10-Q 1 ggg-20210924.htm 10-Q ggg-20210924
September 24, 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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 24, 2021

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

169,965,576 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of October 13, 2021.



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 24,
2021
September 25,
2020
September 24,
2021
September 25,
2020
Net Sales$486,696 $439,316 $1,447,989 $1,179,775 
Cost of products sold238,462 210,363 688,597 569,662 
Gross Profit248,234 228,953 759,392 610,113 
Product development19,762 17,715 60,739 52,744 
Selling, marketing and distribution66,078 54,009 197,432 160,228 
General and administrative37,795 31,957 114,493 102,322 
Impairment 267  35,229 
Operating Earnings124,599 125,005 386,728 259,590 
Interest expense2,500 2,964 7,456 8,708 
Other expense, net344 1,025 31 5,738 
Earnings Before Income Taxes121,755 121,016 379,241 245,144 
Income taxes17,926 6,901 59,607 29,379 
Net Earnings$103,829 $114,115 $319,634 $215,765 
Net Earnings per Common Share
Basic
$0.61 $0.68 $1.89 $1.29 
Diluted
$0.59 $0.66 $1.83 $1.26 
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
 Three Months EndedNine Months Ended
 September 24,
2021
September 25,
2020
September 24,
2021
September 25,
2020
Net Earnings$103,829 $114,115 $319,634 $215,765 
Components of other comprehensive
income (loss)
Cumulative translation adjustment
(3,537)30,966 (8,314)33,045 
Pension and postretirement medical
liability adjustment
2,559 2,313 8,240 7,508 
Income taxes - pension and postretirement
medical liability adjustment
(564)(512)(1,771)(1,681)
Other comprehensive income (loss)(1,542)32,767 (1,845)38,872 
Comprehensive Income$102,287 $146,882 $317,789 $254,637 
See notes to consolidated financial statements.
3

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
September 24,
2021
December 25,
2020
ASSETS
Current Assets
Cash and cash equivalents$603,828 $378,909 
Accounts receivable, less allowances of $4,200 and $4,400
324,284 314,946 
Inventories362,932 285,704 
Other current assets42,027 44,242 
Total current assets1,333,071 1,023,801 
Property, Plant and Equipment, net416,518 350,750 
Goodwill357,014 347,603 
Other Intangible Assets, net154,364 160,669 
Operating Lease Assets37,336 37,807 
Deferred Income Taxes32,842 25,828 
Other Assets46,183 41,670 
Total Assets$2,377,328 $1,988,128 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks$50,323 $22,183 
Trade accounts payable86,858 58,305 
Salaries and incentives76,265 52,005 
Dividends payable31,937 31,636 
Other current liabilities181,831 157,260 
Total current liabilities427,214 321,389 
Long-term Debt150,000 150,000 
Retirement Benefits and Deferred Compensation183,254 184,747 
Operating Lease Liabilities30,389 29,224 
Deferred Income Taxes11,099 10,264 
Other Non-current Liabilities11,023 8,600 
Shareholders’ Equity
Common stock169,954 168,568 
Additional paid-in-capital728,015 671,206 
Retained earnings792,390 568,295 
Accumulated other comprehensive income (loss)(126,010)(124,165)
Total shareholders’ equity1,564,349 1,283,904 
Total Liabilities and Shareholders’ Equity$2,377,328 $1,988,128 
See notes to consolidated financial statements.
4

GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 Nine Months Ended
 September 24,
2021
September 25,
2020
Cash Flows From Operating Activities
Net Earnings$319,634 $215,765 
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization44,846 40,714 
Deferred income taxes(10,219)(653)
Share-based compensation19,882 21,434 
Impairment 35,229 
Change in
Accounts receivable(10,793)(48,733)
Inventories(77,531)(13,506)
Trade accounts payable14,033 6,547 
Salaries and incentives22,770 (10,493)
Retirement benefits and deferred compensation6,676 9,734 
Other accrued liabilities27,307 4,868 
Other626 1,813 
Net cash provided by operating activities357,231 262,719 
Cash Flows From Investing Activities
Property, plant and equipment additions(82,628)(45,756)
Acquisition of businesses, net of cash acquired(19,386)(27,557)
Other(102)(70)
Net cash used in investing activities(102,116)(73,383)
Cash Flows From Financing Activities
Borrowings on short-term lines of credit, net27,880 21,506 
Borrowings on long-term lines of credit 250,000 
Payments on long-term debt and lines of credit(69)(125,000)
Payments of debt issuance costs(1,422) 
Common stock issued40,445 57,949 
Common stock repurchased (102,143)
Taxes paid related to net share settlement of equity awards (1,797)
Cash dividends paid(95,238)(87,665)
Net cash provided by financing activities(28,404)12,850 
Effect of exchange rate changes on cash(1,792)1,515 
Net increase in cash and cash equivalents224,919 203,701 
Cash and Cash Equivalents
Beginning of year378,909 220,973 
End of period$603,828 $424,674 
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 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 

