Document

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 June 29, 2018

Commission File Number:  001-09249

 
GRACO INC.
(Exact name of registrant as specified in its charter)     
 
Minnesota
 
41-0285640
(State of incorporation)  
 
(I.R.S. Employer Identification Number)     
 
88 - 11th Avenue N.E.
Minneapolis, Minnesota
 
55413
(Address of principal executive offices)    
 
(Zip Code)     
(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 (§232.405 of this chapter) 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company
 
 
 
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
 
No
X
 

167,150,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July 18, 2018.


TABLE OF CONTENTS 
 
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBITS
 

2
Table of Contents

PART I     Item 1.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In thousands except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Sales
$
424,570

 
$
379,483

 
$
830,918

 
$
720,073

Cost of products sold
194,667

 
174,973

 
378,594

 
329,718

Gross Profit
229,903

 
204,510

 
452,324

 
390,355

Product development
16,112

 
14,662

 
31,401

 
28,921

Selling, marketing and distribution
62,949

 
55,583

 
125,471

 
109,972

General and administrative
37,464

 
33,855

 
70,378

 
63,617

Operating Earnings
113,378

 
100,410

 
225,074

 
187,845

Interest expense
3,891

 
4,154

 
7,124

 
8,209

Other expense, net
4,251

 
652

 
5,286

 
2,457

Earnings Before Income Taxes
105,236

 
95,604

 
212,664

 
177,179

Income taxes
16,096

 
15,776

 
38,014

 
36,619

Net Earnings
$
89,140

 
$
79,828

 
$
174,650

 
$
140,560

Per Common Share
 
 
 
 
 
 
 
Basic net earnings
$
0.53

 
$
0.48

 
$
1.04

 
$
0.84

Diluted net earnings
$
0.51

 
$
0.46

 
$
1.00

 
$
0.81

Cash dividends declared
$
0.13

 
$
0.12

 
$
0.27

 
$
0.24

See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Earnings
$
89,140

 
$
79,828

 
$
174,650

 
$
140,560

Components of other comprehensive
income (loss)
 
 
 
 
 
 
 
Cumulative translation adjustment
(15,112
)
 
11,029

 
(6,366
)
 
17,347

Pension and postretirement medical
liability adjustment
2,705

 
1,784

 
4,531

 
3,784

Income taxes - pension and postretirement
medical liability adjustment
(596
)
 
(717
)
 
(997
)
 
(1,483
)
Other comprehensive income
(13,003
)
 
12,096

 
(2,832
)
 
19,648

Comprehensive Income
$
76,137

 
$
91,924

 
$
171,818

 
$
160,208

See notes to consolidated financial statements.

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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
 
June 29,
2018
 
December 29,
2017
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
109,854

 
$
103,662

Accounts receivable, less allowances of $5,300 and $4,300
290,946

 
266,080

Inventories
271,729

 
239,349

Other current assets
36,757

 
34,247

Total current assets
709,286

 
643,338

Property, Plant and Equipment, net
214,997

 
204,298

Goodwill
294,343

 
278,789

Other Intangible Assets, net
174,202

 
183,056

Deferred Income Taxes
48,683

 
50,916

Other Assets
31,450

 
30,220

Total Assets
$
1,472,961

 
$
1,390,617

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Notes payable to banks
$
6,549

 
$
6,578

Trade accounts payable
54,814

 
48,748

Salaries and incentives
45,647

 
55,884

Dividends payable
22,146

 
22,260

Other current liabilities
138,369

 
112,368

Total current liabilities
267,525

 
245,838

Long-term Debt
297,295

 
226,035

Retirement Benefits and Deferred Compensation
174,856

 
172,411

Deferred Income Taxes
17,080

 
17,253

Other Non-current Liabilities
4,400

 
6,017

Shareholders’ Equity
 
 
 
Common stock
167,130

 
169,319

Additional paid-in-capital
505,342

 
499,934

Retained earnings
185,407

 
181,599

Accumulated other comprehensive income (loss)
(146,074
)
 
(127,789
)
Total shareholders’ equity
711,805

 
723,063

Total Liabilities and Shareholders’ Equity
$
1,472,961

 
$
1,390,617

See notes to consolidated financial statements.

