Notes to Consolidated Financial Statements
The Valspar Corporation and Subsidiaries
Years Ended October
2016
,
2015
and
2014
(Dollars in thousands, except per share amounts)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Description of Business:
The Valspar Corporation (Valspar, the Company, we, us or our) is a global leader in the paints and coatings industry. We develop, manufacture and distribute a broad range of coatings, paints and related products, and operate our business in
two
reportable segments: Coatings and Paints.
Proposed Merger with The Sherwin-Williams Company
On March 19, 2016, Valspar entered into an Agreement and Plan of Merger (the Merger Agreement) with The Sherwin-Williams Company (Sherwin-Williams) and Viking Merger Sub, Inc., a wholly-owned subsidiary of Sherwin-Williams (Merger Sub).
The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, (1) Merger Sub will be merged with and into Valspar (the Merger), with Valspar surviving the Merger as a wholly-owned subsidiary of Sherwin-Williams, and (2) at the effective time of the Merger, each outstanding share of common stock of Valspar, par value
$0.50
per share (Valspar common stock) (other than Valspar common stock held in treasury by Valspar, owned by a subsidiary of Valspar or owned by Sherwin-Williams or any of its wholly-owned subsidiaries, or shares with respect to which appraisal rights have been validly exercised and not lost in accordance with Delaware law) will be converted into the right to receive the Merger Consideration.
The Merger Consideration means
$113.00
per share in cash, except that if Sherwin-Williams is required, in order to obtain the necessary antitrust approvals, to commit to any divestiture, license, hold separate, sale or other disposition of or with respect to assets, businesses or product lines of Valspar, Sherwin-Williams or their subsidiaries representing, in the aggregate, in excess of
$650 million
of Net Sales (as defined in the Merger Agreement), then the Merger Consideration will be
$105.00
per share in cash.
The Merger Agreement contains certain termination rights, and we may be required to pay Sherwin-Williams a termination fee of $
300 million
.
For further information on the Merger Agreement, refer to the Merger Agreement, a copy of which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 21, 2016, and which is incorporated by reference herein.
On June 29, 2016, Valspar stockholders voted to adopt the Merger Agreement at a special meeting of stockholders held for that purpose. Completion of the Merger remains subject to certain closing conditions, including the expiration or termination of the applicable waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act and the receipt of regulatory approvals in certain other jurisdictions.
In connection with the proposed Merger, we recognized costs of
$28,021
for the year ended
October 28, 2016
in selling, general and administrative expenses in the Consolidated Statements of Operations, for employee-related expenses, professional services and regulatory fees.
Fiscal Year:
We have a 4-4-5 week accounting cycle with the fiscal year ending on the Friday on or immediately preceding October 31. Fiscal years
2016
and
2015
both include 52 weeks while
2014
includes 53 weeks.
Principles of Consolidation:
The consolidated financial statements include the accounts of the parent company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Investments in which we have significant influence and where we do not have management control and are not the primary beneficiary are accounted for using the equity method. In order to facilitate our year-end closing process, foreign subsidiaries’ financial results are included in our consolidated financial statements on a one-month lag.
Estimates:
The preparation of financial statements in conformity with United States generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amount of revenue deferred under extended furniture protection plans, the amount of accounts receivable that will be uncollectible, the amount of customer rebates owed, the amount of inventory reserves, the amount to be paid for other liabilities, including contingent liabilities, assumptions around the valuation of goodwill and indefinite-lived intangible assets, including impairment, our pension expense and pension funding requirements, the fair value of stock option awards and the computation of our income tax expense and liability. Actual results could differ from these estimates.
Revenue Recognition:
We recognize revenue from product sales at the time the product is delivered or title has passed, a sales agreement is in place, pricing is fixed or determinable and collection is reasonably assured. Discounts provided to customers at the point of sale are recognized as reductions in revenue as the products are sold. We offer promotional and rebate programs to our customers. These programs require estimates of customer participation and performance and are recorded at the time of sale as deductions from revenue. We also offer consumer programs to promote the sale of our products and record them as a reduction in revenue at the time the consumer offer is made using estimated redemption and participation. Revenues exclude sales taxes collected from our customers.
Additionally, in the U.S., we sell extended furniture protection plans for which revenue is deferred and recognized over the life of the contract. An actuarial study utilizing historical claims data is used to forecast claim payments over the contract period and revenue is recognized based on the forecasted claims payments. Actual claims costs are reflected in earnings in the period incurred. Anticipated losses on programs in progress are charged to earnings when identified. Differences between estimated and actual results, which have been insignificant historically, are recognized as a change in management estimate in a subsequent period.
Freight Costs:
Freight costs on shipments to our customers are included in cost of sales.
Allowance for Doubtful Accounts:
We estimate the allowance for doubtful accounts by analyzing accounts receivable by age and specific collection risk. When it is deemed probable that a customer account is uncollectible, such as in the event of bankruptcy or other circumstances that make further collection unlikely, that balance is written off against the existing allowance.
Cash Equivalents:
We consider all highly liquid instruments purchased with an original maturity of less than three months to be cash equivalents.
Restricted Cash:
Restricted cash represents cash that is restricted from withdrawal for contractual or legal reasons.
Inventories:
Inventories are stated at the lower of cost or market. Our domestic inventories, except for our Quest Specialty Chemicals (Quest) subsidiaries, are recorded using the last-in, first-out (LIFO) method. The remaining inventories are recorded using the first-in, first-out (FIFO) method.
Other Assets:
We have long-term contracts with certain customers, under which we are obligated to make various up-front payments for which we expect to receive a benefit in excess of the cost over the term of the contract. These up-front payments are deferred and reflected in other assets. Contract incentives are amortized on a straight-line basis over the term of the contract, while equipment is amortized on a straight-line basis over the shorter of the economic life of the equipment or the term of the contract. Amortization expense for contract incentives is classified in our Consolidated Statements of Operations as a reduction of revenue. In certain circumstances, payments for equipment will meet the specific identifiable benefit criteria and the amortization expense will be classified in operating expenses.
Goodwill and Indefinite-Lived Intangible Assets:
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Indefinite-lived intangible assets primarily consist of purchased technology, trademarks and trade names.
Goodwill for each of our reporting units and indefinite-lived assets is tested for impairment at least annually during the fourth quarter, and between annual tests if an event occurs, or circumstances change. A reporting unit is an operating segment or a component of an operating segment for which discrete financial information is available and reviewed by management on a regular basis. We have determined that we have
four
separate reporting units with goodwill. There was no change to our reporting units in 2016, 2015 or 2014.
The goodwill test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value, including goodwill. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. In step 2, we would calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.
In applying the goodwill and indefinite-lived intangible assets impairment tests, we may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (step 0). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the reporting unit. If, after assessing these qualitative factors, the Company determines it is more likely than not that the carrying value is less than the fair value, then performing the two-step impairment test is unnecessary.
For the two-step impairment test, in step 1, we calculate the fair value of the reporting units weighting the income approach and the market approach which is then compared with the reporting units carrying value. For the income approach, we utilize a discounted cash flow where the discount rate reflects the weighted average costs of capital. The income approach is most sensitive to the discount rate, long-term sales growth rates and forecasted operating margins. For the market approach, average revenue and earnings before interest, tax, depreciation and amortization multiples derived from our peer group are weighted and adjusted for size, risk and growth of the individual reporting unit to determine the reporting unit’s business enterprise fair value. Additionally, in assessing goodwill impairment, we consider the implied control premium and if it is reasonable based on other recent market transactions.
For indefinite-lived intangible assets, we utilize a relief from royalty method when applying the quantitative assessment. The relief from royalty method is most sensitive to the discount rate, royalty rate and long-term sales growth rates. If the carrying value of the indefinite-lived intangible assets exceeds the fair value of the asset, the carrying value is written down to fair value in the period identified.
The following is a description of the goodwill and indefinite-lived assets impairment tests performed for each of the fiscal years:
Fiscal Year 2016
During the annual goodwill and indefinite-lived intangible assets impairment tests, we assessed qualitative factors to determine whether it was more likely than not that the fair value of each reporting unit is less than its carrying value (step 0). We concluded that it was more likely than not that the carrying value was less than the fair value. Accordingly, we did not perform a two-step quantitative analysis.
Fiscal Years 2015 and 2014
During the annual impairment tests, we performed step 1 of the quantitative goodwill impairment test. In both years, we determined that the fair value exceeded the carrying value and did not perform step 2.
During the annual impairment tests, we performed step 1 of the indefinite-lived intangible assets impairment test. In both years, we determined that the fair value exceeded the carrying value and did not perform further analysis.
Impairment of Long-Lived Tangible and Intangible Assets with Finite Lives:
We evaluate long-lived assets, including tangible and intangible assets with finite lives, for indicators of impairment. An impairment loss is recognized whenever events or changes in circumstances indicate the carrying amount of an asset is not recoverable. When reviewing for impairment, assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of impairment. If the carrying amount of the asset exceeds expected undiscounted future cash flows, we measure the amount of impairment by comparing the carrying amount of the asset to its fair value. Intangibles with finite lives (primarily customer lists and patents) are amortized using the straight-line method over the estimated useful lives.
Property, Plant and Equipment:
Property, plant and equipment, including capitalized interest, are recorded at cost. Property under capital lease is being amortized as a provision for depreciation over the shorter of the lease or their useful lives. Expenditures that improve or extend the life of the respective assets are capitalized, while maintenance and repairs are expensed as incurred. Provision for depreciation of property, plant and equipment are made by charges to operations at rates calculated to amortize the cost of the property, plant and equipment over their useful lives (
20
years for buildings;
1
to
10
years for machinery and equipment) primarily using the straight-line method.
Stock-Based Compensation:
We recognized compensation expense for our stock-based compensation plans, which include non-qualified stock options, cash settled restricted stock units, restricted stock, and other equity settled awards. Expense for options with graded vesting is recognized using the straight-line method. The fair value of stock-based compensation is determined at the grant date and the recognition of the related expense is recorded over the requisite service period of the award. Share awards are issued from common stock in treasury. See Note 10 for additional information.
Advertising Costs:
Advertising costs are expensed as incurred and totaled
$49,393
,
$56,697
and
$81,855
in
2016
,
2015
and
2014
, respectively.
Foreign Currency Translation:
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is recorded as a component of stockholders’
equity (accumulated other comprehensive income (loss)). Gains and losses from foreign currency transactions are included in other expense (income), net.
Financial Instruments:
All financial instruments are held for purposes other than trading. See Note 8 for additional information.
Research and Development:
Research and development is expensed as incurred.
NOTE 2 – ACQUISITIONS AND DIVESTITURES
On February 4, 2016, we purchased ISVA Vernici (ISVA), a European coil coatings manufacturer headquartered in Turin, Italy, for total consideration of approximately
$23,000
. The ISVA acquisition extends our manufacturing footprint in Europe and brings customers an expanded product offering and increased customer service capabilities. The acquisition was recorded at fair value in our Coatings segment and an allocation of the purchase price has been substantially completed, with the exception of certain tax items. These adjustments are not expected to have a material impact on our consolidated financial statements. We expect to finalize the purchase price allocation within one year of the date of acquisition. The assets, liabilities and operating results have been included in our financial statements from the date of acquisition.
On June 1, 2015, we purchased the performance coating businesses of Quest, which include automotive refinish, aerosol and related specialty paint products, for total consideration of approximately
$350,000
. The acquisition strengthens our value proposition in automotive refinish and broadens distribution and range of high-performance products. The acquisition was recorded at fair value primarily in our Paints segment and an allocation of the purchase price has been completed. The assets, liabilities and operating results have been included in our financial statements from the date of acquisition.
Pro forma results of operations for the acquisitions noted above have not been presented, as they were immaterial to the reported results.
On December 17, 2014, we completed the divestiture of a non-strategic specialty product line in our Coatings segment. The divested assets consisted primarily of goodwill, working capital and intellectual property. The pro forma results of operations for this divestiture have not been presented, as the impact on the reported results is not material. We recorded a pre-tax gain on the sale of the product line of approximately
$48,001
to income from operations.
NOTE 3 – INVENTORIES
The major classes of inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Manufactured products
|
$
|
287,040
|
|
|
$
|
268,832
|
|
Raw materials, supplies and work-in-progress
|
186,254
|
|
|
183,077
|
|
Total inventories
|
$
|
473,294
|
|
|
$
|
451,909
|
|
Our international inventories are recorded using the first-in, first-out (FIFO) method. Domestic inventories, except for Quest, are recorded using the last-in, first-out (LIFO) method. Total LIFO inventories were
$205,161
at
October 28, 2016
and
$190,132
at
October 30, 2015
, approximately
$49,804
and
$55,780
lower, respectively, than such costs determined under the FIFO method.
