made the transition from an emphasis on components to high-tech systems.

Activity continued in other businesses segments. In 1984, Graco discontinued a consumer painting business started in the late 1970s. The purchase of Lockwood Technology, Inc. (LTI), a supplier of chemical bonding and sealing equipment, broadened the fluid handling group that same year. The company acquired 100 percent ownership of former Japanese joint venture in 1985, thus expanding its international operations in the Far East.

By 1986, GRI had become a major supplier of paint-spraying robots, and its customers included Chrysler, Ford, Fiat, Ferrari, Volvo, and Rolls-Royce. Moreover, Japanese auto makers purchased robotics paint sprayers for plants located in the United States. GRI was one of only a few U.S. robot makers that had been able to maintain profitability.

A Changing Marketplace: The 1990s

However, demand for finishing equipment fell off as U.S. auto makers completed installation of the new generation of paint sprayers in the late 1980s; and profits on foreign sales of large automated systems were low due to customizing costs. Graco's 1988 domestic sales were flat, while a 31.7 percent increase in international sales was attributable to its traditional products, such as portable airless-spray painters.

International sales slowed in 1990, but increased U.S. sales in architectural coating and cleaning equipment helped Graco achieve both record sales and earnings for the year; net revenues were $321.3 million, and net earnings were $17.7 million. Continuing recession in the United States and poor economic conditions in several European countries resulted in decreased earnings in 1991, which fell by nearly 50 percent. The company also reported losses associated with the divestment of its robotics division; pressure from larger competitors had prompted the sale.

The company initiated a year-long strategic review in 1992, while it refined various aspects of its businesses. As a result, Graco exited the packaging and converting aspect of the adhesive equipment market with the sale of LTI and a related joint-venture, two Detroit-area operations were consolidated in the building that was constructed for Graco Robotics, and a new spray-gun manufacturing plant was planned.

Weyler resigned his positions as president and chief operating officer in January 1993. Koch--who was the major company shareholder as well as CEO and chairman--commented at the time that he and Weyler had important differences regarding the future direction of the company. "The sudden resignation of a president is enough to throw most public companies into a tailspin," wrote Scott Carlson, in the St. Paul Pioneer Press in March 1993. But with Koch once again at the helm, Wall Street was not fazed; Graco had a solid reputation as a well-run company, with little long-term debt, no across-the-board competition, and the ability to meet the challenges of changing internal and external conditions.

New Leadership for the Future

George Aristides, a 20-year Graco veteran, was promoted to president and chief operating officer in June 1993. Aristides had served as vice-president of manufacturing operations since 1985 and led the $20 million, five-year conversion of Graco's two sprawling Minneapolis plants to a cellular operation with work groups producing components or products from start to finish.

Also in 1993, Graco became the first company in its industry to become ISO 9000-registered at all its major sites. ISO 9000, which set business practice standards, was adopted by the International Organization for Standardization in 1987. Forty percent of Graco's 1992 sales had been in the international marketplace where certification was increasingly expected. More American companies, such as Sherwin-Williams, one of Graco's largest customers for pumps and paint spraying equipment, were also asking their vendors to be certified.

Ongoing recessions in Europe and Japan, both important overseas markets, had forced Graco to downsize operations in those regions. In 1994, Graco restructured its operations in the Pacific and in Europe. In order to boost product development, the company pumped in $23.1 million in capital expenditures into engineering and manufacturing capabilities in 1994 and added another $19.8 million in 1995. Late in 1995 plans for a $17 million distribution and manufacturing center were announced.

After 33 years as CEO, David Koch stepped down from the post in January 1996. Koch was succeeded by Aristides, while maintaining his position as chairman. Net earnings grew by 31 percent to $36.2 million in 1996 on little change in revenue, which was up just one percent to $391.8 million. But profits were slim on foreign sales which contributed nearly one-third of total volume.

Harlan S. Byrne, in a February 1997 Barron's article, credited Aristides with shaking up "the once sleepy organization." Product development spending was increased by nearly 50 percent from 1992 to 1996. Graco introduced 130 new items in 1996 and expected to increase that number to 160 in 1997. Products introduced in the previous three years generated 21 percent of 1996 worldwide sales. Selling, general, and administrative expenses were cut from 40 to 31 percent of revenues from 1992 to 1996.

Byrne regarded Graco's gains in earnings under Aristides as dramatic. Net earnings, before special items, had more than tripled since 1992. Nevertheless, he noted that "Aristides won't be happy until annual revenues rise, on average, at a double-digit clip." Graco predicted future growth in sales and profitability would be driven by increased global industrialization, changes in materials, improved manufacturing processes, and the use of applied technologies all of which would necessitate new fluid handling products and systems solutions.

Principal Subsidiaries: Graco K.K. (Asia Pacific).

Principal Divisions: Automotive and Industrial Equipment; Lubrication Equipment; Contractor Equipment.

Additional Details

Further Reference

Byrne, Harlan S., "Revitalized," Barron's, February 3, 1997, p. 22.Carlson, Scott, "Restructuring Graco," St. Paul Pioneer Press Dispatch, March 1, 1993."Corporate Capsule: Graco Inc.," Minneapolis/St. Paul CityBusiness July 15, 1991 and April 23, 1993."David Koch Ending His 33-Year Tenure as CEO at Graco," Star Tribune (Minneapolis), December 16, 1995, p. 2D.Ewen, Beth, "Graco Reports Earnings Downturn Due to Lower Profit Margins," Minneapolis/St. Paul City Business, August 7-20, 1989, p. 16."Fast-Forward on the Paint-Spray Line," Financial World, October 31-November 13, 1984, p. 70-71.Feyder, Susan, "'Stick-To-Itiveness' Pays Off for Graco," Star Tribune (Minneapolis), May 5, 1986, p. 1M.Fredrickson, Tom, "Aristides Primes the Pump at Graco," Minneapolis/St. Paul City Business, November 12-19, 1993, p. 1.------, "Woes Across the Water," Minneapolis/St. Paul CityBusiness, May 27-June 2, 1994, p. 1."Graco Hires GE Official as President," Star Tribune (Minneapolis), April 12, 1985.Johnson, Ken, "Graco at the Gap," Corporate Report Minnesota, June 1975, p. 35-36.------, "Graco at the Ready," Corporate Report Minnesota, September 1981.Kearney, Robert P., "A Pumped Up Graco," Corporate Report Minnesota, April 1986, p. 45+.Maturi, Richard J., "The Age of Robots," Barron's, August 18, 1986, p. 36.Peterson, Susan E., "Graco Reports Record Sales and Earnings for Last Year," Star Tribune (Minneapolis), February 15, 1991, p. 2D; "Walter Weyler Resigns from Graco Because of 'Differences' with CEO," Star Tribune (Minneapolis), January 16, 1993, p. 1D; "Graco Names Aristides President, COO," Star Tribune (Minneapolis), June 25, 1993, p. 3D; "Aggressive Graco Pumps Up the Volume," Star Tribune (Minneapolis), May 17, 1993, p. 1D; "Global Competition Spurs ISO 9000," Star Tribune (Minneapolis), November 22, 1993, p. 1D.Randle, Wilma, "Dollar's Strength Hit Graco in '84," St. Paul Pioneer Press Dispatch, May 8, 1985.Shapiro, Eben, "Graco Robots Wow Even the Japanese," Minneapolis/St. Paul City Business, June 3, 1987, p. 1.

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