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 endedMarch 28,June 27, 2008

Commission File Number:001-9249001-09249

GRACO INC.

(Exact name of registrant as specified in its charter)

Minnesota

Minnesota

41-0285640

(State of incorporation)

(I.R.S. Employer Identification Number)


88 - 11th11th Avenue N.E.

Minneapolis, Minnesota

55413

Minneapolis, Minnesota55413

(Address of principal executive offices)

(Zip Code)


(612) 623-6000

(Registrant'sRegistrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes

X

No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Large accelerated filer

X

Accelerated filer

Filer

Non-accelerated filerFiler

Smaller reporting company


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

Yes

No

X


60,571,000

60,056,000 shares of the Registrant’s Common Stock, $1.00 par value were outstanding as of AprilJuly 17, 2008.

GRACO INC. AND SUBSIDIARIES

INDEX

Page Number

Page Number

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Earnings

3

Consolidated Balance Sheets

4

Consolidated Statements of Cash Flows

5

Notes to Consolidated Financial Statements

6-12

6

Item 2.

Management's

Management’s Discussion and Analysis

of Financial Condition and

Results of Operations

13-16

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

20

Item 4.

Controls and Procedures

17

20

PART II

OTHER INFORMATION

Item 1A.

Risk Factors

18

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

18

21

Item 4.

Submission of Matters to a Vote of Security Holders

18

22

Item 6.

Exhibits

19

22

SIGNATURES

SIGNATURES

EXHIBITS

PART I
GRACO INC. AND SUBSIDIARIES
Item 1.CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)


 Thirteen Weeks Ended
 March 28, 2008 March 30, 2007 
         
Net Sales  $204,120 $197,495 
         
     Cost of products sold   92,267  92,633 
Gross Profit   111,853  104,862 
         
     Product development   7,940  8,272 
         
     Selling, marketing and distribution   33,821  29,263 
         
     General and administrative   17,738  15,240 
Operating Earnings   52,354  52,087 
         
     Interest expense   1,603  258 
         
     Other expense (income), net   (115) (106)
Earnings before Income Taxes   50,866  51,935 
         
     Income taxes   15,300  18,200 
Net Earnings  $35,566 $33,735 
Basic Net Earnings per Common Share  $.58 $.51 
         
Diluted Net Earnings per Common Share  $.57 $.50 
         
Cash Dividends Declared per Common Share  $.19 $.17 


2

PART I

Item 1.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands except per share amounts)

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

2008

 

2007

 

2008

2007

 

 

 

 

 

 

 

 

 

Net Sales

$

239,230

 

$

231,384

 

$

443,350

 

$

428,879

 

 

 

 

 

 

 

 

 

 

Cost of products sold

110,467

 

 

109,152

 

202,734

 

 

201,785

 

 

 

 

 

 

 

 

 

Gross Profit

128,763

 

 

122,232

 

240,616

 

 

227,094

 

 

 

 

 

 

 

 

 

 

Product development

9,039

 

 

7,544

 

16,979

 

 

15,816

 

Selling, marketing and distribution

35,842

 

 

31,917

 

69,663

 

 

61,180

 

General and administrative

16,819

 

 

15,057

 

34,557

 

30,297

 

 

 

 

 

 

 

 

 

Operating Earnings

67,063

 

 

67,714

 

119,417

 

 

119,801

 

 

 

 

 

 

 

 

 

 

Interest expense

1,906

 

 

642

 

3,509

 

 

900

 

Other expense (income), net

98

 

 

92

 

(17

)

 

(14

)

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

65,059

 

 

66,980

 

115,925

 

 

118,915

 

 

 

 

 

 

 

 

 

 

Income taxes

22,600

 

 

22,800

 

37,900

 

 

41,000

 

 

 

 

 

 

 

 

 

Net Earnings

$

42,459

 

$

 44,180

 

$

78,025

 

$

77,915

 

 

 

 

 

 

 

 

 

Basic Net Earnings

 

 

 

 

 

 

 

 

per Common Share

$

0.70

 

$

 0.67

 

$

1.28

 

$

1.17

 

 

 

 

 

 

 

 

 

Diluted Net Earnings

 

 

 

 

 

 

 

 

per Common Share

$

0.69

 

$

0.66

 

$

1.27

 

$

1.16

 

 

 

 

 

 

 

 

 

Cash Dividends Declared

 

 

 

 

 

 

 

 

per Common Share

$

0.19

 

$

0.17

 

$

0.37

 

$

0.33

See notes to consolidated financial statements.

3

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)


 March 28, 2008Dec. 28, 2007
ASSETS  
   
Current Assets  
   Cash and cash equivalents  $6,778 $4,922 
   Accounts receivable, less allowances of  
     $7,900 and $6,500   150,726  140,489 
   Inventories   88,496  74,737 
   Deferred income taxes   25,510  21,650 
   Other current assets   2,741  7,034 
      Total current assets   274,251  248,832 
   
Property, Plant and Equipment  
     Cost   311,180  306,073 
     Accumulated depreciation   (169,625) (165,479)
      Property, plant and equipment, net   141,555  140,594 
  
Prepaid Pension   32,495  31,823 
Goodwill   84,887  67,204 
Other Intangible Assets, net   58,021  41,889 
Other Assets   6,538  6,382 
          Total Assets  $597,747 $536,724 
   
LIABILITIES AND SHAREHOLDERS' EQUITY  
   
Current Liabilities  
     Notes payable to banks  $19,566 $18,991 
     Trade accounts payable   32,393  27,379 
     Salaries, wages and commissions   14,085  20,470 
     Dividends payable   11,169  11,476 
     Other current liabilities   57,052  47,561 
    134,265  125,877 
   
Long-Term Debt   178,595  107,060 
Retirement Benefits and Deferred Compensation   40,944  40,639 
Uncertain Tax Positions   1,650  5,400 
Deferred Income Taxes   19,104  13,074 
   
Shareholders' Equity  
     Common stock   60,692  61,964 
     Additional paid-in capital   166,080  156,420 
     Retained earnings   4,792  32,986 
     Accumulated other comprehensive income (loss)   (8,375) (6,696)
       Total shareholders' equity   223,189  244,674 
       Total Liabilities and Shareholders' Equity  $597,747 $536,724 


 

 

 

June 27, 2008

Dec 28, 2007

ASSETS

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

4,889

$

4,922

 

Accounts receivable, less allowances of

 

 

