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GRACO INC - Quarter Report: 2020 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 26, 2020

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)     
 
Minnesota41-0285640
(State or other jurisdiction of incorporation or organization)  (I.R.S. Employer Identification Number)     
 
88 - 11th Avenue N.E.
Minneapolis, Minnesota55413
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00 per shareGGGThe 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.
YesNo
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).
YesNo
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 filerAccelerated filerNon-accelerated filerSmaller 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).
YesNo

166,710,627 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July 15, 2020.



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 EndedSix Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Sales$366,892  $428,328  $740,459  $833,198  
Cost of products sold184,363  201,374  359,299  390,202  
Gross Profit182,529  226,954  381,160  442,996  
Product development17,948  17,324  35,029  33,893  
Selling, marketing and distribution48,831  60,441  106,219  121,258  
General and administrative36,015  36,828  70,365  70,957  
Impairment34,962  —  34,962  —  
Operating Earnings44,773  112,361  134,585  216,888  
Interest expense3,258  3,431  5,744  6,966  
Other expense (income), net(510) 1,119  4,713  1,388  
Earnings Before Income Taxes42,025  107,811  124,128  208,534  
Income taxes13,193  19,674  22,478  33,648  
Net Earnings$28,832  $88,137  $101,650  $174,886  
Net Earnings per Common Share
Basic
$0.17  $0.53  $0.61  $1.05  
Diluted
$0.17  $0.51  $0.59  $1.02  
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
 Three Months EndedSix Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Earnings$28,832  $88,137  $101,650  $174,886  
Components of other comprehensive
income (loss)
Cumulative translation adjustment
6,756  1,232  2,079  2,401  
Pension and postretirement medical
liability adjustment
2,446  1,910  5,195  4,037  
Income taxes - pension and postretirement
medical liability adjustment
(554) (423) (1,169) (893) 
Other comprehensive income8,648  2,719  6,105  5,545  
Comprehensive Income$37,480  $90,856  $107,755  $180,431  
See notes to consolidated financial statements.
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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
June 26,
2020
December 27,
2019
ASSETS
Current Assets
Cash and cash equivalents$432,708  $220,973  
Accounts receivable, less allowances of $6,000 and $5,300
282,856  267,345  
Inventories291,442  273,233  
Other current assets31,286  29,917  
Total current assets1,038,292  791,468  
Property, Plant and Equipment, net327,476  325,546  
Goodwill338,735  307,663  
Other Intangible Assets, net162,271  162,623  
Operating Lease Assets28,807  29,891  
Deferred Income Taxes33,968  39,327  
Other Assets32,910  35,692  
Total Assets$1,962,459  $1,692,210  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks$20,597  $7,732  
Trade accounts payable48,259  54,117  
Salaries and incentives35,223  51,301  
Dividends payable29,464  29,235  
Other current liabilities176,837  142,937  
Total current liabilities310,380  285,322  
Long-term Debt400,000  164,298  
Retirement Benefits and Deferred Compensation184,486  182,707  
Operating Lease Liabilities21,860  24,176  
Deferred Income Taxes10,165  10,776  
Other Non-current Liabilities8,600  —  
Shareholders’ Equity
Common stock166,693  167,287  
Additional paid-in-capital623,803  578,440  
Retained earnings400,154  448,991  
Accumulated other comprehensive income (loss)(163,682) (169,787) 
Total shareholders’ equity1,026,968  1,024,931  
Total Liabilities and Shareholders’ Equity$1,962,459  $1,692,210  
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 26,
2020
June 28,
2019
Cash Flows From Operating Activities
Net Earnings$101,650  $174,886  
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization26,966  24,087  
Deferred income taxes1,366  (3,881) 
Share-based compensation15,445  17,548  
Impairment34,962  —  
Change in
Accounts receivable(19,705) (16,051) 
Inventories(22,662) (13,157) 
Trade accounts payable342  4,603  
Salaries and incentives(16,677) (18,514) 
Retirement benefits and deferred compensation6,134  5,780  
Other accrued liabilities12,578  (10,789) 
Other2,151  (690) 
Net cash provided by operating activities142,550  163,822  
Cash Flows From Investing Activities
Property, plant and equipment additions(32,613) (70,186) 
Acquisition of businesses, net of cash acquired(27,173) (6,176) 
Other(245) (828) 
Net cash provided by (used in) investing activities(60,031) (77,190) 
Cash Flows From Financing Activities
Borrowings (payments) on short-term lines of credit, net(768) (3,767) 
Borrowings on long-term lines of credit250,000  23,944  
Payments on long-term debt and lines of credit—  (36,453) 
Common stock issued42,217  33,954  
Common stock repurchased(102,143) (2,438) 
Taxes paid related to net share settlement of equity awards(1,796) (1,268) 
Cash dividends paid(58,490) (53,075) 
Net cash provided by (used in) financing activities129,020  (39,103) 
Effect of exchange rate changes on cash196  1,236  
Net increase (decrease) in cash and cash equivalents211,735  48,765  
Cash and Cash Equivalents
Beginning of year220,973  132,118  
End of period$432,708  $180,883  
See notes to consolidated financial statements.
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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 26, 2020
Balance, March 27, 2020$166,840  $612,698  $411,450  $(172,330) $1,018,658  
Shares issued113  3,951  —  —  4,064  
Shares repurchased(260) (904) (10,950) —  (12,114) 
Stock compensation cost—  8,058  —  —  8,058  
Net earnings—  —  28,832  —  28,832  
Dividends declared ($0.175 per share)
—  —  (29,178) —  (29,178) 
Other comprehensive income (loss)—  —  —  8,648  8,648  
Balance, June 26, 2020$166,693  $623,803  $400,154  $(163,682) $1,026,968  
Six Months Ended June 26, 2020
Balance, December 27, 2019$167,287  $578,440  $448,991  $(169,787) $1,024,931  
Shares issued1,733  39,418  —  —  41,151  
Shares repurchased(2,327) (8,047) (91,769) —  (102,143) 
Stock compensation cost—  13,992  —  —  13,992  
Net earnings—  —  101,650  —  101,650  
Dividends declared ($0.350 per share)
—  —  (58,718) —  (58,718) 
Other comprehensive income (loss)—  —  —  6,105  6,105  
Balance, June 26, 2020$166,693  $623,803  $400,154  $(163,682) $1,026,968  
Three Months Ended June 28, 2019
Balance, March 29, 2019$166,364  539,067  281,038  $(142,031) $844,438  
Shares issued428  8,678  —  —  9,106  
Stock compensation cost—  8,425  —  —  8,425  
Net earnings—  —  88,137  —  88,137  
Dividends declared ($0.160 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 issued1,621  31,064  —  —  32,685  
Stock compensation cost—  14,281  —  —  14,281  
Net earnings—  —  174,886  —  174,886  
Dividends declared ($0.320 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  
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 26, 2020 and the related statements of earnings, comprehensive income and shareholders' equity for the three and six months ended June 26, 2020 and June 28, 2019, and cash flows for the six months ended June 26, 2020 and June 28, 2019 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 26, 2020, 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 2019 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 EndedSix Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Sales
 Industrial$133,287  $188,507  $291,971  $377,607  
 Process77,759  85,064  163,837  171,958  
 Contractor155,846  154,757  284,651  283,633  
 Total$366,892  $428,328  $740,459  $833,198  
Operating Earnings
 Industrial$37,001  $64,428  $87,234  $129,631  
 Process11,672  18,378  29,783  38,392  
 Contractor41,109  40,054  69,739  66,593  
 Unallocated corporate (expense)(10,047) (10,499) (17,209) (17,728) 
 Impairment(34,962) —  (34,962) —  
 Total$44,773  $112,361  $134,585  $216,888  

