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 ~~September 23, 2016~~June 30, 2017

Commission File Number: 001-09249

GRACO INC.

(Exact name of registrant as specified in its charter)



Minnesota		41-0285640
(State of incorporation)		(I.R.S. Employer Identification Number)



88 - 11th Avenue N.E. Minneapolis, Minnesota		55413
(Address of principal executive offices)		(Zip Code)

(612) 623-6000

(Registrant’s telephone number, including area code)

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



Yes	X	No

~~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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Yes	X	No

~~Yes~~ X No

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



Large Accelerated Filer	X	Accelerated Filer
Non-accelerated Filer		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



Yes	No	X

~~55,684,000~~55,996,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of ~~October 12, 2016.~~July 19, 2017.

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

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1413

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1918

	Item 4.	Controls and Procedures	1918



PART II - OTHER INFORMATION

	Item 1A.	Risk Factors	2019

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2019

	Item 6.	Exhibits	2120


SIGNATURES


EXHIBITS

PART I Item 1.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited) (In thousands except per share amounts)


	Three Months Ended					Nine Months Ended						Three Months Ended					Six Months Ended
	September 23, 2016		September 25, 2015			September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016		June 30, 2017			June 24, 2016
Net Sales	$	327,192	$	318,986		$	980,230		$	960,928		$	379,483		$	348,126	$	720,073		$	653,038
Cost of products sold	150,594		148,790			456,695			447,980			175,542			162,985		330,859			306,101
Gross Profit	176,598		170,196			523,535			512,948			203,941			185,141		389,214			346,937
Product development	14,671		14,783			44,964			44,980			14,901			15,607		29,400			30,293
Selling, marketing and distribution	49,269		48,374			158,106			149,924			56,060			56,136		110,971			108,837
General and administrative	31,194		30,112			99,710			91,995			34,211			35,056		64,253			68,516
Operating Earnings	81,464		76,927			220,755			226,049			98,769			78,342		184,590			139,291
Interest expense	4,432		4,025			13,468			13,453			4,154			4,543		8,209			9,036
Held separate investment (income), net	—		(2,388		)	—			(190,744		)
Other expense (income), net	416		1,389			(338		)	1,661			(989		)	392		(798		)	(754		)
Earnings Before Income Taxes	76,616		73,901			207,625			401,679			95,604			73,407		177,179			131,009
Income taxes	22,228		23,210			62,738			109,510			15,776			22,460		36,619			40,510
Net Earnings	$	54,388	$	50,691		$	144,887		$	292,169		$	79,828		$	50,947	$	140,560		$	90,499
Per Common Share
Basic net earnings	$	0.98	$	0.88		$	2.61		$	5.02		$	1.43		$	0.92	$	2.52		$	1.63
Diluted net earnings	$	0.95	$	0.86		$	2.55		$	4.90		$	1.38		$	0.89	$	2.43		$	1.59
Cash dividends declared	$	0.33	$	0.30		$	0.99		$	0.90		$	0.36		$	0.33	$	0.72		$	0.66

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 23, 2016			September 25, 2015			September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016			June 30, 2017			June 24, 2016
Net Earnings	$	54,388		$	50,691		$	144,887		$	292,169		$	79,828		$	50,947		$	140,560		$	90,499
Components of other comprehensive income (loss)
Cumulative translation adjustment	(6,642		)	(13,572		)	(16,679		)	(4,179		)	11,029			(7,635		)	17,347			(10,037		)
Pension and postretirement medical liability adjustment	1,707			2,537			4,957			6,894			1,784			1,777			3,784			3,250
Income taxes - pension and postretirement medical liability adjustment	(619		)	(837		)	(1,823		)	(2,478		)	(717		)	(635		)	(1,483		)	(1,204		)
Other comprehensive income (loss)	(5,554		)	(11,872		)	(13,545		)	237			12,096			(6,493		)	19,648			(7,991		)
Comprehensive Income	$	48,834		$	38,819		$	131,342		$	292,406		$	91,924		$	44,454		$	160,208		$	82,508

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands)


	September 23, 2016			December 25, 2015			June 30, 2017			December 30, 2016
ASSETS
Current Assets
Cash and cash equivalents	$	53,322		$	52,295		$	75,446		$	52,365
Accounts receivable, less allowances of $12,100 and $10,400	223,257			225,509
Accounts receivable, less allowances of $13,800 and $12,700							259,900			218,365
Inventories	201,553			202,136			221,441			201,609
Other current assets	20,111			29,077			22,918			31,023
Total current assets	498,243			509,017			579,705			503,362
Property, Plant and Equipment
Cost	487,496			461,173			506,687			489,642
Accumulated depreciation	(296,973		)	(282,736		)	(313,077		)	(300,046		)
Property, plant and equipment, net	190,523			178,437
Property, Plant and Equipment, net							193,610			189,596
Goodwill	411,594			394,488			273,098			259,849
Other Intangible Assets, net	233,947			227,987			183,883			178,336
Deferred Income Taxes	62,019			56,976			85,537			86,653
Other Assets	24,876			24,447			25,944			25,313
Total Assets	$	1,421,202		$	1,391,352		$	1,341,777		$	1,243,109
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks	$	8,380		$	15,901		$	11,066		$	8,913
Current portion of long term debt							75,000			—
Trade accounts payable	40,951			40,505			44,447			39,988
Salaries and incentives	37,681			44,673			38,813			37,109
Dividends payable	18,381			18,447			20,140			20,088
Other current liabilities	71,829			75,090			74,623			71,887
Total current liabilities	177,222			194,616			264,089			177,985
Long-term Debt	355,780			392,695			236,015			305,685
Retirement Benefits and Deferred Compensation	141,094			137,457			163,552			159,250
Deferred Income Taxes	26,711			22,303			17,962			17,672
Other Non-current Liabilities	8,630			8,730			8,597			8,697
Shareholders’ Equity
Common stock	55,706			55,766			55,991			55,834
Additional paid-in-capital	440,823			398,774			493,329			453,394
Retained earnings	333,278			285,508			224,822			206,820
Accumulated other comprehensive income (loss)	(118,042		)	(104,497		)	(122,580		)	(142,228		)
Total shareholders’ equity	711,765			635,551			651,562			573,820
Total Liabilities and Shareholders’ Equity	$	1,421,202		$	1,391,352		$	1,341,777		$	1,243,109

See notes to consolidated financial statements.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