Three Months Ended September 25, 2020
Balance, June 26, 2020$166,693 $623,803 $400,154 $(163,682)$1,026,968 
Shares issued751 14,981   15,732 
Stock compensation cost 5,415   5,415 
Net earnings  114,115  114,115 
Dividends declared ($0.175 per share)
  (29,060) (29,060)
Other comprehensive income (loss)   32,767 32,767 
Balance, September 25, 2020$167,444 $644,199 $485,209 $(130,915)$1,165,937 

Nine Months Ended September 25, 2020
Balance, December 27, 2019$167,287 $578,440 $448,991 $(169,787)$1,024,931 
Shares issued2,484 54,399   56,883 
Shares repurchased(2,327)(8,047)(91,769) (102,143)
Stock compensation cost 19,407   19,407 
Net earnings  215,765  215,765 
Dividends declared ($0.525 per share)
  (87,778) (87,778)
Other comprehensive income (loss)   38,872 38,872 
Balance, September 25, 2020$167,444 $644,199 $485,209 $(130,915)$1,165,937 

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 24, 2021 and the related statements of earnings, comprehensive income and shareholders' equity for the three and nine months ended September 24, 2021 and September 25, 2020, and cash flows for the nine months ended September 24, 2021 and September 25, 2020 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 24, 2021, 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 2020 Annual Report on Form 10-K.

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

2.Segment Information

The Company has three reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands): 
 Three Months EndedNine Months Ended
 September 24,
2021
September 25,
2020
September 24,
2021
September 25,
2020
Net Sales
 Industrial$211,030 $172,805 $600,339 $464,776 
 Process96,184 78,773 284,790 242,610 
 Contractor179,482 187,738 562,860 472,389 
 Total$486,696 $439,316 $1,447,989 $1,179,775 
Operating Earnings
 Industrial$73,294 $60,776 $207,905 $148,010 
 Process21,514 16,187 64,923 45,970 
 Contractor36,177 54,841 134,340 124,580 
 Unallocated corporate (expense)(6,386)(6,532)(20,440)(23,741)
 Impairment (267) (35,229)
 Total$124,599 $125,005 $386,728 $259,590 

Assets by segment were as follows (in thousands): 
September 24,
2021
December 25,
2020
Industrial
$694,616 $632,165 
Process
427,020 404,370 
Contractor
484,933 438,067 
Unallocated corporate
770,759 513,526 
Total
$2,377,328 $1,988,128 

7

Geographic information follows (in thousands):
 Three Months EndedNine Months Ended
 September 24,
2021
September 25,
2020
September 24,
2021
September 25,
2020
Net Sales (based on customer location)
United States
$244,086 $247,197 $739,309 $651,229 
Other countries
242,610 192,119 708,680 528,546 
Total
$486,696 $439,316 $1,447,989 $1,179,775 
 September 24,
2021
December 25,
2020
Long-lived Assets
United States
$354,837 $301,643 
Other countries
61,681 49,107 
Total
$416,518 $350,750 

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 24,
2021
September 25,
2020
September 24,
2021
September 25,
2020
Net earnings available to common shareholders
$103,829 $114,115 $319,634 $215,765 
Weighted average shares outstanding for basic earnings per share169,834 167,102 169,459 167,248 
Dilutive effect of stock options computed using the treasury stock method and the average market price4,940 4,551 4,939 4,367 
Weighted average shares outstanding for diluted earnings per share174,774 171,653 174,398 171,615 
Basic earnings per share
$0.61 $0.68 $1.89 $1.29 
Diluted earnings per share
$0.59 $0.66 $1.83 $1.26 

Stock options to purchase 428,000 and 1,281,000 shares were not included in the September 24, 2021 and September 25, 2020 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

4.Share-Based Awards

Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):
Option
Shares
Weighted Average
Exercise Price
Options
Exercisable
Weighted Average
Exercise Price
Outstanding, December 25, 202010,208 $35.02 6,553 $28.02 
Granted841 72.21 
Exercised(958)23.28 
Canceled(131)54.75 
Outstanding, September 24, 20219,960 $39.03 7,627 $33.49 

The Company recognized year-to-date share-based compensation of $19.9 million in 2021 and $21.4 million in 2020. As of September 24, 2021, there was $12.6 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.7 years.
8


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 24,
2021
September 25,
2020
Expected life in years
7.57.5
Interest rate
1.2 %1.5 %
Volatility
25.3 %22.0 %
Dividend yield
1.0 %1.3 %
Weighted average fair value per share
$18.91 $12.18 