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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
Cash Flows From Operating Activities
 
 
 
Net Earnings
$
174,650

 
$
140,560

Adjustments to reconcile net earnings to net cash
provided by operating activities
 
 
 
Depreciation and amortization
23,755

 
22,362

Deferred income taxes
355

 
(2,653
)
Share-based compensation
15,832

 
13,451

Change in
 
 
 
Accounts receivable
(26,100
)
 
(35,455
)
Inventories
(17,700
)
 
(17,103
)
Trade accounts payable
2,298

 
3,175

Salaries and incentives
(13,231
)
 
(1,808
)
Retirement benefits and deferred compensation
6,627

 
6,566

Other accrued liabilities
6,493

 
10,453

Other
(2,202
)
 
(3,857
)
Net cash provided by operating activities
170,777

 
135,691

Cash Flows From Investing Activities
 
 
 
Property, plant and equipment additions
(27,443
)
 
(16,621
)
Acquisition of businesses, net of cash acquired
(10,519
)
 
(9,905
)
Other
(65
)
 
102

Net cash provided by (used in) investing activities
(38,027
)
 
(26,424
)
Cash Flows From Financing Activities
 
 
 
Borrowings (payments) on short-term lines of credit, net
112

 
1,568

Borrowings on long-term line of credit
389,340

 
293,880

Payments on long-term debt and line of credit
(320,603
)
 
(288,550
)
Common stock issued
20,052

 
46,693

Common stock repurchased
(155,601
)
 
(90,160
)
Taxes paid related to net share settlement of equity awards
(16,151
)

(10,735
)
Cash dividends paid
(44,650
)
 
(40,115
)
Net cash provided by (used in) financing activities
(127,501
)
 
(87,419
)
Effect of exchange rate changes on cash
448

 
333

Net increase (decrease) in cash and cash equivalents
5,697

 
22,181

Cash, Cash Equivalents and Restricted Cash
 
 
 
Beginning of year
112,904

 
61,594

End of period
$
118,601

 
$
83,775

Reconciliation to Consolidated Balance Sheets
 
 
 
Cash and cash equivalents
$
109,854

 
$
75,446

Restricted cash included in other current assets
8,747

 
8,329

Cash, cash equivalents and restricted cash
$
118,601

 
$
83,775

See notes to consolidated financial statements.

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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 June 29, 2018 and the related statements of earnings and comprehensive income for the three and six months ended June 29, 2018 and June 30, 2017, and cash flows for the six months ended June 29, 2018 and June 30, 2017 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 June 29, 2018, and the results of operations and cash flows for all periods presented. Certain prior year disclosures have been revised to conform with current year reporting.

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 2017 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.Revenue Recognition

Adoption of New Accounting Standard

In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue from contracts with customers, contained in Accounting Standards Codification Topic 606 (“ASC 606”). The new standard sets forth a single comprehensive model for recognizing and reporting revenue. ASC 606 was effective for the Company as of December 30, 2017, the beginning of our fiscal year 2018. The Company adopted the new accounting standard using the modified retrospective transition approach. Application of the transition requirements had no material impact on operations or beginning retained earnings.

We record revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. Under ASC 606, rights of return are recorded as a refund liability and a recovery asset is established for the value of product expected to be returned. We previously classified rights of return, net of amounts expected to be recovered, as an allowance reducing accounts receivable. We reclassified prior period balance sheet amounts to conform to ASC 606 requirements. This resulted in an increase in accounts receivable of $9.7 million, a recovery asset of $1.7 million included in other current assets and $11.4 million of refund liability included in other current liabilities as of December 29, 2017.

Accounting Policy

Revenue is recognized 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. We generally determine standalone selling prices 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, amounts are estimable, and the Company records provisions for anticipated returns 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. 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

6
Table of Contents

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

We defer revenue when cash payments are received or due in advance of our 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 $46.9 million as of June 29, 2018 and $22.6 million as of December 29, 2017. The increase from year-end 2017 includes $21.4 million related to a business acquired in 2018. Net sales for the year to date included $20.0 million that was in deferred revenue and customer advances as of December 29, 2017.

Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

Practical Expedients and Exemptions

We have made an accounting policy election to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.

We have made an accounting policy election to exclude from the transaction price all sales taxes related to revenue producing transactions collected from the customer for a governmental authority.

We apply the new revenue standard requirements 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.

We have made an accounting policy election to not assess whether promised goods or services are 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.

We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are recorded in selling, marketing and distribution expense.

We disclose disaggregated revenues by reporting segment and geography in accordance with the revenue standard. See Note 7 Segment Information.

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3.Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net earnings available to common shareholders
$
89,140

 
$
79,828

 
$
174,650

 
$
140,560

Weighted average shares outstanding for basic earnings per share
167,260

 
167,404

 
168,166

 
167,354

Dilutive effect of stock options computed using the treasury stock method and the average market price
6,005

 
6,378

 
6,291

 
6,105

Weighted average shares outstanding for diluted earnings per share
173,265

 
173,782

 
174,457

 
173,459

Basic earnings per share
$
0.53

 
$
0.48

 
$
1.04

 
$
0.84

Diluted earnings per share
$
0.51

 
$
0.46

 
$
1.00

 
$
0.81


Stock options to purchase 1,099,000 and 801,000 shares were not included in the June 29, 2018 and June 30, 2017 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

4.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
Outstanding, December 29, 2017
13,290