	Nine Months Ended						Six Months Ended
	September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016
Cash Flows From Operating Activities
Net Earnings	$	144,887		$	292,169		$	140,560		$	90,499
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	36,846			33,286			22,362			24,500
Deferred income taxes	(8,470		)	(13,723		)	(2,653		)	(7,397		)
Share-based compensation	16,143			15,488			13,451			12,736
Excess tax benefit related to share-based payment arrangements	(5,800		)	(1,200		)
Gain on sale of business, net	—			(149,003		)
Change in
Accounts receivable	6,100			(21,195		)	(35,455		)	(14,826		)
Inventories	1,628			(28,648		)	(17,103		)	(1,744		)
Trade accounts payable	1,057			3,124			3,175			(34		)
Salaries and incentives	(6,914		)	(2,759		)	(1,808		)	(12,336		)
Retirement benefits and deferred compensation	7,431			8,802			6,566			4,217
Other accrued liabilities	9,379			19,556			10,453			(38		)
Other	(367		)	(20,665		)	(3,857		)	(2,070		)
Net cash provided by operating activities	201,920			135,232			135,691			93,507
Cash Flows From Investing Activities
Property, plant and equipment additions	(34,347		)	(28,860		)	(16,621		)	(25,961		)
Acquisition of businesses, net of cash acquired	(48,643		)	(187,853		)	(9,905		)	(49,110		)
Proceeds from sale of assets	—			610,162
Investment in restricted assets	150			(8,580		)
Change in restricted assets							900			934
Other	(130		)	(43		)	102			(146		)
Net cash provided by (used in) investing activities	(82,970		)	384,826			(25,524		)	(74,283		)
Cash Flows From Financing Activities
Borrowings (payments) on short-term lines of credit, net	(7,349		)	4,265			1,568			(2,616		)
Borrowings on long-term line of credit	532,724			595,400			293,880			416,079
Payments on long-term line of credit	(569,639		)	(835,400		)	(288,550		)	(379,279		)
Excess tax benefit related to share-based payment arrangements	5,800			1,200
Common stock issued	25,564			16,768			46,693			27,643
Common stock repurchased	(48,050		)	(224,730		)	(90,160		)	(48,050		)
Taxes paid related to net share settlement of equity awards							(10,735		)	(3,165		)
Cash dividends paid	(55,058		)	(52,658		)	(40,115		)	(36,685		)
Net cash provided by (used in) financing activities	(116,008		)	(495,155		)	(87,419		)	(26,073		)
Effect of exchange rate changes on cash	(1,915		)	3,354			333			(1,582		)
Net increase (decrease) in cash and cash equivalents	1,027			28,257			23,081			(8,431		)
Cash and cash equivalents
Cash and Cash Equivalents
Beginning of year	52,295			23,656			52,365			52,295
End of period	$	53,322		$	51,913		$	75,446		$	43,864

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 ~~September 23, 2016~~June 30, 2017 and the related statements of earnings and comprehensive income for the three and ~~nine~~six months ended ~~September 23,~~June 30, 2017 and June 24, 2016, ~~and September 25, 2015,~~ and cash flows for the ~~nine~~six months ended ~~September 23,~~June 30, 2017 and June 24, 2016 ~~and September 25, 2015~~ 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 ~~September 23, 2016,~~June 30, 2017, 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 ~~2015~~2016 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.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 Nine Months Ended
September 23,
2016 September 25,
2015 September 23,
2016 September 25,
2015
Net earnings available to
common shareholders
$ 54,388
$ 50,691
$ 144,887
$ 292,169
Weighted average shares outstanding for
basic earnings per share
55,684
57,325
55,571
58,180
Dilutive effect of stock options computed
using the treasury stock method and the
average market price
1,285
1,339
1,335
1,410
Weighted average shares outstanding for
diluted earnings per share
56,969
58,664
56,906
59,590
Basic earnings per share $ 0.98
$ 0.88
$ 2.61
$ 5.02
Diluted earnings per share $ 0.95
$ 0.86
$ 2.55
$ 4.90



	Three Months Ended				Six Months Ended
	June 30, 2017		June 24, 2016		June 30, 2017		June 24, 2016
Net earnings available to common shareholders	$	79,828	$	50,947	$	140,560	$	90,499
Weighted average shares outstanding for basic earnings per share	55,801		55,634		55,785		55,514
Dilutive effect of stock options computed using the treasury stock method and the average market price	2,126		1,406		2,035		1,361
Weighted average shares outstanding for diluted earnings per share	57,927		57,040		57,820		56,875
Basic earnings per share	$	1.43	$	0.92	$	2.52	$	1.63
Diluted earnings per share	$	1.38	$	0.89	$	2.43	$	1.59

Stock options to purchase ~~1,034,000~~267,000 and ~~1,391,000~~509,000 shares were not included in the ~~September 23,~~June 30, 2017 and June 24, 2016 ~~and September 25, 2015~~ computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

3.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		Option Shares		Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price
Outstanding, December 25, 2015	5,165		$	48.16	3,583	$	38.49
Outstanding, December 30, 2016								5,535		$	55.26	3,672	$	45.40
Granted	700		72.24					575		92.13
Exercised	(600	)	37.98					(985	)	40.68
Canceled	(17	)	70.45					(29	)	80.24
Outstanding, September 23, 2016	5,248		$	52.46	3,494	$	42.30
Outstanding, June 30, 2017								5,096		$	62.10	3,217	$	50.91

The Company recognized year-to-date share-based compensation of ~~$16.1~~$13.5 million in ~~2016~~2017 and ~~$15.5~~$12.7 million in ~~2015.~~2016. As of ~~September 23, 2016,~~June 30, 2017, there was ~~$9.5~~$16.2 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.2 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:


	Nine Months Ended						Six Months Ended
	September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016
Expected life in years	7.0			6.5			7.0			7.0
Interest rate	1.4		%	1.7		%	2.2		%	1.4		%
Volatility	30.1		%	35.0		%	26.7		%	30.1		%
Dividend yield	1.8		%	1.6		%	1.6		%	1.8		%
Weighted average fair value per share	$	19.00		$	23.18		$	24.23		$	19.00

Under the Company’s Employee Stock Purchase Plan, the Company issued 167,000 shares in 2017 and 170,000 shares in ~~2016 and 166,000 shares in 2015.~~2016. 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:


	Nine Months Ended						Six Months Ended
	September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016
Expected life in years	1.0			1.0			1.0			1.0
Interest rate	0.7		%	0.2		%	0.9		%	0.7		%
Volatility	24.6		%	18.9		%	22.3		%	24.6		%
Dividend yield	1.7		%	1.6		%	1.5		%	1.7		%
Weighted average fair value per share	$	19.14		$	16.51		$	21.97		$	19.14

4.Retirement Benefits

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

Three Months Ended Nine Months Ended
September 23,
2016 September 25,
2015 September 23,
2016 September 25,
2015
Pension Benefits
Service cost $ 1,968
$ 2,265
$ 5,880
$ 6,268
Interest cost 3,902
3,741
11,765
11,121
Expected return on assets (4,504 ) (5,010 ) (13,509 ) (14,586 )
Amortization and other 2,491
2,291
7,410
7,070
Net periodic benefit cost $ 3,857
$ 3,287
$ 11,546
$ 9,873


													Three Months Ended						Six Months Ended
													June 30, 2017			June 24, 2016			June 30, 2017			June 24, 2016
Pension Benefits
Service cost													$	1,754		$	1,915		$	3,815		$	3,912
Interest cost													3,673			3,846			7,603			7,863
Expected return on assets													(4,112		)	(4,368		)	(8,464		)	(9,005		)
Amortization and other													2,199			2,619			4,524			4,919
Net periodic benefit cost													$	3,514		$	4,012		$	7,478		$	7,689
Postretirement Medical
Service cost	$	136		$	107		$	407		$	407		$	126		$	121		$	301		$	271
Interest cost	271			263			813			716			271			280			546			542
Amortization	(120		)	(63		)	(360		)	(265		)	(55		)	(102		)	(5		)	(240		)
Net periodic benefit cost	$	287		$	307		$	860		$	858		$	342		$	299		$	842		$	573

5.Shareholders’ Equity

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

Pension and Post-
retirement Medical

Cumulative
Translation
Adjustment
Total
Balance, June 26, 2015 $ (73,868 ) $ (14,759 ) $ (88,627 )
Other comprehensive income before reclassifications —
(13,572 ) (13,572 )
Amounts reclassified from accumulated other comprehensive income 1,700
—
1,700
Balance, September 25, 2015 $ (72,168 ) $ (28,331 ) $ (100,499 )



	Pension and Postretirement Medical			Cumulative Translation Adjustment			Total
Balance, March 25, 2016	$	(69,018	)	$	(36,977	)	$	(105,995	)
Other comprehensive income (loss) before reclassifications	—			(7,635		)	(7,635		)
Amounts reclassified from accumulated other comprehensive income	1,142			—			1,142
Balance, June 24, 2016	$	(67,876	)	$	(44,612	)	$	(112,488	)