Assets by segment were as follows (in thousands): 
June 26,
2020
December 27,
2019
Industrial
$621,314  $615,486  
Process
403,083  387,216  
Contractor
420,983  368,832  
Unallocated corporate
517,079  320,676  
Total
$1,962,459  $1,692,210  

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Geographic information follows (in thousands):
 Three Months EndedSix Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Sales (based on customer location)
United States
$205,789  $221,565  $404,032  $424,450  
Other countries
161,103  206,763  336,427  408,748  
Total
$366,892  $428,328  $740,459  $833,198  
 June 26,
2020
December 27,
2019
Long-lived Assets
United States
$278,576  $268,864  
Other countries
48,900  56,682  
Total
$327,476  $325,546  

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 EndedSix Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net earnings available to common shareholders
$28,832  $88,137  $101,650  $174,886  
Weighted average shares outstanding for basic earnings per share166,663  166,684  167,320  166,150  
Dilutive effect of stock options computed using the treasury stock method and the average market price3,886  5,363  4,276  5,303  
Weighted average shares outstanding for diluted earnings per share170,549  172,047  171,596  171,453  
Basic earnings per share
$0.17  $0.53  $0.61  $1.05  
Diluted earnings per share
$0.17  $0.51  $0.59  $1.02  

Stock options to purchase 2,530,000 and 1,532,000 shares were not included in the June 26, 2020 and June 28, 2019 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 27, 201912,112  $28.91  8,231  $23.75  
Granted1,399  55.26  
Exercised(1,371) 19.36  
Canceled(22) 45.43  
Outstanding, June 26, 202012,118  $32.84  8,424  $26.62  

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The Company recognized year-to-date share-based compensation of $15.4 million in 2020 and $17.5 million in 2019. As of June 26, 2020, there was $14.6 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.2 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:
 Six Months Ended
 June 26,
2020
June 28,
2019
Expected life in years
7.57.5
Interest rate
1.5 %2.6 %
Volatility
22.0 %24.6 %
Dividend yield
1.3 %1.4 %
Weighted average fair value per share
$12.18  $12.26  

