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GRACO INC - Quarter Report: 2019 June (Form 10-Q)


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 28, 2019

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number:  001-09249
 
GRACO INC.
(Exact name of registrant as specified in its charter)     
 
Minnesota
 
41-0285640
(State or other jurisdiction of incorporation or organization)  
 
(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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
GGG
The New York Stock Exchange

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
 
No
 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
 
Yes
 
No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
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
 

166,805,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July 17, 2019.



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 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Sales
$
428,328

 
$
424,570

 
$
833,198

 
$
830,918

Cost of products sold
201,374

 
194,667

 
390,202

 
378,594

Gross Profit
226,954

 
229,903

 
442,996

 
452,324

Product development
17,324

 
16,112

 
33,893

 
31,401

Selling, marketing and distribution
60,441

 
62,949

 
121,258

 
125,471

General and administrative
36,828

 
37,464

 
70,957

 
70,378

Operating Earnings
112,361

 
113,378

 
216,888

 
225,074

Interest expense
3,431

 
3,891

 
6,966

 
7,124

Other expense, net
1,119

 
4,251

 
1,388

 
5,286

Earnings Before Income Taxes
107,811

 
105,236

 
208,534

 
212,664

Income taxes
19,674

 
16,096

 
33,648

 
38,014

Net Earnings
$
88,137

 
$
89,140

 
$
174,886

 
$
174,650

Net Earnings per Common Share
 
 
 
 
 
 
 
Basic
$
0.53

 
$
0.53

 
$
1.05

 
$
1.04

Diluted
$
0.51

 
$
0.51

 
$
1.02

 
$
1.00

See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Earnings
$
88,137

 
$
89,140

 
$
174,886

 
$
174,650

Components of other comprehensive
income (loss)
 
 
 
 
 
 
 
Cumulative translation adjustment
1,232

 
(15,112
)
 
2,401

 
(6,366
)
Pension and postretirement medical
liability adjustment
1,910

 
2,705

 
4,037

 
4,531

Income taxes - pension and postretirement
medical liability adjustment
(423
)
 
(596
)
 
(893
)
 
(997
)
Other comprehensive income
2,719

 
(13,003
)
 
5,545

 
(2,832
)
Comprehensive Income
$
90,856

 
$
76,137

 
$
180,431

 
$
171,818

See notes to consolidated financial statements.

3

Table of Contents

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
 
June 28,
2019
 
December 28,
2018
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
180,883

 
$
132,118

Accounts receivable, less allowances of $5,200 and $5,300
291,008

 
274,608

Inventories
297,545

 
283,982

Other current assets
29,457

 
32,508

Total current assets
798,893

 
723,216

Property, Plant and Equipment, net
286,521

 
229,295

Goodwill
296,273

 
293,846

Other Intangible Assets, net
163,564

 
166,310

Operating Lease Assets
32,170

 

Deferred Income Taxes
32,691

 
32,055

Other Assets
30,435

 
28,019

Total Assets
$
1,640,547

 
$
1,472,741

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Notes payable to banks
$
7,284

 
$
11,083

Current portion of long term debt
75,000

 

Trade accounts payable
61,958

 
56,902

Salaries and incentives
47,109

 
62,297

Dividends payable
26,716

 
26,480

Other current liabilities
141,535

 
143,041

Total current liabilities
359,602

 
299,803

Long-term Debt
179,081

 
266,391

Retirement Benefits and Deferred Compensation
135,209

 
133,388

Operating Lease Liabilities
25,734

 

Deferred Income Taxes
14,963

 
16,586

Other Non-current Liabilities

 
4,700

Shareholders’ Equity
 
 
 
Common stock
166,792

 
165,171

Additional paid-in-capital
556,170

 
510,825

Retained earnings
342,308

 
220,734

Accumulated other comprehensive income (loss)
(139,312
)
 
(144,857
)
Total shareholders’ equity
925,958

 
751,873

Total Liabilities and Shareholders’ Equity
$
1,640,547

 
$
1,472,741

See notes to consolidated financial statements.

