NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The consolidated balance sheet of Graco Inc. and Subsidiaries (the “Company”) as of
June 29, 2018
and the related statements of earnings and comprehensive income for the
three and six
months ended
June 29, 2018
and
June 30, 2017
, and cash flows for the
six months
ended
June 29, 2018
and
June 30, 2017
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 29, 2018
, and the results of operations and cash flows for all periods presented. Certain prior year disclosures have been revised to conform with current year reporting.
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
2017
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.
Revenue Recognition
Adoption of New Accounting Standard
In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue from contracts with customers, contained in Accounting Standards Codification Topic 606 (“ASC 606”). The new standard sets forth a single comprehensive model for recognizing and reporting revenue. ASC 606 was effective for the Company as of December 30, 2017, the beginning of our fiscal year 2018. The Company adopted the new accounting standard using the modified retrospective transition approach. Application of the transition requirements had no material impact on operations or beginning retained earnings.
We record revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. Under ASC 606, rights of return are recorded as a refund liability and a recovery asset is established for the value of product expected to be returned. We previously classified rights of return, net of amounts expected to be recovered, as an allowance reducing accounts receivable. We reclassified prior period balance sheet amounts to conform to ASC 606 requirements. This resulted in an increase in accounts receivable of
$9.7 million
, a recovery asset of
$1.7 million
included in other current assets and
$11.4 million
of refund liability included in other current liabilities as of
December 29, 2017
.
Accounting Policy
Revenue is recognized upon the satisfaction of performance obligations, which occurs when control of the good or service transfers to the customer. This is generally on the date of shipment; however certain sales have terms requiring recognition when received by the customer. In cases where there are specific customer acceptance provisions, revenue is recognized at the later of customer acceptance or shipment (subject to shipping terms). Payment terms are established based on the type of product, distributor capabilities and competitive market conditions. We generally determine standalone selling prices based on the prices charged to customers for all material performance obligations.
Variable consideration is accounted for as a price adjustment (sales adjustment). Following are examples of variable consideration that affect the Company's reported revenue. Early payment discounts are provided to certain customers and within certain regions. Rights of return are typically contractually limited, amounts are estimable, and the Company records provisions for anticipated returns at the time revenue is recognized. This includes promotions when, from time to time, the Company may promote the sale of new products by agreeing to accept returns of superseded products. Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include rebates based on annual purchases and sales growth, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or
free product. Rebates are accrued based on the program rates and progress toward the probability weighted estimate of annual sales amount and sales growth.
Additional promotions include cooperative advertising arrangements. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company’s products; estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense or cost of products sold, depending on the type of incentive offered. The considerations payable to customers are deemed as broad based and are not recorded against net sales.
Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping and handling are included in net sales.
Deferred Revenues
We defer revenue when cash payments are received or due in advance of our performance, including amounts which are refundable. This is also the case for services associated with certain product sales. The balance in the deferred revenue and customer advances was
$46.9 million
as of
June 29, 2018
and
$22.6 million
as of
December 29, 2017
. The increase from year-end 2017 includes
$21.4 million
related to a business acquired in 2018. Net sales for the year to date included
$20.0 million
that was in deferred revenue and customer advances as of December 29, 2017.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer
.
Practical Expedients and Exemptions
We have made an accounting policy election to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.
We have made an accounting policy election to exclude from the transaction price all sales taxes related to revenue producing transactions collected from the customer for a governmental authority.
We apply the new revenue standard requirements to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio
.
We have made an accounting policy election to not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services are accrued.
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are recorded in selling, marketing and distribution expense.
We disclose disaggregated revenues by reporting segment and geography in accordance with the revenue standard. See
Note 7
Segment Information.
3.
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 29,
2018
|
|
June 30,
2017
|
|
June 29,
2018
|
|
June 30,
2017
|
Net earnings available to common shareholders
|
$
|
89,140
|
|
|
$
|
79,828
|
|
|
$
|
174,650
|
|
|
$
|
140,560
|
|
Weighted average shares outstanding for basic earnings per share
|
167,260
|
|
|
167,404
|
|
|
168,166
|
|
|
167,354
|
|
Dilutive effect of stock options computed using the treasury stock method and the average market price
|
6,005
|
|
|
6,378
|
|
|
6,291
|
|
|
6,105
|
|
Weighted average shares outstanding for diluted earnings per share
|
173,265
|
|
|
173,782
|
|
|
174,457
|
|
|
173,459
|
|
Basic earnings per share
|
$
|
0.53
|
|
|
$
|
0.48
|
|
|
$
|
1.04
|
|
|
$
|
0.84
|
|
Diluted earnings per share
|
$
|
0.51
|
|
|
$
|
0.46
|
|
|
$
|
1.00
|
|
|
$
|
0.81
|
|
Stock options to purchase
1,099,000
and
801,000
shares were not included in the
June 29, 2018
and
June 30, 2017
computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
4.
