UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒Quarterly Report Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

For the quarterly period ended June ~~29, 2018~~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)~~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	X☒	No	☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).



Yes	X☒	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	X☒	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes	☐	No	X☒

~~167,150,000~~166,805,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July ~~18, 2018.~~17, 2019.

TABLE OF CONTENTS



			Page
PART I - FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Statements of Earnings	3

		Consolidated Statements of Comprehensive Income	3

		Consolidated Balance Sheets	4

		Consolidated Statements of Cash Flows	5

		Consolidated Statements of Shareholders' Equity	6

		Notes to Consolidated Financial Statements	67

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1514

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2120

	Item 4.	Controls and Procedures	2120



PART II - OTHER INFORMATION

	Item 1A.	Risk Factors	2221

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2221

	Item 6.	Exhibits	2322


SIGNATURES


EXHIBITS

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				Three Months Ended				Six Months Ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017		June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Net Sales	$	424,570	$	379,483	$	830,918	$	720,073	$	428,328	$	424,570	$	833,198	$	830,918
Cost of products sold	194,667		174,973		378,594		329,718		201,374		194,667		390,202		378,594
Gross Profit	229,903		204,510		452,324		390,355		226,954		229,903		442,996		452,324
Product development	16,112		14,662		31,401		28,921		17,324		16,112		33,893		31,401
Selling, marketing and distribution	62,949		55,583		125,471		109,972		60,441		62,949		121,258		125,471
General and administrative	37,464		33,855		70,378		63,617		36,828		37,464		70,957		70,378
Operating Earnings	113,378		100,410		225,074		187,845		112,361		113,378		216,888		225,074
Interest expense	3,891		4,154		7,124		8,209		3,431		3,891		6,966		7,124
Other expense, net	4,251		652		5,286		2,457		1,119		4,251		1,388		5,286
Earnings Before Income Taxes	105,236		95,604		212,664		177,179		107,811		105,236		208,534		212,664
Income taxes	16,096		15,776		38,014		36,619		19,674		16,096		33,648		38,014
Net Earnings	$	89,140	$	79,828	$	174,650	$	140,560	$	88,137	$	89,140	$	174,886	$	174,650
Per Common Share
Basic net earnings	$	0.53	$	0.48	$	1.04	$	0.84
Diluted net earnings	$	0.51	$	0.46	$	1.00	$	0.81
Cash dividends declared	$	0.13	$	0.12	$	0.27	$	0.24
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						Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017			June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Net Earnings	$	89,140		$	79,828		$	174,650		$	140,560		$	88,137		$	89,140		$	174,886		$	174,650
Components of other comprehensive income (loss)
Cumulative translation adjustment	(15,112		)	11,029			(6,366		)	17,347			1,232			(15,112		)	2,401			(6,366		)
Pension and postretirement medical liability adjustment	2,705			1,784			4,531			3,784			1,910			2,705			4,037			4,531
Income taxes - pension and postretirement medical liability adjustment	(596		)	(717		)	(997		)	(1,483		)	(423		)	(596		)	(893		)	(997		)
Other comprehensive income	(13,003		)	12,096			(2,832		)	19,648			2,719			(13,003		)	5,545			(2,832		)
Comprehensive Income	$	76,137		$	91,924		$	171,818		$	160,208		$	90,856		$	76,137		$	180,431		$	171,818

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands)


	June 29, 2018			December 29, 2017			June 28, 2019			December 28, 2018
ASSETS
Current Assets
Cash and cash equivalents	$	109,854		$	103,662		$	180,883		$	132,118
Accounts receivable, less allowances of $5,300 and $4,300	290,946			266,080
Accounts receivable, less allowances of $5,200 and $5,300							291,008			274,608
Inventories	271,729			239,349			297,545			283,982
Other current assets	36,757			34,247			29,457			32,508
Total current assets	709,286			643,338			798,893			723,216
Property, Plant and Equipment, net	214,997			204,298			286,521			229,295
Goodwill	294,343			278,789			296,273			293,846
Other Intangible Assets, net	174,202			183,056			163,564			166,310
Operating Lease Assets							32,170			—
Deferred Income Taxes	48,683			50,916			32,691			32,055
Other Assets	31,450			30,220			30,435			28,019
Total Assets	$	1,472,961		$	1,390,617		$	1,640,547		$	1,472,741
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks	$	6,549		$	6,578		$	7,284		$	11,083
Current portion of long term debt							75,000			—
Trade accounts payable	54,814			48,748			61,958			56,902
Salaries and incentives	45,647			55,884			47,109			62,297
Dividends payable	22,146			22,260			26,716			26,480
Other current liabilities	138,369			112,368			141,535			143,041
Total current liabilities	267,525			245,838			359,602			299,803
Long-term Debt	297,295			226,035			179,081			266,391
Retirement Benefits and Deferred Compensation	174,856			172,411			135,209			133,388
Operating Lease Liabilities							25,734			—
Deferred Income Taxes	17,080			17,253			14,963			16,586
Other Non-current Liabilities	4,400			6,017			—			4,700
Shareholders’ Equity
Common stock	167,130			169,319			166,792			165,171
Additional paid-in-capital	505,342			499,934			556,170			510,825
Retained earnings	185,407			181,599			342,308			220,734
Accumulated other comprehensive income (loss)	(146,074		)	(127,789		)	(139,312		)	(144,857		)
Total shareholders’ equity	711,805			723,063			925,958			751,873
Total Liabilities and Shareholders’ Equity	$	1,472,961		$	1,390,617		$	1,640,547		$	1,472,741

