GRACO INC 10-K

Item 8. Financial Statements and Supplementary Data Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control system was designed to provide reasonable assurance to management and the board of directors regarding the reliability of financial reporting and preparation of financial statements in accordance with generally accepted accounting principles. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 25, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment and those criteria, management believes the Company’s internal control over financial reporting is effective as of December 25, 2020. The Company’s independent auditors have issued an attestation report on the Company’s internal control over financial reporting. That report appears in this Form 10-K. 33 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Graco Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Graco Inc. and subsidiaries (the “Company”) as of December 25, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 25, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 25, 2020, of the Company and our report dated February 16, 2021, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota February 16, 2021 34 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Graco Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Graco Inc. and subsidiaries (the "Company") as of December 25, 2020 and December 27, 2019, the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 25, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2020 and December 27, 2019 and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 25, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Retirement Benefits – U.S. Pension Benefit Obligation – Refer to Note J to the financial statements Critical Audit Matter Description The Company has both funded and unfunded defined benefit pension plans. As of December 25, 2020, the pension benefit obligation balance was $510.7 million. The actuarial determination of the present value of the pension obligation on an annual basis requires management to make significant assumptions related to the selection of the discount rates used in the calculation of the net present value of future pension benefits. The Company establishes the discount rate assumptions for the U.S. pension plans by reference to a yield curve published by an actuary based on yields of highly rated corporate bonds and projected plan cash flows. Given the significance of the U.S. pension obligation and the requirement of management to make significant assumptions related to the selection of the discount rates, performing audit procedures to evaluate the reasonableness of the discount rates selected for the U.S. pension plans required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists. 35 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to selection of the discount rates for the U.S. pension obligation included the following, among others: a. We tested the effectiveness of internal controls over the valuation of the pension obligation, including management’s controls over selection of the discount rates. b. With the assistance of our actuarial specialists, we evaluated the reasonableness of the discount rates by: • Evaluating the methodology utilized to select the discount rates for conformity with applicable accounting guidance. • Testing the source information underlying the determination of the discount rates, including the methodology used to construct the yield curve, the characteristics of the bonds underlying the yield curve analysis, and the mathematical accuracy of the calculation. • Developing independent estimates using external published yield curves and comparing them to the discount rates selected by management. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota February 16, 2021 We have served as the Company’s auditor since at least 1969, however, an earlier year could not be readily determined. 36 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts) Years Ended December 25, 2020 December 27, 2019 December 28, 2018 Net Sales $ 1,650,115 $ 1,646,045 $ 1,653,292 Cost of products sold 795,178 786,289 770,753 Gross Profit 854,937 859,756 882,539 Product development 72,194 67,557 63,124 Selling, marketing and distribution 220,271 234,325 245,473 General and administrative 135,525 133,418 137,515 Impairment 35,229 — — Operating Earnings 391,718 424,456 436,427 Interest expense 11,280 13,110 14,385 Other expense, net 5,787 5,469 11,276 Earnings Before Income Taxes 374,651 405,877 410,766 Income taxes 44,195 62,024 69,712 Net Earnings $ 330,456 $ 343,853 $ 341,054 Basic Net Earnings per Common Share $ 1.97 $ 2.06 $ 2.04 Diluted Net Earnings per Common Share $ 1.92 $ 2.00 $ 1.97 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 25, 2020 December 27, 2019 December 28, 2018 Net Earnings $ 330,456 $ 343,853 $ 341,054 Components of other comprehensive income (loss) Cumulative translation adjustment 46,030 1,902 ( 8,609 ) Pension and postretirement medical liability adjustment ( 645 ) ( 33,772 ) 8,793 Income taxes - pension and postretirement medical liability 237 6,940 ( 1,799 ) Other comprehensive income (loss) 45,622 ( 24,930 ) ( 1,615 ) Comprehensive Income $ 376,078 $ 318,923 $ 339,439 See notes to consolidated financial statements. 37 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 25, 2020 December 27, 2019 ASSETS Current Assets Cash and cash equivalents $ 378,909 $ 220,973 Accounts receivable, less allowances of $ 4,400 and $ 5,300 314,946 267,345 Inventories 285,704 273,233 Other current assets 44,242 29,917 Total current assets 1,023,801 791,468 Property, Plant and Equipment, net 350,750 325,546 Goodwill 347,603 307,663 Other Intangible Assets, net 160,669 162,623 Operating Lease Assets 37,807 29,891 Deferred Income Taxes 25,828 39,327 Other Assets 41,670 35,692 Total Assets $ 1,988,128 $ 1,692,210 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Notes payable to banks $ 22,183 $ 7,732 Trade accounts payable 58,305 54,117 Salaries and incentives 52,005 51,301 Dividends payable 31,636 29,235 Other current liabilities 157,260 142,937 Total current liabilities 321,389 285,322 Long-term Debt 150,000 164,298 Retirement Benefits and Deferred Compensation 184,747 182,707 Operating Lease Liabilities 29,224 24,176 Deferred Income Taxes 10,264 10,776 Other Non-current Liabilities 8,600 — Commitments and Contingencies (Note K) Shareholders’ Equity Common stock, $1 par value; 291,000,000 shares authorized; 168,567,919 and 167,286,836 shares outstanding in 2020 and 2019 168,568 167,287 Additional paid-in-capital 671,206 578,440 Retained earnings 568,295 448,991 Accumulated other comprehensive income (loss) ( 124,165 ) ( 169,787 ) Total shareholders’ equity 1,283,904 1,024,931 Total Liabilities and Shareholders’ Equity $ 1,988,128 $ 1,692,210 See notes to consolidated financial statements. 38 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 25, 2020 December 27, 2019 December 28, 2018 Cash Flows From Operating Activities Net Earnings $ 330,456 $ 343,853 $ 341,054 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 55,329 48,911 47,754 Deferred income taxes 10,747 ( 6,411 ) 15,405 Share-based compensation 25,153 26,669 25,565 Impairment 35,229 — — Change in Accounts receivable ( 43,122 ) 8,934 ( 12,402 ) Inventories ( 13,086 ) 12,435 ( 30,719 ) Trade accounts payable 6,820 ( 539 ) ( 1,976 ) Salaries and incentives ( 2,622 ) ( 14,069 ) 2,336 Retirement benefits and deferred compensation ( 6,703 ) 13,264 ( 27,237 ) Other accrued liabilities ( 3,772 ) ( 11,510 ) 7,517 Other ( 394 ) ( 2,803 ) 688 Net cash provided by operating activities 394,035 418,734 367,985 Cash Flows From Investing Activities Property, plant and equipment additions ( 71,338 ) ( 127,953 ) ( 53,854 ) Acquisition of businesses, net of cash acquired ( 27,557 ) ( 26,577 ) ( 10,769 ) Other ( 143 ) ( 939 ) ( 1,624 ) Net cash used in investing activities ( 99,038 ) ( 155,469 ) ( 66,247 ) Cash Flows From Financing Activities Borrowings (payments) on short-term lines of credit, net ( 1,986 ) ( 3,341 ) 4,931 Borrowings on long-term lines of credit 250,000 105,423 620,746 Payments on long-term debt and lines of credit ( 250,000 ) ( 207,191 ) ( 583,212 ) Common stock issued 83,438 48,250 24,634 Common stock repurchased ( 102,143 ) ( 9,482 ) ( 244,814 ) Taxes paid related to net share settlement of equity awards ( 1,797 ) ( 1,268 ) ( 16,151 ) Cash dividends paid ( 116,983 ) ( 106,443 ) ( 88,845 ) Net cash used in financing activities ( 139,471 ) ( 174,052 ) ( 282,711 ) Effect of exchange rate changes on cash 2,410 ( 358 ) 187 Net increase in cash and cash equivalents 157,936 88,855 19,214 Cash and Cash Equivalents Beginning of year 220,973 132,118 112,904 End of year $ 378,909 $ 220,973 $ 132,118 See notes to consolidated financial statements. 