Under the Company’s Employee Stock Purchase Plan, the Company issued 400,000 shares in 2020 and 398,000 shares in 2019. 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 26,
2020
June 28,
2019
Expected life in years
1.01.0
Interest rate
1.5 %2.6 %
Volatility
21.9 %22.7 %
Dividend yield
1.4 %1.4 %
Weighted average fair value per share
$11.55  $11.36  

5.Retirement Benefits

The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
 Three Months EndedSix Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Pension Benefits
Service cost
$2,193  $1,635  $4,615  $3,644  
Interest cost
3,227  3,572  6,634  7,310  
Expected return on assets
(4,651) (4,216) (9,401) (8,575) 
Amortization and other
2,517  1,838  5,238  3,817  
Net periodic benefit cost
$3,286  $2,829  $7,086  $6,196  
Postretirement Medical
Service cost
$130  $123  $305  $273  
Interest cost
260  264  508  581  
Amortization
190  29  367  137  
Net periodic benefit cost
$580  $416  $1,180  $991  

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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
Three Months Ended June 26, 2020
Balance, March 27, 2020$(111,587) $(60,743) $(172,330) 
Other comprehensive income (loss) before reclassifications—  6,756  6,756  
Reclassified to pension cost and deferred tax1,892  —  1,892  
Balance, June 26, 2020$(109,695) $(53,987) $(163,682) 
Six Months Ended June 26, 2020
Balance, December 27, 2019$(113,721) $(56,066) $(169,787) 
Other comprehensive income (loss) before reclassifications—  2,079  2,079  
Reclassified to pension cost and deferred tax4,026  —  4,026  
Balance, June 26, 2020$(109,695) $(53,987) $(163,682) 
Three Months Ended June 28, 2019
Balance, March 29, 2019$(85,232) $(56,799) $(142,031) 
Other comprehensive income (loss) before reclassifications—  1,232  1,232  
Reclassified to pension cost and deferred tax1,487  —  1,487  
Balance, June 28, 2019$(83,745) $(55,567) $(139,312) 
Six Months Ended June 28, 2019
Balance, December 28, 2018$(86,889) $(57,968) $(144,857) 
Other comprehensive income (loss) before reclassifications—  2,401  2,401  
Reclassified to pension cost and deferred tax3,144  —  3,144  
Balance, June 28, 2019$(83,745) $(55,567) $(139,312) 


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.

7.Inventories

Major components of inventories were as follows (in thousands):
June 26,
2020
December 27,
2019
Finished products and components$145,299  $132,128  
Products and components in various stages of completion86,075  86,957  
Raw materials and purchased components123,941  117,026  
Subtotal355,315  336,111  
Reduction to LIFO cost(63,873) (62,878) 
Total$291,442  $273,233  

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8.Intangible Assets

Components of other intangible assets were (dollars in thousands):
Finite LifeIndefinite Life
Customer
Relationships
Patents and
Proprietary
Technology
Trademarks,
Trade Names
and Other
Trade
Names
Total
As of June 26, 2020
Cost
$187,012  $25,313  $1,200  $61,920  $275,445  
Accumulated amortization
(87,704) (11,706) (499) —  (99,909) 
Foreign currency translation(9,795) (828) —  (2,642) (13,265) 
Book value
$89,513  $12,779  $701  $59,278  $162,271  
Weighted average life in years
13104N/A
As of December 27, 2019
Cost
$186,310  $20,413  $1,020  $61,920  $269,663  
Accumulated amortization
(80,764) (10,526) (650) —  (91,940) 
Foreign currency translation(10,412) (885) (73) (3,730) (15,100) 
Book value
$95,134  $9,002  $297  $58,190  $162,623  
Weighted average life in years
13104N/A

Amortization of intangibles for the quarter was $4.1 million in 2020 and $3.8 million in 2019 and for the year to date was $8.2 million in 2020 and $7.7 million in 2019. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
20202021202220232024Thereafter
Estimated Amortization Expense$16,595  $16,570  $16,483  $15,552  $14,009  $32,007  

Changes in the carrying amount of goodwill for each reportable segment were (in thousands): 
Industrial    Process    Contractor    Total    
Balance, December 27, 2019$177,112  $110,997  $19,554  $307,663  
Additions, adjustments from business acquisitions—  29,273  —  29,273  
Foreign currency translation2,482  (683) —  1,799  
Balance, June 26, 2020$179,594  $139,587  $19,554  $338,735  

In the second quarter the Company completed the acquisition of a business that is not material to the consolidated financial statements.