Balance, June 24, 2016 $ (67,876 ) $ (44,612 ) $ (112,488 )
Other comprehensive income before reclassifications —
(6,642 ) (6,642 )
Amounts reclassified from accumulated other comprehensive income 1,088
—
1,088
Balance, September 23, 2016 $ (66,788 ) $ (51,254 ) $ (118,042 )



Balance, March 31, 2017	$	(75,192	)	$	(59,484	)	$	(134,676	)
Other comprehensive income (loss) before reclassifications	—			11,029			11,029
Amounts reclassified from accumulated other comprehensive income	1,067			—			1,067
Balance, June 30, 2017	$	(74,125	)	$	(48,455	)	$	(122,580	)

Balance, December 26, 2014 $ (76,584 ) $ (24,152 ) $ (100,736 )
Other comprehensive income before reclassifications —
(4,179 ) (4,179 )
Reclassified from accumulated other comprehensive income 4,416
—
4,416
Balance, September 25, 2015 $ (72,168 ) $ (28,331 ) $ (100,499 )



Balance, December 25, 2015	$	(69,922	)	$	(34,575	)	$	(104,497	)
Other comprehensive income (loss) before reclassifications	—			(10,037		)	(10,037		)
Amounts reclassified from accumulated other comprehensive income	2,046			—			2,046
Balance, June 24, 2016	$	(67,876	)	$	(44,612	)	$	(112,488	)

Balance, December 25, 2015 $ (69,922 ) $ (34,575 ) $ (104,497 )
Other comprehensive income before reclassifications —
(16,679 ) (16,679 )
Reclassified from accumulated other comprehensive income 3,134
—
3,134
Balance, September 23, 2016 $ (66,788 ) $ (51,254 ) $ (118,042 )



Balance, December 30, 2016	$	(76,426	)	$	(65,802	)	$	(142,228	)
Other comprehensive income (loss) before reclassifications	—			17,347			17,347
Amounts reclassified from accumulated other comprehensive income	2,301			—			2,301
Balance, June 30, 2017	$	(74,125	)	$	(48,455	)	$	(122,580	)

Amounts related to pension and postretirement medical adjustments are reclassified to pension cost, which is allocated to cost of products sold and operating expenses based on salaries and wages, approximately as follows (in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 23, 2016			September 25, 2015			September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016			June 30, 2017			June 24, 2016
Cost of products sold	$	611		$	959		$	1,776		$	2,604		$	620		$	637		$	1,328		$	1,165
Product development	241			418			706			1,120			258			261			556			465
Selling, marketing and distribution	578			718			1,633			1,950			516			569			1,162			1,055
General and administrative	277			442			842			1,220			390			310			738			565
Total before tax	$	1,707		$	2,537		$	4,957		$	6,894		$	1,784		$	1,777		$	3,784		$	3,250
Income tax (benefit)	(619		)	(837		)	(1,823		)	(2,478		)	(717		)	(635		)	(1,483		)	(1,204		)
Total after tax	$	1,088		$	1,700		$	3,134		$	4,416		$	1,067		$	1,142		$	2,301		$	2,046

On February 21, 2017, the Company entered into an accelerated share repurchase arrangement (“ASR”) with a financial institution. In exchange for an up-front payment of $90 million, the financial institution delivered 850,000 shares of Company common stock with a fair value of $78 million. The total number of shares ultimately delivered under the ASR is determined at the end of the purchase period (up to five months, but not less than two months) based on the volume weighted-average price (“VWAP”) of the Company’s common stock during that period. Subsequent to the end of the second quarter, the purchase period ended and the Company received an additional 31,499 shares to complete the ASR at an average realized price of $102.10 per share.

The Company accounted for the up-front payment as a reduction of shareholders’ equity in the period made. Shares received under the ASR were retired and reflected as a reduction of outstanding shares on the date delivered for purposes of calculating earnings per share. The forward contract aspect of the ASR met all of the applicable criteria for equity classification, and therefore was accounted for as a derivative indexed to the Company's equity.


6.	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						Nine Months Ended						Three Months Ended						Six Months Ended
	September 23, 2016			September 25, 2015			September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016			June 30, 2017			June 24, 2016
Net Sales
Industrial	$	150,893		$	152,164		$	454,978		$	448,932		$	174,868		$	156,997		$	331,258		$	304,085
Process	67,077			64,710			196,068			204,337			73,399			64,706			143,428			128,991
Contractor	109,222			102,112			329,184			307,659			131,216			126,423			245,387			219,962
Total	$	327,192		$	318,986		$	980,230		$	960,928		$	379,483		$	348,126		$	720,073		$	653,038
Operating Earnings
Industrial	$	50,573		$	50,822		$	147,419		$	144,500		$	61,596		$	51,052		$	115,331		$	96,846
Process	10,394			10,437			25,305			34,923			13,418			7,634			26,881			14,911
Contractor	25,593			24,135			71,700			70,550			33,759			29,364			59,778			46,107
Unallocated corporate (expense)	(5,096		)	(8,467		)	(23,669		)	(23,924		)	(10,004		)	(9,708		)	(17,400		)	(18,573		)
Total	$	81,464		$	76,927		$	220,755		$	226,049		$	98,769		$	78,342		$	184,590		$	139,291

Assets by segment were as follows (in thousands):


	September 23, 2016		December 25, 2015		June 30, 2017		December 30, 2016
Industrial	$	558,228	$	558,799	$	575,789	$	546,366
Process	513,186		481,677		329,340		318,444
Contractor	212,958		205,632		260,920		208,016
Unallocated corporate	136,830		145,244		175,728		170,283
Total	$	1,421,202	$	1,391,352	$	1,341,777	$	1,243,109

Geographic information follows (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 23, 2016		September 25, 2015		September 23, 2016		September 25, 2015		June 30, 2017		June 24, 2016		June 30, 2017		June 24, 2016
Net sales (based on customer location)
Net Sales (based on customer location)
United States	$	171,988	$	166,602	$	511,273	$	496,851	$	194,619	$	186,284	$	369,473	$	339,285
Other countries	155,204		152,384		468,957		464,077		184,864		161,842		350,600		313,753
Total	$	327,192	$	318,986	$	980,230	$	960,928	$	379,483	$	348,126	$	720,073	$	653,038


	September 23, 2016		December 25, 2015		June 30, 2017		December 30, 2016
Long-lived assets
Long-lived Assets
United States	$	153,160	$	144,571	$	155,271	$	151,911
Other countries	37,363		33,866		38,339		37,685
Total	$	190,523	$	178,437	$	193,610	$	189,596

7.Inventories

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


	September 23, 2016			December 25, 2015			June 30, 2017			December 30, 2016
Finished products and components	$	112,949		$	112,267		$	109,798		$	113,643
Products and components in various stages of completion	51,064			51,033			59,049			50,557
Raw materials and purchased components	83,582			82,894			100,357			84,631
	247,595			246,194
Subtotal							269,204			248,831
Reduction to LIFO cost	(46,042		)	(44,058		)	(47,763		)	(47,222		)
Total	$	201,553		$	202,136		$	221,441		$	201,609

8.Intangible Assets

~~Information related to~~Components of other intangible assets ~~follows~~were (dollars in thousands):



