UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 27, 201931, 2021, or
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to .
Commission File No. 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 No.) | |||||||
| 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 | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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 ☐ No
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of 164,281,638169,657,291 shares of common stock held by non-affiliates of the registrant was $8,243,652,599$12,720,903,679 as of June 28, 201925, 2021.
170,351,046 shares of common stock were outstanding as of February 4, 2020.January 14, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 24, 2020,29, 2022, are incorporated by reference into Part III, as specifically set forth in said Part III.
TABLE OF CONTENTS
| Page | ||||||||
| Part I | ||||||||
| Item 1 | ||||||||
| Item 1A | ||||||||
| Item 1B | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| Part II | ||||||||
| Item | ||||||||
| Item 6 | ||||||||
| Item 7 | ||||||||
| Item 7A | ||||||||
| Item 8 | ||||||||
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) | ||||||||
| Item 9 | ||||||||
| Item 9A | ||||||||
| Item 9B | ||||||||
| Item 9C | ||||||||
| Part III | ||||||||
| Item 10 | ||||||||
| Item 11 | ||||||||
| Item 12 | ||||||||
| Item 13 | ||||||||
| Item 14 | ||||||||
| Part IV | ||||||||
| Item 15 | ||||||||
| ACCESS TO REPORTS | ||
| Investors may obtain access free of charge to the Graco Inc. Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports and amendments to the reports by visiting the Graco website at www.graco.com. These reports will be available as soon as reasonably practicable following electronic filing with, or furnishing to, the Securities and Exchange Commission. | ||
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PART I
Item 1. Business
Graco Inc., together with its subsidiaries (“Graco,” “us,” “we,” or “our Company”), is a multi-national manufacturing company. We supply technology and expertise for the management of fluids and coatings in industrial and commercial applications. We design, manufacture and market systems and equipment used to move, measure, control, dispense and spray fluid and powder materials. Our equipment is used in manufacturing, processing, construction and maintenance industries. Graco is a Minnesota corporation and was incorporated in 1926.
We specialize in providing equipment solutions for difficult-to-handle materials with high viscosities, abrasive or corrosive properties, and multiple component materials that require precise ratio control. We aim to serve niche markets, providing high customer value through product differentiation. Our products enable customers to reduce their use of labor, material and energy, improve quality and achieve environmental compliance.
We make significant investments in developing innovative, high-quality products. We strive to grow into new geographic markets by strategically adding commercial and technical resources and third-party distribution in growing and emerging markets. We have grown our third-party distribution to have specialized experience in particular end-user applications. We leverage our product technologies for new applications and industries.
We also make targeted acquisitions to broaden our product offering, enhance our capabilities in the end-user markets we serve, expand our manufacturing and distribution base and potentially strengthen our geographic presence. These acquisitions may be integrated into existing Graco operations or may be managed as stand-alone operations. We completed business acquisitions in 2019, 20182021, 2020 and 20172019 that were not material to our consolidated financial statements.
We have particularly strong manufacturing, engineering and customer service capabilities that enhance our ability to provide premium customer experience, produce high-quality and reliable products and drive ongoing cost savings.
Our investment in new products, targeted acquisitions and strong manufacturing, engineering and customer service capabilities comprise our long-term growth strategies, which we coordinate and drive across our geographic regions. Values central to our identity - growth, product innovation, premium customer service, quality and continuous improvement - are leveraged to integrate and expand the capabilities of acquired businesses.
We classify our business into three reportable segments, each with a worldwide focus: Industrial, Process and Contractor.
Each segment sells its products in North, Central and South America (the “Americas”), Europe, Middle East and Africa (“EMEA”), and Asia Pacific. Sales in the Americas represent approximately 58 percent of our Company’s total sales. Sales in EMEA represent approximately 2523 percent. Sales in Asia Pacific represent approximately 1719 percent. We provide marketing and product design in each of these geographic regions. Our Company also provides application assistance to distributors and employs sales personnel in each of these geographic regions.
Financial information concerning our segments and geographic markets is set forth in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note B (Segment Information) to the Consolidated Financial Statements of this Form 10-K.
For information about our Company and our products, services and solutions, visit our website at www.graco.com. The information on the website is not part of this report nor any other report filed or furnished to the Securities and Exchange Commission (“SEC”).
Manufacturing and Distribution
We manufacture a majority of our products in the United States (“U.S.”). We also manufacture some of our products in Switzerland (Industrial segment), Italy (Industrial segment), the United Kingdom (Process segment), the People’s Republic of China (“P.R.C.”) (all segments), Belgium (all segments) and Romania (Industrial segment). Our manufacturing is aligned with our business segments and is co-located with product development to accelerate technology improvements and improve our cost structure. We perform critical machining, assembly and testing in-house for most of our products to control quality, improve response time and maximize cost-effectiveness. We make our products in focused factories and product cells. We source raw materials and components from suppliers around the world.
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For all segments, we primarily sell our equipment through third-party distributors worldwide, positioned throughout our geographic regions, and through selected retailers. Our products are sold from our warehouse to our third-party distributors or retailers who sell
our products to end users. Certain of our businesses sell their products directly to end-user customers and have direct relationships with customers.
