NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graco Inc. and Subsidiaries
Years Ended December 27, 2019, December 28, 2018 and December 29, 2017
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, 2019, December 28, 2018 and December 29, 2017 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, 2019, all subsidiaries are 100 percent controlled by the Company. Certain prior year disclosures have been revised to conform with current year reporting.
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
|
|
2019
|
|
2018
|
Assets
|
|
|
|
|
|
Cash surrender value of life insurance
|
2
|
|
$
|
17,702
|
|
|
$
|
14,320
|
|
Forward exchange contracts
|
2
|
|
—
|
|
|
82
|
|
Total assets at fair value
|
|
|
$
|
17,702
|
|
|
$
|
14,402
|
|
Liabilities
|
|
|
|
|
|
Contingent consideration
|
3
|
|
$
|
9,072
|
|
|
$
|
7,200
|
|
Deferred compensation
|
2
|
|
4,719
|
|
|
4,203
|
|
Forward exchange contracts
|
2
|
|
87
|
|
|
—
|
|
Total liabilities at fair value
|
|
|
$
|
13,878
|
|
|
$
|
11,403
|
|
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 Company’s policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities.
Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of certain acquired businesses based on future revenues.
Disclosures related to other 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 $256 million in 2019 and $262 million in 2018. Other receivables totaled $11 million in 2019 and $13 million in 2018.
Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. 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):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Prepaid income taxes
|
$
|
13,462
|
|
|
$
|
14,762
|
|
Prepaid expenses and other
|
16,455
|
|
|
17,746
|
|
Total
|
$
|
29,917
|
|
|
$
|
32,508
|
|
Impairment of Long-Lived Assets. The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
We completed our annual impairment review of all long-lived assets in the fourth quarter of 2019. No impairment charges were recorded as a result of that review. There were no impairment charges in 2018 or 2017.
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
|
|
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
|
(2,093
|
)
|
|
(973
|
)
|
|
—
|
|
|
(3,066
|
)
|
Balance, December 28, 2018
|
177,124
|
|
|
97,168
|
|
|
19,554
|
|
|
293,846
|
|
Additions, adjustments from business acquisitions
|
—
|
|
|
13,444
|
|
|
—
|
|
|
13,444
|
|
Foreign currency translation
|
(12
|
)
|
|
385
|
|
|
—
|
|
|
373
|
|
Balance, December 27, 2019
|
$
|
177,112
|
|
|
$
|
110,997
|
|
|
$
|
19,554
|
|
|
$
|
307,663
|
|
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 December 27, 2019
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
186,310
|
|
|
$
|
20,413
|
|
|
$
|
1,020
|
|
|
$
|
61,920
|
|
|
$
|
269,663
|
|
Accumulated amortization
|
(80,764
|
)
|
|
(10,526
|
)
|
|
(650
|
)
|
|
—
|
|
|
(91,940
|
)
|
Foreign currency translation
|
(10,412
|
)
|
|
(885
|
)
|
|
(73
|
)
|
|
(3,730
|
)
|
|
(15,100
|
)
|
Book value
|
$
|
95,134
|
|
|
$
|
9,002
|
|
|
$
|
297
|
|
|
$
|
58,190
|
|
|
$
|
162,623
|
|
Weighted average life in years
|
13
|
|
|
10
|
|
|
4
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 28, 2018
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
179,449
|
|
|
$
|
18,571
|
|
|
$
|
1,020
|
|
|
$
|
59,537
|
|
|
$
|
258,577
|
|
Accumulated amortization
|
(67,322
|
)
|
|
(8,647
|
)
|
|
(439
|
)
|
|
—
|
|
|
(76,408
|
)
|
Foreign currency translation
|
(10,817
|
)
|
|
(895
|
)
|
|
(73
|
)
|
|
(4,074
|
)
|
|
(15,859
|
)
|
Book value
|
$
|
101,310
|
|
|
$
|
9,029
|
|
|
$
|
508
|
|
|
$
|
55,463
|
|
|
$
|
166,310
|
|
Weighted average life in years
|
13
|
|
|
10
|
|
|
4
|
|
|
N/A
|
|
|
|
Amortization of intangibles was $15.5 million in 2019, $15.6 million in 2018 and $14.8 million in 2017. Estimated future annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
Estimated Amortization Expense
|
$
|
16,095
|
|
|
$
|
15,806
|
|
|
$
|
15,716
|
|
|
$
|
14,811
|
|
|
$
|
13,249
|
|
|
$
|
28,756
|
|
The Company completed business acquisitions in 2019, 2018 and 2017 that were not material to the consolidated financial statements.
Other Assets. Components of other assets were (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Cash surrender value of life insurance
|
$
|
17,702
|
|
|
$
|
14,320
|
|
Capitalized software
|
2,985
|
|
|
2,742
|
|
Equity method investment
|
7,603
|
|
|
7,252
|
|
Prepaid pension
|
2,931
|
|
|
—
|
|
Deposits and other
|
4,471
|
|
|
3,705
|
|
Total
|
$
|
35,692
|
|
|
$
|
28,019
|
|
The Company has entered into contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts are 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 Company’s insolvency. Changes in cash surrender value are recorded in operating expense. The cash surrender value increased $3.4 million in 2019, decreased $1.8 million in 2018 and increased $2.3 million in 2017.
Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation.
Other Current Liabilities. Components of other current liabilities were (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Accrued self-insurance retentions
|
$
|
7,570
|
|
|
$
|
7,870
|
|
Accrued warranty and service liabilities
|
12,785
|
|
|
11,056
|
|
Accrued trade promotions
|
8,390
|
|
|
11,449
|
|
Payable for employee stock purchases
|
13,722
|
|
|
11,916
|
|
Customer advances and deferred revenue
|
33,138
|
|
|
39,995
|
|
Income taxes payable
|
8,706
|
|
|
8,515
|
|
Operating lease liabilities, current
|
7,690
|
|
|
—
|
|
Right of return refund liability
|
13,791
|
|
|
12,705
|
|
Other
|
37,145
|
|
|
39,535
|
|
Total
|
$
|
142,937
|
|
|
$
|
143,041
|
|
Self-Insurance. The Company is self-insured for certain losses and costs relating to product liability, workers’ compensation, and employee medical benefit claims. The Company has stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insurance retentions are based on claims filed, estimates of claims incurred but not reported, and other actuarial assumptions. Self-insured reserves totaled $7.6 million as of December 27, 2019, and $7.9 million as of December 28, 2018.