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9.Other Current Liabilities
Components of other current liabilities were (in thousands):
June 26,
2020
December 27,
2019
Accrued self-insurance retentions
$7,622  $7,570  
Accrued warranty and service liabilities
12,578  12,785  
Accrued trade promotions
6,144  8,390  
Payable for employee stock purchases
6,257  13,722  
Customer advances and deferred revenue
50,281  33,138  
Income taxes payable
16,839  8,706  
Right of return refund liability13,730  13,791  
Operating lease liability, current
8,822  7,690  
Loss reserve24,608  —  
Other
29,956  37,145  
Total
$176,837  $142,937  

In the second quarter, the Company entered into negotiations to sell its U.K.-based valve business (“Alco”). Based on the negotiations to sell, the Company revalued its investment in Alco, recording impairment charges of $35 million. A loss reserve was recognized within other current liabilities, representing $24 million of previously unrealized foreign currency translation losses recorded in accumulated other comprehensive income plus other disposal costs. The sale of Alco was completed in the third quarter, subject to post-closing adjustments.

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 27, 2019$12,785  
Assumed in business acquisition155  
Charged to expense3,318  
Margin on parts sales reversed1,080  
Reductions for claims settled(4,760) 
Balance, June 26, 2020$12,578  

Deferred Revenue

Revenue is deferred when cash payments are received or due in advance of performance, including amounts which are refundable. This is also the case for services associated with certain product sales. The balance in the deferred revenue and customer advances was $50.3 million as of June 26, 2020 and $33.1 million as of December 27, 2019. Net sales for the year to date included $14.2 million in 2020 and $29.9 million in 2019 that related to deferred revenue as of the beginning of each period.

10.Debt

On January 29, 2020, the Company entered into a master note agreement with a sole lender that expires on January 29, 2023. The note agreement sets forth certain terms on which the Company may issue, and affiliates of the lender may purchase, up to $200 million of the Company’s senior notes. Interest on the senior notes will be determined at the time of issuance, at a fixed or LIBOR-based floating rate at the option of the Company, provided that the maximum aggregate principal amount of notes bearing interest at a floating rate may not exceed $100 million. Fixed rate notes issued under the agreement will mature no longer than 12 years from date of issuance and variable rate notes will mature no longer than 10 years from issuance. Under terms of the note agreement, the Company is required to maintain certain financial ratios as to cash flow leverage and interest coverage similar to the requirements of its other debt agreements. There were no senior notes issued under the note agreement as of June 26, 2020.
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In March 2020, the Company borrowed $250 million under its $500 million revolving credit facility in order to increase its cash position and preserve financial flexibility. The proceeds from the advance are available to be used for working capital, general corporate or other purposes.

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 26,
2020
December 27,
2019
Assets
Cash surrender value of life insurance2$16,108  $17,702  
Forward exchange contracts2156  —  
Total assets at fair value$16,264  $17,702  
Liabilities
Contingent consideration3$11,565  $9,072  
Deferred compensation24,415  4,719  
Forward exchange contracts2—  87  
Total liabilities at fair value$15,980  $13,878  

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

Long-term notes payable with fixed interest rates had a carrying amount of $150 million and estimated fair value of $165 million as of both June 26, 2020 and December 27, 2019. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.

12Recent Accounting Pronouncements

Adoption of New Accounting Standard

In June 2016, the Financial Accounting Standards Board (FASB) issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. There was no significant impact on earnings or financial condition from the adoption of the new standard.

Accounting Policy

Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. The Company evaluates the adequacy of the worldwide allowance amount quarterly, considering individual account reviews, historical write-offs, current sales levels and expected economic factors.

Accounts Receivable

Accounts receivable includes trade receivables of $270 million and other receivables of $13 million as of June 26, 2020 and $256 million and $11 million, respectively, as of December 27, 2019.
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Allowance for Credit Losses

Following is a summary of activity in the allowance for credit losses (in thousands):
Three Months EndedSix Months Ended
June 26, 2020June 28, 2019June 26, 2020June 28, 2019
Balance, beginning$4,798  $4,412  $4,828  $4,771  
Additions charged to costs and expenses314  192  631  222  
Deductions from reserves (1)
(38) 146  (291) (690) 
Other additions (deductions) (2)
85  (435) (9) 12  
Balance, ending$5,159  $4,315  $5,159  $4,315  

(1) Represents amounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves.
(2)  Includes amounts assumed or established in connection with acquisitions and effects of foreign currency translation.


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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 26,
2020
June 28,
2019
%
 Change 
June 26,
2020
June 28,
2019
%
 Change 
Net Sales
$366.9  $428.3  (14)%$740.5  $833.2  (11)%
Operating Earnings
44.8  112.4  (60)%134.6  216.9  (38)%
Net Earnings
28.8  88.1  (67)%101.7  174.9  (42)%
Net Earnings, adjusted (1)
62.3  85.9  (27)%127.5  166.0  (23)%
Diluted Net Earnings per Common Share
$0.17  $0.51  (67)%$0.59  $1.02  (42)%
Diluted Net Earnings per Common Share, adjusted (1)
$0.37  $0.50  (26)%$0.74  $0.97  (24)%
(1) See below for a reconciliation of adjusted non-GAAP financial measures to GAAP.