 
$
21.99

 
7,729

 
$
18.33

Granted
1,163

 
44.05

 
 
 
 
Exercised
(1,745
)
 
19.25

 
 
 
 
Canceled
(50
)
 
26.40

 
 
 
 
Outstanding, June 29, 2018
12,658

 
$
24.38

 
7,616

 
$
19.80


The Company recognized year-to-date share-based compensation of $15.8 million in 2018 and $13.5 million in 2017. As of June 29, 2018, there was $14.5 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 1.9 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:
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
Expected life in years
7.5

 
7.0

Interest rate
2.8
%
 
2.2
%
Volatility
25.5
%
 
26.7
%
Dividend yield
1.2
%
 
1.6
%
Weighted average fair value per share
$
12.84

 
$
8.08



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Under the Company’s Employee Stock Purchase Plan, the Company issued 480,000 shares in 2018 and 500,000 shares in 2017. The fair value of the employees’ purchase rights under this 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:
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
Expected life in years
1.0

 
1.0

Interest rate
2.1
%
 
0.9
%
Volatility
21.3
%
 
22.3
%
Dividend yield
1.2
%
 
1.5
%
Weighted average fair value per share
$
10.28

 
$
7.32


5.Retirement Benefits

The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Pension Benefits
 
 
 
 
 
 
 
Service cost
$
1,998

 
$
1,754

 
$
4,211

 
$
3,815

Interest cost
3,411

 
3,673

 
6,845

 
7,603

Expected return on assets
(4,632
)
 
(4,112
)
 
(8,718
)
 
(8,464
)
Amortization and other
2,080

 
2,199

 
4,175

 
4,524

Net periodic benefit cost
$
2,857

 
$
3,514

 
$
6,513

 
$
7,478

Postretirement Medical
 
 
 
 
 
 
 
Service cost
$
175

 
$
126

 
$
350

 
$
301

Interest cost
265

 
271

 
529

 
546

Amortization
136

 
(55
)
 
272

 
(5
)
Net periodic benefit cost
$
576

 
$
342

 
$
1,151

 
$
842


In March 2017, the FASB issued a final standard that changes the presentation of net periodic benefit cost related to defined benefit plans. The Company adopted the standard effective for the first quarter of 2018, and the Company has applied the change retrospectively to all periods presented. Under the new standard, net periodic benefit costs are disaggregated between service costs presented as operating expenses and other components of pension costs presented as non-operating expenses. The Company previously charged service costs to segment operations and included other components of pension cost in unallocated corporate operating expenses. Under the new standard, unallocated corporate operating expenses decreased, operating earnings increased and other expense increased by the amount of non-service components of pension cost, including the amount of changes in cash surrender value of insurance contracts used to fund certain non-qualified pension and deferred compensation arrangements. There was no impact on reported net earnings or earnings per share. The retrospective application of the new standard resulted in increases of $1.6 million and $3.3 million to previously reported operating earnings and other non-operating expense for the quarter and year to date ended June 30, 2017, respectively.

Subsequent to the end of the second quarter of 2018, the Company made a $40 million voluntary contribution to one of its U.S. qualified defined benefit plans.

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6.Shareholders’ Equity

Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):
 
Pension and
Postretirement
Medical
 
Cumulative
Translation
Adjustment
 
Total
Balance, March 31, 2017
$
(75,192
)
 
$
(59,484
)
 
$
(134,676
)
Other comprehensive income (loss) before reclassifications
—

 
11,029

 
11,029

Reclassified to pension cost and deferred tax
1,067

 
—

 
1,067

Balance, June 30, 2017
$
(74,125
)
 
$
(48,455
)
 
$
(122,580
)
Balance, March 30, 2018
$
(92,458
)
 
$
(40,613
)
 
$
(133,071
)
Other comprehensive income (loss) before reclassifications
—

 
(15,112
)
 
(15,112
)
Reclassified to pension cost and deferred tax
2,109

 
—

 
2,109

Balance, June 29, 2018
$
(90,349
)
 
$
(55,725
)
 
$
(146,074
)

 
Pension and
Postretirement
Medical
 
Cumulative
Translation
Adjustment
 
Total
Balance, December 30, 2016
$
(76,426
)
 
$
(65,802
)
 
$
(142,228
)
Other comprehensive income (loss) before reclassifications
—

 
17,347

 
17,347

Reclassified to pension cost and deferred tax
2,301

 
—

 
2,301

Balance, June 30, 2017
$
(74,125
)
 
$
(48,455
)
 
$
(122,580
)
Balance, December 29, 2017
$
(78,430
)
 
$
(49,359
)
 
$
(127,789
)
Other comprehensive income (loss) before reclassifications
—

 
(6,366
)
 
(6,366
)
Reclassified to pension cost and deferred tax
3,534

 
—

 
3,534

Reclassified to retained earnings
(15,453
)
 
—

 
(15,453
)
Balance, June 29, 2018
$
(90,349
)
 
$
(55,725
)
 
$
(146,074
)

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). We early-adopted the new standard in the first quarter of 2018. We elected to reclassify $15.5 million from accumulated other comprehensive income to retained earnings, representing the amount of "stranded" tax effects resulting from the change in the U.S. federal tax rate and the consequent revaluation of deferred tax assets related to pension and postretirement medical expense.