39 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance December 29, 2017 $ 169,319 $ 499,934 $ 181,599 $ ( 127,789 ) $ 723,063 Shares issued 1,657 7,598 — — 9,255 Shares repurchased ( 5,805 ) ( 17,140 ) ( 224,307 ) — ( 247,252 ) Stock compensation cost — 21,205 — — 21,205 Restricted stock canceled (issued) — ( 772 ) — — ( 772 ) Net earnings — — 341,054 — 341,054 Dividends declared ($ 0.5575 per share) — — ( 93,065 ) — ( 93,065 ) Reclassified to retained earnings from AOCI — — 15,453 ( 15,453 ) — Other comprehensive income (loss) — — ( 1,615 ) ( 1,615 ) Balance December 28, 2018 165,171 510,825 220,734 ( 144,857 ) 751,873 Shares issued 2,274 44,707 — — 46,981 Shares repurchased ( 158 ) ( 490 ) ( 6,397 ) — ( 7,045 ) Stock compensation cost — 23,398 — — 23,398 Net earnings — — 343,853 — 343,853 Dividends declared $ 0.6550 per share) — — ( 109,199 ) — ( 109,199 ) Other comprehensive income (loss) — — — ( 24,930 ) ( 24,930 ) Balance December 27, 2019 167,287 578,440 448,991 ( 169,787 ) 1,024,931 Shares issued 3,608 78,789 — — 82,397 Shares repurchased ( 2,327 ) ( 8,047 ) ( 91,768 ) — ( 102,142 ) Stock compensation cost — 22,024 — — 22,024 Net earnings — — 330,456 — 330,456 Dividends declared ($ 0.7125 per share) — — ( 119,384 ) — ( 119,384 ) Other comprehensive income (loss) — — — 45,622 45,622 Balance December 25, 2020 $ 168,568 $ 671,206 $ 568,295 $ ( 124,165 ) $ 1,283,904 See notes to consolidated financial statements. 40 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Graco Inc. and Subsidiaries Years Ended December 25, 2020, December 27, 2019 and December 28, 2018 A. Summary of Significant Accounting Policies Fiscal Year . The fiscal year of Graco Inc. and Subsidiaries (the “Company”) is 52 or 53 weeks, ending on the last Friday in December. The years ended December 25, 2020 , December 27, 2019 and December 28, 2018 were 52-week years. Basis of Statement Presentation . The consolidated financial statements include the accounts of the parent company and its subsidiaries after elimination of intercompany balances and transactions. As of December 25, 2020 , all subsidiaries are 100 percent controlled by the Company. Certain prior year disclosures have been revised to conform with current year reporting. Foreign Currency Translation . The functional currency of certain subsidiaries is the local currency. Accordingly, adjustments resulting from the translation of those subsidiaries’ financial statements into U.S. dollars are charged or credited to accumulated other comprehensive income (loss). The U.S. dollar is the functional currency for all other foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and transactions of those subsidiaries are included in other expense, net. Accounting Estimates . The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value Measurements. The three levels of inputs in the fair value measurement hierarchy are as follows: Level 1 – based on quoted prices in active markets for identical assets Level 2 – based on significant observable inputs Level 3 – based on significant unobservable inputs Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands): Level 2020 2019 Assets Cash surrender value of life insurance 2 $ 19,887 $ 17,702 Forward exchange contracts 2 16 — Total assets at fair value $ 19,903 $ 17,702 Liabilities Contingent consideration 3 $ 9,454 $ 9,072 Deferred compensation 2 5,099 4,719 Forward exchange contracts 2 — 87 Total liabilities at fair value $ 14,553 $ 13,878 Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds. The Company’s policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities. Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of certain acquired businesses based on future revenues. 41 Table of Contents Disclosures related to other fair value measurements are included below in Impairment of Long-Lived Assets, in Note F (Debt) and in Note J (Retirement Benefits). Cash Equivalents . All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Accounts Receivable. Accounts receivable includes trade receivables of $ 302 million in 2020 and $ 256 million in 2019. Other receivables totaled $ 13 million in 2020 and $ 11 million in 2019. Allowance for Credit Losses. Adoption of New Accounting Standard In June 2016, the Financial Accounting Standards Board (FASB) issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. There was no significant impact on earnings or financial condition from the adoption of the new standard. Accounting Policy Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Following is a summary of activity in the allowance for credit losses (in thousands): 2020 2019 2018 Balance, beginning $ 4,828 $ 4,771 $ 3,980 Additions (reversals) charged to costs and expenses 647 836 1,423 Deductions from reserves (1) ( 2,732 ) ( 858 ) ( 899 ) Other additions (deductions) (2) 1,002 79 267 Balance, ending $ 3,745 $ 4,828 $ 4,771 (1) Represents amounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves. (2) Includes amounts assumed or established in connection with acquisitions and effects of foreign currency translation. Inventory Valuation . Inventories are stated at the lower of cost or net realizable value. The last-in, first-out (LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO) cost method. Other Current Assets. Amounts included in other current assets were (in thousands): 2020 2019 Prepaid income taxes $ 22,317 $ 13,462 Prepaid expenses and other 21,925 16,455 Total $ 44,242 $ 29,917 Impairment of Long-Lived Assets. The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In connection with negotiations to sell the Company's U.K.-based valve business in 2020, impairment charges of $35 million were recorded. We completed our annual impairment review of all long-lived assets in the fourth quarter of 2020. No further impairment charges were recorded as a result of that review. There were no impairment charges in 2019 or 2018. Property, Plant and Equipment . For financial reporting purposes, plant and equipment are depreciated over their estimated useful lives, primarily by using the straight-line method as follows: 42 Table of Contents Buildings and improvements 10 to 30 years Leasehold improvements lesser of 5 to 10 years or life of lease Manufacturing equipment lesser of 5 to 10 years or life of equipment Office, warehouse and automotive equipment 3 to 10 years Goodwill and Other Intangible Assets. Goodwill has been assigned to reporting units. Changes in the carrying amounts of goodwill for each reportable segment were (in thousands): Industrial Process Contractor Total Balance, December 28, 2018 $ 177,124 $ 97,168 $ 19,554 $ 293,846 Additions, adjustments from business acquisitions — 13,444 — 13,444 Foreign currency translation ( 12 ) 385 — 373 Balance, December 27, 2019 177,112 110,997 19,554 307,663 Additions, adjustments from business acquisitions — 29,657 — 29,657 Foreign currency translation 9,424 859 — 10,283 Balance, December 25, 2020 $ 186,536 $ 141,513 $ 19,554 $ 347,603 Components of