NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graco Inc. and Subsidiaries
Years Ended December 27,
2013, December 28, 2012 and December 30, 2011
A. Summary of Significant Accounting Policies
Fiscal Year
.
The fiscal year of Graco Inc. and Subsidiaries (the Company) is 52 or 53 weeks, ending on the last Friday in
December. The years ended December 27, 2013, December 28, 2012 and December 30, 2011, were 52-week years.
Basis of Statement
Presentation
.
The consolidated financial statements include the accounts of the parent company and its subsidiaries after elimination of intercompany balances and transactions. As of December 27, 2013, all subsidiaries are 100
percent owned.
As more fully described in Note L, the Company purchased the Powder Finishing and Liquid Finishing businesses in April 2012. The FTC
issued an order requiring the Company to hold the Liquid Finishing businesses separate from the rest of the Companys businesses until the FTC determines which portions of the businesses must be divested. Under terms 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. Furthermore, the Company does not have a controlling interest in the Liquid Finishing businesses, nor is it able to exert
significant influence over the Liquid Finishing businesses. Consequently, the Companys investment in the shares of the Liquid Finishing businesses, totaling $422 million, has been reflected as a cost-method investment on the Consolidated
Balance Sheet as of December 27, 2013, and their results of operations have not been consolidated with those of the Company.
Foreign Currency
Translation
.
The functional currency of certain subsidiaries is the local currency. Accordingly, adjustments resulting from the translation of those subsidiaries financial statements into U.S. dollars are charged or credited to
accumulated other comprehensive income (loss). The U.S. dollar is the functional currency for all other foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and transactions of those subsidiaries are
included in other expense, net.
Accounting Estimates
.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and
assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Measurements.
The three levels of inputs in the fair value measurement hierarchy are as follows:
Level 1 based on quoted prices in active markets for identical assets
Level 2 based on significant observable inputs
Level 3 based on significant unobservable inputs
Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
|
|
2013
|
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance
|
|
2
|
|
$
|
12,611
|
|
|
$
|
9,483
|
|
Forward exchange contracts
|
|
2
|
|
|
291
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
|
$
|
12,902
|
|
|
$
|
9,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
2
|
|
$
|
2,296
|
|
|
$
|
1,759
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The Companys policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities.
35
Disclosures related to non-recurring fair value measurements are included below in Impairment of Long-Lived
Assets, in Note F (Debt) and in Note J (Retirement Benefits).
Cash Equivalents
.
All highly liquid investments with a maturity of
three months or less at the date of purchase are considered to be cash equivalents.
Accounts Receivable.
Accounts receivable includes trade
receivables of $178 million in 2013 and $161 million in 2012. Other receivables totaled $5 million in 2013 and $11 million in 2012.
Inventory
Valuation
.
Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO)
cost method.
Other Current Assets.
Amounts included in other current assets were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Prepaid income taxes
|
|
$
|
7,894
|
|
|
$
|
2,155
|
|
Prepaid expenses and other
|
|
|
6,739
|
|
|
|
5,474
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,633
|
|
|
$
|
7,629
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
.
For financial reporting purposes, plant and equipment are depreciated over
their estimated useful lives, primarily by using the straight-line method as follows:
|
|
|
Buildings and improvements
|
|
10 to 30 years
|
Leasehold improvements
|
|
lesser of 5 to 10 years or life of lease
|
Manufacturing equipment
|
|
lesser of 5 to 10 years or life of equipment
|
Office, warehouse and automotive equipment
|
|
3 to 10 years
|
Goodwill and Other Intangible Assets.
Goodwill has been assigned to reporting units. Changes in the carrying
amounts of goodwill for each reportable segment were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
|
Contractor
|
|
|
Lubrication
|
|
|
Total
|
|
December 27, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
148,999
|
|
|
$
|
12,732
|
|
|
$
|
19,497
|
|
|
$
|
181,228
|
|
Additions from business acquisitions
|
|
|
6,626
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,626
|
|
Foreign currency translation
|
|
|
2,998
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,998
|
|
Other
|
|
|
(885)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(885)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
157,738
|
|
|
$
|
12,732
|
|
|
$
|
19,497
|
|
|
$
|
189,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
61,171
|
|
|
$
|
12,732
|
|
|
$
|
19,497
|
|
|
$
|
93,400
|
|
Additions from business acquisitions
|
|
|
89,044
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89,044
|
|
Foreign currency translation
|
|
|
(1,216)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,216)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
148,999
|
|
|
$
|
12,732
|
|
|
$
|
19,497
|
|
|
$
|
181,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Components of other intangible assets were (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Life
(years)
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Currency
Translation
|
|
|
Book
Value
|
|
December 27, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
3 - 14
|
|
$
|
121,205
|
|
|
$
|
(26,377)
|
|
|
$
|
1,458
|
|
|
$
|
96,286
|
|
Patents, proprietary technology and product documentation
|
|
3 - 11
|
|
|
16,125
|
|
|
|
(5,869)
|
|
|
|
118
|
|
|
|
10,374
|
|
Trademarks, trade names and other
|
|
5
|
|
|
175
|
|
|
|
(9)
|
|
|
|
-
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,505
|
|
|
|
(32,255)
|
|
|
|
1,576
|
|
|
|
106,826
|
|
|
|
|
|
|
|
Not Subject to Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand names
|
|
|
|
|
40,400
|
|
|
|
-
|
|
|
|
714
|
|
|
|
41,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
177,905
|
|
|
$
|
(32,255)
|
|
|
$
|
2,290
|
|
|
$
|
147,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
2 - 14
|
|
$
|
132,245
|
|
|
$
|
(30,041)
|
|
|
$
|
(1,510)
|
|
|
$
|
100,694
|
|
Patents, proprietary technology and product documentation
|
|
3 - 11
|
|
|
20,830
|
|
|
|
(9,679)
|
|
|
|
(147)
|
|
|
|
11,004
|
|
Trademarks, trade names and other
|
|
1 - 5
|
|
|
85
|
|
|
|
(27)
|
|
|
|
-
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,160
|
|
|
|
(39,747)
|
|
|
|
(1,657)
|
|
|
|
111,756
|
|
Not Subject to Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand names
|
|
|
|
|
40,580
|
|
|
|
-
|
|
|
|
(563)
|
|
|
|
40,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
193,740
|
|
|
$
|
(39,747)
|
|
|
$
|
(2,220)
|
|
|
$
|
151,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles was $12.5 million in 2013, $15.0 million in 2012 and $10.9 million in 2011. Estimated future
annual amortization is as follows: $10.0 million in 2014, $9.5 million in 2015, $9.2 million in 2016, $9.0 million in 2017, $8.9 million in 2018 and $60.2 million thereafter.
Other Assets.
Components of other assets were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Cash surrender value of life insurance
|
|
$
|
12,611
|
|
|
$
|
9,483
|
|
Capitalized software
|
|
|
3,448
|
|
|
|
3,291
|
|
Equity method investment
|
|
|
5,569
|
|
|
|
5,224
|
|
Deposits and other
|
|
|
3,017
|
|
|
|
3,645
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,645
|
|
|
$
|
21,643
|
|
|
|
|
|
|
|
|
|
|
The Company paid $1.5 million in each of 2013 and 2012 for contracts insuring the lives of certain employees who are eligible
to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts will be used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are
available to general creditors in the event of the Companys insolvency. Changes in cash surrender value are recorded in operating expense and were not significant in 2012 and 2011. In 2013, increases in cash surrender value totaled $1.6
million and were offset by expenses related to the non-qualified pension and deferred compensation plans funded by the insurance contracts.