On April 30, 2018, the Company repurchased 0.7 million shares of its common stock for $28.2 million from the President and Chief Executive Officer of the Company. The $43.33 per share purchase price represented a discount of 3 percent from the closing price of the Company’s stock immediately prior to the date of the transaction. The repurchase is expected to be accretive to earnings per share and yield a rate of return to remaining shareholders that will exceed the Company’s equity cost of capital. The Company used available cash balances and borrowings under its revolving line of credit to fund the repurchase.

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7.
Segment Information

The Company has three reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Sales
 
 
 
 
 
 
 
 Industrial
$
190,459

 
$
174,868

 
$
385,655

 
$
331,258

 Process
85,059

 
73,399

 
165,094

 
143,428

 Contractor
149,052

 
131,216

 
280,169

 
245,387

 Total
$
424,570

 
$
379,483

 
$
830,918

 
$
720,073

Operating Earnings
 
 
 
 
 
 
 
 Industrial
$
67,030

 
$
61,596

 
$
136,155

 
$
115,331

 Process
17,065

 
13,418

 
34,767

 
26,881

 Contractor
38,382

 
33,759

 
69,793

 
59,778

 Unallocated corporate (expense)
(9,099
)
 
(8,363
)
 
(15,641
)
 
(14,145
)
 Total
$
113,378

 
$
100,410

 
$
225,074

 
$
187,845


Assets by segment were as follows (in thousands): 
 
June 29,
2018
 
December 29,
2017
Industrial
$
627,490

 
$
572,436

Process
341,272

 
345,572

Contractor
298,431

 
255,615

Unallocated corporate
205,768

 
216,994

Total
$
1,472,961

 
$
1,390,617


Geographic information follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Sales (based on customer location)
 
 
 
 
 
 
 
United States
$
212,541

 
$
194,619

 
$
406,323

 
$
369,473

Other countries
212,029

 
184,864

 
424,595

 
350,600

Total
$
424,570

 
$
379,483

 
$
830,918

 
$
720,073

 
June 29,
2018
 
December 29,
2017
Long-lived Assets
 
 
 
United States
$
165,818

 
$
163,416

Other countries
49,179

 
40,882

Total
$
214,997

 
$
204,298



11
Table of Contents

8.Inventories

Major components of inventories were as follows (in thousands):
 
June 29,
2018
 
December 29,
2017
Finished products and components
$
141,101

 
$
124,327

Products and components in various stages of completion
73,900

 
61,274

Raw materials and purchased components
108,083

 
103,407

Subtotal
323,084

 
289,008

Reduction to LIFO cost
(51,355
)
 
(49,659
)
Total
$
271,729

 
$
239,349


9.Intangible Assets

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 June 29, 2018
 
 
 
 
 
 
 
 
 
Cost
$
179,444

 
$
19,371

 
$
1,070

 
$
59,937

 
$
259,822

Accumulated amortization
(60,872
)
 
(8,515
)
 
(674
)
 
—

 
(70,061
)
Foreign currency translation
(10,427
)
 
(860
)
 
(72
)
 
(4,200
)
 
(15,559
)
Book value
$
108,145

 
$
9,996

 
$
324

 
$
55,737

 
$
174,202

Weighted average life in years
13

 
10

 
4

 
N/A

 
 
As of December 29, 2017
 
 
 
 
 
 
 
 
 
Cost
$
179,826

 
$
18,479

 
$
1,071

 
$
59,553

 
$
258,929

Accumulated amortization
(54,076
)
 
(7,795
)
 
(542
)
 
—

 
(62,413
)
Foreign currency translation
(9,186
)
 
(727
)
 
(61
)
 
(3,486
)
 
(13,460
)
Book value
$
116,564

 
$
9,957

 
$
468

 
$
56,067

 
$
183,056

Weighted average life in years
13

 
10

 
4

 
N/A

 
 

Amortization of intangibles for the quarter was $4.0 million in 2018 and $3.7 million in 2017 and for the year to date was $8.0 million in 2018 and $7.3 million in 2017. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Estimated Amortization Expense
$
15,540

 
$
15,014

 
$
14,798

 
$
14,602

 
$
14,617

 
$
51,862


Changes in the carrying amount of goodwill for each reportable segment were (in thousands): 
 
Industrial    
 
Process    
 
Contractor    
 
Total    
Balance, December 29, 2017
$
161,673

 
$
97,971

 
$
19,145

 
$
278,789

Additions, adjustments from business acquisitions
17,544

 
170

 
409

 
18,123

Foreign currency translation
(2,141
)
 
(428
)
 
—

 
(2,569
)
Balance, June 29, 2018
$
177,076

 
$
97,713

 
$
19,554

 
$
294,343


The Company completed business acquisitions in 2018 that were not material to the consolidated financial statements.