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 29, 2017
|
13,290
|
|
|
$
|
21.99
|
|
|
7,729
|
|
|
$
|
18.33
|
|
Granted
|
1,163
|
|
|
44.05
|
|
|
|
|
|
Exercised
|
(1,745
|
)
|
|
19.25
|
|
|
|
|
|
Canceled
|
(50
|
)
|
|
26.40
|
|
|
|
|
|
Outstanding, June 29, 2018
|
12,658
|
|
|
$
|
24.38
|
|
|
7,616
|
|
|
$
|
19.80
|
|
The Company recognized year-to-date share-based compensation of
$15.8 million
in
2018
and
$13.5 million
in
2017
. As of
June 29, 2018
, there was
$14.5 million
of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of
1.9
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 29,
2018
|
|
June 30,
2017
|
Expected life in years
|
7.5
|
|
|
7.0
|
|
Interest rate
|
2.8
|
%
|
|
2.2
|
%
|
Volatility
|
25.5
|
%
|
|
26.7
|
%
|
Dividend yield
|
1.2
|
%
|
|
1.6
|
%
|
Weighted average fair value per share
|
$
|
12.84
|
|
|
$
|
8.08
|
|
Under the Company’s Employee Stock Purchase Plan, the Company issued
480,000
shares in
2018
and
500,000
shares in
2017
. 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 29,
2018
|
|
June 30,
2017
|
Expected life in years
|
1.0
|
|
|
1.0
|
|
Interest rate
|
2.1
|
%
|
|
0.9
|
%
|
Volatility
|
21.3
|
%
|
|
22.3
|
%
|
Dividend yield
|
1.2
|
%
|
|
1.5
|
%
|
Weighted average fair value per share
|
$
|
10.28
|
|
|
$
|
7.32
|
|
5.
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 29,
2018
|
|
June 30,
2017
|
|
June 29,
2018
|
|
June 30,
2017
|
Pension Benefits
|
|
|
|
|
|
|
|
Service cost
|
$
|
1,998
|
|
|
$
|
1,754
|
|
|
$
|
4,211
|
|
|
$
|
3,815
|
|
Interest cost
|
3,411
|
|
|
3,673
|
|
|
6,845
|
|
|
7,603
|
|
Expected return on assets
|
(4,632
|
)
|
|
(4,112
|
)
|
|
(8,718
|
)
|
|
(8,464
|
)
|
Amortization and other
|
2,080
|
|
|
2,199
|
|
|
4,175
|
|
|
4,524
|
|
Net periodic benefit cost
|
$
|
2,857
|
|
|
$
|
3,514
|
|
|
$
|
6,513
|
|
|
$
|
7,478
|
|
Postretirement Medical
|
|
|
|
|
|
|
|
Service cost
|
$
|
175
|
|
|
$
|
126
|
|
|
$
|
350
|
|
|
$
|
301
|
|
Interest cost
|
265
|
|
|
271
|
|
|
529
|
|
|
546
|
|
Amortization
|
136
|
|
|
(55
|
)
|
|
272
|
|
|
(5
|
)
|
Net periodic benefit cost
|
$
|
576
|
|
|
$
|
342
|
|
|
$
|
1,151
|
|
|
$
|
842
|
|
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 adopted the standard effective for the first quarter of 2018, and the Company has applied the change retrospectively to all periods presented. Under the new standard, net periodic benefit costs are disaggregated between service costs presented as operating expenses and other components of pension costs presented as non-operating expenses. The Company previously charged service costs to segment operations and included other components of pension cost in unallocated corporate operating expenses. Under the new standard, unallocated corporate operating expenses decreased, operating earnings increased and other expense increased by the amount of non-service components of pension cost, including the amount of changes in cash surrender value of insurance contracts used to fund certain non-qualified pension and deferred compensation arrangements. There was no impact on reported net earnings or earnings per share. The retrospective application of the new standard resulted in increases of
$1.6 million
and
$3.3 million
to previously reported operating earnings and other non-operating expense for the quarter and year to date ended
June 30, 2017
, respectively.
Subsequent to the end of the second quarter of 2018, the Company made a
$40 million
voluntary contribution to one of its U.S. qualified defined benefit plans.
6.