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):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance, beginning of year
|
$
|
11,056
|
|
|
$
|
10,535
|
|
Charged to expense
|
10,350
|
|
|
8,963
|
|
Margin on parts sales reversed
|
2,576
|
|
|
1,193
|
|
Reductions for claims settled
|
(11,197
|
)
|
|
(9,635
|
)
|
Balance, end of year
|
$
|
12,785
|
|
|
$
|
11,056
|
|
Revenue Recognition.
Accounting Policy
Revenue is recognized at a single point in time 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, and do not exceed one year. Standalone selling prices are determined 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 and amounts are estimable. The Company records a refund liability and establishes a recovery asset for the value of product expected to be returned 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. 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. Historically, sales returns have been approximately 3 percent of sales. 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
Revenue is deferred when cash payments are received or due in advance of 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 $33.1 million as of December 27, 2019 and $40.0 million as of December 28, 2018. Net sales for the year included $39.4 million that was in deferred revenue and customer advances as of December 28, 2018.
Practical Expedients and Exemptions
Shipping and handling activities that occur after control of the related good transfers are accounted for as fulfillment activities instead of assessing such activities as performance obligations.
Sales taxes related to revenue producing transactions collected from the customer for a governmental authority are excluded from the transaction price.
Revenue standard requirements are applied 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.
Promised goods or services are not assessed as 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.
Incremental costs of obtaining a contract are generally expensed when incurred because the amortization period would be less than one year. Such costs primarily relate to sales commissions and are recorded in selling, marketing and distribution expense.
Disaggregated revenues by reporting segment and geography are disclosed in accordance with the revenue standard. See Note B, Segment Information.
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.
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 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 Company’s 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, 2019, totaled $33 million. The Company believes it uses strong financial counterparties 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 net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. Net derivative assets are reported on the balance sheet in accounts receivable and net derivative liabilities are reported as other current liabilities. The fair market value of such instruments follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Foreign Currency Contracts
|
|
|
|
Assets
|
$
|
—
|
|
|
$
|
322
|
|
Liabilities
|
(87
|
)
|
|
(240
|
)
|
Net Assets (Liabilities)
|
$
|
(87
|
)
|
|
$
|
82
|
|
Recent Accounting Pronouncements.
Credit Losses
In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. The Company has determined there will be no significant impact on earnings or financial condition from the adoption of the new standard. Accounting policies and systems have been updated as needed and disclosures required by the new standard will be provided in the Company's first quarter 2020 reporting cycle.
B. Segment Information
The Company has six operating segments which are aggregated into three reportable segments: Industrial, Process and Contractor.
The Industrial segment includes our Industrial Products and Applied Fluid Technologies divisions. The Industrial segment markets equipment and solutions for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and vehicle assembly and components production, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles and various other industries.
The Process segment includes our Process, Oil and Natural Gas, and Lubrication divisions. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, lubricants and other fluids. Markets served include food and beverage, dairy, oil and natural gas, pharmaceutical, cosmetics, electronics, wastewater, mining, fast oil change facilities, service garages, fleet service centers, automobile dealerships and industrial lubrication applications.
The Contractor segment markets sprayers for architectural coatings for painting, corrosion control, texture and line striping.
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.
Segments information follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net Sales
|
|
|
|
|
|
Industrial
|
$
|
747,396
|
|
|
$
|
781,029
|
|
|
$
|
691,978
|
|
Process
|
344,930
|
|
|
337,953
|
|
|
294,652
|
|
Contractor
|
553,719
|
|
|
534,310
|
|
|
488,114
|
|
Total
|
$
|
1,646,045
|
|
|
$
|
1,653,292
|
|
|
$
|
1,474,744
|
|
Operating Earnings
|
|
|
|
|
|
Industrial
|
$
|
247,216
|
|
|
$
|
271,307
|
|
|
$
|
237,700
|
|
Process
|
76,367
|
|
|
68,514
|
|
|
52,216
|
|
Contractor
|
128,282
|
|
|
120,905
|
|
|
113,898
|
|
Unallocated corporate (expense)
|
(27,409
|
)
|
|
(24,299
|
)
|
|
(25,069
|
)
|
Total
|
$
|
424,456
|
|
|
$
|
436,427
|
|
|
$
|
378,745
|
|
Assets
|
|
|
|
|
|
Industrial
|
$
|
615,486
|
|
|
$
|
640,683
|
|
|
|
Process
|
387,216
|
|
|
350,306
|
|
|
|
Contractor
|
368,832
|
|
|
283,727
|
|
|
|
Unallocated corporate
|
320,676
|
|
|
198,025
|
|
|
|
Total
|
$
|
1,692,210
|
|
|
$
|
1,472,741
|
|
|
|
Management assesses performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments. Unallocated corporate (expense) includes such items as stock compensation, certain acquisition transaction costs, bad debt expense, charitable contributions and certain facility expenses. Unallocated assets include cash, allowances and valuation reserves, deferred income taxes, certain capital and other assets.
Geographic information follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net Sales (based on customer location)
|
|
|
|
|
|
United States
|
$
|
840,659
|
|
|
$
|
806,127
|
|
|
$
|
743,344
|
|
Other countries
|
805,386
|
|
|
847,165
|
|
|
731,400
|
|
Total
|
$
|
1,646,045
|
|
|
$
|
1,653,292
|
|
|
$
|
1,474,744
|
|
Long-lived Assets
|
|
|
|
|
|
United States
|
$
|
268,864
|
|
|
$
|
178,331
|
|
|
|
Other countries
|
56,682
|
|
|
50,964
|
|
|
|
Total
|
$
|
325,546
|
|
|
$
|
229,295
|
|
|
|
Sales to Major Customers. Worldwide sales to one customer in the Contractor and Industrial segments individually represented over 10 percent of the Company’s consolidated sales in 2019, 2018 and 2017.