Under the Company’s Employee Stock Purchase Plan, the Company issued 416,000 shares in 2021 and 400,000 shares in 2020. 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 24,
2021
September 25,
2020
Expected life in years
1.01.0
Interest rate
0.1 %1.5 %
Volatility
40.1 %21.9 %
Dividend yield
1.1 %1.4 %
Weighted average fair value per share
$21.50 $11.55 

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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 24,
2021
September 25,
2020
September 24,
2021
September 25,
2020
Pension Benefits
Service cost
$1,674 $2,392 $7,119 $7,007 
Interest cost
2,519 3,351 8,476 9,985 
Expected return on assets
(5,412)(4,706)(15,673)(14,107)
Amortization and other
2,148 2,777 7,254 8,015 
Net periodic benefit cost
$929 $3,814 $7,176 $10,900 
Postretirement Medical
Service cost
$153 $152 $503 $457 
Interest cost
124 254 624 762 
Amortization
252 183 752 550 
Net periodic benefit cost
$529 $589 $1,879 $1,769 

Subsequent Event

Subsequent to the end of the third quarter, the Company entered into an agreement under which approximately $63 million of $414 million in pension obligations in its two U.S. funded defined benefit pension plans were transferred to an insurance company.
Under the agreement, the Company will purchase a group annuity contract for approximately 421 plan participants that will provide for an irrevocable commitment to make annuity payments to the affected participants. The payment obligation and administration thereof for the affected participants will be transferred from the pension plans to the insurance company. The transfer will not change the amount of the monthly pension benefits received by the affected participants. The smaller of the two pension plans will be merged into the larger plan in the fourth quarter of 2021, with the larger plan being the surviving plan.

This arrangement is part of the Company’s effort to reduce the overall size and volatility of its pension plan obligations. The purchase of the group annuity contract will be funded through existing plan assets. The Company expects to recognize a non-cash pension settlement loss of approximately $12 million before tax in the fourth quarter of 2021. This charge represents the acceleration of deferred charges currently accrued in accumulated other comprehensive income. The actual amount of the settlement loss will depend on the value of plan assets and the discount rate as of the measurement date.

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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 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)

Three Months Ended September 25, 2020
Balance, June 26, 2020$(109,695)$(53,987)$(163,682)
Other comprehensive income (loss) before reclassifications 30,966 30,966 
Reclassified to pension cost and deferred tax1,801  1,801 
Balance, September 25, 2020$(107,894)$(23,021)$(130,915)

Nine Months Ended September 25, 2020
Balance, December 27, 2019$(113,721)$(56,066)$(169,787)
Other comprehensive income (loss) before reclassifications 33,045 33,045 
Reclassified to pension cost and deferred tax5,827  5,827 
Balance, September 25, 2020$(107,894)$(23,021)$(130,915)

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.

11


7.Receivables and Credit Losses

Accounts receivable includes trade receivables of $316 million and other receivables of $9 million as of September 24, 2021 and $302 million and $13 million, respectively, as of December 25, 2020.

Allowance for Credit Losses

Following is a summary of activity in the year to date allowance for credit losses (in thousands):
September 24,
2021
September 25,
2020
Balance, beginning$3,745 $4,828 
Additions (reversals) charged to costs and expenses164 338 
Deductions from reserves (1)
(425)(1,247)
Other additions (deductions) (2)
68 106 
Balance, ending$3,552 $4,025 

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


8.Inventories

Major components of inventories were as follows (in thousands):
September 24,
2021
December 25,
2020
Finished products and components$165,771 $133,122 
Products and components in various stages of completion110,284 83,791 
Raw materials and purchased components166,633 129,319 
Subtotal442,688 346,232 
Reduction to LIFO cost(79,756)(60,528)
Total$362,932 $285,704 

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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 24, 2021
Cost
$194,505 $26,074 $900 $62,633 $284,112 
Accumulated amortization
(104,892)(15,023)(414)— (120,329)
Foreign currency translation(7,414)(655) (1,350)(9,419)
Book value
$82,199 $10,396 $486 $61,283 $154,364 
Weighted average life in years
13105N/A
As of December 25, 2020
Cost
$186,073 $25,187 $900 $61,920 $274,080 
Accumulated amortization
(93,832)(12,924)(301)— (107,057)
Foreign currency translation(6,004)(538) 188 (6,354)
Book value
$86,237 $11,725 $599 $62,108 $160,669 
Weighted average life in years
13105N/A

Amortization of intangibles for the quarter was $4.6 million in 2021 and $4.2 million in 2020 and for the year to date was $13.4 million in 2021 and $12.5 million in 2020. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
2021 (Remainder)2022202320242025Thereafter
Estimated Amortization Expense$4,646 $17,757 $16,980 $15,425 $14,853 $23,420 

Changes in the carrying amount of goodwill for each reportable segment were as follows (in thousands): 
Industrial    Process    Contractor    Total    
Balance, December 25, 2020$186,536 $141,513 $19,554 $347,603 
Additions, adjustments from business acquisitions13,321