10-Q 1 ggg-20220930.htm 10-Q ggg-20220930
September 30, 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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 30, 2022

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

Commission File Number:  001-09249
GRACO INC.
(Exact name of registrant as specified in its charter)     
 
Minnesota41-0285640
(State or other jurisdiction of incorporation or organization)  (I.R.S. Employer Identification Number)     
 
88 - 11th Avenue N.E.
Minneapolis,Minnesota55413
(Address of principal executive offices)    (Zip Code)     
(612)623-6000
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesNo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YesNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting company
Emerging growth company

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

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

168,529,015 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of October 12, 2022.



TABLE OF CONTENTS 
2

PART I     Item 1.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In thousands except per share amounts)
 Three Months EndedNine Months Ended
 September 30,
2022
September 24,
2021
September 30,
2022
September 24,
2021
Net Sales$545,644 $486,696 $1,588,476 $1,447,989 
Cost of products sold284,556 238,462 803,853 688,597 
Gross Profit261,088 248,234 784,623 759,392 
Product development19,704 19,762 58,749 60,739 
Selling, marketing and distribution61,386 66,078 186,457 197,432 
General and administrative36,849 37,795 119,225 114,493 
Operating Earnings143,149 124,599 420,192 386,728 
Interest expense1,542 2,500 8,555 7,456 
Other expense (income), net(866)344 (106)31 
Earnings Before Income Taxes142,473 121,755 411,743 379,241 
Income taxes26,241 17,926 77,290 59,607 
Net Earnings$116,232 $103,829 $334,453 $319,634 
Net Earnings per Common Share
Basic
$0.69 $0.61 $1.97 $1.89 
Diluted
$0.67 $0.59 $1.93 $1.83 
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
 Three Months EndedNine Months Ended
 September 30,
2022
September 24,
2021
September 30,
2022
September 24,
2021
Net Earnings$116,232 $103,829 $334,453 $319,634 
Components of other comprehensive
income (loss)
Cumulative translation adjustment
(13,335)(3,537)(29,827)(8,314)
Pension and postretirement medical
liability adjustment
1,340 2,559 3,602 8,240 
Income taxes - pension and postretirement
medical liability adjustment
(312)(564)(826)(1,771)
Other comprehensive income (loss)(12,307)(1,542)(27,051)(1,845)
Comprehensive Income$103,925 $102,287 $307,402 $317,789 
See notes to consolidated financial statements.
3

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
September 30,
2022
December 31,
2021
ASSETS
Current Assets
Cash and cash equivalents$414,827 $624,302 
Accounts receivable, less allowances of $6,600 and $3,900
364,073 325,132 
Inventories462,220 382,301 
Other current assets44,783 31,886 
Total current assets1,285,903 1,363,621 
Property, Plant and Equipment, net562,807 451,061 
Goodwill359,645 356,255 
Other Intangible Assets, net136,948 149,740 
Operating Lease Assets30,996 30,046 
Deferred Income Taxes30,450 55,786 
Other Assets31,451 36,689 
Total Assets$2,438,200 $2,443,198 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks$42,692 $43,489 
Current portion of long term debt 75,000 
Trade accounts payable99,025 78,432 
Salaries and incentives60,458 82,941 
Dividends payable35,836 35,771 
Other current liabilities192,757 191,159 
Total current liabilities430,768 506,792 
Long-term Debt75,000 75,000 
Retirement Benefits and Deferred Compensation101,626 106,897 
Operating Lease Liabilities22,107 23,527 
Deferred Income Taxes8,310 10,661 
Other Non-current Liabilities12,078 10,978 
Shareholders’ Equity
Common stock168,523 170,308 
Additional paid-in-capital776,594 742,288 
Retained earnings950,414 876,916 
Accumulated other comprehensive income (loss)(107,220)(80,169)
Total shareholders’ equity1,788,311 1,709,343 
Total Liabilities and Shareholders’ Equity$2,438,200 $2,443,198 
See notes to consolidated financial statements.
4