Outside of the U.S., our subsidiaries located in Australia, Belgium, Japan, Italy, Korea, the P.R.C., the United Kingdom and Brazil distribute our Company’s products. Operations in Maasmechelen, Belgium; St. Gallen, Switzerland; Shanghai, P.R.C.; and Montevideo, UruguayPorto Alegre, Brazil reinforce our commitment to their regions.
Product Development
Our primary product development efforts are carried out in facilities located in Minneapolis, Anoka and Rogers, Minnesota; North Canton, Ohio; St. Gallen, Switzerland; Suzhou and Shanghai, P.R.C.; Dexter, Michigan; Erie, Pennsylvania; Kamas, Utah; and Coventry, and Brighouse, United Kingdom. In 2021, we opened facilities in Dongguan City, P.R.C. and Aachen, Germany, devoted to the support and development of products for electronics assembly, battery and new energy vehicles. The product development and engineering groups focus on new product design, product improvements, and new applications for existing products and technologies for their specific customer base. We continue to enhance our product capabilities with particular emphasis on automation and configurability, easier integration with end-user customer manufacturing and business systems, and increased focus on data and analytics. Our product development efforts focus on bringing new and supplemental return on investment value to end users of our products.products and enhance their ability to manage products and efficiency and support their sustainability initiatives.
Our Company consistently makes significant investments in new products. Total product development expenditures for all segments were $80 million in 2021, $72 million in 2020 and $68 million in 2019, $63 million in 2018 and $59 million in 2017.2019. The amounts invested in product development averaged approximately 4 percent of sales over the last three years. Our product development activities are focused both on upgrades to our current product lines to provide features and benefits that will provide a return on investment to our end-user customers and development of products that will reach into new industries and applications to incrementally grow our sales. Sales of products that refresh and upgrade our product lines are measured and compared with planned results. Sales of products that provide entry into new industries and applications are also measured, with additional focus on commercial resources and activities to build specialized third-party distribution and market acceptance by end users.
Our Company measures the results of acquired businesses as compared to historical results and projections made at the time of acquisition. Our CompanyWe will invest in engineering, manufacturing and commercial resources for these businesses based on expected return on investment.
Business Segments
Industrial Segment
The Industrial segment is our largest segment and represents approximately 4542 percent of our total sales in 2019.2021. It includes the Industrial Products and Applied Fluid Technologies divisions. The Industrial segment markets equipment and solutions for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and vehicle assembly and components production, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles and various other industries. End users often invest in our equipment to gain process efficiencies, improve quality or save on material or energy costs.
Most Industrial segment equipment is sold worldwide through specialized third-party distributors, integrators, design centers, original equipment manufacturers and material suppliers. Some products are sold directly to end users and may include design and installation to specific customer requirements. We work with material suppliers to develop or adapt our equipment for use with specialized or hard-to-handle materials. Distributors promote and sell the equipment, hold
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inventory, provide product application expertise and offer on-site service, technical support and integration capabilities. Integrators implement large individual installations in manufacturing plants where products and services from a number of different manufacturers are aggregated into a single system. Design centers engineer systems for their customers using our products. Original equipment manufacturers incorporate our Company’s Industrial segment products into systems and assemblies that they then supply to their customers.
Applied Fluid Technologies
The Applied Fluid Technologies division designs and sells equipment for use by industrial customers and specialty contractors. This equipment includes two-component proportioning systems that are used to spray polyurethane foam (spray foam) and polyurea coatings. Spray foam is commonly used for insulating building walls, roofs, water heaters, refrigerators, hot tubs and other items. Polyurea coatings are applied on storage tanks, pipes, roofs, truck beds, concrete and other items. We offer a complete line of pumps and proportioning equipment that sprays specialty coatings on a variety of surfaces for protection and fireproofing. This division also manufactures equipment that pumps, meters, mixes and dispenses sealant, adhesive and composite materials. Our advanced composite equipment includes gel-coat equipment, chop and wet-out systems, resin transfer molding systems and applicators and precision dispensing solutions. This equipment bonds, molds, seals, vacuum encapsulates and laminates parts and devices in a wide variety of industrial applications.
Industrial Products
The Industrial Products division makes finishing equipment that applies paint and other coatings to products such as motor vehicles, appliances, furniture and other industrial and consumer products. A majority of this division’s business is outside of North America.
This division’s products include liquid finishing equipment that applies liquids on metals, wood and plastics, with emphasis on solutions that provide easy integration to paint monitoring and control systems. Products include paint circulating and paint supply pumps, paint circulating advanced control systems, plural component coating proportioners, various accessories to filter, transport, agitate and regulate fluid, and spare parts such as spray tips, seals and filter screens. We also offer a variety of applicators that use different methods of atomizing and spraying the paint or other coatings depending on the viscosity of the fluid, the type of finish desired and the need to maximize transfer efficiency, minimize overspray and minimize the release of volatile organic compounds into the air. Manufacturers in the automotive, automotive feeder, commercial and recreational vehicle, military and utility vehicle, aerospace, farm, construction, wood and general metals industries use our liquid finishing products.