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the fiscal years ended
October 28, 2016
and
October 30, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coatings
|
|
|
Paints
|
|
|
Other
|
|
|
Total
|
|
Balance, October 31, 2014
|
$
|
836,594
|
|
|
$
|
263,855
|
|
|
$
|
25,375
|
|
|
$
|
1,125,824
|
|
Goodwill acquired
|
2,474
|
|
|
214,140
|
|
|
—
|
|
|
216,614
|
|
Goodwill disposed
|
(3,764
|
)
|
|
—
|
|
|
—
|
|
|
(3,764
|
)
|
Currency translation gain (loss)
|
(41,291
|
)
|
|
(7,437
|
)
|
|
(2,243
|
)
|
|
(50,971
|
)
|
Balance, October 30, 2015
|
$
|
794,013
|
|
|
$
|
470,558
|
|
|
$
|
23,132
|
|
|
$
|
1,287,703
|
|
Goodwill acquired
|
11,845
|
|
|
—
|
|
|
—
|
|
|
11,845
|
|
Measurement period adjustment
|
—
|
|
|
(3,521
|
)
|
|
—
|
|
|
(3,521
|
)
|
Currency translation gain (loss)
|
(4,791
|
)
|
|
(6,392
|
)
|
|
(138
|
)
|
|
(11,321
|
)
|
Balance, October 28, 2016
|
$
|
801,067
|
|
|
$
|
460,645
|
|
|
$
|
22,994
|
|
|
$
|
1,284,706
|
|
Information regarding our intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Balance, October 28, 2016
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
15 to 40 years
|
|
$
|
328,343
|
|
|
$
|
(87,478
|
)
|
|
$
|
240,865
|
|
Technology
|
Indefinite
|
|
172,381
|
|
|
—
|
|
|
172,381
|
|
Trademarks
|
Indefinite
|
|
202,894
|
|
|
—
|
|
|
202,894
|
|
Other
|
2 to 50 years
|
|
24,246
|
|
|
(14,987
|
)
|
|
9,259
|
|
Total
|
|
|
$
|
727,864
|
|
|
$
|
(102,465
|
)
|
|
$
|
625,399
|
|
Balance, October 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
20 to 40 years
|
|
$
|
327,782
|
|
|
$
|
(76,070
|
)
|
|
$
|
251,712
|
|
Technology
|
Indefinite
|
|
175,652
|
|
|
—
|
|
|
175,652
|
|
Trademarks
|
Indefinite
|
|
208,261
|
|
|
—
|
|
|
208,261
|
|
Other
|
10 to 50 years
|
|
22,064
|
|
|
(14,589
|
)
|
|
7,475
|
|
Total
|
|
|
$
|
733,759
|
|
|
$
|
(90,659
|
)
|
|
$
|
643,100
|
|
The decrease in goodwill during fiscal year 2016 is primarily due to foreign currency translation and measurement period adjustments for the Quest acquisition, offset by goodwill acquired from the ISVA acquisition. The decrease in intangible assets during fiscal year 2016 is due to foreign currency translation and amortization, offset by customer lists and trademarks acquired from acquisitions.
The increase in goodwill during fiscal year 2015 is due to the Quest acquisition partially offset by foreign currency translation and the divestiture of a non-strategic specialty product offering in our Coatings segment. The increase in intangible assets during fiscal year 2015 is primarily due to acquired customer lists, trademarks and technology as part of the Quest acquisition, partially offset by foreign currency translation and amortization.
Total intangible asset amortization expense was
$11,806
,
$9,640
, and
$8,273
in
2016
,
2015
and
2014
, respectively. The remaining life averages for assets included in the customer lists and other categories is
24
years and
28
years, respectively. Estimated amortization expense for each of the five succeeding fiscal years is approximately
$12,000
annually.
NOTE 5 – SUPPLEMENTAL DISCLOSURES RELATED TO CURRENT LIABILITIES
Other accrued liabilities include the following:
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Employee compensation
|
$
|
168,234
|
|
|
$
|
149,838
|
|
Customer volume rebates and incentives
|
98,748
|
|
|
91,933
|
|
Uninsured loss reserves and deferred revenue
|
60,343
|
|
|
59,040
|
|
Taxes, insurance, professional fees and services
|
42,777
|
|
|
45,755
|
|
Interest
|
25,993
|
|
|
25,856
|
|
Contribution to employees' retirement trusts
|
24,296
|
|
|
16,218
|
|
Advertising and promotions
|
15,242
|
|
|
17,264
|
|
Restructuring
|
7,727
|
|
|
12,065
|
|
Deferred tax liability
|
576
|
|
|
1,512
|
|
Other
|
19,070
|
|
|
23,358
|
|
Total other accrued liabilities
|
$
|
463,006
|
|
|
$
|
442,839
|
|
NOTE 6 – GUARANTEES
Furniture Protection Plans:
We sell extended furniture protection plans and offer warranties for certain products. In the U.S., revenue related to furniture protection plans is deferred and recognized over the contract life. The range of contractual lives for our extended furniture protection plans is
three
years to lifetime warranty (estimated as
20
years). We have not sold lifetime warranty plans since 2005. Our furniture protection plans outstanding as of
October 28, 2016
have a weighted average contractual life of approximately
11
years; however, we expect to pay substantially all of the claims for such plans within
five
years. We periodically assess the adequacy of these recorded amounts and adjust as necessary. Provisions for estimated losses on uncompleted furniture protection plan contracts are made in the period in which such losses can be estimated. The extended furniture protection plans that we enter into have fixed prices. To the extent the actual costs to complete contracts differ from the amounts estimated as of the date of the financial statements, gross margin would be affected in future periods when we revise our estimates.
Warranties:
We offer warranties for certain products.
For product warranties, we estimate the costs that may be incurred under these warranties based on historical claims data and record a liability in the amount of such costs at the time revenue is recognized. Anticipated losses are charged to earnings when identified.
Changes in the recorded amounts included in other accrued liabilities, both short and long-term during the three years ended October 28, 2016 are as follows:
|
|
|
|
|
Balance, October 25, 2013
|
$
|
78,818
|
|
Additional net deferred revenue/accrual made during the period
|
8,982
|
|
Payments made during the period
|
(7,173
|
)
|
Balance, October 31, 2014
|
$
|
80,627
|
|
Additional net deferred revenue/accrual made during the period
|
11,086
|
|
Payments made during the period
|
(8,842
|
)
|
Balance, October 30, 2015
|
$
|
82,871
|
|
Additional net deferred revenue/accrual made during the period
|
17,275
|
|
Payments made during the period
|
(10,108
|
)
|
Balance, October 28, 2016
|
$
|
90,038
|
|
NOTE 7 – FAIR VALUE MEASUREMENT
We measure certain assets and liabilities at fair value or disclose the fair value of certain assets and liabilities recorded at cost in the Consolidated Financial Statements on both a recurring and non-recurring basis. Fair value is defined as an exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value accounting rules establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes use of unobservable inputs. Observable inputs must be used when available. Observable
inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the inputs used in the valuation. We classify assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. Transfers of instruments between levels are recorded based on end of period values. There were no transfers between levels for all periods presented. The three levels are defined as follows:
|
|
•
|
Level 1:
Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2:
Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
|
|
|
•
|
Level 3:
Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
|
Recurring Fair Value Measurements
The following tables provide information by level for assets and liabilities that are recorded at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
October 28, 2016
|
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
39,842
|
|
|
$
|
39,842
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash
1
|
857
|
|
|
857
|
|
|
—
|
|
|
—
|
|
Foreign currency contracts
2
|
267
|
|
|
—
|
|
|
267
|
|
|
—
|
|
Deferred compensation plan assets
3
|
12,864
|
|
|
12,864
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
53,830
|
|
|
$
|
53,563
|
|
|
$
|
267
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
October 30, 2015
|
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
26,139
|
|
|
$
|
26,139
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash
1
|
1,307
|
|
|
1,307
|
|
|
—
|
|
|
—
|
|
Foreign currency contracts
2
|
207
|
|
|
—
|
|
|
207
|
|
|
—
|
|
Deferred compensation plan assets
3
|
6,579
|
|
|
6,579
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
34,232
|
|
|
$
|
34,025
|
|
|
$
|
207
|
|
|
$
|
—
|
|
1
Restricted cash represents cash that is restricted from withdrawal for contractual or legal reasons.
2
In the Consolidated Balance Sheets, foreign currency contracts are included in prepaid expenses and other when in an asset position and other accrued liabilities when in a liability position. The fair market value was estimated using observable market data for similar financial instruments. See Note 8 for additional information on derivative financial instruments.
3
The Deferred Compensation Plan Assets consist of the investment funds maintained for the future payments under the Company's deferred compensation plan, which is structured as a rabbi trust. Investments held in the rabbi trust are publicly-traded mutual funds. Rabbi trust assets are considered irrevocable, and may only be used to pay participant benefits under the plan. The only exception is the event of bankruptcy, in which case the assets in the rabbi trust would be subject to the claims of creditors of the corporation. In the Consolidated Balance Sheets, rabbi trust assets are included in other assets.
The following tables provide information regarding the estimated fair value of our outstanding debt which is recorded at carrying value in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
October 28, 2016
|
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Debt
1
|
|
|
|
|
|
|
|
Publicly traded debt
|
$
|
1,777,957
|
|
|
$
|
1,777,957
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-publicly traded debt
|
78,398
|
|
|
—
|
|
|
78,398
|
|
|
—
|
|
Total debt
|
$
|
1,856,355
|
|
|
$
|
1,777,957
|
|
|
$
|
78,398
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
October 30, 2015
|
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Debt
1
|
|
|
|
|
|
|
|
|
|
|
|
Publicly traded debt
|
$
|
1,741,003
|
|
|
$
|
1,741,003
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-publicly traded debt
|
341,086
|
|
|
—
|
|
|
341,086
|
|
|
—
|
|
Total debt
|
$
|
2,082,089
|
|
|
$
|
1,741,003
|
|
|
$
|
341,086
|
|
|
$
|
—
|
|
1
Debt is recorded at carrying value of
$1,778,398
and
$2,041,086
on the Consolidated Balance Sheets as of
October 28, 2016
and
October 30, 2015
, respectively. The fair value of our publicly traded debt is based on quoted prices (unadjusted) in active markets. The fair value of our non-publicly traded debt was estimated using a discounted cash flow analysis based on our current borrowing costs for debt with similar maturities. In addition, the carrying values of our commercial paper included in non-publicly traded debt approximate the financial instrument’s fair value as the maturities are less than three months. See Note 9 for additional information on debt.
Nonrecurring Fair Value Measurements
We measure certain assets at fair value on a nonrecurring basis. These assets primarily include assets acquired and liabilities assumed as part of an acquisition, as well as property, plant and equipment when the planned use of the asset changes. See Note 2 for additional information on our acquisitions and Note 18 for additional information on restructuring.
NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative financial instruments to manage interest rate and foreign currency exchange risks. We enter into derivative financial instruments with high-credit quality counterparties and diversify our positions among such counterparties to reduce our exposure to credit losses. We do not have any credit-risk-related contingent features in our derivative contracts as of
October 28, 2016
.
At
October 28, 2016
, we had
$6,141
notional amount of foreign currency contracts that mature during fiscal year
2017
. These foreign currency contracts have been designated as cash flow hedges with unrealized gains or losses recorded in accumulated other comprehensive income (loss). Gains and losses are reclassified from accumulated other comprehensive income (loss) to other expense (income) in the Consolidated Statements of Operations when the underlying hedged item is realized. At
October 30, 2015
, we had
$8,903
notional amount of foreign currency contracts maturing in fiscal year
2016
. There was no material ineffectiveness for these hedges during
2016
or
2015
.
At
October 28, 2016
and
October 30, 2015
, we had
no
treasury lock contracts in place. The accumulated other comprehensive loss amount in our Consolidated Balance Sheets as of
October 28, 2016
and
October 30, 2015
represents the unamortized gains and losses, net of tax, from treasury lock contracts settled in previous periods. Unamortized gains and losses are reclassified ratably from accumulated other comprehensive income (loss) to interest expense in our Consolidated Statements of Operations over the term of the related debt. At
October 28, 2016
, the amount that will be recognized in interest expense in fiscal year
2017
is
$1,402
.