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 31, 2017
|
$
|
(75,192
|
)
|
|
$
|
(59,484
|
)
|
|
$
|
(134,676
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
11,029
|
|
|
11,029
|
|
Reclassified to pension cost and deferred tax
|
1,067
|
|
|
—
|
|
|
1,067
|
|
Balance, June 30, 2017
|
$
|
(74,125
|
)
|
|
$
|
(48,455
|
)
|
|
$
|
(122,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 30, 2018
|
$
|
(92,458
|
)
|
|
$
|
(40,613
|
)
|
|
$
|
(133,071
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(15,112
|
)
|
|
(15,112
|
)
|
Reclassified to pension cost and deferred tax
|
2,109
|
|
|
—
|
|
|
2,109
|
|
Balance, June 29, 2018
|
$
|
(90,349
|
)
|
|
$
|
(55,725
|
)
|
|
$
|
(146,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Postretirement
Medical
|
|
Cumulative
Translation
Adjustment
|
|
Total
|
Balance, December 30, 2016
|
$
|
(76,426
|
)
|
|
$
|
(65,802
|
)
|
|
$
|
(142,228
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
17,347
|
|
|
17,347
|
|
Reclassified to pension cost and deferred tax
|
2,301
|
|
|
—
|
|
|
2,301
|
|
Balance, June 30, 2017
|
$
|
(74,125
|
)
|
|
$
|
(48,455
|
)
|
|
$
|
(122,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 29, 2017
|
$
|
(78,430
|
)
|
|
$
|
(49,359
|
)
|
|
$
|
(127,789
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(6,366
|
)
|
|
(6,366
|
)
|
Reclassified to pension cost and deferred tax
|
3,534
|
|
|
—
|
|
|
3,534
|
|
Reclassified to retained earnings
|
(15,453
|
)
|
|
—
|
|
|
(15,453
|
)
|
Balance, June 29, 2018
|
$
|
(90,349
|
)
|
|
$
|
(55,725
|
)
|
|
$
|
(146,074
|
)
|
Amounts related to pension and postretirement medical adjustments are reclassified to non-service components of pension cost that are included within other non-operating expenses.
In February 2018, FASB issued a new standard related to reclassification of certain tax effects from accumulated other comprehensive income (AOCI). We early-adopted the new standard in the first quarter of 2018. We elected to reclassify
$15.5 million
from accumulated other comprehensive income to retained earnings, representing the amount of "stranded" tax effects resulting from the change in the U.S. federal tax rate and the consequent revaluation of deferred tax assets related to pension and postretirement medical expense.
On April 30, 2018, the Company repurchased
0.7 million
shares of its common stock for
$28.2 million
from the President and Chief Executive Officer of the Company. The
$43.33
per share purchase price represented a discount of
3 percent
from the closing price of the Company’s stock immediately prior to the date of the transaction. The repurchase is expected to be accretive to earnings per share and yield a rate of return to remaining shareholders that will exceed the Company’s equity cost of capital. The Company used available cash balances and borrowings under its revolving line of credit to fund the repurchase.
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 29,
2018
|
|
June 30,
2017
|
|
June 29,
2018
|
|
June 30,
2017
|
Net Sales
|
|
|
|
|
|
|
|
Industrial
|
$
|
190,459
|
|
|
$
|
174,868
|
|
|
$
|
385,655
|
|
|
$
|
331,258
|
|
Process
|
85,059
|
|
|
73,399
|
|
|
165,094
|
|
|
143,428
|
|
Contractor
|
149,052
|
|
|
131,216
|
|
|
280,169
|
|
|
245,387
|
|
Total
|
$
|
424,570
|
|
|
$
|
379,483
|
|
|
$
|
830,918
|
|
|
$
|
720,073
|
|
Operating Earnings
|
|
|
|
|
|
|
|
Industrial
|
$
|
67,030
|
|
|
$
|
61,596
|
|
|
$
|
136,155
|
|
|
$
|
115,331
|
|
Process
|
17,065
|
|
|
13,418
|
|
|
34,767
|
|
|
26,881
|
|
Contractor
|
38,382
|
|
|
33,759
|
|
|
69,793
|
|
|
59,778
|
|
Unallocated corporate (expense)
|
(9,099
|
)
|
|
(8,363
|
)
|
|
(15,641
|
)
|
|
(14,145
|
)
|
Total
|
$
|
113,378
|
|
|
$
|
100,410
|
|
|
$
|
225,074
|
|
|
$
|
187,845
|
|
Assets by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 29,
2018
|
|
December 29,
2017
|
Industrial
|
$
|
627,490
|
|
|
$
|
572,436
|
|
Process
|
341,272
|
|
|
345,572
|
|
Contractor
|
298,431
|
|
|
255,615
|
|
Unallocated corporate
|
205,768
|
|
|
216,994
|
|
Total
|
$
|
1,472,961
|
|
|
$
|
1,390,617
|
|
Geographic information follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2018
|
|
June 30,
2017
|
|
June 29,
2018
|
|
June 30,
2017
|
Net Sales (based on customer location)
|
|
|
|
|
|
|
|
United States
|
$
|
212,541
|
|
|
$
|
194,619
|
|
|
$
|
406,323
|
|
|
$
|
369,473
|
|
Other countries
|
212,029
|
|
|
184,864
|
|
|
424,595
|
|
|
350,600
|
|
Total
|
$
|
424,570
|
|
|
$
|
379,483
|
|
|
$
|
830,918
|
|
|
$
|
720,073
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2018
|
|
December 29,
2017
|
Long-lived Assets
|
|
|
|
United States
|
$
|
165,818
|
|
|
$
|
163,416
|
|
Other countries
|
49,179
|
|
|
40,882
|
|
Total
|
$
|
214,997
|
|
|
$
|
204,298
|
|
8.