This division also makes powder finishing products and systems that coat powder finishing on metals. These products are sold under the Gema® and SAT® brands. Gema powder systems coat window frames, metallic furniture, automotive components and sheet metal. Primary end users of our powder finishing products include manufacturers in the construction, home appliance, automotive component and custom coater industries. We strive to provide innovative solutions in powder coating for end users in emerging and developed markets.
Process Segment
The Process segment represented approximately 2120 percent of our total sales in 2019.2021. It includes our Process, Oil and Natural Gas, and Lubrication divisions. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, lubricants and other fluids. Markets served include food and beverage, dairy, oil and natural gas, pharmaceutical, cosmetics, semi-conductor,semiconductor, electronics, wastewater, mining, fast oil change facilities, service garages, fleet service centers, automobile dealerships and industrial lubrication applications.
Most Process segment equipment is sold worldwide through third-party distributors and original equipment manufacturers. Some products are sold directly to end users, particularly in the oil and natural gas and semi-conductorsemiconductor industries.
Process
Our Process division makes pumps of various technologies that move chemicals, water, wastewater, petroleum, food and other fluids. Manufacturers and processors in the food and beverage, dairy, pharmaceutical, cosmetic, oil and natural gas, semi-conductor,semiconductor, electronics, wastewater, mining and ceramics industries use these pumps. This division makes environmental monitoring and remediation equipment that is used to conduct ground water sampling and ground water remediation, and for landfill liquid and gas management.
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Oil and Natural Gas
Our Oil and Natural Gas division makes high pressure and ultra-high pressure valves used in the oil and natural gas industry, other industrial processes and research facilities. Our high and ultra-high pressure valves are sold directly to end-user customers as well as through distribution worldwide. The division also has a line of chemical injection pumping solutions for precise injection of chemicals into producing oil wells and pipelines and is sold through third-party distributors.
Lubrication
The Lubrication division designs and sells equipment for use in vehicle servicing. We supply pumps, hose reels, meters, valves and accessories for use by fast oil change facilities, service garages, fleet service centers, automobile dealerships, auto parts stores, truck builders and heavy equipment service centers.
The Lubrication division also offers systems, components and accessories for the automatic lubrication of bearings, gears and generators in industrial and commercial equipment, compressors, turbines and on- and off-road vehicles. Automatic lubrication systems reduce maintenance needs and down time and extend the life of the equipment. Industries served include gas transmission, petrochemical, pulp and paper, mining, construction, agricultural equipment, food and beverage, material handling, metal manufacturing, wind energy and oil and natural gas.
Contractor Segment
The Contractor segment represented approximately 3438 percent of our total sales in 2019.2021. Through this segment, we offer sprayers that apply paint to walls and other structures, with product models for users ranging from do-it-yourself homeowners to professional painting contractors. Contractor equipment also includes sprayers that apply texture to walls and ceilings, highly viscous coatings to roofs, and markings on roads, parking lots, athletic fields and floors.
This segment’s end users are primarily professional painters in the construction and maintenance industries, tradesmen and do-it-yourselfers. Contractor products are marketed and sold in all major geographic areas. We continue to add distributors throughout the world that specialize in the sale of Contractor products. Globally, we are pursuing a broad strategy of converting contractors accustomed to manually applying paint and other coatings by brush-and-roller to spray technology.
Our Contractor products are distributed primarily though distributor outlets whose main products are paint and other coatings. Certain sprayers and accessories are distributed globally through the home center channel. Contractor products are also sold through general equipment distributors outside of North America.
2022 Change in Organizational Structure
As previously announced, effective January 1, 2022, our high performance coatings and foam product offerings within the Applied Fluid Technologies division of the Industrial segment were realigned and are now managed under the Contractor segment. High performance coatings and foam equipment includes two-component proportioning systems to spray foam and polyurea coatings, equipment that sprays specialty coatings for protection and fireproofing and vapor-abrasive blasting equipment. Also effective January 1, 2022, our Oil and Natural Gas division is now combined into our Lubrication division, with no impact to Process segment reporting. These changes will allow leadership to address overlap of markets, products, end users and distributors between the businesses.
Segment operating results will be reported under the new organizational structure commencing with the first quarter of 2022, in connection with the effective date of the realignment. Historic segment information restated to conform to the new organizational structure is available as supplemental financial information on the Company’s website at www.graco.com.
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Raw Materials
The primary materials and components in our products are steel of various alloys, sizes and hardness; specialty stainless steel and aluminum bar stock, tubing and castings; tungsten carbide; electric and gas motors; injection molded plastics; sheet metal; forgings; powdered metal; hoses; electronic components and high performance plastics, such as polytetrafluoroethylene (PTFE). The materials and components that we use are generally adequately available through multiple sources of supply. To manage cost, we source significant amounts of materials and components from outside the U.S., primarily in the Asia Pacific region.