Capitalized
software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation.
Impairment of Long-Lived Assets.
The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be
recoverable. Goodwill and other intangible assets not subject to amortization are also reviewed for impairment annually in the fourth quarter. There were no write-downs of long-lived assets in the periods presented.
37
Other Current Liabilities.
Components of other current liabilities were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Accrued self-insurance retentions
|
|
$
|
6,381
|
|
|
$
|
6,952
|
|
Accrued warranty and service liabilities
|
|
|
7,771
|
|
|
|
7,943
|
|
Accrued trade promotions
|
|
|
7,245
|
|
|
|
5,669
|
|
Payable for employee stock purchases
|
|
|
7,908
|
|
|
|
7,203
|
|
Customer advances and deferred revenue
|
|
|
11,693
|
|
|
|
10,617
|
|
Income taxes payable
|
|
|
4,561
|
|
|
|
4,305
|
|
Other
|
|
|
23,608
|
|
|
|
22,704
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,167
|
|
|
$
|
65,393
|
|
|
|
|
|
|
|
|
|
|
Self-Insurance.
The Company is self-insured for certain losses and costs relating to product liability,
workers compensation and employee medical benefits claims. The Company has purchased stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insured retentions are based on claims filed and estimates of claims
incurred but not reported.
Product Warranties.
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):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Balance, beginning of year
|
|
$
|
7,943
|
|
|
$
|
6,709
|
|
Assumed in business acquisition
|
|
|
-
|
|
|
|
1,121
|
|
Charged to expense
|
|
|
6,119
|
|
|
|
6,182
|
|
Margin on parts sales reversed
|
|
|
3,819
|
|
|
|
2,244
|
|
Reductions for claims settled
|
|
|
(10,110)
|
|
|
|
(8,313)
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
7,771
|
|
|
$
|
7,943
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition
.
Sales are recognized when revenue is realized or realizable and has been earned. The
Companys policy is to recognize revenue when risk and title passes 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. Rights of return are typically contractually limited, amounts are estimable, and the Company records provisions for anticipated returns and warranty claims at the time revenue is recognized. Historically, sales returns have been
approximately 2 percent of sales. Provisions for sales returns are recorded as a reduction of net sales, and provisions for warranty claims are recorded in selling, marketing and distribution expenses. From time to time, the Company may promote the
sale of new products by agreeing to accept returns of superseded products. In such cases, provisions for estimated returns are recorded as a reduction of net sales.
Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include
cooperative advertising arrangements, rebates based on annual purchases, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or free product. Under cooperative
advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Companys products; estimated costs are accrued at the time of sale and classified as selling, marketing and distribution
expense. Rebates are accrued based on the program rates and progress toward the estimated annual sales amount, and are recorded as a reduction of sales (cash, trade credit) or cost of products sold (free goods). 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.
Shipping and Handling.
Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold in the
accompanying Consolidated Statements of Income. Amounts billed to customers for shipping and handling are included in net sales.
Earnings Per Common Share
.
Basic net earnings per share is computed by dividing earnings available to common shareholders by the weighted
average number of shares outstanding during the year. Diluted net earnings per share is computed after giving effect to the exercise of all dilutive outstanding option grants.
38
Comprehensive Income.
Comprehensive income is a measure of all changes in shareholders equity
except those resulting from investments by and distributions to owners, and includes such items as net earnings, certain foreign currency translation items, changes in the value of qualifying hedges and pension liability adjustments.
Derivative Instruments and Hedging Activities
.
The Company accounts for all derivatives, including those embedded in other contracts, as
either assets or liabilities and measures those financial instruments at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation.
As part of its risk management program, the Company may periodically use forward exchange contracts and interest rate swaps to manage known market exposures.
Terms of derivative instruments are structured to match the terms of the risk being managed and are generally held to maturity. The Company does not hold or issue derivative financial instruments for trading purposes. All other contracts that
contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Companys policy is to not enter into contracts with terms that cannot be designated as normal
purchases or sales.
The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The Company enters
into forward contracts or options, or borrows in various currencies, in order to hedge its net monetary positions. These instruments are recorded at fair value and the gains and losses are included in other expense, net. The notional amounts of
contracts outstanding as of December 27, 2013 totaled $22 million. The Company believes it uses strong financial counterparts in these transactions and that the resulting credit risk under these hedging strategies is not significant.
The Company uses significant other observable inputs (level 2 in the fair value hierarchy) to value the derivative instruments used to hedge interest rate
volatility and net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. The fair market value and balance sheet classification of such instruments follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
2013
|
|
|
2012
|
|
Gain (loss) on foreign currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
$
|
306
|
|
|
$
|
553
|
|
Losses
|
|
|
|
|
(15)
|
|
|
|
(62)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
Accounts receivable
|
|
$
|
291
|
|
|
$
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements.
The accounting standards updates issued by The Financial Accounting Standards
Board (FASB) that will be effective for the Company in 2014 will not have a significant impact on the Companys consolidated financial statements.
B. Segment Information
The Company has three
reportable segments: Industrial (which aggregates four operating segments), Contractor and Lubrication. The Industrial segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives and other
fluids. Markets served include automotive and truck assembly and components plants, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles, and various other industries. The Contractor segment markets
sprayers for architectural coatings for painting, corrosion control, texture, and line striping. The Lubrication segment markets products to move and dispense lubricants for fast oil change facilities, service garages, fleet service centers,
automobile dealerships, the mining industry and industrial lubrication applications. All segments market parts and accessories for their products.
The
accounting policies of the segments are the same as those described in the summary of significant accounting policies. The cost of manufacturing for each segment is based on product cost, and expenses are based on actual costs incurred along with
cost allocations of shared and centralized functions based on activities performed, sales or space utilization. Depreciation expense is charged to the manufacturing or operating cost center that utilizes the asset, and is then allocated to segments
on the same basis as other expenses within that cost center.
Reportable
segments are defined by product. Segments are responsible for development, manufacturing, marketing and sales of their products. This allows for focused marketing and efficient product development. The segments share common purchasing, certain
manufacturing, distribution and administration functions.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments (in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
652,344
|
|
|
$
|
603,398
|
|
|
$
|
501,841
|
|
Contractor
|
|
|
342,546
|
|
|
|
298,811
|
|
|
|
290,732
|
|
Lubrication
|
|
|
109,134
|
|
|
|
110,247
|
|
|
|
102,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,104,024
|
|
|
$
|
1,012,456
|
|
|
$
|
895,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
211,265
|
|
|
$
|
186,129
|
|
|
$
|
173,694
|
|
Contractor
|
|
|
72,245
|
|
|
|
54,310
|
|
|
|
50,581
|
|
Lubrication
|
|
|
22,512
|
|
|
|
22,535
|
|
|
|
18,928
|
|
Unallocated corporate (expense)
|
|
|
(26,253)
|
|
|
|
(38,297)
|
|
|
|
(23,689)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
279,769
|
|
|
$
|
224,677
|
|
|
$
|
219,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
591,135
|
|
|
$
|
567,879
|
|
|
|
|
|
Contractor
|
|
|
152,300
|
|
|
|
141,094
|
|
|
|
|
|
Lubrication
|
|
|
82,503
|
|
|
|
84,079
|
|
|
|
|
|
Unallocated corporate
|
|
|
501,290
|
|
|
|
528,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,327,228
|
|
|
$
|
1,321,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate (expense) is not included in managements measurement of segment performance and includes such
items as acquisition and divestiture transaction costs, stock compensation, bad debt expense, charitable contributions and certain portions of pension expense. Unallocated assets include cash, allowances and valuation reserves, deferred income
taxes, certain capital items and other assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information (in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net Sales (based on customer location)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
498,478
|
|
|
$
|
440,757
|
|
|
$
|
394,318
|
|
Other countries
|
|
|
605,546
|
|
|
|
571,699
|
|
|
|
500,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,104,024
|
|
|
$
|
1,012,456
|
|
|
$
|
895,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
120,262
|
|
|
$
|
119,331
|
|
|
|
|
|
Other countries
|
|
|
31,455
|
|
|
|
32,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
151,717
|
|
|
$
|
151,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Major Customers
There were no customers that accounted for 10 percent or more of consolidated sales in 2013, 2012 or 2011.
