NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The consolidated balance sheet of Graco Inc. and Subsidiaries (the “Company”) as of
June 30, 2017
and the related statements of earnings and comprehensive income for the
three and six
months ended
June 30, 2017
and
June 24, 2016
, and cash flows for the
six months
ended
June 30, 2017
and
June 24, 2016
have been prepared by the Company and have not been audited.
In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of
June 30, 2017
, and the results of operations and cash flows for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s
2016
Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.
2.
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 24,
2016
|
|
June 30,
2017
|
|
June 24,
2016
|
Net earnings available to common shareholders
|
$
|
79,828
|
|
|
$
|
50,947
|
|
|
$
|
140,560
|
|
|
$
|
90,499
|
|
Weighted average shares outstanding for basic earnings per share
|
55,801
|
|
|
55,634
|
|
|
55,785
|
|
|
55,514
|
|
Dilutive effect of stock options computed using the treasury stock method and the average market price
|
2,126
|
|
|
1,406
|
|
|
2,035
|
|
|
1,361
|
|
Weighted average shares outstanding for diluted earnings per share
|
57,927
|
|
|
57,040
|
|
|
57,820
|
|
|
56,875
|
|
Basic earnings per share
|
$
|
1.43
|
|
|
$
|
0.92
|
|
|
$
|
2.52
|
|
|
$
|
1.63
|
|
Diluted earnings per share
|
$
|
1.38
|
|
|
$
|
0.89
|
|
|
$
|
2.43
|
|
|
$
|
1.59
|
|
Stock options to purchase
267,000
and
509,000
shares were not included in the
June 30, 2017
and
June 24, 2016
computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
3.
Share-Based Awards
Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Shares
|
|
Weighted Average
Exercise Price
|
|
Options
Exercisable
|
|
Weighted Average
Exercise Price
|
Outstanding, December 30, 2016
|
5,535
|
|
|
$
|
55.26
|
|
|
3,672
|
|
|
$
|
45.40
|
|
Granted
|
575
|
|
|
92.13
|
|
|
|
|
|
Exercised
|
(985
|
)
|
|
40.68
|
|
|
|
|
|
Canceled
|
(29
|
)
|
|
80.24
|
|
|
|
|
|
Outstanding, June 30, 2017
|
5,096
|
|
|
$
|
62.10
|
|
|
3,217
|
|
|
$
|
50.91
|
|
The Company recognized year-to-date share-based compensation of
$13.5 million
in
2017
and
$12.7 million
in
2016
. As of
June 30, 2017
, there was
$16.2 million
of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of
2.2 years
.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 24,
2016
|
Expected life in years
|
7.0
|
|
|
7.0
|
|
Interest rate
|
2.2
|
%
|
|
1.4
|
%
|
Volatility
|
26.7
|
%
|
|
30.1
|
%
|
Dividend yield
|
1.6
|
%
|
|
1.8
|
%
|
Weighted average fair value per share
|
$
|
24.23
|
|
|
$
|
19.00
|
|
Under the Company’s Employee Stock Purchase Plan, the Company issued
167,000
shares in
2017
and
170,000
shares in
2016
. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the
15 percent
discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 24,
2016
|
Expected life in years
|
1.0
|
|
|
1.0
|
|
Interest rate
|
0.9
|
%
|
|
0.7
|
%
|
Volatility
|
22.3
|
%
|
|
24.6
|
%
|
Dividend yield
|
1.5
|
%
|
|
1.7
|
%
|
Weighted average fair value per share
|
$
|
21.97
|
|
|
$
|
19.14
|
|
4.