 

 

 

$7,000 and $6,500

167,182

 

140,489

 

Inventories

91,709

 

74,737

 

Deferred income taxes

25,498

 

21,650

 

Other current assets

4,215

 

7,034

 

 

Total current assets

293,493

 

248,832

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

Cost

316,950

 

306,073

 

Accumulated depreciation

(173,458

)

 

(165,479

)

 

 

Property, plant and equipment, net

143,492

 

140,594

 

 

 

 

 

 

Prepaid Pension

33,273

 

31,823

Goodwill

84,880

 

67,204

Other Intangible Assets, net

55,394

 

41,889

Other Assets

6,940

 

6,382

 

 

Total Assets

$

617,472

$

536,724

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

Current Liabilities

 

 

 

 

Notes payable to banks

$

19,415

$

18,991

 

Trade accounts payable

30,572

 

27,379

 

Salaries, wages and commissions

17,314

 

20,470

 

Dividends payable

11,137

 

11,476

 

Other current liabilities

45,093

 

47,561

 

 

Total current liabilities

123,531

 

125,877

 

 

 

 

 

 

Long-term Debt

188,900

 

107,060

Retirement Benefits and Deferred Compensation

41,386

 

40,639

Uncertain Tax Positions

1,650

 

5,400

Deferred Income Taxes

18,702

 

13,074

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

Common stock

60,373

 

61,964

 

Additional paid-in-capital

171,886

 

156,420

 

Retained earnings

17,921

 

32,986

 

Accumulated other comprehensive income (loss)

(6,877

)

 

(6,696

)

 

 

Total shareholders' equity

243,303

 

244,674

 

 

Total Liabilities and Shareholders' Equity

$

617,472

$

536,724

See notes to consolidated financial statements.

4

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In (In thousands)


Thirteen Weeks Ended
March 28, 2008March 30, 2007
Cash Flows from Operating Activities      
   
   Net Earnings  $35,566 $33,735 
     Adjustments to reconcile net earnings to net cash  
      provided by operating activities  
        Depreciation and amortization   7,395  6,959 
        Deferred income taxes   (2,885) (3,478)
        Share-based compensation   2,553  2,218 
        Excess tax benefit related to share-based payment  
         arrangements   (1,723) (848)
        Change in  
          Accounts receivable   (5,296) (7,631)
          Inventories   (9,836) (10,985)
          Trade accounts payable   4,801  1,711 
          Salaries, wages and commissions   (6,808) (12,469)
          Retirement benefits and deferred compensation   (887) (989)
          Other accrued liabilities   9,204  15,081 
          Other   (228) (165)
Net cash provided by operating activities   31,856  23,139 
Cash Flows from Investing Activities  
   
   Property, plant and equipment additions   (5,130) (13,267)
   Proceeds from sale of property, plant and equipment   39  149 
   Capitalized software and other intangible asset additions   (222) — 
   Acquisition of business, net of cash acquired   (35,266) — 
Net cash used in investing activities   (40,579) (13,118)
Cash Flows from Financing Activities  
   
   Net borrowings (payments) on short-term lines of credit   (818) 14,939 
   Borrowings on long-term line of credit   83,335  — 
   Payments on long-term line of credit   (11,800) — 
   Excess tax benefit related to share-based payment  
    arrangements   1,723  848 
   Common stock issued   9,811  8,355 
   Common stock retired   (59,528) (23,985)
   Cash dividends paid   (11,376) (11,010)
Net cash provided by (used in) financing activities   11,347  (10,853)
Effect of exchange rate changes on cash   (768) (272)
Net increase (decrease) in cash and cash equivalents   1,856  (1,104)
   
Cash and cash equivalents  
   
   Beginning of year   4,922  5,871 
   End of period  $6,778 $4,767 


 

 

 

 

 

Twenty-six Weeks Ended

 

 

 

 

 

June 27, 2008

 

June 29, 2007

Cash Flows From Operating Activities

 

 

 

 

Net Earnings

$

78,025

 

$

77,915

 

 

Adjustments to reconcile net earnings to

 

 

 

 

 

 

net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

15,737

 

 

13,994

 

 

 

Deferred income taxes

(4,243

)

 

(4,312

)

 

 

 

Share-based compensation

5,081

 

 

4,351

 

 

 

Excess tax benefit related to share-based

 

 

 

 

 

 

 

 

payment arrangements

(2,923

)

 

(3,848

)

 

 

 

Change in

 

 

 

 

 

 

 

 

Accounts receivable

(22,217

)

 

(24,733

)

 

 

 

 

Inventories

(13,060

)

 

(5,358

)

 

 

 

 

Trade accounts payable

3,580

 

 

1,465

 

 

 

 

Salaries, wages and commissions

(3,647

)

 

(10,313

)

 

 

 

 

Retirement benefits and deferred compensation

(1,018

)

 

(713

)

 

 

 

 

Other accrued liabilities

(607

)

 

4,830

 

 

 

 

Other

315

 

 

(114

)

Net cash provided by operating activities

55,023

 

 

53,164

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Property, plant and equipment additions

(12,944

)

 

(21,646

)

 

Proceeds from sale of property, plant and equipment

1,517

 

 

207

 

Investment in life insurance

(1,499

)

 

(1,499

)

 

Capitalized software and other intangible asset additions

(726

)

 

(5

)

 

Acquisition of business, net of cash acquired

(35,266

)

 

-

Net cash used in investing activities

(48,918

)

 

(22,943

)

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

Net borrowings (payments) on short-term lines of credit

(660

)

 

46,745

 

Borrowings on long-term line of credit

162,235

 

 

-

 

Payments on long-term line of credit

(80,395

)

 

-

 

Excess tax benefit related to share-based

 

 

 

 

 

payment arrangements

2,923

 

 

3,848

 

Common stock issued

13,176

 

 

19,194

 

Common stock retired

(80,130

)

 

(78,470

)

 

Cash dividends paid

(22,582

)

 

(21,984

)

Net cash provided by (used in) financing activities

(5,433

)

 

(30,667

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

(705

)

 

(736

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

(33

)

 

(1,182

)

Cash and cash equivalents

 

 

 

 

Beginning of year

4,922

 

 

5,871

End of year

$

4,889

$

4,689

See notes to consolidated financial statements.

