Graco 2005 Annual Report Download - page 13

The Company deÑnes Invest businesses as those having high margin opportunity and the ability to
generate proÑtable growth through innovative new products and investments in brand building and
marketing. Invest businesses are generally meeting or exceeding the company's minimum Ñnancial targets
and collectively generate above average operating income margins. Fix businesses are characterized as
having unacceptable proÑtability levels. Management's primary focus for Fix businesses is to take
signiÑcant actions to improve overall proÑtability. For all periods presented, the Company classiÑed
Rubbermaid Home Products, Home Fashions, Goody, Graco and Little Tikes as Fix businesses. Beginning
in 2006, Graco and Goody will be classiÑed as Invest businesses.
2005 Overview
The following section details the Company's performance in each of its 2005 objectives:
Strengthen/Broaden its Portfolio of Businesses
The Company continues to evaluate its current portfolio and intends to pursue acquisition
opportunities to complement internal growth. In addition to acquiring high potential businesses or product
lines, such as DYMO, the Company is focused on divesting non-strategic businesses, such as the divested
Curver and the European Cookware businesses, and rationalizing low margin product lines that do not Ñt
within the Company's strategy. In 2005 and 2004, the Company rationalized $200 million and
$257 million, respectively, in low-margin product sales. See Footnote 2 to the Consolidated Financial
Statements for additional information on acquisitions. See Footnote 3 to the Consolidated Financial
Statements for additional information on divestitures.
Invest in High Margin Businesses
The Company continues to focus signiÑcant resources on enhancing its new product development
pipeline, as well as strengthening the Company's numerous brands through targeted advertising and
promotion. In 2005, the Company made additional investments in SG&A (primarily in the OÇce Products
and Tools & Hardware segments) through increased expenditures for advertising and promotion.
In order to partially fund increases in SG&A in the Invest businesses, the Company is focused on
streamlining its operations to reduce non-strategic costs throughout the organization.
Address Raw Material InÖation
The Company has several businesses that have been signiÑcantly impacted by raw material inÖation,
particularly in resin and to a lesser extent, steel. The Company historically combated such cost increases
through internal productivity initiatives. However, due to the continued inÖationary pressure in raw
materials, the Company has implemented sales price increases to oÅset a portion of the increased costs. In
2005, the Company experienced raw material inÖation of approximately $153 million (primarily in resin
and steel), partially oÅset by pricing increases of approximately $132 million. The Company expects such
inÖationary pressures to continue in 2006. The Company has reduced the volume of its resin purchases
through product line rationalization and divestitures in 2005. In 2005, the Company purchased
approximately 900 million pounds of resin and expects to purchase approximately 10% less in 2006.
Reduce Manufacturing Overhead
The Company is committed to reducing the cost of manufacturing. The primary focus is on reducing
its manufacturing overhead structure and labor costs.
In 2005, the Company announced a global initiative referred to as Project Acceleration aimed at
strengthening and transforming the Company's portfolio. In connection with Project Acceleration, in
September 2005 the Board of Directors of the Company approved a three-year restructuring plan (""the
Plan''), which commenced in December 2005. While the Board of Directors has approved the overall plan,
speciÑc approval of each individual project is required prior to commencing the action in accordance with
12