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


	Six Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 28, 2019			June 29, 2018
Cash Flows From Operating Activities
Net Earnings	$	174,650		$	140,560		$	174,886		$	174,650
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	23,755			22,362			24,087			23,755
Deferred income taxes	355			(2,653		)	(3,881		)	355
Share-based compensation	15,832			13,451			17,548			15,832
Change in
Accounts receivable	(26,100		)	(35,455		)	(16,051		)	(26,100		)
Inventories	(17,700		)	(17,103		)	(13,157		)	(17,700		)
Trade accounts payable	2,298			3,175			4,603			2,298
Salaries and incentives	(13,231		)	(1,808		)	(18,514		)	(13,231		)
Retirement benefits and deferred compensation	6,627			6,566			5,780			6,627
Other accrued liabilities	6,493			10,453			(10,789		)	6,493
Other	(2,202		)	(3,857		)	(690		)	(2,202		)
Net cash provided by operating activities	170,777			135,691			163,822			170,777
Cash Flows From Investing Activities
Property, plant and equipment additions	(27,443		)	(16,621		)	(70,186		)	(27,443		)
Acquisition of businesses, net of cash acquired	(10,519		)	(9,905		)	(6,176		)	(10,519		)
Other	(65		)	102			(828		)	(65		)
Net cash provided by (used in) investing activities	(38,027		)	(26,424		)	(77,190		)	(38,027		)
Cash Flows From Financing Activities
Borrowings (payments) on short-term lines of credit, net	112			1,568			(3,767		)	112
Borrowings on long-term line of credit	389,340			293,880
Payments on long-term debt and line of credit	(320,603		)	(288,550		)
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	20,052			46,693			33,954			20,052
Common stock repurchased	(155,601		)	(90,160		)	(2,438		)	(155,601		)
Taxes paid related to net share settlement of equity awards	(16,151		)	(10,735		)	(1,268		)	(16,151		)
Cash dividends paid	(44,650		)	(40,115		)	(53,075		)	(44,650		)
Net cash provided by (used in) financing activities	(127,501		)	(87,419		)	(39,103		)	(127,501		)
Effect of exchange rate changes on cash	448			333			1,236			448
Net increase (decrease) in cash and cash equivalents	5,697			22,181			48,765			5,697
Cash, Cash Equivalents and Restricted Cash
Beginning of year	112,904			61,594			132,118			112,904
End of period	$	118,601		$	83,775		$	180,883		$	118,601
Reconciliation to Consolidated Balance Sheets
Cash and cash equivalents	$	109,854		$	75,446		$	180,883		$	109,854
Restricted cash included in other current assets	8,747			8,329			—			8,747
Cash, cash equivalents and restricted cash	$	118,601		$	83,775		$	180,883		$	118,601

See notes to consolidated financial statements.

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.

GRACO INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Basis of Presentation

The consolidated balance sheet of Graco Inc. and Subsidiaries (the “Company”) as of June ~~29, 2018~~28, 2019 and the related statements of earnings, ~~and~~ comprehensive income and shareholders' equity for the three and six months ended June ~~29, 2018~~28, 2019 and June ~~30, 2017,~~29, 2018, and cash flows for the six months ended June ~~29, 2018~~28, 2019 and June ~~30, 2017~~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 ~~29, 2018,~~28, 2019, and the results of operations and cash flows for all periods presented. ~~Certain prior year disclosures have been revised to conform with current year reporting.~~

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s ~~2017~~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

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

2.~~Revenue Recognition~~

~~Adoption of New Accounting Standard~~

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

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

~~Accounting Policy~~

Revenue is recognized upon the satisfaction of performance obligations, which occurs when control of the good or service transfers to the customer. This is generally on the date of shipment; however certain sales have terms requiring recognition when received by the customer. In cases where there are specific customer acceptance provisions, revenue is recognized at the later of customer acceptance or shipment (subject to shipping terms). Payment terms are established based on the type of product, distributor capabilities and competitive market conditions. We generally determine standalone selling prices based on the prices charged to customers for all material performance obligations.

Variable consideration is accounted for as a price adjustment (sales adjustment). Following are examples of variable consideration that affect the Company's reported revenue. Early payment discounts are provided to certain customers and within certain regions. Rights of return are typically contractually limited, amounts are estimable, and the Company records provisions for anticipated returns at the time revenue is recognized. This includes promotions when, from time to time, the Company may promote the sale of new products by agreeing to accept returns of superseded products. Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include rebates based on annual purchases and sales growth, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or

~~free product. Rebates are accrued based on the program rates and progress toward the probability weighted estimate of annual sales amount and sales growth.~~

Additional promotions include cooperative advertising arrangements. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company’s products; estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense or cost of products sold, depending on the type of incentive offered. The considerations payable to customers are deemed as broad based and are not recorded against net sales.

~~Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping and handling are included in net sales.~~

~~Deferred Revenues~~

We defer revenue when cash payments are received or due in advance of our performance, including amounts which are refundable. This is also the case for services associated with certain product sales. The balance in the deferred revenue and customer advances was $46.9 million as of June 29, 2018 and $22.6 million as of December 29, 2017. The increase from year-end 2017 includes $21.4 million related to a business acquired in 2018. Net sales for the year to date included $20.0 million that was in deferred revenue and customer advances as of December 29, 2017.

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

~~Practical Expedients and Exemptions~~

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

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

We apply the new revenue standard requirements to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

We have made an accounting policy election to not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services are accrued.