5

GRACO INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of March 28,June 27, 2008 and the related statements of earnings for the thirteen and twenty-six weeks ended June 27, 2008 and June 29, 2007, and cash flows for the thirteentwenty-six weeks then ended June 27, 2008 and June 29, 2007 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 Graco Inc. and Subsidiaries as of June 27, 2008, 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 2007 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.

In the opinion of management, these consolidated statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Graco Inc. and Subsidiaries as of March 28, 2008, and the results of operations and cash flows for all periods presented.

2.

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 2007 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.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):


  Thirteen Weeks Ended
  March 28, 2008March 30, 2007
    
 Net earnings available to common shareholders$35,566$33,735
  
 Weighted average shares outstanding for basic
 earnings per share61,25466,667
  
 Dilutive effect of stock options computed
 based on the treasury stock method using the average
 market price6631,048
  
 Weighted average shares outstanding for diluted
       earnings per share61,91767,715
  
 Basic earnings per share$      .58$      .51
  
 Diluted earnings per share$      .57$      .50

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Net earnings available to

 

 

 

 

 

 

 

 

common shareholders

$         42,459

 

$         44,180

 

$       78,025

 

$           77,915

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

 

 

 

 

 

 

outstanding for basic

 

 

 

 

 

 

 

 

earnings per share

60,540

 

66,045

 

60,897

 

66,356

 

 

 

 

 

 

 

 

 

Dilutive effect of stock

 

 

 

 

 

 

 

 

options computed using the

 

 

 

 

 

 

 

 

treasury stock method and

 

 

 

 

 

 

 

 

the average market price

682

 

1,025

 

672

 

1,036

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

 

 

 

 

 

 

outstanding for diluted

 

 

 

 

 

 

 

 

earnings per share

61,222

 

67,070

 

61,569

 

67,392

 

 

 

 

 

 

 

 

 

Basic earnings per share

$             0.70

 

$             0.67

 

$          1.28

 

$               1.17

Diluted earnings per share

$             0.69

$             0.66

$          1.27

$               1.16

6

Stock options to purchase 1,889,000 and 1,228,000 shares were not included in the 2008 and 2007 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

3.

Stock options to purchase 2,215,000 and 948,000 shares were not included in the 2008 and 2007 calculations of diluted earnings per share, respectively, because they would have been anti-dilutive.

3.

Information on option shares outstanding and option activity for the thirteentwenty-six weeks ended March 28,June 27, 2008 is shown below (in thousands, except per share amounts):


 Option
Shares		Weighted 
Average 
Exercise 
Price 		Options
Exercisable		Weighted
Average
Exercise
Price
         
Outstanding, December 28, 2007   3,779 $28.63  2,228 $21.41 
     Granted   676  35.87 
     Exercised   (210) 15.90 
     Canceled   (160) 38.95 
Outstanding, March 28, 2008   
4,085		 $30.08  2,353 $24.02 
    
 		    

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

Average

 

 

 

Average

 

 

Option

 

Exercise

 

Options

 

Exercise

 

 

Shares

 

Price

 

Exercisable

 

Price

 

 

 

 

 

 

 

 

 

Outstanding, December 28, 2007

3,779

 

$        28.63

 

2,228

 

$           21.41

 

Granted

749

 

36.13

 

 

 

 

 

Exercised

(398

)

16.61

 

 

 

 

 

Canceled

(189

)

38.95

 

 

 

 

Outstanding, June 27, 2008

3,941

 

$        30.79

 

2,211

 

$           24.92

The aggregate intrinsic value of exercisable option shares was $30.9 million as of June 27, 2008, with a weighted average contractual term of 4.7 years. There were approximately 3.9 million vested share options and share options expected to vest as of June 27, 2008, with an aggregate intrinsic value of $32.7 million, a weighted average exercise price of $30.65 and a weighted average contractual term of 6.6 years.

Information related to options exercised in the first six months of 2008 and 2007 follows (in thousands):

 

 

Twenty-six Weeks Ended

 

 

June 27, 2008

 

June 29, 2007

           Cash received

$            6,605

 

$         12,046

           Aggregate intrinsic value

8,359

 

14,535

           Tax benefit realized

3,000

 

5,300

The Company recognized year-to-date share-based compensation of $5.1 million in 2008 and $4.4 million in 2007. As of June 27, 2008, there was $11 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.5 years.

             7

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:

 

 

Twenty-six Weeks Ended

 

 

June 27, 2008

 

June 29, 2007

Expected life in years

6.0      

 

6.0   

 

Interest rate

3.2%   

 

4.7%

  

Volatility

25.0%   

 

26.1%

 

Dividend yield

2.1%   

 

1.6%

 

Weighted average fair value per share

$   8.43      

 

$ 12.01   

 

Under the Company’s Employee Stock Purchase Plan, the Company issued 216,000 shares in 2008 and 202,000 shares in 2007. 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:

 

 

Twenty-six Weeks Ended

 

 

June 27, 2008

 

June 29, 2007

Expected life in years

1.0       

 

1.0       

Interest rate

1.5%    

 

4.9%    

Volatility

27.1%    

 

24.4%    

Dividend yield

2.1%    

 

1.6%    

Weighted average fair value per share

$   8.14       

 

$   9.79       

8

The aggregate intrinsic value of exercisable option shares was $30.7 million as of March 28, 2008, with a weighted average contractual term of 4.8 years. There were approximately 4 million vested share options and share options expected to vest as of March 28, 2008, with an aggregate intrinsic value of $31.1 million, a weighted average exercise price of $29.94 and a weighted average contractual term of 6.6 years.

4.

Information related to options exercised in the first three months of 2008 and 2007 follows (in thousands):

         Thirteen Weeks Ended
 March 28, 2008March 30, 2007
Cash received$3,329$1,305
Aggregate intrinsic value4,1343,407
Tax benefit realized1,5001,200

The Company recognized share-based compensation of $2.6 million in the first quarter of 2008 and $2.2 million in the first quarter of 2007. As of March 28, 2008, there was $12.5 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.7 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:

Thirteen Weeks Ended
 March 28, 2008   March 30, 2007   
Expected life in years6.0   6.0   
Interest rate3.1%4.6%
Volatility25.0%26.2%
Dividend yield2.1%1.6%
Weighted average fair value per share$8.32   $12.05   

Under the Company’s Employee Stock Purchase Plan, the Company issued 216,000 shares in 2008 and 202,000 shares in 2007. 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:

Thirteen Weeks Ended
 March 28, 2008   March 30, 2007   
Expected life in years1.0   1.0   
Interest rate1.5%4.9%
Volatility27.1%24.4%
Dividend yield2.1%1.6%
Weighted average fair value per share$8.14   $9.79   

4.