Increases in Contractor sales for the quarter and year to date partially offset the impact of double digit organic percentage declines in other segments. Changes in currency translation rates decreased worldwide sales by approximately $5 million for the quarter and $9 million for the year to date. Sales from acquired operations contributed approximately $7 million (2 percentage points) to the second quarter and $12 million (2 percentage points) to the year to date.
Changes in product and channel mix, lower factory volume and changes in currency translation rates drove decreases in gross margin rates for the quarter and the year to date. Earnings for the quarter and year to date included non-cash impairment charges of $35 million ($34 million, $0.20 per diluted share, after tax effects) related to a U.K.-based valve business that was sold in the third quarter. Total operating expenses before impairment charges decreased 10 percent for the quarter and 6 percent for the year to date. Reductions in volume and earnings-based expenses more than offset increases in product development expenses.
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Excluding the impact of impairment charges, excess tax benefits related to stock option exercises and certain tax provision adjustments presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements of adjusted operating earnings, earnings before income taxes, income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):
Three Months EndedSix Months Ended
June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Operating earnings, as reported$44.8  $112.4  $134.6  $216.9  
Impairment35.0  —  35.0  —  
Operating earnings, adjusted$79.8  $112.4  $169.6  $216.9  
Earnings before income taxes, as reported$42.0  $107.8  $124.1  $208.5  
Impairment35.0  —  35.0  —  
Earnings before income taxes, adjusted$77.0  $107.8  $159.1  $208.5  
Income taxes, as reported$13.2  $19.7  $22.5  $33.6  
Excess tax benefit from option exercises0.3  2.2  8.0  7.4  
Impairment tax benefit1.2  —  1.2  —  
Other non-recurring tax benefit—  —  —  1.5  
Income taxes, adjusted$14.7  $21.9  $31.7  $42.5  
Effective income tax rate
   As reported31.4 %18.2 %18.1 %16.1 %
   Adjusted19.1 %20.3 %19.9 %20.4 %
Net Earnings, as reported$28.8  $88.1  $101.7  $174.9  
Impairment, net33.8  —  33.8  —  
Excess tax benefit from option exercises(0.3) (2.2) (8.0) (7.4) 
Other non-recurring tax benefit—  —  —  (1.5) 
Net Earnings, adjusted$62.3  $85.9  $127.5  $166.0  
Weighted Average Diluted Shares170.5  172.0  171.6  171.5  
Diluted Earnings per Share
   As reported$0.17  $0.51  $0.59  $1.02  
   Adjusted$0.37  $0.50  $0.74  $0.97  


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The following table presents an overview of components of net earnings as a percentage of net sales:
Three Months Ended   Six Months Ended
June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Sales100.0 %100.0 %100.0 %100.0 %
Cost of products sold50.2  47.0  48.5  46.8  
Gross Profit49.8  53.0  51.5  53.2  
Product development4.9  4.1  4.7  4.1  
Selling, marketing and distribution13.3  14.1  14.4  14.6  
General and administrative9.8  8.6  9.5  8.5  
Impairment9.6  —  4.7  —  
Operating Earnings12.2  26.2  18.2  26.0  
Interest expense0.9  0.8  0.8  0.8  
Other expense (income), net(0.2) 0.2  0.6  0.2  
Earnings Before Income Taxes11.5  25.2  16.8  25.0  
Income taxes3.6  4.6  3.1  4.0  
Net Earnings7.9 %20.6 %13.7 %21.0 %

Net Sales

The following table presents net sales by geographic region (in millions):
 Three Months Ended   Six Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Americas(1)
$227.7  $253.7  $452.5  $485.7  
EMEA(2)
71.1  101.1  158.9  200.6  
Asia Pacific68.1  73.5  129.1  146.9  
Consolidated$366.9  $428.3  $740.5  $833.2  
(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 MonthsSix Months
Volume and PriceAcquisitionsCurrencyTotalVolume and PriceAcquisitionsCurrencyTotal
Americas(11)%1%0%(10)%(7)%0%0%(7)%
EMEA(30)%2%(2)%(30)%(21)%2%(2)%(21)%
Asia Pacific(9)%4%(2)%(7)%(13)%3%(2)%(12)%
Consolidated(15)%2%(1)%(14)%(12)%2%(1)%(11)%

Gross Profit

Gross profit margin rates for the quarter and year to date decreased from the comparable periods last year. Strong price realization was not enough to offset the adverse impacts of unfavorable product and channel mix (lower high-margin Industrial sales combined with growth in lower-margin Contractor segment sales), lower factory volume and changes in currency translation rates.


