UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 23, 2016June 30, 2017
Commission File Number: 001-09249
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|
GRACO INC. |
(Exact name of registrant as specified in its charter) |
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| | |
Minnesota | | 41-0285640 |
(State of incorporation) | | (I.R.S. Employer Identification Number) |
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| | |
88 - 11th Avenue N.E. Minneapolis, Minnesota | | 55413 |
(Address of principal executive offices) | | (Zip Code) |
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(612) 623-6000 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | | | | | | |
Large Accelerated Filer | | X | | Accelerated Filer | | |
Non-accelerated Filer | | | | Smaller reporting company | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
55,684,00055,996,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of October 12, 2016.July 19, 2017.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION | |
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| Item 1. | | | |
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| Item 2. | | | |
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| Item 3. | | | |
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| Item 4. | | | |
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PART II - OTHER INFORMATION | |
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| Item 1A. | | | |
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| Item 2. | | | |
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| Item 6. | | | |
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EXHIBITS | |
PART I Item 1.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In thousands except per share amounts)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net Sales | $ | 327,192 |
| | $ | 318,986 |
| | $ | 980,230 |
| | $ | 960,928 |
| $ | 379,483 |
| | $ | 348,126 |
| | $ | 720,073 |
| | $ | 653,038 |
|
Cost of products sold | 150,594 |
| | 148,790 |
| | 456,695 |
| | 447,980 |
| 175,542 |
| | 162,985 |
| | 330,859 |
| | 306,101 |
|
Gross Profit | 176,598 |
| | 170,196 |
| | 523,535 |
| | 512,948 |
| 203,941 |
| | 185,141 |
| | 389,214 |
| | 346,937 |
|
Product development | 14,671 |
| | 14,783 |
| | 44,964 |
| | 44,980 |
| 14,901 |
| | 15,607 |
| | 29,400 |
| | 30,293 |
|
Selling, marketing and distribution | 49,269 |
| | 48,374 |
| | 158,106 |
| | 149,924 |
| 56,060 |
| | 56,136 |
| | 110,971 |
| | 108,837 |
|
General and administrative | 31,194 |
| | 30,112 |
| | 99,710 |
| | 91,995 |
| 34,211 |
| | 35,056 |
| | 64,253 |
| | 68,516 |
|
Operating Earnings | 81,464 |
| | 76,927 |
| | 220,755 |
| | 226,049 |
| 98,769 |
| | 78,342 |
| | 184,590 |
| | 139,291 |
|
Interest expense | 4,432 |
| | 4,025 |
| | 13,468 |
| | 13,453 |
| 4,154 |
| | 4,543 |
| | 8,209 |
| | 9,036 |
|
Held separate investment (income), net | — |
| | (2,388 | ) | | — |
| | (190,744 | ) | |
Other expense (income), net | 416 |
| | 1,389 |
| | (338 | ) | | 1,661 |
| (989 | ) | | 392 |
| | (798 | ) | | (754 | ) |
Earnings Before Income Taxes | 76,616 |
| | 73,901 |
| | 207,625 |
| | 401,679 |
| 95,604 |
| | 73,407 |
| | 177,179 |
| | 131,009 |
|
Income taxes | 22,228 |
| | 23,210 |
| | 62,738 |
| | 109,510 |
| 15,776 |
| | 22,460 |
| | 36,619 |
| | 40,510 |
|
Net Earnings | $ | 54,388 |
| | $ | 50,691 |
| | $ | 144,887 |
| | $ | 292,169 |
| $ | 79,828 |
| | $ | 50,947 |
| | $ | 140,560 |
| | $ | 90,499 |
|
Per Common Share | | | | | | | | | | | | | | |
Basic net earnings | $ | 0.98 |
| | $ | 0.88 |
| | $ | 2.61 |
| | $ | 5.02 |
| $ | 1.43 |
| | $ | 0.92 |
| | $ | 2.52 |
| | $ | 1.63 |
|
Diluted net earnings | $ | 0.95 |
| | $ | 0.86 |
| | $ | 2.55 |
| | $ | 4.90 |
| $ | 1.38 |
| | $ | 0.89 |
| | $ | 2.43 |
| | $ | 1.59 |
|
Cash dividends declared | $ | 0.33 |
| | $ | 0.30 |
| | $ | 0.99 |
| | $ | 0.90 |
| $ | 0.36 |
| | $ | 0.33 |
| | $ | 0.72 |
| | $ | 0.66 |
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net Earnings | $ | 54,388 |
| | $ | 50,691 |
| | $ | 144,887 |
| | $ | 292,169 |
| $ | 79,828 |
| | $ | 50,947 |
| | $ | 140,560 |
| | $ | 90,499 |
|
Components of other comprehensive income (loss) | | | | | | | | | | | | | | |
Cumulative translation adjustment | (6,642 | ) | | (13,572 | ) | | (16,679 | ) | | (4,179 | ) | 11,029 |
| | (7,635 | ) | | 17,347 |
| | (10,037 | ) |
Pension and postretirement medical liability adjustment | 1,707 |
| | 2,537 |
| | 4,957 |
| | 6,894 |
| 1,784 |
| | 1,777 |
| | 3,784 |
| | 3,250 |
|
Income taxes - pension and postretirement medical liability adjustment | (619 | ) | | (837 | ) | | (1,823 | ) | | (2,478 | ) | (717 | ) | | (635 | ) | | (1,483 | ) | | (1,204 | ) |
Other comprehensive income (loss) | (5,554 | ) | | (11,872 | ) | | (13,545 | ) | | 237 |
| 12,096 |
| | (6,493 | ) | | 19,648 |
| | (7,991 | ) |
Comprehensive Income | $ | 48,834 |
| | $ | 38,819 |
| | $ | 131,342 |
| | $ | 292,406 |
| $ | 91,924 |
| | $ | 44,454 |
| | $ | 160,208 |
| | $ | 82,508 |
|
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands) | | | September 23, 2016 | | December 25, 2015 | June 30, 2017 | | December 30, 2016 |
ASSETS | | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | $ | 53,322 |
| | $ | 52,295 |
| $ | 75,446 |
| | $ | 52,365 |
|
Accounts receivable, less allowances of $12,100 and $10,400 | 223,257 |
| | 225,509 |
| |
Accounts receivable, less allowances of $13,800 and $12,700 | | 259,900 |
| | 218,365 |
|
Inventories | 201,553 |
| | 202,136 |
| 221,441 |
| | 201,609 |
|
Other current assets | 20,111 |
| | 29,077 |
| 22,918 |
| | 31,023 |
|
Total current assets | 498,243 |
| | 509,017 |
| 579,705 |
| | 503,362 |
|
Property, Plant and Equipment | | | | | | |
Cost | 487,496 |
| | 461,173 |
| 506,687 |
| | 489,642 |
|
Accumulated depreciation | (296,973 | ) | | (282,736 | ) | (313,077 | ) | | (300,046 | ) |
Property, plant and equipment, net | 190,523 |
| | 178,437 |
| |
Property, Plant and Equipment, net | | 193,610 |
| | 189,596 |
|
Goodwill | 411,594 |
| | 394,488 |
| 273,098 |
| | 259,849 |
|
Other Intangible Assets, net | 233,947 |
| | 227,987 |
| 183,883 |
| | 178,336 |
|
Deferred Income Taxes | 62,019 |
| | 56,976 |
| 85,537 |
| | 86,653 |
|
Other Assets | 24,876 |
| | 24,447 |
| 25,944 |
| | 25,313 |
|
Total Assets | $ | 1,421,202 |
| | $ | 1,391,352 |
| $ | 1,341,777 |
| | $ | 1,243,109 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
Current Liabilities | | | | | | |
Notes payable to banks | $ | 8,380 |
| | $ | 15,901 |
| $ | 11,066 |
| | $ | 8,913 |
|
Current portion of long term debt | | 75,000 |
| | — |
|
Trade accounts payable | 40,951 |
| | 40,505 |
| 44,447 |
| | 39,988 |
|
Salaries and incentives | 37,681 |
| | 44,673 |
| 38,813 |
| | 37,109 |
|
Dividends payable | 18,381 |
| | 18,447 |
| 20,140 |
| | 20,088 |
|
Other current liabilities | 71,829 |
| | 75,090 |
| 74,623 |
| | 71,887 |
|
Total current liabilities | 177,222 |
| | 194,616 |
| 264,089 |
| | 177,985 |
|
Long-term Debt | 355,780 |
| | 392,695 |
| 236,015 |
| | 305,685 |
|
Retirement Benefits and Deferred Compensation | 141,094 |
| | 137,457 |
| 163,552 |
| | 159,250 |
|
Deferred Income Taxes | 26,711 |
| | 22,303 |
| 17,962 |
| | 17,672 |
|
Other Non-current Liabilities | 8,630 |
| | 8,730 |
| 8,597 |
| | 8,697 |
|
Shareholders’ Equity | | | | | | |
Common stock | 55,706 |
| | 55,766 |
| 55,991 |
| | 55,834 |
|
Additional paid-in-capital | 440,823 |
| | 398,774 |
| 493,329 |
| | 453,394 |
|
Retained earnings | 333,278 |
| | 285,508 |
| 224,822 |
| | 206,820 |
|
Accumulated other comprehensive income (loss) | (118,042 | ) | | (104,497 | ) | (122,580 | ) | | (142,228 | ) |
Total shareholders’ equity | 711,765 |