Our derivative assets and liabilities subject to fair value measurement (see Note 7) include the following:
|
|
|
|
|
|
|
|
|
|
Fair Value at
October 28, 2016
|
|
|
Fair Value at
October 30, 2015
|
|
Assets
|
|
|
|
|
|
Prepaid expenses and other:
|
|
|
|
|
|
Foreign currency contracts
|
$
|
267
|
|
|
$
|
207
|
|
Total assets
|
$
|
267
|
|
|
$
|
207
|
|
Derivative gains (losses) recognized in accumulated other comprehensive income (AOCI) and on the Consolidated Statements of Operations for fiscal year ended
October 28, 2016
and
October 30, 2015
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 28, 2016
|
Amount of Gain
(Loss)
Recognized in
AOCI
|
|
|
Statement of Operations
Classification
|
|
Amount of Gain
(Loss)
Recognized in
Earnings
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
60
|
|
|
Other income (expense), net
|
|
$
|
511
|
|
Treasury lock contracts
|
1,191
|
|
|
Interest expense
|
|
(1,191
|
)
|
Total derivatives designated as cash flow hedges
|
$
|
1,251
|
|
|
Total
|
|
$
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 30, 2015
|
Amount of Gain
(Loss)
Recognized in
AOCI
|
|
|
Statement of Operations
Classification
|
|
Amount of Gain
(Loss)
Recognized in
Earnings
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
(248
|
)
|
|
Other income (expense), net
|
|
$
|
1,269
|
|
Treasury lock contracts
|
1,254
|
|
|
Interest expense
|
|
(1,254
|
)
|
Total derivatives designated as cash flow hedges
|
$
|
1,006
|
|
|
Total
|
|
$
|
15
|
|
NOTE 9 – DEBT
Our debt consists of the following:
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Notes to banks
(weighted average interest rate of 2.74% at October 28, 2016 and 9.28% at October 30, 2015)
|
$
|
8,950
|
|
|
$
|
6,153
|
|
Commercial paper
(1.00% - 1.10% at October 28, 2016 and 0.43% - 0.50% at October 30, 2015)
|
62,389
|
|
|
327,869
|
|
Total short-term debt
|
71,339
|
|
|
334,022
|
|
Capital leases
|
107
|
|
|
131
|
|
Senior notes - due 2017 at 6.05%
|
150,000
|
|
|
—
|
|
Total current portion of long-term debt
|
150,107
|
|
|
131
|
|
Notes to banks
(weighted average interest rate 1.94% at October 28, 2016 and 0.00
%
at October 30, 2015)
|
132
|
|
|
6
|
|
Capital leases
|
6,820
|
|
|
6,927
|
|
Senior notes (at fixed rates)
|
|
|
|
|
Due 2017 at 6.05%
|
—
|
|
|
150,000
|
|
Due 2019 at 7.25%
|
300,000
|
|
|
300,000
|
|
Due 2022 at 4.20%
|
400,000
|
|
|
400,000
|
|
Due 2025 at 3.30%
|
250,000
|
|
|
250,000
|
|
Due 2026 at 3.95%
|
350,000
|
|
|
350,000
|
|
Due 2045 at 4.40%
|
250,000
|
|
|
250,000
|
|
Total long-term debt
|
1,556,952
|
|
|
1,706,933
|
|
Total debt
|
$
|
1,778,398
|
|
|
$
|
2,041,086
|
|
During 2016,
$150,000
of unsecured Senior Notes that mature on May 1, 2017 were reclassified as current portion of long-term debt.
On August 3, 2015, we retired
$150,000
of unsecured Senior Notes in accordance with their scheduled maturity using commercial paper.
On July 27, 2015, we issued
$350,000
of unsecured Senior Notes that mature on January 15, 2026 with a coupon rate of
3.95%
. The net proceeds of the issuance were approximately
$345,000
. The public offering was made pursuant to a registration statement
filed with the U.S. Securities and Exchange Commission (SEC). We used the net proceeds from this offering for the repayment of borrowings under the term loan credit facility that was entered into on May 29, 2015.
On May 29, 2015, we entered into a
$350,000
term loan credit agreement with a syndicate of banks with a maturity date of November 29, 2016. This facility was used to provide funding for the acquisition of Quest. See Note 2 in the Consolidated Financial Statements for further information on the acquisition. This facility was repaid and terminated on July 29, 2015 primarily using the net proceeds from the unsecured Senior Notes issued in July 2015.
On January 21, 2015, we issued
$250,000
of unsecured Senior Notes that mature on February 1, 2025 with a coupon rate of
3.30%
, and
$250,000
of unsecured Senior Notes that mature on February 1, 2045 with a coupon rate of
4.40%
. The net proceeds of both issuances were approximately
$492,000
in the aggregate. The public offering was made pursuant to a registration statement filed with the SEC. We used the net proceeds to repay short-term borrowings under our commercial paper program and credit facility in the first quarter of 2015.
We maintain a
$750,000
unsecured revolving credit facility with a syndicate of banks with a maturity date of December 14, 2018. Under certain circumstances we have the option to increase this credit facility to
$1,000,000
.
In July 2013, we entered into a U.S. dollar equivalent unsecured committed revolving bilateral credit facility, expiring July 2014. In July 2014, this facility was extended for one year to July 2015. We paid off and terminated the bilateral credit facility in December 2014.
We have a capital lease covering a building that terminates in 2034. Refer to Note 17 for additional information on leasing arrangements.
As of
October 28, 2016
and
October 30, 2015
, our bank credit facilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
October 28, 2016
|
|
Total Outstanding
|
|
|
Facility
Size
|
|
December 2018 unsecured committed credit revolving facility
1
|
$
|
62,389
|
|
|
$
|
750,000
|
|
Uncommitted bank lines of credit
|
8,950
|
|
|
109,825
|
|
Total bank credit facilities
|
$
|
71,339
|
|
|
$
|
859,825
|
|
|
|
October 30, 2015
|
|
Total
Outstanding
|
|
|
Facility
Size
|
|
December 2018 unsecured committed credit revolving facility
1
|
$
|
327,869
|
|
|
$
|
750,000
|
|
Uncommitted bank lines of credit
|
6,153
|
|
|
97,512
|
|
Total bank credit facilities
|
$
|
334,022
|
|
|
$
|
847,512
|
|
|
|
1
|
We have a
$450,000
commercial paper program backed by our
$750,000
bank syndicate committed credit revolving facility, as amended and restated. We pay a
0.15%
per year commitment fee on the full amount of the facility. The facility includes
$62,389
and
$327,869
of commercial paper as of
October 28, 2016
and
October 30, 2015
, respectively.
|
Our unsecured committed credit revolving facility has covenants that require us to maintain certain financial ratios. We were in compliance with these covenants as of
October 28, 2016
. Our debt covenants do not limit, nor are they reasonably likely to limit, our ability to obtain additional debt or equity financing.
We maintain uncommitted bank lines of credit to meet short-term funding needs in certain of our international locations. These arrangements are reviewed periodically for renewal and modification. Borrowings under these debt arrangements had an average annual interest rate of
4.46%
in
2016
,
10.92%
in
2015
and
12.30%
in
2014
.
Our short-term debt consists primarily of commercial paper. The weighted-average annual interest rates on outstanding short-term borrowings were
1.27%
and
0.64%
on
October 28, 2016
and
October 30, 2015
, respectively. To ensure availability of funds, we maintain uncommitted bank lines of credit sufficient to cover outstanding short-term borrowings. These arrangements are reviewed periodically for renewal and modification.
The future maturities of long-term debt are as follows:
|
|
|
|
|
|
Maturities
|
|
2017
|
$
|
150,107
|
|
2018
|
126
|
|
2019
|
300,000
|
|
2020
|
—
|
|
2021
|
—
|
|
Thereafter
|
1,256,826
|
|
NOTE 10 – STOCK-BASED COMPENSATION
Our 2015 Omnibus Equity Plan (the Omnibus Plan) authorizes us to grant or issue non-qualified stock options, cash settled awards, share awards and other equity settled awards of up to
7,000,000
shares of common stock. Under the Omnibus Plan, awards denominated in shares of common stock other than options reduce the pool of reserved shares at a multiple of
3.51
times the number of shares awarded. Stock options awarded through the Omnibus Plan reduce the reserved share pool at a rate equal to the number of options granted. As of
October 28, 2016
, there were
4,105,254
shares available for future grants.
Upon adoption and approval of the Omnibus Plan, all of our previous equity incentive compensation plans were terminated. However, existing awards under those plans continue to vest in accordance with the original vesting schedule and will expire at the end of their original term.
Total stock-based compensation expense was
$30,250
,
$14,793
and
$28,314
in
2016
,
2015
and
2014
, respectively.
Stock Options:
Stock options issued to participants other than non-employees and retirement eligible employees vest over
three
to
five
years and typically have a contractual term of
10
years. Stock options vest immediately upon grant for non-employee directors.
Stock-based compensation expense included in our Consolidated Statements of Operations for stock options was
$5,522
,
$1,826
, and
$6,382
in fiscal year
2016
,
2015
, and
2014
, respectively. The total grant-date fair value of options vested during the year was
$6,974
,
$6,363
and
$4,444
in fiscal year
2016
,
2015
and
2014
, respectively. As of
October 28, 2016
, there was
$6,085
of total unrecognized pre-tax compensation cost related to non-vested awards that are expected to be recognized over a weighted-average period of
1.6
years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. Annually, we make predictive assumptions regarding future stock price volatility, employee exercise behavior, dividend yield, and the forfeiture rate. The dividend yield assumption is based on the expected annual dividend yield on the grant date. Expected stock price volatility is estimated using historical volatility over the expected life of the option. The risk-free interest rate for periods during the expected term of the options is based on yields available on the grant date for U.S. Treasury STRIPS with maturity consistent with the expected life assumption. The expected life represents the period of time that options granted are expected to be outstanding based on historical data to estimate option exercises and employee terminations within the valuation model.
The following table sets forth the weighted-average fair values and assumptions on which the fair values are determined. There were
no
stock option awards granted during 2016:
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Expected dividend yield
|
1.7
|
%
|
|
1.4
|
%
|
Expected stock price volatility
|
23.0
|
%
|
|
30.0
|
%
|
Risk-free interest rate
|
1.8
|
%
|
|
2.2
|
%
|
Expected life of options
|
6.7 years
|
|
|
6.8 years
|
|
Weighted average fair value on the date of grant
|
$15.72
|
|
$22.54
|
Stock option activity for the three years ended
October 28, 2016
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price
per share1
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
2
|
|
Balance, October 25, 2013
|
6,062,817
|
|
|
$
|
31.37
|
|
|
5.9 years
|
|
$
|
235,887
|
|
Granted
|
297,865
|
|
|
76.50
|
|
|
|
|
|
Exercised
|
(1,098,023
|
)
|
|
25.18
|
|
|
|
|
54,909
|
|
Canceled
|
(20,419
|
)
|
|
53.07
|
|
|
|
|
|
Balance, October 31, 2014
|
5,242,240
|
|
|
$
|
35.15
|
|
|
5.5 years
|
|
$
|
246,440
|
|
Granted
|
467,860
|
|
|
72.58
|
|
|
|
|
|
Exercised
|
(621,237
|
)
|
|
28.20
|
|
|
|
|
34,497
|
|
Canceled
|
(51,301
|
)
|
|
68.27
|
|
|
|
|
|
Balance, October 30, 2015
|
5,037,562
|
|
|
$
|
39.15
|
|
|
5.2 years
|
|
$
|
210,609
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(684,735
|
)
|
|
26.90
|
|
|
|
|
44,994
|
|
Canceled
|
(9,816
|
)
|
|
67.78
|
|
|
|
|
|
Balance, October 28, 2016
|
4,343,011
|
|
|
$
|
41.01
|
|
|
4.6 years
|
|
$
|
246,345
|
|
Exercisable
|
3,927,965
|
|
|
37.63
|
|
|
4.2 years
|
|
236,072
|
|
1
The exercise price of the options granted during these periods was equal to the market price of the underlying stock on the date of grant.
2
Intrinsic values are based on our closing stock price on the last trading day of the year for in-the-money options.
Options exercisable of
4,241,769
at
October 30, 2015
and
4,489,970
at
October 31, 2014
had weighted-average exercise prices of
$32.99
and
$29.74
, respectively.
