GRACO INC [GGG] Filings

10-Q 1 ggg-20220701.htm 10-Q ggg-20220701

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 July 1, 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)


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


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


(612)			623-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	GGG	The New York Stock Exchange

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

Yes

☒

☐

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).

Yes

☒

☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Yes

☐

☒

169,115,561 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July 14, 2022.

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders' Equity

Notes to Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II - OTHER INFORMATION

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.

Exhibits

SIGNATURES

EXHIBITS

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PART I Item 1.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited) (In thousands except per share amounts)


	Three Months Ended				Six Months Ended
	July 1, 2022		June 25, 2021		July 1, 2022		June 25, 2021
Net Sales	$	548,547	$	507,164	$	1,042,832	$	961,293
Cost of products sold	279,487		243,340		519,297		450,135
Gross Profit	269,060		263,824		523,535		511,158
Product development	19,967		21,406		39,045		40,977
Selling, marketing and distribution	62,076		69,126		125,071		131,354
General and administrative	38,337		39,449		82,376		76,698

Operating Earnings	148,680		133,843		277,043		262,129

Interest expense	1,726		2,528		7,013		4,956

Other expense, net	607		(434)		760		(313)
Earnings Before Income Taxes	146,347		131,749		269,270		257,486
Income taxes	28,969		21,631		51,049		41,681
Net Earnings	$	117,378	$	110,118	$	218,221	$	215,805
Net Earnings per Common Share
Basic	$	0.69	$	0.65	$	1.29	$	1.27
Diluted	$	0.68	$	0.63	$	1.26	$	1.24

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)


	Three Months Ended				Six Months Ended
	July 1, 2022		June 25, 2021		July 1, 2022		June 25, 2021
Net Earnings	$	117,378	$	110,118	$	218,221	$	215,805
Components of other comprehensive income (loss)
Cumulative translation adjustment	(13,532)		5,693		(16,492)		(4,777)
Pension and postretirement medical liability adjustment	1,368		2,373		2,262		5,681
Income taxes - pension and postretirement medical liability adjustment	(320)		(535)		(514)		(1,207)
Other comprehensive income (loss)	(12,484)		7,531		(14,744)		(303)
Comprehensive Income	$	104,894	$	117,649	$	203,477	$	215,502

See notes to consolidated financial statements.

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GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands)


	July 1, 2022		December 31, 2021
ASSETS
Current Assets
Cash and cash equivalents	$	413,359	$	624,302
Accounts receivable, less allowances of $6,600 and $3,900	373,141		325,132
Inventories	450,974		382,301
Other current assets	39,002		31,886
Total current assets	1,276,476		1,363,621



Property, Plant and Equipment, net	516,156		451,061
Goodwill	365,491		356,255
Other Intangible Assets, net	145,201		149,740
Operating Lease Assets	31,055		30,046
Deferred Income Taxes	37,137		55,786
Other Assets	32,762		36,689
Total Assets	$	2,404,278	$	2,443,198
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks	$	55,522	$	43,489
Current portion of long term debt	—		75,000
Trade accounts payable	85,452		78,432
Salaries and incentives	53,198		82,941
Dividends payable	35,794		35,771
Other current liabilities	194,092		191,159
Total current liabilities	424,058		506,792
Long-term Debt	75,000		75,000
Retirement Benefits and Deferred Compensation	103,341		106,897
Operating Lease Liabilities	23,112		23,527
Deferred Income Taxes	9,273		10,661
Other Non-current Liabilities	12,220		10,978

Shareholders’ Equity
Common stock	169,114		170,308
Additional paid-in-capital	770,209		742,288
Retained earnings	912,864		876,916
Accumulated other comprehensive income (loss)	(94,913)		(80,169)
Total shareholders’ equity	1,757,274		1,709,343
Total Liabilities and Shareholders’ Equity	$	2,404,278	$	2,443,198

See notes to consolidated financial statements.

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GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


	Six Months Ended
	July 1, 2022		June 25, 2021
Cash Flows From Operating Activities
Net Earnings	$	218,221	$	215,805
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	31,453		29,812
Deferred income taxes	14,743		(10,313)
Share-based compensation	14,386		13,745

Change in
Accounts receivable	(56,263)		(38,747)
Inventories	(70,879)		(51,359)
Trade accounts payable	8,369		14,496
Salaries and incentives	(29,201)		8,334
Retirement benefits and deferred compensation	349		5,980
Other accrued liabilities	(386)		32,399
Other	4,193		(105)
Net cash provided by operating activities	134,985		220,047
Cash Flows From Investing Activities
Property, plant and equipment additions	(88,861)		(54,759)
Acquisition of businesses, net of cash acquired	(25,296)		(19,322)
Other	(397)		(112)
Net cash used in investing activities	(114,554)		(74,193)
Cash Flows From Financing Activities
Borrowings on short-term lines of credit, net	13,830		(9,282)

Payments on long-term debt	(75,000)		(70)
Payments of debt issuance costs	—		(1,422)
Common stock issued	23,410		33,216
Common stock repurchased	(120,021)		—
Taxes paid related to net share settlement of equity awards	(1,219)		—
Cash dividends paid	(71,341)		(63,414)
Net cash used in financing activities	(230,341)		(40,972)
Effect of exchange rate changes on cash	(1,033)		(1,004)
Net increase in cash and cash equivalents	(210,943)		103,878
Cash and Cash Equivalents
Beginning of year	624,302		378,909
End of period	$	413,359	$	482,787

See notes to consolidated financial statements.