| | 635,551 |
| 651,562 |
| | 573,820 |
|
Total Liabilities and Shareholders’ Equity | $ | 1,421,202 |
| | $ | 1,391,352 |
| $ | 1,341,777 |
| | $ | 1,243,109 |
|
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands) | | | Nine Months Ended | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 |
Cash Flows From Operating Activities | | | | | | |
Net Earnings | $ | 144,887 |
| | $ | 292,169 |
| $ | 140,560 |
| | $ | 90,499 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities | | | | | | |
Depreciation and amortization | 36,846 |
| | 33,286 |
| 22,362 |
| | 24,500 |
|
Deferred income taxes | (8,470 | ) | | (13,723 | ) | (2,653 | ) | | (7,397 | ) |
Share-based compensation | 16,143 |
| | 15,488 |
| 13,451 |
| | 12,736 |
|
Excess tax benefit related to share-based payment arrangements | (5,800 | ) | | (1,200 | ) | |
Gain on sale of business, net | — |
| | (149,003 | ) | |
Change in | | | | | | |
Accounts receivable | 6,100 |
| | (21,195 | ) | (35,455 | ) | | (14,826 | ) |
Inventories | 1,628 |
| | (28,648 | ) | (17,103 | ) | | (1,744 | ) |
Trade accounts payable | 1,057 |
| | 3,124 |
| 3,175 |
| | (34 | ) |
Salaries and incentives | (6,914 | ) | | (2,759 | ) | (1,808 | ) | | (12,336 | ) |
Retirement benefits and deferred compensation | 7,431 |
| | 8,802 |
| 6,566 |
| | 4,217 |
|
Other accrued liabilities | 9,379 |
| | 19,556 |
| 10,453 |
| | (38 | ) |
Other | (367 | ) | | (20,665 | ) | (3,857 | ) | | (2,070 | ) |
Net cash provided by operating activities | 201,920 |
| | 135,232 |
| 135,691 |
| | 93,507 |
|
Cash Flows From Investing Activities | | | | | | |
Property, plant and equipment additions | (34,347 | ) | | (28,860 | ) | (16,621 | ) | | (25,961 | ) |
Acquisition of businesses, net of cash acquired | (48,643 | ) | | (187,853 | ) | (9,905 | ) | | (49,110 | ) |
Proceeds from sale of assets | — |
| | 610,162 |
| |
Investment in restricted assets | 150 |
| | (8,580 | ) | |
Change in restricted assets | | 900 |
| | 934 |
|
Other | (130 | ) | | (43 | ) | 102 |
| | (146 | ) |
Net cash provided by (used in) investing activities | (82,970 | ) | | 384,826 |
| (25,524 | ) | | (74,283 | ) |
Cash Flows From Financing Activities | | | | | | |
Borrowings (payments) on short-term lines of credit, net | (7,349 | ) | | 4,265 |
| 1,568 |
| | (2,616 | ) |
Borrowings on long-term line of credit | 532,724 |
| | 595,400 |
| 293,880 |
| | 416,079 |
|
Payments on long-term line of credit | (569,639 | ) | | (835,400 | ) | (288,550 | ) | | (379,279 | ) |
Excess tax benefit related to share-based payment arrangements | 5,800 |
| | 1,200 |
| |
Common stock issued | 25,564 |
| | 16,768 |
| 46,693 |
| | 27,643 |
|
Common stock repurchased | (48,050 | ) | | (224,730 | ) | (90,160 | ) | | (48,050 | ) |
Taxes paid related to net share settlement of equity awards | | (10,735 | ) |
| (3,165 | ) |
Cash dividends paid | (55,058 | ) | | (52,658 | ) | (40,115 | ) | | (36,685 | ) |
Net cash provided by (used in) financing activities | (116,008 | ) | | (495,155 | ) | (87,419 | ) | | (26,073 | ) |
Effect of exchange rate changes on cash | (1,915 | ) | | 3,354 |
| 333 |
| | (1,582 | ) |
Net increase (decrease) in cash and cash equivalents | 1,027 |
| | 28,257 |
| 23,081 |
| | (8,431 | ) |
Cash and cash equivalents | | | | |
Cash and Cash Equivalents | | | | |
Beginning of year | 52,295 |
| | 23,656 |
| 52,365 |
| | 52,295 |
|
End of period | $ | 53,322 |
| | $ | 51,913 |
| $ | 75,446 |
| | $ | 43,864 |
|
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation
The consolidated balance sheet of Graco Inc. and Subsidiaries (the “Company”) as of September 23, 2016June 30, 2017 and the related statements of earnings and comprehensive income for the three and ninesix months ended September 23,June 30, 2017 and June 24, 2016, and September 25, 2015, and cash flows for the ninesix months ended September 23,June 30, 2017 and June 24, 2016 and September 25, 2015 have been prepared by the Company and have not been audited.
In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 23, 2016,June 30, 2017, and the results of operations and cash flows for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 20152016 Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.
2.Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 |
Net earnings available to common shareholders | $ | 54,388 |
| | $ | 50,691 |
| | $ | 144,887 |
| | $ | 292,169 |
|
Weighted average shares outstanding for basic earnings per share | 55,684 |
| | 57,325 |
| | 55,571 |
| | 58,180 |
|
Dilutive effect of stock options computed using the treasury stock method and the average market price | 1,285 |
| | 1,339 |
| | 1,335 |
| | 1,410 |
|
Weighted average shares outstanding for diluted earnings per share | 56,969 |
| | 58,664 |
| | 56,906 |
| | 59,590 |
|
Basic earnings per share | $ | 0.98 |
| | $ | 0.88 |
| | $ | 2.61 |
| | $ | 5.02 |
|
Diluted earnings per share | $ | 0.95 |
| | $ | 0.86 |
| | $ | 2.55 |
| | $ | 4.90 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net earnings available to common shareholders | $ | 79,828 |
| | $ | 50,947 |
| | $ | 140,560 |
| | $ | 90,499 |
|
Weighted average shares outstanding for basic earnings per share | 55,801 |
| | 55,634 |
| | 55,785 |
| | 55,514 |
|
Dilutive effect of stock options computed using the treasury stock method and the average market price | 2,126 |
| | 1,406 |
| | 2,035 |
| | 1,361 |
|
Weighted average shares outstanding for diluted earnings per share | 57,927 |
| | 57,040 |
| | 57,820 |
| | 56,875 |
|
Basic earnings per share | $ | 1.43 |
| | $ | 0.92 |
| | $ | 2.52 |
| | $ | 1.63 |
|
Diluted earnings per share | $ | 1.38 |
| | $ | 0.89 |
| | $ | 2.43 |
| | $ | 1.59 |
|
Stock options to purchase 1,034,000267,000 and 1,391,000509,000 shares were not included in the September 23,June 30, 2017 and June 24, 2016 and September 25, 2015 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
3.Share-Based Awards
Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):
| | | Option Shares | | Weighted Average Exercise Price | | Options Exercisable | | Weighted Average Exercise Price | Option Shares | | Weighted Average Exercise Price | | Options Exercisable | | Weighted Average Exercise Price |
Outstanding, December 25, 2015 | 5,165 |
| | $ | 48.16 |
| | 3,583 |
| | $ | 38.49 |
| |
Outstanding, December 30, 2016 | | 5,535 |
| | $ | 55.26 |
| | 3,672 |
| | $ | 45.40 |
|
Granted | 700 |
| | 72.24 |
| | | | | 575 |
| | 92.13 |
| | | | |
Exercised | (600 | ) | | 37.98 |
| | | | | (985 | ) | | 40.68 |
| | | | |
Canceled | (17 | ) | | 70.45 |
| | | | | (29 | ) | | 80.24 |
| | | | |
Outstanding, September 23, 2016 | 5,248 |
| | $ | 52.46 |
| | 3,494 |
| | $ | 42.30 |
| |
Outstanding, June 30, 2017 | | 5,096 |
| | $ | 62.10 |
| | 3,217 |
| | $ | 50.91 |
|
The Company recognized year-to-date share-based compensation of $16.1$13.5 million in 20162017 and $15.5$12.7 million in 2015.2016. As of September 23, 2016,June 30, 2017, there was $9.5$16.2 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.2 years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:
| | | Nine Months Ended | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 |
Expected life in years | 7.0 |
| | 6.5 |
| 7.0 |
| | 7.0 |
|
Interest rate | 1.4 | % | | 1.7 | % | 2.2 | % | | 1.4 | % |
Volatility | 30.1 | % | | 35.0 | % | 26.7 | % | | 30.1 | % |
Dividend yield | 1.8 | % | | 1.6 | % | 1.6 | % | | 1.8 | % |
Weighted average fair value per share | $ | 19.00 |
| | $ | 23.18 |
| $ | 24.23 |
| | $ | 19.00 |
|
Under the Company’s Employee Stock Purchase Plan, the Company issued 167,000 shares in 2017 and 170,000 shares in 2016 and 166,000 shares in 2015.2016. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percentdiscount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:
| | | Nine Months Ended | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 |
Expected life in years | 1.0 |
| | 1.0 |
| 1.0 |
| | 1.0 |
|
Interest rate | 0.7 | % | | 0.2 | % | 0.9 | % | | 0.7 | % |
Volatility | 24.6 | % | | 18.9 | % | 22.3 | % | | 24.6 | % |
Dividend yield | 1.7 | % | | 1.6 | % | 1.5 | % | | 1.7 | % |
Weighted average fair value per share | $ | 19.14 |
| | $ | 16.51 |
| $ | 21.97 |
| | $ | 19.14 |
|
4.Retirement Benefits
The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 |
Pension Benefits | | | | | | | |
Service cost | $ | 1,968 |
| | $ | 2,265 |
| | $ | 5,880 |
| | $ | 6,268 |
|
Interest cost | 3,902 |
| | 3,741 |
| | 11,765 |
| | 11,121 |
|
Expected return on assets | (4,504 | ) | | (5,010 | ) | | (13,509 | ) | | (14,586 | ) |
Amortization and other | 2,491 |
| | 2,291 |
| | 7,410 |
| | 7,070 |
|
Net periodic benefit cost | $ | 3,857 |
| | $ | 3,287 |
| | $ | 11,546 |
| | $ | 9,873 |
|
| | | | Three Months Ended | | Six Months Ended |
| | June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Pension Benefits | | | | | | | | |
Service cost | | $ | 1,754 |
| | $ | 1,915 |
| | $ | 3,815 |
| | $ | 3,912 |
|
Interest cost | | 3,673 |
| | 3,846 |
| | 7,603 |
| | 7,863 |
|
Expected return on assets | | (4,112 | ) | | (4,368 | ) | | (8,464 | ) | | (9,005 | ) |
Amortization and other | | 2,199 |
| | 2,619 |
| | 4,524 |
| | 4,919 |
|
Net periodic benefit cost | | $ | 3,514 |
| | $ | 4,012 |
| | $ | 7,478 |
| | $ | 7,689 |
|
Postretirement Medical | | | | | | | | | | | | | | |
Service cost | $ | 136 |
| | $ | 107 |
| | $ | 407 |
| | $ | 407 |
| $ | 126 |
| | $ | 121 |
| | $ | 301 |
| | $ | 271 |
|
Interest cost | 271 |
| | 263 |
| | 813 |
| | 716 |
| 271 |
| | 280 |
| | 546 |
| | 542 |
|
Amortization | (120 | ) | | (63 | ) | | (360 | ) | | (265 | ) | (55 | ) | | (102 | ) | | (5 | ) | | (240 | ) |
Net periodic benefit cost | $ | 287 |
| | $ | 307 |
| | $ | 860 |
| | $ | 858 |
| $ | 342 |
| | $ | 299 |
| | $ | 842 |
| | $ | 573 |
|
5.Shareholders’ Equity
Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):
|
| | | | | | | | | | | |
| Pension and Post- retirement Medical | | Cumulative Translation Adjustment | | Total |
Balance, June 26, 2015 | $ | (73,868 | ) | | $ | (14,759 | ) | | $ | (88,627 | ) |
Other comprehensive income before reclassifications | — |
| | (13,572 | ) | | (13,572 | ) |
Amounts reclassified from accumulated other comprehensive income | 1,700 |
| | — |
| | 1,700 |
|
Balance, September 25, 2015 | $ | (72,168 | ) | | $ | (28,331 | ) | | $ | (100,499 | ) |
|
| | | | | | | | | | | |
| Pension and Postretirement Medical | | Cumulative Translation Adjustment | | Total |
Balance, March 25, 2016 | $ | (69,018 | ) | | $ | (36,977 | ) | | $ | (105,995 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | (7,635 | ) | | (7,635 | ) |
Amounts reclassified from accumulated other comprehensive income | 1,142 |
| | — |
| | 1,142 |
|
Balance, June 24, 2016 | $ | (67,876 | ) | | $ | (44,612 | ) | | $ | (112,488 | ) |
|
| | | | | | | | | | | |
Balance, June 24, 2016 | $ | (67,876 | ) | | $ | (44,612 | ) | | $ | (112,488 | ) |
Other comprehensive income before reclassifications | — |
| | (6,642 | ) | | (6,642 | ) |
Amounts reclassified from accumulated other comprehensive income | 1,088 |
| | — |
| | 1,088 |
|
Balance, September 23, 2016 | $ | (66,788 | ) | | $ | (51,254 | ) | | $ | (118,042 | ) |
|
| | | | | | | | | | | |
Balance, March 31, 2017 | $ | (75,192 | ) | | $ | (59,484 | ) | | $ | (134,676 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 11,029 |
| | 11,029 |
|
Amounts reclassified from accumulated other comprehensive income | 1,067 |
| | — |
| | 1,067 |
|
Balance, June 30, 2017 | $ | (74,125 | ) | | $ | (48,455 | ) | | $ | (122,580 | ) |
|
| | | | | | | | | | | |
Balance, December 26, 2014 | $ | (76,584 | ) | | $ | (24,152 | ) | | $ | (100,736 | ) |
Other comprehensive income before reclassifications | — |
| | (4,179 | ) | | (4,179 | ) |
Reclassified from accumulated other comprehensive income | 4,416 |
| | — |
| | 4,416 |
|
Balance, September 25, 2015 | $ | (72,168 | ) | | $ | (28,331 | ) | | $ | (100,499 | ) |
|
| | | | | | | | | | | |
Balance, December 25, 2015 | $ | (69,922 | ) | | $ | (34,575 | ) | | $ | (104,497 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | (10,037 | ) | | (10,037 | ) |
Amounts reclassified from accumulated other comprehensive income | 2,046 |
| | — |
| | 2,046 |
|
Balance, June 24, 2016 | $ | (67,876 | ) | | $ | (44,612 | ) | | $ | (112,488 | ) |
|
| | | | | | | | | | | |
Balance, December 25, 2015 | $ | (69,922 | ) | | $ | (34,575 | ) | | $ | (104,497 | ) |
Other comprehensive income before reclassifications | — |
| | (16,679 | ) | | (16,679 | ) |
Reclassified from accumulated other comprehensive income | 3,134 |
| | — |
| | 3,134 |
|
Balance, September 23, 2016 | $ | (66,788 | ) | | $ | (51,254 | ) | | $ | (118,042 | ) |
|
| | | | | | | | | | | |
Balance, December 30, 2016 | $ | (76,426 | ) | | $ | (65,802 | ) | | $ | (142,228 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 17,347 |
| | 17,347 |
|
Amounts reclassified from accumulated other comprehensive income | 2,301 |
| | — |
| | 2,301 |
|
Balance, June 30, 2017 | $ | (74,125 | ) | | $ | (48,455 | ) | | $ | (122,580 | ) |
Amounts related to pension and postretirement medical adjustments are reclassified to pension cost, which is allocated to cost of products sold and operating expenses based on salaries and wages, approximately as follows (in thousands): | | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Cost of products sold | $ | 611 |
| | $ | 959 |
| | $ | 1,776 |
| | $ | 2,604 |
| $ | 620 |
| | $ | 637 |
| | $ | 1,328 |
| | $ | 1,165 |
|
Product development | 241 |
| | 418 |
| | 706 |
| | 1,120 |
| 258 |
| | 261 |
| | 556 |
| | 465 |
|
Selling, marketing and distribution | 578 |
| | 718 |
| | 1,633 |
| | 1,950 |
| 516 |
| | 569 |
| | 1,162 |
| | 1,055 |
|
General and administrative | 277 |
| | 442 |
| | 842 |
| | 1,220 |
| 390 |
| | 310 |
| | 738 |
| | 565 |
|
Total before tax | $ | 1,707 |
| | $ | 2,537 |
| | $ | 4,957 |
| | $ | 6,894 |
| $ | 1,784 |
| | $ | 1,777 |
| | $ | 3,784 |
| | $ | 3,250 |
|
Income tax (benefit) | (619 | ) | | (837 | ) | | (1,823 | ) | | (2,478 | ) | (717 | ) | | (635 | ) | | (1,483 | ) | | (1,204 | ) |
Total after tax | $ | 1,088 |
| | $ | 1,700 |
| | $ | 3,134 |
| | $ | 4,416 |
| $ | 1,067 |
| | $ | 1,142 |
| | $ | 2,301 |
| | $ | 2,046 |
|
On February 21, 2017, the Company entered into an accelerated share repurchase arrangement (“ASR”) with a financial institution. In exchange for an up-front payment of $90 million, the financial institution delivered 850,000 shares of Company common stock with a fair value of $78 million. The total number of shares ultimately delivered under the ASR is determined at the end of the purchase period (up to five months, but not less than two months) based on the volume weighted-average price (“VWAP”) of the Company’s common stock during that period. Subsequent to the end of the second quarter, the purchase period ended and the Company received an additional 31,499 shares to complete the ASR at an average realized price of $102.10 per share.
The Company accounted for the up-front payment as a reduction of shareholders’ equity in the period made. Shares received under the ASR were retired and reflected as a reduction of outstanding shares on the date delivered for purposes of calculating earnings per share. The forward contract aspect of the ASR met all of the applicable criteria for equity classification, and therefore was accounted for as a derivative indexed to the Company's equity.