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

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

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

Three Months Ended Six Months Ended
June 29,
2018 June 30,
2017 June 29,
2018 June 30,
2017
Net earnings available to common shareholders $ 89,140
$ 79,828
$ 174,650
$ 140,560
Weighted average shares outstanding for basic earnings per share 167,260
167,404
168,166
167,354
Dilutive effect of stock options computed using the treasury stock method and the average market price 6,005
6,378
6,291
6,105
Weighted average shares outstanding for diluted earnings per share 173,265
173,782
174,457
173,459
Basic earnings per share $ 0.53
$ 0.48
$ 1.04
$ 0.84
Diluted earnings per share $ 0.51
$ 0.46
$ 1.00
$ 0.81

Stock options to purchase ~~1,099,000~~1,532,000 and ~~801,000~~1,099,000 shares were not included in the June ~~29, 2018~~28, 2019 and June ~~30, 2017~~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

Option
Shares

Weighted Average
Exercise Price

Options
Exercisable

Weighted Average
Exercise Price
Outstanding, December 29, 2017 13,290
$ 21.99
7,729
$ 18.33
Granted 1,163
44.05

Exercised (1,745 ) 19.25

Canceled (50 ) 26.40

Outstanding, June 29, 2018 12,658
$ 24.38
7,616
$ 19.80

The Company recognized year-to-date share-based compensation of $17.5 million in 2019 and $15.8 million in ~~2018 and $13.5 million in 2017.~~2018. As of June ~~29, 2018,~~28, 2019, there was ~~$14.5~~$12.4 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of ~~1.9~~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

Six Months Ended
June 29,
2018 June 30,
2017
Expected life in years 7.5
7.0
Interest rate 2.8 % 2.2 %
Volatility 25.5 % 26.7 %
Dividend yield 1.2 % 1.6 %
Weighted average fair value per share $ 12.84
$ 8.08

Under the Company’s Employee Stock Purchase Plan, the Company issued 398,000 shares in 2019 and 480,000 shares in ~~2018 and 500,000 shares in 2017.~~2018. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percentdiscount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:



	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

Six Months Ended
June 29,
2018 June 30,
2017
Expected life in years 1.0
1.0
Interest rate 2.1 % 0.9 %
Volatility 21.3 % 22.3 %
Dividend yield 1.2 % 1.5 %
Weighted average fair value per share $ 10.28
$ 7.32

5.Retirement Benefits

The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):



	Three Months Ended						Six Months Ended
	June 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

Three Months Ended Six Months Ended
June 29,
2018 June 30,
2017 June 29,
2018 June 30,
2017
Pension Benefits
Service cost $ 1,998
$ 1,754
$ 4,211
$ 3,815
Interest cost 3,411
3,673
6,845
7,603
Expected return on assets (4,632 ) (4,112 ) (8,718 ) (8,464 )
Amortization and other 2,080
2,199
4,175
4,524
Net periodic benefit cost $ 2,857
$ 3,514
$ 6,513
$ 7,478
Postretirement Medical
Service cost $ 175
$ 126
$ 350
$ 301
Interest cost 265
271
529
546
Amortization 136
(55 ) 272
(5 )
Net periodic benefit cost $ 576
$ 342
$ 1,151
$ 842

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

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

6.Shareholders’ Equity

Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):

Pension and
Postretirement
Medical

Cumulative
Translation
Adjustment
Total
Balance, March 31, 2017 $ (75,192 ) $ (59,484 ) $ (134,676 )
Other comprehensive income (loss) before reclassifications —
11,029
11,029
Reclassified to pension cost and deferred tax 1,067
—
1,067
Balance, June 30, 2017 $ (74,125 ) $ (48,455 ) $ (122,580 )


Balance, March 30, 2018	$	(92,458	)	$	(40,613	)	$	(133,071	)
										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	—			(15,112		)	(15,112		)	—			1,232			1,232
Reclassified to pension cost and deferred tax	2,109			—			2,109			1,487			—			1,487
Balance, June 29, 2018	$	(90,349	)	$	(55,725	)	$	(146,074	)
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	)


	Pension and Postretirement Medical			Cumulative Translation Adjustment			Total
Balance, December 30, 2016	$	(76,426	)	$	(65,802	)	$	(142,228	)
Three Months Ended June 29, 2018
Balance, March 30, 2018										$	(92,458	)	$	(40,613	)	$	(133,071	)
Other comprehensive income (loss) before reclassifications	—			17,347			17,347			—			(15,112		)	(15,112		)
Reclassified to pension cost and deferred tax	2,301			—			2,301			2,109			—			2,109
Balance, June 30, 2017	$	(74,125	)	$	(48,455	)	$	(122,580	)
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	)	$	(78,430	)	$	(49,359	)	$	(127,789	)
Other comprehensive income (loss) before reclassifications	—			(6,366		)	(6,366		)	—			(6,366		)	(6,366		)
Reclassified to pension cost and deferred tax	3,534			—			3,534			3,534			—			3,534
Reclassified to retained earnings	(15,453		)	—			(15,453		)	(15,453		)	—			(15,453		)
Balance, June 29, 2018	$	(90,349	)	$	(55,725	)	$	(146,074	)	$	(90,349	)	$	(55,725	)	$	(146,074	)

Amounts related to pension and postretirement medical adjustments are reclassified to non-service components of pension cost that are included within other non-operating expenses.