C. Inventories
Major components of inventories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Finished products and components
|
|
$
|
65,963
|
|
|
$
|
58,703
|
|
Products and components in various stages of completion
|
|
|
41,458
|
|
|
|
44,001
|
|
Raw materials and purchased components
|
|
|
69,051
|
|
|
|
59,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,472
|
|
|
|
161,894
|
|
Reduction to LIFO cost
|
|
|
(42,685)
|
|
|
|
(40,345)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133,787
|
|
|
$
|
121,549
|
|
|
|
|
|
|
|
|
|
|
Inventories valued under the LIFO method were $76.9 million in 2013 and $72.6 million in 2012. All other inventory was valued
on the FIFO method.
40
D. Property, Plant and Equipment
Property, plant and equipment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Land and improvements
|
|
$
|
16,506
|
|
|
$
|
16,261
|
|
Buildings and improvements
|
|
|
118,460
|
|
|
|
115,774
|
|
Manufacturing equipment
|
|
|
222,810
|
|
|
|
214,073
|
|
Office, warehouse and automotive equipment
|
|
|
35,887
|
|
|
|
33,388
|
|
Additions in progress
|
|
|
14,224
|
|
|
|
9,571
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
407,887
|
|
|
|
389,067
|
|
Accumulated depreciation
|
|
|
(256,170)
|
|
|
|
(237,523)
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
151,717
|
|
|
$
|
151,544
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $23.4 million in 2013, $22.2 million in 2012 and $20.6 million in 2011.
E. Income Taxes
Earnings before income tax
expense consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Domestic
|
|
$
|
238,928
|
|
|
$
|
184,132
|
|
|
$
|
186,374
|
|
Foreign
|
|
|
49,894
|
|
|
|
33,194
|
|
|
|
23,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
288,822
|
|
|
$
|
217,326
|
|
|
$
|
209,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
64,753
|
|
|
$
|
61,989
|
|
|
$
|
58,192
|
|
State and local
|
|
|
2,470
|
|
|
|
5,180
|
|
|
|
3,920
|
|
Foreign
|
|
|
11,569
|
|
|
|
11,218
|
|
|
|
7,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,792
|
|
|
|
78,387
|
|
|
|
69,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(553)
|
|
|
|
(5,431)
|
|
|
|
(1,496)
|
|
Foreign
|
|
|
(239)
|
|
|
|
(4,756)
|
|
|
|
(377)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(792)
|
|
|
|
(10,187)
|
|
|
|
(1,873)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,000
|
|
|
$
|
68,200
|
|
|
$
|
67,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid were $78.0 million, $71.7 million
and $61.3 million in 2013, 2012 and 2011.
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Statutory tax rate
|
|
|
35 %
|
|
|
|
35 %
|
|
|
|
35 %
|
|
Tax effect of international operations
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
-
|
|
State taxes, net of federal effect
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
U.S. general business tax credits
|
|
|
(2)
|
|
|
|
-
|
|
|
|
(2)
|
|
Domestic production deduction
|
|
|
(3)
|
|
|
|
(2)
|
|
|
|
(3)
|
|
Dividends from Liquid Finishing
|
|
|
(3)
|
|
|
|
(2)
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
27 %
|
|
|
|
31 %
|
|
|
|
32 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Deferred income taxes are provided for temporary differences between the financial reporting and the tax basis of
assets and liabilities. The deferred tax assets (liabilities) resulting from these differences are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Inventory valuations
|
|
$
|
8,825
|
|
|
$
|
8,289
|
|
Self-insurance retention accruals
|
|
|
1,887
|
|
|
|
2,035
|
|
Warranty reserves
|
|
|
2,089
|
|
|
|
2,091
|
|
Vacation accruals
|
|
|
2,740
|
|
|
|
2,406
|
|
Bad debt reserves
|
|
|
1,961
|
|
|
|
1,753
|
|
Other
|
|
|
1,325
|
|
|
|
1,168
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, current
|
|
|
18,827
|
|
|
|
17,742
|
|
Included in other current liabilities
|
|
|
(1,095)
|
|
|
|
(1,042)
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
17,732
|
|
|
|
16,700
|
|
|
|
|
|
|
|
|
|
|
Unremitted earnings of consolidated foreign subsidiaries
|
|
|
(6,316)
|
|
|
|
(4,016)
|
|
Excess of tax over book depreciation
|
|
|
(42,322)
|
|
|
|
(42,195)
|
|
Pension liability
|
|
|
20,798
|
|
|
|
36,821
|
|
Postretirement medical
|
|
|
8,097
|
|
|
|
7,998
|
|
Acquisition costs
|
|
|
3,644
|
|
|
|
4,024
|
|
Stock compensation
|
|
|
14,401
|
|
|
|
13,046
|
|
Deferred compensation
|
|
|
1,193
|
|
|
|
982
|
|
Other
|
|
|
(64)
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
Total Non-current
|
|
|
(569)
|
|
|
|
16,860
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
17,163
|
|
|
$
|
33,560
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets were $78.6 million and $93.2 million, and total deferred tax liabilities were $61.4 million and
$59.6 million on December 27, 2013 and December 28, 2012.
The Company files income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2007.
The Company records penalties and accrued interest related to uncertain tax positions in income tax expense. Total reserves for uncertain tax positions were
not material.
F. Debt
A summary of debt
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Interest Rate
December 27,
2013
|
|
|
Maturity
|
|
|
2013
|
|
|
2012
|
|
Private placement unsecured fixed-rate notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
4.00 %
|
|
|
|
March 2018
|
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
Series B
|
|
|
5.01 %
|
|
|
|
March 2023
|
|
|
|
75,000
|
|
|
|
75,000
|
|
Series C
|
|
|
4.88 %
|
|
|
|
January 2020
|
|
|
|
75,000
|
|
|
|
75,000
|
|
Series D
|
|
|
5.35 %
|
|
|
|
July 2026
|
|
|
|
75,000
|
|
|
|
75,000
|
|
Unsecured revolving credit facility
|
|
|
1.42 %
|
|
|
|
March 2017
|
|
|
|
108,370
|
|
|
|
256,480
|
|
Notes payable to banks
|
|
|
0.81 %
|
|
|
|
2014
|
|
|
|
9,584
|
|
|
|
8,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, including current portion
|
|
|
|
|
|
|
|
|
|
$
|
417,954
|
|
|
$
|
564,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of debt with fixed interest
rates was $320 million on December 27, 2013 and $330 million on December 28, 2012. 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.