The Company has three reportable segments, Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands):
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net Sales | | | | | | | | | | | | | | |
Industrial | $ | 150,893 |
| | $ | 152,164 |
| | $ | 454,978 |
| | $ | 448,932 |
| $ | 174,868 |
| | $ | 156,997 |
| | $ | 331,258 |
| | $ | 304,085 |
|
Process | 67,077 |
| | 64,710 |
| | 196,068 |
| | 204,337 |
| 73,399 |
| | 64,706 |
| | 143,428 |
| | 128,991 |
|
Contractor | 109,222 |
| | 102,112 |
| | 329,184 |
| | 307,659 |
| 131,216 |
| | 126,423 |
| | 245,387 |
| | 219,962 |
|
Total | $ | 327,192 |
| | $ | 318,986 |
| | $ | 980,230 |
| | $ | 960,928 |
| $ | 379,483 |
| | $ | 348,126 |
| | $ | 720,073 |
| | $ | 653,038 |
|
Operating Earnings | | | | | | | | | | | | | | |
Industrial | $ | 50,573 |
| | $ | 50,822 |
| | $ | 147,419 |
| | $ | 144,500 |
| $ | 61,596 |
| | $ | 51,052 |
| | $ | 115,331 |
| | $ | 96,846 |
|
Process | 10,394 |
| | 10,437 |
| | 25,305 |
| | 34,923 |
| 13,418 |
| | 7,634 |
| | 26,881 |
| | 14,911 |
|
Contractor | 25,593 |
| | 24,135 |
| | 71,700 |
| | 70,550 |
| 33,759 |
| | 29,364 |
| | 59,778 |
| | 46,107 |
|
Unallocated corporate (expense) | (5,096 | ) | | (8,467 | ) | | (23,669 | ) | | (23,924 | ) | (10,004 | ) | | (9,708 | ) | | (17,400 | ) | | (18,573 | ) |
Total | $ | 81,464 |
| | $ | 76,927 |
| | $ | 220,755 |
| | $ | 226,049 |
| $ | 98,769 |
| | $ | 78,342 |
| | $ | 184,590 |
| | $ | 139,291 |
|
Assets by segment were as follows (in thousands):
| | | September 23, 2016 | | December 25, 2015 | June 30, 2017 | | December 30, 2016 |
Industrial | $ | 558,228 |
| | $ | 558,799 |
| $ | 575,789 |
| | $ | 546,366 |
|
Process | 513,186 |
| | 481,677 |
| 329,340 |
| | 318,444 |
|
Contractor | 212,958 |
| | 205,632 |
| 260,920 |
| | 208,016 |
|
Unallocated corporate | 136,830 |
| | 145,244 |
| 175,728 |
| | 170,283 |
|
Total | $ | 1,421,202 |
| | $ | 1,391,352 |
| $ | 1,341,777 |
| | $ | 1,243,109 |
|
Geographic information follows (in thousands):
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net sales (based on customer location) | | | | | | | | |
Net Sales (based on customer location) | | | | | | | | |
United States | $ | 171,988 |
| | $ | 166,602 |
| | $ | 511,273 |
| | $ | 496,851 |
| $ | 194,619 |
| | $ | 186,284 |
| | $ | 369,473 |
| | $ | 339,285 |
|
Other countries | 155,204 |
| | 152,384 |
| | 468,957 |
| | 464,077 |
| 184,864 |
| | 161,842 |
| | 350,600 |
| | 313,753 |
|
Total | $ | 327,192 |
| | $ | 318,986 |
| | $ | 980,230 |
| | $ | 960,928 |
| $ | 379,483 |
| | $ | 348,126 |
| | $ | 720,073 |
| | $ | 653,038 |
|
| | | September 23, 2016 | | December 25, 2015 | June 30, 2017 | | December 30, 2016 |
Long-lived assets | | | | |
Long-lived Assets | | | | |
United States | $ | 153,160 |
| | $ | 144,571 |
| $ | 155,271 |
| | $ | 151,911 |
|
Other countries | 37,363 |
| | 33,866 |
| 38,339 |
| | 37,685 |
|
Total | $ | 190,523 |
| | $ | 178,437 |
| $ | 193,610 |
| | $ | 189,596 |
|
7.Inventories
Major components of inventories were as follows (in thousands):
| | | September 23, 2016 | | December 25, 2015 | June 30, 2017 | | December 30, 2016 |
Finished products and components | $ | 112,949 |
| | $ | 112,267 |
| $ | 109,798 |
| | $ | 113,643 |
|
Products and components in various stages of completion | 51,064 |
| | 51,033 |
| 59,049 |
| | 50,557 |
|
Raw materials and purchased components | 83,582 |
| | 82,894 |
| 100,357 |
| | 84,631 |
|
| 247,595 |
| | 246,194 |
| |
Subtotal | | 269,204 |
| | 248,831 |
|
Reduction to LIFO cost | (46,042 | ) | | (44,058 | ) | (47,763 | ) | | (47,222 | ) |
Total | $ | 201,553 |
| | $ | 202,136 |
| $ | 221,441 |
| | $ | 201,609 |
|
8.Intangible Assets
Information related toComponents of other intangible assets followswere (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | |
| Finite Life | | Indefinite Life | | |
| Customer Relationships | | Patents and Proprietary Technology | | Trademarks, Trade Names and Other | | Trade Names | | Total |
As of June 30, 2017 | | | | | | | | | |
Cost | $ | 174,884 |
| | $ | 17,921 |
| | $ | 895 |
| | $ | 57,853 |
| | $ | 251,553 |
|
Accumulated amortization | (47,840 | ) | | (6,994 | ) | | (440 | ) | | — |
| | (55,274 | ) |
Foreign currency translation | (8,926 | ) | | (660 | ) | | (61 | ) | | (2,749 | ) | | (12,396 | ) |
Book value | $ | 118,118 |
| | $ | 10,267 |
| | $ | 394 |
| | $ | 55,104 |
| | $ | 183,883 |
|
Weighted average life | 13 |
| | 10 |
| | 4 |
| | N/A |
| | |
|
| | | | | | | | | | | | | | | | | | | |
As of December 30, 2016 | | | | | | | | | |
Cost | $ | 170,284 |
| | $ | 17,321 |
| | $ | 895 |
| | $ | 57,853 |
| | $ | 246,353 |
|
Accumulated amortization | (41,599 | ) | | (6,088 | ) | | (337 | ) | | — |
| | (48,024 | ) |
Foreign currency translation | (13,630 | ) | | (1,055 | ) | | (59 | ) | | (5,249 | ) | | (19,993 | ) |
Book value | $ | 115,055 |
| | $ | 10,178 |
| | $ | 499 |
| | $ | 52,604 |
| | $ | 178,336 |
|
Weighted average life | 13 |
| | 10 |
| | 4 |
| | N/A |
| | |
|
| | | | | | | | | | | | | | | | | |
| Estimated Life (years) | | Cost | | Accumulated Amortization | | Foreign Currency Translation | | Book Value |
September 23, 2016 | | | | | | | | | |
Customer relationships | 3 - 14 | | $ | 218,227 |
| | $ | (49,383 | ) | | $ | (12,316 | ) | | $ | 156,528 |
|
Patents, proprietary technology and product documentation | 3 - 11 | | 17,422 |
| | (5,731 | ) | | (705 | ) | | 10,986 |
|
Trademarks, trade names and other | 3 - 5 | | 895 |
| | (284 | ) | | (58 | ) | | 553 |
|
| | | 236,544 |
| | (55,398 | ) | | (13,079 | ) | | 168,067 |
|
Not Subject to Amortization: | | | | | | | | | |
Brand names | | | 70,528 |
| | — |
| | (4,648 | ) | | 65,880 |
|
Total | | | $ | 307,072 |
| | $ | (55,398 | ) | | $ | (17,727 | ) | | $ | 233,947 |
|
|
| | | | | | | | | | | | | | | | | |
December 25, 2015 | | | | | | | | | |
Customer relationships | 3 - 14 | | $ | 197,900 |
| | $ | (36,852 | ) | | $ | (9,738 | ) | | $ | 151,310 |
|
Patents, proprietary technology and product documentation | 3 - 11 | | 20,400 |
| | (8,952 | ) | | (658 | ) | | 10,790 |
|
Trademarks, trade names and other | 5 | | 495 |
| | (132 | ) | | (94 | ) | | 269 |
|
| | | 218,795 |
| | (45,936 | ) | | (10,490 | ) | | 162,369 |
|
Not Subject to Amortization: | | | | | | | | | |
Brand names | | | 69,514 |
| | — |
| | (3,896 | ) | | 65,618 |
|
Total | | | $ | 288,309 |
| | $ | (45,936 | ) | | $ | (14,386 | ) | | $ | 227,987 |
|
Amortization of intangibles for the quarter was $4.6$3.7 million in 2017 and $4.9 million in 2016 and $4.4for the year to date was $7.3 million in 20152017 and for the year-to-date was $14.3$9.6 million in 2016 and $12.9 million in 2015.2016. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows: $18.7 millionfollows (in thousands):in 2016,$18.6 million in 2017, $18.5 million in 2018, $18.0 million in 2019, $17.9 million in 2020, and $90.7 million thereafter. |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter |
Estimated Amortization Expense | $ | 14,649 |
| | $ | 14,511 |
| | $ | 14,182 |
| | $ | 14,127 |
| | $ | 14,083 |
| | $ | 64,477 |
|
Changes in the carrying amount of goodwill in 2016for each reportable segment were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Industrial | | Process | | Contractor | | Total |
Balance, December 25, 2015 | $ | 153,283 |
| | $ | 228,473 |
| | $ | 12,732 |
| | $ | 394,488 |
|
Additions from business acquisitions | — |
| | 27,881 |
| | — |
| | 27,881 |
|
Foreign currency translation | 1,585 |
| | (12,360 | ) | | — |
| | (10,775 | ) |
Balance, September 23, 2016 | $ | 154,868 |
| | $ | 243,994 |
| | $ | 12,732 |
| | $ | 411,594 |
|
Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. In completing the goodwill impairment analysis for 2015, the estimated fair value of all reporting units substantially exceeded carrying value except for our Oil and Natural Gas reporting unit (“ONG”), which exceeded its carrying value by 14 percent. In 2016, operating results of ONG have fallen short of expectations due to weakness in oil and natural gas markets. After considering third quarter operating results and preliminary projections from our 2017 planning process, we concluded that the depth and length of industry weakness, and its continuing impact on ONG results, were greater than previously expected. Consequently, we initiated an impairment analysis at the end of the third quarter. Preliminary analysis indicated potential impairment of ONG goodwill as of September 23, 2016. Due to the amount of time and effort required to determine the implied fair value of ONG goodwill, we are unable to provide a reasonable estimate or a range of estimates for the potential non-cash impairment charge at this time. The carrying value of ONG goodwill was $147 million and the carrying value of other identifiable intangible assets of ONG totaled $73 million as of September 23, 2016. The valuation to determine the amount of impairment will be completed in the fourth quarter. |