Restricted Stock:
Restricted stock awards vest over
three
to
five
years. Stock-based compensation expense included in our Consolidated Statements of Operations for restricted stock was
$2,607
,
$2,161
and
$5,878
in fiscal year
2016
,
2015
and
2014
, respectively. As of
October 28, 2016
, there was
$3,339
of total unrecognized pre-tax compensation cost related to restricted stock that is expected to be recognized over a weighted-average period of
2.2
years. There were
no
restricted stock awards granted during fiscal year 2016.
The following table sets forth a reconciliation of restricted stock for the three years ended
October 28, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance, Balance, October 25, 2013
|
356,923
|
|
|
$
|
39.54
|
|
|
$
|
25,085
|
|
Granted
|
85,121
|
|
|
74.78
|
|
|
6,366
|
|
Vested
|
(139,994
|
)
|
|
35.90
|
|
|
9,831
|
|
Forfeited
|
(22,127
|
)
|
|
42.79
|
|
|
(947
|
)
|
Balance, Balance, October 31, 2014
|
279,923
|
|
|
$
|
51.82
|
|
|
$
|
22,998
|
|
Granted
|
103,863
|
|
|
86.21
|
|
|
8,954
|
|
Vested
|
(154,703
|
)
|
|
38.57
|
|
|
12,948
|
|
Forfeited
|
(13,217
|
)
|
|
77.21
|
|
|
(1,021
|
)
|
Balance, Balance, October 30, 2015
|
215,866
|
|
|
$
|
76.36
|
|
|
$
|
17,474
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
(46,400
|
)
|
|
64.28
|
|
|
3,777
|
|
Forfeited
|
(3,429
|
)
|
|
83.72
|
|
|
(287
|
)
|
Balance, October 28, 2016
|
166,037
|
|
|
$
|
79.58
|
|
|
$
|
16,227
|
|
Stock-Settled Restricted Stock Units:
We have issued both time and performance based stock-settled restricted stock units to certain participants under the Omnibus Plan.
Time-based
Time-based restricted stock units represent future shares issuable and cliff vest at the end of a
three
to
four
year service period. Stock-based compensation expense included in our Consolidated Statements of Operations for stock-settled restricted stock units was
$4,704
,
$1,831
and
$0
in fiscal year
2016
,
2015
and
2014
, respectively. As of
October 28, 2016
, there was
$23,102
of total unrecognized pre-tax compensation cost related to these units that is expected to be recognized over a weighted-average period of
2.5
years.
The following table sets forth a reconciliation of the time-based stock-settled restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
Outstanding
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance, October 31, 2014
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Granted
|
93,938
|
|
|
85.00
|
|
|
7,985
|
|
Vested
|
(1,204
|
)
|
|
86.85
|
|
|
(105
|
)
|
Forfeited
|
(6,949
|
)
|
|
85.56
|
|
|
(595
|
)
|
Balance, October 30, 2015
|
85,785
|
|
|
$
|
84.93
|
|
|
$
|
6,944
|
|
Granted
|
284,950
|
|
|
94.35
|
|
|
26,885
|
|
Vested
|
(1,050
|
)
|
|
82.43
|
|
|
82
|
|
Forfeited
|
(9,902
|
)
|
|
78.93
|
|
|
(775
|
)
|
Balance, October 28, 2016
|
359,783
|
|
|
$
|
92.56
|
|
|
$
|
35,162
|
|
Performance-based
Performance-based units represent shares potentially issuable in the future based upon EPS over a
three
year performance period. Dividends are accrued during the performance period for these grants. The fair value of performance share units is calculated based on the stock price at the time of grant. Compensation expense included in our Consolidated Statements of Operations for performance-based stock-settled restricted stock units was
$6,096
and
$2,299
in fiscal years
2016
and
2015
, respectively. As of
October 28, 2016
, there was
$8,589
of total unrecognized pre-tax compensation cost related to performance-based stock-settled restricted stock units that is expected to be recognized over a weighted-average period of
1.8
years.
The following table sets forth a reconciliation of the performance-based stock-settled restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
Outstanding
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance, October 31, 2014
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Granted
|
73,468
|
|
|
87.03
|
|
|
6,394
|
|
Vested
|
(1,598
|
)
|
|
87.03
|
|
|
(139
|
)
|
Forfeited
|
(5,641
|
)
|
|
87.03
|
|
|
(490
|
)
|
Balance, October 30, 2015
|
66,229
|
|
|
$
|
87.03
|
|
|
$
|
5,764
|
|
Granted
|
75,548
|
|
|
78.27
|
|
|
5,913
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(1,288
|
)
|
|
84.41
|
|
|
(244
|
)
|
Balance, October 28, 2016
|
140,489
|
|
|
$
|
82.32
|
|
|
$
|
13,574
|
|
Cash-settled Restricted Stock Units:
Cash-settled restricted stock units granted through our Omnibus Plan cliff vest at the end of a
three
to
five
year service period. These awards are cash-settled and are classified as a liability, which is marked to market each period. This liability is included within our long-term liabilities. Stock-based compensation expense included in our Consolidated Statements of Operations for cash-settled restricted stock units was
$11,321
,
$5,593
and
$15,198
in fiscal year
2016
,
2015
and
2014
, respectively. Cash payments for cash-settled restricted stock units were
$7,783
,
$15,437
and
$8,083
in
2016
,
2015
and 2014, respectively. There were no payments for cash-settled restricted stock units prior to 2014. As of
October 28, 2016
, there
was
$5,285
of total unrecognized pre-tax compensation cost related to cash-settled restricted stock units that is expected to be recognized over a weighted-average period of
1.8
years.
The following table sets forth a reconciliation of cash-settled restricted stock units for the three years ended
October 28, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
Outstanding
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
3
|
|
Balance, October 25, 2013
|
598,523
|
|
|
$
|
46.41
|
|
|
$
|
42,064
|
|
Granted
|
143,244
|
|
|
71.50
|
|
|
10,243
|
|
Vested
|
(111,798
|
)
|
|
37.62
|
|
|
7,960
|
|
Forfeited
|
(33,881
|
)
|
|
51.76
|
|
|
(1,754
|
)
|
Balance, October 31, 2014
|
596,088
|
|
|
$
|
53.78
|
|
|
$
|
48,975
|
|
Granted
|
48,081
|
|
|
84.28
|
|
|
4,052
|
|
Vested
|
(180,723
|
)
|
|
43.94
|
|
|
(15,273
|
)
|
Forfeited
|
(51,630
|
)
|
|
59.30
|
|
|
(3,017
|
)
|
Balance, October 30, 2015
|
411,816
|
|
|
$
|
60.99
|
|
|
$
|
33,337
|
|
Granted
|
42,749
|
|
|
79.98
|
|
|
3,419
|
|
Vested
|
(85,467
|
)
|
|
64.72
|
|
|
6,954
|
|
Forfeited
|
(16,595
|
)
|
|
74.98
|
|
|
(1,244
|
)
|
Balance, October 28, 2016
|
352,503
|
|
|
$
|
61.73
|
|
|
$
|
34,450
|
|
3
Intrinsic value of cash-settled restricted stock units vested was based on our closing stock price on the last trading day of the year.
Stock Awards:
Stock awards are issued and outstanding upon date awarded. Stock-based compensation expense included in our Consolidated Statements of Operations for stock awards was
$0
,
$1,083
, and
$856
in fiscal year
2016
,
2015
and
2014
, respectively. Cash awards were granted in lieu of stock awards to non-employee directors during fiscal year
2016
.
NOTE 11 – PENSIONS AND OTHER POST-RETIREMENT BENEFITS
Savings and Retirement Plan:
We sponsor a Savings and Retirement Plan for substantially all of our U.S. employees. Under the Plan, we match employee contributions up to a maximum of
3%
of employees’ compensation. In addition to matching employees’ contributions throughout the year, there is a year-end discretionary contribution that can range from
4%
to
13%
of eligible employees’ pay as defined in the Plan. U.S. employees who are not eligible for the Savings and Retirement Plan have the option to participate in a separate 401(k) Employee Stock Ownership Plan. We match employee contributions made by participants in that plan up to a maximum of
3%
of employees’ compensation. In addition to matching employees’ contributions throughout the year, there is a discretionary year-end matching contribution that can range from
0
% to
3%
. Employer contributions to the Plans totaled
$27,502
,
$20,927
, and
$20,981
for
2016
,
2015
, and
2014
, respectively.
Executive Retirement Plans:
We have Supplemental Executive Retirement Plans (SERPs) to provide retirement, death and disability benefits to a limited number of former employees. Annual benefits under the SERPs are based on years of service and individual compensation near retirement.
Pension and Post-Retirement Medical Plans:
We sponsor several defined benefit pension plans for certain hourly and salaried employees. The benefits for most of these plans are generally based on stated amounts for each year of service. We fund the plans in amounts consistent with the limits of allowable tax deductions. During fiscal year
2016
, we made contributions of approximately
$2,101
to our pension plans. We also sponsor a post-retirement medical plan that provides subsidized medical benefits for eligible retired employees and their eligible dependents. The plan changed on January 1, 2009 to eliminate the subsidy for future retirees with the exception of a small group of employees near retirement that will still be eligible for the subsidized coverage at retirement. A
1%
increase in the medical trend rates would not have a material effect on post-retirement medical expense or the post-retirement benefit obligation. For the fiscal year ending October 27, 2017, we expect our total contributions to our funded pension plans, unfunded pension, non-qualified plans and post-retirement medical plans to be at least
$1,438
.