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


Thirteen Weeks Ended
 March 28, 2008March 30, 2007
Pension Benefits  
Service cost  $1,391 $1,479 
Interest cost 3,146  2,882 
Expected return on assets   (4,850) (4,800)
Amortization and other   152  255 
Net periodic benefit cost (credit)  
$
(161		)
$
(184		)
   
 
 
Postretirement Medical  
Service cost  $125 $150 
Interest cost   375  300 
Amortization and other   —  (50)
Net periodic benefit cost  
$
500		 
$
400		 
   
 
 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

June 27,

 

June 29,

 

June 27,  

 

June 29,

 

2008

 

2007

 

2008

 

2007

Pension Benefits

 

 

 

 

 

 

 

Service cost

$

1,412

 

$

1,501

 

$

2,803

 

 

$

2,980

Interest cost

3,144

 

 

2,885

 

6,290

 

 

5,767

Expected return on assets

(4,850

)

 

(4,800

)

(9,700

)

 

(9,600

)

Amortization and other

144

 

 

291

 

296

 

 

546

Net periodic benefit cost (credit)

$

(150

)

$

(123

 

)

$

$(311

)

 

$

(307)

 

 

 

 

 

 

 

 

Postretirement Medical

 

 

 

 

 

 

 

Service cost

$

125

 

$

150

 

$

$250

 

 

$

 300

Interest cost

375

 

 

315

 

750

 

 

615

Amortization

-

 

 

623

 

-

 

 

573

Net periodic benefit cost

$

500

 

$

1,088

 

$

1,000

 

 

$

1,488

The Company paid $1.5 million in June 2008 and $1.5 million in June 2007 for contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts will be used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company’s insolvency. Cash surrender value of $2.8 million and $1.4 million is included in other assets in the consolidated balance sheet as of June 27, 2008 and June 29, 2007, respectively.

5.

Total comprehensive income was as follows (in thousands):

Thirteen Weeks Ended

Twenty-six Weeks Ended

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Net earnings

$ 

42,459

 

$

44,180

 

$

$78,025

 

$

77,915

Cumulative translation

 

 

 

 

 

 

 

 

adjustment

(26

)

121

 

(31

)

114

Pension and postretirement

 

 

 

 

 

 

 

 

medical liability adjustment

65

 

144

 

189

 

130

Gain (loss) on interest

 

 

 

 

 

 

 

 

rate hedge contracts

2,352

 

-

 

(423

)

-

 

 

 

 

 

 

 

 

 

Income taxes

(893

)

(54

)

84

 

(49

)

 

 

 

 

 

 

 

 

 

Comprehensive income

$ 

43,957

 

$

44,391

 

$

77,844

 

$

78,110


Thirteen Weeks Ended
March 28, 2008March 30, 2007
       
Net earnings  $35,566 $33,735 
Pension and postretirement medical liability adjustment   124  (14)
Gain (loss) on interest rate hedge contracts   (2,775) — 
Cumulative translation adjustment   (5) (7)
Income Taxes   977  5 
Comprehensive income  
$
33,887		 
$
33,719		 
 
 
 		 
 
 		 

9

  Components of accumulated other comprehensive income (loss) were (in thousands):

 

 

 

June 27, 2008

 

Dec 28, 2007

 

 

 

 

 

 

     Pension and postretirement medical liability adjustment

 

$        (5,556)

 

$      (5,672)

     Gain (loss) on interest rate hedge contracts

 

(1,338)

 

(1,072)

     Cumulative translation adjustment

 

17 

 

48 

     Total

 

$        (6,877)

 

$      (6,696)

6.

Components of accumulated other comprehensive income (loss) were (in thousands):

 March 28, 2008Dec. 28, 2007
Pension and postretirement medical liability adjustment  $(5,597)$(5,672)
Gain (loss) on interest rate hedge contracts   (2,821) (1,072)
Cumulative translation adjustment   43  48 
Total  
$
(8,375		)
$
(6,696		)

6.

The Company has three reportable segments: Industrial, Contractor and Lubrication. The Company does not track assets by segment. Sales and operating earnings by segment for the thirteen and twenty-six weeks ended March 28,June 27, 2008 and March 30,June 29, 2007 were as follows (in thousands):


       Thirteen Weeks Ended
March 28, 2008 March 30, 2007 
Net Sales        
Industrial  $114,251 $105,065 
Contractor   66,180  69,751 
Lubrication   23,689  22,679 
Consolidated  
$
204,120		 
$
197,495		 
Operating Earnings  
Industrial  $37,898 $34,418 
Contractor   13,696  17,027 
Lubrication   4,317  3,064 
Unallocated corporate   (3,557) (2,422)
Consolidated  
$
52,354		 
$
52,087		 

Thirteen Weeks Ended

Twenty-six Weeks Ended

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

2008

 

2007

 

2008

 

2007

Net Sales

 

 

 

 

 

 

 

Industrial

$

133,092

 

$

114,281

 

$

247,343

 

$

219,346

Contractor

82,061

 

94,231

 

148,241

 

163,982

Lubrication

24,077

 

22,872

 

47,766

 

45,551

Consolidated

$

239,230

 

$

231,384

 

$

443,350

 

$

428,879

 

 

 

 

 

 

 

 

Operating Earnings

 

 

 

 

 

 

 

Industrial

$

44,075

 

$

39,555

 

$

81,973

 

$

73,973

Contractor

20,741

 

28,619

 

34,437

 

45,646

Lubrication

4,607

 

2,196

 

8,924

 

5,260

Unallocated corporate (expense)

(2,360

)

(2,656

)

(5,917

)

(5,078

)

Consolidated

$

67,063

 

$

67,714

 

$

119,417

 

$

119,801

7.

Major components of inventories were as follows (in thousands):


 March 28, 2008 Dec. 28, 2007 
         
Finished products and components  $55,402 $46,677 
Products and components in various stages  
     of completion   26,262  24,805 
Raw materials and purchased components   40,231  37,311 
   
 
121,895		 
 
108,793		 
Reduction to LIFO cost   (33,399) (34,056)
Total  
$
88,496		 
$
74,737		 

 

 

 

June 27, 2008

 

Dec 28, 2007

 

 

 

 

 

 

Finished products and components

 

$

57,353

 

$

46,677

Products and components in various

 

 

 

 

 

stages of completion

 

28,755

 

24,805

Raw materials and purchased components

 

39,007

 

37,311

 

 

 

125,115

 

108,793

Reduction to LIFO cost

 

(33,406

)

(34,056

)

Total

 

$

91,709

 

$

74,737

10

8.