other intangible assets were (dollars in thousands): Finite Life Indefinite Life Customer Relationships Patents and Proprietary Technology Trademarks, Trade Names and Other Trade Names Total As of December 25, 2020 Cost $ 186,073 $ 25,187 $ 900 $ 61,920 $ 274,080 Accumulated amortization ( 93,832 ) ( 12,924 ) ( 301 ) — ( 107,057 ) Foreign currency translation ( 6,004 ) ( 538 ) — 188 ( 6,354 ) Book value $ 86,237 $ 11,725 $ 599 $ 62,108 $ 160,669 Weighted average life in years 13 10 5 N/A As of December 27, 2019 Cost $ 186,310 $ 20,413 $ 1,020 $ 61,920 $ 269,663 Accumulated amortization ( 80,764 ) ( 10,526 ) ( 650 ) — ( 91,940 ) Foreign currency translation ( 10,412 ) ( 885 ) ( 73 ) ( 3,730 ) ( 15,100 ) Book value $ 95,134 $ 9,002 $ 297 $ 58,190 $ 162,623 Weighted average life in years 13 10 4 N/A Amortization of intangibles was $ 16.7 million in 2020, $ 15.5 million in 2019 and $ 15.6 million in 2018. Estimated future annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands): 2021 2022 2023 2024 2025 Thereafter Estimated Amortization Expense $ 17,286 $ 17,196 $ 16,187 $ 14,660 $ 14,078 $ 19,154 The Company completed business acquisitions in 2020, 2019 and 2018 that were not material to the consolidated financial statements. 43 Table of Contents Other Assets. Components of other assets were (in thousands): 2020 2019 Cash surrender value of life insurance $ 19,887 $ 17,702 Capitalized software 2,737 2,985 Equity method investment 7,610 7,603 Prepaid pension 9,144 2,931 Deposits and other 2,292 4,471 Total $ 41,670 $ 35,692 The Company has entered into contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts are used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company’s insolvency. Changes in cash surrender value are recorded in other expense, net. The cash surrender value increased $ 2.2 million in 2020, $ 3.4 million in 2019 and decreased $ 1.8 million in 2018. Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation. Other Current Liabilities . Components of other current liabilities were (in thousands): 2020 2019 Accrued self-insurance retentions $ 8,041 $ 7,570 Accrued warranty and service liabilities 13,082 12,785 Accrued trade promotions 12,140 8,390 Payable for employee stock purchases 14,554 13,722 Customer advances and deferred revenue 41,689 33,138 Income taxes payable 8,564 8,706 Operating lease liabilities, current 11,178 7,690 Right of return refund liability 16,303 13,791 Other 31,709 37,145 Total $ 157,260 $ 142,937 Self-Insurance. The Company is self-insured for certain losses and costs relating to product liability, workers’ compensation, and employee medical benefit claims. The Company has stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insurance retentions are based on claims filed, estimates of claims incurred but not reported, and other actuarial assumptions. Self-insured reserves totaled $ 8.0 million as of December 25, 2020, and $ 7.6 million as of December 27, 2019. Product Warranties. A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands): 2020 2019 Balance, beginning of year $ 12,785 $ 11,056 Assumed in business acquisition 155 — Charged to expense 8,270 10,350 Margin on parts sales reversed 2,960 2,576 Reductions for claims settled ( 11,088 ) ( 11,197 ) Balance, end of year $ 13,082 $ 12,785 44 Table of Contents Revenue Recognition . Accounting Policy Revenue is recognized at a single point in time upon the satisfaction of performance obligations, which occurs when control of the good or service transfers to the customer. This is generally on the date of shipment; however certain sales have terms requiring recognition when received by the customer. In cases where there are specific customer acceptance provisions, revenue is recognized at the later of customer acceptance or shipment (subject to shipping terms). Payment terms are established based on the type of product, distributor capabilities and competitive market conditions, and do not exceed one year. Standalone selling prices are determined based on the prices charged to customers for all material performance obligations. Variable consideration is accounted for as a price adjustment (sales adjustment). Following are examples of variable consideration that affect the Company’s reported revenue. Early payment discounts are provided to certain customers and within certain regions. Rights of return are typically contractually limited and amounts are estimable. The Company records a refund liability and establishes a recovery asset for the value of product expected to be returned at the time revenue is recognized. This includes promotions when, from time to time, the Company may promote the sale of new products by agreeing to accept returns of superseded products. Provisions for sales returns are recorded as a reduction of net sales, and provisions for warranty claims are recorded in selling, marketing and distribution expenses. Historically, sales returns have been approximately 3 percent of sales. Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include rebates based on annual purchases and sales growth, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or free product. Rebates are accrued based on the program rates and progress toward the probability weighted estimate of annual sales amount and sales growth. Additional promotions include cooperative advertising arrangements. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company’s products. Estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense or cost of products sold, depending on the type of incentive offered. The considerations payable to customers are deemed as broad based and are not recorded against net sales. Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping and handling are included in net sales. Deferred Revenues Revenue is deferred when cash payments are received or due in advance of performance, including amounts which are refundable. This is also the case for services associated with certain product sales. The balance in the deferred revenue and customer advances was $ 41.7 million as of December 25, 2020 and $ 33.1 million as of December 27, 2019. Net sales for the year included $ 33.1 million that was in deferred revenue and customer advances as of December 27, 2019. Practical Expedients and Exemptions Shipping and handling activities that occur after control of the related good transfers are accounted for as fulfillment activities instead of assessing such activities as performance obligations. Sales taxes related to revenue producing transactions collected from the customer for a governmental authority are excluded from the transaction price. Revenue standard requirements are applied to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. Promised goods or services are not assessed as performance obligations if they are immaterial in the context of the contract with the customer. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services are accrued. 