Retirement Benefits
The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 24,
2016
|
|
June 30,
2017
|
|
June 24,
2016
|
Pension Benefits
|
|
|
|
|
|
|
|
Service cost
|
$
|
1,754
|
|
|
$
|
1,915
|
|
|
$
|
3,815
|
|
|
$
|
3,912
|
|
Interest cost
|
3,673
|
|
|
3,846
|
|
|
7,603
|
|
|
7,863
|
|
Expected return on assets
|
(4,112
|
)
|
|
(4,368
|
)
|
|
(8,464
|
)
|
|
(9,005
|
)
|
Amortization and other
|
2,199
|
|
|
2,619
|
|
|
4,524
|
|
|
4,919
|
|
Net periodic benefit cost
|
$
|
3,514
|
|
|
$
|
4,012
|
|
|
$
|
7,478
|
|
|
$
|
7,689
|
|
Postretirement Medical
|
|
|
|
|
|
|
|
Service cost
|
$
|
126
|
|
|
$
|
121
|
|
|
$
|
301
|
|
|
$
|
271
|
|
Interest cost
|
271
|
|
|
280
|
|
|
546
|
|
|
542
|
|
Amortization
|
(55
|
)
|
|
(102
|
)
|
|
(5
|
)
|
|
(240
|
)
|
Net periodic benefit cost
|
$
|
342
|
|
|
$
|
299
|
|
|
$
|
842
|
|
|
$
|
573
|
|
5.
Shareholders’ Equity
Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Postretirement
Medical
|
|
Cumulative
Translation
Adjustment
|
|
Total
|
Balance, March 25, 2016
|
$
|
(69,018
|
)
|
|
$
|
(36,977
|
)
|
|
$
|
(105,995
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(7,635
|
)
|
|
(7,635
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
1,142
|
|
|
—
|
|
|
1,142
|
|
Balance, June 24, 2016
|
$
|
(67,876
|
)
|
|
$
|
(44,612
|
)
|
|
$
|
(112,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017
|
$
|
(75,192
|
)
|
|
$
|
(59,484
|
)
|
|
$
|
(134,676
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
11,029
|
|
|
11,029
|
|
Amounts reclassified from accumulated other comprehensive income
|
1,067
|
|
|
—
|
|
|
1,067
|
|
Balance, June 30, 2017
|
$
|
(74,125
|
)
|
|
$
|
(48,455
|
)
|
|
$
|
(122,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 25, 2015
|
$
|
(69,922
|
)
|
|
$
|
(34,575
|
)
|
|
$
|
(104,497
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(10,037
|
)
|
|
(10,037
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
2,046
|
|
|
—
|
|
|
2,046
|
|
Balance, June 24, 2016
|
$
|
(67,876
|
)
|
|
$
|
(44,612
|
)
|
|
$
|
(112,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2016
|
$
|
(76,426
|
)
|
|
$
|
(65,802
|
)
|
|
$
|
(142,228
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
17,347
|
|
|
17,347
|
|
Amounts reclassified from accumulated other comprehensive income
|
2,301
|
|
|
—
|
|
|
2,301
|
|
Balance, June 30, 2017
|
$
|
(74,125
|
)
|
|
$
|
(48,455
|
)
|
|
$
|
(122,580
|
)
|
Amounts related to pension and postretirement medical adjustments are reclassified to pension cost, which is allocated to cost of products sold and operating expenses based on salaries and wages, approximately as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 24,
2016
|
|
June 30,
2017
|
|
June 24,
2016
|
Cost of products sold
|
$
|
620
|
|
|
$
|
637
|
|
|
$
|
1,328
|
|
|
$
|
1,165
|
|
Product development
|
258
|
|
|
261
|
|
|
556
|
|
|
465
|
|
Selling, marketing and distribution
|
516
|
|
|
569
|
|
|
1,162
|
|
|
1,055
|
|
General and administrative
|
390
|
|
|
310
|
|
|
738
|
|
|
565
|
|
Total before tax
|
$
|
1,784
|
|
|
$
|
1,777
|
|
|
$
|
3,784
|
|
|
$
|
3,250
|
|
Income tax (benefit)
|
(717
|
)
|
|
(635
|
)
|
|
(1,483
|
)
|
|
(1,204
|
)
|
Total after tax
|
$
|
1,067
|
|
|
$
|
1,142
|
|
|
$
|
2,301
|
|
|
$
|
2,046
|
|
On February 21, 2017, the Company entered into an accelerated share repurchase arrangement (“ASR”) with a financial institution. In exchange for an up-front payment of
$90 million
, the financial institution delivered
850,000
shares of Company common stock with a fair value of
$78 million
. The total number of shares ultimately delivered under the ASR is determined at the end of the purchase period (up to five months, but not less than two months) based on the volume weighted-average price (“VWAP”) of the Company’s common stock during that period. Subsequent to the end of the second quarter, the purchase period ended and the Company received an additional
31,499
shares to complete the ASR at an average realized price of
$102.10
per share.