8.

Information related to other intangible assets follows (dollars in thousands):


 Estimated
Life (Years)		Original
Cost		Amorti-
zation		Foreign
Currency
Translation
and Other		Book
Value
March 28, 2008             
Customer relationships  3 - 8   $37,230 $(9,021)$28 $28,237 
Patents, proprietary technology  
  and product documentation  3 - 15   23,598  (8,566) 14  15,046 
Trademarks and trade names  3 - 10   4,684  (2,878) 22  1,828 
      
 
65,512		 
 
(20,465		)
 
64		 
 
45,111		 
Not Subject to Amortization:  
Brand names      12,910  —  —  12,910 
Total     
$
78,422		 
$
(20,465		)
$
64		 
$
58,021		 
December 28, 2007  
Customer relationships and  
  distribution network  4 - 8   $26,102 $(11,092)$29 $15,039 
Patents, proprietary technology  
  and product documentation  5 - 15   22,243  (7,720) 16  14,539 
Trademarks, trade names and  
  other  3 - 10   4,684  (2,555) 22  2,151 
      
 
53,029		 
 
(21,367		)
 
67		 
 
31,729		 
Not Subject to Amortization:  
Brand names      10,160  —  —  10,160 
Total     
$
63,189		 
$
(21,367		)
$
67		 
$
41,889		 

 

 

 

Estimated

 

 

 

 

 

Foreign

 

 

 

 

 

Life

 

Original

 

Accumulated

 

Currency

 

Book

 

 

 

(years)

 

Cost

 

Amortization

 

Translation

 

Value

June 27, 2008

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

3 - 8

 

$        37,230

 

$       (10,414)

 

$         23

 

$  26,839

Patents, proprietary technology

 

 

 

 

 

 

 

 

 

 

 

and product documentation

 

3 - 15

 

23,598

 

(9,468)

 

12

 

14,142

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

3 - 10

 

4,684

 

(3,201)

 

20

 

1,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,512

 

(23,083)

 

55

 

42,484

Not Subject to Amortization:

 

 

 

 

 

 

 

 

 

 

 

Brand names

 

 

 

12,910

 

-

 

-

 

12,910

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$        78,422

 

$       (23,083)

 

$         55

 

$  55,394

 

 

 

 

 

 

 

 

 

 

 

 

December 28, 2007

 

 

 

 

 

 

 

 

 

 

Customer relationships and

 

 

 

 

 

 

 

 

 

 

 

distribution network

 

4 - 8

 

$        26,102

 

$       (11,092)

 

$         29

 

$  15,039

Patents, proprietary technology

 

 

 

 

 

 

 

 

 

 

 

and product documentation

 

5 - 15

 

22,243

 

(7,720)

 

16

 

14,539

Trademarks, trade names

 

 

 

 

 

 

 

 

 

 

 

and other

 

3 - 10

 

4,684

 

(2,555)

 

22

 

2,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,029

 

(21,367)

 

67

 

31,729

Not Subject to Amortization:

 

 

 

 

 

 

 

 

 

 

 

Brand names

 

 

 

10,160

 

-

 

-

 

10,160

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$        63,189

 

$       (21,367)

 

$         67

 

$  41,889

Amortization of intangibles was $2.6 million in the second quarter of 2008 and $4.9 million year-to-date. Estimated annual amortization expense is as follows: $10.2 million in 2008, $9.5 million in 2009, $8.6 million in 2010, $7.5 million in 2011, $6.7 million in 2012 and $4.9 million thereafter.

11

Amortization of intangibles was $2.3 million in the first quarter of 2008. Estimated annual amortization expense is as follows: $10.2 million in 2008, $9.5 million in 2009, $8.5 million in 2010, $7.5 million in 2011, $6.8 million in 2012 and $4.9 million thereafter.

9.

Components of other current liabilities were (in thousands):


 March 28, 2008Dec. 28, 2007
   
Accrued self-insurance retentions$  7,909$  7,842
Accrued warranty and service liabilities7,4237,084
Accrued trade promotions3,7876,480
Payable for employee stock purchases8255,829
Income taxes payable12,807678
Other24,30119,648
  
$57,052 
$47,561 
  
 
 

 

 

 

June 27, 2008

 

Dec 28, 2007

 

 

 

 

 

 

Accrued self-insurance retentions

 

$               7,962

 

$              7,842

Accrued warranty and service liabilities

 

7,471

 

7,084

Accrued trade promotions

 

4,556

 

6,480

Payable for employee stock purchases

 

2,557

 

5,829

Income taxes payable

 

3,014

 

678

Other

 

19,533

 

19,648

Total

 

$             45,093

 

$            47,561

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):

 

 

 

Twenty-six

 

 

 

 

 

Weeks Ended

 

 Year Ended

 

 

 

June 27, 2008

 

Dec 28, 2007

 

 

 

 

 

 

Balance, beginning of year

 

$            7,084

 

$        6,675

Charged to expense

 

3,122

 

6,053

Margin on parts sales reversed

 

1,948

 

3,186

Reductions for claims settled

 

(4,683

)

(8,830

)

Balance, end of period

 

$            7,471

 

$        7,084

10.

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):

 Thirteen Weeks
Ended       
March 28, 2008		 Year Ended  
Dec. 28, 2007		 
         
Balance, beginning of year  $7,084 $6,675 
Charged to expense   1,421  6,053 
Margin on parts sales reversed   1,253  3,186 
Reductions for claims settled   (2,335) (8,830)
Balance, end of period  
$
7,423		 
$
7,084		 

10.

The examination of the Company’s U.S. income tax returns for 2004 and 2005 was completed in the first quarter of 2008. Completion of the examination resulted in a payment of approximately $1 million and reductions of uncertain tax positions totaling approximately $4 million. The settlement of the examination decreased the Company’s effective tax rate for the quarteryear-to-date to 3033 percent.


With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2002.

12

11.

With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2002.

11.