C. Inventories
Major components of inventories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Finished products and components
|
$
|
132,128
|
|
|
$
|
142,535
|
|
Products and components in various stages of completion
|
86,957
|
|
|
83,768
|
|
Raw materials and purchased components
|
117,026
|
|
|
115,705
|
|
Subtotal
|
336,111
|
|
|
342,008
|
|
Reduction to LIFO cost
|
(62,878
|
)
|
|
(58,026
|
)
|
Total
|
$
|
273,233
|
|
|
$
|
283,982
|
|
Inventories valued under the LIFO method were $140.3 million in 2019 and $154.4 million in 2018. All other inventory was valued on the FIFO method.
In 2019, certain inventory quantities were reduced, resulting in liquidation of LIFO inventory quantities carried at lower costs from prior years, although increases in material costs, including tariffs, offset the impact of the decrement and drove the LIFO reserve requirement higher. The effect of the LIFO reserve change on net earnings was not significant.
D. Property, Plant and Equipment
Property, plant and equipment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Land and improvements
|
$
|
29,817
|
|
|
$
|
26,252
|
|
Buildings and improvements
|
182,195
|
|
|
157,385
|
|
Manufacturing equipment
|
320,240
|
|
|
317,011
|
|
Office, warehouse and automotive equipment
|
48,476
|
|
|
44,901
|
|
Additions in progress
|
99,476
|
|
|
24,484
|
|
Total property, plant and equipment
|
680,204
|
|
|
570,033
|
|
Accumulated depreciation
|
(354,658
|
)
|
|
(340,738
|
)
|
Net property, plant and equipment
|
$
|
325,546
|
|
|
$
|
229,295
|
|
Depreciation expense was $32.2 million in 2019, $31.1 million in 2018 and $29.5 million in 2017.
E. Income Taxes
Earnings before income tax expense consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
294,402
|
|
|
$
|
310,999
|
|
|
$
|
269,258
|
|
Foreign
|
111,475
|
|
|
99,767
|
|
|
77,836
|
|
Total
|
$
|
405,877
|
|
|
$
|
410,766
|
|
|
$
|
347,094
|
|
Income tax expense consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
39,015
|
|
|
$
|
27,760
|
|
|
$
|
41,996
|
|
State and local
|
3,347
|
|
|
3,398
|
|
|
3,088
|
|
Foreign
|
26,270
|
|
|
23,118
|
|
|
19,486
|
|
Current income tax expense
|
68,632
|
|
|
54,276
|
|
|
64,570
|
|
Deferred
|
|
|
|
|
|
Domestic
|
(151
|
)
|
|
17,058
|
|
|
35,782
|
|
Foreign
|
(6,457
|
)
|
|
(1,622
|
)
|
|
(5,670
|
)
|
Deferred income tax expense (benefit)
|
(6,608
|
)
|
|
15,436
|
|
|
30,112
|
|
Total
|
$
|
62,024
|
|
|
$
|
69,712
|
|
|
$
|
94,682
|
|
Income taxes paid were $67.1 million in 2019, $58.1 million in 2018 and $61.0 million in 2017.
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Statutory tax rate
|
21
|
%
|
|
21
|
%
|
|
35
|
%
|
Tax effect of international operations
|
(1
|
)
|
|
—
|
|
|
(6
|
)
|
State taxes, net of federal effect
|
1
|
|
|
1
|
|
|
1
|
|
U.S. general business tax credits
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Domestic production deduction
|
—
|
|
|
—
|
|
|
(2
|
)
|
Stock compensation excess tax benefit
|
(3
|
)
|
|
(2
|
)
|
|
(10
|
)
|
Impact of 2017 Tax Cuts and Jobs Act
|
—
|
|
|
—
|
|
|
10
|
|
Global Intangible Low-taxed Income (GILTI)
|
1
|
|
|
1
|
|
|
—
|
|
Foreign Derived Intangible Income (FDII)
|
(3
|
)
|
|
(2
|
)
|
|
—
|
|
Pension contribution
|
—
|
|
|
(1
|
)
|
|
—
|
|
Effective tax rate
|
15
|
%
|
|
17
|
%
|
|
27
|
%
|
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 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Inventory valuations
|
$
|
966
|
|
|
$
|
(1,012
|
)
|
Self-insurance retention accruals
|
1,280
|
|
|
1,284
|
|
Warranty reserves
|
2,095
|
|
|
1,778
|
|
Vacation accruals
|
2,335
|
|
|
2,259
|
|
Bad debt reserves
|
3,142
|
|
|
2,785
|
|
Excess of tax over book depreciation and amortization
|
(38,735
|
)
|
|
(37,208
|
)
|
Pension liability
|
32,079
|
|
|
22,884
|
|
Postretirement medical
|
4,625
|
|
|
4,491
|
|
Acquisition costs
|
407
|
|
|
601
|
|
Stock compensation
|
13,979
|
|
|
13,763
|
|
Deferred compensation
|
1,960
|
|
|
1,994
|
|
Net operating loss carryforward
|
929
|
|
|
—
|
|
Deferred revenue
|
1,638
|
|
|
590
|
|
Other
|
1,851
|
|
|
1,260
|
|
Net deferred tax assets
|
$
|
28,551
|
|
|
$
|
15,469
|
|
Total deferred tax assets were $68.9 million and $56.1 million, and total deferred tax liabilities were $40.4 million and $40.6 million on December 27, 2019 and December 28, 2018. The difference between the deferred income tax provision and the change in net deferred income taxes is due to the change in other comprehensive income (loss) items.
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 2013.
The Company continues to assert that it will indefinitely reinvest earnings of foreign subsidiaries to support expansion of its international business. No additional income or withholding taxes have been provided for any remaining undistributed foreign earnings, as these amounts continue to be indefinitely reinvested in foreign operations. As of December 27, 2019, the amount of cash held outside the U.S. was not significant to the Company’s liquidity and was available to fund investments abroad.