The Company accounted for the up-front payment as a reduction of shareholders’ equity in the period made. Shares received under the ASR were retired and reflected as a reduction of outstanding shares on the date delivered for purposes of calculating earnings per share. The forward contract aspect of the ASR met all of the applicable criteria for equity classification, and therefore was accounted for as a derivative indexed to the Company's equity.
The Company has
three
reportable segments, Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 24,
2016
|
|
June 30,
2017
|
|
June 24,
2016
|
Net Sales
|
|
|
|
|
|
|
|
Industrial
|
$
|
174,868
|
|
|
$
|
156,997
|
|
|
$
|
331,258
|
|
|
$
|
304,085
|
|
Process
|
73,399
|
|
|
64,706
|
|
|
143,428
|
|
|
128,991
|
|
Contractor
|
131,216
|
|
|
126,423
|
|
|
245,387
|
|
|
219,962
|
|
Total
|
$
|
379,483
|
|
|
$
|
348,126
|
|
|
$
|
720,073
|
|
|
$
|
653,038
|
|
Operating Earnings
|
|
|
|
|
|
|
|
Industrial
|
$
|
61,596
|
|
|
$
|
51,052
|
|
|
$
|
115,331
|
|
|
$
|
96,846
|
|
Process
|
13,418
|
|
|
7,634
|
|
|
26,881
|
|
|
14,911
|
|
Contractor
|
33,759
|
|
|
29,364
|
|
|
59,778
|
|
|
46,107
|
|
Unallocated corporate (expense)
|
(10,004
|
)
|
|
(9,708
|
)
|
|
(17,400
|
)
|
|
(18,573
|
)
|
Total
|
$
|
98,769
|
|
|
$
|
78,342
|
|
|
$
|
184,590
|
|
|
$
|
139,291
|
|
Assets by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 30,
2016
|
Industrial
|
$
|
575,789
|
|
|
$
|
546,366
|
|
Process
|
329,340
|
|
|
318,444
|
|
Contractor
|
260,920
|
|
|
208,016
|
|
Unallocated corporate
|
175,728
|
|
|
170,283
|
|
Total
|
$
|
1,341,777
|
|
|
$
|
1,243,109
|
|
Geographic information follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 24,
2016
|
|
June 30,
2017
|
|
June 24,
2016
|
Net Sales (based on customer location)
|
|
|
|
|
|
|
|
United States
|
$
|
194,619
|
|
|
$
|
186,284
|
|
|
$
|
369,473
|
|
|
$
|
339,285
|
|
Other countries
|
184,864
|
|
|
161,842
|
|
|
350,600
|
|
|
313,753
|
|
Total
|
$
|
379,483
|
|
|
$
|
348,126
|
|
|
$
|
720,073
|
|
|
$
|
653,038
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 30,
2016
|
Long-lived Assets
|
|
|
|
United States
|
$
|
155,271
|
|
|
$
|
151,911
|
|
Other countries
|
38,339
|
|
|
37,685
|
|
Total
|
$
|
193,610
|
|
|
$
|
189,596
|
|
7.
Inventories
Major components of inventories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 30,
2016
|
Finished products and components
|
$
|
109,798
|
|
|
$
|
113,643
|
|
Products and components in various stages of completion
|
59,049
|
|
|
50,557
|
|
Raw materials and purchased components
|
100,357
|
|
|
84,631
|
|
Subtotal
|
269,204
|
|
|
248,831
|
|
Reduction to LIFO cost
|
(47,763
|
)
|
|
(47,222
|
)
|
Total
|
$
|
221,441
|
|
|
$
|
201,609
|
|
8.