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Operating Expenses

In the second quarter, the Company entered into negotiations to sell its U.K.-based valve business (“Alco”), which has significant exposure to oil and natural gas markets, and has accumulated operating losses since acquired in 2014. Alco operations contributed $7 million of sales for the year to date and are included within the Company's Process segment. Based on the negotiations to sell, the Company revalued its investment in Alco, recording non-cash impairment charges of $35 million, including $24 million of previously unrealized foreign currency translation losses recorded in accumulated other comprehensive income. The impact on net earnings was $34 million or $0.20 per diluted share. The sale of Alco was completed in the third quarter.

Total operating expenses before impairment charges decreased $12 million (10 percent) for the quarter and $14 million (6 percent) for the year to date compared to last year. Reductions in volume and earnings-based expenses more than offset increases in product development, which increased 4 percent for the quarter and 3 percent for the year to date, as the Company continued its development initiatives.

Other Expense

Other non-operating expenses decreased $2 million for the quarter and increased $3 million for the year to date mostly due to market valuation fluctuations on investments held to fund certain retirement benefits liabilities.
Income Taxes

The effective income tax rate for the quarter was 31 percent, up 13 percentage points from the comparable period last year, primarily due to non-deductible impairment charges. The effective income tax rate for the year to date was 18 percent, up 2 percentage points from the comparable period last year. The year-to-date increase from the non-deductible impairment charges was partially offset by the favorable impact of an increase in excess tax benefits related to stock option exercises.
Economic Uncertainty
The ongoing COVID-19 pandemic and related governmental and business responses had an adverse effect on our operations, supply chains, distribution channels, and end-user customers. Incoming order rates, on an organic, constant currency basis, declined by approximately 24 percent in April and improved sequentially in May and June, as government restrictions loosened in certain areas, and as our customers responded favorably to new product offerings. Current order rates for our Industrial and Process segments have not recovered to pre-pandemic levels. While our Contractor segment has seen growth in order rates, there is uncertainty with respect to the duration and level at which the activity will continue.

We manufacture and provide essential products and services to a variety of critical infrastructure customers. We have remained operational during the pandemic and we intend to continue providing our products and services to our customers. Our commercial teams are focused on customer service, maintaining end-user customer contact and providing support to our distributors. Our engineering teams continue to develop and launch new products.

As a result of the pandemic and various governmental orders, a significant number of our employees are working from home, and we altered our manufacturing operations to allow for appropriate social distancing, hygiene, cleaning and disinfecting. In our supply chain, we have experienced isolated instances of suppliers temporarily closing their operations, delaying order fulfillment or limiting their production, and we are utilizing alternative supply arrangements as needed. We have also experienced isolated instances of distributors reducing or closing their operations, impacting the ability of some of our end-user customers to procure our products through our traditional distribution channels. Some of our end-user customers are deferring capital equipment purchases, and have eliminated in-person sales meetings. In addition, trade shows, industry events and product demonstrations have been cancelled or postponed. As a result, our selling activities and our ability to convert those activities into sales have been and we expect will continue to be adversely impacted. We will continue to manage our working capital, such as receivables and inventory, to align with customer needs and changes in demand for our products and services.

The timing and extent of the economic recovery from the pandemic in our major geographies is still uncertain and we cannot predict the magnitude of the impact to the results of our operations or financial position. We do not expect the pandemic to have a significant effect on our liquidity as operating cash flows and available liquidity are sufficient to support operations at current order rates (see Liquidity and Capital Resources below).


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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 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Sales
Americas
$58.4  $80.7  $132.8  $161.6  
EMEA
34.8  59.1  81.0  117.2  
Asia Pacific
40.0  48.7  78.1  98.8  
Total
$133.2  $188.5  $291.9  $377.6  
Operating earnings as a percentage of net sales
28 %34 %30 %34 %

The following table presents the components of net sales change by geographic region for the Industrial segment:
Three MonthsSix Months
Volume and PriceAcquisitionsCurrencyTotalVolume and PriceAcquisitionsCurrencyTotal
Americas(27)%0%(1)%(28)%(17)%0%(1)%(18)%
EMEA(40)%0%(1)%(41)%(29)%0%(2)%(31)%
Asia Pacific(16)%0%(2)%(18)%(19)%0%(2)%(21)%
Segment Total(28)%0%(1)%(29)%(22)%0%(1)%(23)%

Industrial segment sales for the quarter and year to date declined in all regions with worldwide government actions that severely reduced economic activity in major geographies. While gross margin rates in this segment remained relatively strong, decreases in operating expenses did not keep pace with the drop in sales volume, driving operating earnings as a percentage of sales down compared to last year.