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, 2019
|
|
Maturity
|
|
2019
|
|
2018
|
Private placement unsecured fixed-rate notes
|
|
|
|
|
|
|
|
Series B
|
5.01%
|
|
March 2023
|
|
75,000
|
|
|
75,000
|
|
Series C
|
4.88%
|
|
January 2020
|
|
—
|
|
|
75,000
|
|
Series D
|
5.35%
|
|
July 2026
|
|
75,000
|
|
|
75,000
|
|
Unsecured revolving credit facility
|
N/A
|
|
December 2021
|
|
—
|
|
|
—
|
|
Unsecured revolving credit facility - CNH
|
4.41%
|
|
N/A
|
|
14,298
|
|
|
41,391
|
|
Notes payable to banks
|
1.11%
|
|
2020
|
|
7,732
|
|
|
11,083
|
|
Total debt
|
|
|
|
|
$
|
172,030
|
|
|
$
|
277,474
|
|
The estimated fair value of the fixed interest rate private placement debt was $165 million on December 27, 2019 and $235 million on December 28, 2018. 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.
On December 15, 2016, the Company executed an amendment to its revolving credit agreement, extending the expiration date to December 15, 2021 and decreasing certain interest rates and fees. The amended agreement with a syndicate of lenders provides up to $500 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 amended revolving credit agreement, borrowings may be denominated in U.S. dollars or certain other currencies. Loans denominated in U.S. dollars bear interest, at the Company’s 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 0.75 percent, depending on the Company’s 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 bank’s 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 1.75 percent, depending on the Company’s cash flow leverage ratio. In addition to paying interest on the outstanding loans, the Company is required to pay a fee on the unused amount of the loan commitments at an annual rate ranging from 0.125 percent to 0.25 percent, depending on the Company’s cash flow leverage ratio.
On September 24, 2018, the Company entered into a revolving credit agreement with a sole lender that was scheduled to expire in September 2020. The credit agreement provides up to $50 million of committed credit, available for general corporate purposes, working capital needs, share repurchases and acquisitions. Under the terms of the agreement, loans may be denominated in U.S. dollars or Chinese renminbi (offshore). Loans denominated in U.S. dollars bear interest, at the Company’s option, at either a base rate or a LIBOR-based rate. Loans denominated in Chinese renminbi (offshore) bear interest at a LIBOR-based rate based on the Chinese offshore rate. Other terms of this revolving credit agreement are substantially similar to those of the Company’s revolving credit
agreement that expires in December 2021. This revolver was amended effective January 29, 2020 to remove the expiration date, eliminate commitment fees, reduce interest rate margins and delete negative covenants regarding cash flow leverage and interest coverage ratios.
On December 27, 2019, the Company had $594 million in lines of credit, including the $550 million in committed credit facilities described above and $44 million with foreign banks. The unused portion of committed credit lines was $546 million as of December 27, 2019. In addition, the Company has unused, uncommitted lines of credit with foreign banks totaling $27 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 at an annual rate of up to 0.15 percent 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 as of December 27, 2019.
Annual maturities of debt are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
Maturities of debt
|
$
|
7,732
|
|
|
$
|
14,298
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
Interest paid on debt was $13.5 million in 2019, $14.0 million in 2018 and $16.5 million in 2017.
Subsequent Event
On January 29, 2020, the Company entered into a master note agreement with a sole lender that expires on January 29, 2023. The note agreement sets forth certain terms on which the Company may issue, and affiliates of the lender may purchase, up to $200 million of the Company’s senior notes. Interest on the senior notes will be determined at the time of issuance, at a fixed or LIBOR-based floating rate at the option of the Company, provided that the maximum aggregate principal amount of notes bearing interest at a floating rate may not exceed $100 million. Fixed rate notes issued under the agreement will mature no longer than 12 years from date of issuance and variable rate notes will mature no longer than 10 years from issuance. Under terms of the note agreement, the Company is required to maintain certain financial ratios as to cash flow leverage and interest coverage similar to the requirements of its other debt agreements.
G. Shareholders’ Equity
At December 27, 2019, 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.
Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Postretirement
Medical
|
|
Cumulative
Translation
Adjustment
|
|
Total
|
Balance, December 30, 2016
|
$
|
(76,426
|
)
|
|
$
|
(65,802
|
)
|
|
$
|
(142,228
|
)
|
Other comprehensive income (loss) before reclassifications
|
(14,791
|
)
|
|
16,443
|
|
|
1,652
|
|
Amounts reclassified from accumulated other comprehensive income
|
12,787
|
|
|
—
|
|
|
12,787
|
|
Balance, December 29, 2017
|
(78,430
|
)
|
|
(49,359
|
)
|
|
(127,789
|
)
|
Other comprehensive income (loss) before reclassifications
|
(196
|
)
|
|
(8,609
|
)
|
|
(8,805
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
7,190
|
|
|
—
|
|
|
7,190
|
|
Reclassified to retained earnings
|
(15,453
|
)
|
|
—
|
|
|
(15,453
|
)
|
Balance, December 28, 2018
|
(86,889
|
)
|
|
(57,968
|
)
|
|
(144,857
|
)
|
Other comprehensive income (loss) before reclassifications
|
(33,938
|
)
|
|
1,902
|
|
|
(32,036
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
7,106
|
|
|
—
|
|
|
7,106
|
|
Balance, December 27, 2019
|
$
|
(113,721
|
)
|
|
$
|
(56,066
|
)
|
|
$
|
(169,787
|
)
|
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. Included in the 2017 reclassification is $12 million related to a pension settlement loss (Note J).
In February 2018, FASB issued a new standard related to reclassification of certain tax effects from accumulated other comprehensive income (AOCI). The Company 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 Company used available cash balances and borrowings under its revolving line of credit to fund the repurchase.
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 related to restricted shares 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 Company’s common stock over a period of time. Compensation cost related to the stock appreciation plan was $3.3 million in 2019, $4.4 million in 2018 and $4.5 million in 2017.
Individual nonemployee directors of the Company may elect to receive, either currently or deferred, all or part of their retainer in the form of shares of the Company’s common stock instead of cash. Under this arrangement, the Company issued 15,016 shares in 2019, 14,595 shares in 2018 and 20,646 shares in 2017. The expense related to this arrangement is not significant.
Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Shares
|
|
Weighted Average
Exercise Price
|
|
Options
Exercisable
|
|
Weighted Average
Exercise Price
|
Outstanding, December 30, 2016
|
16,605
|
|
|
$
|
18.42
|
|
|
11,016
|
|
|
$
|
15.13
|
|
Granted
|
1,725
|
|
|
30.71
|
|
|
|
|
|
Exercised
|
(4,903
|
)
|
|
12.86
|
|
|
|
|
|
Canceled
|
(137
|
)
|
|
26.63
|
|
|
|
|
|
Outstanding, December 29, 2017
|
13,290
|
|
|
21.99
|
|
|
7,729
|
|
|
18.33
|
|
Granted
|
1,163
|
|
|
44.05
|
|
|
|
|
|
Exercised
|
(2,081
|
)
|
|
18.17
|
|
|
|
|
|
Canceled
|
(102
|
)
|
|
28.59
|
|
|
|
|
|
Outstanding, December 28, 2018
|
12,270
|
|
|
24.67
|
|
|
7,312
|
|
|
20.17
|
|
Granted
|
1,781
|
|
|
46.36
|
|
|
|
|
|
Exercised
|
(1,886
|
)
|
|
17.64
|
|
|
|
|
|
Canceled
|
(53
|
)
|
|
33.13
|
|
|
|
|
|
Outstanding, December 27, 2019
|
12,112
|
|
|
$
|
28.91
|
|
|
8,231
|
|
|
$
|
23.75
|
|
The following table summarizes information for options outstanding and exercisable at December 27, 2019 (in thousands, except exercise prices and contractual term amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Prices
|
|
Options
Outstanding
|
|
Weighted Average
Remaining
Contractual Term
in Years
|
|
Weighted Average
Exercise Price
|
|
Options
Exercisable
|
|
Weighted Average
Exercise Price
|
$5 - $20
|
|
2,513
|
|
|
2.1
|
|
$
|
16.46
|
|
|
2,513
|
|
|
$
|
16.46
|
|
$20 - $30
|
|
5,141
|
|
|
5.5
|
|
25.09
|
|
|
4,671
|
|
|
25.20
|
|
$30 - $40
|
|
1,549
|
|
|
7.2
|
|
30.74
|
|
|
731
|
|
|
30.77
|
|
$40 - $51
|
|
2,909
|
|
|
8.9
|
|
45.46
|
|
|
316
|
|
|
44.05
|
|
$5 - $51
|
|
12,112
|
|
|
5.8
|
|
$
|
28.91
|
|
|
8,231
|
|
|
$
|
23.75
|
|
The aggregate intrinsic value of exercisable option shares was $233.2 million as of December 27, 2019, with a weighted average contractual term of 4.7 years. There were approximately 12.1 million vested share options and share options expected to vest as of December 27, 2019, with an aggregate intrinsic value of $280.6 million, a weighted average exercise price of $28.91 and a weighted average contractual term of 5.8 years.
Information related to options exercised follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash received
|
$
|
32,749
|
|
|
$
|
11,158
|
|
|
$
|
48,833
|
|
Aggregate intrinsic value
|
57,419
|
|
|
57,979
|
|
|
119,442
|
|
Tax benefit realized
|
12,000
|
|
|
12,000
|
|
|
42,000
|
|
Employee Stock Purchase Plan. Under the Company’s 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. Under this plan, the Company issued 397,833 shares in 2019, 480,461 shares in 2018 and 499,956 shares in 2017.
Authorized Shares. In April 2019, shareholders of the Company approved the Graco Inc. 2019 Stock Incentive Plan. The Plan provides for issuance of up to 10 million shares of Graco common stock. 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, 2019
|
Stock Incentive Plan (2019)
|
10,000
|
|
|
9,413
|
|
Employee Stock Purchase Plan (2006)
|
21,000
|
|
|
12,897
|
|
Total
|
31,000
|
|
|
22,310
|
|
Amounts available for future issuance exclude outstanding options. Options outstanding as of December 27, 2019, 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 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Share-based compensation
|
$
|
26,669
|
|
|
$
|
25,565
|
|
|
$
|
23,652
|
|
Tax benefit
|
2,100
|
|
|
3,500
|
|
|
5,100
|
|
Share-based compensation, net of tax
|
$
|
24,569
|
|
|
$
|
22,065
|
|
|
$
|
18,552
|
|
As of December 27, 2019, there was $9.9 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of approximately 2.5 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Expected life in years
|
6.8
|
|
|
7.5
|
|
|
7.0
|
|
Interest rate
|
2.3
|
%
|
|
2.8
|
%
|
|
2.2
|
%
|
Volatility
|
24.0
|
%
|
|
25.5
|
%
|
|
26.7
|
%
|
Dividend yield
|
1.4
|
%
|
|
1.2
|
%
|
|
1.6
|
%
|
Weighted average fair value per share
|
$
|
11.31
|
|
|
$
|
12.84
|
|
|
$
|
8.08
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Expected life in years
|
1.0
|
|
|
1.0
|
|
|
1.0
|
|
Interest rate
|
2.6
|
%
|
|
2.1
|
%
|
|
0.9
|
%
|
Volatility
|
22.7
|
%
|
|
21.3
|
%
|
|
22.3
|
%
|
Dividend yield
|
1.4
|
%
|
|
1.2
|
%
|
|
1.5
|
%
|
Weighted average fair value per share
|
$
|
11.36
|
|
|
$
|
10.28
|
|
|
$
|
7.32
|
|
I. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net earnings available to common shareholders
|
$
|
343,853
|
|
|
$
|
341,054
|
|
|
$
|
252,412
|
|
Weighted average shares outstanding for basic earnings per share
|
166,515
|
|
|
167,364
|
|
|
167,925
|
|
Dilutive effect of stock options computed based on the treasury stock method using the average market price
|
5,109
|
|
|
5,849
|
|
|
6,393
|
|
Weighted average shares outstanding for diluted earnings per share
|
171,624
|
|
|
173,213
|
|
|
174,318
|
|
Basic earnings per share
|
$
|
2.06
|
|
|
$
|
2.04
|
|
|
$
|
1.50
|
|
Diluted earnings per share
|
$
|
2.00
|
|
|
$
|
1.97
|
|
|
$
|
1.45
|
|
Anti-dilutive stock options excluded from computations of diluted earnings per share totaled 1.1 million shares in 2019 and 1.1 million shares in 2018. The number of anti-dilutive options excluded from the 2017 computation of diluted earnings per share was not significant.