The cost of pension and post-retirement medical benefits recognized in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Service cost
|
$
|
2,709
|
|
|
$
|
3,543
|
|
|
$
|
4,358
|
|
Interest cost
|
12,992
|
|
|
13,734
|
|
|
14,848
|
|
Expected return on plan assets
|
(19,115
|
)
|
|
(19,294
|
)
|
|
(19,907
|
)
|
Amortization of prior service cost
|
448
|
|
|
484
|
|
|
480
|
|
Recognized actuarial loss
|
6,532
|
|
|
6,602
|
|
|
6,190
|
|
Net periodic benefit cost
|
3,566
|
|
|
5,069
|
|
|
5,969
|
|
Settlement gain
|
66
|
|
|
(52
|
)
|
|
(422
|
)
|
Curtailment gain
|
—
|
|
|
(2,913
|
)
|
|
—
|
|
Net total benefit cost
|
$
|
3,632
|
|
|
$
|
2,104
|
|
|
$
|
5,547
|
|
|
|
Post-Retirement Medical
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Service cost
|
$
|
287
|
|
|
$
|
204
|
|
|
$
|
153
|
|
Interest cost
|
358
|
|
|
367
|
|
|
382
|
|
Expected return on plan assets
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Amortization of prior service cost
|
(128
|
)
|
|
(128
|
)
|
|
(128
|
)
|
Recognized actuarial loss
|
385
|
|
|
431
|
|
|
369
|
|
Net periodic benefit cost
|
$
|
902
|
|
|
$
|
874
|
|
|
$
|
776
|
|
The plans’ funded status is shown below, along with a description of how the status changed during the past two years. The benefit obligation is the projected benefit obligation—the actuarial present value, as of a date, of all benefits attributed by the pension benefit formula to employee service rendered prior to that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
Change in Benefit Obligation
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Benefit obligation beginning of year
|
$
|
320,071
|
|
|
$
|
354,403
|
|
|
$
|
8,346
|
|
|
$
|
9,127
|
|
Service cost
|
2,709
|
|
|
3,543
|
|
|
287
|
|
|
204
|
|
Interest cost
|
12,992
|
|
|
13,734
|
|
|
358
|
|
|
367
|
|
Plan participants’ contributions
|
64
|
|
|
179
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
105
|
|
|
473
|
|
|
—
|
|
|
—
|
|
Actuarial loss/(gain)
|
30,703
|
|
|
37
|
|
|
(306
|
)
|
|
(254
|
)
|
Benefits paid
|
(15,303
|
)
|
|
(14,865
|
)
|
|
(803
|
)
|
|
(1,098
|
)
|
Expenses paid from assets
|
(361
|
)
|
|
(497
|
)
|
|
—
|
|
|
—
|
|
Currency impact
|
(7,705
|
)
|
|
(9,342
|
)
|
|
—
|
|
|
—
|
|
Curtailments
|
—
|
|
|
(6,487
|
)
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
(21,107
|
)
|
|
—
|
|
|
—
|
|
Benefit obligation at end of year
|
$
|
343,275
|
|
|
$
|
320,071
|
|
|
$
|
7,882
|
|
|
$
|
8,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
Change in Plan Assets
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Fair value of plan assets at beginning of year
|
$
|
293,886
|
|
|
$
|
323,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
25,663
|
|
|
9,979
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
2,101
|
|
|
3,024
|
|
|
803
|
|
|
1,098
|
|
Plan participants’ contributions
|
64
|
|
|
179
|
|
|
—
|
|
|
—
|
|
Benefit payments
|
(15,303
|
)
|
|
(14,865
|
)
|
|
(803
|
)
|
|
(1,098
|
)
|
Expenses paid from assets
|
(361
|
)
|
|
(497
|
)
|
|
—
|
|
|
—
|
|
Currency impact
|
(7,326
|
)
|
|
(6,701
|
)
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
(21,107
|
)
|
|
—
|
|
|
—
|
|
Fair value of assets at end of year
|
$
|
298,724
|
|
|
$
|
293,886
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
Funded Status
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Projected benefit obligation
|
$
|
(343,275
|
)
|
|
$
|
(320,071
|
)
|
|
$
|
(7,882
|
)
|
|
$
|
(8,346
|
)
|
Plan assets at fair value
|
298,724
|
|
|
293,886
|
|
|
—
|
|
|
—
|
|
Net funded status - over / (under)
|
$
|
(44,551
|
)
|
|
$
|
(26,185
|
)
|
|
$
|
(7,882
|
)
|
|
$
|
(8,346
|
)
|
Funded status - overfunded plans
|
$
|
1,613
|
|
|
$
|
1,608
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status - underfunded plans
|
(46,164
|
)
|
|
(27,793
|
)
|
|
(7,882
|
)
|
|
(8,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
Amounts Recognized in Balance Sheet
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Noncurrent assets
|
$
|
1,613
|
|
|
$
|
1,608
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(577
|
)
|
|
(663
|
)
|
|
(677
|
)
|
|
(759
|
)
|
Noncurrent liabilities
|
(45,587
|
)
|
|
(27,130
|
)
|
|
(7,205
|
)
|
|
(7,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
Amounts in Accumulated Other Comprehensive Income
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
$
|
129,514
|
|
|
$
|
114,310
|
|
|
$
|
3,805
|
|
|
$
|
4,498
|
|
Net prior service cost (credit)
|
3,956
|
|
|
4,298
|
|
|
(55
|
)
|
|
(183
|
)
|
Other comprehensive loss - total
|
$
|
133,470
|
|
|
$
|
118,608
|
|
|
$
|
3,750
|
|
|
$
|
4,315
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
Amortization expense expected to be recognized
during next fiscal year
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Prior service cost (credits)
|
$
|
439
|
|
|
$
|
448
|
|
|
$
|
(55
|
)
|
|
$
|
(128
|
)
|
Net loss
|
7,203
|
|
|
6,578
|
|
|
322
|
|
|
385
|
|
Our pension and post-retirement medical plans with accumulated benefit obligations in excess of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Projected/accumulated post-retirement benefit obligation
|
$
|
336,597
|
|
|
$
|
313,799
|
|
|
$
|
7,882
|
|
|
$
|
8,346
|
|
Accumulated benefit obligation
|
332,634
|
|
|
309,878
|
|
|
N/A
|
|
|
N/A
|
|
Fair value of plan assets
|
290,434
|
|
|
286,006
|
|
|
N/A
|
|
|
N/A
|
|
Our pension and post-retirement medical plans with projected benefit obligations in excess of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
2015
|
Projected benefit obligation
|
$
|
336,597
|
|
|
$
|
313,799
|
|
|
N/A
|
|
N/A
|
Accumulated benefit obligation
|
332,634
|
|
|
309,878
|
|
|
N/A
|
|
N/A
|
Fair value of plan assets
|
290,434
|
|
|
286,006
|
|
|
N/A
|
|
N/A
|
Our pension and post-retirement medical plans with projected benefit obligations less than or equal to plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
2015
|
Projected benefit obligation
|
$
|
6,677
|
|
|
$
|
6,272
|
|
|
N/A
|
|
N/A
|
Accumulated benefit obligation
|
6,638
|
|
|
6,195
|
|
|
N/A
|
|
N/A
|
Fair value of plan assets
|
8,290
|
|
|
7,880
|
|
|
N/A
|
|
N/A
|
Actuarial Assumptions:
We determine our actuarial assumptions on an annual basis. The effect of any changes in actuarial assumptions is recorded in net periodic benefit cost. These assumptions are weighted to reflect each country having requirements that may impact the cost of providing retirement benefits. We employ a total return investment approach for the domestic and foreign pension plan assets. A mix of equities and fixed income investments are used to maximize the long-term return on plan assets for a prudent level of risk. In determining the expected long-term rate of return, management considers the historical rates of return, the nature of investments and an expectation of future investment strategies. Our expected return on plan assets utilizes a calculated-value technique that recognizes changes in actual investment return from expected investment return in a systematic and rational manner over a
5
year period. We use the most recent mortality tables available for each country.
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-Retirement Medical
|
Assumption Ranges Used in Net Periodic Benefit Cost
|
2016
|
|
2015
|
|
2016
|
|
|
2015
|
|
Discount rate
|
2.25% - 4.50%
|
|
2.50% - 4.50%
|
|
4.50
|
%
|
|
4.25
|
%
|
Expected long-term return on plan assets
|
6.00% - 7.25%
|
|
2.50% - 7.25%
|
|
N/A
|
|
|
N/A
|
|
Average increase in compensation
|
2.25% - 3.25%
|
|
2.25% - 3.25%
|
|
N/A
|
|
|
N/A
|
|
Initial medical trend rate
|
N/A
|
|
N/A
|
|
7.00
|
%
|
|
7.00
|
%
|
Ultimate medical trend rate
|
N/A
|
|
N/A
|
|
5.00
|
%
|
|
5.00
|
%
|
Years to ultimate rate
|
N/A
|
|
N/A
|
|
6 Years
|
|
|
4 Years
|
|
|
Pension
|
|
Post-Retirement Medical
|
Assumption Ranges Used to Determine Benefit Obligation
|
2016
|
|
2015
|
|
2016
|
|
|
2015
|
|
Discount rate
|
1.25% - 4.00%
|
|
2.25% - 4.50%
|
|
4.00
|
%
|
|
4.50
|
%
|
Rate of compensation increase
|
2.25% - 3.25%
|
|
2.25% - 3.25%
|
|
N/A
|
|
|
N/A
|
|
Initial medical trend rate
|
N/A
|
|
N/A
|
|
7.00
|
%
|
|
7.00
|
%
|
Ultimate medical trend rate
|
N/A
|
|
N/A
|
|
5.00
|
%
|
|
5.00
|
%
|
Years to ultimate rate
|
N/A
|
|
N/A
|
|
5 Years
|
|
|
6 Years
|
|
Investment Strategy:
We have a master trust that holds the assets for all our U.S. pension plans. For investment purposes, the plans are managed in an identical way, as their objectives are similar. The Benefit Funds Investment Committee (Committee), along with assistance from external consultants, sets investment guidelines and makes asset allocation decisions based on market conditions, risk tolerance, funding requirements and expected benefit payments. The Committee also oversees the selection of investment managers and monitors asset performance. As pension liabilities are long-term in nature, the Committee employs a long-term rate of return on plan assets approach for a prudent level of risk. Historical returns are considered as well as advice from investment experts. Annually, the Committee and the consultants review the risk versus the return of the investment portfolio to assess the long-term rate of return assumption.
The U.S. investment portfolio contains a diversified portfolio of investment categories, including domestic and international equities and short and long-term fixed income securities. Among the equity investments there is also diversity of style, growth versus value. Plan assets did not include investments in our stock as of the reported dates. The Committee believes with prudent risk tolerance and asset diversification, the plans should be able to meet their pension obligations in the future.
The weighted average asset allocations for the past two fiscal years by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
Asset Allocation
|
2016
|
|
|
2015
|
|
|
Target
Allocation
|
|
Equity securities
|
57
|
%
|
|
60
|
%
|
|
50% - 60%
|
|
Debt securities
|
42
|
%
|
|
39
|
%
|
|
40% - 50%
|
|
Other
|
1
|
%
|
|
1
|
%
|
|
—
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The following tables provide information on the fair value of pension plan assets. See Note 7 for more information on fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Fair Value Measurements Using Inputs Considered as
|
|
October 28, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
Domestic Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
Commingled trust
|
$
|
80,056
|
|
|
$
|
—
|
|
|
$
|
80,056
|
|
|
$
|
—
|
|
Mutual fund
|
29,184
|
|
|
29,184
|
|
|
—
|
|
|
—
|
|
International Equity Securities
|
|
|
|
|
|
|
|
Mutual funds
|
60,043
|
|
|
27,365
|
|
|
32,678
|
|
|
—
|
|
Total equity securities
|
169,283
|
|
|
56,549
|
|
|
112,734
|
|
|
—
|
|
Domestic Fixed Income
|
|
|
|
|
|
|
|
Mutual fund
|
94,468
|
|
|
94,468
|
|
|
—
|
|
|
—
|
|
International Fixed Income
|
|
|
|
|
|
|
|
Debt securities
|
15,827
|
|
|
—
|
|
|
15,827
|
|
|
—
|
|
Mutual funds
|
14,017
|
|
|
—
|
|
|
14,017
|
|
|
—
|
|
Total fixed income
|
124,312
|
|
|
94,468
|
|
|
29,844
|
|
|
—
|
|
Other Investments
|
|
|
|
|
|
|
|
Cash
|
2,888
|
|
|
2,888
|
|
|
—
|
|
|
—
|
|
Real estate
|
2,241
|
|
|
—
|
|
|
1,741
|
|
|
500
|
|
Total other investments
|
5,129
|
|
|
2,888
|
|
|
1,741
|
|
|
500
|
|
Total
|
$
|
298,724
|
|
|
$
|
153,905
|
|
|
$
|
144,319
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Fair Value Measurements Using Inputs Considered as
|
|
October 30, 2015
|
Level 1
|
|
Level 2
|
|
Level 3
|
Domestic Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
Commingled trust
|
$
|
80,473
|
|
|
$
|
—
|
|
|
$
|
80,473
|
|
|
$
|
—
|
|
Mutual fund
|
29,670
|
|
|
29,670
|
|
|
—
|
|
|
—
|
|
International Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
65,921
|
|
|
30,059
|
|
|
35,862
|
|
|
—
|
|
Total equity securities
|
176,064
|
|
|
59,729
|
|
|
116,335
|
|
|
—
|
|
Domestic Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund
|
89,934
|
|
|
89,934
|
|
|
—
|
|
|
—
|
|
International Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
10,104
|
|
|
—
|
|
|
10,104
|
|
|
—
|
|
Mutual funds
|
13,212
|
|
|
—
|
|
|
13,212
|
|
|
—
|
|
Total fixed income
|
113,250
|
|
|
89,934
|
|
|
23,316
|
|
|
—
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
3,205
|
|
|
3,205
|
|
|
—
|
|
|
—
|
|
Real estate
|
1,367
|
|
|
—
|
|
|
867
|
|
|
500
|
|
Total other investments
|
4,572
|
|
|
3,205
|
|
|
867
|
|
|
500
|
|
Total
|
$
|
293,886
|
|
|
$
|
152,868
|
|
|
$
|
140,518
|
|
|
$
|
500
|
|
Pension plan investments in publicly-traded corporate stocks and mutual funds are classified as Level 1 investments within the fair value hierarchy, as determined by quoted market prices. Pension plan investments in mutual funds that are not exchange-traded, and commingled trusts, and certain other investments are classified as Level 2 investments within the fair value hierarchy. These investments are valued at net asset value based on the underlying securities, as determined by the sponsor. Level 3 investments are related to real estate in the U.S. pension plans. The fair value is determined primarily based on the cost basis of the real estate
.
There were no transfers between levels for all periods presented.
Investment securities, in general, are exposed to various risks such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported. The valuation methods previously described above may produce a fair value calculation that may not be indicative of net realized value or reflective of future fair values.