42
On March 27, 2012, the Companys $250 million credit agreement was terminated in connection with the
execution of an amendment to a new unsecured revolving credit agreement. The new agreement is with a syndicate of lenders and expires in March 2017. It provides up to $450 million of committed credit, available for general corporate purposes,
working capital needs, share repurchases and acquisitions. The Company may borrow up to $50 million under the swingline portion of the facility for daily working capital needs.
Under terms of the revolving credit agreement, loans denominated in U.S. dollars bear interest, at the Companys option, at either a base rate or a
LIBOR-based rate. Loans denominated in currencies other than U.S. dollars bear interest at a LIBOR-based rate. The base rate is an annual rate equal to a margin ranging from zero percent to 1 percent, depending on the Companys cash flow
leverage ratio (debt to earnings before interest, taxes, depreciation, amortization and extraordinary non-operating or non-cash charges and expenses) plus the highest of (i) the banks prime rate, (ii) the federal funds rate plus 0.5
percent or (iii) one-month LIBOR plus 1.5 percent. In general, LIBOR-based loans bear interest at LIBOR plus 1 percent to 2 percent, depending on the Companys cash flow leverage ratio. The Company is also required to pay a fee on the
undrawn amount of the loan commitment at an annual rate ranging from 0.15 percent to 0.40 percent, depending on the Companys cash flow leverage ratio.
On December 27, 2013, the Company had $502 million in lines of credit, including the $450 million in committed credit facilities described above and $52
million with foreign banks. The unused portion of committed credit lines was $355 million as of December 27, 2013. In addition, the Company has unused, uncommitted lines of credit with foreign banks totaling $32 million. Borrowing rates under
these credit lines vary with the prime rate, rates on domestic certificates of deposit and the London Interbank market. The Company pays facility fees of up to 0.15 percent per annum on certain of these lines. No compensating balances are required.
Various debt agreements require the Company to maintain certain financial ratios as to cash flow leverage and interest coverage. The Company is in
compliance with all financial covenants of its debt agreements.
Annual maturities of debt are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
$
|
9,584
|
|
|
2015
|
|
|
-
|
|
|
2016
|
|
|
-
|
|
|
2017
|
|
|
108,370
|
|
|
2018
|
|
|
75,000
|
|
|
Thereafter
|
|
|
225,000
|
|
Interest paid on debt during 2013, 2012 and 2011 was $18.3 million, $19.0 million and $8.7 million.
G. Shareholders Equity
At
December 27, 2013, the Company had 22,549 authorized, but not issued, cumulative preferred shares, $100 par value. The Company also has authorized, but not issued, a separate class of 3 million shares of preferred stock, $1 par value.
The Company maintained a plan in which one preferred share purchase right (Right) existed for each common share of the Company. Each Right
entitled its holder to purchase one one-thousandth of a share of a new series of junior participating preferred stock at an exercise price of $150, subject to adjustment. The Rights were exercisable only if a person or group acquired beneficial
ownership of 15 percent or more of the Companys outstanding common stock. On February 15, 2013, the Company terminated the plan and all of the Rights expired.
43
Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and Post-
retirement
Medical
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Gain (Loss)
on Interest
Rate Hedge
Contracts
|
|
|
Total
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(51,334)
|
|
|
$
|
(823)
|
|
|
$
|
(286)
|
|
|
$
|
(52,443)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(28,112)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,112)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
3,788
|
|
|
|
-
|
|
|
|
286
|
|
|
|
4,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(75,658)
|
|
|
$
|
(823)
|
|
|
$
|
-
|
|
|
$
|
(76,481)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(75,658)
|
|
|
$
|
(823)
|
|
|
$
|
-
|
|
|
$
|
(76,481)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(10,993)
|
|
|
|
(3,206)
|
|
|
|
-
|
|
|
|
(14,199)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
6,935
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(79,716)
|
|
|
$
|
(4,029)
|
|
|
$
|
-
|
|
|
$
|
(83,745)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(79,716)
|
|
|
$
|
(4,029)
|
|
|
$
|
-
|
|
|
$
|
(83,745)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
23,103
|
|
|
|
7,812
|
|
|
|
-
|
|
|
|
30,915
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
6,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(50,132)
|
|
|
$
|
3,783
|
|
|
$
|
-
|
|
|
$
|
(46,349)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Cost of products sold
|
|
$
|
3,635
|
|
|
$
|
3,900
|
|
|
$
|
2,122
|
|
Product development
|
|
|
1,699
|
|
|
|
1,728
|
|
|
|
901
|
|
Selling, marketing and distribution
|
|
|
2,828
|
|
|
|
2,886
|
|
|
|
1,636
|
|
General and administrative
|
|
|
2,124
|
|
|
|
2,032
|
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before tax
|
|
$
|
10,286
|
|
|
$
|
10,546
|
|
|
$
|
5,724
|
|
Income tax (benefit)
|
|
|
(3,805)
|
|
|
|
(3,611)
|
|
|
|
(1,936)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total after tax
|
|
$
|
6,481
|
|
|
$
|
6,935
|
|
|
$
|
3,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
H. Share-Based Awards, Purchase Plans and Compensation Cost
Stock Option and Award Plan.
The Company has a stock incentive plan under which it grants stock options and share awards to directors, officers
and other employees. Option price is the market price on the date of grant. Options become exercisable at such time, generally over three or four years, and in such installments as set by the Company, and expire ten years from the date of grant.
Restricted share awards have been made to certain key employees under the plan. The market value of restricted stock at the date of grant is charged to
operations over the vesting period. Compensation cost charged to operations for restricted share awards was $528,000 in 2013, $408,000 in 2012 and $291,000 in 2011. Individual nonemployee directors of the Company may elect to receive, either
currently or deferred, all or part of their annual retainer, and/or payment for attendance at Board or Committee meetings, in the form of shares of the Companys common stock instead of cash. Under this arrangement, the Company issued 6,079
shares in 2013, 7,656 shares in 2012 and 8,190 shares in 2011. The expense related to this arrangement is not significant. The Company has a stock appreciation plan that provides for payments of cash to eligible foreign employees based on the change
in the market price of the Companys common stock over a period of time. Compensation cost related to this plan was $1,900,000 in 2013, $470,000 in 2012 and $851,000 in 2011.
Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, December 31, 2010
|
|
|
5,509
|
|
|
$
|
30.42
|
|
|
|
2,980
|
|
|
$
|
31.99
|
|
Granted
|
|
|
569
|
|
|
|
43.15
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(553)
|
|
|
|
26.19
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(47)
|
|
|
|
35.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 30, 2011
|
|
|
5,478
|
|
|
|
32.12
|
|
|
|
3,211
|
|
|
|
32.27
|
|
Granted
|
|
|
566
|
|
|
|
50.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(805)
|
|
|
|
27.14
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(47)
|
|
|
|
35.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 28, 2012
|
|
|
5,192
|
|
|
|
34.85
|
|
|
|
3,194
|
|
|
|
32.99
|
|
Granted
|
|
|
969
|
|
|
|
65.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(990)
|
|
|
|
33.04
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(22)
|
|
|
|
40.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 27, 2013
|
|
|
5,149
|
|
|
$
|
41.03
|
|
|
|
3,311
|
|
|
$
|
33.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information for options outstanding and exercisable at December 27, 2013 (in thousands,
except per share and contractual term amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Prices
|
|
|
Options
Outstanding
|
|
|
Options
Outstanding
Weighted Avg.