4

Table of Contents

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
Cash Flows From Operating Activities
 
 
 
Net Earnings
$
174,886

 
$
174,650

Adjustments to reconcile net earnings to net cash
provided by operating activities
 
 
 
Depreciation and amortization
24,087

 
23,755

Deferred income taxes
(3,881
)
 
355

Share-based compensation
17,548

 
15,832

Change in
 
 
 
Accounts receivable
(16,051
)
 
(26,100
)
Inventories
(13,157
)
 
(17,700
)
Trade accounts payable
4,603

 
2,298

Salaries and incentives
(18,514
)
 
(13,231
)
Retirement benefits and deferred compensation
5,780

 
6,627

Other accrued liabilities
(10,789
)
 
6,493

Other
(690
)
 
(2,202
)
Net cash provided by operating activities
163,822

 
170,777

Cash Flows From Investing Activities
 
 
 
Property, plant and equipment additions
(70,186
)
 
(27,443
)
Acquisition of businesses, net of cash acquired
(6,176
)
 
(10,519
)
Other
(828
)
 
(65
)
Net cash provided by (used in) investing activities
(77,190
)
 
(38,027
)
Cash Flows From Financing Activities
 
 
 
Borrowings (payments) on short-term lines of credit, net
(3,767
)
 
112

Borrowings on long-term lines of credit
23,944

 
389,340

Payments on long-term debt and lines of credit
(36,453
)
 
(320,603
)
Common stock issued
33,954

 
20,052

Common stock repurchased
(2,438
)
 
(155,601
)
Taxes paid related to net share settlement of equity awards
(1,268
)

(16,151
)
Cash dividends paid
(53,075
)
 
(44,650
)
Net cash provided by (used in) financing activities
(39,103
)
 
(127,501
)
Effect of exchange rate changes on cash
1,236

 
448

Net increase (decrease) in cash and cash equivalents
48,765

 
5,697

Cash, Cash Equivalents and Restricted Cash
 
 
 
Beginning of year
132,118

 
112,904

End of period
$
180,883

 
$
118,601

Reconciliation to Consolidated Balance Sheets
 
 
 
Cash and cash equivalents
$
180,883

 
$
109,854

Restricted cash included in other current assets

 
8,747

Cash, cash equivalents and restricted cash
$
180,883

 
$
118,601

See notes to consolidated financial statements.

5

Table of Contents

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands)
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Three Months Ended June 28, 2019
 
 
 
 
 
 
 
 
 
Balance, March 29, 2019
$
166,364

 
$
539,067

 
$
281,038

 
$
(142,031
)
 
$
844,438

Shares issued
428

 
8,678

 

 

 
9,106

Stock compensation cost

 
8,425

 

 

 
8,425

Net earnings

 

 
88,137

 

 
88,137

Dividends declared ($0.1600 per share)

 

 
(26,867
)
 

 
(26,867
)
Other comprehensive income (loss)

 

 

 
2,719

 
2,719

Balance, June 28, 2019
$
166,792

 
$
556,170

 
$
342,308

 
$
(139,312
)
 
$
925,958

Six Months Ended June 28, 2019
 
 
 
 
 
 
 
 
 
Balance, December 28, 2018
$
165,171

 
$
510,825

 
$
220,734

 
$
(144,857
)
 
$
751,873

Shares issued
1,621

 
31,064

 

 

 
32,685

Stock compensation cost

 
14,281

 

 

 
14,281

Net earnings

 

 
174,886

 

 
174,886

Dividends declared ($0.3200 per share)

 

 
(53,312
)
 

 
(53,312
)
Other comprehensive income (loss)

 

 

 
5,545

 
5,545

Balance, June 28, 2019
$
166,792

 
$
556,170

 
$
342,308

 
$
(139,312
)
 
$
925,958

Three Months Ended June 29, 2018
 
 
 
 
 
 
 
 
 
Balance, March 30, 2018
$
168,033

 
515,693

 
176,524

 
$
(133,071
)
 
$
727,179

Shares issued
548

 
(13,963
)
 

 

 
(13,415
)
Shares repurchased
(1,451
)
 
(4,285
)
 
(58,352
)
 

 
(64,088
)
Stock compensation cost

 
7,897

 

 

 
7,897

Restricted stock canceled (issued)

 

 

 

 

Net earnings

 

 
89,140

 

 
89,140

Dividends declared ($0.1325 per share)

 

 
(21,905
)
 

 
(21,905
)
Other comprehensive income (loss)

 

 

 
(13,003
)
 
(13,003
)
Balance, June 29, 2018
$
167,130

 
505,342

 
185,407

 
$
(146,074
)
 
$
711,805

Six Months Ended June 29, 2018
 
 
 
 
 
 
 
 
 
Balance, December 29, 2017
$
169,319

 
$
499,934

 
$
181,599

 
$
(127,789
)
 