	Finite Life									Indefinite Life
	Customer Relationships			Patents and Proprietary Technology			Trademarks, Trade Names and Other			Trade Names			Total
As of June 30, 2017
Cost	$	174,884		$	17,921		$	895		$	57,853		$	251,553
Accumulated amortization	(47,840		)	(6,994		)	(440		)	—			(55,274		)
Foreign currency translation	(8,926		)	(660		)	(61		)	(2,749		)	(12,396		)
Book value	$	118,118		$	10,267		$	394		$	55,104		$	183,883
Weighted average life	13			10			4			N/A



As of December 30, 2016
Cost	$	170,284		$	17,321		$	895		$	57,853		$	246,353
Accumulated amortization	(41,599		)	(6,088		)	(337		)	—			(48,024		)
Foreign currency translation	(13,630		)	(1,055		)	(59		)	(5,249		)	(19,993		)
Book value	$	115,055		$	10,178		$	499		$	52,604		$	178,336
Weighted average life	13			10			4			N/A

Estimated Life
(years)
Cost
Accumulated
Amortization

Foreign
Currency Translation

Book
Value
September 23, 2016
Customer relationships 3 - 14 $ 218,227
$ (49,383 ) $ (12,316 ) $ 156,528
Patents, proprietary technology and product documentation 3 - 11 17,422
(5,731 ) (705 ) 10,986
Trademarks, trade names and other 3 - 5 895
(284 ) (58 ) 553
236,544
(55,398 ) (13,079 ) 168,067
Not Subject to Amortization:
Brand names 70,528
—
(4,648 ) 65,880
Total $ 307,072
$ (55,398 ) $ (17,727 ) $ 233,947

December 25, 2015
Customer relationships 3 - 14 $ 197,900
$ (36,852 ) $ (9,738 ) $ 151,310
Patents, proprietary technology and product documentation 3 - 11 20,400
(8,952 ) (658 ) 10,790
Trademarks, trade names and other 5 495
(132 ) (94 ) 269
218,795
(45,936 ) (10,490 ) 162,369
Not Subject to Amortization:
Brand names 69,514
—
(3,896 ) 65,618
Total $ 288,309
$ (45,936 ) $ (14,386 ) $ 227,987

Amortization of intangibles for the quarter was ~~$4.6~~$3.7 million in 2017 and $4.9 million in 2016 and ~~$4.4~~for the year to date was $7.3 million in ~~2015~~2017 and ~~for the year-to-date was $14.3~~$9.6 million in ~~2016 and $12.9 million in 2015.~~2016. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as ~~follows: $18.7 million~~follows (in thousands):~~in 2016,$18.6 million in 2017, $18.5 million in 2018, $18.0 million in 2019, $17.9 million in 2020, and $90.7 million thereafter.~~



	2017		2018		2019		2020		2021		Thereafter
Estimated Amortization Expense	$	14,649	$	14,511	$	14,182	$	14,127	$	14,083	$	64,477

Changes in the carrying amount of goodwill ~~in 2016~~for each reportable segment were ~~as follows~~ (in thousands):

Industrial Process Contractor Total
Balance, December 25, 2015 $ 153,283
$ 228,473
$ 12,732
$ 394,488
Additions from business acquisitions —
27,881
—
27,881
Foreign currency translation 1,585
(12,360 ) —
(10,775 )
Balance, September 23, 2016 $ 154,868
$ 243,994
$ 12,732
$ 411,594

Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. In completing the goodwill impairment analysis for 2015, the estimated fair value of all reporting units substantially exceeded carrying value except for our Oil and Natural Gas reporting unit (“ONG”), which exceeded its carrying value by 14 percent. In 2016, operating results of ONG have fallen short of expectations due to weakness in oil and natural gas markets. After considering third quarter operating results and preliminary projections from our 2017 planning process, we concluded that the depth and length of industry weakness, and its continuing impact on ONG results, were greater than previously expected. Consequently, we initiated an impairment analysis at the end of the third quarter. Preliminary analysis indicated potential impairment of ONG goodwill as of September 23, 2016. Due to the amount of time and effort required to determine the implied fair value of ONG goodwill, we are unable to provide a reasonable estimate or a range of estimates for the potential non-cash impairment charge at this time. The carrying value of ONG goodwill was $147 million and the carrying value of other identifiable intangible assets of ONG totaled $73 million as of September 23, 2016. The valuation to determine the amount of impairment will be completed in the fourth quarter.



	Industrial		Process			Contractor		Total
Balance, December 30, 2016	$	150,556	$	96,561		$	12,732	$	259,849
Additions (adjustments) from business acquisitions	7,152		(63		)	—		7,089
Foreign currency translation	5,263		897			—		6,160
Balance, June 30, 2017	$	162,971	$	97,395		$	12,732	$	273,098


9.	Other Current Liabilities

Components of other current liabilities were (in thousands):


	September 23, 2016		December 25, 2015		June 30, 2017		December 30, 2016
Accrued self-insurance retentions	$	7,000	$	6,908	$	7,182	$	7,105
Accrued warranty and service liabilities	8,384		7,870		9,650		8,934
Accrued trade promotions	6,375		8,522		6,821		6,007
Payable for employee stock purchases	6,678		8,825		4,394		9,328
Customer advances and deferred revenue	13,577		9,449		17,788		9,400
Income taxes payable	3,581		1,308		3,562		8,608
Other	26,234		32,208		25,226		22,505
Total	$	71,829	$	75,090	$	74,623	$	71,887

The Company manages certain self-insured loss exposures through a wholly-owned captive insurance subsidiary. Cash balances of $8.3 million as of June 30, 2017 and $9.2 million as of December 30, 2016 were restricted to funding of the captive's loss reserves and are included within other current assets on the Company's Consolidated Balance Sheets.

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 25, 2015 $ 7,870
Charged to expense 5,057
Margin on parts sales reversed 1,307
Reductions for claims settled (5,850 )
Balance, September 23, 2016 $ 8,384

The Company manages certain self-insured loss exposures through a wholly-owned captive insurance subsidiary established in 2015. At September 23, 2016, cash balances of $9 million were restricted to funding of the captive's loss reserves. Restricted cash is included within other current assets on the Company's consolidated balance sheet.



Balance, December 30, 2016	$	8,934
Charged to expense	3,733
Margin on parts sales reversed	1,298
Reductions for claims settled	(4,315		)
Balance, June 30, 2017	$	9,650

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	September 23, 2016		December 25, 2015		Level	June 30, 2017		December 30, 2016
Assets
Cash surrender value of life insurance	2	$	13,659	$	12,856	2	$	14,883	$	13,785
Forward exchange contracts	2	—		107		2	—		571
Total assets at fair value		$	13,659	$	12,963		$	14,883	$	14,356
Liabilities
Contingent consideration	3	$	4,081	$	9,600	3	$	4,081	$	4,081
Deferred compensation	2	3,190		2,958		2	3,527		3,265
Forward exchange contracts	2	58		—		2	272		—
Total liabilities at fair value		$	7,329	$	12,558		$	7,880	$	7,346

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 $300 million (including $75 million classified as current) and an estimated fair value of ~~$335~~$325 million as of ~~September 23, 2016~~June 30, 2017 and ~~$320~~$325 millionas of December ~~25, 2015.~~30, 2016. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.

11.~~Divestiture in 2015~~

In the second quarter of 2015, the Company sold the Liquid Finishing business assets that were held as a cost-method investment. The $149 million pre-tax gain, net of transaction and other related expenses, was included in investment income in the Company's consolidated statements of earnings. Net earnings for the third quarter of 2015 included after-tax net gain from post-closing purchase price adjustments of $2 million and year-to-date after-tax gain and dividends totaling $141 million. Prior to the sale, income was recognized on dividends received from after-tax earnings of Liquid Finishing and also included in investment income. Net earnings in 2015 included no dividend income for the quarter and $42 million for the year-to-date.