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 Nine Months Ended
 September 30,
2022
September 24,
2021
Cash Flows From Operating Activities
Net Earnings$334,453 $319,634 
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization48,223 44,846 
Deferred income taxes20,062 (10,219)
Share-based compensation19,480 19,882 
Change in
Accounts receivable(56,524)(10,793)
Inventories(86,455)(77,531)
Trade accounts payable8,456 14,033 
Salaries and incentives(20,841)22,770 
Retirement benefits and deferred compensation473 6,676 
Other accrued liabilities411 27,307 
Other3,814 626 
Net cash provided by operating activities271,552 357,231 
Cash Flows From Investing Activities
Property, plant and equipment additions(147,193)(82,628)
Acquisition of businesses, net of cash acquired(25,296)(19,386)
Other(477)(102)
Net cash used in investing activities(172,966)(102,116)
Cash Flows From Financing Activities
Borrowings on short-term lines of credit, net4,110 27,880 
Payments on long-term debt(75,000)(69)
Payments of debt issuance costs (1,422)
Common stock issued28,299 40,445 
Common stock repurchased(155,181) 
Taxes paid related to net share settlement of equity awards(1,219) 
Cash dividends paid(106,855)(95,238)
Net cash used in financing activities(305,846)(28,404)
Effect of exchange rate changes on cash(2,215)(1,792)
Net increase (decrease) in cash and cash equivalents(209,475)224,919 
Cash and Cash Equivalents
Beginning of year624,302 378,909 
End of period$414,827 $603,828 
See notes to consolidated financial statements.
5

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Three Months Ended September 30, 2022
Balance, July 1, 2022$169,114 $770,209 $912,864 $(94,913)$1,757,274 
Shares issued182 4,707   4,889 
Shares repurchased(773)(3,369)(43,126) (47,268)
Stock compensation cost 5,047   5,047 
Net earnings  116,232  116,232 
Dividends declared ($0.210 per share)
  (35,556) (35,556)
Other comprehensive income (loss)   (12,307)(12,307)
Balance, September 30, 2022$168,523 $776,594 $950,414 $(107,220)$1,788,311 
Nine Months Ended September 30, 2022
Balance, December 31, 2021$170,308 $742,288 $876,916 $(80,169)$1,709,343 
Shares issued689 26,392   27,081 
Shares repurchased(2,474)(10,781)(154,034) (167,289)
Stock compensation cost 18,696   18,696 
Restricted stock canceled (issued) (1)  (1)
Net earnings  334,453  334,453 
Dividends declared ($0.630 per share)
  (106,921) (106,921)
Other comprehensive income (loss)   (27,051)(27,051)
Balance, September 30, 2022$168,523 $776,594 $950,414 $(107,220)$1,788,311 
Three Months Ended September 24, 2021
Balance, June 25, 2021$169,667 $715,635 $720,429 $(124,468)$1,481,263 
Shares issued287 6,942   7,229 
Stock compensation cost 5,438   5,438 
Net earnings  103,829  103,829 
Dividends declared ($0.188 per share)
  (31,868) (31,868)
Other comprehensive income (loss)   (1,542)(1,542)
Balance, September 24, 2021$169,954 $728,015 $792,390 $(126,010)$1,564,349 
Nine Months Ended September 24, 2021
Balance, December 25, 2020$168,568 $671,206 $568,295 $(124,165)$1,283,904 
Shares issued1,386 41,395   42,781 
Stock compensation cost 17,750   17,750 
Restricted stock canceled (issued) (2,336)  (2,336)
Net earnings  319,634  319,634 
Dividends declared ($0.563 per share)
  (95,539) (95,539)
Other comprehensive income (loss)   (1,845)(1,845)
Balance, September 24, 2021$169,954 $728,015 $792,390 $(126,010)$1,564,349 
See notes to consolidated financial statements.
6

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 30, 2022 and the related statements of earnings, comprehensive income and shareholders' equity for the three and nine months ended September 30, 2022 and September 24, 2021, and cash flows for the nine months ended September 30, 2022 and September 24, 2021 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 30, 2022, 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 2021 Annual Report on Form 10-K.

The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.

2.Segment Information

Effective January 1, 2022, our high performance coatings and foam product offerings previously included within the Applied Fluid Technologies division of the Industrial segment were realigned and are now managed under the Contractor segment. This change aligns the types of products offered and markets served within the segments. Prior year segment information has been restated to conform to the current organizational structure.