Remaining
Contractual Term
in
Years
|
|
Options
Outstanding
Weighted Avg.
Exercise
Price
|
|
|
Options
Exercisable
|
|
|
Options
Exercisable
Weighted Avg.
Exercise
Price
|
|
$
|
16-30
|
|
|
|
1,469
|
|
|
5
|
|
$
|
23.62
|
|
|
|
1,295
|
|
|
$
|
23.16
|
|
$
|
30-45
|
|
|
|
2,062
|
|
|
5
|
|
|
38.97
|
|
|
|
1,805
|
|
|
|
38.50
|
|
$
|
45-60
|
|
|
|
1,211
|
|
|
8
|
|
|
53.97
|
|
|
|
211
|
|
|
|
49.44
|
|
$
|
60-76
|
|
|
|
407
|
|
|
10
|
|
|
75.88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16-76
|
|
|
|
5,149
|
|
|
6
|
|
$
|
41.03
|
|
|
|
3,311
|
|
|
$
|
33.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of exercisable option
shares was $147.7 million as of December 27, 2013, with a weighted average contractual term of 4.9 years. There were approximately 5.1 million vested share options and share options expected to vest as of December 27, 2013, with an
aggregate intrinsic value of $71.3 million, a weighted average exercise price of $40.71 and a weighted average contractual term of 6.2 years.
45
Information related to options exercised follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cash received
|
|
$
|
32,630
|
|
|
$
|
21,687
|
|
|
$
|
14,476
|
|
Aggregate intrinsic value
|
|
|
33,028
|
|
|
|
18,195
|
|
|
|
10,485
|
|
Tax benefit realized
|
|
|
11,200
|
|
|
|
6,200
|
|
|
|
3,500
|
|
Stock Purchase Plan.
Under the Companys Employee Stock Purchase Plan, the purchase price of the shares is
the lesser of 85 percent of the fair market value on the first day or the last day of the plan year. The Company issued 196,913 shares under this plan in 2013, 238,621 shares in 2012 and 313,013 shares in 2011.
Authorized Shares.
Shares authorized for issuance under the stock option and purchase plans are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Total Shares
Authorized
|
|
|
Available for Future
Issuance as of
December 27, 2013
|
|
Stock Incentive Plan (2010)
|
|
|
5,100
|
|
|
|
2,473
|
|
Employee Stock Purchase Plan (2006)
|
|
|
7,000
|
|
|
|
5,288
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,100
|
|
|
|
7,761
|
|
|
|
|
|
|
|
|
|
|
Amounts available for future issuance exclude outstanding options. Options outstanding as of December 27, 2013, include
options granted under three plans that were replaced by subsequent plans. No shares are available for future grants under those plans.
Share-based
Compensation.
The Company recognized share-based compensation cost of $16.5 million in 2013, $12.4 million in 2012 and $11.0 million in 2011, which reduced net income by $12.6 million, or $0.20 per weighted common share in 2013, $9.5
million, or $0.15 per weighted common share in 2012 and $8.4 million, or $0.14 per weighted common share in 2011. As of December 27, 2013, there was $15.2 million of unrecognized compensation cost related to unvested options, expected to be
recognized over a weighted average period of approximately two 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected life in years
|
|
|
5.9
|
|
|
|
6.5
|
|
|
|
6.5
|
|
Interest rate
|
|
|
1.3 %
|
|
|
|
1.3 %
|
|
|
|
2.8 %
|
|
Volatility
|
|
|
35.4 %
|
|
|
|
36.6 %
|
|
|
|
33.7 %
|
|
Dividend yield
|
|
|
1.6 %
|
|
|
|
1.8 %
|
|
|
|
2.0 %
|
|
Weighted average fair value per share
|
|
$
|
19.44
|
|
|
$
|
15.60
|
|
|
$
|
13.35
|
|
Expected life is estimated based on vesting terms and exercise and termination history. Interest rate is based on the U.S.
Treasury rate on zero-coupon issues with a remaining term equal to the expected life of the option. Expected volatility is based on historical volatility over a period commensurate with the expected life of options.
The fair value of employees purchase rights under the Employee Stock Purchase 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected life in years
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Interest rate
|
|
|
0.2 %
|
|
|
|
0.2 %
|
|
|
|
0.3 %
|
|
Volatility
|
|
|
26.0 %
|
|
|
|
40.6 %
|
|
|
|
27.8 %
|
|
Dividend yield
|
|
|
1.7 %
|
|
|
|
1.7 %
|
|
|
|
2.1 %
|
|
Weighted average fair value per share
|
|
$
|
14.16
|
|
|
$
|
15.58
|
|
|
$
|
10.05
|
|
46
I. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net earnings available to common shareholders
|
|
$
|
210,822
|
|
|
$
|
149,126
|
|
|
$
|
142,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
61,203
|
|
|
|
60,451
|
|
|
|
60,286
|
|
Dilutive effect of stock options computed based on the treasury stock method using the average market price
|
|
|
1,587
|
|
|
|
1,260
|
|
|
|
1,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per share
|
|
|
62,790
|
|
|
|
61,711
|
|
|
|
61,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
3.44
|
|
|
$
|
2.47
|
|
|
$
|
2.36
|
|
Diluted earnings per share
|
|
$
|
3.36
|
|
|
$
|
2.42
|
|
|
$
|
2.32
|
|
Stock options to purchase 0.4 million, 0.6 million and 1.6 million shares were not included in the 2013, 2012
and 2011 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
J. Retirement Benefits
The Company has a defined contribution plan, under Section 401(k) of the Internal Revenue Code, which provides retirement benefits to most U.S.
employees. For all employees who choose to participate, the Company matches employee contributions at a 100 percent rate, up to 3 percent of the employees compensation. For employees not covered by a defined benefit plan, the Company
contributes an amount equal to 1.5 percent of the employees compensation. Employer contributions totaled $6.3 million in 2013, $5.6 million in 2012 and $4.2 million in 2011.
The Companys postretirement medical plan provides certain medical benefits for retired U.S. employees. Employees hired before January 1, 2005, are
eligible for these benefits upon retirement and fulfillment of other eligibility requirements as specified by the plan.
The Company has both funded and
unfunded noncontributory defined benefit pension plans that together cover most U.S. employees hired before January 1, 2006, certain directors and some of the employees of the Companys non-U.S. subsidiaries. For U.S. plans, benefits are
based on years of service and the highest five consecutive years earnings in the ten years preceding retirement. The Company funds annually in amounts consistent with minimum funding levels and maximum tax deduction limits.
In 2012, the Company assumed the obligations and assets of a defined contribution plan with a guaranteed return that covers employees of an acquired business
in Switzerland. The Swiss plan is funded by company and employee contributions. In 2013, the Company transferred responsibility for pension coverage under Swiss law to an insurance company. To effect the change, plan assets were converted to cash
and deposited with the insurance company for investment under an insurance contract. Assets of the plan are valued at the amount of benefits liability of the insurance company and classified in the other assets category, level 2 in the
fair value hierarchy. The transfer of responsibility for current retirees to the new plan carrier was treated as a settlement under ASC 715 and resulted in a reduction of plan obligations and assets, and a small settlement gain.