~~12.~~Recent Accounting Pronouncements

A new accounting standard that changed certain aspects of accounting for share-based payments became effective for the Company in the first quarter of 2017. Excess tax benefits on exercised stock options that were previously credited to equity now reduce the current income tax provision. For the quarter, the change in accounting for excess tax benefits decreased the current income tax provision and increased net earnings by $13.6 million, reduced the effective income tax rate by 14 percentage points, increased the number of diluted average shares outstanding by 0.5 million and increased diluted earnings per share by $0.23. For the year to date, the change in accounting for excess tax benefits decreased the current income tax provision and increased net earnings by $17.2 million, reduced the effective income tax rate by 10 percentage points, increased the number of diluted average shares outstanding by 0.5 million and increased diluted earnings per share by $0.28. Under the new standard, excess tax benefits are no longer reclassified out of cash flows from operating activities to financing activities in the Consolidated Statements of Cash Flows. We elected to apply the cash flow presentation requirements retrospectively to all periods presented, which resulted in a year-to-date increase in previously reported net cash provided by operating activities and a decrease in net cash provided by financing activities of $5.5 million for the six months ended June 24, 2016. Also under the new standard, the Company elected to account for share-based grant forfeitures as they occur. The impact of the change in accounting for forfeitures was not significant, and was reflected in share-based compensation cost in the first quarter.

In ~~February 2016,~~May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on ~~accounting for leases.~~revenue from contracts with customers. The new standard issets forth a single comprehensive model for recognizing and reporting revenue. The new standard will become effective for the Company ~~in fiscal 2019~~beginning with the first quarter of 2018, and ~~requires most leases~~the Company plans to ~~be recorded on~~adopt the ~~balance sheet.~~accounting standard using the modified retrospective transition approach. The ~~Company is evaluating~~modified retrospective transition approach will recognize any changes from the ~~effect~~beginning of the year of initial application through retained earnings with no restatement of comparative periods.

We have established an implementation team and engaged a third-party consultant to assist with our assessment of the impact of the new ~~standard~~revenue guidance on ~~its~~our operations, consolidated financial statements and related disclosures. To date, this assessment has included (1) utilizing questionnaires to assist with the identification of our revenue streams, (2) performing sample contract analyses for each revenue stream identified, (3) assessing the noted differences in recognition and measurement that may result from adopting this new standard, (4) performing detailed analyses of contracts with larger customers, and (5) developing plans to test transactions for consistency with contract provisions that affect revenue recognition. Based on the preliminary results of the evaluation, which is still in process, nothing has come to our attention that would indicate that adoption of the new standard will have a material impact on our consolidated financial statements. However, given our acquisition strategy, there may be additional revenue streams acquired prior to the adoption date. We currently believe the most significant potential changes relate to variable consideration and whether certain contracts' revenues will be recognized over time or at a point in time, although our technical analysis of these potential impacts is still on-going. We also anticipate changes to the consolidated balance sheet related to accounts receivable, contract assets, and contract liabilities.

We are in the process of evaluating and designing the necessary changes to our business processes, systems and controls to support recognition and disclosure under the new standard. Further, we are continuing to assess what incremental disaggregated revenue disclosures ~~and accounting systems.~~will be required in our consolidated financial statements.

In March ~~2016,~~2017, the FASB issued a ~~new~~final standard that changes the ~~accounting for share-based payments.~~presentation of net periodic benefit cost related to defined benefit plans. The Company will adopt the standard iswhen it becomes effective ~~for the Company~~ in fiscal ~~2017~~2018 and early adoption is permitted. It simplifies several aspects of accounting for share-based payments, including the accounting for income taxes, forfeitures, and classification in the statement of cash flows.it will be applied retrospectively to all periods presented. Under the new standard, ~~excess tax benefits on the exercise~~net periodic benefit costs are required to be disaggregated between service costs presented as operating expenses and other components of ~~stock options currently credited to equity will reduce the current tax provision, potentially creating volatility in the Company's effective tax rate.~~pension costs presented as non-operating expenses. The Company ~~is evaluating the effect~~currently charges service costs to segment operations and includes other components of pension cost in unallocated corporate operating expenses. Under the new standard, unallocated corporate operating expenses will decrease, operating earnings will increase and other expense will increase by the amount of other (non-service) components of pension cost. There will be no impact on ~~its consolidated financial statements and related disclosures and will adopt for fiscal 2017.~~reported segment earnings, net earnings or earnings per share.

Item 2. GRACO INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company 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

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

Three Months Ended Nine Months Ended
September 23,
2016 September 25,
2015
%
Change
September 23,
2016 September 25,
2015
%
Change
Net Sales $ 327.2
$ 319.0
3 % $ 980.2
$ 960.9
2 %
Operating Earnings 81.5
76.9
6 % 220.8
226.0
(2 )%
Net Earnings 54.4
50.7
7 % 144.9
292.2
(50 )%
Diluted Net Earnings per Common Share $ 0.95
$ 0.86
10 % $ 2.55
$ 4.90
(48 )%

~~Net earnings in 2015 included net investment income from the Liquid Finishing businesses sold in the second quarter~~A summary of ~~2015. Results excluding Liquid Finishing investment income and expense provide a more consistent base of comparison of ongoing~~ financial ~~results. A calculation of the non-GAAP measurement of net earnings excluding investment income and expense~~results follows (in millions except per share amounts):

Three Months Ended Nine Months Ended
September 23,
2016 September 25,
2015 September 23,
2016 September 25,
2015
Net Earnings, as reported $ 54.4
$ 50.7
$ 144.9
$ 292.2
Held separate investment (income), net —
(2.4 ) —
(190.7 )
Income tax effect —
0.8
—
49.7
Net Earnings, adjusted $ 54.4
$ 49.1
$ 144.9
$ 151.2
Diluted earnings per share
As reported $ 0.95
$ 0.86
$ 2.55
$ 4.90
Adjusted $ 0.95
$ 0.84
$ 2.55
$ 2.54



	Three Months Ended						Six Months Ended
	June 30, 2017		June 24, 2016		% Change		June 30, 2017		June 24, 2016		% Change
Net Sales	$	379.5	$	348.1	9	%	$	720.1	$	653.0	10	%
Operating Earnings	98.8		78.3		26	%	184.6		139.3		33	%
Net Earnings	79.8		50.9		57	%	140.6		90.5		55	%
Diluted Net Earnings per Common Share	$	1.38	$	0.89	55	%	$	2.43	$	1.59	53	%

Solid sales growth combined with improved gross margins and lower operating expenses levered operating earnings to increases of 26 percent and 33 percent for the quarter and year to date, respectively. Diluted earnings per share include $0.23 for the quarter and $0.28 for the year to date from a required change in accounting for stock compensation. Increases in diluted earnings per share include $0.01 for the quarter and $0.02 for the year to date from reduced amortization expense resulting from the impairment charge recorded in the fourth quarter of 2016.