The following table provides a reconciliation of the beginning and ending balances of pension assets measured at fair value that used significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
U.S.
|
|
Non-U.S.
|
Balance, October 31, 2014
|
$
|
20,774
|
|
|
$
|
500
|
|
|
$
|
20,274
|
|
Actual return on plan assets relating to assets still held at reporting date
|
1,507
|
|
|
—
|
|
|
1,507
|
|
Purchases
|
336
|
|
|
—
|
|
|
336
|
|
Settlements
|
(21,133
|
)
|
|
—
|
|
|
(21,133
|
)
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Currency impact
|
(984
|
)
|
|
—
|
|
|
(984
|
)
|
Balance, October 30, 2015
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
—
|
|
Actual return on plan assets relating to assets still held at reporting date
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Currency impact
|
—
|
|
|
—
|
|
|
—
|
|
Balance, October 28, 2016
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
—
|
|
Estimated Future Benefits:
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-retirement
Medical
|
2017
|
$
|
16,036
|
|
|
$
|
691
|
|
2018
|
16,040
|
|
|
592
|
|
2019
|
16,576
|
|
|
549
|
|
2020
|
17,199
|
|
|
533
|
|
2021
|
17,382
|
|
|
482
|
|
2022- 2026
|
91,115
|
|
|
2,166
|
|
Total
|
$
|
174,348
|
|
|
$
|
5,013
|
|
NOTE 12 – INCOME TAXES
Income before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
$
|
270,423
|
|
|
$
|
353,068
|
|
|
$
|
349,174
|
|
Foreign
|
164,096
|
|
|
210,733
|
|
|
142,708
|
|
Total income before income taxes
|
$
|
434,519
|
|
|
$
|
563,801
|
|
|
$
|
491,882
|
|
Significant components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
$
|
77,173
|
|
|
$
|
92,820
|
|
|
$
|
86,698
|
|
State
|
10,852
|
|
|
12,911
|
|
|
9,908
|
|
Foreign
|
43,660
|
|
|
61,622
|
|
|
51,982
|
|
Total current
|
$
|
131,685
|
|
|
$
|
167,353
|
|
|
$
|
148,588
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(36,739
|
)
|
|
$
|
2,192
|
|
|
$
|
20,166
|
|
State
|
(3,201
|
)
|
|
1,236
|
|
|
436
|
|
Foreign
|
(10,266
|
)
|
|
(6,486
|
)
|
|
(22,709
|
)
|
Total deferred
|
(50,206
|
)
|
|
(3,058
|
)
|
|
(2,107
|
)
|
Total income taxes
|
$
|
81,479
|
|
|
$
|
164,295
|
|
|
$
|
146,481
|
|
Significant components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets
|
|
|
|
|
|
Insurance reserves
|
$
|
7,860
|
|
|
$
|
7,261
|
|
Compensation
|
46,815
|
|
|
40,716
|
|
Deferred revenue
|
16,722
|
|
|
13,163
|
|
Pension
|
14,888
|
|
|
8,519
|
|
Accrued expenses
|
32,581
|
|
|
30,424
|
|
Tax credits and carryforwards
|
49,957
|
|
|
27,164
|
|
Other
|
12,414
|
|
|
12,180
|
|
|
181,237
|
|
|
139,427
|
|
Less: valuation allowance
|
(7,996
|
)
|
|
(15,872
|
)
|
Total deferred tax assets
|
$
|
173,241
|
|
|
$
|
123,555
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
Prepaids
|
$
|
(19,486
|
)
|
|
$
|
(20,360
|
)
|
Tax in excess of book depreciation
|
(35,432
|
)
|
|
(32,701
|
)
|
LIFO
|
(18,642
|
)
|
|
(20,622
|
)
|
Intangible assets
|
(238,870
|
)
|
|
(235,139
|
)
|
Other
|
—
|
|
|
(8,415
|
)
|
Total deferred tax liabilities
|
(312,430
|
)
|
|
(317,237
|
)
|
Net deferred tax liabilities
|
$
|
(139,189
|
)
|
|
$
|
(193,682
|
)
|
We recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. The valuation allowances of
$7,996
and
$15,872
at the end of fiscal years
2016
and
2015
respectively, primarily relate to foreign net operating losses.
Cumulative foreign tax loss carryforwards at the end of fiscal year
2016
were
$74,409
. Of this amount,
$29,429
will be subject to expiration between fiscal year 2017 and fiscal year 2026. The majority of these foreign tax loss carryforwards will be subject to expiration beginning in 2021. The remaining losses of
$44,980
are not subject to expiration. Cumulative foreign tax credits at the end of fiscal year
2016
were
$32,324
. The majority of these foreign tax credits will be subject to expiration in fiscal years 2025 and 2026.
A reconciliation of income tax computed at the U.S. federal statutory tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Tax (benefit) at U.S. statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
1.5
|
%
|
|
1.5
|
%
|
|
1.3
|
%
|
Domestic manufacturing activities
|
(1.8
|
)%
|
|
(1.5
|
)%
|
|
(1.6
|
)%
|
Tax credit on foreign dividends
|
(6.3
|
)%
|
|
(2.3
|
)%
|
|
—
|
%
|
Non-U.S. taxes
|
(3.7
|
)%
|
|
(3.2
|
)%
|
|
(2.4
|
)%
|
Valuation allowance
|
(1.8
|
)%
|
|
—
|
%
|
|
(1.8
|
)%
|
Research and Development Credit
|
(3.3
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
(0.8
|
)%
|
|
(0.4
|
)%
|
|
(0.7
|
)%
|
Total effective income tax rate
|
18.8
|
%
|
|
29.1
|
%
|
|
29.8
|
%
|
No provision has been made for U.S. federal income taxes on certain undistributed earnings of foreign subsidiaries that we intend to permanently invest or that may be remitted substantially tax-free. The total of undistributed earnings that would be subject to federal income tax if remitted under existing law is approximately
$588,777
at
October 28, 2016
. Determination of the unrecognized deferred tax liability related to these earnings is not practicable because of the complexities with its hypothetical calculation. Upon distribution of these earnings, we will be subject to U.S. taxes and withholding taxes payable to various foreign governments. A credit for foreign taxes already paid would be available to reduce the U.S. tax liability.
We recognize investment tax credits under the "flow-through" method, with the credit reflected as a reduction to income taxes payable and a current income tax benefit in the year realized.
Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. We record an accrual for uncertain tax positions after evaluating the positions associated with our various income tax filings. A number of years may elapse before a particular matter for which we have established an accrual is audited and fully resolved or clarified. We adjust our tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from our established accrual, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) for fiscal year
2014
through
2016
is as follows:
|
|
|
|
|
Unrecognized tax benefits at October 25, 2013
|
$
|
15,363
|
|
Increases in tax positions for prior years
|
3,004
|
|
Decreases in tax positions for prior years
|
(217
|
)
|
Increases in tax positions for current year
|
3,029
|
|
Settlements
|
—
|
|
Lapse in statute of limitations
|
(2,413
|
)
|
Unrecognized tax benefits at October 31, 2014
|
$
|
18,766
|
|
Increases in tax positions for prior years
|
2,096
|
|
Decreases in tax positions for prior years
|
(23
|
)
|
Increases in tax positions for current year
|
390
|
|
Settlements
|
(3,485
|
)
|
Lapse in statute of limitations
|
(2,144
|
)
|
Unrecognized tax benefits at October 30, 2015
|
$
|
15,600
|
|
Increases in tax positions for prior years
|
2,734
|
|
Decreases in tax positions for prior years
|
(264
|
)
|
Increases in tax positions for current year
|
2,791
|
|
Settlements
|
—
|
|
Lapse in statute of limitations
|
(1,794
|
)
|
Unrecognized tax benefits at October 28, 2016
|
$
|
19,067
|
|
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. We had accrued interest and penalties relating to unrecognized tax benefits of
$4,179
and
$4,243
as of
October 28, 2016
and
October 30, 2015
, respectively. The gross amount of interest expense (income) and penalties included in tax expense for the year ended
October 28, 2016
,
October 30, 2015
, and
October 31, 2014
was
$(63)
,
$(1,137)
, and
$61
, respectively.
The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was
$16,674
,
$13,668
, and
$18,169
as of
October 28, 2016
,
October 30, 2015
and
October 31, 2014
, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and numerous state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011. The Internal Revenue Service (IRS) has completed the audit of our U.S. federal tax returns for fiscal years 2010, 2011 and 2013. There were no material adjustments to our income tax expense or balance of unrecognized tax benefits as a result of those audits. The IRS is currently auditing our U.S. federal income tax return for fiscal year 2012. We are also currently under audit in several state and foreign jurisdictions. We do not anticipate any material adjustments to our income tax expense or balance of unrecognized tax benefits as a result of those audits. We also expect various statutes of limitation to expire during the next
12 months
. Due to the uncertain response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.
NOTE 13 – NET INCOME PER COMMON SHARE
The following table presents the net income per common share calculations for the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Basic
|
|
|
|
|
|
|
|
|
Net income
|
$
|
353,040
|
|
|
$
|
399,506
|
|
|
$
|
345,401
|
|
Weighted-average common shares outstanding - basic
|
79,009,955
|
|
|
80,429,741
|
|
|
83,710,111
|
|
Net income per common share - basic
|
$
|
4.47
|
|
|
$
|
4.97
|
|
|
$
|
4.13
|
|
Diluted
|
|
|
|
|
|
Net income
|
$
|
353,040
|
|
|
$
|
399,506
|
|
|
$
|
345,401
|
|
Weighted-average common shares outstanding - basic
|
79,009,955
|
|
|
80,429,741
|
|
|
83,710,111
|
|
Diluted effect of stock options and unvested restricted stock
|
2,010,021
|
|
|
2,016,962
|
|
|
2,335,946
|
|
Weighted-average common shares outstanding - diluted
|
81,019,976
|
|
|
82,446,703
|
|
|
86,046,057
|
|
Net income per common share - diluted
|
$
|
4.36
|
|
|
$
|
4.85
|
|
|
$
|
4.01
|
|
Basic earnings per share are based on the weighted-average number of common shares outstanding during each period. In computing diluted earnings per share, the number of common shares outstanding is increased by common stock options and unvested restricted stock with exercise prices lower than the average market prices of common shares during each period and reduced by the number of shares assumed to have been purchased with proceeds from the exercised options. Potential common shares of
14,694
,
316,236
, and
209,523
related to our outstanding stock options and unvested restricted stock were excluded from the computation of diluted earnings per share for
2016
,
2015
, and
2014
, respectively, as inclusion of these shares would have been antidilutive.
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss), net of tax, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
|
Benefit Obligations
|
|
|
Financial Instruments
|
|
|
Accumulated Other Comprehensive Income (loss)
|
|
Balance, October 25, 2013
|
$
|
133,603
|
|
|
$
|
(70,940
|
)
|
|
$
|
(9,244
|
)
|
|
$
|
53,419
|
|
Other comprehensive income before reclassifications
|
(62,783
|
)
|
|
—
|
|
|
3,421
|
|
|
(59,362
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(11,462
|
)
|
|
(2,265
|
)
|
|
(13,727
|
)
|
Balance, October 31, 2014
|
$
|
70,820
|
|
|
$
|
(82,402
|
)
|
|
$
|
(8,088
|
)
|
|
$
|
(19,670
|
)
|
Other comprehensive income before reclassifications
|
(178,309
|
)
|
|
—
|
|
|
991
|
|
|
(177,318
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
1,861
|
|
|
(371
|
)
|
|
1,490
|
|
Balance, October 30, 2015
|
$
|
(107,489
|
)
|
|
$
|
(80,541
|
)
|
|
$
|
(7,468
|
)
|
|
$
|
(195,498
|
)
|
Other comprehensive income before reclassifications
|
(12,167
|
)
|
|
(17,525
|
)
|
|
549
|
|
|
(29,143
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
7,237
|
|
|
221
|
|
|
7,458
|
|
Balance, October 28, 2016
|
$
|
(119,656
|
)
|
|
$
|
(90,829
|
)
|
|
$
|
(6,698
|
)
|
|
$
|
(217,183
|
)
|
The components of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
October 28, 2016
|
|
|
October 30, 2015
|
|
|
October 31, 2014
|
|
Foreign currency translation
|
$
|
(12,167
|
)
|
|
$
|
(178,309
|
)
|
|
$
|
(62,783
|
)
|
Defined Benefit Pension and Post-Retirement Plan Adjustment
|
|
|
|
|
|
(Increase)/decrease in net loss
|
(21,428
|
)
|
|
(3,872
|
)
|
|
(24,201
|
)
|
Reclassification for recognition of net loss included in net periodic benefit cost
|
6,917
|
|
|
7,033
|
|
|
6,559
|
|
(Increase)/decrease in net prior service cost
|
(106
|
)
|
|
(577
|
)
|
|
128
|
|
Reclassification for amortization of prior service (credit) cost included in net periodic pension cost
|
320
|
|
|
356
|
|
|
352
|
|
Income tax benefit (provision)
|
4,009
|
|
|
(1,079
|
)
|
|
5,700
|
|
Defined benefit pension and post-retirement plan adjustment
|
(10,288
|
)
|
|
1,861
|
|
|
(11,462
|
)
|
Unrealized Gain (Loss) on Financial Instruments
|
|
|
|
|
|
Net unrealized holding gains (losses)
|
571
|
|
|
991
|
|
|
3,421
|
|
Reclassification adjustment for net gains (losses) included in net income
|
680
|
|
|
15
|
|
|
(1,542
|
)
|
Income tax benefit (provision)
|
(481
|
)
|
|
(386
|
)
|
|
(723
|
)
|
Unrealized gain (loss) on financial instruments
|
770
|
|
|
620
|
|
|
1,156
|
|
Other comprehensive income (loss)
|
$
|
(21,685
|
)
|
|
$
|
(175,828
|
)
|
|
$
|
(73,089
|
)
|
We deem our foreign investments to be permanent in nature and therefore do not provide for taxes on foreign currency translation adjustments.