In February 2018, ~~FASB~~the Financial Accounting Standards Board ("FASB") issued a new standard related to reclassification of certain tax effects from accumulated other comprehensive income (AOCI). We ~~early-adopted~~adopted the new standard in the first quarter of 2018. We elected to reclassify $15.5 million from accumulated other comprehensive income to retained earnings, representing the amount of "stranded" tax effects resulting from the change in the U.S. federal tax rate and the consequent revaluation of deferred tax assets related to pension and postretirement medical expense.

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


7.	~~Segment Information~~

~~The Company has three reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands):~~

Three Months Ended Six Months Ended
June 29,
2018 June 30,
2017 June 29,
2018 June 30,
2017
Net Sales
Industrial $ 190,459
$ 174,868
$ 385,655
$ 331,258
Process 85,059
73,399
165,094
143,428
Contractor 149,052
131,216
280,169
245,387
Total $ 424,570
$ 379,483
$ 830,918
$ 720,073
Operating Earnings
Industrial $ 67,030
$ 61,596
$ 136,155
$ 115,331
Process 17,065
13,418
34,767
26,881
Contractor 38,382
33,759
69,793
59,778
Unallocated corporate (expense) (9,099 ) (8,363 ) (15,641 ) (14,145 )
Total $ 113,378
$ 100,410
$ 225,074
$ 187,845

~~Assets by segment were as follows (in thousands):~~ 7.Inventories

June 29,
2018 December 29,
2017
Industrial $ 627,490
$ 572,436
Process 341,272
345,572
Contractor 298,431
255,615
Unallocated corporate 205,768
216,994
Total $ 1,472,961
$ 1,390,617

~~Geographic information follows (in thousands):~~

Three Months Ended Six Months Ended
June 29,
2018 June 30,
2017 June 29,
2018 June 30,
2017
Net Sales (based on customer location)
United States $ 212,541
$ 194,619
$ 406,323
$ 369,473
Other countries 212,029
184,864
424,595
350,600
Total $ 424,570
$ 379,483
$ 830,918
$ 720,073

June 29,
2018 December 29,
2017
Long-lived Assets
United States $ 165,818
$ 163,416
Other countries 49,179
40,882
Total $ 214,997
$ 204,298

8.~~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

June 29,
2018 December 29,
2017
Finished products and components $ 141,101
$ 124,327
Products and components in various stages of completion 73,900
61,274
Raw materials and purchased components 108,083
103,407
Subtotal 323,084
289,008
Reduction to LIFO cost (51,355 ) (49,659 )
Total $ 271,729
$ 239,349

9.8.Intangible Assets

Components of other intangible assets were (dollars in thousands):


	Finite Life									Indefinite Life						Finite Life									Indefinite Life
	Customer Relationships			Patents and Proprietary Technology			Trademarks, Trade Names and Other			Trade Names			Total			Customer Relationships			Patents and Proprietary Technology			Trademarks, Trade Names and Other			Trade Names			Total
As of June 29, 2018
As of June 28, 2019
Cost	$	179,444		$	19,371		$	1,070		$	59,937		$	259,822		$	182,410		$	18,913		$	1,020		$	60,220		$	262,563
Accumulated amortization	(60,872		)	(8,515		)	(674		)	—			(70,061		)	(73,974		)	(9,557		)	(545		)	—			(84,076		)
Foreign currency translation	(10,427		)	(860		)	(72		)	(4,200		)	(15,559		)	(10,352		)	(861		)	(72		)	(3,638		)	(14,923		)
Book value	$	108,145		$	9,996		$	324		$	55,737		$	174,202		$	98,084		$	8,495		$	403		$	56,582		$	163,564
Weighted average life in years	13			10			4			N/A						13			10			4			N/A


As of December 29, 2017
As of December 28, 2018
Cost	$	179,826		$	18,479		$	1,071		$	59,553		$	258,929		$	179,449		$	18,571		$	1,020		$	59,537		$	258,577
Accumulated amortization	(54,076		)	(7,795		)	(542		)	—			(62,413		)	(67,322		)	(8,647		)	(439		)	—			(76,408		)
Foreign currency translation	(9,186		)	(727		)	(61		)	(3,486		)	(13,460		)	(10,817		)	(895		)	(73		)	(4,074		)	(15,859		)
Book value	$	116,564		$	9,957		$	468		$	56,067		$	183,056		$	101,310		$	9,029		$	508		$	55,463		$	166,310
Weighted average life in years	13			10			4			N/A						13			10			4			N/A

Amortization of intangibles for the quarter was $3.8 million in 2019 and $4.0 million in 2018 ~~and $3.7 million in 2017~~ and for the year to date was $7.7 million in 2019 and $8.0 million in ~~2018 and $7.3 million in 2017.~~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

2018 2019 2020 2021 2022 Thereafter
Estimated Amortization Expense $ 15,540
$ 15,014
$ 14,798
$ 14,602
$ 14,617
$ 51,862

Changes in the carrying amount of goodwill for each reportable segment were (in thousands):



	Industrial		Process		Contractor		Total
Balance, December 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

Industrial Process Contractor Total
Balance, December 29, 2017 $ 161,673
$ 97,971
$ 19,145
$ 278,789
Additions, adjustments from business acquisitions 17,544
170
409
18,123
Foreign currency translation (2,141 ) (428 ) —
(2,569 )
Balance, June 29, 2018 $ 177,076
$ 97,713
$ 19,554
$ 294,343

The Company completed business acquisitions in ~~2018~~2019 that were not material to the consolidated financial statements.