| | | | | | | | | | | | | | | |
| Industrial | | Process | | Contractor | | Total |
Balance, December 30, 2016 | $ | 150,556 |
| | $ | 96,561 |
| | $ | 12,732 |
| | $ | 259,849 |
|
Additions (adjustments) from business acquisitions | 7,152 |
| | (63 | ) | | — |
| | 7,089 |
|
Foreign currency translation | 5,263 |
| | 897 |
| | — |
| | 6,160 |
|
Balance, June 30, 2017 | $ | 162,971 |
| | $ | 97,395 |
| | $ | 12,732 |
| | $ | 273,098 |
|
| |
9. | Other Current Liabilities |
Components of other current liabilities were (in thousands): | | | September 23, 2016 | | December 25, 2015 | June 30, 2017 | | December 30, 2016 |
Accrued self-insurance retentions | $ | 7,000 |
| | $ | 6,908 |
| $ | 7,182 |
| | $ | 7,105 |
|
Accrued warranty and service liabilities | 8,384 |
| | 7,870 |
| 9,650 |
| | 8,934 |
|
Accrued trade promotions | 6,375 |
| | 8,522 |
| 6,821 |
| | 6,007 |
|
Payable for employee stock purchases | 6,678 |
| | 8,825 |
| 4,394 |
| | 9,328 |
|
Customer advances and deferred revenue | 13,577 |
| | 9,449 |
| 17,788 |
| | 9,400 |
|
Income taxes payable | 3,581 |
| | 1,308 |
| 3,562 |
| | 8,608 |
|
Other | 26,234 |
| | 32,208 |
| 25,226 |
| | 22,505 |
|
Total | $ | 71,829 |
| | $ | 75,090 |
| $ | 74,623 |
| | $ | 71,887 |
|
The Company manages certain self-insured loss exposures through a wholly-owned captive insurance subsidiary. Cash balances of $8.3 million as of June 30, 2017 and $9.2 million as of December 30, 2016 were restricted to funding of the captive's loss reserves and are included within other current assets on the Company's Consolidated Balance Sheets.
A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):
|
| | | |
Balance, December 25, 2015 | $ | 7,870 |
|
Charged to expense | 5,057 |
|
Margin on parts sales reversed | 1,307 |
|
Reductions for claims settled | (5,850 | ) |
Balance, September 23, 2016 | $ | 8,384 |
|
The Company manages certain self-insured loss exposures through a wholly-owned captive insurance subsidiary established in 2015. At September 23, 2016, cash balances of $9 million were restricted to funding of the captive's loss reserves. Restricted cash is included within other current assets on the Company's consolidated balance sheet. |
| | | |
Balance, December 30, 2016 | $ | 8,934 |
|
Charged to expense | 3,733 |
|
Margin on parts sales reversed | 1,298 |
|
Reductions for claims settled | (4,315 | ) |
Balance, June 30, 2017 | $ | 9,650 |
|
10.Fair Value
Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
| | | Level | | September 23, 2016 | | December 25, 2015 | Level | | June 30, 2017 | | December 30, 2016 |
Assets | | | | | | | | | | |
Cash surrender value of life insurance | 2 | | $ | 13,659 |
| | $ | 12,856 |
| 2 | | $ | 14,883 |
| | $ | 13,785 |
|
Forward exchange contracts | 2 | | — |
| | 107 |
| 2 | | — |
| | 571 |
|
Total assets at fair value | | $ | 13,659 |
| | $ | 12,963 |
| | $ | 14,883 |
| | $ | 14,356 |
|
Liabilities | | | | | | | | |
Contingent consideration | 3 | | $ | 4,081 |
| | $ | 9,600 |
| 3 | | $ | 4,081 |
| | $ | 4,081 |
|
Deferred compensation | 2 | | 3,190 |
| | 2,958 |
| 2 | | 3,527 |
| | 3,265 |
|
Forward exchange contracts | 2 | | 58 |
| | — |
| 2 | | 272 |
| | — |
|
Total liabilities at fair value | | $ | 7,329 |
| | $ | 12,558 |
| | $ | 7,880 |
| | $ | 7,346 |
|
Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.
Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of an acquired business based on future revenues.
Long-term notes payable with fixed interest rates have a carrying amount of $300 million (including $75 million classified as current) and an estimated fair value of $335$325 million as of September 23, 2016June 30, 2017 and $320$325 millionas of December 25, 2015.30, 2016. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.
11.Divestiture in 2015
In the second quarter of 2015, the Company sold the Liquid Finishing business assets that were held as a cost-method investment. The $149 million pre-tax gain, net of transaction and other related expenses, was included in investment income in the Company's consolidated statements of earnings. Net earnings for the third quarter of 2015 included after-tax net gain from post-closing purchase price adjustments of $2 million and year-to-date after-tax gain and dividends totaling $141 million. Prior to the sale, income was recognized on dividends received from after-tax earnings of Liquid Finishing and also included in investment income. Net earnings in 2015 included no dividend income for the quarter and $42 million for the year-to-date.
12.Recent Accounting Pronouncements
A new accounting standard that changed certain aspects of accounting for share-based payments became effective for the Company in the first quarter of 2017. Excess tax benefits on exercised stock options that were previously credited to equity now reduce the current income tax provision. For the quarter, the change in accounting for excess tax benefits decreased the current income tax provision and increased net earnings by $13.6 million, reduced the effective income tax rate by 14 percentage points, increased the number of diluted average shares outstanding by 0.5 million and increased diluted earnings per share by $0.23. For the year to date, the change in accounting for excess tax benefits decreased the current income tax provision and increased net earnings by $17.2 million, reduced the effective income tax rate by 10 percentage points, increased the number of diluted average shares outstanding by 0.5 million and increased diluted earnings per share by $0.28. Under the new standard, excess tax benefits are no longer reclassified out of cash flows from operating activities to financing activities in the Consolidated Statements of Cash Flows. We elected to apply the cash flow presentation requirements retrospectively to all periods presented, which resulted in a year-to-date increase in previously reported net cash provided by operating activities and a decrease in net cash provided by financing activities of $5.5 million for the six months ended June 24, 2016. Also under the new standard, the Company elected to account for share-based grant forfeitures as they occur. The impact of the change in accounting for forfeitures was not significant, and was reflected in share-based compensation cost in the first quarter.
In February 2016,May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on accounting for leases.revenue from contracts with customers. The new standard issets forth a single comprehensive model for recognizing and reporting revenue. The new standard will become effective for the Company in fiscal 2019beginning with the first quarter of 2018, and requires most leasesthe Company plans to be recorded onadopt the balance sheet.accounting standard using the modified retrospective transition approach. The Company is evaluatingmodified retrospective transition approach will recognize any changes from the effectbeginning of the year of initial application through retained earnings with no restatement of comparative periods.
We have established an implementation team and engaged a third-party consultant to assist with our assessment of the impact of the new standardrevenue guidance on itsour operations, consolidated financial statements and related disclosures. To date, this assessment has included (1) utilizing questionnaires to assist with the identification of our revenue streams, (2) performing sample contract analyses for each revenue stream identified, (3) assessing the noted differences in recognition and measurement that may result from adopting this new standard, (4) performing detailed analyses of contracts with larger customers, and (5) developing plans to test transactions for consistency with contract provisions that affect revenue recognition. Based on the preliminary results of the evaluation, which is still in process, nothing has come to our attention that would indicate that adoption of the new standard will have a material impact on our consolidated financial statements. However, given our acquisition strategy, there may be additional revenue streams acquired prior to the adoption date. We currently believe the most significant potential changes relate to variable consideration and whether certain contracts' revenues will be recognized over time or at a point in time, although our technical analysis of these potential impacts is still on-going. We also anticipate changes to the consolidated balance sheet related to accounts receivable, contract assets, and contract liabilities.
We are in the process of evaluating and designing the necessary changes to our business processes, systems and controls to support recognition and disclosure under the new standard. Further, we are continuing to assess what incremental disaggregated revenue disclosures and accounting systems.will be required in our consolidated financial statements.