$
723,063

Shares issued
1,313

 
3,360

 

 

 
4,673

Shares repurchased
(3,502
)
 
(10,340
)
 
(141,759
)
 

 
(155,601
)
Stock compensation cost

 
13,160

 

 

 
13,160

Restricted stock canceled (issued)

 
(772
)
 

 

 
(772
)
Net earnings

 

 
174,650

 

 
174,650

Dividends declared ($0.2650 per share)

 

 
(44,536
)
 

 
(44,536
)
Reclassified to retained earnings from AOCI

 

 
15,453

 
(15,453
)
 

Other comprehensive income (loss)

 

 

 
(2,832
)
 
(2,832
)
Balance, June 29, 2018
$
167,130

 
$
505,342

 
$
185,407

 
$
(146,074
)
 
$
711,805


See notes to consolidated financial statements.

6

Table of Contents

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 28, 2019 and the related statements of earnings, comprehensive income and shareholders' equity for the three and six months ended June 28, 2019 and June 29, 2018, and cash flows for the six months ended June 28, 2019 and June 29, 2018 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 28, 2019, and the results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2018 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.
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 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Sales
 
 
 
 
 
 
 
 Industrial
$
188,507

 
$
190,459

 
$
377,607

 
$
385,655

 Process
85,064

 
85,059

 
171,958

 
165,094

 Contractor
154,757

 
149,052

 
283,633

 
280,169

 Total
$
428,328

 
$
424,570

 
$
833,198

 
$
830,918

Operating Earnings
 
 
 
 
 
 
 
 Industrial
$
64,428

 
$
67,030

 
$
129,631

 
$
136,155

 Process
18,378

 
17,065

 
38,392

 
34,767

 Contractor
40,054

 
38,382

 
66,593

 
69,793

 Unallocated corporate (expense)
(10,499
)
 
(9,099
)
 
(17,728
)
 
(15,641
)
 Total
$
112,361

 
$
113,378

 
$
216,888

 
$
225,074



Assets by segment were as follows (in thousands): 
 
June 28,
2019
 
December 28,
2018
Industrial
$
633,813

 
$
640,683

Process
364,496

 
350,306

Contractor
361,832

 
283,727

Unallocated corporate
280,406

 
198,025

Total
$
1,640,547

 
$
1,472,741




7

Table of Contents

Geographic information follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Sales (based on customer location)
 
 
 
 
 
 
 
United States
$
221,565

 
$
212,541

 
$
424,450

 
$
406,323

Other countries
206,763

 
212,029

 
408,748

 
424,595

Total
$
428,328

 
$
424,570

 
$
833,198

 
$
830,918

 
June 28,
2019
 
December 28,
2018
Long-lived Assets
 
 
 
United States
$
229,398

 
$
178,331

Other countries
57,123

 
50,964

Total
$
286,521

 
$
229,295



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 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net earnings available to common shareholders
$
88,137

 
$
89,140

 
$
174,886

 
$
174,650

Weighted average shares outstanding for basic earnings per share
166,684

 
167,260

 
166,150

 
168,166

Dilutive effect of stock options computed using the treasury stock method and the average market price
5,363

 
6,005

 
5,303

 
6,291

Weighted average shares outstanding for diluted earnings per share
172,047

 
173,265

 
171,453

 
174,457

Basic earnings per share
$
0.53

 
$
0.53

 
$
1.05

 
$
1.04

Diluted earnings per share
$
0.51

 
$
0.51

 
$
1.02

 
$
1.00



Stock options to purchase 1,532,000 and 1,099,000 shares were not included in the June 28, 2019 and June 29, 2018 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 28, 2018
12,270

 
$
24.67

 
7,312

 
$
20.17

Granted
1,285

 
45.91

 
 
 
 
Exercised
(1,241
)
 
15.59

 
 
 
 
Canceled
(22
)
 
32.72

 
 
 
 
Outstanding, June 28, 2019
12,292

 
$
27.79

 
7,731

 
$
22.98



The Company recognized year-to-date share-based compensation of $17.5 million in 2019 and $15.8 million in 2018. As of June 28, 2019, there was $12.4 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.0 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 28,
2019
 
June 29,
2018
Expected life in years
7.5

 
7.5

Interest rate
2.6
%
 
2.8
%
Volatility
24.6
%
 
25.5
%
Dividend yield
1.4
%
 
1.2
%
Weighted average fair value per share
$
12.26

 
$
12.84



Under the Company’s Employee Stock Purchase Plan, the Company issued 398,000 shares in 2019 and 480,000 shares in 2018. 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 28,
2019
 