The following table presents an overview of components of ~~changes in~~net earnings as a percentage of net sales:

Quarter
Segment Region Total
Industrial   Process   Contractor
Americas₍₁₎

EMEA₍₂₎
Asia Pacific
Volume and Price (1) % 0 % 7 % 2 % 2 % 3 % 2 %
Acquisitions 0 % 5 % 0 % 0 % 2 % 1 % 1 %
Currency 0 % (1) % 0 % 0 % (2) % 0 % 0 %
Total (1) % 4 % 7 % 2 % 2 % 4 % 3 %



	Three Months Ended				Six Months Ended
	June 30, 2017		June 24, 2016		June 30, 2017		June 24, 2016
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of products sold	46.3		46.8		45.9		46.9
Gross Profit	53.7		53.2		54.1		53.1
Product development	3.9		4.5		4.1		4.6
Selling, marketing and distribution	14.8		16.1		15.4		16.7
General and administrative	9.0		10.1		9.0		10.5
Operating Earnings	26.0		22.5		25.6		21.3
Interest expense	1.1		1.3		1.1		1.3
Other expense (income), net	(0.3	)	0.1		(0.1	)	(0.1	)
Earnings Before Income Taxes	25.2		21.1		24.6		20.1
Income taxes	4.2		6.5		5.1		6.2
Net Earnings	21.0	%	14.6	%	19.5	%	13.9	%

Net Sales

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

Year-to-Date
Segment Region Total
Industrial   Process   Contractor
Americas₍₁₎

EMEA₍₂₎
Asia Pacific
Volume and Price 2 % (9) % 7 % 0 % 5 % 2 % 1 %
Acquisitions 0 % 6 % 0 % 1 % 3 % 2 % 2 %
Currency (1) % (1) % 0 % 0 % (2) % (2) % (1) %
Total 1 % (4) % 7 % 1 % 6 % 2 % 2 %



	Three Months Ended				Six Months Ended
	June 30, 2017		June 24, 2016		June 30, 2017		June 24, 2016
Americas⁽¹⁾	$	221.4	$	207.5	$	421.4	$	380.9
EMEA⁽²⁾	87.0		80.1		166.1		155.8
Asia Pacific	71.1		60.5		132.6		116.3
Consolidated	$	379.5	$	348.1	$	720.1	$	653.0


(1)
₍₁₎North, South and ~~South~~Central America, including the United States


₍₂₎	Europe, Middle East and Africa

~~Sales~~The following table presents the components of net sales change by geographic ~~area were as follows (in millions):~~region:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 23, 2016		September 25, 2015		September 23, 2016		September 25, 2015		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	$	194.4	$	190.0	$	575.3	$	572.1	7%	0%	0%	7%	11%	0%	0%	11%
EMEA	73.6		72.2		229.4		216.6		12%	0%	(3)%	9%	11%	0%	(4)%	7%
Asia Pacific	59.2		56.8		175.5		172.2		20%	0%	(2)%	18%	16%	0%	(2)%	14%
Consolidated	$	327.2	$	319.0	$	980.2	$	960.9	10%	0%	(1)%	9%	12%	0%	(2)%	10%

~~Changes in currency translation rates had no significant effect on results for the quarter, and decreased year-to-date sales and net earnings by approximately $9 million and $2 million, respectively.~~

Sales for the quarter increased 3 percent, with 2 percent increases in the Americas and EMEA and a 4 percent increase in Asia Pacific. Incremental sales from operations acquired within the last 12 months totaled $4 million, contributing 1 percentage point of growth. Organic sales at consistent translation rates increased 2 percent, with increases in all regions.

Sales for the year to date increased 2 percent, driven by a 6 percent increase in EMEA. Incremental sales from operations acquired within the last 12 months totaled $15 million, contributing 2 percentage points of growth. Organic sales at consistent translation rates increased 1 percent, with increases of 5 percent in EMEA and 2 percent in Asia Pacific.Gross Profit

Gross profit margin ~~rates were slightly higher~~rate increased by one-half percentage point for the quarter and ~~flat~~one percentage point for the year to date. ~~The favorable~~Favorable effects offrom higher production volume and realized pricing ~~and product and channel mix~~were partially offset ~~the~~by unfavorable impacts of ~~lower factory volume. Gross margin rate for the year to date also included the favorable impact of reduced acquisition-related purchase accounting effects.~~currency translation and product mix.

Operating Expenses

Total operating expenses for the quarter were $2 million (2 percent) higher than the third quarter last year, including $2 million of incremental expenses of acquired operations. Unallocated corporate expenses decreased $3 million, mostly from changes in market-driven components of pension and ~~stock compensation. Total operating expenses for the~~ year to date were ~~$16 million (6 percent) higher~~slightly lower than last year. Year-to-date reductions from the ~~comparable period last year, including $7 million~~impact of ~~incremental~~currency translation, decreased amortization expense and lower unallocated corporate expenses ~~of acquired operations.~~(mostly central warehouse) more than offset volume and rate-related increases.

Income Taxes

The effective income tax rate for the quarter was 2917 percent, ~~2 percentage points lower than the comparable period~~down from 31 percent last year. The ~~2016 rate included the impact of the federal R&D credit that was not available until the fourth quarter of 2015, and the favorable effect of foreign earnings taxed at lower rates than in the U.S. The~~ effective income tax rate for the year to date was 3021 percent, 3down from 31 percent last year. Adoption of a new accounting standard, requiring excess tax benefits related to stock option exercises to be credited to the income tax provision (formerly credited to equity), reduced the tax provision by $13.6 million for the quarter and $17.2 million for the year to date, decreasing the effective tax rate for the quarter and year to date by 14 and 10 percentage points, higher than the comparable period last year. Last year's rate included the favorable impact of non-recurring tax benefits, mostly related to a change in assertion as to reinvestment of foreign earnings, and the impact of post-tax dividend income, partially offset by the tax rate effect of the gain on the sale of the Liquid Finishing assets.

~~Goodwill Impairment Analysis~~

In 2016, operating results of our Oil and Natural Gas reporting unit ("ONG") within the Process segment have fallen short of expectations due to weakness in oil and natural gas markets. After considering third quarter operating results and preliminary projections from our 2017 planning process, we concluded that the depth and length of industry weakness, and its continuing impact on ONG results, were greater than previously expected. While management is committed to long-term profitability in ONG, and believes its investment in facility improvements, manufacturing capabilities and commercial resources have positioned the unit to benefit strongly from a recovery when it occurs, we initiated an impairment analysis at the end of the third quarter. Preliminary analysis indicated potential impairment of ONG goodwill as of September 23, 2016. Due to the amount of time and effort required to determine the implied fair value of ONG goodwill, we are unable to provide a reasonable estimate or a range of estimates for the potential non-cash impairment charge at this time. The carrying value of ONG goodwill was $147 million and the carrying value of other identifiable intangible assets of ONG totaled $73 million as of September 23, 2016. The valuation to determine the amount of impairment will be completed in the fourth quarter.respectively.

Segment Results

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

Industrial

Three Months Ended Nine Months Ended
September 23,
2016 September 25,
2015 September 23,
2016 September 25,
2015
Net sales (in millions)
Americas $ 66.8
$ 69.8
$ 201.3
$ 209.1
EMEA 44.4
45.6
134.2
128.0
Asia Pacific 39.7
36.8
119.5
111.8
Total $ 150.9
$ 152.2
$ 455.0
$ 448.9
Operating earnings as a percentage
of net sales
34 % 33 % 32 % 32 %
Segment

~~Industrial segment~~The following table presents net sales and operating earnings as a percentage of sales for the ~~quarter decreased 1 percent. An increase~~Industrial segment

(dollars in millions):



	Three Months Ended						Six Months Ended
	June 30, 2017			June 24, 2016			June 30, 2017			June 24, 2016
Net Sales
Americas	$	75.9		$	69.4		$	144.9		$	134.5
EMEA	49.9			45.6			94.0			89.8
Asia Pacific	49.1			42.0			92.4			79.8
Total	$	174.9		$	157.0		$	331.3		$	304.1
Operating earnings as a percentage of net sales	35		%	33		%	35		%	32		%

The following table presents the components of ~~8 percent~~net sales change by geographic region for the Industrial segment:



	Three Months Ended				Six Months Ended
	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	9%	0%	0%	9%	7%	1%	0%	8%
EMEA	12%	0%	(3)%	9%	8%	0%	(3)%	5%
Asia Pacific	19%	1%	(3)%	17%	18%	1%	(3)%	16%
Segment Total	13%	0%	(2)%	11%	10%	1%	(2)%	9%

Sales increased in ~~Asia Pacific offset decreases~~all Industrial segment product applications. Year-to-date operating margin rate for the Industrial segment increased 3 percentage points compared to last year. Favorable effects of ~~4 percent in the Americas~~higher sales volume, improved gross margin rate and 3 percent in EMEA. Year-to-date sales increased 1 percent (2 percent at consistent translation rates), including increases of 5 percent in EMEA (6 percent at consistent translation rates) and 7 percent in Asia Pacific (8 percent at consistent translation rates),expense leverage were partially offset by the unfavorable effect of currency translation.