Intangible Assets
Components of other intangible assets were (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite Life
|
|
Indefinite Life
|
|
|
|
Customer
Relationships
|
|
Patents and
Proprietary
Technology
|
|
Trademarks,
Trade Names
and Other
|
|
Trade
Names
|
|
Total
|
As of June 30, 2017
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
174,884
|
|
|
$
|
17,921
|
|
|
$
|
895
|
|
|
$
|
57,853
|
|
|
$
|
251,553
|
|
Accumulated amortization
|
(47,840
|
)
|
|
(6,994
|
)
|
|
(440
|
)
|
|
—
|
|
|
(55,274
|
)
|
Foreign currency translation
|
(8,926
|
)
|
|
(660
|
)
|
|
(61
|
)
|
|
(2,749
|
)
|
|
(12,396
|
)
|
Book value
|
$
|
118,118
|
|
|
$
|
10,267
|
|
|
$
|
394
|
|
|
$
|
55,104
|
|
|
$
|
183,883
|
|
Weighted average life
|
13
|
|
|
10
|
|
|
4
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2016
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
170,284
|
|
|
$
|
17,321
|
|
|
$
|
895
|
|
|
$
|
57,853
|
|
|
$
|
246,353
|
|
Accumulated amortization
|
(41,599
|
)
|
|
(6,088
|
)
|
|
(337
|
)
|
|
—
|
|
|
(48,024
|
)
|
Foreign currency translation
|
(13,630
|
)
|
|
(1,055
|
)
|
|
(59
|
)
|
|
(5,249
|
)
|
|
(19,993
|
)
|
Book value
|
$
|
115,055
|
|
|
$
|
10,178
|
|
|
$
|
499
|
|
|
$
|
52,604
|
|
|
$
|
178,336
|
|
Weighted average life
|
13
|
|
|
10
|
|
|
4
|
|
|
N/A
|
|
|
|
Amortization of intangibles for the quarter was
$3.7 million
in
2017
and
$4.9 million
in
2016
and for the year to date was
$7.3 million
in
2017
and
$9.6 million
in
2016
. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Estimated Amortization Expense
|
$
|
14,649
|
|
|
$
|
14,511
|
|
|
$
|
14,182
|
|
|
$
|
14,127
|
|
|
$
|
14,083
|
|
|
$
|
64,477
|
|
Changes in the carrying amount of goodwill for each reportable segment were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
Process
|
|
Contractor
|
|
Total
|
Balance, December 30, 2016
|
$
|
150,556
|
|
|
$
|
96,561
|
|
|
$
|
12,732
|
|
|
$
|
259,849
|
|
Additions (adjustments) from business acquisitions
|
7,152
|
|
|
(63
|
)
|
|
—
|
|
|
7,089
|
|
Foreign currency translation
|
5,263
|
|
|
897
|
|
|
—
|
|
|
6,160
|
|
Balance, June 30, 2017
|
$
|
162,971
|
|
|
$
|
97,395
|
|
|
$
|
12,732
|
|
|
$
|
273,098
|
|
|
|
9.
|
Other Current Liabilities
|
Components of other current liabilities were (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 30,
2016
|
Accrued self-insurance retentions
|
$
|
7,182
|
|
|
$
|
7,105
|
|
Accrued warranty and service liabilities
|
9,650
|
|
|
8,934
|
|
Accrued trade promotions
|
6,821
|
|
|
6,007
|
|
Payable for employee stock purchases
|
4,394
|
|
|
9,328
|
|
Customer advances and deferred revenue
|
17,788
|
|
|
9,400
|
|
Income taxes payable
|
3,562
|
|
|
8,608
|
|
Other
|
25,226
|
|
|
22,505
|
|
Total
|
$
|
74,623
|
|
|
$
|
71,887
|
|
The Company manages certain self-insured loss exposures through a wholly-owned captive insurance subsidiary. Cash balances of
$8.3 million
as of
June 30, 2017
and
$9.2 million
as of
December 30, 2016
were restricted to funding of the captive's loss reserves and are included within other current assets on the Company's Consolidated Balance Sheets.
A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):
|
|
|
|
|
Balance, December 30, 2016
|
$
|
8,934
|
|
Charged to expense
|
3,733
|
|
Margin on parts sales reversed
|
1,298
|
|
Reductions for claims settled
|
(4,315
|
)
|
Balance, June 30, 2017
|
$
|
9,650
|
|
10.
Fair Value
Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Level
|
|
June 30,
2017
|
|
December 30,
2016
|
Assets
|
|
|
|
|
|
Cash surrender value of life insurance
|
2
|
|
$
|
14,883
|
|
|
$
|
13,785
|
|
Forward exchange contracts
|
2
|
|
—
|
|
|
571
|
|
Total assets at fair value
|
|
|
$
|
14,883
|
|
|
$
|
14,356
|
|
Liabilities
|
|
|
|
|
|
Contingent consideration
|
3
|
|
$
|
4,081
|
|
|
$
|
4,081
|
|
Deferred compensation
|
2
|
|
3,527
|
|
|
3,265
|
|
Forward exchange contracts
|
2
|
|
272
|
|
|
—
|
|
Total liabilities at fair value
|
|
|
$
|
7,880
|
|
|
$
|
7,346
|
|
Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.
Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of an acquired business based on future revenues.
Long-term notes payable with fixed interest rates have a carrying amount of
$300 million
(including
$75 million
classified as current) and an estimated fair value of
$325 million
as of
June 30, 2017
and
$325 million
as of
December 30, 2016
. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.
11.
Recent Accounting Pronouncements
A new accounting standard that changed certain aspects of accounting for share-based payments became effective for the Company in the first quarter of 2017. Excess tax benefits on exercised stock options that were previously credited to equity now reduce the current income tax provision. For the quarter, the change in accounting for excess tax benefits decreased the current income tax provision and increased net earnings by
$13.6 million
, reduced the effective income tax rate by
14 percentage points
, increased the number of diluted average shares outstanding by
0.5 million
and increased diluted earnings per share by
$0.23
. For the year to date, the change in accounting for excess tax benefits decreased the current income tax provision and increased net earnings by
$17.2 million
, reduced the effective income tax rate by
10 percentage points
, increased the number of diluted average shares outstanding by
0.5 million
and increased diluted earnings per share by
$0.28
. Under the new standard, excess tax benefits are no longer reclassified out of cash flows from operating activities to financing activities in the Consolidated Statements of Cash Flows. We elected to apply the cash flow presentation requirements retrospectively to all periods presented, which resulted in a year-to-date increase in previously reported net cash provided by operating activities and a decrease in net cash provided by financing activities of
$5.5 million
for the six months ended June 24, 2016. Also under the new standard, the Company elected to account for share-based grant forfeitures as they occur. The impact of the change in accounting for forfeitures was
no
t significant, and was reflected in share-based compensation cost in the first quarter.
In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue from contracts with customers. The new standard sets forth a single comprehensive model for recognizing and reporting revenue. The new standard will become effective for the Company beginning with the first quarter of 2018, and the Company plans to adopt the accounting standard using the modified retrospective transition approach. The modified retrospective transition approach will recognize any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods.
We have established an implementation team and engaged a third-party consultant to assist with our assessment of the impact of the new revenue guidance on our operations, consolidated financial statements and related disclosures. To date, this assessment has included (1) utilizing questionnaires to assist with the identification of our revenue streams, (2) performing sample contract analyses for each revenue stream identified, (3) assessing the noted differences in recognition and measurement that may result from adopting this new standard, (4) performing detailed analyses of contracts with larger customers, and (5) developing plans to test transactions for consistency with contract provisions that affect revenue recognition. Based on the preliminary results of the evaluation, which is still in process, nothing has come to our attention that would indicate that adoption of the new standard will have a material impact on our consolidated financial statements. However, given our acquisition strategy, there may be additional revenue streams acquired prior to the adoption date. We currently believe the most significant potential changes relate to variable consideration and whether certain contracts' revenues will be recognized over time or at a point in time, although our technical analysis of these potential impacts is still on-going. We also anticipate changes to the consolidated balance sheet related to accounts receivable, contract assets, and contract liabilities.
We are in the process of evaluating and designing the necessary changes to our business processes, systems and controls to support recognition and disclosure under the new standard. Further, we are continuing to assess what incremental disaggregated revenue disclosures will be required in our consolidated financial statements.
In March 2017, the FASB issued a final standard that changes the presentation of net periodic benefit cost related to defined benefit plans. The Company will adopt the standard when it becomes effective in fiscal 2018 and it will be applied retrospectively to all periods presented. Under the new standard, net periodic benefit costs are required to be disaggregated between service costs presented as operating expenses and other components of pension costs presented as non-operating expenses. The Company currently charges service costs to segment operations and includes other components of pension cost in unallocated corporate operating expenses. Under the new standard, unallocated corporate operating expenses will decrease, operating earnings will increase and other expense will increase by the amount of other (non-service) components of pension cost. There will be no impact on reported segment earnings, net earnings or earnings per share.
Item 2. GRACO INC. AND SUBSIDIARIES