The Company has three reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands): 
 Three Months EndedNine Months Ended
 September 30,
2022
September 24,
2021
September 30,
2022
September 24,
2021
Net Sales
 Industrial$156,182 $154,560 $459,176 $428,872 
 Process125,376 96,185 364,883 284,790 
 Contractor264,086 235,951 764,417 734,327 
 Total$545,644 $486,696 $1,588,476 $1,447,989 
Operating Earnings
 Industrial$53,964 $50,812 $161,795 $138,879 
 Process30,638 21,514 89,183 64,923 
 Contractor65,123 58,659 192,314 203,366 
 Unallocated corporate (expense)(6,576)(6,386)(23,100)(20,440)
 Total$143,149 $124,599 $420,192 $386,728 

7

Assets by segment were as follows (in thousands): 
September 30,
2022
December 31,
2021
Industrial
$606,224 $601,843 
Process
543,701 436,203 
Contractor
698,698 599,726 
Unallocated corporate
589,577 805,426 
Total
$2,438,200 $2,443,198 

Geographic information follows (in thousands):
 Three Months EndedNine Months Ended
 September 30,
2022
September 24,
2021
September 30,
2022
September 24,
2021
Net Sales (based on customer location)
United States
$289,831 $244,086 $840,922 $739,309 
Other countries
255,813 242,610 747,554 708,680 
Total
$545,644 $486,696 $1,588,476 $1,447,989 

 September 30,
2022
December 31,
2021
Long-lived Assets
United States
$498,780 $388,835 
Other countries
64,027 62,226 
Total
$562,807 $451,061 


3.Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 Three Months EndedNine Months Ended
 September 30,
2022
September 24,
2021
September 30,
2022
September 24,
2021
Net earnings available to common shareholders
$116,232 $103,829 $334,453 $319,634 
Weighted average shares outstanding for basic earnings per share169,166 169,834 169,368 169,459 
Dilutive effect of stock options computed using the treasury stock method and the average market price3,623 4,940 4,020 4,939 
Weighted average shares outstanding for diluted earnings per share172,789 174,774 173,388 174,398 
Basic earnings per share
$0.69 $0.61 $1.97 $1.89 
Diluted earnings per share
$0.67 $0.59 $1.93 $1.83 

Stock options to purchase 1,618,000 and 428,000 shares were not included in the September 30, 2022 and September 24, 2021 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

8

4.Share-Based Awards

Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):
Option
Shares
Weighted Average
Exercise Price
Options
Exercisable
Weighted Average
Exercise Price
Outstanding, December 31, 20219,575 $39.31 7,296 $33.75 
Granted831 71.73 
Exercised(391)24.00 
Canceled(40)49.17 
Outstanding, September 30, 20229,975 $42.58 7,648 $36.35 

The Company recognized year-to-date share-based compensation of $17.9 million in 2022 and $19.9 million in 2021. As of September 30, 2022, there was $11.0 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:
 Nine Months Ended
 September 30,
2022
September 24,
2021
Expected life in years
7.37.5
Interest rate
1.9 %1.2 %
Volatility
25.5 %25.3 %
Dividend yield
1.2 %1.0 %
Weighted average fair value per share
$19.06 $18.91 

Under the Company’s Employee Stock Purchase Plan, the Company issued 316,000 shares in 2022 and 416,000 shares in 2021. 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:
 Nine Months Ended
 September 30,
2022
September 24,
2021
Expected life in years
1.01.0
Interest rate
0.9 %0.1 %
Volatility
20.5 %40.1 %
Dividend yield
1.2 %1.1 %
Weighted average fair value per share
$16.01 $21.50 

9

5.Retirement Benefits

The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
 Three Months EndedNine Months Ended
 September 30,
2022
September 24,
2021
September 30,
2022
September 24,
2021
Pension Benefits
Service cost
$2,053 $1,674 $6,187 $7,119 
Interest cost
2,745 2,519 8,249 8,476 
Expected return on assets
(5,237)(5,412)(14,816)(15,673)
Amortization and other
1,200 2,148 3,695 7,254 
Net periodic benefit cost
$761 $929 $3,315 $7,176 
Postretirement Medical
Service cost
$129 $153 $387 $503 
Interest cost
209 124 629 624 
Amortization
86 252 259 752 
Net periodic benefit cost
$424 $529 $1,275 $1,879 