~~10.~~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

June 29,
2018 December 29,
2017
Accrued self-insurance retentions $ 7,853
$ 7,956
Accrued warranty and service liabilities 10,956
10,535
Accrued trade promotions 9,064
10,588
Payable for employee stock purchases 5,666
10,053
Customer advances and deferred revenue 46,881
22,632
Income taxes payable 12,554
7,564
Right of return refund liability 12,119
11,412
Other 33,276
31,628
Total $ 138,369
$ 112,368

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

A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):



Balance, December 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

Balance, December 29, 2017 $ 10,535
Charged to expense 3,917
Margin on parts sales reversed 1,440
Reductions for claims settled (4,936 )
Balance, June 29, 2018 $ 10,956

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.

~~11.~~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

Level June 29,
2018 December 29,
2017
Assets
Cash surrender value of life insurance 2 $ 16,000
$ 16,128
Forward exchange contracts 2 677
—
Total assets at fair value $ 16,677
$ 16,128
Liabilities
Contingent consideration 3 $ 5,300
$ 4,081
Deferred compensation 2 4,257
3,836
Forward exchange contracts 2 —
517
Total liabilities at fair value $ 9,557
$ 8,434

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

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

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

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 ~~$235~~$240 million as of June ~~29, 2018~~28, 2019 and ~~$245~~$235 millionas of December ~~29, 2017.~~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.

~~12.Income Taxes~~11.Recent Accounting Pronouncements

Leases

Adoption of New Accounting Standard

The effective income tax rate was 15 percent for the quarter, down 1 percentage point from the second quarter last year. The effective income tax rate for the year to date was 18 percent, down 3 percentage points from last year. U.S. federal income tax reform legislation (the "Tax Act") passed at the end of 2017 decreased the effective tax rate by 9 percentage points percentage points for both the quarter and the year to date compared to last year. Excess tax benefits related to stock option exercises reduced the effective tax rate by 6 percentage points in the second quarter of 2018 and 14 percentage points in the second quarter last year. Year-to-date excess tax benefits related to stock option exercises reduced the effective tax rate by 4 percentage points in 2018 and 10 percentage points in 2017.

Our accounting for certain income tax effects of the Tax Act related to the transition tax is incomplete; however, we have determined reasonable estimates for those effects and have recorded provisional amounts in our consolidated financial statementsCompany adopted ASU No. 2016-02— Leases (Topic 842) as of ~~June~~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 ~~December 29, 2017. We~~made no adjustments to retained earnings. Adoption of the new standard did not ~~make~~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 ~~measurement-period adjustments~~changes to ~~those amounts during~~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 ~~first half~~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 ~~2018.~~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.

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

~~13.Recent Accounting Pronouncements~~



	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 ~~February~~June 2016, the FASB issued a final standard on ~~leases contained in Accounting Standards Codification Topic 842 (“ASC 842”).~~accounting for credit losses. The new standard is effective for the Company in ~~the first quarter of 2019~~fiscal 2020 and requires ~~most leases to be recorded on~~a change in credit loss calculations using the ~~balance sheet.~~expected loss method. The Company plans to adopt the new accounting standard using the modified retrospective transition approach and will elect to use the package of practical expedients. The modified retrospective transition approach will recognize any changesexpects no significant impact on earnings or financial condition from the ~~beginning of the year of initial application through retained earnings with no restatement of comparative periods.~~

We have established an implementation team that has gathered and analyzed a significant portion of our lease contracts. Based on preliminary results of the process, which has not been completed, nothing has come to our attention that would indicate that adoption of the new ~~standard will have a material impact on our earnings or shareholders equity. We expect that~~standard. The Company is continuing to evaluate the ~~recording~~effects of ~~right-of-use assets and associated lease liabilities will have a significant effect on our consolidated balance sheet; however, we are unable to determine an amount at this time.~~

~~We are in the process of evaluating changes to our business processes, systems and controls needed to support recognition and disclosure under~~ the new ~~standard. Further, we are continuing to assess any incremental~~standard on related disclosures ~~that will be required in our consolidated financial statements.~~

and accounting systems.

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						Three Months Ended						Six Months Ended
	June 29, 2018		June 30, 2017		% Change		June 29, 2018		June 30, 2017		% Change		June 28, 2019		June 29, 2018		% Change		June 28, 2019		June 29, 2018		% Change
Net Sales	$	424.6	$	379.5	12	%	$	830.9	$	720.1	15	%	$	428.3	$	424.6	1	%	$	833.2	$	830.9	0	%
Operating Earnings	113.4		100.4		13	%	225.1		187.8		20	%	112.4		113.4		(1	)%	216.9		225.1		(4	)%
Net Earnings	89.1		79.8		12	%	174.7		140.6		24	%	88.1		89.1		(1	)%	174.9		174.7		0	%
Net Earnings, adjusted ⁽¹⁾	82.7		66.2		25	%	166.8		123.4		35	%	85.9		82.7		4	%	166.0		166.8		0	%
Diluted Net Earnings per Common Share	$	0.51	$	0.46	11	%	$	1.00	$	0.81	23	%	$	0.51	$	0.51	0	%	$	1.02	$	1.00	2	%
Diluted Net Earnings per Common Share, adjusted ⁽¹⁾	$	0.48	$	0.38	26	%	$	0.96	$	0.71	35	%	$	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 ~~for~~increases in the ~~quarter~~Americas and ~~year to date increased double-digit percentages with growth~~EMEA were offset by decreases in ~~all segments.~~Asia Pacific. Changes in currency translation rates ~~increased~~decreased worldwide sales by approximately $9 million (3(2 percentage points) for the quarter and ~~$23~~$20 million ~~(3 percentage points)~~ for the year to ~~date. Acquired operations contributed 3~~date (3 percentage ~~points~~points). Gross margin rates decreased from the comparable periods last year, and operating expenses decreased both in dollars and as a percentage of sales growth for the quarter and year to date. Operating expense leverage on higher sales drove 13 percent and 20 percent increases in operating earnings for the quarter and year to date, respectively.sales.