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 employee’s compensation. For employees not covered by a defined benefit plan, the Company contributed an amount equal to 1.5 percent of the employee’s compensation through 2019 and increased the contribution to 2.0 percent effective January 1, 2020. Employer contributions totaled $8.4 million in 2019, $8.0 million in 2018 and $7.8 million in 2017.
The Company’s 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 Company’s non-U.S. subsidiaries. The Company restructured its U.S. qualified defined benefit plan in 2017. Under the restructuring, the plan transferred $42 million of liabilities and assets associated with certain plan participants to an insurance company via the purchase of a group annuity contract, and the Company recognized a $12 million settlement loss, included in 2017 other non-operating expense. Remaining pension plan participants and related liabilities and assets were transferred into one of two new, legally separate qualified defined benefit plans, and the former plan was terminated. The benefits offered to the plans’ participants were unchanged.
For U.S. plans, benefits are based on years of service and the highest 5 consecutive years’ earnings in the 10 years preceding retirement. The Company funds annually in amounts consistent with minimum funding levels and maximum tax deduction limits.
Investment policies and strategies of the U.S. funded pension plans are based on participant demographics of each plan. For the larger of the two plans (the “Blue plan”) covering active participants and retirees with higher benefit amounts, investments are based on a long-term view of economic growth and weighted toward equity securities. The primary goal of the plan’s investments is to ensure that the plan’s 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. Strategic target allocations for Blue plan assets are 50 percent equity securities, 37 percent fixed income securities and 13 percent real estate and alternative investments. For the smaller of the two plans (the “Gray plan”) covering retirees with lower benefit amounts, investments are based on a shorter-term, more conservative outlook. The midpoints of the ranges of strategic target allocations for the Gray plan assets are 28 percent equity securities, 60 percent fixed income securities and 12 percent real estate and alternative investments.
Plan assets are held in trusts for the benefit of plan participants and are invested in various commingled funds, most of which are sponsored by the trustee. The fair values for commingled equity, fixed-income 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. Certain trustee-sponsored funds allow redemptions monthly or quarterly, with 10 or 60 days advance notice, while most of the funds allow redemptions daily. The plans had unfunded commitments to make additional investments in certain funds totaling $2.5 million as of December 27, 2019 and $3.0 million as of December 28, 2018.
The Company maintains a defined contribution plan covering employees of a Swiss subsidiary, funded by Company and employee contributions. Responsibility for pension coverage under Swiss law has been transferred to a Swiss insurance company. Plan assets are invested in an insurance contract that guarantees a federally mandated annual rate of return. The value of the plan assets is effectively the value of the insurance contract. The performance of the underlying assets held by the insurance company has no direct impact on the surrender value of the insurance contract. The insurance backed assets have no active market and are classified as level 3 in the fair value hierarchy.
Assets of all plans by category and fair value measurement level were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Level
|
|
2019
|
|
2018
|
Cash and cash equivalents(1)
|
1
|
|
$
|
(156
|
)
|
|
$
|
927
|
|
Insurance contract
|
3
|
|
27,675
|
|
|
26,364
|
|
Investments categorized in fair value hierarchy
|
|
|
27,519
|
|
|
27,291
|
|
Equity
|
|
|
|
|
|
U.S. Large Cap
|
N/A
|
|
84,330
|
|
|
53,597
|
|
U.S. Small/Mid Cap
|
N/A
|
|
9,202
|
|
|
7,602
|
|
International
|
N/A
|
|
39,240
|
|
|
31,586
|
|
Total Equity
|
|
|
132,772
|
|
|
92,785
|
|
Fixed income
|
N/A
|
|
107,832
|
|
|
76,213
|
|
Real estate and other
|
N/A
|
|
35,821
|
|
|
72,964
|
|
Investments measured at net asset value
|
|
|
276,425
|
|
|
241,962
|
|
Total
|
|
|
$
|
303,944
|
|
|
$
|
269,253
|
|
(1) Negative cash for 2019 represents unsettled pending trades within an investment that are classified in cash and cash equivalents until settled.
The following table is a reconciliation of pension assets measured at fair value using level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance, beginning of year
|
$
|
26,364
|
|
|
$
|
26,411
|
|
Purchases
|
2,151
|
|
|
2,074
|
|
Redemptions
|
(1,326
|
)
|
|
(2,086
|
)
|
Unrealized gains (losses)
|
486
|
|
|
(35
|
)
|
Balance, end of year
|
$
|
27,675
|
|
|
$
|
26,364
|
|
The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the periods ending December 27, 2019, and December 28, 2018, and a statement of the funded status as of the same dates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Medical Benefits
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in benefit obligation
|
|
|
|
|
|
|
|
Obligation, beginning of year
|
$
|
371,282
|
|
|
$
|
393,559
|
|
|
$
|
27,778
|
|
|
$
|
27,771
|
|
Service cost
|
7,735
|
|
|
8,487
|
|
|
545
|
|
|
636
|
|
Interest cost
|
15,103
|
|
|
13,424
|
|
|
1,162
|
|
|
1,084
|
|
Actuarial loss (gain)
|
67,756
|
|
|
(30,452
|
)
|
|
2,532
|
|
|
(397
|
)
|
Benefit payments
|
(12,594
|
)
|
|
(11,265
|
)
|
|
(1,371
|
)
|
|
(1,316
|
)
|
Settlements
|
—
|
|
|
(1,561
|
)
|
|
—
|
|
|
—
|
|
Exchange rate changes
|
137
|
|
|
(910
|
)
|
|
—
|
|
|
—
|
|
Obligation, end of year
|
$
|
449,419
|
|
|
$
|
371,282
|
|
|
$
|
30,646
|
|
|
$
|
27,778
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value, beginning of year
|
$
|
269,253
|
|
|
$
|
254,186
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on assets
|
44,743
|
|
|
(13,875
|
)
|
|
—
|
|
|
—
|
|
Employer contributions
|
2,276
|
|
|
42,023
|
|
|
1,371
|
|
|
1,316
|
|
Benefit payments
|
(12,594
|
)
|
|
(11,265
|
)
|
|
(1,371
|
)
|
|
(1,316
|
)
|
Settlements
|
—
|
|
|
(1,561
|
)
|
|
—
|
|
|
—
|
|
Exchange rate changes
|
266
|
|
|
(255
|
)
|
|
—
|
|
|
—
|
|
Fair value, end of year
|
$
|
303,944
|
|
|
$
|
269,253
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status
|
$
|
(145,475
|
)
|
|
$
|
(102,029
|
)
|
|
$
|
(30,646
|
)
|
|
$
|
(27,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheets
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
2,931
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
1,824
|
|
|
1,453
|
|
|
1,656
|
|
|
1,573
|
|
Non-current liabilities
|
146,582
|
|
|
100,576
|
|
|
28,990
|
|
|
26,205
|
|
Net
|
$
|
145,475
|
|
|
$
|
102,029
|
|
|
$
|
30,646
|
|
|
$
|
27,778
|
|
Changes in discount rates used to value pension obligations were the main drivers of large actuarial losses (gains) in 2019 and 2018. In the third quarter of 2018, the Company made a $40 million voluntary contribution to one of its U.S. qualified defined benefit plans.