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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 July 1, 2022
Balance, April 1, 2022	$	169,223	$	761,959	$	841,503	$	(82,429)	$	1,690,256

Shares issued	70		2,047						2,117
Shares repurchased	(179)		(777)		(10,360)				(11,316)
Stock compensation cost			6,980						6,980

Restricted stock canceled (issued)			—						—
Net earnings					117,378				117,378
Dividends declared ($0.210 per share)					(35,657)				(35,657)

Other comprehensive income (loss)							(12,484)		(12,484)
Balance, July 1, 2022	$	169,114	$	770,209	$	912,864	$	(94,913)	$	1,757,274



Six Months Ended July 1, 2022
Balance, December 31, 2021	$	170,308	$	742,288	$	876,916	$	(80,169)	$	1,709,343

Shares issued	507		21,685						22,192
Shares repurchased	(1,701)		(7,412)		(110,908)				(120,021)
Stock compensation cost			13,649						13,649

Restricted stock canceled (issued)			(1)						(1)
Net earnings					218,221				218,221
Dividends declared ($0.420 per share)					(71,365)				(71,365)

Other comprehensive income (loss)							(14,744)		(14,744)
Balance, July 1, 2022	$	169,114	$	770,209	$	912,864	$	(94,913)	$	1,757,274



Three Months Ended June 25, 2021
Balance, March 26, 2021	$	169,413	$	702,829	$	642,259	$	(131,999)	$	1,382,502

Shares issued	254		8,838		—		—		9,092

Stock compensation cost	—		6,304		—		—		6,304

Restricted stock canceled (issued)	—		(2,336)		—		—		(2,336)
Net earnings	—		—		110,118		—		110,118
Dividends declared ($0.188 per share)	—		—		(31,948)		—		(31,948)

Other comprehensive income (loss)	—		—		—		7,531		7,531
Balance, June 25, 2021	$	169,667	$	715,635	$	720,429	$	(124,468)	$	1,481,263



Six Months Ended June 25, 2021
Balance, December 25, 2020	$	168,568	$	671,206	$	568,295	$	(124,165)	$	1,283,904

Shares issued	1,099		34,453		—		—		35,552

Stock compensation cost	—		12,312		—		—		12,312

Restricted stock canceled (issued)	—		(2,336)		—		—		(2,336)
Net earnings	—		—		215,805		—		215,805
Dividends declared ($0.375 per share)	—		—		(63,671)		—		(63,671)

Other comprehensive income (loss)	—		—		—		(303)		(303)
Balance, June 25, 2021	$	169,667	$	715,635	$	720,429	$	(124,468)	$	1,481,263

See notes to consolidated financial statements.

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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 July 1, 2022 and the related statements of earnings, comprehensive income and shareholders' equity for the three and six months ended July 1, 2022 and June 25, 2021, and cash flows for the six months ended July 1, 2022 and June 25, 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 July 1, 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 Ended				Six Months Ended
	July 1, 2022		June 25, 2021		July 1, 2022		June 25, 2021
Net Sales
Industrial	$	158,325	$	144,448	$	302,994	$	274,312
Process	124,483		97,232		239,507		188,605
Contractor	265,739		265,484		500,331		498,376
Total	$	548,547	$	507,164	$	1,042,832	$	961,293
Operating Earnings
Industrial	$	55,201	$	45,709	$	107,831	$	88,067
Process	31,057		21,676		58,545		43,409
Contractor	68,244		73,656		127,191		144,707
Unallocated corporate (expense)	(5,822)		(7,198)		(16,524)		(14,054)

Total	$	148,680	$	133,843	$	277,043	$	262,129

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Assets by segment were as follows (in thousands):


	July 1, 2022		December 31, 2021
Industrial	$	604,654	$	601,843
Process	517,098		436,203
Contractor	658,361		599,726
Unallocated corporate	624,165		805,426
Total	$	2,404,278	$	2,443,198

Geographic information follows (in thousands):


	Three Months Ended				Six Months Ended
	July 1, 2022		June 25, 2021		July 1, 2022		June 25, 2021
Net Sales (based on customer location)
United States	$	296,009	$	263,722	$	551,091	$	495,223
Other countries	252,538		243,442		491,741		466,070
Total	$	548,547	$	507,164	$	1,042,832	$	961,293


	July 1, 2022		December 31, 2021
Long-lived Assets
United States	$	456,238	$	388,835
Other countries	59,918		62,226
Total	$	516,156	$	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 Ended				Six Months Ended
	July 1, 2022		June 25, 2021		July 1, 2022		June 25, 2021
Net earnings available to common shareholders	$	117,378	$	110,118	$	218,221	$	215,805
Weighted average shares outstanding for basic earnings per share	169,128		169,594		169,469		169,271
Dilutive effect of stock options computed using the treasury stock method and the average market price	3,570		4,978		4,219		4,939
Weighted average shares outstanding for diluted earnings per share	172,698		174,572		173,688		174,210
Basic earnings per share	$	0.69	$	0.65	$	1.29	$	1.27
Diluted earnings per share	$	0.68	$	0.63	$	1.26	$	1.24