In March 2016,2017, the FASB issued a newfinal standard that changes the accounting for share-based payments.presentation of net periodic benefit cost related to defined benefit plans. The Company will adopt the standard iswhen it becomes effective for the Company in fiscal 20172018 and early adoption is permitted. It simplifies several aspects of accounting for share-based payments, including the accounting for income taxes, forfeitures, and classification in the statement of cash flows.it will be applied retrospectively to all periods presented. Under the new standard, excess tax benefits on the exercisenet periodic benefit costs are required to be disaggregated between service costs presented as operating expenses and other components of stock options currently credited to equity will reduce the current tax provision, potentially creating volatility in the Company's effective tax rate.pension costs presented as non-operating expenses. The Company is evaluating the effectcurrently charges service costs to segment operations and includes other components of pension cost in unallocated corporate operating expenses. Under the new standard, unallocated corporate operating expenses will decrease, operating earnings will increase and other expense will increase by the amount of other (non-service) components of pension cost. There will be no impact on its consolidated financial statements and related disclosures and will adopt for fiscal 2017.reported segment earnings, net earnings or earnings per share.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and coating materials. Management classifies the Company’s business into three reportable segments: Industrial, Process and Contractor. Key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end-user markets, expanding distribution globally and completing strategic acquisitions that provide additional channel and technologies.
The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying notes to the financial statements.
Consolidated Results
Net sales, net earnings and earnings per share were as follows (in millions except per share amounts and percentages):
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 23, 2016 | | September 25, 2015 | | % Change | | September 23, 2016 | | September 25, 2015 | | % Change |
Net Sales | $ | 327.2 |
| | $ | 319.0 |
| | 3 | % | | $ | 980.2 |
| | $ | 960.9 |
| | 2 | % |
Operating Earnings | 81.5 |
| | 76.9 |
| | 6 | % | | 220.8 |
| | 226.0 |
| | (2 | )% |
Net Earnings | 54.4 |
| | 50.7 |
| | 7 | % | | 144.9 |
| | 292.2 |
| | (50 | )% |
Diluted Net Earnings per Common Share | $ | 0.95 |
| | $ | 0.86 |
| | 10 | % | | $ | 2.55 |
| | $ | 4.90 |
| | (48 | )% |
Net earnings in 2015 included net investment income from the Liquid Finishing businesses sold in the second quarterA summary of 2015. Results excluding Liquid Finishing investment income and expense provide a more consistent base of comparison of ongoing financial results. A calculation of the non-GAAP measurement of net earnings excluding investment income and expenseresults follows (in millions except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 |
Net Earnings, as reported | $ | 54.4 |
| | $ | 50.7 |
| | $ | 144.9 |
| | $ | 292.2 |
|
Held separate investment (income), net | — |
| | (2.4 | ) | | — |
| | (190.7 | ) |
Income tax effect | — |
| | 0.8 |
| | — |
| | 49.7 |
|
Net Earnings, adjusted | $ | 54.4 |
| | $ | 49.1 |
| | $ | 144.9 |
| | $ | 151.2 |
|
Diluted earnings per share | | | | | | | |
As reported | $ | 0.95 |
| | $ | 0.86 |
| | $ | 2.55 |
| | $ | 4.90 |
|
Adjusted | $ | 0.95 |
| | $ | 0.84 |
| | $ | 2.55 |
| | $ | 2.54 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 24, 2016 | | % Change | | June 30, 2017 | | June 24, 2016 | | % Change |
Net Sales | $ | 379.5 |
| | $ | 348.1 |
| | 9 | % | | $ | 720.1 |
| | $ | 653.0 |
| | 10 | % |
Operating Earnings | 98.8 |
| | 78.3 |
| | 26 | % | | 184.6 |
| | 139.3 |
| | 33 | % |
Net Earnings | 79.8 |
| | 50.9 |
| | 57 | % | | 140.6 |
| | 90.5 |
| | 55 | % |
Diluted Net Earnings per Common Share | $ | 1.38 |
| | $ | 0.89 |
| | 55 | % | | $ | 2.43 |
| | $ | 1.59 |
| | 53 | % |
Solid sales growth combined with improved gross margins and lower operating expenses levered operating earnings to increases of 26 percent and 33 percent for the quarter and year to date, respectively. Diluted earnings per share include $0.23 for the quarter and $0.28 for the year to date from a required change in accounting for stock compensation. Increases in diluted earnings per share include $0.01 for the quarter and $0.02 for the year to date from reduced amortization expense resulting from the impairment charge recorded in the fourth quarter of 2016.
The following table presents an overview of components of changes innet earnings as a percentage of net sales:
|
| | | | | | | | | | | | | | | | | | | | |
| Quarter |
| Segment | | Region | | Total |
| Industrial | | Process | | Contractor | | Americas(1) | | EMEA(2) | | Asia Pacific | |
Volume and Price | (1) | % | | 0 | % | | 7 | % | | 2 | % | | 2 | % | | 3 | % | | 2 | % |
Acquisitions | 0 | % | | 5 | % | | 0 | % | | 0 | % | | 2 | % | | 1 | % | | 1 | % |
Currency | 0 | % | | (1) | % | | 0 | % | | 0 | % | | (2) | % | | 0 | % | | 0 | % |
Total | (1) | % | | 4 | % | | 7 | % | | 2 | % | | 2 | % | | 4 | % | | 3 | % |
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net Sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of products sold | 46.3 |
| | 46.8 |
| | 45.9 |
| | 46.9 |
|
Gross Profit | 53.7 |
| | 53.2 |
| | 54.1 |
| | 53.1 |
|
Product development | 3.9 |
| | 4.5 |
| | 4.1 |
| | 4.6 |
|
Selling, marketing and distribution | 14.8 |
| | 16.1 |
| | 15.4 |
| | 16.7 |
|
General and administrative | 9.0 |
| | 10.1 |
| | 9.0 |
| | 10.5 |
|
Operating Earnings | 26.0 |
| | 22.5 |
| | 25.6 |
| | 21.3 |
|
Interest expense | 1.1 |
| | 1.3 |
| | 1.1 |
| | 1.3 |
|
Other expense (income), net | (0.3 | ) | | 0.1 |
| | (0.1 | ) | | (0.1 | ) |
Earnings Before Income Taxes | 25.2 |
| | 21.1 |
| | 24.6 |
| | 20.1 |
|
Income taxes | 4.2 |
| | 6.5 |
| | 5.1 |
| | 6.2 |
|
Net Earnings | 21.0 | % | | 14.6 | % | | 19.5 | % | | 13.9 | % |
Net Sales
The following table presents net sales by geographic region (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Year-to-Date |
| Segment | | Region | | Total |
| Industrial | | Process | | Contractor | | Americas(1) | | EMEA(2) | | Asia Pacific | |
Volume and Price | 2 | % | | (9) | % | | 7 | % | | 0 | % | | 5 | % | | 2 | % | | 1 | % |
Acquisitions | 0 | % | | 6 | % | | 0 | % | | 1 | % | | 3 | % | | 2 | % | | 2 | % |
Currency | (1) | % | | (1) | % | | 0 | % | | 0 | % | | (2) | % | | (2) | % | | (1) | % |
Total | 1 | % | | (4) | % | | 7 | % | | 1 | % | | 6 | % | | 2 | % | | 2 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Americas(1) | $ | 221.4 |
| | $ | 207.5 |
| | $ | 421.4 |
| | $ | 380.9 |
|
EMEA(2) | 87.0 |
| | 80.1 |
| | 166.1 |
| | 155.8 |
|
Asia Pacific | 71.1 |
| | 60.5 |
| | 132.6 |
| | 116.3 |
|
Consolidated | $ | 379.5 |
| | $ | 348.1 |
| | $ | 720.1 |
| | $ | 653.0 |
|
| |
(1) |
(1) North, South and SouthCentral America, including the United States
|
| |
(2) | Europe, Middle East and Africa |
SalesThe following table presents the components of net sales change by geographic area were as follows (in millions):region:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 | Volume and Price | | Acquisitions | | Currency | | Total | | Volume and Price | | Acquisitions | | Currency | | Total |
Americas | $ | 194.4 |
| | $ | 190.0 |
| | $ | 575.3 |
| | $ | 572.1 |
| 7% | | 0% | | 0% | | 7% | | 11% | | 0% | | 0% | | 11% |
EMEA | 73.6 |
| | 72.2 |
| | 229.4 |
| | 216.6 |
| 12% | | 0% | | (3)% | | 9% | | 11% | | 0% | | (4)% | | 7% |
Asia Pacific | 59.2 |
| | 56.8 |
| | 175.5 |
| | 172.2 |
| 20% | | 0% | | (2)% | | 18% | | 16% | | 0% | | (2)% | | 14% |
Consolidated | $ | 327.2 |
| | $ | 319.0 |
| | $ | 980.2 |
| | $ | 960.9 |
| 10% | | 0% | | (1)% | | 9% | | 12% | | 0% | | (2)% | | 10% |
Changes in currency translation rates had no significant effect on results for the quarter, and decreased year-to-date sales and net earnings by approximately $9 million and $2 million, respectively.
Sales for the quarter increased 3 percent, with 2 percent increases in the Americas and EMEA and a 4 percent increase in Asia Pacific. Incremental sales from operations acquired within the last 12 months totaled $4 million, contributing 1 percentage point of growth. Organic sales at consistent translation rates increased 2 percent, with increases in all regions.