In February 2008, the Company acquired GlasCraft Inc. for approximately $35 million cash. GlasCraft has an office and manufacturing facility in Indianapolis, Indiana and had sales of approximately $18 million in 2007. It designs, manufactures and sells spray systems for the composites manufacturing industry and high performance dispense systems for the polyurethane foam and polyurea coatings industries. The products, brands, distribution channels and engineering capabilities of GlasCraft will expand and complement the Company’s Industrial Equipment business.


The purchase price was allocated based on estimated fair values as follows (in thousands):

Accounts receivable and prepaid expenses

$

2,200

 

Inventories

 

3,700

 

Deferred income taxes

700

 

Property, plant and equipment

700

 

Identifiable intangible assets

18,200

 

Goodwill

 

17,700

 

Total purchase price

43,200

 

Current liabilities assumed

(1,000

)

Deferred income taxes

(6,900

)

Net assets acquired

$

35,300

 

Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):

Product documentation (5 years)

$

    900

Customer relationships (6 years)

 

14,100

Proprietary technology (3 years)

 

500

Total (6 years)

15,500

Brand name (indefinite useful life)

 

2,700

Total identifiable intangible assets

$

18,200

None of the goodwill or identifiable intangible assets is expected to be deductible for tax purposes.

13

12.

The purchase price has not been finalized and is subject to final determination of acquired asset and liability balances. The preliminary purchase price was allocated based on estimated fair values as follows (in thousands):

Accounts receivable and prepaid expenses  $2,200 
Inventories   3,700 
Deferred income taxes   700 
Property, plant and equipment   700 
Identifiable intangible assets   18,200 
Goodwill   17,700 
Total purchase price   43,200 
Current liabilities assumed   (1,000)
Deferred income taxes   (6,900)
Net assets acquired  $35,300 
Identifiable intangible assets and weighted average estimated useful life are as follows (dollars in thousands):

Product documentation (5 years)$     900
Customer relationships (6 years)14,100
Proprietary technology (3 years)500
Total (6 years)
15,500
Brand name (indefinite useful life)2,700
Total identifiable intangible assets
$18,200
None of the goodwill or identifiable intangible assets is expected to be deductible for tax purposes.

12.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements.” This statement establishes a consistent framework for measuring fair value and expands disclosures on fair value measurements. SFAS No. 157 was effective for the Company starting in fiscal 2008 with respect to financial assets and liabilities. The impact of the initial adoption of SFAS No. 157 in 2008 had no impact on the consolidated financial statements.


The Company uses significant other observable inputs to value the derivative instruments used to hedge interest rate volatility and net monetary positions. The fair market value of such instruments follows (in thousands):

 

 

June 27, 2008

 

Dec 28, 2007

 

 

 

 

 

Gain (loss) on interest rate hedge contracts

 

$         (2,123)

 

$        (1,700)

Gain (loss) on foreign currency forward contracts

 

(33)

 

(282)

Total

 

$         (2,156)

 

$        (1,982)

With respect to non-financial assets and liabilities, SFAS No. 157 is effective for the Company starting in fiscal 2009. The Company has not determined the impact, if any, the adoption of this statement as it pertains to non-financial assets and liabilities will have on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This statement expands disclosures but does not change accounting for derivative instruments and hedging activities. The statement is effective for the Company starting in fiscal 2009.

14

The Company uses significant other observable inputs to value the derivative instruments used to hedge interest rate volatility and net monetary positions. The fair market value of such instruments follows (in thousands):

 March 28, 2008Dec. 28, 2007
Gain (loss) on interest rate hedge contracts$(4,475)$(1,700)
Gain (loss) on foreign currency forward contracts(401)(282)
Total$(4,876)$(1,982)

With respect to non-financial assets and liabilities, SFAS No. 157 is effective for the Company starting in fiscal 2009. The Company has not determined the impact, if any, the adoption of this statement as it pertains to non-financial assets and liabilities will have on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This statement expands disclosures but does not change accounting for derivative instruments and hedging activities. The statement is effective for the Company starting in fiscal 2009.

Item 2.

GRACO INC. AND SUBSIDIARIES

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

Results of Operations

Net sales, net earnings and earnings per share were as follows (in thousandsmillions except per share amounts and percentages):

              Thirteen Weeks Ended%     
 March 28, 2008 March 30, 2007 Change
Net Sales$204,120 $197,495 3%
Net Earnings35,566 33,735 5%
Diluted Net Earnings per Common Share$      0.57 $      0.50 14%

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

June 27,

 

June 29,

 

%

 

June 27,

 

June 29,

 

%

 

2008

 

2007

 

Change

 

2008

 

2007

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

$      239.2

 

$       231.4

 

3 %

 

$       443.4

 

$     428.9

 

3 %

Net Earnings

42.5

 

44.2

 

(4)%

 

78.0

 

77.9

 

0 %

Diluted Net Earnings

 

 

 

 

 

 

 

 

 

 

 

   per Common Share

$        0.69

 

$         0.66

 

5 %

 

$         1.27

 

$       1.17

 

9 %

Foreign currency translation rates had a favorable impact on first quarter sales and net earnings. Translated at consistent exchange rates, sales for both the quarter and year-to-date were flat compared to 2007 and net earnings decreased 4 percent.12 percent for the quarter and 8 percent year-to-date.

Results

Sales include sales of $1.5$5 million from GlasCraft which was acquiredoperations since the date of acquisition, including $3.5 million in late February 2008.the second quarter.

Investments in product and market development, along with rising costs of doing business, continued to apply pressure on earnings.

Earnings per share increased at a higher rate than net earnings due to purchases and retirement of approximately 1.72.2 million shares of Company common stock.stock, including approximately 0.5 million shares in the second quarter.

Consolidated Results

Sales by geographic area were as follows (in thousands)millions):

    Thirteen Weeks Ended
 March 28, 2008March 30, 2007
Americas1$115,833$120,546
Europe259,50849,377
Asia Pacific28,77927,572
Consolidated
$204,120
$197,495
1

North and South America, including the U.S.

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

Americas 1

$        131.9

 

$        141.5

 

$        247.8

 

$        262.0

Europe 2

72.0

 

58.7

 

131.6

 

108.1

Asia Pacific

35.3

 

31.2

 

64.0

 

58.8

Consolidated

$        239.2

 

$        231.4

 

$        443.4

 

$        428.9

 

 

 

 

 

 

 

 

1 North and South America, including the U.S.

 

 

 

 

 

2 Europe, Africa and Middle East

 

 

 

 

 

 

15

2

Europe, Africa and Middle East


The decrease in the Americas was driven by weakness in the Contractor business, was more than offset by the increase in Europe, where net sales were 21 percent higher than last year.Business. Translated at consistent exchange rates, net sales in Europe increased 9 percent. In10 percent for both the quarter and year-to-date, and sales in Asia Pacific region, net sales were 4increased by 11 percent higher than last year, with half offor the increase from favorable currency translation.quarter and 6 percent year-to-date.