In 2019, our2021, we experienced logistical and production constraints associated with raw materialmaterials and purchased components. These constraints were due to limited component availability, was strong. Pressures from tariffs, mostlyreduced freight capacity, shipping delays, and labor shortages. While we were generally able to find alternative suppliers to source raw materials and components for our products as interruptions persisted, these constraints reduced our ability to meet strengthening demand and increased lead times across many of our product lines. Additionally, we experienced price inflation related to raw materials and purchased components. The effects of inflation were most pronounced on metals andmotors, electronics, and increased materialcommodity prices particularly infor materials, such as aluminum, stainless steel, carbon steel bar stock, electronic controls, plastics and copper, increased production cost in 2019.copper. Although pressures from tariffs continuecontinued in 2020,2021, we are workingworked with our supplier base on a variety of opportunities to lessen the effect.
We endeavor to address fluctuations in the price and availability of various materials and components through adjustable surcharges and credits, close management of current suppliers, price negotiations and an intensive search for new suppliers. We have performed risk assessments of our key suppliers, and we factor the risks identified into our commodity plans.
Intellectual Property
We own a number of patents across our segments and have patent applications pending in the U.S. and other countries. We also license our patents to others and are a licensee of patents owned by others. In our opinion, our business is not materially dependent upon any one or more of these patents or licenses. Our Company also owns a number of trademarks in the U.S. and foreign countries, including registered trademarks for “GRACO,” “Gema,” several forms of a capital “G,” and various product trademarks that are material to our business, inasmuch as they identify Graco and our products to our customers.
Competition
We encounter a wide variety of competitors that vary by product, industry and geographic area. Each of our segments generally has several competitors. Our competitors are both U.S. and foreign companies and range in size. We believe that our ability to compete depends upon product quality, product reliability, innovation, design, customer support and service, specialized engineering and competitive pricing. Although no competitor duplicates all of our products, some competitors are larger than our Company, both in terms of sales of directly competing products and in terms of total sales and financial resources. We also face competitors with different cost structures and expectations of profitability, and these companies may offer competitive products at lower prices. We refresh our product line and continue development of our distribution channel to stay competitive. We also face competitors who illegally sell counterfeits of our products or otherwise infringe on our intellectual property rights. WeAs this type of unfair competition grows or evolves, we may have to increase our intellectual property and unfair competition enforcement activities.
Environmental Protection
Our compliance with federal, state and local laws and regulations did not have a material effect upon our capital expenditures, earnings or competitive position during the fiscal year ended December 27, 2019.31, 2021.
As of December 27, 2019,31, 2021, we employed approximately 3,7003,800 persons. Of this total, approximately 1,400 were employees based outside of the U.S., and 1,4001,600 were hourly factory workers in the U.S. None of our Company’s U.S. employees are covered by a collective bargaining agreement. Various national industry-wide labor agreements apply to certain employees in various countries outside of the U.S. Compliance with such agreements has no material effect on our Company or our operations.
The location of the majority of our manufacturing operations within the U.S. allows us to flex employee resources as needed to respond to changes in demand of our business. Our manufacturing, product development, warehouse and
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administrative employees are generally located in the same or adjacent facilities, which we believe contributes to our culture of strong manufacturing, engineering and customer service capabilities.
Health, Wellness & Safety
The personal health and safety of each of our employees is of primary importance. The prevention of occupationally-induced injuries and illnesses is given precedence over operating productivity. Our Health, Wellness and Safety program is designed to increase engagement, reduce absenteeism due to illness or injury, provide healthier lifestyle choices, and reduce health risk factors for our employees.
Our experience with – and ongoing commitment to – workplace health and safety has enabled us to remain operational throughout the COVID-19 pandemic while at the same time protecting the health and safety of our employees and workplace visitors. We have implemented a variety of comprehensive protocols, practices, operational changes, workplace modifications and arrangements. Employees have adapted to evolving conditions and continue to adapt as processes and procedures are adjusted and aligned with public health authority recommendations and requirements.
Total Rewards
Our reward programs connect all employees to the performance and success of the Company. As an employer of choice, we offer pay, benefits and a work environment that attracts and retains high-performing talent. We believe that an effective compensation program must be market competitive as well as fair and equitable. Our compensation program is designed to attract and retain top talent, drive and reward performance and enhance our reputation. Our total rewards program is comprised of various elements, including base pay, variable pay, equity-based compensation for all employees, and health, welfare and retirement benefits.
Talent
To achieve our strategic objectives, it is imperative that we attract, develop and retain qualified personnel. We seek to develop talent from within our organization and supplement our workforce with external hires as necessary. This approach has helped create among our employees an in-depth understanding of our business, products, competition and customers, while also adding new employee ideas and perspectives in support of our continuous improvement initiatives.
Our executive officers responsible for setting overall strategy average nearly 21 years of tenure with us. Tenure of all employees averages nearly 10 years, reflective of our positive workplace culture. Our recruiting team uses internal and external resources to recruit highly skilled and talented workers, and we encourage and reward employee referrals for open positions.