6.Shareholders’ Equity

Changes in components of accumulated other comprehensive income (loss), net of tax were as follows (in thousands):
Pension and
Postretirement
Medical
Cumulative
Translation
Adjustment
Total
Three Months Ended September 30, 2022
Balance, July 1, 2022$(58,359)$(36,554)$(94,913)
Other comprehensive income (loss) before reclassifications (13,335)(13,335)
Reclassified to pension cost and deferred tax1,028  1,028 
Balance, September 30, 2022$(57,331)$(49,889)$(107,220)

Nine Months Ended September 30, 2022
Balance, December 31, 2021$(60,107)$(20,062)$(80,169)
Other comprehensive income (loss) before reclassifications (29,827)(29,827)
Reclassified to pension cost and deferred tax2,776  2,776 
Balance, September 30, 2022$(57,331)$(49,889)$(107,220)

Three Months Ended September 24, 2021
Balance, June 25, 2021$(109,655)$(14,813)$(124,468)
Other comprehensive income (loss) before reclassifications (3,537)(3,537)
Reclassified to pension cost and deferred tax1,995  1,995 
Balance, September 24, 2021$(107,660)$(18,350)$(126,010)

Nine Months Ended September 24, 2021
Balance, December 25, 2020$(114,129)$(10,036)$(124,165)
Other comprehensive income (loss) before reclassifications (8,314)(8,314)
Reclassified to pension cost and deferred tax6,469  6,469 
Balance, September 24, 2021$(107,660)$(18,350)$(126,010)
10


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


7.Receivables and Credit Losses

Accounts receivable includes trade receivables of $350 million and other receivables of $14 million as of September 30, 2022 and $315 million and $10 million, respectively, as of December 31, 2021.

Allowance for Credit Losses

Following is a summary of activity in the year to date allowance for credit losses (in thousands):
September 30,
2022
September 24,
2021
Balance, beginning$3,254 $3,745 
Additions (reversals) charged to costs and expenses3,262 164 
Deductions from reserves (1)
(564)(425)
Other additions (deductions) (2)
(452)68 
Balance, ending$5,500 $3,552 

(1)    Represents amounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves.
(2) Includes effects of foreign currency translation.


8.Inventories

Major components of inventories were as follows (in thousands):
September 30,
2022
December 31,
2021
Finished products and components$211,195 $166,922 
Products and components in various stages of completion140,892 117,063 
Raw materials and purchased components229,127 185,291 
Subtotal581,214 469,276 
Reduction to LIFO cost(118,994)(86,975)
Total$462,220 $382,301 

11

9.Intangible Assets

Components of other intangible assets were as follows (dollars in thousands):
Finite LifeIndefinite Life
Customer
Relationships
Patents and
Proprietary
Technology
Trademarks,
Trade Names
and Other
Trade
Names
Total
As of September 30, 2022
Cost
$202,103 $26,574 $1,700 $62,633 $293,010 
Accumulated amortization
(119,529)(17,519)(659)— (137,707)
Foreign currency translation(12,791)(1,042) (4,522)(18,355)
Book value
$69,783 $8,013 $1,041 $58,111 $136,948 
Weighted average life in years
13105N/A
As of December 31, 2021
Cost
$194,505 $26,074 $900 $62,633 $284,112 
Accumulated amortization
(108,657)(15,734)(452)— (124,843)
Foreign currency translation(7,710)(707) (1,112)(9,529)
Book value
$78,138 $9,633 $448 $61,521 $149,740 
Weighted average life in years
13105N/A

Amortization of intangibles for the quarter was $4.8 million in 2022 and $4.6 million in 2021 and for the year to date was $14.1 million in 2022 and $13.4 million in 2021. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
2022 (Remainder)2023202420252026Thereafter
Estimated Amortization Expense$4,556 $16,860 $15,639 $15,071 $8,660 $18,051 

Changes in the carrying amount of goodwill for each reportable segment were as follows (in thousands): 
Industrial    Process    Contractor    Total    
Balance, December 31, 2021$185,733 $141,304 $29,218 $356,255 
Additions, adjustments from business acquisitions 16,994  16,994 
Foreign currency translation(10,162)(3,442) (13,604)
Balance, September 30, 2022$175,571 $154,856 $29,218 $