Gross profit margin, expressed as a percentage of sales, was 54.853.8 percent for the quarter and 54.3 percent year-to-date, versus 53.152.8 percent and 53.0 percent for the same periodperiods last year.year, respectively. The increase was due mainly to favorable currency translation rates. The effects of higher material and other manufacturing costs on gross margin rate have been offset by the impact of pricing and the benefits of integrating Lubriquip and consolidating the Lubrication Equipment operations in the Company’s Anoka facility are also beginning to be reflected in the gross profit margin percentage.facility.

Operating profit margin, expressed as aexpenses for both the quarter and year-to-date are 13 percent higher than last year. The effects of currency translation contributed approximately 3 percentage points of sales, was 25.6 percent for the first quarter versus 26.4 percent last year.increase. Operating expenses in 2008 include approximately $1increased $3 million from acquired GlasCraft operations. Continued investments in product and market development also contributed to the increase in operating expenses, including expenses related to the rolloutintroduction of the new sprayer lineproduct lines in the home center channel, approximately $1 million from GlasCraft operationsnew product development teams and a $1 million contribution toadditional sales and marketing personnel in developing countries.

Higher operating expenses offset the Company’s charitable foundation. Thefavorable effects of currency translation increasedhigher sales and gross profit margins, resulting in flat operating expenses by approximately $2 million.earnings for both the quarter and year-to-date.

The $1.3Interest expense is $3 million increase in interest expense resulted fromhigher than last year due to borrowings used tofor the purchase and retireretirement of Company shares and for the acquisition of GlasCraft. The Company repurchased approximately 2.2 million shares of its common stock for $80 million in the first half of 2008.

The Company’s effective tax rate for the first quarterhalf was 3033 percent, down from 35 percent for the first quarterhalf last year. The decrease resulted from the completion of the examination of the Company’s income tax returns.returns in the first quarter of 2008.

Segment Results

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

Industrial

 Thirteen Weeks Ended
Net sales (in thousands)March 28, 2008March 30, 2007
 
   Americas  $53,403 $50,475 
   Europe   39,650  32,447 
   Asia Pacific   21,198  22,143 
   Total  $114,251 $105,065 
Operating earnings as a percentage of net sales   33%  33% 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Net sales (in millions)

 

 

 

 

 

 

 

 

 

Americas

 

 

$         61.6

 

$        54.7

 

$       114.9

 

$       105.1

 

Europe

 

 

46.1

 

36.8

 

85.8

 

69.3

 

Asia Pacific

 

 

25.4

 

22.8

 

46.6

 

44.9

 

Total

 

 

$       133.1

 

$      114.3

 

$       247.3

 

$       219.3

 

 

 

 

 

 

 

 

 

 

 

Operating earnings as a

 

 

 

 

 

 

 

 

 

percentage of net sales

 

33

%

35

%

33

%

34

%

Net sales in the

16

The Industrial segment had second quarter sales growth in all regions and in all major product categories. Translated at consistent exchange rates, sales for the quarter were up 612 percent in both the Americas and in Europe and 9 percent in Asia Pacific. Year-to-date sales were up 8 percent in the Americas, and 2212 percent in Europe. Approximately half of the percentage increase in Europe came from currency translation.

Contractor

 Thirteen Weeks Ended
Net sales (in thousands)March 28, 2008March 30, 2007
 
   Americas  $42,362 $50,580 
   Europe   17,962  15,134 
   Asia Pacific   5,856  4,037 
   Total  $66,180 $69,751 
Operating earnings as a percentage of net sales   21%  24% 

In the Contractor segment, net sales increases in Europe and 1 percent in Asia Pacific, were not enough to offset a 16 percent decrease in the Americas, where sales were down in both the paint store and home center channels.all at consistent translation rates. Operating earnings in this segment were affected by $2.5an operating loss from GlasCraft, resulting from acquisition and integration related activities.

Contractor

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Net sales (in millions)

 

 

 

 

 

 

 

 

 

Americas

 

 

$          51.4

 

$          67.2

 

$          93.7

 

$       117.8

 

Europe

 

 

24.0

 

20.4

 

42.0

 

35.5

 

Asia Pacific

 

 

6.7

 

6.6

 

12.5

 

10.7

 

Total

 

 

$          82.1

 

$          94.2

 

$       148.2

 

$       164.0

 

 

 

 

 

 

 

 

 

 

 

Operating earnings as a

 

 

 

 

 

 

 

 

 

percentage of net sales

 

25

%

30

%

23

%

28

%

The Contractor segment continued to experience softness in both the North American paint store and home center channels. Year-to-date increases in Europe (18 percent increase, including 12 percentage points from currency translation) and in Asia Pacific (17 percent increase, including 2 percentage points from currency translation) were not enough to offset the 20 percent decrease in the Americas.

Operating earnings in this segment were affected by approximately $6 million (half in the second quarter) related to the launch and production of new paint sprayer units in the home center channel.

Lubrication

 Thirteen Weeks Ended
Net sales (in thousands)March 28, 2008March 30, 2007
 
   Americas  $20,068 $19,491 
   Europe   1,896  1,796 
   Asia Pacific   1,725  1,392 
   Total  $23,689 $22,679 
Operating earnings as a percentage of net sales   18%  14% 

Lubrication

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Net sales (in millions)

 

 

 

 

 

 

 

 

 

Americas

 

 

$          19.0

 

$         19.6

 

$          39.1

 

$          39.1

 

Europe

 

 

1.9

 

1.5

 

3.8

 

3.3

 

Asia Pacific

 

 

3.2

 

1.8

 

4.9

 

3.2

 

Total

 

 

$          24.1

 

$          22.9

 

$          47.8

 

$          45.6

 

 

 

 

 

 

 

 

 

 

 

Operating earnings as a

 

 

 

 

 

 

 

 

 

percentage of net sales

 

19

%

10

%

19

%

12

%

Most sales, and sales growth, in

In the Lubrication segment, came fromsecond quarter sales increases in Europe and Asia Pacific more than offset a decrease in the Americas. Year-to-date, sales were flat in the Americas and up in Europe and Asia Pacific.