Process Segment

The following table presents net sales and operating earnings as a ~~decrease~~percentage of ~~4 percent~~sales for the Process segment

(dollars in millions):



	Three Months Ended						Six Months Ended
	June 30, 2017			June 24, 2016			June 30, 2017			June 24, 2016
Net Sales
Americas	$	46.6		$	41.3		$	91.2		$	81.3
EMEA	13.9			13.5			28.8			27.4
Asia Pacific	12.9			9.9			23.4			20.3
Total	$	73.4		$	64.7		$	143.4		$	129.0
Operating earnings as a percentage of net sales	18		%	12		%	19		%	12		%

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



	Three Months Ended				Six Months Ended
	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	13%	0%	0%	13%	12%	0%	0%	12%
EMEA	9%	0%	(6)%	3%	12%	0%	(7)%	5%
Asia Pacific	33%	0%	(3)%	30%	17%	0%	(2)%	15%
Segment Total	15%	0%	(2)%	13%	13%	0%	(2)%	11%

The Process segment had solid sales growth across most product applications, partially offset by the effects of continued weakness in Oil and Natural Gas. Operating margin rates for ~~the Industrial~~this segment ~~were slightly higher than last year.~~

~~Process~~

Three Months Ended Nine Months Ended
September 23,
2016 September 25,
2015 September 23,
2016 September 25,
2015
Net sales (in millions)
Americas $ 43.0
$ 41.0
$ 124.3
$ 128.3
EMEA 12.7
12.7
40.1
41.5
Asia Pacific 11.4
11.0
31.7
34.5
Total $ 67.1
$ 64.7
$ 196.1
$ 204.3
Operating earnings as a percentage
of net sales
15 % 16 % 13 % 17 %

Process segment sales for the quarter increased 4 percent (5 percent at consistent translation rates), including increases of 5 percent in the Americas and 4 percent in Asia Pacific. Sales were flat in EMEA, but increased 7 percent at consistent translation rates. Year-to-date sales in this segment were down 4 percent (3 percent at consistent translation rates), including decreases of 3 percent in the Americas, 4 percent in EMEA (flat at consistent translation rates) and 8 percent in Asia Pacific (6 percent at consistent translation rates). Operating margin rate recovered in the third quarter with higher sales volume and improved gross margin rate. For the year to date, operating margin rate decreasedpercentage points compared to last year due to ~~lower~~higher sales volume, favorable expense leverage and ~~unfavorable expense leverage.~~a decrease in intangible amortization related to the impairment recorded in the fourth quarter of 2016.

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						Nine Months Ended						Three Months Ended						Six Months Ended
	September 23, 2016			September 25, 2015			September 23, 2016			September 25, 2015			June 30, 2017			June 24, 2016			June 30, 2017			June 24, 2016
Net sales (in millions)
Net Sales
Americas	$	84.6		$	79.2		$	249.7		$	234.7		$	98.9		$	96.8		$	185.3		$	165.1
EMEA	16.5			13.9			55.2			47.1			23.2			21.1			43.3			38.7
Asia Pacific	8.1			9.0			24.3			25.9			9.1			8.6			16.8			16.2
Total	$	109.2		$	102.1		$	329.2		$	307.7		$	131.2		$	126.5		$	245.4		$	220.0
Operating earnings as a percentage of net sales	23		%	24		%	22		%	23		%	26		%	23		%	24		%	21		%

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



	Three Months Ended				Six Months Ended
	Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	2%	0%	0%	2%	12%	0%	0%	12%
EMEA	14%	0%	(4)%	10%	16%	0%	(4)%	12%
Asia Pacific	7%	0%	(1)%	6%	4%	0%	0%	4%
Segment Total	5%	0%	(1)%	4%	12%	0%	0%	12%

Contractor segment sales increased 4 percent compared to second quarter last year, which included new product launches that created a tough comparable for the quarter increased 7 percent, with increases of 7 percent in the Americas and 20 percent in EMEA, partially offset by a decrease of 11 percent in Asia Pacific. Year-to-date sales increased 7 percent, with increases of 6 percent in the Americas and 17 percent in EMEA, partially offset by a 6 percent decrease in Asia Pacific.this year. Operating margin rates ~~decreased slightly~~for the Contractor segment increased 3 percentage points compared to last year due to ~~unfavorable~~higher sales volume, improved gross margin rate and favorable expense ~~leverage and product and channel mix.~~leverage.

Liquidity and Capital Resources

Net cash provided by operating activities ~~through the first nine months~~ of ~~2016 was $202~~$136 million increased $42 million compared to ~~$135 million~~the first half of last year, mostly driven by the increase in ~~the same period of 2015. Net cash from operating activities in 2015 was affected by increases~~net earnings. Increases in accounts ~~receivables balances from~~receivable, inventories and accrued liabilities reflect growth in business activity ~~build up of inventory levels to improve customer service and transaction costs related to the sale of Liquid Finishing business assets. In~~in the first ~~quarter~~half of ~~2016, the~~2017. The Company used ~~proceeds from borrowings under its revolving line~~cash of ~~credit~~$10 million in 2017 and $49 million in 2016 to ~~complete acquisitions of two related~~acquire businesses that were not material to the consolidated financial statements. Other significant uses of cash in ~~2016~~2017 included share repurchases of ~~$48~~$90 million (partially offset by ~~$26~~$36 million of net proceeds from shares issued), cash dividends of ~~$55~~$40 million and property, plant and equipment additions of ~~$34~~$17 million. ~~In 2015, proceeds of $610 million from the sale of Liquid Finishing assets were principally used to retire debt.~~

At ~~September 23, 2016,~~June 30, 2017, cash balances of $9$8 million were restricted to funding of certain self-insured loss reserves. Restricted cash is included within other current assets on the Company's consolidated balance sheet.

At ~~September 23, 2016,~~June 30, 2017, the Company had various lines of credit totaling $547 million, of which ~~$484~~$525 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 ~~2016.~~2017.

Outlook

WeDemand in the second quarter remained broad-based across products and geographies and continues to exceed our expectations. As a result, we are ~~holding~~raising our full-year 2017 outlook to ~~our~~mid-to-high single-digit organic sales growth on a constant currency basis worldwide, from a prior outlook of ~~low~~mid single-digit ~~sales~~growth. We expect to achieve mid-to-high single-digit growth ~~for Graco worldwide~~in each geographic region for the full year 2016. The Industrial segment continues to experience a spotty environment for capital equipment spending worldwide, with ongoing weakness most notable in the Americas region. Construction activity remains solid in the EMEA and Americas regions. While the Process segment saw modest growth sequentially in the third quarter, we are cautious about ongoing headwinds. Regionally, we anticipate the Americas region will finish the full year 2016 flat compared with the prior year, below our prior outlook of low single-digit growth. In the EMEA region, we reiterate our low-to-mid single-digit growth expectations for the full year. Our outlook for the Asia Pacific region continues to be low single-digit growth for 2016. The fourth quarter of 2015 was the highest growth quarter of the year, with 6 percent growth on an organic, constant currency basis, providing a difficult comparable for the last quarter of the year.2017.