Investment policies and strategies of the U.S. funded pension plan are based on a long-term view of economic growth and heavily weighted toward equity
securities. The primary goal of the plans investments is to ensure that the plans liabilities are met over time. In developing strategic asset allocation guidelines, an emphasis is placed on the long-term characteristics of individual
asset classes, and the benefits of diversification among multiple asset classes. The plan invests primarily in domestic and international equities, fixed income securities, which include treasuries, highly-rated corporate bonds and high-yield bonds
and real estate. The midpoints of the ranges of strategic target allocations for plan assets are 65 percent equity securities, 22 percent fixed income securities and 13 percent real estate and alternative investments.
Plan assets are held in a trust for the benefit of plan participants and are
invested in various commingled funds, most of which are sponsored by the trustee. Equity securities are valued using quoted prices in active markets. The fair values for commingled equity and fixed-income funds, international equity funds, and real
estate investments are measured using net asset values, which take into consideration the value of underlying fund investments, as well as the other accrued assets and liabilities of a fund, in order to determine a per share market value. Commingled
fund and international equity funds are classified as level 2 because the net asset value is not directly traded on an active exchange. Certain trustee-sponsored funds allow redemptions monthly or quarterly, with 10 or 60 days advance notice, while
most of the funds allow redemptions daily.
Level 3 assets consist of investments in real estate investment trust funds whose assets are valued at least
annually by independent appraisal firms, using market, income and cost approaches. Significant unobservable quantitative inputs used in determining the fair
47
value of each investment include cash flow assumptions, capitalization rates and discount rates. These inputs are subject to change based on changes in economic and market conditions and/or
changes in use or timing of exit. Changes in cash flows, discount rates and terminal capitalization rates will result in increases or decreases in the fair values of these investments. It is not possible for us to predict the effect of future
economic or market conditions on the estimated fair values of plan assets.
Plan assets by category and fair value measurement level were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 27, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
|
$
|
95,025
|
|
|
$
|
-
|
|
|
$
|
95,025
|
|
|
$
|
-
|
|
U.S. Small/Mid Cap
|
|
|
18,020
|
|
|
|
-
|
|
|
|
18,020
|
|
|
|
-
|
|
International
|
|
|
69,140
|
|
|
|
-
|
|
|
|
69,140
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
182,185
|
|
|
|
-
|
|
|
|
182,185
|
|
|
|
-
|
|
Fixed income
|
|
|
48,718
|
|
|
|
-
|
|
|
|
40,158
|
|
|
|
8,560
|
|
Real estate and other
|
|
|
49,704
|
|
|
|
1,149
|
|
|
|
31,271
|
|
|
|
17,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
280,607
|
|
|
$
|
1,149
|
|
|
$
|
253,614
|
|
|
$
|
25,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graco common stock
|
|
$
|
7,196
|
|
|
$
|
7,196
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Large Cap
|
|
|
78,263
|
|
|
|
-
|
|
|
|
78,263
|
|
|
|
-
|
|
U.S. Small/Mid Cap
|
|
|
12,282
|
|
|
|
-
|
|
|
|
12,282
|
|
|
|
-
|
|
International
|
|
|
67,459
|
|
|
|
-
|
|
|
|
67,459
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
165,200
|
|
|
|
7,196
|
|
|
|
158,004
|
|
|
|
-
|
|
Fixed income
|
|
|
63,592
|
|
|
|
-
|
|
|
|
63,592
|
|
|
|
-
|
|
Real estate and other
|
|
|
17,814
|
|
|
|
2,676
|
|
|
|
-
|
|
|
|
15,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
246,606
|
|
|
$
|
9,872
|
|
|
$
|
221,596
|
|
|
$
|
15,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending balances of level 3 plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Balance, beginning of year
|
|
$
|
15,138
|
|
|
$
|
9,247
|
|
Pension assets of acquired businesses
|
|
|
-
|
|
|
|
5,216
|
|
Purchases
|
|
|
14,277
|
|
|
|
4,443
|
|
Redemptions
|
|
|
(5,351)
|
|
|
|
(4,891)
|
|
Change in unrealized gains (losses)
|
|
|
1,780
|
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
25,844
|
|
|
$
|
15,138
|
|
|
|
|
|
|
|
|
|
|
48
The Company uses a year-end measurement date for all of its plans. The following provides a reconciliation of the
changes in the plans benefit obligations and fair value of assets over the periods ending December 27, 2013, and December 28, 2012, and a statement of the funded status as of the same dates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Medical Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation, beginning of year
|
|
$
|
359,701
|
|
|
$
|
278,611
|
|
|
$
|
23,472
|
|
|
$
|
23,445
|
|
Pension obligation of acquired businesses
|
|
|
-
|
|
|
|
39,139
|
|
|
|
-
|
|
|
|
-
|
|
Service cost
|
|
|
7,447
|
|
|
|
6,414
|
|
|
|
626
|
|
|
|
589
|
|
Interest cost
|
|
|
14,149
|
|
|
|
13,729
|
|
|
|
961
|
|
|
|
986
|
|
Actuarial loss (gain)
|
|
|
(15,653)
|
|
|
|
31,869
|
|
|
|
(2,582)
|
|
|
|
(294)
|
|
Plan changes
|
|
|
3,197
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Benefit payments
|
|
|
(10,762)
|
|
|
|
(9,717)
|
|
|
|
(1,135)
|
|
|
|
(1,254)
|
|
Settlements
|
|
|
(7,430)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exchange rate changes
|
|
|
1,622
|
|
|
|
(344)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation, end of year
|
|
$
|
352,271
|
|
|
$
|
359,701
|
|
|
$
|
21,342
|
|
|
$
|
23,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, beginning of year
|
|
$
|
246,606
|
|
|
$
|
181,319
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Pension assets of acquired businesses
|
|
|
-
|
|
|
|
32,132
|
|
|
|
-
|
|
|
|
-
|
|
Actual return on assets
|
|
|
40,280
|
|
|
|
30,861
|
|
|
|
-
|
|
|
|
-
|
|
Employer contributions
|
|
|
10,728
|
|
|
|
12,437
|
|
|
|
1,135
|
|
|
|
1,254
|
|
Benefit payments
|
|
|
(10,762)
|
|
|
|
(9,717)
|
|
|
|
(1,135)
|
|
|
|
(1,254)
|
|
Settlements
|
|
|
(7,241)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exchange rate changes
|
|
|
996
|
|
|
|
(426)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of year
|
|
$
|
280,607
|
|
|
$
|
246,606
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(71,664)
|
|
|
$
|
(113,095)
|
|
|
$
|
(21,342)
|
|
|
$
|
(23,472)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,116
|
|
|
$
|
850
|
|
|
$
|
1,256
|
|
|
$
|
1,254
|
|
Non-current liabilities
|
|
|
70,548
|
|
|
|
112,245
|
|
|
|
20,086
|
|
|
|
22,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
71,664
|
|
|
$
|
113,095
|
|
|
$
|
21,342
|
|
|
$
|
23,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation as of year-end for all defined benefit pension plans was $326 million for 2013 and $330
million for 2012. Information for plans with an accumulated benefit obligation in excess of plan assets follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Projected benefit obligation
|
|
$
|
352,271
|
|
|
$
|
359,701
|
|
Accumulated benefit obligation
|
|
|
326,030
|
|
|
|
329,530
|
|
Fair value of plan assets
|
|
|
280,607
|
|
|
|
246,606
|
|
The components of net periodic benefit cost for the plans for 2013, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Medical Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service cost-benefits earned during the period
|
|
$
|
7,447
|
|
|
$
|
6,414
|
|
|
$
|
4,429
|
|
|
$
|
626
|
|
|
$
|
589
|
|
|
$
|
602
|
|
Interest cost on projected benefit obligation
|
|
|
14,149
|
|
|
|
13,729
|
|