We are committed to maintaining a culture of trust that recognizes the dignity and uniqueness of the individual. We provide equal opportunities for professional growth and advancement based on performance, qualifications, demonstrated skill and achievements. All employees are encouraged, under a continuous improvement program with financial incentives, to submit ideas to improve profitability, quality, safety and environmental practices. New employee orientations and regular ethics training are required for all employees. We complete a biennial survey of our employees to assess our culture, benchmark us against industry leaders, and to make improvements as necessary.
Community
We have a long history of giving back to the communities where we live and work through the volunteer efforts of our employees and the giving efforts of the Graco Foundation. The Graco Foundation’s goal is to help organizations grow their ability to serve community needs through grants focused on capital projects, specific programs and technology needs. The Graco Foundation places emphasis on educational programs, especially STEM (science, technology, engineering and math) programs; human service programs promoting workforce development; and youth development programs. The Graco Foundation also supports several employee-based programs, including dollar-for-dollar gift matching, grants to support volunteerism, scholarships for children of employees, tutoring with a local middle school and an annual Paint-A-Thon that helps low-income seniors and people with permanent disabilities continue to live independently in their own homes.
Item 1A. Risk Factors
As a global manufacturer of systems and equipment designed to move, measure, control, dispense and spray fluid and powder materials, our business is subject to various risks and uncertainties. Below are the most significantrisk factors that could materially and adversely affect our business, financial condition and results of operations.
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COVID-19 Pandemic Risks
The COVID-19 pandemic, the governmental, business and societal responses to the pandemic, and the resulting impacts on global economic activity have adversely affected our business and results of operations, and could have a material and adverse effect on our business, results of operations and financial condition in the future.
The COVID-19 pandemic and related governmental, business and societal responses to the pandemic have had, and may continue to have, an adverse effect on our operations, employees, supply chains, distribution channels, and end-user customers. In response to the pandemic, we invested in and implemented a variety of measures intended to protect the health and safety of our employees. Implementation of these measures impacted the efficiency and productivity of our workforce and our operations, and the continuation or reinstatement of some or all of these measures, or the implementation of new or additional measures, could impact the efficiency and productivity of our workforce and our operations in the future. Our ability to manufacture products and provide related services is dependent on the health, safety and availability of our employees. Notwithstanding the health and safety measures we implemented in response to the pandemic, a number of our employees have been infected with or exposed to COVID-19, and in the future a number of our employees may be infected (or re-infected) with or exposed (or re-exposed) to COVID-19, which has impacted, and in the future may impact, our ability to manufacture products and provide related services in a timely manner. We have experienced, and in the future may experience, certain supply chain disruptions related to the pandemic, including increased costs of raw materials and components, and delays, shortages and difficulties in sourcing raw materials and components. Similarly, we have experienced, and in the future may experience, volatility in demand for certain of our products, inability to meet end-user customer demand, and distribution and logistics challenges, including increased freight costs, reduced freight capacity, and shipping delays. We have also experienced, and in the future may experience, restrictions on our employees’ ability to meet customers in person and the cancellation, postponement and reformatting of trade shows, industry events and product demonstrations, which has impacted, and in the future may impact, our selling activities and our ability to convert those activities into actual sales. Management has focused on mitigating the effects of the COVID-19 pandemic on our employees and our business, which has required a large investment of time, energy and resources. The duration and extent to which management will be required to focus on mitigating the effects of the COVID-19 pandemic on our employees and our business in the future, including complying with existing, new or modified governmental rules, regulations or standards, could require significant additional investment of management’s time, energy and resources.
The extent to which the continuing COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that are uncertain and that we are not able to predict, including: the severity of the virus and new variants of the virus; the duration and scope of the pandemic; the efficacy, distribution and adoption rate of vaccines; whether there are additional waves of the pandemic; whether there are continued increases or spikes in COVID-19 cases in the areas in which we or our suppliers, distributors or end-user customers operate; governmental, business, societal, individual and other actions taken in response to the pandemic; the effect on our suppliers and distributors, and disruptions to the global supply chain; the impact on economic activity; the extent and duration of the impact on consumer and business confidence and spending; the effect on our end-user customers and their demand and buying patterns for our products and services; the effect of any closures or other changes in operations of our and our suppliers’, distributors’ and end-user customers’ facilities; the health of and the effect on our employees and our ability to meet staffing needs in our manufacturing and distribution facilities and other critical functions, particularly if a significant number of employees are absent because they become ill, are quarantined as a result of exposure, are reluctant to show up for work, or resign or are restricted from working as a result of vaccine mandates; our ability to sell our products and services and provide product support, including as a result of travel restrictions, work from home requirements and arrangements, and other restrictions or changes in behavior or preferences for interactions; the effect on employee or Company healthcare costs under our self-insurance programs; restrictions or disruptions to transportation, including reduced availability of ground, sea or air transport; the ability of our distributors and end-user customers to pay for our products and services; the potential effects on our internal controls, including those over financial reporting, as a result of changes in working arrangements that are applicable to our employees and business partners; and the effect on our ability to access capital on favorable terms and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse effects to our business as a result of ongoing or new economic impacts that may occur in the future. The COVID-19 pandemic could also exacerbate or trigger other risks discussed in this report, any of which could have a material and adverse effect on our business, results of operations and financial condition.