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						Three Months Ended						Six Months Ended
	Jun 29, 2018			Jun 30, 2017			Jun 29, 2018			Jun 30, 2017			June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Earnings before income taxes	$	105.2		$	95.6		$	212.7		$	177.2		$	107.8		$	105.2		$	208.5		$	212.7

Income taxes, as reported	$	16.1		$	15.8		$	38.0		$	36.6		$	19.7		$	16.1		$	33.6		$	38.0
Excess tax benefit from option exercises	6.4			13.6			7.9			17.2			2.2			6.4			7.4			7.9
Other non-recurring tax benefit													—			—			1.5			—
Income taxes, adjusted	$	22.5		$	29.4		$	45.9		$	53.8		$	21.9		$	22.5		$	42.5		$	45.9

Effective income tax rate
As reported	15.3		%	16.5		%	17.9		%	20.7		%	18.2		%	15.3		%	16.1		%	17.9		%
Adjusted	21.4		%	30.7		%	21.6		%	30.4		%	20.3		%	21.4		%	20.4		%	21.6		%

Net Earnings, as reported	$	89.1		$	79.8		$	174.7		$	140.6		$	88.1		$	89.1		$	174.9		$	174.7
Excess tax benefit from option exercises	(6.4		)	(13.6		)	(7.9		)	(17.2		)	(2.2		)	(6.4		)	(7.4		)	(7.9		)
Other non-recurring tax benefit													—			—			(1.5		)	—
Net Earnings, adjusted	$	82.7		$	66.2		$	166.8		$	123.4		$	85.9		$	82.7		$	166.0		$	166.8

Weighted Average Diluted Shares	173.3			173.8			174.5			173.5			172.0			173.3			171.5			174.5
Diluted Earnings per Share
As reported	$	0.51		$	0.46		$	1.00		$	0.81		$	0.51		$	0.51		$	1.02		$	1.00
Adjusted	$	0.48		$	0.38		$	0.96		$	0.71		$	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				Three Months Ended				Six Months Ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017		June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of products sold	45.9		46.1		45.6		45.8		47.0		45.9		46.8		45.6
Gross Profit	54.1		53.9		54.4		54.2		53.0		54.1		53.2		54.4
Product development	3.8		3.9		3.8		4.0		4.1		3.8		4.1		3.8
Selling, marketing and distribution	14.8		14.6		15.1		15.3		14.1		14.8		14.6		15.1
General and administrative	8.8		8.9		8.4		8.8		8.6		8.8		8.5		8.4
Operating Earnings	26.7		26.5		27.1		26.1		26.2		26.7		26.0		27.1
Interest expense	0.9		1.1		0.9		1.1		0.8		0.9		0.8		0.9
Other expense, net	1.0		0.2		0.6		0.4		0.2		1.0		0.2		0.6
Earnings Before Income Taxes	24.8		25.2		25.6		24.6		25.2		24.8		25.0		25.6
Income taxes	3.8		4.2		4.6		5.1		4.6		3.8		4.0		4.6
Net Earnings	21.0	%	21.0	%	21.0	%	19.5	%	20.6	%	21.0	%	21.0	%	21.0	%

Net Sales

The following table presents net sales by geographic region (in millions):


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017		June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Americas⁽¹⁾	$	245.7	$	221.4	$	467.1	$	421.4	$	253.7	$	245.7	$	485.7	$	467.1
EMEA⁽²⁾	96.8		87.0		198.2		166.1		101.1		96.8		200.6		198.2
Asia Pacific	82.1		71.1		165.6		132.6		73.5		82.1		146.9		165.6
Consolidated	$	424.6	$	379.5	$	830.9	$	720.1	$	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				Three Months				Six Months
	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	10%	1%	0%	11%	10%	1%	0%	11%	4%	0%	(1)%	3%	4%	0%	0%	4%
EMEA	(2)%	6%	7%	11%	3%	6%	10%	19%	10%	0%	(6)%	4%	7%	0%	(6)%	1%
Asia Pacific	7%	3%	5%	15%	15%	4%	6%	25%	(6)%	0%	(4)%	(10)%	(7)%	0%	(4)%	(11)%
Consolidated	6%	3%	3%	12%	9%	3%	3%	15%	3%	0%	(2)%	1%	3%	0%	(3)%	0%

Gross Profit

Gross profit margin rates ~~improved slightly~~ for the quarter and year to ~~date. Favorable effects~~date decreased by 1 percentage point from the comparable periods last year. Changes in currency translation ~~and realized pricing were mostly offset by~~rates accounted for approximately half of the ~~unfavorable effects~~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 ~~gross margins from acquired operations~~factory volume and ~~changes in~~ product and channel mix.

Operating Expenses

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

~~Other expense~~

~~Other expense for the quarter~~ and year to date ~~includes $3 million and~~decreased $2 million ~~of exchange losses on net assets of foreign operations,~~(2 percent) and $1 million (1 percent), respectively, compared to ~~small gains~~last year. Reductions in volume and earnings-based expenses more than offset increases in product development expenses, which increased 8 percent for both the ~~comparable periods last year.~~quarter and the year to date.