June 29,
2018
Expected life in years
1.0

 
1.0

Interest rate
2.6
%
 
2.1
%
Volatility
22.7
%
 
21.3
%
Dividend yield
1.4
%
 
1.2
%
Weighted average fair value per share
$
11.36

 
$
10.28



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 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Pension Benefits
 
 
 
 
 
 
 
Service cost
$
1,635

 
$
1,998

 
$
3,644

 
$
4,211

Interest cost
3,572

 
3,411

 
7,310

 
6,845

Expected return on assets
(4,216
)
 
(4,632
)
 
(8,575
)
 
(8,718
)
Amortization and other
1,838

 
2,080

 
3,817

 
4,175

Net periodic benefit cost
$
2,829

 
$
2,857

 
$
6,196

 
$
6,513

Postretirement Medical
 
 
 
 
 
 
 
Service cost
$
123

 
$
175

 
$
273

 
$
350

Interest cost
264

 
265

 
581

 
529

Amortization
29

 
136

 
137

 
272

Net periodic benefit cost
$
416

 
$
576

 
$
991

 
$
1,151




8

Table of Contents

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
Three Months Ended June 28, 2019
 
 
 
 
 
Balance, March 29, 2019
$
(85,232
)
 
$
(56,799
)
 
$
(142,031
)
Other comprehensive income (loss) before reclassifications

 
1,232

 
1,232

Reclassified to pension cost and deferred tax
1,487

 

 
1,487

Balance, June 28, 2019
$
(83,745
)
 
$
(55,567
)
 
$
(139,312
)
Six Months Ended June 28, 2019
 
 
 
 
 
Balance, December 28, 2018
$
(86,889
)
 
$
(57,968
)
 
$
(144,857
)
Other comprehensive income (loss) before reclassifications

 
2,401

 
2,401

Reclassified to pension cost and deferred tax
3,144

 

 
3,144

Balance, June 28, 2019
$
(83,745
)
 
$
(55,567
)
 
$
(139,312
)

Three Months Ended June 29, 2018
 
 
 
 
 
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
)
Six Months Ended June 29, 2018
 
 
 
 
 
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, the Financial Accounting Standards Board ("FASB") issued a new standard related to reclassification of certain tax effects from accumulated other comprehensive income (AOCI). We 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.



9

Table of Contents

7.Inventories

Major components of inventories were as follows (in thousands):
 
June 28,
2019
 
December 28,
2018
Finished products and components
$
147,159

 
$
142,535

Products and components in various stages of completion
87,670

 
83,768

Raw materials and purchased components
122,318

 
115,705

Subtotal
357,147

 
342,008

Reduction to LIFO cost
(59,602
)
 
(58,026
)
Total
$
297,545

 
$
283,982



8.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 28, 2019
 
 
 
 
 
 
 
 
 
Cost
$
182,410

 
$
18,913

 
$
1,020

 
$
60,220

 
$
262,563

Accumulated amortization
(73,974
)
 
(9,557
)
 
(545
)
 

 
(84,076
)
Foreign currency translation
(10,352
)
 
(861
)
 
(72
)
 
(3,638
)
 
(14,923
)
Book value
$
98,084

 
$
8,495

 
$
403

 
$
56,582

 
$
163,564

Weighted average life in years
13

 
10

 
4

 
N/A

 
 
As of December 28, 2018
 
 
 
 
 
 
 
 
 
Cost
$
179,449

 
$
18,571

 
$
1,020

 
$
59,537

 
$
258,577

Accumulated amortization
(67,322
)
 
(8,647
)
 
(439
)
 

 
(76,408
)
Foreign currency translation
(10,817
)
 
(895
)
 
(73
)
 
(4,074
)
 
(15,859
)
Book value
$
101,310

 
$
9,029

 
$
508

 
$
55,463

 
$
166,310

Weighted average life in years
13

 
10

 
4

 
N/A

 
 


Amortization of intangibles for the quarter was $3.8 million in 2019 and $4.0 million in 2018 and for the year to date was $7.7 million in 2019 and $8.0 million in 2018. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Estimated Amortization Expense
$
15,503

 
$
15,289

 
$
15,089

 
$
15,001

 
$
14,088

 
$
39,686



Changes in the carrying amount 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

 
1,575

 

 
1,575

Foreign currency translation
803

 
49

 

 
852

Balance, June 28, 2019
$
177,927

 
$
98,792

 
$
19,554

 
$
296,273



The Company completed business acquisitions in 2019 that were not material to the consolidated financial statements.