12
Table of Contents

10.
Other Current Liabilities
Components of other current liabilities were (in thousands):
 
June 29,
2018
 
December 29,
2017
Accrued self-insurance retentions
$
7,853

 
$
7,956

Accrued warranty and service liabilities
10,956

 
10,535

Accrued trade promotions
9,064

 
10,588

Payable for employee stock purchases
5,666

 
10,053

Customer advances and deferred revenue
46,881

 
22,632

Income taxes payable
12,554

 
7,564

Right of return refund liability
12,119

 
11,412

Other
33,276

 
31,628

Total
$
138,369

 
$
112,368


The Company managed certain self-insured loss exposures through a wholly-owned captive insurance subsidiary. Cash balances of $8.7 million as of June 29, 2018 and $9.2 million as of December 29, 2017 were restricted to funding of the captive's loss reserves and are included within other current assets on the Company's Consolidated Balance Sheets. The Company has begun the process of dissolving the captive insurance subsidiary. Cash balances will no longer be restricted upon final dissolution.

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 29, 2017
$
10,535

Charged to expense
3,917

Margin on parts sales reversed
1,440

Reductions for claims settled
(4,936
)
Balance, June 29, 2018
$
10,956


11.Fair Value

Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
 
Level   
 
June 29,
2018
 
December 29,
2017
Assets
 
 
 
 
 
Cash surrender value of life insurance
2
 
$
16,000

 
$
16,128

Forward exchange contracts
2
 
677

 
—

Total assets at fair value
 
 
$
16,677

 
$
16,128

Liabilities
 
 
 
 
 
Contingent consideration
3
 
$
5,300

 
$
4,081

Deferred compensation
2
 
4,257

 
3,836

Forward exchange contracts
2
 
—

 
517

Total liabilities at fair value
 
 
$
9,557

 
$
8,434


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.

13
Table of Contents


Long-term notes payable with fixed interest rates have a carrying amount of $225 million and an estimated fair value of $235 million as of June 29, 2018 and $245 million as of December 29, 2017. 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.

12.Income Taxes

The effective income tax rate was 15 percent for the quarter, down 1 percentage point from the second quarter last year. The effective income tax rate for the year to date was 18 percent, down 3 percentage points from last year. U.S. federal income tax reform legislation (the "Tax Act") passed at the end of 2017 decreased the effective tax rate by 9 percentage points percentage points for both the quarter and the year to date compared to last year. Excess tax benefits related to stock option exercises reduced the effective tax rate by 6 percentage points in the second quarter of 2018 and 14 percentage points in the second quarter last year. Year-to-date excess tax benefits related to stock option exercises reduced the effective tax rate by 4 percentage points in 2018 and 10 percentage points in 2017.
  
Our accounting for certain income tax effects of the Tax Act related to the transition tax is incomplete; however, we have determined reasonable estimates for those effects and have recorded provisional amounts in our consolidated financial statements as of June 29, 2018 and December 29, 2017. We did not make any measurement-period adjustments to those amounts during the first half of 2018.

13.Recent Accounting Pronouncements

In February 2016, FASB issued a final standard on leases contained in Accounting Standards Codification Topic 842 (“ASC 842”). The new standard is effective for the Company in the first quarter of 2019 and requires most leases to be recorded on the balance sheet. The Company plans to adopt the new accounting standard using the modified retrospective transition approach and will elect to use the package of practical expedients. The modified retrospective transition approach will recognize any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods.
We have established an implementation team that has gathered and analyzed a significant portion of our lease contracts. Based on preliminary results of the process, which has not been completed, nothing has come to our attention that would indicate that adoption of the new standard will have a material impact on our earnings or shareholders equity. We expect that the recording of right-of-use assets and associated lease liabilities will have a significant effect on our consolidated balance sheet; however, we are unable to determine an amount at this time.
We are in the process of evaluating changes to our business processes, systems and controls needed to support recognition and disclosure under the new standard. Further, we are continuing to assess any incremental disclosures that will be required in our consolidated financial statements.