The accumulated benefit obligation as of year-end for all defined benefit pension plans was $410 million for 2019 and $344 million for 2018. Information for plans with an accumulated benefit obligation in excess of plan assets follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Projected benefit obligation
|
$
|
402,900
|
|
|
$
|
371,282
|
|
Accumulated benefit obligation
|
363,497
|
|
|
343,705
|
|
Fair value of plan assets
|
254,493
|
|
|
269,253
|
|
The components of net periodic benefit cost for the plans for 2019, 2018 and 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Medical Benefits
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost-benefits earned during the period
|
$
|
7,735
|
|
|
$
|
8,487
|
|
|
$
|
7,675
|
|
|
$
|
545
|
|
|
$
|
636
|
|
|
$
|
601
|
|
Interest cost on projected benefit obligation
|
15,103
|
|
|
13,424
|
|
|
15,044
|
|
|
1,162
|
|
|
1,084
|
|
|
1,093
|
|
Expected return on assets
|
(17,152
|
)
|
|
(17,447
|
)
|
|
(17,186
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
279
|
|
|
279
|
|
|
255
|
|
|
—
|
|
|
—
|
|
|
(344
|
)
|
Amortization of net loss (gain)
|
8,392
|
|
|
7,931
|
|
|
8,634
|
|
|
273
|
|
|
646
|
|
|
334
|
|
Settlement loss (gain)
|
—
|
|
|
184
|
|
|
12,313
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cost of pension plans which are not significant and have not adopted ASC 715
|
110
|
|
|
106
|
|
|
122
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Net periodic benefit cost
|
$
|
14,467
|
|
|
$
|
12,964
|
|
|
$
|
26,857
|
|
|
$
|
1,980
|
|
|
$
|
2,366
|
|
|
$
|
1,684
|
|
Net periodic benefit cost is disaggregated between service cost presented as operating expense and other components of pension cost presented as non-operating expense. Other components of pension cost and changes in cash surrender value of insurance contracts intended to fund certain non-qualified pension and deferred compensation arrangements included in non-operating expenses totaled $5 million in 2019, $8 million in 2018 and $18 million in 2017.
Amounts recognized in other comprehensive (income) loss in 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Medical Benefits
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net loss (gain) arising during the period
|
$
|
40,184
|
|
|
$
|
644
|
|
|
$
|
2,532
|
|
|
$
|
(397
|
)
|
Amortization of net gain (loss)
|
(8,392
|
)
|
|
(7,931
|
)
|
|
(273
|
)
|
|
(646
|
)
|
Settlement gain (loss)
|
—
|
|
|
(184
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit (cost)
|
(279
|
)
|
|
(279
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
31,513
|
|
|
$
|
(7,750
|
)
|
|
$
|
2,259
|
|
|
$
|
(1,043
|
)
|
Amounts included in accumulated other comprehensive (income) loss as of December 27, 2019 and December 28, 2018, that had not yet been recognized as components of net periodic benefit cost, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Medical Benefits
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Prior service cost (credit)
|
$
|
1,197
|
|
|
$
|
1,465
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net loss
|
135,910
|
|
|
104,127
|
|
|
8,052
|
|
|
5,793
|
|
Net before income taxes
|
137,107
|
|
|
105,592
|
|
|
8,052
|
|
|
5,793
|
|
Income taxes
|
(29,666
|
)
|
|
(23,221
|
)
|
|
(1,772
|
)
|
|
(1,275
|
)
|
Net
|
$
|
107,441
|
|
|
$
|
82,371
|
|
|
$
|
6,280
|
|
|
$
|
4,518
|
|
Amounts included in accumulated other comprehensive (income) loss that are expected to be recognized as components of net periodic benefit cost in 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Medical Benefits
|
Prior service cost (credit)
|
$
|
282
|
|
|
$
|
—
|
|
Net loss (gain)
|
10,354
|
|
|
707
|
|
Net before income taxes
|
10,636
|
|
|
707
|
|
Income taxes
|
(2,340
|
)
|
|
(156
|
)
|
Net
|
$
|
8,296
|
|
|
$
|
551
|
|
Assumptions used to determine the Company’s benefit obligations are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Medical Benefits
|
Weighted average assumptions
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
U.S. Plans
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.5
|
%
|
|
4.5
|
%
|
|
3.4
|
%
|
|
4.5
|
%
|
Rate of compensation increase
|
|
2.8
|
%
|
|
2.8
|
%
|
|
N/A
|
|
|
N/A
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
Discount rate
|
|
0.4
|
%
|
|
1.3
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
1.3
|
%
|
|
1.4
|
%
|
|
N/A
|
|
|
N/A
|
|
Assumptions used to determine the Company’s net periodic benefit cost are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Medical Benefits
|
Weighted average assumptions
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.5
|
%
|
|
3.9
|
%
|
|
4.5
|
%
|
|
4.5
|
%
|
|
3.9
|
%
|
|
4.5
|
%
|
Rate of compensation increase
|
|
2.8
|
%
|
|
2.8
|
%
|
|
2.8
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected return on assets
|
|
7.0
|
%
|
|
7.1
|
%
|
|
7.0
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
1.3
|
%
|
|
1.0
|
%
|
|
0.9
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
1.4
|
%
|
|
0.9
|
%
|
|
1.0
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected return on assets
|
|
2.0
|
%
|
|
2.0
|
%
|
|
2.0
|
%
|
|
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 advisers, 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 Company’s 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 5.8 percent for 2020, decreasing each year to a constant rate of 4.5 percent for 2038 and thereafter, subject to the plan’s annual increase limitation.