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Table of Contents

9.
Other Current Liabilities
Components of other current liabilities were (in thousands):
 
June 28,
2019
 
December 28,
2018
Accrued self-insurance retentions
$
7,920

 
$
7,870

Accrued warranty and service liabilities
11,797

 
11,056

Accrued trade promotions
7,229

 
11,449

Payable for employee stock purchases
6,437

 
11,916

Customer advances and deferred revenue
41,509

 
39,995

Income taxes payable
9,727

 
8,515

Right of return refund liability
12,996

 
12,705

Operating lease liability, current
8,416

 

Other
35,504

 
39,535

Total
$
141,535

 
$
143,041



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 28, 2018
$
11,056

Charged to expense
5,001

Margin on parts sales reversed
1,537

Reductions for claims settled
(5,797
)
Balance, June 28, 2019
$
11,797



Deferred Revenues

For certain products or services and customer types, we require payment before delivery to the customer. 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 $41.5 million as of June 28, 2019 and $40.0 million as of December 28, 2018. Net sales for the year to date included $29.9 million in 2019 and $20.0 million in 2018 that related to deferred revenue as of the beginning of each period.

10.Fair Value

Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
 
Level   
 
June 28,
2019
 
December 28,
2018
Assets
 
 
 
 
 
Cash surrender value of life insurance
2
 
$
16,572

 
$
14,320

Forward exchange contracts
2
 
78

 
82

Total assets at fair value
 
 
$
16,650

 
$
14,402

Liabilities
 
 
 
 
 
Contingent consideration
3
 
$
4,700

 
$
7,200

Deferred compensation
2
 
4,373

 
4,203

Total liabilities at fair value
 
 
$
9,073

 
$
11,403



Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred

11

Table of Contents

compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.

Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of an acquired business based on future revenues.

Long-term notes payable with fixed interest rates have a carrying amount of $225 million, including $75 million classified as current, and an estimated fair value of $240 million as of June 28, 2019 and $235 million as of December 28, 2018. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.

11.Recent Accounting Pronouncements

Leases

Adoption of New Accounting Standard

The Company adopted ASU No. 2016-02— Leases (Topic 842) as of December 29, 2018, the beginning of our fiscal year 2019. Using the modified retrospective approach with transition relief, we recorded operating lease assets and liabilities of approximately $35 million as of December 29, 2018, and made no adjustments to retained earnings. Adoption of the new standard did not materially impact our consolidated net earnings and cash flows.

Practical Expedients and Exemptions

Electing the package of practical expedients permitted under transition guidance, we did not reassess previous conclusions about whether existing contracts contained a lease, historical lease classification, or initial direct costs. Electing the hindsight practical expedient to determine the lease term for existing leases did not result in any changes to existing lease terms. We elected not to apply recognition requirements to short term leases with terms of twelve months or less across all asset classes. We elected to analyze vehicle assets using the portfolio approach. Lastly, we elected as an accounting policy not to separate the lease and non-lease components in the lease payments across all asset classes.

Accounting Policy

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 June 28, 2019, the weighted average remaining lease term was 6.0 years and the weighted average discount rate used to determine the operating lease liability was 4.1%. For the six months ended June 28, 2019, expense related to operating leases was $5.8 million, operating lease payments included in operating cash flows totaled $5.7 million and non-cash additions to operating lease assets totaled $2.0 million.

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Table of Contents


As of June 28, 2019, future maturities of operating lease liabilities were as follows (in thousands):

 
Operating Leases
2019
$
4,755

2020
8,581

2021
6,473

2022
5,320

2023
3,947

2024
1,825

Thereafter
7,507

Total lease payments
$
38,408

Present value adjustment
(4,258
)
Operating lease liabilities
$
34,150



Aggregate annual rental commitments under operating leases with noncancelable terms of more than one year at December 28, 2018 were reported under previous lease accounting standards as follows (in thousands):

 
Total
2019
$
11,613

2020
8,759

2021
6,745

2022
5,102

2023
3,721

Thereafter
2,340

Total
$
38,280



Credit Losses

In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. The Company expects no significant impact on earnings or financial condition from the adoption of the new standard. The Company is continuing to evaluate the effects of the new standard on related disclosures and accounting systems.