|
|
13,072
|
|
|
|
961
|
|
|
|
986
|
|
|
|
1,219
|
|
Expected return on assets
|
|
|
(18,508)
|
|
|
|
(15,907)
|
|
|
|
(15,802)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of prior service cost (credit)
|
|
|
8
|
|
|
|
(5)
|
|
|
|
(5)
|
|
|
|
(658)
|
|
|
|
(658)
|
|
|
|
(658)
|
|
Amortization of net loss (gain)
|
|
|
10,456
|
|
|
|
10,814
|
|
|
|
5,819
|
|
|
|
480
|
|
|
|
395
|
|
|
|
568
|
|
Cost of pension plans which are not significant and have not adopted ASC 715
|
|
|
94
|
|
|
|
121
|
|
|
|
97
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
13,646
|
|
|
$
|
15,166
|
|
|
$
|
7,610
|
|
|
$
|
1,409
|
|
|
$
|
1,312
|
|
|
$
|
1,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Amounts recognized in other comprehensive (income) loss in 2013 and 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Medical Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net loss (gain) arising during the period
|
|
$
|
(37,284)
|
|
|
$
|
17,011
|
|
|
$
|
(2,582)
|
|
|
$
|
(294)
|
|
Prior service cost (credit) arising during the period
|
|
|
3,197
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of net gain (loss)
|
|
|
(10,456)
|
|
|
|
(10,814)
|
|
|
|
(480)
|
|
|
|
(395)
|
|
Amortization of prior service credit (cost)
|
|
|
(8)
|
|
|
|
5
|
|
|
|
658
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(44,551)
|
|
|
$
|
6,202
|
|
|
$
|
(2,404)
|
|
|
$
|
(31)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in accumulated other comprehensive (income) loss as of December 27, 2013 and December 28, 2012,
that had not yet been recognized as components of net periodic benefit cost, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Medical Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Prior service cost (credit)
|
|
$
|
3,271
|
|
|
$
|
(123)
|
|
|
$
|
(2,444)
|
|
|
$
|
(3,101)
|
|
Net loss
|
|
|
73,200
|
|
|
|
121,146
|
|
|
|
3,325
|
|
|
|
6,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net before income taxes
|
|
|
76,471
|
|
|
|
121,023
|
|
|
|
881
|
|
|
|
3,284
|
|
Income taxes
|
|
|
(26,903)
|
|
|
|
(43,409)
|
|
|
|
(317)
|
|
|
|
(1,182)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
49,568
|
|
|
$
|
77,614
|
|
|
$
|
564
|
|
|
$
|
2,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in accumulated other comprehensive (income) loss that are expected to be recognized as components of net
periodic benefit cost in 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Postretirement
Medical
Benefits
|
|
Prior service cost (credit)
|
|
$
|
330
|
|
|
$
|
(658)
|
|
Net loss (gain)
|
|
|
4,883
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
Net before income taxes
|
|
|
5,213
|
|
|
|
(509)
|
|
Income taxes
|
|
|
(1,877)
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
3,336
|
|
|
$
|
(326)
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine the Companys benefit obligations are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Medical Benefits
|
|
Weighted average assumptions
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.0 %
|
|
|
|
4.2 %
|
|
|
|
5.0 %
|
|
|
|
4.2 %
|
|
Rate of compensation increase
|
|
|
3.0 %
|
|
|
|
3.0 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.5 %
|
|
|
|
2.3 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
1.3 %
|
|
|
|
1.3 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
50
Assumptions used to determine the Companys net periodic benefit cost are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Medical Benefits
|
|
Weighted average
assumptions
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.2 %
|
|
|
|
4.6 %
|
|
|
|
5.5 %
|
|
|
|
4.2 %
|
|
|
|
4.6 %
|
|
|
|
5.5 %
|
|
Rate of compensation increase
|
|
|
3.0 %
|
|
|
|
3.0 %
|
|
|
|
3.8 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected return on assets
|
|
|
8.5 %
|
|
|
|
8.5 %
|
|
|
|
8.5 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.3 %
|
|
|
|
2.9 %
|
|
|
|
4.7 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
1.2 %
|
|
|
|
1.2 %
|
|
|
|
3.0 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected return on assets
|
|
|
3.0 %
|
|
|
|
3.0 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Several sources of information are considered in determining the expected rate of return assumption, including the allocation
of plan assets, the input of actuaries and professional investment advisors, and historical long-term returns. In setting the return assumption, the Company recognizes that historical returns are not always indicative of future returns and also
considers the long-term nature of its pension obligations.
The Companys U.S. retirement medical plan limits the annual cost increase that will be
paid by the Company to 3 percent. In measuring the accumulated postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed to be 7.4 percent for 2014, decreasing each year to a constant rate of 4.5 percent for
2026 and thereafter, subject to the plans annual increase limitation.
At December 27, 2013, a one percent change in assumed health care cost
trend rates would not have a significant impact on the service and interest cost components of net periodic postretirement health care benefit cost or the APBO for health care benefits.
The Company expects to contribute $2.3 million to its unfunded pension plans and $1.3 million to the postretirement medical plan in 2014. The Company expects
that contributions to the funded pension plan under minimum funding requirements for 2014 will not exceed $9 million, and that the amounts payable in 2014 may be eliminated by available credits. Estimated future benefit payments are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Postretirement
Medical
Benefits
|
|
2014
|
|
$
|
13,999
|
|
|
$
|
1,256
|
|
2015
|
|
|
15,045
|
|
|
|
1,314
|
|
2016
|
|
|
17,926
|
|
|
|
1,361
|
|
2017
|
|
|
16,675
|
|
|
|
1,395
|
|
2018
|
|
|
18,007
|
|
|
|
1,458
|
|
Years 2019 - 2023
|
|
|
104,174
|
|
|
|
8,032
|
|
51
K. Commitments and Contingencies
Lease Commitments
.
Aggregate annual rental commitments under operating leases with noncancelable terms of more than one year were $13.2
million at December 27, 2013, payable as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
Vehicles &
Equipment
|
|
|
Total
|
|
2014
|
|
$
|
2,170
|
|
|
$
|
3,214
|
|
|
$
|
5,384
|
|
2015
|
|
|
1,914
|
|
|
|
2,083
|
|
|
|
3,997
|
|
2016
|
|
|
1,350
|
|
|
|
1,250
|
|
|
|
2,600
|
|
2017
|
|
|
1,338
|
|
|
|
841
|
|
|
|
2,179
|
|
2018
|
|
|
1,360
|
|
|
|
555
|
|
|
|
1,915
|
|
Thereafter
|
|
|
7,655
|
|
|
|
764
|
|
|
|
8,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,787
|
|
|
$
|
8,707
|
|
|
$
|
24,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental expense was $3.6 million for 2013, $3.3 million for 2012 and $3.0 million for 2011.
Other Commitments.
The Company is committed to pay suppliers under the terms of open purchase orders issued in the normal course of business
totaling approximately $57 million at December 27, 2013. The Company also has commitments with certain suppliers to purchase minimum quantities, and under the terms of certain agreements, the Company is committed for certain portions of the
suppliers inventory. The Company does not purchase, or commit to purchase, quantities in excess of normal usage or amounts that cannot be used within one year. The Company estimates that the maximum commitment amount under such agreements does
not exceed $43 million. In addition, the Company could be obligated to perform under standby letters of credit totaling $3 million at December 27, 2013. The Company has also guaranteed the debt of its subsidiaries for up to $10 million. All
debt of subsidiaries is reflected in the consolidated balance sheets.