Stock options to purchase 1,632,000 and 737,000 shares were not included in the July 1, 2022 and June 25, 2021 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

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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, 2021	9,575	$	39.31	7,296	$	33.75
Granted	831	71.73
Exercised	(228)	24.62
Canceled	(24)	43.75
Outstanding, July 1, 2022	10,154	$	42.29	7,809	$	36.06

The Company recognized year-to-date share-based compensation of $12.9 million in 2022 and $13.7 million in 2021. As of July 1, 2022, there was $14.9 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 3.0 years.

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


	Six Months Ended
	July 1, 2022			June 25, 2021
Expected life in years	7.3			7.5
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 319,000 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:


	Six Months Ended
	July 1, 2022			June 25, 2021
Expected life in years	1.0			1.0
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

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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 Ended				Six Months Ended
	July 1, 2022		June 25, 2021		July 1, 2022		June 25, 2021
Pension Benefits
Service cost	$	1,964	$	2,724	$	4,134	$	5,445
Interest cost	2,766		2,976		5,504		5,957
Expected return on assets	(4,777)		(5,131)		(9,579)		(10,261)
Amortization and other	1,419		2,555		2,495		5,106
Net periodic benefit cost	$	1,372	$	3,124	$	2,554	$	6,247
Postretirement Medical
Service cost	$	83	$	175	$	258	$	350
Interest cost	195		250		420		500
Amortization	(2)		250		173		500
Net periodic benefit cost	$	276	$	675	$	851	$	1,350

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 July 1, 2022
Balance, April 1, 2022	$	(59,407)	$	(23,022)	$	(82,429)
Other comprehensive income (loss) before reclassifications	—		(13,532)		(13,532)
Reclassified to pension cost and deferred tax	1,048		—		1,048

Balance, July 1, 2022	$	(58,359)	$	(36,554)	$	(94,913)



Six Months Ended July 1, 2022
Balance, December 31, 2021	$	(60,107)	$	(20,062)	$	(80,169)
Other comprehensive income (loss) before reclassifications	—		(16,492)		(16,492)
Reclassified to pension cost and deferred tax	1,748		—		1,748

Balance, July 1, 2022	$	(58,359)	$	(36,554)	$	(94,913)



Three Months Ended June 25, 2021
Balance, March 26, 2021	$	(111,493)	$	(20,506)	$	(131,999)
Other comprehensive income (loss) before reclassifications	—		5,693		5,693
Reclassified to pension cost and deferred tax	1,838		—		1,838

Balance, June 25, 2021	$	(109,655)	$	(14,813)	$	(124,468)



Six Months Ended June 25, 2021
Balance, December 25, 2020	$	(114,129)	$	(10,036)	$	(124,165)
Other comprehensive income (loss) before reclassifications	—		(4,777)		(4,777)
Reclassified to pension cost and deferred tax	4,474		—		4,474

Balance, June 25, 2021	$	(109,655)	$	(14,813)	$	(124,468)

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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 $361 million and other receivables of $12 million as of July 1, 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):



	July 1, 2022		June 25, 2021
Balance, beginning	$	3,254	$	3,745
Additions (reversals) charged to costs and expenses	3,246		265
Deductions from reserves (1)	(575)		(495)
Other additions (deductions) (2)	(236)		(4)
Balance, ending	$	5,688	$	3,511

(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):


	July 1, 2022		December 31, 2021
Finished products and components	$	197,042	$	166,922
Products and components in various stages of completion	137,268		117,063
Raw materials and purchased components	221,746		185,291
Subtotal	556,056		469,276
Reduction to LIFO cost	(105,082)		(86,975)
Total	$	450,974	$	382,301

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9.Intangible Assets

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


	Finite Life						Indefinite Life
	Customer Relationships		Patents and Proprietary Technology		Trademarks, Trade Names and Other		Trade Names		Total
As of July 1, 2022
Cost	$	202,903	$	26,974	$	1,700	$	62,633	$	294,210
Accumulated amortization	(116,312)		(17,176)		(581)		—		(134,069)
Foreign currency translation	(10,815)		(930)		—		(3,195)		(14,940)
Book value	$	75,776	$	8,868	$	1,119	$	59,438	$	145,201
Weighted average life in years	13		9		5		N/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	13		10		5		N/A

Amortization of intangibles for the quarter was $4.6 million in 2022 and $4.6 million in 2021 and for the year to date was $9.4 million in 2022 and $8.9 million in 2021. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):


	2022 (Remainder)		2023		2024		2025		2026		Thereafter
Estimated Amortization Expense	$	9,253	$	17,309	$	16,076	$	15,511	$	8,915	$	18,699

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	(5,977)		(1,781)		—		(7,758)
Balance, July 1, 2022	$	179,756	$	156,517	$	29,218	$