Inventories
Major components of inventories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 29,
2018
|
|
December 29,
2017
|
Finished products and components
|
$
|
141,101
|
|
|
$
|
124,327
|
|
Products and components in various stages of completion
|
73,900
|
|
|
61,274
|
|
Raw materials and purchased components
|
108,083
|
|
|
103,407
|
|
Subtotal
|
323,084
|
|
|
289,008
|
|
Reduction to LIFO cost
|
(51,355
|
)
|
|
(49,659
|
)
|
Total
|
$
|
271,729
|
|
|
$
|
239,349
|
|
9.
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 29, 2018
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
179,444
|
|
|
$
|
19,371
|
|
|
$
|
1,070
|
|
|
$
|
59,937
|
|
|
$
|
259,822
|
|
Accumulated amortization
|
(60,872
|
)
|
|
(8,515
|
)
|
|
(674
|
)
|
|
—
|
|
|
(70,061
|
)
|
Foreign currency translation
|
(10,427
|
)
|
|
(860
|
)
|
|
(72
|
)
|
|
(4,200
|
)
|
|
(15,559
|
)
|
Book value
|
$
|
108,145
|
|
|
$
|
9,996
|
|
|
$
|
324
|
|
|
$
|
55,737
|
|
|
$
|
174,202
|
|
Weighted average life in years
|
13
|
|
|
10
|
|
|
4
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 29, 2017
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
179,826
|
|
|
$
|
18,479
|
|
|
$
|
1,071
|
|
|
$
|
59,553
|
|
|
$
|
258,929
|
|
Accumulated amortization
|
(54,076
|
)
|
|
(7,795
|
)
|
|
(542
|
)
|
|
—
|
|
|
(62,413
|
)
|
Foreign currency translation
|
(9,186
|
)
|
|
(727
|
)
|
|
(61
|
)
|
|
(3,486
|
)
|
|
(13,460
|
)
|
Book value
|
$
|
116,564
|
|
|
$
|
9,957
|
|
|
$
|
468
|
|
|
$
|
56,067
|
|
|
$
|
183,056
|
|
Weighted average life in years
|
13
|
|
|
10
|
|
|
4
|
|
|
N/A
|
|
|
|
Amortization of intangibles for the quarter was
$4.0 million
in
2018
and
$3.7 million
in
2017
and for the year to date was
$8.0 million
in 2018 and
$7.3 million
in 2017. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Estimated Amortization Expense
|
$
|
15,540
|
|
|
$
|
15,014
|
|
|
$
|
14,798
|
|
|
$
|
14,602
|
|
|
$
|
14,617
|
|
|
$
|
51,862
|
|
Changes in the carrying amount of goodwill for each reportable segment were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
Process
|
|
Contractor
|
|
Total
|
Balance, December 29, 2017
|
$
|
161,673
|
|
|
$
|
97,971
|
|
|
$
|
19,145
|
|
|
$
|
278,789
|
|
Additions, adjustments from business acquisitions
|
17,544
|
|
|
170
|
|
|
409
|
|
|
18,123
|
|
Foreign currency translation
|
(2,141
|
)
|
|
(428
|
)
|
|
—
|
|
|
(2,569
|
)
|
Balance, June 29, 2018
|
$
|
177,076
|
|
|
$
|
97,713
|
|
|
$
|
19,554
|
|
|
$
|
294,343
|
|
The Company completed business acquisitions in 2018 that were not material to the consolidated financial statements.