14
Table of Contents

Item 2. GRACO INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company supplies technology and expertise for the management of fluids and coatings in both industrial and commercial applications. It 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

A summary of financial results follows (in millions except per share amounts):
 
Three Months Ended    
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
%
 Change 
 
June 29,
2018
 
June 30,
2017
 
%
 Change 
Net Sales
$
424.6

 
$
379.5

 
12
%
 
$
830.9

 
$
720.1

 
15
%
Operating Earnings
113.4

 
100.4

 
13
%
 
225.1

 
187.8

 
20
%
Net Earnings
89.1

 
79.8

 
12
%
 
174.7

 
140.6

 
24
%
Net Earnings, adjusted (1)
82.7

 
66.2

 
25
%
 
166.8

 
123.4

 
35
%
Diluted Net Earnings per Common Share
$
0.51

 
$
0.46

 
11
%
 
$
1.00

 
$
0.81

 
23
%
Diluted Net Earnings per Common Share, adjusted (1)
$
0.48

 
$
0.38

 
26
%
 
$
0.96

 
$
0.71

 
35
%
(1) See below for a reconciliation of adjusted non-GAAP financial measures to GAAP.

Sales for the quarter and year to date increased double-digit percentages with growth in all segments. Changes in currency translation rates increased sales by approximately $9 million (3 percentage points) for the quarter and $23 million (3 percentage points) for the year to date. Acquired operations contributed 3 percentage points of sales growth for the quarter and year to date. Operating expense leverage on higher sales drove 13 percent and 20 percent increases in operating earnings for the quarter and year to date, respectively.


15
Table of Contents

Excluding the impact of tax benefits related to stock option exercises presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements of adjusted income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
Jun 29,
2018
 
Jun 30,
2017
 
Jun 29,
2018
 
Jun 30,
2017
Earnings before income taxes
$
105.2

 
$
95.6

 
$
212.7

 
$
177.2

 
 
 
 
 
 
 
 
Income taxes, as reported
$
16.1

 
$
15.8

 
$
38.0

 
$
36.6

Excess tax benefit from option exercises
6.4

 
13.6

 
7.9

 
17.2

Income taxes, adjusted
$
22.5

 
$
29.4

 
$
45.9

 
$
53.8

 
 
 
 
 
 
 
 
Effective income tax rate
 
 
 
 
 
 
 
   As reported
15.3
%
 
16.5
%
 
17.9
%
 
20.7
%
   Adjusted
21.4
%
 
30.7
%
 
21.6
%
 
30.4
%
 
 
 
 
 
 
 
 
Net Earnings, as reported
$
89.1

 
$
79.8

 
$
174.7

 
$
140.6

Excess tax benefit from option exercises
(6.4
)
 
(13.6
)
 
(7.9
)
 
(17.2
)
Net Earnings, adjusted
$
82.7

 
$
66.2

 
$
166.8

 
$
123.4

 
 
 
 
 
 
 
 
Weighted Average Diluted Shares
173.3

 
173.8

 
174.5

 
173.5

Diluted Earnings per Share
 
 
 
 
 
 
 
   As reported
$
0.51

 
$
0.46

 
$
1.00

 
$
0.81

   Adjusted
$
0.48

 
$
0.38

 
$
0.96

 
$
0.71


The following table presents an overview of components of net earnings as a percentage of net sales:
 
Three Months Ended   
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of products sold
45.9

 
46.1

 
45.6

 
45.8

Gross Profit
54.1

 
53.9

 
54.4

 
54.2

Product development
3.8

 
3.9

 
3.8

 
4.0

Selling, marketing and distribution
14.8

 
14.6

 
15.1

 
15.3

General and administrative
8.8

 
8.9

 
8.4

 
8.8

Operating Earnings
26.7

 
26.5

 
27.1

 
26.1

Interest expense
0.9

 
1.1

 
0.9

 
1.1

Other expense, net
1.0

 
0.2

 
0.6

 
0.4

Earnings Before Income Taxes
24.8

 
25.2

 
25.6

 
24.6

Income taxes
3.8

 
4.2

 
4.6

 
5.1

Net Earnings
21.0
%
 
21.0
%
 
21.0
%
 
19.5
%



16
Table of Contents

Net Sales

The following table presents net sales by geographic region (in millions):
 
Three Months Ended   
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Americas(1)
$
245.7

 
$
221.4

 
$
467.1

 
$
421.4

EMEA(2)
96.8

 
87.0

 
198.2

 
166.1

Asia Pacific
82.1

 
71.1

 
165.6

 
132.6

Consolidated
$
424.6

 
$
379.5

 
$
830.9

 
$
720.1

(1)
North, South and Central America, including the United States
(2)
Europe, Middle East and Africa

The following table presents the components of net sales change by geographic region:
 
Three Months
 
Six Months
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
Americas
10%
 
1%
 
0%
 
11%
 
10%
 
1%
 
0%
 
11%
EMEA
(2)%
 
6%
 
7%
 
11%
 
3%
 
6%
 
10%
 
19%
Asia Pacific
7%
 
3%
 
5%
 
15%
 
15%
 
4%
 
6%
 
25%
Consolidated
6%
 
3%
 
3%
 
12%
 
9%
 
3%
 
3%
 
15%

Gross Profit

Gross profit margin rates improved slightly for the quarter and year to date. Favorable effects from currency translation and realized pricing were mostly offset by the unfavorable effects of lower gross margins from acquired operations and changes in product and channel mix.