Sales for the year to date increased 2 percent, driven by a 6 percent increase in EMEA. Incremental sales from operations acquired within the last 12 months totaled $15 million, contributing 2 percentage points of growth. Organic sales at consistent translation rates increased 1 percent, with increases of 5 percent in EMEA and 2 percent in Asia Pacific.Gross Profit
Gross profit margin rates were slightly higherrate increased by one-half percentage point for the quarter and flatone percentage point for the year to date. The favorableFavorable effects offrom higher production volume and realized pricing and product and channel mixwere partially offset theby unfavorable impacts of lower factory volume. Gross margin rate for the year to date also included the favorable impact of reduced acquisition-related purchase accounting effects.currency translation and product mix.
Operating Expenses
Total operating expenses for the quarter were $2 million (2 percent) higher than the third quarter last year, including $2 million of incremental expenses of acquired operations. Unallocated corporate expenses decreased $3 million, mostly from changes in market-driven components of pension and stock compensation. Total operating expenses for the year to date were $16 million (6 percent) higherslightly lower than last year. Year-to-date reductions from the comparable period last year, including $7 millionimpact of incrementalcurrency translation, decreased amortization expense and lower unallocated corporate expenses of acquired operations.(mostly central warehouse) more than offset volume and rate-related increases.
Income Taxes
The effective income tax rate for the quarter was 2917 percent, 2 percentage points lower than the comparable perioddown from 31 percent last year. The 2016 rate included the impact of the federal R&D credit that was not available until the fourth quarter of 2015, and the favorable effect of foreign earnings taxed at lower rates than in the U.S. The effective income tax rate for the year to date was 3021 percent, 3down from 31 percent last year. Adoption of a new accounting standard, requiring excess tax benefits related to stock option exercises to be credited to the income tax provision (formerly credited to equity), reduced the tax provision by $13.6 million for the quarter and $17.2 million for the year to date, decreasing the effective tax rate for the quarter and year to date by 14 and 10 percentage points, higher than the comparable period last year. Last year's rate included the favorable impact of non-recurring tax benefits, mostly related to a change in assertion as to reinvestment of foreign earnings, and the impact of post-tax dividend income, partially offset by the tax rate effect of the gain on the sale of the Liquid Finishing assets.
Goodwill Impairment Analysis
In 2016, operating results of our Oil and Natural Gas reporting unit ("ONG") within the Process segment have fallen short of expectations due to weakness in oil and natural gas markets. After considering third quarter operating results and preliminary projections from our 2017 planning process, we concluded that the depth and length of industry weakness, and its continuing impact on ONG results, were greater than previously expected. While management is committed to long-term profitability in ONG, and believes its investment in facility improvements, manufacturing capabilities and commercial resources have positioned the unit to benefit strongly from a recovery when it occurs, we initiated an impairment analysis at the end of the third quarter. Preliminary analysis indicated potential impairment of ONG goodwill as of September 23, 2016. Due to the amount of time and effort required to determine the implied fair value of ONG goodwill, we are unable to provide a reasonable estimate or a range of estimates for the potential non-cash impairment charge at this time. The carrying value of ONG goodwill was $147 million and the carrying value of other identifiable intangible assets of ONG totaled $73 million as of September 23, 2016. The valuation to determine the amount of impairment will be completed in the fourth quarter.respectively.
Segment Results
Certain measurements of segment operations compared to last year are summarized below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 |
Net sales (in millions) | | | | | | | |
Americas | $ | 66.8 |
| | $ | 69.8 |
| | $ | 201.3 |
| | $ | 209.1 |
|
EMEA | 44.4 |
| | 45.6 |
| | 134.2 |
| | 128.0 |
|
Asia Pacific | 39.7 |
| | 36.8 |
| | 119.5 |
| | 111.8 |
|
Total | $ | 150.9 |
| | $ | 152.2 |
| | $ | 455.0 |
| | $ | 448.9 |
|
Operating earnings as a percentage of net sales | 34 | % | | 33 | % | | 32 | % | | 32 | % |
Segment
Industrial segmentThe following table presents net sales and operating earnings as a percentage of sales for the quarter decreased 1 percent. An increaseIndustrial segment
(dollars in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net Sales | | | | | | | |
Americas | $ | 75.9 |
| | $ | 69.4 |
| | $ | 144.9 |
| | $ | 134.5 |
|
EMEA | 49.9 |
| | 45.6 |
| | 94.0 |
| | 89.8 |
|
Asia Pacific | 49.1 |
| | 42.0 |
| | 92.4 |
| | 79.8 |
|
Total | $ | 174.9 |
| | $ | 157.0 |
| | $ | 331.3 |
| | $ | 304.1 |
|
Operating earnings as a percentage of net sales | 35 | % | | 33 | % | | 35 | % | | 32 | % |
The following table presents the components of 8 percentnet sales change by geographic region for the Industrial segment:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Volume and Price | | Acquisitions | | Currency | | Total | | Volume and Price | | Acquisitions | | Currency | | Total |
Americas | 9% | | 0% | | 0% | | 9% | | 7% | | 1% | | 0% | | 8% |
EMEA | 12% | | 0% | | (3)% | | 9% | | 8% | | 0% | | (3)% | | 5% |
Asia Pacific | 19% | | 1% | | (3)% | | 17% | | 18% | | 1% | | (3)% | | 16% |
Segment Total | 13% | | 0% | | (2)% | | 11% | | 10% | | 1% | | (2)% | | 9% |
Sales increased in Asia Pacific offset decreasesall Industrial segment product applications. Year-to-date operating margin rate for the Industrial segment increased 3 percentage points compared to last year. Favorable effects of 4 percent in the Americashigher sales volume, improved gross margin rate and 3 percent in EMEA. Year-to-date sales increased 1 percent (2 percent at consistent translation rates), including increases of 5 percent in EMEA (6 percent at consistent translation rates) and 7 percent in Asia Pacific (8 percent at consistent translation rates),expense leverage were partially offset by the unfavorable effect of currency translation.
Process Segment
The following table presents net sales and operating earnings as a decreasepercentage of 4 percentsales for the Process segment
(dollars in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net Sales | | | | | | | |
Americas | $ | 46.6 |
| | $ | 41.3 |
| | $ | 91.2 |
| | $ | 81.3 |
|
EMEA | 13.9 |
| | 13.5 |
| | 28.8 |
| | 27.4 |
|
Asia Pacific | 12.9 |
| | 9.9 |
| | 23.4 |
| | 20.3 |
|
Total | $ | 73.4 |
| | $ | 64.7 |
| | $ | 143.4 |
| | $ | 129.0 |
|
Operating earnings as a percentage of net sales | 18 | % | | 12 | % | | 19 | % | | 12 | % |
The following table presents the Americas.components of net sales change by geographic region for the Process segment:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Volume and Price | | Acquisitions | | Currency | | Total | | Volume and Price | | Acquisitions | | Currency | | Total |
Americas | 13% | | 0% | | 0% | | 13% | | 12% | | 0% | | 0% | | 12% |
EMEA | 9% | | 0% | | (6)% | | 3% | | 12% | | 0% | | (7)% | | 5% |
Asia Pacific | 33% | | 0% | | (3)% | | 30% | | 17% | | 0% | | (2)% | | 15% |
Segment Total | 15% | | 0% | | (2)% | | 13% | | 13% | | 0% | | (2)% | | 11% |
The Process segment had solid sales growth across most product applications, partially offset by the effects of continued weakness in Oil and Natural Gas. Operating margin rates for the Industrialthis segment were slightly higher than last year.
Process
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 |
Net sales (in millions) | | | | | | | |
Americas | $ | 43.0 |
| | $ | 41.0 |
| | $ | 124.3 |
| | $ | 128.3 |
|
EMEA | 12.7 |
| | 12.7 |
| | 40.1 |
| | 41.5 |
|
Asia Pacific | 11.4 |
| | 11.0 |
| | 31.7 |
| | 34.5 |
|
Total | $ | 67.1 |
| | $ | 64.7 |
| | $ | 196.1 |
| | $ | 204.3 |
|
Operating earnings as a percentage of net sales | 15 | % | | 16 | % | | 13 | % | | 17 | % |
Process segment sales for the quarter increased 4 percent (5 percent at consistent translation rates), including increases of 5 percent in the Americas and 4 percent in Asia Pacific. Sales were flat in EMEA, but increased 7 percent at consistent translation rates. Year-to-date sales in this segment were down 4 percent (3 percent at consistent translation rates), including decreases of 3 percent in the Americas, 4 percent in EMEA (flat at consistent translation rates) and 8 percent in Asia Pacific (6 percent at consistent translation rates). Operating margin rate recovered in the third quarter with higher sales volume and improved gross margin rate. For the year to date, operating margin rate decreasedpercentage points compared to last year due to lowerhigher sales volume, favorable expense leverage and unfavorable expense leverage.a decrease in intangible amortization related to the impairment recorded in the fourth quarter of 2016.