|
|
10.
|
Other Current Liabilities
|
Components of other current liabilities were (in thousands):
|
|
|
|
|
|
|
|
|
|
June 29,
2018
|
|
December 29,
2017
|
Accrued self-insurance retentions
|
$
|
7,853
|
|
|
$
|
7,956
|
|
Accrued warranty and service liabilities
|
10,956
|
|
|
10,535
|
|
Accrued trade promotions
|
9,064
|
|
|
10,588
|
|
Payable for employee stock purchases
|
5,666
|
|
|
10,053
|
|
Customer advances and deferred revenue
|
46,881
|
|
|
22,632
|
|
Income taxes payable
|
12,554
|
|
|
7,564
|
|
Right of return refund liability
|
12,119
|
|
|
11,412
|
|
Other
|
33,276
|
|
|
31,628
|
|
Total
|
$
|
138,369
|
|
|
$
|
112,368
|
|
The Company managed certain self-insured loss exposures through a wholly-owned captive insurance subsidiary. Cash balances of
$8.7 million
as of
June 29, 2018
and
$9.2 million
as of
December 29, 2017
were restricted to funding of the captive's loss reserves and are included within other current assets on the Company's Consolidated Balance Sheets. The Company has begun the process of dissolving the captive insurance subsidiary. Cash balances will no longer be restricted upon final dissolution.
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 29, 2017
|
$
|
10,535
|
|
Charged to expense
|
3,917
|
|
Margin on parts sales reversed
|
1,440
|
|
Reductions for claims settled
|
(4,936
|
)
|
Balance, June 29, 2018
|
$
|
10,956
|
|
11.
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 29,
2018
|
|
December 29,
2017
|
Assets
|
|
|
|
|
|
Cash surrender value of life insurance
|
2
|
|
$
|
16,000
|
|
|
$
|
16,128
|
|
Forward exchange contracts
|
2
|
|
677
|
|
|
—
|
|
Total assets at fair value
|
|
|
$
|
16,677
|
|
|
$
|
16,128
|
|
Liabilities
|
|
|
|
|
|
Contingent consideration
|
3
|
|
$
|
5,300
|
|
|
$
|
4,081
|
|
Deferred compensation
|
2
|
|
4,257
|
|
|
3,836
|
|
Forward exchange contracts
|
2
|
|
—
|
|
|
517
|
|
Total liabilities at fair value
|
|
|
$
|
9,557
|
|
|
$
|
8,434
|
|
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
$225 million
and an estimated fair value of
$235 million
as of
June 29, 2018
and
$245 million
as of
December 29, 2017
. 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.
12.
Income Taxes
The effective income tax rate was
15 percent
for the quarter, down
1 percentage point
from the second quarter last year. The effective income tax rate for the year to date was
18 percent
, down
3 percentage points
from last year. U.S. federal income tax reform legislation (the "Tax Act") passed at the end of 2017 decreased the effective tax rate by
9 percentage points
percentage points for both the quarter and the year to date compared to last year. Excess tax benefits related to stock option exercises reduced the effective tax rate by
6 percentage points
in the second quarter of 2018 and
14 percentage points
in the second quarter last year. Year-to-date excess tax benefits related to stock option exercises reduced the effective tax rate by
4 percentage points
in 2018 and
10 percentage points
in 2017.
Our accounting for certain income tax effects of the Tax Act related to the transition tax is incomplete; however, we have determined reasonable estimates for those effects and have recorded provisional amounts in our consolidated financial statements as of
June 29, 2018
and
December 29, 2017
. We did not make any measurement-period adjustments to those amounts during the first half of 2018.
13.
Recent Accounting Pronouncements
In February 2016, FASB issued a final standard on leases contained in Accounting Standards Codification Topic 842 (“ASC 842”). The new standard is effective for the Company in the first quarter of 2019 and requires most leases to be recorded on the balance sheet. The Company plans to adopt the new accounting standard using the modified retrospective transition approach and will elect to use the package of practical expedients. 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 that has gathered and analyzed a significant portion of our lease contracts. Based on preliminary results of the process, which has not been completed, nothing has come to our attention that would indicate that adoption of the new standard will have a material impact on our earnings or shareholders equity. We expect that the recording of right-of-use assets and associated lease liabilities will have a significant effect on our consolidated balance sheet; however, we are unable to determine an amount at this time.
We are in the process of evaluating changes to our business processes, systems and controls needed to support recognition and disclosure under the new standard. Further, we are continuing to assess any incremental disclosures that will be required in our consolidated financial statements.
Item 2. GRACO INC. AND SUBSIDIARIES