Income Taxes

The effective income tax rate ~~was 15 percent~~ for the quarter ~~down 1~~was 18 percent, up 3 percentage ~~point~~points from the ~~second quarter~~comparable period last year. ~~U.S. federal income tax reform legislation passed at the end of 2017 decreased the effective tax rate by 9 percentage points for the quarter, and~~The increase was primarily due to a $4 million decrease in excess tax benefits related to stock option ~~exercises increased the effective rate by 8 percentage points compared to the second quarter of last year.~~exercises. The effective income tax rate for the year to date was 1816 percent, down 3 percentage points from last year. U.S. federal income tax reform legislation decreased the year-to-date effective tax rate by 9 percentage points and the decrease in excess tax benefits related to stock option exercises increased the effective rate by 62 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.

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						Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017			June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Net Sales
Americas	$	79.3		$	75.9		$	153.5		$	144.9		$	80.7		$	79.3		$	161.6		$	153.5
EMEA	56.5			49.9			116.7			94.0			59.1			56.5			117.2			116.7
Asia Pacific	54.7			49.1			115.5			92.4			48.7			54.7			98.8			115.5
Total	$	190.5		$	174.9		$	385.7		$	331.3		$	188.5		$	190.5		$	377.6		$	385.7
Operating earnings as a percentage of net sales	35		%	35		%	35		%	35		%	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				Three Months				Six Months
	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	4%	0%	0%	4%	6%	0%	0%	6%	2%	0%	0%	2%	6%	0%	(1)%	5%
EMEA	(5)%	11%	7%	13%	2%	11%	11%	24%	10%	0%	(5)%	5%	7%	0%	(7)%	0%
Asia Pacific	2%	5%	5%	12%	12%	6%	7%	25%	(6)%	0%	(5)%	(11)%	(10)%	0%	(4)%	(14)%
Segment Total	1%	4%	4%	9%	6%	5%	5%	16%	2%	0%	(3)%	(1)%	1%	0%	(3)%	(2)%

For both the quarter and the year to date, Industrial segment sales growth included $8 million for the quarter and $17 million for the year to date from acquired operations. Sales growth for the quarter was modest due to timing of finishing system sales and other project activity. Strong finishing systems sales in the ~~first quarter boosted year to date~~Americas and EMEA was more than offset by decreases in Asia Pacific, where end markets softened. Operating earnings as a percentage of sales ~~growth. Operating margin rates for~~decreased as the ~~quarter and year to date were consistent with comparable periods last year. 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 were offset by the effects of purchase accounting and lower operating margins in acquired operations.~~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						Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017			June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Net Sales
Americas	$	54.8		$	46.6		$	106.1		$	91.2		$	55.1		$	54.8		$	112.2		$	106.1
EMEA	14.4			13.9			29.4			28.8			14.3			14.4			30.1			29.4
Asia Pacific	15.9			12.9			29.6			23.4			15.7			15.9			29.7			29.6
Total	$	85.1		$	73.4		$	165.1		$	143.4		$	85.1		$	85.1		$	172.0		$	165.1
Operating earnings as a percentage of net sales	20		%	18		%	21		%	19		%	22		%	20		%	22		%	21		%

The following table presents the components of net sales change by geographic region for the Process segment:


	Three Months				Six Months				Three Months				Six Months
	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	16%	2%	0%	18%	14%	2%	0%	16%	1%	0%	0%	1%	6%	0%	0%	6%
EMEA	(2)%	1%	5%	4%	(5)%	1%	6%	2%	2%	1%	(4)%	(1)%	6%	0%	(4)%	2%
Asia Pacific	18%	1%	4%	23%	21%	1%	5%	27%	3%	0%	(4)%	(1)%	4%	0%	(4)%	0%
Segment Total	13%	1%	2%	16%	11%	1%	3%	15%	1%	0%	(1)%	0%	6%	0%	(2)%	4%

~~The~~ Process segment ~~had~~ sales ~~growth~~for the year to date increased in all product ~~applications. Strong sales~~applications, although the rate of growth ~~continued in the segment's Lubrication division, and the Oil and Natural Gas division had solid growth~~slowed in the second quarter. Gross margin rates were consistent with the comparable periods last year at constant currency translation rates. Operating margin ~~rates~~rate for the quarter for this segment improved by 2 percentage points, ~~for both~~driven by lower volume and earnings-based costs. For the ~~quarter and~~ year to date, ~~driven by~~ higher sales volume and expense ~~leverage.~~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						Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017			June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Net Sales
Americas	$	111.6		$	98.9		$	207.5		$	185.3		$	118.0		$	111.6		$	211.9		$	207.5
EMEA	26.0			23.2			52.2			43.3			27.7			26.0			53.3			52.2
Asia Pacific	11.5			9.1			20.5			16.8			9.1			11.5			18.4			20.5
Total	$	149.1		$	131.2		$	280.2		$	245.4		$	154.8		$	149.1		$	283.6		$	280.2
Operating earnings as a percentage of net sales	26		%	26		%	25		%	24		%	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				Three Months				Six Months
	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	11%	2%	0%	13%	10%	2%	0%	12%	6%	0%	0%	6%	2%	0%	0%	2%
EMEA	4%	0%	8%	12%	10%	0%	11%	21%	12%	0%	(5)%	7%	9%	0%	(7)%	2%
Asia Pacific	22%	0%	4%	26%	17%	0%	5%	22%	(17)%	0%	(4)%	(21)%	(5)%	0%	(5)%	(10)%
Segment Total	11%	1%	2%	14%	11%	1%	2%	14%	5%	0%	(1)%	4%	3%	0%	(2)%	1%