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 EndedSix Months Ended
 June 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Sales
Americas
$45.9  $55.1  $101.0  $112.2  
EMEA
13.2  14.3  29.0  30.1  
Asia Pacific
18.6  15.7  33.8  29.7  
Total
$77.7  $85.1  $163.8  $172.0  
Operating earnings as a percentage of net sales
15 %22 %18 %22 %

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The following table presents the components of net sales change by geographic region for the Process segment:
Three MonthsSix Months
Volume and PriceAcquisitionsCurrencyTotalVolume and PriceAcquisitionsCurrencyTotal
Americas(20)%4%0%(16)%(13)%3%0%(10)%
EMEA(17)%11%(2)%(8)%(11)%9%(2)%(4)%
Asia Pacific1%20%(3)%18%(1)%18%(3)%14%
Segment Total(16)%8%(1)%(9)%(11)%7%(1)%(5)%

Acquired operations in the Process segment contributed sales of $7 million for the quarter and $12 million for the year to date. Lower volume, higher product costs, unfavorable channel and product mix, and lower operating margins of acquired operations combined to decrease operating earnings as a percentage of sales for both the quarter and the year to date.

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 26,
2020
June 28,
2019
June 26,
2020
June 28,
2019
Net Sales
Americas
$123.3  $118.0  $218.6  $211.9  
EMEA
23.0  27.7  48.8  53.3  
Asia Pacific
9.5  9.1  17.2  18.4  
Total
$155.8  $154.8  $284.6  $283.6  
Operating earnings as a percentage of net sales
26 %26 %24 %23 %

The following table presents the components of net sales change by geographic region for the Contractor segment:
Three MonthsSix Months
Volume and PriceAcquisitionsCurrencyTotalVolume and PriceAcquisitionsCurrencyTotal
Americas5%0%(1)%4%3%0%0%3%
EMEA(15)%0%(2)%(17)%(6)%0%(2)%(8)%
Asia Pacific9%0%(4)%5%(3)%0%(4)%(7)%
Segment Total1%0%0%1%1%0%(1)%0%

Contractor segment sales increased by 1 percent at consistent currency translation rates for both the quarter and the year to date. Favorable response to new product offerings and continued stability in construction markets in the Americas drove the increase. Operating margin rate was steady for the quarter and increased by 1 percentage point for the year to date, as the favorable effects of strong realized pricing and expense leverage offset unfavorable effects of product and channel mix and higher factory spending.

Liquidity and Capital Resources

Net cash provided by operating activities totaled $143 million in the first half of 2020, down $21 million from the comparable period of 2019. The decrease was driven by lower sales and net earnings. Purchases of Company common stock totaling $102 million in 2020 were partially offset by net proceeds from shares issued totaling $40 million. Other significant uses of cash included dividend payments of $58 million, property, plant and equipment additions of $33 million and business acquisitions of $27 million. The Company may make additional opportunistic share purchases going forward.

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In March 2020, the Company borrowed $250 million under its $500 million revolving credit facility in order to increase its cash position and preserve financial flexibility. The proceeds from the advance are available to be used for working capital, general corporate or other purposes.
Significant uses of cash in 2019 included cash dividends of $53 million, property, plant and equipment additions of $70 million and business acquisitions of $6 million. Proceeds from shares issued in the first half of 2019 totaled $33 million, partially offset by $2 million of payments for shares repurchased in 2018 and settled in 2019.

At June 26, 2020, the Company had various lines of credit totaling $595 million, of which $326 million was unused. In addition to its lines of credit, under the terms of a master note agreement with a sole lender expiring in January 2023, the Company may issue up to $200 million of senior notes. Interest on the notes will be determined at the time of issuance, at a fixed or LIBOR-based floating rate at the option of the Company, provided that the maximum aggregate principal amount of notes bearing interest at a floating rate may not exceed $100 million. Fixed rate notes issued under the agreement will mature no longer than 12 years from date of issuance and variable rate notes will mature no longer than 10 years from date of issuance.

Cash balances and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2020, including its capital expenditure plan, planned dividends, share repurchases, acquisitions and operating requirements.

Outlook

While weak economic conditions affected our business in the second quarter, we remain committed to our long-term strategy. Our initiatives for 2021 and beyond have continued as usual. We will use this difficult period to strengthen our competitive position, expand our product offering, build our global channel and enter new market spaces. These initiatives may put pressure on our short-term financial results, but will position us to capitalize when market conditions normalize. We also recognize that the timing and shape of a recovery is highly uncertain. We will remain agile and have contingency plans in place to appropriately respond to conditions as they unfold.

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 2019 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: the impact of the COVID-19 pandemic on our business; economic conditions in the United States and other major world economies; our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; changes in currency translation rates; 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 2019 and Item 1A of this Form 10-Q 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.
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Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.


Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes related to market risk from the disclosures made in the Company’s 2019 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.

PART IIOTHER INFORMATION

Item 1A.Risk Factors

Except as noted below, there have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2019 Annual Report on Form 10-K.

Coronavirus Disease 2019 (COVID-19) - The COVID-19 pandemic, the governmental responses to the pandemic, and the resulting decline in global economic activity have adversely affected our business and results of operations, and could have a material and adverse effect on our business, results of operations and financial condition in the future.