45 Table of Contents Incremental costs of obtaining a contract are generally expensed when incurred because the amortization period would be less than one year. Such costs primarily relate to sales commissions and are recorded in selling, marketing and distribution expense. Disaggregated revenues by reporting segment and geography are disclosed in accordance with the revenue standard. See Note B , Segment Information. Earnings Per Common Share . Basic net earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the year. Diluted net earnings per share is computed after giving effect to the exercise of all dilutive outstanding option grants. Comprehensive Income. Comprehensive income is a measure of all changes in shareholders’ equity except those resulting from investments by and distributions to owners, and includes such items as net earnings, certain foreign currency translation items, changes in the value of qualifying hedges and pension liability adjustments. Derivative Instruments and Hedging Activities . The Company accounts for all derivatives, including those embedded in other contracts, as either assets or liabilities and measures those financial instruments at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. As part of its risk management program, the Company may periodically use forward exchange contracts to manage known market exposures. Terms of derivative instruments are structured to match the terms of the risk being managed and are generally held to maturity. The Company does not hold or issue derivative financial instruments for trading purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Company’s policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales. The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The Company enters into forward contracts or options, or borrows in various currencies, in order to hedge its net monetary positions. These instruments are recorded at fair value and the gains and losses are included in other expense, net. The notional amounts of contracts outstanding as of December 25, 2020 , totaled $ 38 million. The Company believes it uses strong financial counterparties in these transactions and that the resulting credit risk under these hedging strategies is not significant. The Company uses significant other observable inputs (level 2 in the fair value hierarchy) to value the derivative instruments used to hedge net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. Net derivative assets are reported on the balance sheet in accounts receivable and net derivative liabilities are reported as other current liabilities. The fair market value of such instruments follows (in thousands): 2020 2019 Foreign Currency Contracts Assets $ 114 $ — Liabilities ( 98 ) ( 87 ) Net Assets (Liabilities) $ 16 $ ( 87 ) B. Segment Information The Company has six operating segments which are aggregated into three reportable segments: Industrial, Process and Contractor. The Industrial segment includes our Industrial Products and Applied Fluid Technologies divisions. The Industrial segment markets equipment and solutions for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and vehicle assembly and components production, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles and various other industries. The Process segment includes our Process, Oil and Natural Gas, and Lubrication divisions. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, lubricants and other fluids. Markets served include food and beverage, dairy, oil and natural gas, 46 Table of Contents pharmaceutical, cosmetics, electronics, semiconductor fabrication, wastewater, mining, fast oil change facilities, service garages, fleet service centers, automobile dealerships and industrial lubrication applications. The Contractor segment markets sprayers for architectural coatings for painting, corrosion control, texture and line striping. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The cost of manufacturing for each segment is based on product cost, and expenses are based on actual costs incurred along with cost allocations of shared and centralized functions based on activities performed, sales or space utilization. Depreciation expense is charged to the manufacturing or operating cost center that utilizes the asset, and is then allocated to segments on the same basis as other expenses within that cost center. Reportable segments are defined by product. Segments are responsible for development, manufacturing, marketing and sales of their products. This allows for focused marketing and efficient product development. The segments share common purchasing, certain manufacturing, distribution and administration functions. Segments information follows (in thousands): 2020 2019 2018 Net Sales Industrial $ 677,680 $ 747,396 $ 781,029 Process 326,105 344,930 337,953 Contractor 646,330 553,719 534,310 Total $ 1,650,115 $ 1,646,045 $ 1,653,292 Operating Earnings Industrial $ 226,575 $ 247,216 $ 271,307 Process 64,498 76,367 68,514 Contractor 164,549 128,282 120,905 Unallocated corporate (expense) ( 28,675 ) ( 27,409 ) ( 24,299 ) Impairment ( 35,229 ) — — Total $ 391,718 $ 424,456 $ 436,427 Assets Industrial $ 632,165 $ 615,486 Process 404,370 387,216 Contractor 438,067 368,832 Unallocated corporate 513,526 320,676 Total $ 1,988,128 $ 1,692,210 Management assesses performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments. Unallocated corporate (expense) includes such items as stock compensation, certain acquisition transaction costs, bad debt expense, charitable contributions and certain facility expenses. Unallocated assets include cash, allowances and valuation reserves, deferred income taxes, certain capital and other assets. 47 Table of Contents Geographic information follows (in thousands): 2020 2019 2018 Net Sales (based on customer location) United States $ 883,451 $ 840,659 $ 806,127 Other countries 766,664 805,386 847,165 Total $ 1,650,115 $ 1,646,045 $ 1,653,292 Long-lived Assets United States $ 301,643 $ 268,864 Other countries 49,107 56,682 Total $ 350,750 $ 325,546 Sales to Major Customers. Worldwide sales to one customer in the Contractor and Industrial segments individually represented over 10 percent of the Company’s consolidated sales in 2020, 2019 and 2018. C. Inventories Major components of inventories were as follows (in thousands): 2020 2019 Finished products and components $ 133,122 $ 132,128 Products and components in various stages of completion 83,791 86,957 Raw materials and purchased components 129,319 117,026 Subtotal 346,232 336,111 Reduction to LIFO cost ( 60,528 ) ( 62,878 ) Total $ 285,704 $ 273,233 Inventories valued under the LIFO method were $ 150.1 million in 2020 and $ 140.3 million in 2019. All other inventory was valued on the FIFO method. In 2020, decreases in material costs, including tariffs, offset the impact of increases in certain inventory quantities and drove the LIFO reserve requirement lower. The effect of the LIFO reserve change on net earnings was not significant. D. Property, Plant and Equipment Property, plant and equipment were as follows (in thousands): 2020 2019 Land and improvements $ 26,529 $ 29,817 Buildings and improvements 277,449 182,195 Manufacturing equipment 340,838 320,240 Office, warehouse and automotive equipment 54,211 48,476 Additions in progress 39,354 99,476 Total property, plant and equipment 738,381 680,204 Accumulated depreciation ( 387,631 ) ( 354,658 ) Net property, plant and equipment $ 350,750 $ 325,546 Depreciation expense was $ 37.8 million in 2020, $ 32.2 million in 2019 and $ 31.1 million in 2018. 48 Table of Contents E. Income Taxes Earnings before income tax expense consist of (in thousands): 2020 2019 2018 Domestic $ 289,708 $ 294,402 $ 310,999 Foreign 84,943 111,475 99,767 Total $ 374,651 $ 405,877 $ 410,766 Income tax expense consists of (in thousands): 2020 2019 2018 Current Federal $ 11,509 $ 39,015 $ 27,760 State and local 3,217 3,347 3,398 Foreign 18,722 26,270 23,118 Current income tax expense 33,448 68,632 54,276 Deferred Domestic 12,856 ( 151 ) 17,058 Foreign ( 2,109 ) ( 6,457 ) ( 1,622 ) Deferred income tax expense (benefit) 10,747 ( 6,608 ) 15,436 Total $ 44,195 $ 62,024 $ 69,712 Income taxes paid were $ 44.0 million in 2020, $ 67.1 million in 2019 and $ 58.1 million in 2018. A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows: 2020 2019 2018 Statutory tax rate 21 % 21 % 21 % Tax effect of international operations ( 2 ) ( 1 ) — State taxes, net of federal effect 1 1 1 U.S. general business tax credits ( 1 ) ( 1 ) ( 1 ) Loss on sale of business 2 — — Stock compensation excess tax benefit ( 6 ) ( 3 ) ( 2 ) Global Intangible Low-taxed Income (GILTI) — 1 1 Foreign Derived Intangible Income (FDII) ( 3 ) ( 3 ) ( 2 ) Pension contribution — — ( 1 ) Effective tax rate 12 % 15 % 17 % 49 Table of Contents Deferred income