At December 27, 2019, 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 $1.8 million to its unfunded pension plans and $1.7 million to the postretirement medical plan in 2020. The Company expects to utilize available credits to satisfy any required contributions to the funded pension plans under minimum funding requirements for 2020. Estimated future benefit payments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Medical Benefits
|
2020
|
$
|
15,337
|
|
|
$
|
1,656
|
|
2021
|
16,520
|
|
|
1,707
|
|
2022
|
17,917
|
|
|
1,731
|
|
2023
|
19,173
|
|
|
1,727
|
|
2024
|
21,281
|
|
|
1,703
|
|
Years 2025-2029
|
115,303
|
|
|
8,357
|
|
K. Commitments and Contingencies
Operating Lease Liabilities and Assets
The Company adopted ASU No. 2016-02— Leases (Topic 842) as of December 29, 2018, the beginning of its fiscal year 2019. Using the modified retrospective approach with transition relief, the Company recorded operating lease assets and liabilities of $35 million as of December 29, 2018, and made no adjustments to retained earnings. Adoption of the new standard did not materially impact consolidated net earnings and cash flows.
Electing the package of practical expedients permitted under transition guidance, the Company did not reassess previous conclusions about whether existing contracts contained a lease, historical lease classification, or initial direct costs. Electing the hindsight practical expedient to determine the lease term for existing leases did not result in any changes to existing lease terms. The Company elected not to apply recognition requirements to short term leases with terms of twelve months or less across all asset classes. The Company elected to analyze vehicle assets using the portfolio approach. Lastly, the Company elected as an accounting policy not to separate the lease and non-lease components in the lease payments across all asset classes.
The Company owns most of the assets used in its operations, but leases certain buildings and land, vehicles, office equipment and other rental assets. The Company determines if an arrangement is a lease at inception. All of the Company’s current lease arrangements are classified as operating leases. The Company historically has not entered into financing leases. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease expense is recognized by amortizing the amount recorded as an asset on a straight-line basis over the lease term.
In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments.
As of December 27, 2019, the weighted average remaining lease term was 5.7 years and the weighted average discount rate used to determine the operating lease liability was 3.9 percent. For the twelve months ended December 27, 2019, expense related to operating leases was $11.5 million, operating lease payments included in operating cash flows totaled $11.0 million, and non-cash additions to operating lease assets totaled $2.4 million. Variable lease costs and short term lease costs were not significant for the twelve months ended December 27, 2019.
As of December 27, 2019, future maturities of operating lease liabilities were as follows (in thousands):
|
|
|
|
|
2020
|
$
|
8,222
|
|
2021
|
8,237
|
|
2022
|
5,657
|
|
2023
|
4,226
|
|
2024
|
1,843
|
|
Thereafter
|
7,490
|
|
Total lease payments
|
$
|
35,675
|
|
Present value adjustment
|
(3,809
|
)
|
Operating lease liabilities
|
$
|
31,866
|
|
Aggregate annual rental commitments under operating leases with noncancelable terms of more than one year at December 28, 2018 were reported under previous lease accounting standards as follows (in thousands):
|
|
|
|
|
2019
|
$
|
11,613
|
|
2020
|
8,759
|
|
2021
|
6,745
|
|
2022
|
5,102
|
|
2023
|
3,721
|
|
Thereafter
|
2,340
|
|
Total
|
$
|
38,280
|
|
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 $83 million at December 27, 2019. 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 supplier’s 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 $44 million.
The Company enters into contracts with vendors to receive services. Commitments under these service contracts with noncancelable terms of more than one year totaled $10 million in 2020, $8 million in 2021, $2 million in 2022 and $1 million thereafter.
In addition, the Company could be obligated to perform under standby letters of credit totaling $2 million at December 27, 2019. The Company has also guaranteed the debt of its subsidiaries for up to $42 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 where appropriate. 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.
L. Quarterly Financial Information (Unaudited)
Unaudited quarterly financial data is summarized below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
2019
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
404,870
|
|
|
$
|
428,328
|
|
|
$
|
400,555
|
|
|
$
|
412,292
|
|
|
Gross Profit
|
216,042
|
|
|
226,954
|
|
|
207,379
|
|
|
209,381
|
|
|
Net Earnings
|
86,749
|
|
|
88,137
|
|
|
84,132
|
|
|
84,835
|
|
|
Basic Net Earnings per Common Share
|
$
|
0.52
|
|
|
$
|
0.53
|
|
|
$
|
0.50
|
|
|
$
|
0.51
|
|
|
Diluted Net Earnings per Common Share
|
0.51
|
|
|
0.51
|
|
|
0.49
|
|
|
0.49
|
|
|
Cash Dividends Declared per Common Share
|
0.16
|
|
|
0.16
|
|
|
0.16
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
406,348
|
|
|
$
|
424,570
|
|
|
$
|
415,936
|
|
|
$
|
406,438
|
|
|
Gross Profit
|
222,421
|
|
|
229,903
|
|
|
221,459
|
|
|
208,756
|
|
|
Net Earnings
|
85,510
|
|
|
89,140
|
|
|
92,681
|
|
|
73,723
|
|
|
Basic Net Earnings per Common Share
|
$
|
0.51
|
|
|
$
|
0.53
|
|
|
$
|
0.55
|
|
|
$
|
0.44
|
|
|
Diluted Net Earnings per Common Share
|
0.49
|
|
|
0.51
|
|
|
0.54
|
|
|
0.43
|
|
|
Cash Dividends Declared per Common Share
|
0.13
|
|
|
0.13
|
|
|
0.13
|
|
|
0.16
|
|
|