Contingencies.
The Company is party to various legal proceedings
arising in the normal course of business. The Company is actively pursuing and defending these matters and has recorded an estimate of the probable costs. Management does not expect that resolution of these matters will have a material adverse
effect on the Company, although the ultimate outcome cannot be determined based on available information.
As more fully described in Note L, under terms
of orders issued by the FTC, the Company is required to separately maintain the Liquid Finishing businesses as viable and competitive while it seeks a buyer for those businesses. The Companys maximum exposure to loss as a result of its
involvement with the Liquid Finishing businesses would include the entirety of its investment of $422 million and reimbursement of losses of the operations of the Liquid Finishing businesses in accordance with the hold separate order, which cannot
be quantified. The operating earnings of the Liquid Finishing businesses exceed $100 million (unaudited) since the date of acquisition, and no additional financial resources were required to be funded by the Company.
L. Acquisitions
On April 2, 2012, the
Company completed the purchase of the finishing businesses of Illinois Tool Works Inc. The acquisition includes powder and liquid finishing equipment operations, technologies and brands. In Powder Finishing, Graco acquired the Gema® businesses.
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 businesses 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.
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 and divestiture-related expenses are included in general and administrative expense in the Companys consolidated statements of earnings, and totaled $2 million in
2013, $16 million in 2012 and $8 million in 2011.
In December 2011, the FTC
filed a formal complaint to challenge the proposed acquisition on the grounds that the addition of the Liquid Finishing businesses to Graco would be anti-competitive, a position which Graco denied. In March 2012, the FTC issued an 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 order, the Liquid Finishing businesses were to be held separate from the rest of
Gracos businesses until the FTC determined which portions of the Liquid Finishing businesses Graco must divest.
52
In May 2012, the FTC issued a proposed 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 businesses 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 businesses, including general funds, capital, working capital and reimbursement of losses. To the extent that the Liquid Finishing businesses generate funds in excess of financial resources needed, the Company has access to such funds
consistent with practices in place prior to the acquisition.
Under terms of the hold separate order, the Company does not have a controlling interest in
the Liquid Finishing businesses, nor is it able to exert significant influence over the Liquid Finishing businesses. Consequently, the Companys investment in the shares of the Liquid Finishing businesses, totaling $422 million, has been
reflected as a cost-method investment on the Consolidated Balance Sheet as of December 27, 2013, and its results of operations have not been consolidated with those of the Company.
As a cost-method investment, income is recognized based on dividends received from current earnings of Liquid Finishing. Dividends of $28 million received in
2013 and $12 million received in 2012 are included in other expense (income) on the Consolidated Statements of Earnings. Once the FTC issues its final decision and order, and the Company completes the sale of its investment, there will be no further
dividends from Liquid Finishing.
The Company evaluates its cost-method investment for other-than-temporary impairment at each reporting period. As of
December 27, 2013, the Company evaluated its investment in Liquid Finishing and determined that there is no impairment.
Sales and operating earnings
of the Liquid Finishing businesses for the years 2013 and 2012 were as follows (unaudited, in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
278,543
|
|
|
$
|
269,099
|
|
|
Operating Earnings
|
|
|
61,174
|
|
|
|
52,256
|
|
53
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. In 2013, the seller reimbursed Graco approximately $5
million for payments of pre-acquisition tax liabilities paid by Liquid Finishing businesses after the acquisition date. This reimbursement was recorded as a reduction of the cost-method investment.
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
|
|
|
86,056
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
303,074
|
|
|
Current liabilities assumed
|
|
|
(27,434)
|
|
|
Non-current liabilities assumed
|
|
|
(7,984)
|
|
|
Deferred income taxes
|
|
|
(26,105)
|
|
|
|
|
|
|
|
|
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 Company adjusted the preliminary purchase price allocation in the fourth quarter of 2012 to recognize deferred tax
liability on certain identifiable intangible assets, which resulted in an $8 million increase in goodwill. Substantially none of the goodwill acquired in 2012 is deductible for tax purposes. The Company completed other business acquisitions in 2013,
2012 and 2011 that were not material to the consolidated financial statements.
Subsequent to the end of fiscal year 2013, the Company completed the
acquisition of a manufacturer of fluid management solutions for environmental monitoring and remediation, markets where Graco had little or no previous exposure. This business acquisition will not be material to the consolidated financial
statements.
The following unaudited pro forma information reflects the combined results of Graco and Powder Finishing operations as if the acquisition
had occurred at the beginning of 2011 (unaudited, in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,042,701
|
|
|
$
|
1,020,823
|
|
|
Operating Earnings
|
|
|
249,789
|
|
|
|
236,284
|
|
|
Net Earnings
|
|
|
153,008
|
|
|
|
147,290
|
|
|
Basic earnings per share
|
|
|
2.53
|
|
|
|
2.44
|
|
|
Diluted earnings per share
|
|
|
2.48
|
|
|
|
2.40
|
|
54
Additional depreciation and amortization of $2 million and $8 million are reflected in the 2012 and 2011 pro
forma results, respectively, as if the acquisition of Powder Finishing had occurred at the beginning of 2011. Non-recurring acquisition expenses of $16 million were eliminated from the 2012 pro forma results, and $8 million were eliminated from the
2011 pro forma results. Purchase accounting effects of $7 million related to inventory were removed from 2012 and reflected in 2011. For pro forma purposes, dividend income from Liquid Finishing of $12 million was eliminated from other income in
2012.
M. Quarterly Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
269,046
|
|
|
$
|
286,020
|
|
|
$
|
277,035
|
|
|
$
|
271,923
|
|
Gross Profit
|
|
|
150,644
|
|
|
|
158,739
|
|
|
|
150,873
|
|
|
|
147,199
|
|
Net Earnings
|
|
|
52,130
|
|
|
|
57,843
|
|
|
|
56,101
|
|
|
|
44,748
|
|
Basic Net Earnings per Common Share
|
|
$
|
0.86
|
|
|
$
|
0.94
|
|
|
$
|
0.91
|
|
|
$
|
0.73
|
|
Diluted Net Earnings per Common Share
|
|
|
0.84
|
|
|
|
0.92
|
|
|
|
0.89
|
|
|
|
0.71
|
|
Cash Dividends Declared per Common Share
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
0.28
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
234,122
|
|
|
$
|
268,184
|
|
|
$
|
256,472
|
|
|
$
|
253,678
|
|
Gross Profit
|
|
|
132,179
|
|
|
|
139,530
|
|
|
|
139,933
|
|
|
|
138,888
|
|
Net Earnings
|
|
|
35,381
|
|
|
|
34,352
|
|
|
|
37,131
|
|
|
|
42,262
|
|
Basic Net Earnings per Common Share
|
|
$
|
0.59
|
|
|
$
|
0.57
|
|
|
$
|
0.61
|
|
|
$
|
0.70
|
|
Diluted Net Earnings per Common Share
|
|
|
0.58
|
|
|
|
0.56
|
|
|
|
0.60
|
|
|
|
0.68
|
|
Cash Dividends Declared per Common Share
|
|
|
0.23
|
|
|
|
0.23
|
|
|
|
0.23
|
|
|
|
0.25
|
|
55