Amounts related to financial instruments are reclassified from accumulated other comprehensive income (loss) to net income based on the nature of the instrument. Gains and losses on foreign currency contracts are reclassified to other expense (income) in the Consolidated Statements of Operations when the underlying hedged item is realized. Unamortized gains and losses on treasury lock contracts are reclassified ratably to interest expense in our Consolidated Statements of Operations over the term of the related debt. See Note 8 for further information on financial instrument reclassifications.
Amounts related to pension and post-retirement medical adjustments are reclassified from accumulated other comprehensive income (loss) to pension cost, which is allocated to cost of sales and operating expenses based on salaries and wages, approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of sales
|
$
|
2,901
|
|
|
$
|
3,003
|
|
|
$
|
2,656
|
|
Research and development
|
926
|
|
|
885
|
|
|
964
|
|
Selling, general and administrative
|
3,410
|
|
|
3,501
|
|
|
3,291
|
|
Total before income taxes
|
$
|
7,237
|
|
|
$
|
7,389
|
|
|
$
|
6,911
|
|
NOTE 15 – SEGMENT INFORMATION
Based on the nature of our products, technology, manufacturing processes, customers and regulatory environment, we aggregate our operating segments into
two
reportable segments: Coatings and Paints. We are required to report segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources. We evaluate the performance of operating segments and allocate resources based on earnings before interest and taxes (EBIT).
The Coatings segment aggregates our industrial product lines and packaging product line. Industrial products include a broad range of decorative and protective coatings for metal, wood and plastic. Packaging products include both interior and exterior coatings used in packaging containers, principally metal food containers and beverage cans. The products of this segment are sold throughout the world.
The Paints segment aggregates our consumer paint and automotive refinish product lines. Consumer paint products include interior and exterior decorative paints, stains, primers, varnishes, high performance floor paints and specialty decorative products, such
as enamels, aerosols and faux finishes primarily distributed for the do-it-yourself and professional markets in Australia, China, Europe and North America. Automotive refinish products include refinish paints and aerosol spray paints sold through automotive refinish distributors, body shops and automotive supply distributors and retailers in many countries around the world.
Our remaining activities are included in Other and Administrative. These activities include specialty polymers and colorants that are used internally and sold to other coatings manufacturers, as well as related products, furniture protection plans and furniture care and repair products. Also included within Other and Administrative are our corporate administrative expenses. The administrative expenses include expenses not directly allocated to any other reportable segment.
In the following table, sales between segments are recorded at selling prices that are below market prices, generally intended to recover internal costs. Segment EBIT includes income realized on inter-segment sales. Comparative segment data for fiscal years
2016
,
2015
, and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Sales
|
|
|
|
|
|
|
|
|
Coatings
|
$
|
2,388,133
|
|
|
$
|
2,496,528
|
|
|
$
|
2,585,416
|
|
Paints
|
1,564,531
|
|
|
1,661,186
|
|
|
1,806,051
|
|
Other and Administrative
|
426,539
|
|
|
448,006
|
|
|
412,073
|
|
Less inter-segment sales
|
(188,651
|
)
|
|
(213,098
|
)
|
|
(177,916
|
)
|
Total net sales
|
$
|
4,190,552
|
|
|
$
|
4,392,622
|
|
|
$
|
4,625,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
EBIT
|
|
|
|
|
|
|
|
|
Coatings
|
$
|
444,190
|
|
|
$
|
483,649
|
|
|
$
|
389,390
|
|
Paints
|
149,539
|
|
|
173,435
|
|
|
192,222
|
|
Other and Administrative
|
(68,650
|
)
|
|
(11,935
|
)
|
|
(24,400
|
)
|
Total EBIT
|
525,079
|
|
|
645,149
|
|
|
557,212
|
|
Interest expense
|
90,560
|
|
|
81,348
|
|
|
65,330
|
|
Income before income taxes
|
$
|
434,519
|
|
|
$
|
563,801
|
|
|
$
|
491,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
Coatings
|
$
|
44,581
|
|
|
$
|
45,442
|
|
|
$
|
54,039
|
|
Paints
|
33,694
|
|
|
28,907
|
|
|
30,676
|
|
Other and Administrative
|
19,747
|
|
|
18,254
|
|
|
16,195
|
|
Total depreciation and amortization
|
$
|
98,022
|
|
|
$
|
92,603
|
|
|
$
|
100,910
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Identifiable Assets
|
|
|
|
|
|
Coatings
|
$
|
2,327,740
|
|
|
$
|
2,268,649
|
|
Paints
|
1,553,597
|
|
|
1,616,919
|
|
Other and Administrative
1
|
433,213
|
|
|
433,007
|
|
Total identifiable assets
|
$
|
4,314,550
|
|
|
$
|
4,318,575
|
|
1
Includes our consolidated cash and cash equivalent balances and restricted cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Coatings
|
$
|
80,370
|
|
|
$
|
53,459
|
|
|
$
|
47,122
|
|
Paints
|
16,251
|
|
|
16,623
|
|
|
42,313
|
|
Other and Administrative
|
23,799
|
|
|
27,044
|
|
|
31,836
|
|
Total capital expenditures
|
$
|
120,420
|
|
|
$
|
97,126
|
|
|
$
|
121,271
|
|
It is not practicable to obtain the information needed to disclose revenues attributable to each of our identified product lines within our reportable segments.
Geographic net sales are based on the country from which the customer was billed for the products sold. The United States is the largest country for customer sales. China and Australia are the only countries outside of the United States that represent more than
10%
of consolidated sales. Long-lived assets include property, plant and equipment, intangibles and goodwill attributable to each country’s operations. Net sales and long-lived assets by geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Sales - External
|
|
|
|
|
|
|
|
|
United States
|
$
|
2,321,228
|
|
|
$
|
2,381,677
|
|
|
$
|
2,478,770
|
|
China
|
467,650
|
|
|
545,750
|
|
|
524,368
|
|
Australia
|
263,624
|
|
|
294,726
|
|
|
352,540
|
|
Other Countries
|
1,138,050
|
|
|
1,170,469
|
|
|
1,269,946
|
|
Total net sales - external
|
$
|
4,190,552
|
|
|
$
|
4,392,622
|
|
|
$
|
4,625,624
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Long-lived Assets
|
|
|
|
|
|
United States
|
$
|
1,737,776
|
|
|
$
|
1,743,104
|
|
China
|
482,307
|
|
|
506,912
|
|
Australia
|
88,921
|
|
|
82,275
|
|
Other Countries
|
269,544
|
|
|
231,277
|
|
Total long-lived assets
|
$
|
2,578,548
|
|
|
$
|
2,563,568
|
|
We have
one
significant customer in the Paints segment whose net sales were
12.3%
,
14.4%
, and
16.9%
of total consolidated net sales in
2016
,
2015
and
2014
, respectively.
NOTE 16 – LEGAL PROCEEDINGS
Environmental Matters
We are involved in various claims relating to environmental matters at a number of current and former plant sites and waste management sites. We engage or participate in remedial and other environmental compliance activities at certain of these sites. At other sites, we have been named as a potentially responsible party (PRP) under federal and state environmental laws for site remediation. We analyze each individual site, considering the number of parties involved, the level of our potential liability or contribution relative to the other parties, the nature and magnitude of the hazardous wastes involved, the method and extent of remediation, the potential insurance coverage, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Based on the above analysis, we estimate the clean-up costs and related claims for each site. The estimates are based in part on discussion with other PRPs, governmental agencies and engineering firms.
We accrue appropriate reserves for potential environmental liabilities when the amount of the costs that will be incurred can be reasonably determined. Accruals are reviewed and adjusted as additional information becomes available. While uncertainties exist with respect to the amounts and timing of our ultimate environmental liabilities, we believe it is neither probable nor reasonably possible that such liabilities, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.
Other Legal Matters
We are involved in a variety of legal claims and proceedings relating to personal injury, product liability, warranties, customer contracts, employment, trade practices, environmental and other legal matters that arise in the normal course of business. These claims and proceedings include cases where we are one of a number of defendants in proceedings alleging that the plaintiffs suffered injuries or contracted diseases from exposure to chemicals or other ingredients used in the production of some of our products or waste disposal. We are also subject to claims related to the performance of our products. We believe these claims and proceedings are in the ordinary course for a business of the type and size in which we are engaged. While we are unable to predict the ultimate outcome of these claims and proceedings, we believe it is neither probable nor reasonably possible that the costs and
liabilities of such matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.
NOTE 17 – LEASING ARRANGEMENTS
We have future minimum lease payments for operating lease commitments for plant and warehouse equipment, office and warehouse space, vehicles and retail stores that have initial periods ranging from
one
to
ten
years, and future minimum lease payments for a capital lease commitment for a building that has an initial period of
20
years at
October 28, 2016
as follows:
|
|
|
|
|
|
|
|
|
Capital leases
|
|
Operating leases
|
|
2017
|
$
|
1,047
|
|
$
|
32,656
|
|
2018
|
1,047
|
|
25,151
|
|
2019
|
1,047
|
|
17,658
|
|
2020
|
1,047
|
|
11,182
|
|
2021
|
1,047
|
|
9,316
|
|
2022 and beyond
|
12,996
|
|
32,635
|
|
Total minimum future lease rental payments
|
$
|
18,231
|
|
$
|
128,598
|
|
Less amount representing interest
|
(11,304
|
)
|
N/A
|
|
Present value of net minimum capital lease payments
|
6,927
|
|
N/A
|
|
Less current portion of capital leases
|
(107
|
)
|
N/A
|
|
Obligations under capital leases, excluding current portion
|
$
|
6,820
|
|
N/A
|
|
Rent expense for operating leases was
$38,600
in
2016
,
$44,117
in
2015
, and
$43,348
in
2014
.
Our building capital lease amortizes over
20
years. Our equipment capital leases expired during fiscal year 2016. At
October 28, 2016
and
October 30, 2015
, the gross amount of plant and equipment and related accumulated amortization recorded under capital leases were as follows:
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Building
|
$
|
5,377
|
|
$
|
5,377
|
|
Equipment
|
—
|
|
98
|
|
Less accumulated amortization
|
(365
|
)
|
(164
|
)
|
Net plant and equipment under capital leases
|
$
|
5,012
|
|
$
|
5,311
|
|
NOTE 18 – RESTRUCTURING
Restructuring charges in fiscal year
2016
primarily relate to initiatives to improve our global cost structure by consolidating our manufacturing operations in the Paints segment and reducing non-manufacturing headcount in our Paints and Coatings segments. These initiatives included moving manufacturing of selected products in our consumer paints product line to a third party (continuation of an initiative started in 2015), consolidating three sites in our automotive product line as a result of the Quest acquisition and reducing headcount in our Australia and Europe regions. These restructuring activities resulted in pre-tax charges of
$18,505
in fiscal year
2016
. Included in fiscal year
2016
restructuring charges were pre-tax non-cash asset-related charges of
$7,358
. Asset-related charges include asset impairment charges as well as accelerated depreciation for assets with useful lives that have been shortened, accounted for in accordance with ASC 360.