Contractor segment sales at consistent currency translation rates increased ~~in all channels.~~by 5 percent, driving year-to-date growth to 3 percent. Operating margin ~~rates~~rate for the quarter ~~and year to date improved slightly compared to~~was consistent with the rate for the comparable ~~periods~~quarter last year. ~~Favorable effects of translation and expense leverage were offset by increases~~Reductions in volume and earnings-based ~~incentive costs.~~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 ~~of $171~~totaled $164 million ~~increased $35 million compared to~~in the first half of ~~last year, driven by~~2019 compared to $171 million in the ~~increase in net earnings.~~comparable period of 2018. The decrease reflects increased payments related to various accrued liabilities. Increases in accounts receivable and inventories reflect ~~acquired operations and~~ 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 ~~2018. The Company used cash~~2019 totaled $34 million, partially offset by $2 million of ~~$11 million~~payments for shares repurchased in 2018 and ~~$10 million~~settled in ~~2017 to acquire businesses that were~~2019. Although the Company did not ~~material to~~repurchase any shares in the ~~consolidated financial statements. Other~~first half of 2019, it may make additional opportunistic purchases going forward.

In 2018, significant uses of cash ~~in 2018~~ included share repurchases of $156 million, ~~(including $28 million repurchased from the Company's President and Chief Executive Officer),~~ cash dividends of $45 million, and property, plant and equipment additions of $27 million.

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

At June ~~29, 2018,~~28, 2019, the Company had various lines of credit totaling ~~$544~~$594 million, of which ~~$466~~$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 ~~2018.~~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

~~Demand remains broad-based across products and geographies. We are holding~~Given the slow start to the year, we lowered our full-year 2019 worldwide outlook ~~of mid-to-high~~to low single-digit organic sales growth on a constant currency ~~basis worldwide~~basis. While overall economic conditions are challenging, we continue to pursue our growth strategies and manage the business for the full year 2018. Although we anticipate second half pressures from tariffs, material costs and currency, we are encouraged by the strong levels of demand in many of our key end markets. As a result, we believe Graco is well positioned to deliver another record year of sales and earnings in 2018.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 ~~2017~~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 ~~tax rates~~product demand; supply interruptions or ~~the adoption of new tax legislation: changes in currency translation rates; changes in laws and regulations; compliance with anti-corruption and trade laws;~~delays; security breaches; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; ~~the ability to meet our customers’ needs and~~catastrophic events; changes in ~~product demand; supply interruptions~~laws and regulations; compliance with anti-corruption and trade laws; changes in tax rates or ~~delays; security breaches;~~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; our ability to attract, develop and retain qualified personnel; and catastrophic events.~~industries. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year ~~2017~~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.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes related to market risk from the disclosures made in the Company’s ~~2017~~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.

PART IIOTHER INFORMATION

Item 1A.Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s ~~2017~~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 ~~authorization is~~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~~No shares were purchased in the second quarter of ~~equity securities follows:~~

Period
Total Number
of Shares Purchased

Average Price
Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be
Purchased Under the Plans or Programs
(at end of period)
Mar 31, 2018 - Apr 27, 2018 768,078
$ 44.87
768,078
5,988,729
Apr 28, 2018 - May 25, 2018 ⁽¹⁾
683,188
$ 43.36
683,188
5,305,541
May 26, 2018 - June 29, 2018 —
$ —
—
5,305,541
2019. As of June 28, 2019, there were 21,002,528 shares that may yet be purchased under the Board authorizations.

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

Item 6.Exhibits



3.1			Restated Articles of Incorporation as amended December 8, 2017. (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K filed December 8, 2017.)

3.2			Restated Bylaws as amended February 14, 2014. (Incorporated by reference to Exhibit 3.2 to the Company’s 2013 Annual Report on Form 10-K.)

10.1			~~Stock Repurchase Agreement, dated April 30, 2018, by and between~~ Graco Inc. ~~and Patrick J. McHale.~~2019 Stock Incentive Plan. ~~(Incorporated~~(Incorporated by reference to ~~Exhibit 10.1~~Appendix A to the ~~Company's Report~~Company’s Definitive Proxy Statement on ~~Form 8-K~~Schedule 14A filed ~~May 1, 2018.~~March 13, 2019.)

~~31.1~~10.2			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.

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

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

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

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

99.1			Press Release Reporting Second Quarter Earnings dated July ~~25, 2018.~~24, 2019.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GRACO INC.




Date:	July ~~25, 2018~~24, 2019	By:	/s/ Patrick J. McHale
			Patrick J. McHale
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	July ~~25, 2018~~24, 2019	By:	/s/ Mark W. Sheahan
			Mark W. Sheahan
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)

Date:	July ~~25, 2018~~24, 2019	By:	/s/ Caroline M. Chambers
			Caroline M. Chambers
			Executive Vice President, Corporate Controller and Information Systems
			(Principal Accounting Officer)



	2018		2019		2020		2021		2022		Thereafter
Estimated Amortization Expense	$	15,540	$	15,014	$	14,798	$	14,602	$	14,617	$	51,862



Balance, December 29, 2017	$	10,535
Charged to expense	3,917
Margin on parts sales reversed	1,440
Reductions for claims settled	(4,936		)
Balance, June 29, 2018	$	10,956



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (at end of period)
Mar 31, 2018 - Apr 27, 2018	768,078	$	44.87	768,078	5,988,729
Apr 28, 2018 - May 25, 2018 ⁽¹⁾	683,188	$	43.36	683,188	5,305,541
May 26, 2018 - June 29, 2018	—	$	—	—	5,305,541