taxes are provided for temporary differences between the financial reporting and the tax basis of assets and liabilities. The deferred tax assets (liabilities) resulting from these differences were as follows (in thousands): 2020 2019 Inventory valuations $ 586 $ 966 Accrued self-insurance retentions 1,164 1,280 Accrued warranty and service liabilities 2,062 2,095 Vacation accruals 3,249 2,335 Customer allowances 3,650 3,142 Excess of tax over book depreciation and amortization ( 49,377 ) ( 38,735 ) Pension benefit obligation 30,942 32,079 Postretirement medical benefit obligation 4,808 4,625 Acquisition costs 389 407 Stock compensation 11,743 13,979 Deferred compensation 2,075 1,960 Net operating loss carryforward 440 929 Deferred revenue 1,792 1,638 Other 2,041 1,851 Net deferred tax assets $ 15,564 $ 28,551 Total deferred tax assets were $ 67.0 million and $ 68.9 million, and total deferred tax liabilities were $ 51.4 million and $ 40.4 million on December 25, 2020 and December 27, 2019, respectively. The difference between the deferred income tax provision and the change in net deferred income taxes is due to the change in other comprehensive income (loss) items, acquisition purchase accounting and the sale of the Company's U.K.-based valve business. The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2014. The Company continues to assert that it will indefinitely reinvest earnings of foreign subsidiaries to support expansion of its international business. No additional income or withholding taxes have been provided for any remaining undistributed foreign earnings, as these amounts continue to be indefinitely reinvested in foreign operations. As of December 25, 2020 , the amount of cash held outside the U.S. was not significant to the Company’s liquidity and was available to fund investments abroad. The Company records penalties and accrued interest related to uncertain tax positions in income tax expense. Total reserves for uncertain tax positions were not material. F. Debt A summary of debt follows (dollars in thousands): Average Interest Rate December 25, 2020 Maturity 2020 2019 Private placement unsecured fixed-rate notes Series B 5.01 % March 2023 75,000 75,000 Series D 5.35 % July 2026 75,000 75,000 Unsecured revolving credit facility N/A December 2021 — — Unsecured revolving credit facility - CNH 3.77 % N/A 7,668 14,298 Notes payable to banks 1.11 % 2021 14,515 7,732 Total debt $ 172,183 $ 172,030 50 Table of Contents The estimated fair value of the fixed interest rate private placement debt was $ 170 million on December 25, 2020 and $ 165 million on December 27, 2019. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities. On December 15, 2016, the Company executed an amendment to its revolving credit agreement, extending the expiration date to December 15, 2021 and decreasing certain interest rates and fees. The amended agreement with a syndicate of lenders provides up to $ 500 million of committed credit, available for general corporate purposes, working capital needs, share repurchases and acquisitions. The Company may borrow up to $ 50 million under the swingline portion of the facility for daily working capital needs. Under terms of the amended revolving credit agreement, borrowings may be denominated in U.S. dollars or certain other currencies. Loans denominated in U.S. dollars bear interest, at the Company’s option, at either a base rate or a LIBOR-based rate. Loans denominated in currencies other than U.S. dollars bear interest at a LIBOR-based rate. The base rate is an annual rate equal to a margin ranging from zero percent to 0.75 percent, depending on the Company’s cash flow leverage ratio (debt to earnings before interest, taxes, depreciation, amortization and extraordinary non-operating or non-cash charges and expenses) plus the highest of (i) the bank’s prime rate, (ii) the federal funds rate plus 0.5 percent, or (iii) one-month LIBOR plus 1.5 percent. In general, LIBOR-based loans bear interest at LIBOR plus 1 percent to 1.75 percent, depending on the Company’s cash flow leverage ratio. In addition to paying interest on the outstanding loans, the Company is required to pay a fee on the unused amount of the loan commitments at an annual rate ranging from 0.125 to 0.25 , depending on the Company’s cash flow leverage ratio. On September 24, 2018, the Company entered into a revolving credit agreement with a sole lender that was scheduled to expire in September 2020. This revolver was amended effective January 29, 2020 to remove the expiration date, eliminate commitment fees, reduce interest rate margins and delete negative covenants regarding cash flow leverage and interest coverage ratios. The credit agreement provides up to $ 50 million of committed credit, available for general corporate purposes, working capital needs, share repurchases and acquisitions. Under the terms of the agreement, loans may be denominated in U.S. dollars or Chinese renminbi (offshore). Loans denominated in U.S. dollars bear interest, at the Company’s option, at either a base rate or a LIBOR-based rate. Loans denominated in Chinese renminbi (offshore) bear interest at a LIBOR-based rate based on the Chinese offshore rate. Other terms of this revolving credit agreement are substantially similar to those of the Company’s revolving credit agreement that expires in December 2021. On January 29, 2020, the Company entered into a master note agreement with a sole lender that expires on January 29, 2023 . The note agreement sets forth certain terms on which the Company may issue, and affiliates of the lender may purchase, up to $ 200 million of the Company’s senior notes. Interest on the senior notes will be determined at the time of issuance, at a fixed or LIBOR-based floating rate at the option of the Company, provided that the maximum aggregate principal amount of notes bearing interest at a floating rate may not exceed $ 100 million. Fixed rate notes issued under the agreement will mature no longer than 12 years from date of issuance and variable rate notes will mature no longer than 10 years from issuance. Under terms of the note agreement, the Company is required to maintain certain financial ratios as to cash flow leverage and interest coverage similar to the requirements of its other debt agreements. On December 25, 2020 , the Company had $ 598 million in lines of credit, including the $ 550 million in committed credit facilities described above and $ 48 million with foreign banks. The unused portion of committed credit lines was $ 548 million as of December 25, 2020 . In addition, the Company has unused, uncommitted lines of credit with foreign banks totaling $ 30 million. Borrowing rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit and the London Interbank market. The Company pays facility fees at an annual rate of up to 0.15 on certain of these lines. No compensating balances are required. Various debt agreements require the Company to maintain certain financial ratios as to cash flow leverage and interest coverage. The Company is in compliance with all financial covenants of its debt agreements as of December 25, 2020 . Annual maturities of debt are as follows (in thousands): 2021 2022 2023 2024 2025 Thereafter Maturities of debt $ 22,183 $ — $ 75,000 $ — $ — $ 75,000 Interest paid on debt was $ 11.3 million in 2020, $ 13.5 million in 2019 and $ 14.0 million in 2018. 51 Table of Contents G. Shareholders’ Equity At December 25, 2020 , the Company had 22,549 authorized, but not issued, cumulative preferred shares, $ 100 par value. The Company also has authorized, but not issued, a separate class of 3 million shares of preferred stock, $ 1 par value. Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands): Pension and Postretirement Medical Cumulative Translation Adjustment Total Balance, December 29, 2017 $ ( 78,430 ) $ ( 49,359 ) $ ( 127,789 ) Other comprehensive income (loss) before reclassifications ( 196 ) ( 8,609 ) ( 8,805 ) Amounts reclassified from accumulated other comprehensive income 7,190 — 7,190 Reclassified to retained earnings ( 15,453 ) — ( 15,453 ) Balance, December 28, 2018 ( 86,889 ) ( 57,968 ) ( 144,857 ) Other comprehensive income (loss) before reclassifications ( 33,938 ) 1,902 ( 32,036 ) Amounts reclassified from accumulated other comprehensive income 7,106 — 7,106 Balance, December 27, 2019 ( 113,721 ) ( 56,066 ) ( 169,787 ) Other comprehensive income (loss) before reclassifications ( 7,852 ) 46,030 38,178 Amounts reclassified from accumulated other comprehensive income 7,444 — 7,444 Balance, December 25, 2020 $ ( 114,129 ) $ ( 10,036 ) $ ( 124,165 ) In connection with the Company's sale of its U.K.-based valve business in 2020, $ 24 million of unrealized foreign currency translation losses recorded in accumulated other comprehensive income were reclassified to net earnings. Amounts related to pension and postretirement medical adjustments are reclassified to non-service components of pension cost that are included within other non-operating expenses. In February 2018, FASB issued a new standard related to reclassification of certain tax effects from accumulated other comprehensive income (AOCI). The Company adopted the new standard in the first quarter of 2018. We elected to reclassify $ 15.5 million from accumulated other comprehensive income to retained earnings, representing the amount of “ stranded ” tax effects resulting from the change in the U.S. federal tax rate and the consequent revaluation of deferred tax assets related to pension and postretirement medical expense. H. Share-Based Awards, Purchase Plans and Compensation Cost Stock Option and Award Plan. The Company has a stock incentive plan under which it grants stock options and share awards to directors, officers and other employees. Option price is the market price on the date of grant. Options become exercisable at such time, generally over 3 years or 4 years, and in such installments as set by the Company, and expire 10 years from the date of grant. Restricted share awards have been made to certain key employees under the plan. The market value of restricted stock at the date of grant is charged to operations over the vesting period. Compensation cost related to restricted shares is not significant. The Company has a stock appreciation plan that provides for payments of cash to eligible foreign employees based on the change in the market price of the Company’s common stock over a period of time. Compensation cost related to the stock appreciation plan was $ 2.4 million in 2020, $ 3.3 million in 2019 and $ 4.4 million in 2018. Individual nonemployee directors of the Company may elect to receive, either currently or deferred, all or part of their retainer in the form of shares of the Company’s common stock instead of cash. Under this arrangement, the Company issued 15,243 shares in 2020, 15,016 shares in 2019 and 14,595 shares in 2018. The expense related to this arrangement is not significant. 52 Table of Contents Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices): Option Shares Weighted Average Exercise Price Options Exercisable Weighted Average Exercise Price Outstanding, December 29, 2017 13,290 $ 21.99 7,729 $ 18.33 Granted 1,163 44.05 Exercised ( 2,081 ) 18.17 Canceled ( 102 ) 28.59 Outstanding, December 28, 2018 12,270 24.67 7,312 20.17 Granted 1,781 46.36 Exercised ( 1,886 ) 17.64 Canceled ( 53 ) 33.13 Outstanding, December 27, 2019 12,112 28.91 8,231 23.75 Granted 1,400 55.26 Exercised ( 3,238 ) 20.81 Canceled ( 66 ) 41.24 Outstanding, December 25, 2020 10,208 $ 35.02 6,553 $ 28.02 The following table summarizes information for options outstanding and exercisable at December 25, 2020 (in thousands, except exercise prices and contractual term amounts): Options Outstanding Options Exercisable Range of Prices Options Outstanding Weighted Average Remaining Contractual Term in Years Weighted Average Exercise Price Options Exercisable Weighted Average Exercise Price $10 - $25 3,628 3.6 $ 22.76 3,628 $ 22.76 $25 - $35 2,240 5.7 29.03 1,850 28.75 $35 - $45 1,258 7.3 43.30 631 42.86 $45 - $57 3,082 8.7 50.43 444 46.89 $10 - $57 10,208 6.0 $ 35.02 6,553 $ 28.02 The aggregate intrinsic value of exercisable option shares was $ 293.7 million as of December 25, 2020 , with a weighted average contractual term of 4.8 years. There were approximately 10.2 million vested share options and share options expected to vest as of December 25, 2020 , with an aggregate intrinsic value of $ 386.1 million, a weighted average exercise price of $ 35.02 and a weighted average contractual term of 6 years. Information related to options exercised follows (in thousands): 2020 2019 2018 Cash received $ 66,625 $ 32,749 $ 11,158 Aggregate intrinsic value 120,395 57,419 57,979 Tax benefit realized 25,000 12,000 12,000 Employee Stock Purchase Plan. Under the Company’s Employee Stock Purchase Plan, the purchase price of the shares is the lesser of 85 percent of the fair market value on the first day or the last day of the plan year. Under this plan, the Company issued 399,567 shares in 2020, 397,833 shares in 2019 and 480,461 shares in 2018. Authorized Shares. In April 2019, shareholders of the Company approved the Graco Inc. 2019 Stock Incentive Plan. The Plan provides for issuance of up to 10 million shares of Graco common stock. Shares authorized for issuance under the stock option and purchase plans are shown below (in thousands): 53 Table of Contents Total Shares Authorized Available for Future Issuance as of December 25, 2020 Stock Incentive Plan (2019) 10,000 8,026 Employee Stock Purchase Plan (2006) 21,000 12,896 Total 31,000 20,922 Amounts available for future issuance exclude outstanding options. Options outstanding as of December 25, 2020 , include options granted under three plans that were replaced by subsequent plans. No shares are available for future grants under those plans. Share-based Compensation. The Company recognized share-based compensation cost as follows (in thousands): 2020 2019 2018 Share-based compensation $ 25,153 $ 26,669 $ 25,565 Tax benefit 1,700 2,100 3,500 Share-based compensation, net of tax $ 23,453 $ 24,569 $ 22,065 As of December 25, 2020 , there was $ 9.0 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of approximately 2.3 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: 2020 2019 2018 Expected life in years 7.5 6.8 7.5 Interest rate 1.4 % 2.3 % 2.8 % Volatility 22.0 % 24.0 % 25.5 % Dividend yield 1.3 % 1.4 % 1.2 % Weighted average fair value per share $ 12.18 $ 11.31 $ 12.84 Expected life is estimated based on vesting terms and exercise and termination history. Interest rate is based on the U.S. Treasury rate on zero-coupon issues with a remaining term equal to the expected life of the option. Expected volatility is based on historical volatility over a period commensurate with the expected life of options. The fair value of employees’ purchase rights under the Employee Stock Purchase Plan was estimated on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results: 2020 2019 2018 Expected life in years 1.0 1.0 1.0 Interest rate 1.5 % 2.6 % 2.1 % Volatility 21.9 % 22.7 % 21.3 % Dividend yield 1.4 % 1.4 % 1.2 % Weighted average fair value per share $ 11.55 $ 11.36 $ 10.28 54 Table of Contents I. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): 2020 2019 2018 Net earnings available to common shareholders $ 330,456 $ 343,853 $ 341,054 Weighted average shares outstanding for basic earnings per share 167,462 166,515 167,364 Dilutive effect of stock options computed based on the treasury stock method using the average market price 4,546 5,109 5,849 Weighted average shares outstanding for diluted earnings per share 172,008 171,624 173,213 Basic earnings per share $ 1.97 $ 2.06 $ 2.04 Diluted earnings per share $ 1.92 $ 2.00 $ 1.97 Anti-dilutive stock options excluded from computations of diluted earnings per share totaled 0.3 million shares in 2020 and 1.1 million shares in 2019 and 2018. J. Retirement Benefits The Company has a defined contribution plan, under Section 401(k) of the Internal Revenue Code, which provides retirement benefits to most U.S. employees. For all employees who choose to participate, the Company matches employee contributions at a 100 percent rate, up to 3 percent of the employee’s compensation. For employees not covered by a defined benefit plan, the Company contributed an amount equal to 2.0 percent of the employee’s compensation. Employer contributions totaled $ 8.7 million in 2020, $ 8.4 million in 2019 and $ 8.0 million in 2018. The Company’s postretirement medical plan provides certain medical benefits for retired U.S. employees. Employees hired before January 1, 2005, are eligible for these benefits upon retirement and fulfillment of other eligibility requirements as specified by the plan. The Company has both funded and unfunded noncontributory defined benefit pension plans that together cover most U.S. employees hired before January 1, 2006, certain directors and some of the employees of the Company’s non-U.S. subsidiaries. For U.S. plans, benefits are based on years of service and the highest 5 consecutive years’ earnings in the 10 years preceding retirement. The Company funds annually in amounts consistent with minimum funding levels and maximum tax deduction limits. Investment policies and strategies of the U.S. funded pension plans are based on participant demographics of each plan. For the larger of the two plans (the “Blue plan”) covering active participants and retirees with higher benefit amounts, investments are based on a long-term view of economic growth and weighted toward equity securities. The primary goal of the plan’s investments is to ensure that the plan’s liabilities are met over time. In developing strategic asset allocation guidelines, an emphasis is placed on the long-term characteristics of individual asset classes, and the benefits of diversification among multiple asset classes. The plan invests primarily in domestic and international equities, fixed income securities, which include treasuries, highly-rated corporate bonds and high-yield bonds and real estate. Strategic target allocations for Blue plan assets are 50 percent equity securities, 37 percent fixed income securities and 13 percent real estate and alternative investments. For the smaller of the two plans (the “Gray plan”) covering retirees with lower benefit amounts, investments are based on a shorter-term, more conservative outlook. The midpoints of the ranges of strategic target allocations for the Gray plan assets are 28 percent equity securities, 60 percent fixed income securities and 12 percent real estate and alternative investments. Plan assets are held in trusts for the benefit of plan participants and are invested in various commingled funds, most of which are sponsored by the trustee. The fair values for commingled equity, fixed-income and real estate investments are measured using net asset values, which take into consideration the value of underlying fund investments, as well as the other accrued assets and liabilities of a fund, in order to determine a per share market value. Certain trustee-sponsored funds allow redemptions monthly or quarterly, with 10 or 60 days advance notice, while most of the funds allow redemptions daily. The plans had unfunded commitments to make additional investments in certain funds totaling $ 2.4 million as of December 25, 2020 and $ 2.5 million as of December 27, 2019. 55 Table of Contents The Company maintains a defined contribution plan covering employees of a Swiss subsidiary, funded by Company and employee contributions. Responsibility for pension coverage under Swiss law has been transferred to a Swiss insurance company. Plan assets are invested in an insurance contract that guarantees a federally mandated annual rate of return. The value of the plan assets is effectively the value of the insurance contract. The performance of the underlying assets held by the insurance company has no direct impact on the surrender value of the insurance contract. The insurance backed assets have no active market and are classified as level 3 in the fair value hierarchy. Assets of all plans by category and fair value measurement level were as follows (in thousands): Level 2020 2019 Cash and cash equivalents (1) 1 $ 1,234 $ ( 156 ) Insurance contract 3 31,877 27,675 Investments categorized in fair value hierarchy 33,111 27,519 Equity U.S. Large Cap N/A 89,003 84,330 U.S. Small/Mid Cap N/A 20,313 9,202 International N/A 56,761 39,240 Total equity 166,077 132,772 Fixed income N/A 161,706 107,832 Real estate and other N/A 12,671 35,821 Investments measured at net asset value 340,454 276,425 Total $ 373,565 $ 303,944 (1) Negative cash for 2019 represents unsettled pending trades within an investment that are classified in cash and cash equivalents until settled. The following table is a reconciliation of pension assets measured at fair value using level 3 inputs (in thousands): 2020 2019 Balance, beginning of year $ 27,675 $ 26,364 Purchases 2,255 2,151 Redemptions ( 1,425 ) ( 1,326 ) Unrealized gains 3,372 486 Balance, end of year $ 31,877 $ 27,675 56 Table of Contents The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the periods ending December 25, 2020 , and December 27, 2019, and a statement of the funded status as of the same dates (in thousands): Pension Benefits Postretirement Medical Benefits 2020 2019 2020 2019 Change in benefit obligation Obligation, beginning of year $ 449,419 $ 371,282 $ 30,646 $ 27,778 Service cost 9,361 7,735 609 545 Interest cost 13,313 15,103 1,016 1,162 Actuarial loss 46,545 67,756 3,572 2,532 Benefit payments ( 13,602 ) ( 12,594 ) ( 1,385 ) ( 1,371 ) Plan changes ( 529 ) — — — Exchange rate changes 6,145 137 — — Obligation, end of year $ 510,652 $ 449,419 $ 34,458 $ 30,646 Change in plan assets Fair value, beginning of year $ 303,944 $ 269,253 $ — $ — Actual return on assets 58,068 44,743 — — Employer contributions 22,237 2,276 1,385 1,371 Benefit payments ( 13,602 ) ( 12,594 ) ( 1,385 ) ( 1,371 ) Exchange rate changes 2,918 266 — — Fair value, end of year $ 373,565 $ 303,944 $ — $ — Funded status $ ( 137,087 ) $ ( 145,475 ) $ ( 34,458 ) $ ( 30,646 ) Amounts recognized in consolidated balance sheets Non-current assets $ 9,144 $ 2,931 $ — $ — Current liabilities 1,750 1,824 1,714 1,656 Non-current liabilities 144,481 146,582 32,744 28,990 Net $ 137,087 $ 145,475 $ 34,458 $ 30,646 Changes in discount rates used to value pension obligations were the main drivers of large actuarial losses in 2020 and 2019. In the fourth quarter of 2020, the Company made a $ 20 million voluntary contribution to one of its U.S. qualified defined benefit plans. The accumulated benefit obligation as of year-end for all defined benefit pension plans was $ 465 million for 2020 and $ 410 million for 2019. Information for plans with an accumulated benefit obligation in excess of plan assets follows (in thousands): 2020 2019 Projected benefit obligation $ 463,959 $ 402,900 Accumulated benefit obligation 418,372 363,497 Fair value of plan assets 317,727 254,493 57 Table of Contents The components of net periodic benefit cost for the plans for 2020, 2019 and 2018 were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2020 2019 2018 2020 2019 2018 Service cost-benefits earned during the period $ 9,361 $ 7,735 $ 8,487 $ 609 $ 545 $ 636 Interest cost on projected benefit obligation 13,313 15,103 13,424 1,016 1,162 1,084 Expected return on assets ( 18,814 ) ( 17,152 ) ( 17,447 ) — — — Amortization of prior service cost (credit) 294 279 279 — — — Amortization of net loss (gain) 10,243 8,392 7,931 733 273 646 Settlement loss (gain) — — 184 — — — Cost of pension