Contractor Segment
The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment
(dollars in millions):
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 23, 2016 | | September 25, 2015 | | September 23, 2016 | | September 25, 2015 | June 30, 2017 | | June 24, 2016 | | June 30, 2017 | | June 24, 2016 |
Net sales (in millions) | | | | | | | | |
Net Sales | | | | | | | | |
Americas | $ | 84.6 |
| | $ | 79.2 |
| | $ | 249.7 |
| | $ | 234.7 |
| $ | 98.9 |
| | $ | 96.8 |
| | $ | 185.3 |
| | $ | 165.1 |
|
EMEA | 16.5 |
| | 13.9 |
| | 55.2 |
| | 47.1 |
| 23.2 |
| | 21.1 |
| | 43.3 |
| | 38.7 |
|
Asia Pacific | 8.1 |
| | 9.0 |
| | 24.3 |
| | 25.9 |
| 9.1 |
| | 8.6 |
| | 16.8 |
| | 16.2 |
|
Total | $ | 109.2 |
| | $ | 102.1 |
| | $ | 329.2 |
| | $ | 307.7 |
| $ | 131.2 |
| | $ | 126.5 |
| | $ | 245.4 |
| | $ | 220.0 |
|
Operating earnings as a percentage of net sales | 23 | % | | 24 | % | | 22 | % | | 23 | % | 26 | % | | 23 | % | | 24 | % | | 21 | % |
The following table presents the components of net sales change by geographic region for the Contractor segment:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Volume and Price | | Acquisitions | | Currency | | Total | | Volume and Price | | Acquisitions | | Currency | | Total |
Americas | 2% | | 0% | | 0% | | 2% | | 12% | | 0% | | 0% | | 12% |
EMEA | 14% | | 0% | | (4)% | | 10% | | 16% | | 0% | | (4)% | | 12% |
Asia Pacific | 7% | | 0% | | (1)% | | 6% | | 4% | | 0% | | 0% | | 4% |
Segment Total | 5% | | 0% | | (1)% | | 4% | | 12% | | 0% | | 0% | | 12% |
Contractor segment sales increased 4 percent compared to second quarter last year, which included new product launches that created a tough comparable for the quarter increased 7 percent, with increases of 7 percent in the Americas and 20 percent in EMEA, partially offset by a decrease of 11 percent in Asia Pacific. Year-to-date sales increased 7 percent, with increases of 6 percent in the Americas and 17 percent in EMEA, partially offset by a 6 percent decrease in Asia Pacific.this year. Operating margin rates decreased slightlyfor the Contractor segment increased 3 percentage points compared to last year due to unfavorablehigher sales volume, improved gross margin rate and favorable expense leverage and product and channel mix.leverage.
Liquidity and Capital Resources
Net cash provided by operating activities through the first nine months of 2016 was $202$136 million increased $42 million compared to $135 millionthe first half of last year, mostly driven by the increase in the same period of 2015. Net cash from operating activities in 2015 was affected by increasesnet earnings. Increases in accounts receivables balances fromreceivable, inventories and accrued liabilities reflect growth in business activity build up of inventory levels to improve customer service and transaction costs related to the sale of Liquid Finishing business assets. Inin the first quarterhalf of 2016, the2017. The Company used proceeds from borrowings under its revolving linecash of credit$10 million in 2017 and $49 million in 2016 to complete acquisitions of two relatedacquire businesses that were not material to the consolidated financial statements. Other significant uses of cash in 20162017 included share repurchases of $48$90 million (partially offset by $26$36 million of net proceeds from shares issued), cash dividends of $55$40 million and property, plant and equipment additions of $34$17 million. In 2015, proceeds of $610 million from the sale of Liquid Finishing assets were principally used to retire debt.
At September 23, 2016,June 30, 2017, cash balances of $9$8 million were restricted to funding of certain self-insured loss reserves. Restricted cash is included within other current assets on the Company's consolidated balance sheet.
At September 23, 2016,June 30, 2017, the Company had various lines of credit totaling $547 million, of which $484$525 million was unused. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2016.2017.
Outlook
WeDemand in the second quarter remained broad-based across products and geographies and continues to exceed our expectations. As a result, we are holdingraising our full-year 2017 outlook to ourmid-to-high single-digit organic sales growth on a constant currency basis worldwide, from a prior outlook of lowmid single-digit salesgrowth. We expect to achieve mid-to-high single-digit growth for Graco worldwidein each geographic region for the full year 2016. The Industrial segment continues to experience a spotty environment for capital equipment spending worldwide, with ongoing weakness most notable in the Americas region. Construction activity remains solid in the EMEA and Americas regions. While the Process segment saw modest growth sequentially in the third quarter, we are cautious about ongoing headwinds. Regionally, we anticipate the Americas region will finish the full year 2016 flat compared with the prior year, below our prior outlook of low single-digit growth. In the EMEA region, we reiterate our low-to-mid single-digit growth expectations for the full year. Our outlook for the Asia Pacific region continues to be low single-digit growth for 2016. The fourth quarter of 2015 was the highest growth quarter of the year, with 6 percent growth on an organic, constant currency basis, providing a difficult comparable for the last quarter of the year.2017.
Cautionary Statement Regarding Forward-Looking Statements
The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including our Form 10-K, Form 10-Qs and Form 8-Ks, and other disclosures, including our 20152016 Overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.
Future results could differ materially from those expressed due to the impact of changes in various factors. These risk factors include, but are not limited to: our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; economic conditions in the United States and other major world economies; changes in currency translation rates; changes in laws and regulations; compliance with anti-corruption and trade laws; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; the possibility of asset impairments if acquired businesses do not meet performance expectations; political instability; results of and costs associated with litigation, administrative proceedings and regulatory reviews incident to our business as well as indemnification claims under our asset purchase agreement with Carlisle Companies Incorporated, Carlisle Fluid Technologies, Inc., and Finishing Brands Holdings Inc.; the possibility of decline in purchases from few large customers of the Contractor segment; variations in activity in the construction, automotive, mining and oil and natural gas industries; our ability to attract, develop and retain qualified personnel; and catastrophic events. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year 20152016 for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com and the Securities and Exchange Commission’s website at www.sec.gov. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.
Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes related to market risk from the disclosures made in the Company’s 20152016 Annual Report on Form 10-K.
Item 4.Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer, the Chief Financial Officer and Treasurer, the Vice President, Controller and Information Systems, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective.
Changes in internal controls
During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
PART IIOTHER INFORMATION
Item 1A.Risk Factors
Except as noted below, thereThere have been no material changes to the Company’s risk factors from those disclosed in the Company’s 20152016 Annual Report on Form 10-K.
Impairment - If acquired businesses do not meet performance expectations, assets acquired could be subject to impairment.
Our total assets reflect goodwill from acquisitions, representing the excess cost over the fair value of the identifiable net assets acquired. We test annually whether goodwill has been impaired, or more frequently if events or changes in circumstances indicate the goodwill may be impaired. If future operating performance at one or more of our operating units were to fall significantly below forecast levels or if market conditions for one or more of our acquired businesses were to decline, we could be required to incur a non-cash charge to operating income for impairment. Any impairment in the value of our goodwill would have an adverse non-cash impact on our results of operations and reduce our net worth. In 2016, operating results of our Oil and Natural Gas reporting unit ("ONG") have fallen short of expectations due to weakness in oil and natural gas markets. After considering third quarter operating results and preliminary projections from our 2017 planning process, we concluded that the depth and length of industry weakness, and its continuing impact on ONG results, were greater than previously expected. Consequently, we initiated an impairment analysis at the end of the third quarter. Preliminary analysis indicated potential impairment of ONG goodwill as of September 23, 2016. Due to the amount of time and effort required to determine the implied fair value of ONG goodwill, we are unable to provide a reasonable estimate or a range of estimates for the potential non-cash impairment charge at this time. The carrying value of ONG goodwill was $147 million and the carrying value of other identifiable intangible assets of ONG totaled $73 million as of September 23, 2016. The valuation to determine the amount of impairment will be completed in the fourth quarter.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On April 24, 2015, the Board of Directors authorized the Company to purchase up to 6,000,000 shares of its outstanding common stock, primarily through open-market transactions. The authorization is for an indefinite period of time or until terminated by the Board.
In addition to shares purchased under the Board authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax due upon exercise of options or vesting of restricted stock.
No shares were purchased in the thirdsecond quarter of 2016.2017. As of September 23, 2016,June 30, 2017, there were 3,852,3672,967,367 shares that may yet be purchased under the Board authorization.
Item 6.Exhibits
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3.1 |
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3.2 |
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10.1 |
| | Amendment No. 4 dated as of May 23, 2017 to Note Agreement dated as of March 11, 2011. |
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10.2 |
| | Amendment No. 4 dated as of May 23, 2017, amending the Credit Agreement among Graco Inc., the borrowing subsidiaries from time to time party thereto, the banks from time to time party thereto and U.S. Bank National Association, as administrative agent. |
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10.3 |
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31.1 |
| | Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a). |
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31.2 |
| | Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a). |
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32 |
| | Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C. |
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99.1 |
| | Press Release Reporting ThirdSecond Quarter Earnings dated October 19, 2016.July 26, 2017. |
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101 |
| | Interactive Data File. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GRACO INC.
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Date: | | October 19, 2016July 26, 2017 | | By: | | /s/ Patrick J. McHale |
| | | | | | Patrick J. McHale |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
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Date: | | October 19, 2016July 26, 2017 | | By: | | /s/ Christian E. Rothe |
| | | | | | Christian E. Rothe |
| | | | | | Chief Financial Officer and Treasurer |
| | | | | | (Principal Financial Officer) |
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Date: | | October 19, 2016July 26, 2017 | | By: | | /s/ Caroline M. Chambers |
| | | | | | Caroline M. Chambers |
| | | | | | Vice President, Corporate Controller and Information Systems |
| | | | | | (Principal Accounting Officer) |