In response to the COVID-19 pandemic, federal, provincial, state, county and local governments and public health organizations and authorities around the world implemented a variety of measures intended to control the spread of the virus, including quarantines, “shelter-in-place,” “stay-at-home” and similar orders, travel restrictions, school closures, business curtailments and closures, social distancing and hygiene requirements, and other measures. While there has been a loosening of some of these measures in certain areas, the ongoing pandemic and outbreaks of COVID-19 in various areas has resulted in, and may continue to result in, reinstating these measures or implementing new or additional measures in certain areas.

We manufacture and provide essential products and services to a variety of critical infrastructure customers around the globe. We have remained operational during the pandemic, and we intend to continue providing our products and services to our customers. However, the COVID-19 pandemic and related governmental and business responses have had, and will likely continue to have, an adverse effect on our operations, supply chains, distribution channels, and end-user customers. For example, as a result of the pandemic and various governmental orders, a significant number of our employees are working from home, and we substantially altered our manufacturing operations to allow for appropriate social distancing and hygiene, which could lead to decreased efficiency and productivity in our workforce and our operations. In our supply chain, we have experienced isolated instances of suppliers temporarily closing their operations, delaying order fulfillment or limiting their production due to the pandemic, and we are utilizing alternative supply arrangements where appropriate or necessary, which may lead to increased costs, delays, and difficulties sourcing certain products. Similarly, we have experienced isolated instances of distributors reducing or closing their operations, impacting the ability of some of our end-user customers to procure our products through our traditional distribution channels. Some
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of our end-user customers are deferring capital equipment purchases and have eliminated in-person sales meetings. In addition, trade shows, industry events and product demonstrations have been cancelled and are continuing to be cancelled or postponed. As a result, our selling activities and our ability to convert those activities into actual sales have been and will continue to be adversely impacted. In addition, management is focused on mitigating the effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time, energy, resources and focus.

The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that are uncertain and that we are not able to predict, including: the severity of the virus; the duration and scope of the pandemic; whether there is a second wave of the pandemic; whether there are increases or spikes in COVID-19 cases in the areas in which we or our suppliers, distributors or end-user customers operate; governmental, business, individual and other actions taken in response to the pandemic; the effect on our suppliers and distributors, and disruptions to the global supply chain; the impact on economic activity; the extent and duration of the impact on consumer and business confidence and spending; the effect on our end-user customers and their demand and buying patterns for our products and services; the effect of any closures or other changes in operations of our and our suppliers’, distributors’ and end-user customers’ facilities; the health of and the effect on our employees and our ability to meet staffing needs in our manufacturing and distribution facilities and other critical functions, particularly if a significant number of employees become ill, are quarantined as a result of exposure, or are reluctant to show up for work; our ability to sell our products and services and provide product support, including as a result of travel restrictions, work from home requirements and arrangements, and other restrictions or changes in behavior or preferences for interactions; the effect on employee healthcare costs under our self-insurance programs; restrictions or disruptions to transportation, including reduced availability of ground, sea or air transport; the ability of our distributors and end-user customers to pay for our products and services; the potential effects on our internal controls, including those over financial reporting, as a result of changes in working arrangements that are applicable to our employees and business partners; and the effect on our ability to access capital on favorable terms and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of the economic recession that has occurred and any economic recession that may occur in the future. The COVID-19 pandemic could also exacerbate or trigger other risks discussed in our 2019 Annual Report on Form 10-K, any of which could have a material and adverse effect on our business, results of operations and financial condition.
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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.

Information on issuer purchases of equity securities follows:
PeriodTotal Number
of Shares Purchased  
Average Price
Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be
Purchased Under the Plans or Programs
(at end of period)
Mar 28,2020 - Apr 24, 2020
261,467  $46.33  —  18,517,834  
Apr 25, 2020 - May 22, 2020
—  $—  —  18,517,834  
May 23, 2020 - Jun 26, 2020
—  $—  —  18,517,834  


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Item 6.Exhibits
3.1  
3.2  
10.1  
Amendment No. 5 dated as of April 17, 2020 to Note Agreement dated as of March 11, 2011. (Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 27, 2020.)
10.2  
Fifth Amendment to Credit Agreement dated as of April 17, 2020, amending the Credit Agreement among Graco Inc., the borrowing subsidiaries from time to time party thereto, the banks from time to time party thereto and U.S. Bank National Association, as administrative agent. (Incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 27, 2020.)
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 22, 2020.
101  Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language).
104  Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101).
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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 22, 2020By:/s/ Patrick J. McHale
Patrick J. McHale
President and Chief Executive Officer
(Principal Executive Officer)
Date:July 22, 2020By:/s/ Mark W. Sheahan
Mark W. Sheahan
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date:July 22, 2020By:/s/ Caroline M. Chambers
Caroline M. Chambers
Executive Vice President, Corporate Controller
and Information Systems
(Principal Accounting Officer)