plans which are not significant and have not adopted ASC 715 168 110 106 N/A N/A N/A Net periodic benefit cost $ 14,565 $ 14,467 $ 12,964 $ 2,358 $ 1,980 $ 2,366 Net periodic benefit cost is disaggregated between service cost presented as operating expense and other components of pension cost presented as non-operating expense. Other components of pension cost and changes in cash surrender value of insurance contracts intended to fund certain non-qualified pension and deferred compensation arrangements included in non-operating expenses totaled $ 5 million in 2020, $ 5 million in 2019 and $ 8 million in 2018. Amounts recognized in other comprehensive (income) loss in 2020 and 2019 were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2020 2019 2020 2019 Net loss (gain) arising during the period $ 8,872 $ 40,184 $ 3,572 $ 2,532 Amortization of net gain (loss) ( 10,243 ) ( 8,392 ) ( 733 ) ( 273 ) Prior service cost (credit) arising during the period ( 529 ) — — — Amortization of prior service credit (cost) ( 294 ) ( 279 ) — — Total $ ( 2,194 ) $ 31,513 $ 2,839 $ 2,259 Amounts included in accumulated other comprehensive (income) loss as of December 25, 2020 and December 27, 2019, that had not yet been recognized as components of net periodic benefit cost, were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2020 2019 2020 2019 Prior service cost $ 439 $ 1,197 $ — $ — Net loss 134,469 135,910 10,891 8,052 Net before income taxes 134,908 137,107 10,891 8,052 Income taxes ( 29,274 ) ( 29,666 ) ( 2,396 ) ( 1,772 ) Net $ 105,634 $ 107,441 $ 8,495 $ 6,280 Assumptions used to determine the Company’s benefit obligations are shown below: Pension Benefits Postretirement Medical Benefits Weighted average assumptions 2020 2019 2020 2019 U.S. Plans Discount rate 2.6 % 3.5 % 2.6 % 3.4 % Rate of compensation increase 2.7 % 2.8 % N/A N/A Non-U.S. Plans Discount rate 0.4 % 0.4 % N/A N/A Rate of compensation increase 1.3 % 1.3 % N/A N/A 58 Table of Contents Assumptions used to determine the Company’s net periodic benefit cost are shown below: Pension Benefits Postretirement Medical Benefits Weighted average assumptions 2020 2019 2018 2020 2019 2018 U.S. Plans Discount rate 3.5 % 4.5 % 3.9 % 3.4 % 4.5 % 3.9 % Rate of compensation increase 2.8 % 2.8 % 2.8 % N/A N/A N/A Expected return on assets 6.8 % 7.0 % 7.1 % N/A N/A N/A Non-U.S. Plans Discount rate 0.4 % 1.3 % 1.0 % N/A N/A N/A Rate of compensation increase 1.3 % 1.4 % 0.9 % N/A N/A N/A Expected return on assets 1.5 % 2.0 % 2.0 % N/A N/A N/A Several sources of information are considered in determining the expected rate of return assumption, including the allocation of plan assets, the input of actuaries and professional investment advisers, and historical long-term returns. In setting the return assumption, the Company recognizes that historical returns are not always indicative of future returns and also considers the long-term nature of its pension obligations. The Company’s U.S. retirement medical plan limits the annual cost increase that will be paid by the Company to 3 percent. In measuring the accumulated postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed to be 8.0 percent for 2021, decreasing each year to a constant rate of 4.5 percent for 2038 and thereafter, subject to the plan’s annual increase limitation. The Company expects to contribute $ 1.8 million to its unfunded pension plans and $ 1.7 million to the postretirement medical plan in 2021. The Company expects to utilize available credits to satisfy any required contributions to the funded pension plans under minimum funding requirements for 2021. Estimated future benefit payments are as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2021 $ 17,370 $ 1,714 2022 18,669 1,759 2023 19,877 1,761 2024 21,866 1,745 2025 21,102 1,742 Years 2026-2030 121,486 8,417 59 Table of Contents K. Commitments and Contingencies Operating Lease Liabilities and Assets The Company owns most of the assets used in its operations, but leases certain buildings and land, vehicles, office equipment and other rental assets. The Company determines if an arrangement is a lease at inception. All of the Company’s current lease arrangements are classified as operating leases. The Company historically has not entered into financing leases. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease expense is recognized by amortizing the amount recorded as an asset on a straight-line basis over the lease term. In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments. As of December 25, 2020, the weighted average remaining lease term was 6.3 years and the weighted average discount rate used to determine the operating lease liability was 3.1 percent. For the twelve months ended December 25, 2020, expense related to operating leases was $ 11.1 million, operating lease payments included in operating cash flows totaled $ 11.2 million, and non-cash additions to operating lease assets totaled $ 13.2 million. Variable lease costs and short term lease costs were not significant for the twelve months ended December 25, 2020. As of December 25, 2020, future maturities of operating lease liabilities were as follows (in thousands): 2021 $ 9,418 2022 8,369 2023 5,719 2024 4,691 2025 4,142 Thereafter 12,388 Total lease payments $ 44,727 Present value adjustment ( 4,325 ) Operating lease liabilities $ 40,402 Other Commitments. The Company is committed to pay suppliers under the terms of open purchase orders issued in the normal course of business totaling approximately $ 139 million at December 25, 2020 . The Company also has commitments with certain suppliers to purchase minimum quantities, and under the terms of certain agreements, the Company is committed for certain portions of the supplier’s inventory. The Company does not purchase, or commit to purchase, quantities in excess of normal usage or amounts that cannot be used within one year. The Company estimates that the maximum commitment amount under such agreements does not exceed $ 59 million. The Company enters into contracts with vendors to receive services. Commitments under these service contracts with noncancelable terms of more than one year totaled $ 7 million in 2021, $ 6 million in 2022, $ 3 million in 2023 and $ 4 million thereafter. In addition, the Company could be obligated to perform under standby letters of credit totaling $ 3 million at December 25, 2020 . The Company has also guaranteed the debt of its subsidiaries for up to $ 4 million. All debt of subsidiaries is reflected in the consolidated balance sheets. Contingencies. The Company is party to various legal proceedings arising in the normal course of business. The Company is actively pursuing and defending these matters and has recorded an estimate of the probable costs where appropriate. Management does not expect that resolution of these matters will have a material adverse effect on the Company, although the ultimate outcome cannot be determined based on available information. 60 Table of Contents L. Quarterly Financial Information (Unaudited) Unaudited quarterly financial data is summarized below (in thousands, except per share amounts): First Quarter Second Quarter Third Quarter Fourth Quarter 2020 Net Sales $ 373,567 $ 366,892 $ 439,316 $ 470,340 Gross Profit 198,631 182,529 228,953 244,824 Net Earnings 72,818 28,832 114,115 114,691 Basic Net Earnings per Common Share $ 0.43 $ 0.17 $ 0.68 $ 0.68 Diluted Net Earnings per Common Share 0.42 0.17 0.66 0.66 Cash Dividends Declared per Common Share 0.18 0.18 0.18 0.19 2019 Net Sales $ 404,870 $ 428,328 $ 400,555 $ 412,292 Gross Profit 216,042 226,954 207,379 209,381 Net Earnings 86,749 88,137 84,132 84,835 Basic Net Earnings per Common Share $ 0.52 $ 0.53 $ 0.50 $ 0.51 Diluted Net Earnings per Common Share 0.51 0.51 0.49 0.49 Cash Dividends Declared per Common Share 0.16 0.16 0.16 0.18 61 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.