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 ~~2015~~2016 Overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.

Future results could differ materially from those expressed due to the impact of changes in various factors. These risk factors include, but are not limited to: our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; economic conditions in the United States and other major world economies; changes in currency translation rates; changes in laws and regulations; compliance with anti-corruption and trade laws; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; the possibility of asset impairments if acquired businesses do not meet performance expectations; political instability; results of and costs associated with litigation, administrative proceedings and regulatory reviews incident to our business as well as indemnification claims under our asset purchase agreement with Carlisle Companies Incorporated, Carlisle Fluid Technologies, Inc., and Finishing Brands Holdings Inc.; the possibility of decline in purchases from few large customers of the Contractor segment; variations in activity in the construction, automotive, mining and oil and natural gas industries; our ability to attract, develop and retain qualified personnel; and catastrophic events. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year ~~2015~~2016 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 ~~2015~~2016 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, the Chief Financial Officer and Treasurer, the Vice President, Controller and Information Systems, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective.

Changes in internal controls

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART IIOTHER INFORMATION

Item 1A.Risk Factors

~~Except as noted below, there~~There have been no material changes to the Company’s risk factors from those disclosed in the Company’s ~~2015~~2016 Annual Report on Form 10-K.

~~Impairment - If acquired businesses do not meet performance expectations, assets acquired could be subject to impairment.~~

Our total assets reflect goodwill from acquisitions, representing the excess cost over the fair value of the identifiable net assets acquired. We test annually whether goodwill has been impaired, or more frequently if events or changes in circumstances indicate the goodwill may be impaired. If future operating performance at one or more of our operating units were to fall significantly below forecast levels or if market conditions for one or more of our acquired businesses were to decline, we could be required to incur a non-cash charge to operating income for impairment. Any impairment in the value of our goodwill would have an adverse non-cash impact on our results of operations and reduce our net worth. In 2016, operating results of our Oil and Natural Gas reporting unit ("ONG") have fallen short of expectations due to weakness in oil and natural gas markets. After considering third quarter operating results and preliminary projections from our 2017 planning process, we concluded that the depth and length of industry weakness, and its continuing impact on ONG results, were greater than previously expected. Consequently, we initiated an impairment analysis at the end of the third quarter. Preliminary analysis indicated potential impairment of ONG goodwill as of September 23, 2016. Due to the amount of time and effort required to determine the implied fair value of ONG goodwill, we are unable to provide a reasonable estimate or a range of estimates for the potential non-cash impairment charge at this time. The carrying value of ONG goodwill was $147 million and the carrying value of other identifiable intangible assets of ONG totaled $73 million as of September 23, 2016. The valuation to determine the amount of impairment will be completed in the fourth quarter.

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 6,000,000 shares of its outstanding common stock, primarily through open-market transactions. The authorization is for an indefinite period of time or until terminated by the Board.

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

No shares were purchased in the ~~third~~second quarter of ~~2016.~~2017. As of ~~September 23, 2016,~~June 30, 2017, there were ~~3,852,367~~2,967,367 shares that may yet be purchased under the Board authorization.

Item 6.Exhibits



3.1			Restated Articles of Incorporation as amended ~~June 13, 2014. (Incorporated~~December 9, 2016. (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed ~~June 16, 2014.~~December 9, 2016.)

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

10.1			Amendment No. 4 dated as of May 23, 2017 to Note Agreement dated as of March 11, 2011.

10.2			Amendment No. 4 dated as of May 23, 2017, amending the Credit Agreement among Graco Inc., the borrowing subsidiaries from time to time party thereto, the banks from time to time party thereto and U.S. Bank National Association, as administrative agent.

10.3			Graco Inc. Incentive Bonus Plan. (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed March 15, 2017.)

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 ~~Third~~Second Quarter Earnings dated ~~October 19, 2016.~~July 26, 2017.

101			Interactive Data File.

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:	~~October 19, 2016~~July 26, 2017	By:	/s/ Patrick J. McHale
			Patrick J. McHale
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	~~October 19, 2016~~July 26, 2017	By:	/s/ Christian E. Rothe
			Christian E. Rothe
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)

Date:	~~October 19, 2016~~July 26, 2017	By:	/s/ Caroline M. Chambers
			Caroline M. Chambers
			Vice President, Corporate Controller and Information Systems
			(Principal Accounting Officer)



	Pension and Post- retirement Medical			Cumulative Translation Adjustment			Total
Balance, June 26, 2015	$	(73,868	)	$	(14,759	)	$	(88,627	)
Other comprehensive income before reclassifications	—			(13,572		)	(13,572		)
Amounts reclassified from accumulated other comprehensive income	1,700			—			1,700
Balance, September 25, 2015	$	(72,168	)	$	(28,331	)	$	(100,499	)



Balance, December 26, 2014	$	(76,584	)	$	(24,152	)	$	(100,736	)
Other comprehensive income before reclassifications	—			(4,179		)	(4,179		)
Reclassified from accumulated other comprehensive income	4,416			—			4,416
Balance, September 25, 2015	$	(72,168	)	$	(28,331	)	$	(100,499	)



	Estimated Life (years)	Cost		Accumulated Amortization			Foreign Currency Translation			Book Value
September 23, 2016
Customer relationships	3 - 14	$	218,227	$	(49,383	)	$	(12,316	)	$	156,528
Patents, proprietary technology and product documentation	3 - 11	17,422		(5,731		)	(705		)	10,986
Trademarks, trade names and other	3 - 5	895		(284		)	(58		)	553
		236,544		(55,398		)	(13,079		)	168,067
Not Subject to Amortization:
Brand names		70,528		—			(4,648		)	65,880
Total		$	307,072	$	(55,398	)	$	(17,727	)	$	233,947



December 25, 2015
Customer relationships	3 - 14	$	197,900	$	(36,852	)	$	(9,738	)	$	151,310
Patents, proprietary technology and product documentation	3 - 11	20,400		(8,952		)	(658		)	10,790
Trademarks, trade names and other	5	495		(132		)	(94		)	269
		218,795		(45,936		)	(10,490		)	162,369
Not Subject to Amortization:
Brand names		69,514		—			(3,896		)	65,618
Total		$	288,309	$	(45,936	)	$	(14,386	)	$	227,987



	Quarter
	Segment						Region						Total
	Industrial		Process		Contractor		Americas₍₁₎		EMEA₍₂₎		Asia Pacific		Total
Volume and Price	(1)	%	0	%	7	%	2	%	2	%	3	%	2	%
Acquisitions	0	%	5	%	0	%	0	%	2	%	1	%	1	%
Currency	0	%	(1)	%	0	%	0	%	(2)	%	0	%	0	%
Total	(1)	%	4	%	7	%	2	%	2	%	4	%	3	%



	Year-to-Date
	Segment						Region						Total
	Industrial		Process		Contractor		Americas₍₁₎		EMEA₍₂₎		Asia Pacific		Total
Volume and Price	2	%	(9)	%	7	%	0	%	5	%	2	%	1	%
Acquisitions	0	%	6	%	0	%	1	%	3	%	2	%	2	%
Currency	(1)	%	(1)	%	0	%	0	%	(2)	%	(2)	%	(1)	%
Total	1	%	(4)	%	7	%	1	%	6	%	2	%	2	%