17

The improvement in operating profitability is related to the integration and consolidation of Lubrication operations completed in 2007.

Liquidity and Capital Resources

The

In the first half of 2008, the Company used cash and borrowings under its long-term line of credit to purchase and retire $60$80 million of Company shares. Other significant uses of cash in the first quarter of 2008 included $35 million to acquire GlasCraft and $11$23 million for payment of dividends. Significant uses of cash in the first quarterhalf of 2007 included $24$78 million for purchases and retirement of Company common stock, $13$22 million for capital additions and $11$22 million for payment of dividends.

Increases in accounts receivable and inventories since the end of 2007 reflect the acquisition of GlasCraft operations and the higher level of business activity in the second quarter of 2008 compared to the fourth quarter of 2007.

At March 28,June 27, 2008, the Company had various lines of credit totaling $295 million, of which $101$90 million was unused. Internally generated funds and unused financing sources provide the Company with the financial flexibility to meet liquidity needs.

Outlook

Management is encouraged by the gains in the Company’s Industrial and Lubrication segments in North America and by the continued strength of its international business, including the Asia Pacific region, where orders were 15 percent higher than last year. Based on continuing weakness in the U.S. housing market, management remains cautious about the outlook for the ContractorCompany’s business in North Americathe U.S. and will continue to manage accordingly. At the same time, with the gains experienced in the Industrial and international business, accordingly.management is encouraged that its strategies for achieving product and market diversification are paying off. The Company will continue to make long-term investments in key growth strategies including new product development, expanding distribution, entering new markets and pursuing strategic acquisitions.



18

SAFE HARBOR CAUTIONARY STATEMENT

A forward-looking statement is any statement made in this report and other reports that the Company files periodically with the Securities and Exchange Commission, or in press or earnings releases, analyst briefings and conference calls, which reflects the Company’s current thinking on market trends and the Company’s future financial performance at the time they are made. All forecasts and projections are forward-looking statements.

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 by making cautionary statements concerning any forward-looking statements made by or on behalf of the Company. The Company cannot give any assurance that the results forecasted in any forward-looking statement will actually be achieved. 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: economic conditions in the United States and other major world economies, currency fluctuations, political instability, changes in laws and regulations, and changes in product demand. Please refer to Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for fiscal year 2007 for a more comprehensive discussion of these and other risk factors.

Investors should realize that factors other than those identified above and in Item 1A and Exhibit 99 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.

19

Item 3.          Quantitative and Qualitative Disclosures About Market Risk

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 2007 Annual Report on Form 10-K.

Item 4.

Controls and Procedures

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, the Chief Financial Officer and Treasurer, the Vice President and Controller, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company’s disclosure obligations under the Exchange Act.

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.

20

PART II

OTHER INFORMATION


Item 1A.

Risk Factors


There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2007 Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


Issuer Purchases of Equity Securities

On September 28, 2007, the Board of Directors authorized the Company to purchase up to a total of 7,000,000 shares of its outstanding common stock, primarily through open-market transactions. This authorization expires on September 30, 2009.

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 withholding on option exercises.

Information on issuer purchases of equity securities follows:

Period                                    (a)
Total Number
of Shares
Purchased		(b)
Average
Price Paid
per Share		(c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs		(d)
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (at
end of period)
                
Dec 29, 2007 - Jan 25, 2008709,319$34.40709,3195,438,214
                
Jan 26, 2008 - Feb 22, 2008169,032$34.08159,0005,279,214
                
Feb 23, 2008 - Mar 28, 2008821,501$35.03819,2594,459,955

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

Total

 

Number of

 

 

 

 

 

 

Number

 

Shares that

 

 

 

 

 

 

of Shares

 

May Yet Be

 

 

 

 

 

 

Purchased

 

Purchased

 

 

 

 

 

 

as Part of

 

Under the

 

 

Total

 

Average

 

Publicly

 

Plans or

 

 

Number

 

Price

 

Announced

 

Programs

 

 

of Shares

 

Paid per

 

Plans or

 

(at end of

Period

 

Purchased

 

Share

 

Programs

 

period)

 

 

 

 

 

 

 

 

 

Mar 29, 2008 – Apr 25, 2008

 

155,565

 

$        37.31

 

155,565

 

4,304,390

 

 

 

 

 

 

 

 

 

Apr 26, 2008 – May 23, 2008

 

89,000

 

$        40.16

 

89,000

 

4,215,390

 

 

 

 

 

 

 

 

 

May 24, 2008 – Jun 27, 2008

 

265,626

 

$        39.84

 

264,590

 

3,950,800

21

Item 4.

Submission of Matters to a Vote of Security Holders


At the Annual Meeting of Shareholders held on April 25, 2008, three directors were elected to the Board of Directors with the following votes:

 

 

 

For

 

Withheld

 

 

 

 

 

 

Patrick J. McHale

 

51,850,208

 

1,372,816

Lee R. Mitau

 

51,320,659

 

1,902,365

Marti Morfitt

 

51,772,973

 

1,450,052

At the same meeting, the appointment of Deloitte & Touche LLP as the Independent Registered Public Accounting Firm was ratified, with the following votes:

For

 

Against

 

Abstentions

52,183,467

 

958,747

 

80,809

None

Item 6.

Exhibits


 

10.1

Graco

10.1

Restoration Plan (2005 Statement). Third Amendment adopted March 27, 2008.


 

10.2

10.2

Stock Option Agreement. Form of agreement used for award in 2008 of non-incentivenonstatutory stock options to executive officers undernon-employee directors uder the Graco Inc. Amended and Restated Stock Incentive Plan (2006). Form of agreement for award made to Chief Executive Officer in 2008.


 

31.1

31.1

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


 

31.2

31.2

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


 

32

32

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

22

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:

 April

Date:

July 23, 2008

By:

/s/Patrick J. McHale

Patrick J. McHale

President and Chief Executive Officer

(Principal Executive Officer)

Date:

 April

Date:

July 23, 2008

By:

/s/James A. Graner

James A. Graner

James A. Graner

Chief Financial Officer and Treasurer

(Principal Financial Officer)

Date:

 April

Date:

July 23, 2008

By:

/s/Caroline M. Chambers

Caroline M. Chambers

Caroline M. Chambers

Vice President and Controller

(Principal Accounting Officer)