Economic, Financial and Political Risks
Economic Environment - Demand for our products depends on the level of commercial and industrial activity worldwide.
An economic downturn or financial market turmoil may depress demand for our equipment in all major geographies and markets. Economic uncertainty and volatility in various geographies may adversely affect our net sales and earnings. If our distributors and original equipment manufacturers are unable to purchase our products because of unavailable credit
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or unfavorable credit terms, depressed end-user demand, or are simply unwilling to purchase our products, our net sales and earnings will be adversely affected. An economic downturn may affect our ability to satisfy the financial covenants in the terms of our financing arrangements.
Currency - Changes in currency translation rates could adversely impact our revenue, earnings and the valuation of assets denominated in foreign currencies.
A significant number of routine transactions are conducted in foreign currencies. Changes in exchange rates will impact our reported sales and earnings and the valuation of assets denominated in foreign currencies. A majority of our manufacturing and cost structure is based in the U.S. In addition, decreased value of local currency may make it difficult for some of our distributors and end users to purchase products.
Political Instability - Uncertainty surrounding political leadership may limit our growth opportunities.
Domestic political instability, including government shut downs, may limit our ability to grow our business. International political instability may prevent us from expanding our business into certain geographies and may also limit our ability to grow our business. Civil disturbances may harm our business.
Pension Plan – Declines in interest rates, asset values and investment returns could significantly increase our pension costs and required pension contributions.
The Company sponsors a qualified defined benefit pension plan for certain U.S. employees and retirees of the Company. The pension plan is funded with trust assets invested in a diversified portfolio of equity, fixed income and other investments. Declines in interest rates, the market value of plan assets, and investment returns could significantly increase our net periodic pension costs and our future pension contribution requirements and adversely affect our results of operations and financial condition.
Strategic Risks
Growth Strategies and Acquisitions - Our growth strategies may not provide the return on investment desired if we are not successful in implementation of these strategies.
Making acquisitions, investing in new products, expanding geographically and targeting new industries are among our growth strategies. We may not obtain the return on investment desired if we are not successful in implementing these growth strategies. The success of our acquisition strategy depends on our ability to successfully identify and properly value suitable acquisition candidates, negotiate appropriate acquisition terms, obtain financing at a reasonable cost, prevail against competing acquirers, complete the acquisitions and integrate or add the acquired businesses into our existing businesses or corporate structure. Once successfully integrated into our existing businesses or added to our corporate structure, the acquired businesses may not perform as planned, be accretive to earnings, generate positive cash flows, provide an acceptable return on investment or otherwise be beneficial to us. We may not realize projected efficiencies and cost-savings from the businesses we acquire. We cannot predict how customers, competitors, suppliers, distributors and employees will react to the acquisitions that we make. Acquisitions may result in the assumption of undisclosed or contingent liabilities, the incurrence of increased indebtedness and expenses, and the diversion of management’s time and attention away from other business matters.matters, any of which may have an adverse affect on our business, results of operations and financial condition. We make significant investments in developing products that have innovative features and differentiated technology in their industries and in niche markets. We are adding to the geographies in which we do business with third-party distributors. We cannot predict whether and when we will be able to realize the expected financial results and accretive effect of the acquisitions that we make, the new products that we develop and the channel expansions that we make.
Competition - Our success depends upon our ability to develop, market and sell new products that meet our customers’ needs, and anticipate industry changes.
Our profitability will be affected if we do not develop new products and technologies that meet our customers’ needs. Our ability to develop, market and sell products that meet our customers’ needs depends upon a number of factors, including anticipating the features and products that our customers will need in the future, identifying and entering into new markets, and training our distributors.distributors, and anticipating market trends. Changes in industries that we serve, including consolidation of competitors, distributors and customers, could affect our success. Increases in the number of competitors, the market reach of competitors, and the quality of competitive products could also affect our success. Price competition and competitor strategies could negatively impact our growth and have an adverse impact on our results of operations.
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Impairment - If acquired businesses do not meet performance expectations, acquired assets 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.
Major Customers - Our Contractor segment depends on a few large customers for a significant portion of its sales. Significant declines in the level of purchases by these customers could reduce our sales and impact segment profitability.
Our Contractor segment derives a significant amount of revenue from a few large customers. Substantial decreases in purchases by these customers, difficulty in collecting amounts due or the loss of their business would adversely affect the profitability of this segment. The business of these customers is dependent upon the economic vitality of the construction and home improvement markets. If these markets decline, the business of our customers could be adversely affected and their purchases of our equipment could decrease which could have an adverse impact on our results of operations.
Variable Industries - Our success may be affected by variations in the construction, automotive, mining and oil and natural gas industries.
Our business may be affected by fluctuations in residential, commercial and institutional building and remodeling activity. Changes in construction materials and techniques may also impact our business. Our business may also be affected by fluctuations of activity in the automotive, mining and oil and natural gas industries.
Operational Risks
Global Sourcing - Risks associated with foreign sourcing, supply interruption, delays in raw material or component delivery, supply shortages and counterfeit components may adversely affect our production or profitability.