Operating Expenses

Total operating expenses for the quarter increased $12 million (12 percent) compared to the second quarter last year. The increase includes approximately $2 million related to currency translation, $2 million from acquired operations, $4 million of increases in costs directly based on sales and earnings and a $1 million increase in market-driven share-based compensation. Year-to-date operating expenses increased $25 million (12 percent) compared to the first half last year. The increase includes approximately $5 million related to currency translation, $4 million from acquired operations, $9 million of increases in costs directly based on sales and earnings and a $2 million increase in market-driven share-based compensation.

Other expense

Other expense for the quarter and year to date includes $3 million and $2 million of exchange losses on net assets of foreign operations, respectively, compared to small gains in the comparable periods last year.

Income Taxes

The effective income tax rate was 15 percent for the quarter, down 1 percentage point from the second quarter last year. U.S. federal income tax reform legislation passed at the end of 2017 decreased the effective tax rate by 9 percentage points for the quarter, and a decrease in excess tax benefits related to stock option exercises increased the effective rate by 8 percentage points compared to the second quarter of last year. The effective income tax rate for the year to date was 18 percent, down 3 percentage points from last year. U.S. federal income tax reform legislation decreased the year-to-date effective tax rate by 9 percentage points and the decrease in excess tax benefits related to stock option exercises increased the effective rate by 6 percentage points from the comparable period last year.

17
Table of Contents

Segment Results

Certain measurements of segment operations compared to last year are summarized below:

Industrial Segment

The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment
(dollars in millions):
 
Three Months Ended  
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Sales
 
 
 
 
 
 
 
Americas
$
79.3

 
$
75.9

 
$
153.5

 
$
144.9

EMEA
56.5

 
49.9

 
116.7

 
94.0

Asia Pacific
54.7

 
49.1

 
115.5

 
92.4

Total
$
190.5

 
$
174.9

 
$
385.7

 
$
331.3

Operating earnings as a percentage of net sales
35
%
 
35
%
 
35
%
 
35
%

The following table presents the components of net sales change by geographic region for the Industrial segment:
 
Three Months
 
Six Months
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
Americas
4%
 
0%
 
0%
 
4%
 
6%
 
0%
 
0%
 
6%
EMEA
(5)%
 
11%
 
7%
 
13%
 
2%
 
11%
 
11%
 
24%
Asia Pacific
2%
 
5%
 
5%
 
12%
 
12%
 
6%
 
7%
 
25%
Segment Total
1%
 
4%
 
4%
 
9%
 
6%
 
5%
 
5%
 
16%

Industrial segment sales growth included $8 million for the quarter and $17 million for the year to date from acquired operations. Sales growth for the quarter was modest due to timing of finishing system sales and other project activity. Strong finishing systems sales in the first quarter boosted year to date sales growth. Operating margin rates for the quarter and year to date were consistent with comparable periods last year. The favorable effects of translation and product and channel mix were offset by the effects of purchase accounting and lower operating margins in acquired operations.

Process Segment

The following table presents net sales and operating earnings as a percentage of sales for the Process segment
(dollars in millions):
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Sales
 
 
 
 
 
 
 
Americas
$
54.8

 
$
46.6

 
$
106.1

 
$
91.2

EMEA
14.4

 
13.9

 
29.4

 
28.8

Asia Pacific
15.9

 
12.9

 
29.6

 
23.4

Total
$
85.1

 
$
73.4

 
$
165.1

 
$
143.4

Operating earnings as a percentage of net sales
20
%
 
18
%
 
21
%
 
19
%


18
Table of Contents

The following table presents the components of net sales change by geographic region for the Process segment:
 
Three Months
 
Six Months
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
Americas
16%
 
2%
 
0%
 
18%
 
14%
 
2%
 
0%
 
16%
EMEA
(2)%
 
1%
 
5%
 
4%
 
(5)%
 
1%
 
6%
 
2%
Asia Pacific
18%
 
1%
 
4%
 
23%
 
21%
 
1%
 
5%
 
27%
Segment Total
13%
 
1%
 
2%
 
16%
 
11%
 
1%
 
3%
 
15%

The Process segment had sales growth in all product applications. Strong sales growth continued in the segment's Lubrication division, and the Oil and Natural Gas division had solid growth in the second quarter. Operating margin rates for this segment improved by 2 percentage points for both the quarter and year to date, driven by higher sales volume and expense leverage.
 