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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 28,
2019
 
June 29,
2018
 
%
 Change 
 
June 28,
2019
 
June 29,
2018
 
%
 Change 
Net Sales
$
428.3

 
$
424.6

 
1
 %
 
$
833.2

 
$
830.9

 
0
 %
Operating Earnings
112.4

 
113.4

 
(1
)%
 
216.9

 
225.1

 
(4
)%
Net Earnings
88.1

 
89.1

 
(1
)%
 
174.9

 
174.7

 
0
 %
Net Earnings, adjusted (1)
85.9

 
82.7

 
4
 %
 
166.0

 
166.8

 
0
 %
Diluted Net Earnings per Common Share
$
0.51

 
$
0.51

 
0
 %
 
$
1.02

 
$
1.00

 
2
 %
Diluted Net Earnings per Common Share, adjusted (1)
$
0.50

 
$
0.48

 
4
 %
 
$
0.97

 
$
0.96

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

Sales increases in the Americas and EMEA were offset by decreases in Asia Pacific. Changes in currency translation rates decreased worldwide sales by approximately $9 million (2 percentage points) for the quarter and $20 million for the year to date (3 percentage points). Gross margin rates decreased from the comparable periods last year, and operating expenses decreased both in dollars and as a percentage of sales.



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Table of Contents

Excluding the impact of tax benefits related to stock option exercises and the effects of certain tax provision adjustments 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
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Earnings before income taxes
$
107.8

 
$
105.2

 
$
208.5

 
$
212.7

 
 
 
 
 
 
 
 
Income taxes, as reported
$
19.7

 
$
16.1

 
$
33.6

 
$
38.0

Excess tax benefit from option exercises
2.2

 
6.4

 
7.4

 
7.9

Other non-recurring tax benefit

 

 
1.5

 

Income taxes, adjusted
$
21.9

 
$
22.5

 
$
42.5

 
$
45.9

 
 
 
 
 
 
 
 
Effective income tax rate
 
 
 
 
 
 
 
   As reported
18.2
%
 
15.3
%
 
16.1
%
 
17.9
%
   Adjusted
20.3
%
 
21.4
%
 
20.4
%
 
21.6
%
 
 
 
 
 
 
 
 
Net Earnings, as reported
$
88.1

 
$
89.1

 
$
174.9

 
$
174.7

Excess tax benefit from option exercises
(2.2
)
 
(6.4
)
 
(7.4
)
 
(7.9
)
Other non-recurring tax benefit

 

 
(1.5
)
 

Net Earnings, adjusted
$
85.9

 
$
82.7

 
$
166.0

 
$
166.8

 
 
 
 
 
 
 
 
Weighted Average Diluted Shares
172.0

 
173.3

 
171.5

 
174.5

Diluted Earnings per Share
 
 
 
 
 
 
 
   As reported
$
0.51

 
$
0.51

 
$
1.02

 
$
1.00

   Adjusted
$
0.50

 
$
0.48

 
$
0.97

 
$
0.96


The following table presents an overview of components of net earnings as a percentage of net sales:
 
Three Months Ended   
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of products sold
47.0

 
45.9

 
46.8

 
45.6

Gross Profit
53.0

 
54.1

 
53.2

 
54.4

Product development
4.1

 
3.8

 
4.1

 
3.8

Selling, marketing and distribution
14.1

 
14.8

 
14.6

 
15.1

General and administrative
8.6

 
8.8

 
8.5

 
8.4

Operating Earnings
26.2

 
26.7

 
26.0

 
27.1

Interest expense
0.8

 
0.9

 
0.8

 
0.9

Other expense, net
0.2

 
1.0

 
0.2

 
0.6

Earnings Before Income Taxes
25.2

 
24.8

 
25.0

 
25.6

Income taxes
4.6

 
3.8

 
4.0

 
4.6

Net Earnings
20.6
%
 
21.0
%
 
21.0
%
 
21.0
%



15

Table of Contents

Net Sales

The following table presents net sales by geographic region (in millions):
 
Three Months Ended   
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Americas(1)
$
253.7