We source certain of our materials and components from suppliers outside the U.S., and from suppliers within the U.S. who engage in foreign sourcing. Long lead times or supply interruptions associated with a global supply base may reduce our flexibility and make it more difficult to respond promptly to fluctuations in demand or respond quickly to product quality problems. Changes in exchange rates between the U.S. dollar and other currencies and fluctuations in the price of commoditiesraw materials and components have impacted and may continue to impact the manufacturing costs of our products and affect our profitability. Protective tariffs, unpredictable changes in duty rates, and changes in trade policies, agreements, relations and regulations have made and may continue to make certain foreign-sourced parts no longer competitively priced. Long supply chains may be disrupted by environmental events, public health crises (such as the ongoing COVID-19 pandemic), political or other political factors. Raw materials may become limited in availability from certain regions. Port labor disputesissues may delay shipments. We source a large volume and a variety of electronic components, which exposes us to an increased risk of counterfeit components entering our supply chain. If counterfeit components unknowingly become part of our products, we may need to stop delivery and rework our products. We may be subject to warranty claims and may need to recall products. Shortages, delivery delays and price inflation in a wide variety of raw materials and components (including but not limited to electronic components, castings, engines and motors) and logistical challenges (including but not limited to increased freight costs, shipping container shortages, trucking shortages, ocean, railway and air freight capacity constraints, labor shortages and port delays) have adversely affected production and profitability and may continue to adversely affect production and profitability.
Information Systems - Interruption of or intrusion into information systems may impact our business.
We rely on information systems and networks, including the internet, to conduct and support our business. Some of these systems and networks are managed, hosted and provided by third parties. We use these systems and networks to record, process, summarize, transmit and store electronic information, and to manage or support our business processes and activities. We have implemented measures intended to secure our information systems and networks and prevent unauthorized access to or loss of sensitive data. However, these measures may not be effective against all eventualities, and our information systems and networks may be vulnerable to hacking, human error, fraud or other misconduct, system error, faulty password management or other irregularities. Cybersecurity threats are increasing in frequency, sophistication and severity. We experience cybersecurity threats from time to time, and expect to continue to experience such threats in the future. To date, we have not experienced a material cybersecurity incident. Security breaches or intrusion into our information systems or networks or the information systems or networks of the third parties with whom we do business
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pose a risk to the confidentiality, availability and integrity of our data, and could lead to any one or more of the following: the compromising of confidential information; manipulation, unauthorized use, theft or destruction of data; product defects or malfunctions; production downtimes and operations disruptions; litigation; regulatory action; fines; and other costs and adverse consequences. The occurrence of a security breach or an intrusion into an information system or a network, or the breakdown, interruption in or inadequate upgrading or maintenance of our information processing software, hardware or networks or the internet, may adversely affect our business, reputation, results of operations and financial condition.
Intellectual Property - Demand for our products may be affected by new entrants who copy our products or infringe on our intellectual property. Competitors may allege that our products infringe the intellectual property of others.
From time to time, we have been faced with instances where competitors have infringed or unfairly used our intellectual property or taken advantage of our design and development efforts. The ability to protect and enforce intellectual property rights varies across jurisdictions. Competitors who copy our products are prevalent in Asia. If we are unable to effectively meet these challenges, they could adversely affect our revenues and profits and hamper our ability to grow. Competitors and others may also initiate litigation to challenge the validity of our intellectual property or allege that we infringe their intellectual property. We may be required to pay
substantial damages if it is determined our products infringe their intellectual property. We may also be required to develop an alternative, non-infringing product that could be costly and time-consuming, or acquire a license (if available) on terms that are not favorable to us. Regardless of whether infringement claims against us are successful, defending against such claims could significantly increase our costs, divert management’s time and attention away from other business matters, and otherwise adversely affect our results of operations and financial condition.
Foreign Operations - Conducting business internationally exposes our Company to risks that could harm our business.
In 2019,2021, approximately 49 percent of our sales were generated by customers located outside the United States.U.S. Operating and selling outside of the United StatesU.S. exposes us to certain risks that could adversely impact our sales volume, rate of growth or profitability. These risks include: complying with foreign legal and regulatory requirements; international trade factors (export controls, customs clearance, trade policy, trade sanctions, trade agreements, duties, tariff barriers and other restrictions); protection of our proprietary technology in certain countries; potentially burdensome taxes; potential difficulties staffing and managing local operations; and changes in exchange rates.
Catastrophic Events - Our operations are at risk of damage, destruction or disruption by natural disasters and other unexpected events.
The loss of, or substantial damage to, one of our facilities, our information system infrastructure or the facilities of our suppliers could make it difficult to manufacture product, fulfill customer orders and provide our employees with work. Flooding, tornadoes, hurricanes, unusually heavy precipitation or other severe weather events, earthquakes, tsunamis, fires, explosions, acts of war, terrorism, civil unrest or outbreaks, epidemics or pandemics of infectious diseases (such as the ongoing COVID-19 pandemic) could adversely impact our operations.