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   
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net Sales
 
 
 
 
 
 
 
Americas
$
111.6

 
$
98.9

 
$
207.5

 
$
185.3

EMEA
26.0

 
23.2

 
52.2

 
43.3

Asia Pacific
11.5

 
9.1

 
20.5

 
16.8

Total
$
149.1

 
$
131.2

 
$
280.2

 
$
245.4

Operating earnings as a percentage of net sales
26
%
 
26
%
 
25
%
 
24
%

The following table presents the components of net sales change by geographic region for the Contractor segment:
 
Three Months
 
Six Months
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
 
Volume and Price
 
Acquisitions
 
Currency
 
Total
Americas
11%
 
2%
 
0%
 
13%
 
10%
 
2%
 
0%
 
12%
EMEA
4%
 
0%
 
8%
 
12%
 
10%
 
0%
 
11%
 
21%
Asia Pacific
22%
 
0%
 
4%
 
26%
 
17%
 
0%
 
5%
 
22%
Segment Total
11%
 
1%
 
2%
 
14%
 
11%
 
1%
 
2%
 
14%

Contractor segment sales increased in all channels. Operating margin rates for the quarter and year to date improved slightly compared to the comparable periods last year. Favorable effects of translation and expense leverage were offset by increases in volume and earnings-based incentive costs.

Liquidity and Capital Resources

Net cash provided by operating activities of $171 million increased $35 million compared to the first half of last year, driven by the increase in net earnings. Increases in accounts receivable and inventories reflect acquired operations and growth in business activity in the first half of 2018. The Company used cash of $11 million in 2018 and $10 million in 2017 to acquire businesses that were not material to the consolidated financial statements. Other significant uses of cash in 2018 included share repurchases of $156 million (including $28 million repurchased from the Company's President and Chief Executive Officer), cash dividends of $45 million, and property, plant and equipment additions of $27 million.


19
Table of Contents

Subsequent to the end of the second quarter of 2018, the Company used available cash and borrowings under its revolving line of credit to make a $40 million voluntary contribution to one of its U.S. qualified defined benefit retirement plans.

At June 29, 2018, the Company had various lines of credit totaling $544 million, of which $466 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 2018.

Outlook

Demand remains broad-based across products and geographies. We are holding to our outlook of mid-to-high single-digit organic sales growth on a constant currency basis worldwide for the full year 2018. Although we anticipate second half pressures from tariffs, material costs and currency, we are encouraged by the strong levels of demand in many of our key end markets. As a result, we believe Graco is well positioned to deliver another record year of sales and earnings in 2018.

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 2017 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 tax rates or the adoption of new tax legislation: 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; 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 2017 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.

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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 2017 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 and the Chief Financial Officer and Treasurer. Based upon that evaluation, the Company's President and Chief Executive Officer and the Chief Financial Officer and Treasurer 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.

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PART IIOTHER INFORMATION

Item 1A.Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2017 Annual Report on Form 10-K.

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 18,000,000 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.

Information on issuer purchases of equity securities follows:
Period
 
Total Number
of Shares Purchased  
 
Average Price
Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be
Purchased Under the Plans or Programs
(at end of period)
Mar 31, 2018 - Apr 27, 2018
 
768,078

 
$
44.87

 
768,078

 
5,988,729

Apr 28, 2018 - May 25, 2018 (1)
 
683,188

 
$
43.36

 
683,188

 
5,305,541

May 26, 2018 - June 29, 2018
 
—

 
$
—

 
—

 
5,305,541


(1) On April 30, 2018, the Company repurchased 650,770 shares of its common stock for $28.2 million from the President and Chief Executive Officer of the Company. The $43.33 per share purchase price represented a discount of 3 percent from the closing price of the Company’s stock immediately prior to the date of the transaction.






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Item 6.Exhibits
3.1

 
 
 
 
3.2

 
 
 
 
10.1

 
Stock Repurchase Agreement, dated April 30, 2018, by and between Graco Inc. and Patrick J. McHale. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K filed May 1, 2018.) 
 
 
 

 
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a).
 
 
 

 
Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a).
 
 
 

 
Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C.
 
 
 

 
Press Release Reporting Second Quarter Earnings dated July 25, 2018.
 
 
 
101

 
Interactive Data File.

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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.
 
 
 
 
 
 
 
Date:
 
July 25, 2018
 
By:
 
/s/ Patrick J. McHale
 
 
 
 
 
 
Patrick J. McHale
 
 
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
 
July 25, 2018
 
By:
 
/s/ Mark W. Sheahan
 
 
 
 
 
 
Mark W. Sheahan
 
 
 
 
 
 
Chief Financial Officer and Treasurer
 
 
 
 
 
 
(Principal Financial Officer)
 
 
 
 
Date:
 
July 25, 2018
 
By:
 
/s/ Caroline M. Chambers
 
 
 
 
 
 
Caroline M. Chambers
 
 
 
 
 
 
Vice President, Corporate Controller
     and Information Systems
 
 
 
 
 
 
(Principal Accounting Officer)