 
$
245.7

 
$
485.7

 
$
467.1

EMEA(2)
101.1

 
96.8

 
200.6

 
198.2

Asia Pacific
73.5

 
82.1

 
146.9

 
165.6

Consolidated
$
428.3

 
$
424.6

 
$
833.2

 
$
830.9

(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
4%
 
0%
 
(1)%
 
3%
 
4%
 
0%
 
0%
 
4%
EMEA
10%
 
0%
 
(6)%
 
4%
 
7%
 
0%
 
(6)%
 
1%
Asia Pacific
(6)%
 
0%
 
(4)%
 
(10)%
 
(7)%
 
0%
 
(4)%
 
(11)%
Consolidated
3%
 
0%
 
(2)%
 
1%
 
3%
 
0%
 
(3)%
 
0%

Gross Profit

Gross profit margin rates for the quarter and year to date decreased by 1 percentage point from the comparable periods last year. Changes in currency translation rates accounted for approximately half of the decrease. Price changes implemented in the first quarter had a stronger impact on second quarter gross margin rate, largely offsetting the adverse impacts of higher material costs, lower factory volume and product and channel mix.

Operating Expenses

Total operating expenses for the quarter and year to date decreased $2 million (2 percent) and $1 million (1 percent), respectively, compared to last year. Reductions in volume and earnings-based expenses more than offset increases in product development expenses, which increased 8 percent for both the quarter and the year to date.

Income Taxes

The effective income tax rate for the quarter was 18 percent, up 3 percentage points from the comparable period last year. The increase was primarily due to a $4 million decrease in excess tax benefits related to stock option exercises. The effective income tax rate for the year to date was 16 percent, down 2 percentage points from the comparable period last year. The decrease was due to additional net benefits from U.S. tax reform provisions and non-recurring benefits from other tax planning activities.


16

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 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Sales
 
 
 
 
 
 
 
Americas
$
80.7

 
$
79.3

 
$
161.6

 
$
153.5

EMEA
59.1

 
56.5

 
117.2

 
116.7

Asia Pacific
48.7

 
54.7

 
98.8

 
115.5

Total
$
188.5

 
$
190.5

 
$
377.6

 
$
385.7

Operating earnings as a percentage of net sales
34
%
 
35
%
 
34
%
 
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
2%
 
0%
 
0%
 
2%
 
6%
 
0%
 
(1)%
 
5%
EMEA
10%
 
0%
 
(5)%
 
5%
 
7%
 
0%
 
(7)%
 
0%
Asia Pacific
(6)%
 
0%
 
(5)%
 
(11)%
 
(10)%
 
0%
 
(4)%
 
(14)%
Segment Total
2%
 
0%
 
(3)%
 
(1)%
 
1%
 
0%
 
(3)%
 
(2)%

For both the quarter and the year to date, Industrial segment sales growth in the Americas and EMEA was more than offset by decreases in Asia Pacific, where end markets softened. Operating earnings as a percentage of sales decreased as the favorable effects of pricing and expense leverage were more than offset by the adverse impacts of currency translation, higher material costs, lower factory volume and product and channel mix.

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 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Sales
 
 
 
 
 
 
 
Americas
$
55.1

 
$
54.8

 
$
112.2

 
$
106.1

EMEA
14.3

 
14.4

 
30.1

 
29.4

Asia Pacific
15.7

 
15.9

 
29.7

 
29.6

Total
$
85.1

 
$
85.1

 
$
172.0

 
$
165.1

Operating earnings as a percentage of net sales
22
%
 
20
%
 
22
%
 
21
%


17

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
1%
 
0%
 
0%
 
1%
 
6%
 
0%
 
0%
 
6%
EMEA
2%
 
1%
 
(4)%
 
(1)%
 
6%
 
0%
 
(4)%
 
2%
Asia Pacific
3%
 
0%
 
(4)%
 
(1)%
 
4%
 
0%
 
(4)%
 
0%
Segment Total
1%
 
0%
 
(1)%
 
0%
 
6%
 
0%
 
(2)%
 
4%

Process segment sales for the year to date increased in all product applications, although the rate of growth slowed in the second quarter. Gross margin rates were consistent with the comparable periods last year at constant currency translation rates. Operating margin rate for the quarter for this segment improved by 2 percentage points, driven by lower volume and earnings-based costs. For the year to date, higher sales volume and expense leverage led to a 1 percentage point increase in operating margin rate.