Restructuring charges in fiscal year
2015
included the following: (i) actions to close a manufacturing facility and other facilities in the Coatings segment to rationalize operations in the Australia region, (ii) actions to streamline and consolidate administrative operations in the Europe region and (iii) initiatives in the Paints segment to improve our North American cost structure through staffing reductions and actions to rationalize our manufacturing operations by moving certain manufacturing to a third party. These restructuring activities resulted in pre-tax charges of
$21,569
, including non-cash asset-related charges of
$2,842
.
Fiscal year 2014 restructuring initiatives related primarily to initiatives that began in fiscal year 2013, including the following: (i) actions in the Paints segment to consolidate manufacturing and distribution operations following the acquisition of Ace Hardware Corporation's paint manufacturing business, ongoing profit improvement plans in Australia, and other actions in Asia, (ii) actions in our Coatings segment to consolidate manufacturing operations in Europe following the acquisition of the Inver Group and other actions to rationalize manufacturing operations and lower operating expenses, (iii) overall initiatives to improve our global cost
structure, including non-manufacturing headcount reductions, and (iv) in the fourth quarter of 2014, activities initiated to rationalize manufacturing operations in the Coatings segment in the Australia region. These restructuring activities resulted in pre-tax charges of
$41,139
, including non-cash asset-related charges of
$11,141
.
The total resulting expenses recognized in fiscal year
2016
,
2015
, and
2014
included severance and employee benefits, asset impairments, professional services and site clean-up. We plan to pay the majority of the current restructuring liabilities within the next twelve months.
We currently expect additional expenses of approximately
$1,200
in fiscal year 2017 for these restructuring plans, primarily related to site clean-up costs, employment-related costs and accelerated depreciation.
The following restructuring charges by segment were recorded in the
2016
,
2015
and
2014
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 28, 2016
|
Liability Beginning Balance
10/30/2015
|
|
|
Expense
|
|
|
Payments and Other Activity
|
|
|
Liability Ending Balance
10/28/2016
|
|
Coatings
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
$
|
6,679
|
|
|
$
|
41
|
|
|
$
|
(5,264
|
)
|
|
$
|
1,456
|
|
Asset-related charges
|
—
|
|
|
(60
|
)
|
|
60
|
|
|
—
|
|
Exit costs (consulting/site clean-up)
|
—
|
|
|
600
|
|
|
(175
|
)
|
|
425
|
|
Total Coatings
|
6,679
|
|
|
581
|
|
|
(5,379
|
)
|
|
1,881
|
|
Paints
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
6,004
|
|
|
6,216
|
|
|
(8,499
|
)
|
|
3,721
|
|
Asset-related charges
|
—
|
|
|
7,418
|
|
|
(7,418
|
)
|
|
—
|
|
Exit costs (consulting/site clean-up)
|
1,069
|
|
|
2,605
|
|
|
(2,818
|
)
|
|
856
|
|
Total Paints
|
7,073
|
|
|
16,239
|
|
|
(18,735
|
)
|
|
4,577
|
|
Other and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
38
|
|
|
1,685
|
|
|
(454
|
)
|
|
1,269
|
|
Total Other and Administrative
|
38
|
|
|
1,685
|
|
|
(454
|
)
|
|
1,269
|
|
Total
|
$
|
13,790
|
|
|
$
|
18,505
|
|
|
$
|
(24,568
|
)
|
|
$
|
7,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 30, 2015
|
Liability Beginning Balance 10/31/2014
|
|
|
Expense
|
|
|
Payments and Other Activity
|
|
|
Liability Ending Balance
10/30/2015
|
|
Coatings
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
$
|
8,711
|
|
|
$
|
7,708
|
|
|
$
|
(9,740
|
)
|
|
$
|
6,679
|
|
Asset-related charges
|
—
|
|
|
1,306
|
|
|
(1,306
|
)
|
|
—
|
|
Exit costs (consulting/site clean-up)
|
4,437
|
|
|
560
|
|
|
(4,997
|
)
|
|
—
|
|
Total Coatings
|
13,148
|
|
|
9,574
|
|
|
(16,043
|
)
|
|
6,679
|
|
Paints
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
803
|
|
|
8,160
|
|
|
(2,959
|
)
|
|
6,004
|
|
Asset-related charges
|
—
|
|
|
1,536
|
|
|
(1,536
|
)
|
|
—
|
|
Exit costs (consulting/site clean-up)
|
1,901
|
|
|
2,217
|
|
|
(3,049
|
)
|
|
1,069
|
|
Total Paints
|
2,704
|
|
|
11,913
|
|
|
(7,544
|
)
|
|
7,073
|
|
Other and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
152
|
|
|
82
|
|
|
(196
|
)
|
|
38
|
|
Total Other and Administrative
|
152
|
|
|
82
|
|
|
(196
|
)
|
|
38
|
|
Total
|
$
|
16,004
|
|
|
$
|
21,569
|
|
|
$
|
(23,783
|
)
|
|
$
|
13,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31, 2014
|
Liability Beginning Balance 10/25/2013
|
|
|
Expense
|
|
|
Payments and Other Activity
|
|
|
Liability Ending Balance
10/31/2014
|
|
Coatings
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
$
|
18,899
|
|
|
$
|
10,668
|
|
|
$
|
(20,856
|
)
|
|
$
|
8,711
|
|
Asset-related charges
|
—
|
|
|
9,572
|
|
|
(9,572
|
)
|
|
—
|
|
Exit costs (consulting/site clean-up)
|
119
|
|
|
8,662
|
|
|
(4,344
|
)
|
|
4,437
|
|
Total Coatings
|
19,018
|
|
|
28,902
|
|
|
(34,772
|
)
|
|
13,148
|
|
Paints
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
6,118
|
|
|
6,593
|
|
|
(11,908
|
)
|
|
803
|
|
Asset-related charges
|
—
|
|
|
1,569
|
|
|
(1,569
|
)
|
|
—
|
|
Exit costs (consulting/site clean-up)
|
2,196
|
|
|
3,772
|
|
|
(4,067
|
)
|
|
1,901
|
|
Total Paints
|
8,314
|
|
|
11,934
|
|
|
(17,544
|
)
|
|
2,704
|
|
Other and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee benefits
|
1,791
|
|
|
303
|
|
|
(1,942
|
)
|
|
152
|
|
Total Other and Administrative
|
1,791
|
|
|
303
|
|
|
(1,942
|
)
|
|
152
|
|
Total
|
$
|
29,123
|
|
|
$
|
41,139
|
|
|
$
|
(54,258
|
)
|
|
$
|
16,004
|
|
The ending liability balance at
October 28, 2016
,
October 30, 2015
, and
October 31, 2014
is included in accrued liabilities and other liabilities on our Consolidated Balance Sheets. The restructuring reserve balances presented are considered adequate to cover committed restructuring actions.
Restructuring charges were recorded in the Statements of Operations for fiscal years
2016
,
2015
, and
2014
approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
October 28, 2016
|
|
|
October 30, 2015
|
|
|
October 31, 2014
|
|
Cost of sales
|
$
|
9,906
|
|
|
$
|
14,007
|
|
|
$
|
28,471
|
|
Research and development
|
(13
|
)
|
|
552
|
|
|
2,247
|
|
Selling, general and administrative
|
8,612
|
|
|
7,010
|
|
|
10,421
|
|
Total restructuring charges
|
$
|
18,505
|
|
|
$
|
21,569
|
|
|
$
|
41,139
|
|
NOTE 19 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results for the years ended
October 28, 2016
and
October 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Net Income
|
|
|
Net Income per Common Share - Basic
|
|
Net Income per Common Share - Diluted
|
2016 Quarter Ended
|
|
|
|
|
|
|
|
|
|
January 29,
|
$
|
885,756
|
|
|
$
|
318,627
|
|
|
$
|
52,431
|
|
|
$
|
0.67
|
|
|
$
|
0.65
|
|
April 29,
|
1,056,797
|
|
|
401,441
|
|
|
80,027
|
|
|
1.01
|
|
|
0.99
|
|
July 29,
|
1,141,942
|
|
|
421,947
|
|
|
116,988
|
|
|
1.48
|
|
|
1.44
|
|
October 28,
|
1,106,057
|
|
|
393,569
|
|
|
103,594
|
|
|
1.31
|
|
|
1.27
|
|
|
$
|
4,190,552
|
|
|
$
|
1,535,584
|
|
|
$
|
353,040
|
|
|
$
|
4.47
|
|
|
$
|
4.36
|
|
2015 Quarter Ended
|
|
|
|
|
|
|
|
|
|
January 30,
|
$
|
1,014,669
|
|
|
$
|
333,292
|
|
|
$
|
103,974
|
|
|
$
|
1.27
|
|
|
$
|
1.24
|
|
May 1,
|
1,079,289
|
|
|
393,203
|
|
|
90,314
|
|
|
1.12
|
|
|
1.09
|
|
July 31,
|
1,149,126
|
|
|
411,283
|
|
|
102,862
|
|
|
1.29
|
|
|
1.25
|
|
October 30,
|
1,149,538
|
|
|
413,611
|
|
|
102,356
|
|
|
1.29
|
|
|
1.26
|
|
|
$
|
4,392,622
|
|
|
$
|
1,551,389
|
|
|
$
|
399,506
|
|
|
$
|
4.97
|
|
|
$
|
4.85
|
|
The quarters may not sum to the fiscal year amount due to rounding and the effect of weighting.
NOTE 20 – RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2016, the Financial Accounting Standards Board (FASB) issued guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. Adoption of this guidance will not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued guidance on intra-entity asset transfers (other than inventory) that will require immediate recognition of current and deferred income tax consequences for intercompany asset transfers at the time of the asset transfer. Under the existing standard, current and deferred income tax consequences are recognized when the assets are sold to an outside party. This new guidance is intended to align with International Accounting Standards 12 – Income Taxes. The guidance is effective for fiscal years beginning on or after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows and is intended to simplify guidance that is currently absent for debt prepayments and extinguishment costs, contingent consideration payments made after business combinations, and separately identifiable cash flows, among other clarifications. The guidance is effective for fiscal years beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements.
In March 2016, the FASB issued an update to accounting standards regarding accounting for employee share-based payments. The new guidance is intended to provide simplification of share-based payment transaction accounting, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as presentation in the statement of cash flows. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. Early adoption is permitted. We are currently reviewing the revised guidance and assessing the impact on our consolidated financial statements.
In February 2016, the FASB issued guidance on leases. The new guidance requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under existing GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, which means the first quarter of our fiscal year 2020, and modified retrospective adoption is required. Early adoption is permitted. We are currently reviewing the revised guidance and assessing the impact on our consolidated financial statements.
In November 2015, the FASB issued guidance that simplifies the balance sheet classification of deferred taxes. The new guidance requires that deferred tax assets and deferred tax liabilities be presented as non-current in the consolidated balance sheets. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In September 2015, the FASB issued guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under the previous standard, an acquirer in a business combination reported provisional amounts with respect to acquired assets and liabilities when their measurements are incomplete as of the end of the reporting period, and adjusted the provisional amounts (and the related impact on earnings) by restating prior period financial statements during the measurement period not exceeding one year from the date of acquisition. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified, thus eliminating the requirement to restate prior period financial statements. The new standard requires disclosure of the nature and amount of measurement-period adjustments as well as information with respect to the portion of the adjustments recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustments to provisional amounts had been recognized as of the acquisition date. We adopted this guidance in the first quarter of our fiscal year 2016. Adoption of this guidance did not have a material impact on our consolidated financial statements.
In July 2015, the FASB issued guidance that simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued guidance on the recognition of fees paid by a customer for cloud computing arrangements. The new guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the software license consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, which means the first quarter of our fiscal year 2017. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued guidance that changes the presentation of debt issuance costs in financial statements. Under the new guidance, debt issuance costs will be presented as a direct deduction from the carrying value of the related debt liability, consistent with debt discounts. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, which means the first quarter of our fiscal year 2017, and retrospective adoption is required. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued revised guidance on revenue recognition. The standard provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and to enhance disclosures. The guidance, following a one-year deferral issued by the FASB in August 2015, is effective for fiscal years and interim periods within those years beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. Either full retrospective or modified retrospective adoption is permitted. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements. In addition to the expanded disclosures regarding revenue, this guidance may impact timing of revenue recognition in some arrangements with variable consideration or contracts for the sale of good or services.
We have determined that all other recently issued accounting standards will not have a material impact on our consolidated financial statements or do not apply to our operations.