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 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Net Sales
 
 
 
 
 
 
 
Americas
$
118.0

 
$
111.6

 
$
211.9

 
$
207.5

EMEA
27.7

 
26.0

 
53.3

 
52.2

Asia Pacific
9.1

 
11.5

 
18.4

 
20.5

Total
$
154.8

 
$
149.1

 
$
283.6

 
$
280.2

Operating earnings as a percentage of net sales
26
%
 
26
%
 
23
%
 
25
%

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
6%
 
0%
 
0%
 
6%
 
2%
 
0%
 
0%
 
2%
EMEA
12%
 
0%
 
(5)%
 
7%
 
9%
 
0%
 
(7)%
 
2%
Asia Pacific
(17)%
 
0%
 
(4)%
 
(21)%
 
(5)%
 
0%
 
(5)%
 
(10)%
Segment Total
5%
 
0%
 
(1)%
 
4%
 
3%
 
0%
 
(2)%
 
1%

Contractor segment sales at consistent currency translation rates increased by 5 percent, driving year-to-date growth to 3 percent. Operating margin rate for the quarter was consistent with the rate for the comparable quarter last year. Reductions in volume and earnings-based costs offset the adverse impacts of currency translation. Operating margin rate for the year to date was 2 percentage points lower than last year due to changes in currency translation rates, higher material costs, lower factory volume and higher factory spending.

Liquidity and Capital Resources

Net cash provided by operating activities totaled $164 million in the first half of 2019 compared to $171 million in the comparable period of 2018. The decrease reflects increased payments related to various accrued liabilities. Increases in accounts receivable and inventories reflect growth in business activity in the six months ended June 28, 2019. Significant uses of cash in 2019 included dividend payments of $53 million, property, plant and equipment additions of $70 million and net payments on credit lines of $16 million. Proceeds from shares issued in the first half of 2019 totaled $34 million, partially offset by $2 million of payments for shares repurchased in 2018 and settled in 2019. Although the Company did not repurchase any shares in the first half of 2019, it may make additional opportunistic purchases going forward.

18

Table of Contents

 
In 2018, significant uses of cash included share repurchases of $156 million, cash dividends of $45 million, and property, plant and equipment additions of $27 million.

At June 28, 2019, the Company had various lines of credit totaling $594 million, of which $559 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 2019, including its capital expenditure plan (including several building projects to expand production and distribution capacity), planned dividends, share repurchases, and acquisitions. Subsequent to the end of the second quarter of 2019, the Company prepaid $75 million of private placement debt that was due in January, 2020.

Outlook

Given the slow start to the year, we lowered our full-year 2019 worldwide outlook to low single-digit organic sales growth on a constant currency basis. While overall economic conditions are challenging, we continue to pursue our growth strategies and manage the business for the long term.

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 2018 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; changes in currency translation rates; economic conditions in the United States and other major world economies; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; catastrophic events; changes in laws and regulations; compliance with anti-corruption and trade laws; changes in tax rates or the adoption of new tax legislation; 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; our ability to attract, develop and retain qualified personnel; the possibility of decline in purchases from a few large customers of the Contractor segment; and variations in activity in the construction, automotive, mining and oil and natural gas industries. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year 2018 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 2018 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 2018 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. There were approximately 3.3 million shares remaining under the authorization on December 7, 2018, when the board of Directors authorized the purchase of up to an additional 18 million shares. The authorizations are for an indefinite period of time or until terminated by the Board.

In addition to shares purchased under the Board authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax due upon exercise of options or vesting of restricted stock.

No shares were purchased in the second quarter of 2019. As of June 28, 2019, there were 21,002,528 shares that may yet be purchased under the Board authorizations.

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Item 6.Exhibits
3.1

 
 
 
 
3.2

 
 
 
 
10.1

 
 
 
 

 
Stock Option Agreement. Form of agreement used for award of non-incentive stock options to nonemployee directors under the Graco Inc. 2019 Stock Incentive Plan in 2019.
 
 




 
Nonemployee Director Stock and Deferred Stock Program (2019 Restatement).
 
 
 

 
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 24, 2019.
 
 
 
101

 
Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language).

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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 24, 2019
 
By:
 
/s/ Patrick J. McHale
 
 
 
 
 
 
Patrick J. McHale
 
 
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
 
July 24, 2019
 
By:
 
/s/ Mark W. Sheahan
 
 
 
 
 
 
Mark W. Sheahan
 
 
 
 
 
 
Chief Financial Officer and Treasurer
 
 
 
 
 
 
(Principal Financial Officer)
 
 
 
 
Date:
 
July 24, 2019
 
By:
 
/s/ Caroline M. Chambers
 
 
 
 
 
 
Caroline M. Chambers
 
 
 
 
 
 
Executive Vice President, Corporate Controller
     and Information Systems
 
 
 
 
 
 
(Principal Accounting Officer)