Personnel - Our success may be affected if we are not able to attract, develop and retain qualified personnel.
Our success depends in large part on our ability to identify, recruit, develop and retain qualified personnel. If we are unable to successfully identify, recruit, develop and retain qualified personnel or adapt to changing worker expectations and working arrangements, it may be difficult for us to meet our strategic objectives and grow our business, which could adversely affect our results of operations and financial condition.
Legal, Regulatory and Compliance Risks
Changes in Laws and Regulations - Changes may impact how we can do business and the cost of doing business around the world.
Anti-Corruption and Trade Laws - We may incur costs and suffer damages if our employees, agents, distributors or suppliers violate anti-bribery, anti-corruption or trade laws and regulations.
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As a global manufacturer, we are subject to a variety of complex and stringent laws and regulations related to bribery, corruption and trade, and enforcement thereof, are increasing in frequency, complexity and severity on a global basis.trade. The continued geographic expansion of our business increases our exposure to, and cost of complying with, these laws and regulations. If our internal controls and compliance program do not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating anti-bribery, anti-corruption or trade laws and regulations, we may incur defense costs, fines, penalties, reputational damage and business disruptions.
Tax Rates and New Tax Legislation - Changes in tax rates or the adoption of new tax legislation may affect our results of operations, cash flows and financial condition.
The Company is subject to taxes in the U.S. and a number of foreign jurisdictions where it conducts business. The Company’s effective tax rate has been and may continue to be affected by changes in the mix of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws or their interpretation. If the Company’s effective tax rate were to increase, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s results of operations, cash flows and financial condition could be adversely affected.
Legal Proceedings - Costs associated with claims, litigation, administrative proceedings and regulatory reviews, and potentially adverse outcomes, may affect our profitability.
As our Company grows, we are at an increased risk of being a target in matters related to the assertion of claims and demands, litigation, administrative proceedings and regulatory reviews. We may also need to pursue claims or litigation to protect our interests. The cost of pursuing, defending and insuring against such matters appears to beis increasing, particularly in the U.S. Such costs may adversely affect our Company’s profitability. Further, due to adverse changes in costs to insure against such matters, we have increased our self-insured retention and deductibles and procured lower coverage limits under certain policies, which may increase our risk exposure for certain types of claims and adversely affect our profitability if we are ultimately held responsible for such claims. Our businesses expose us to potential toxic tort, product liability, commercial and employment claims. Successful claims against the Company and settlements may adversely affect our results.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our facilities are in satisfactory condition, suitable for their respective uses, and are generally adequate to meet current needs. A description of our principal facilities as of February 18, 2020,22, 2022, is set forth in the chart below.
| Facility | Owned or Leased | Square Footage | Facility Activities | Operating Segment | ||||||||||
| North America | ||||||||||||||
| Rogers, Minnesota, United States | Owned | 782,000 | Manufacturing, warehouse, office and product development | Contractor | ||||||||||
| Minneapolis, Minnesota, United States | Owned | 390,000 | Manufacturing and office | Industrial and Process | ||||||||||
| Rogers, Minnesota, United States | Leased | 268,000 | Distribution center and office | All segments | ||||||||||
| Anoka, Minnesota, United States | Owned | 208,000 | Manufacturing, warehouse, office and product development | Process | ||||||||||
| Sioux Falls, South Dakota, United States | Owned | 203,000 | Manufacturing, warehouse and office | Industrial and Contractor | ||||||||||
| Minneapolis, Minnesota, United States | Owned | 141,000 | Worldwide headquarters; office and product development | Corporate, Industrial and Process | ||||||||||
| North Canton, Ohio, United States | Owned | 131,000 | Manufacturing, warehouse, office and application laboratory | Industrial | ||||||||||
| Pompano Beach, Florida, United States | Leased | 109,000 | Office, assembly and warehouse | Contractor | ||||||||||
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| Erie, Pennsylvania, United States | Owned | 89,000 | Manufacturing, warehouse, office and product development | Process | ||||||||||
| Minneapolis, Minnesota, United States | Owned | 87,000 | Assembly | Industrial and Process | ||||||||||
| Kamas, Utah, United States | Owned | 74,000 | Manufacturing, warehouse, office, product development and test laboratory | Process | ||||||||||
| Dexter, Michigan, United States | Owned | 65,000 | Manufacturing, warehouse, office and product development | Process | ||||||||||
| Indianapolis, Indiana, United States | Owned | 64,000 | Warehouse, office, product development and application laboratory | Industrial | ||||||||||
| Minneapolis, Minnesota, United States | Owned | |||||||||||||
| Fremont, California, United States | Leased | 27,000 | Manufacturing, office and warehouse | Process | ||||||||||||||
| Maasmechelen, Belgium | Owned | 210,000 | EMEA headquarters, warehouse and assembly | All segments | ||||||||||||||
| Leased | ||||||||||||||||||
| St. Gallen, Switzerland | Owned | 82,000 | Manufacturing, warehouse, office, product development and application laboratory | Industrial | ||||||||||||||
| Sibiu, Romania | Leased | 68,000 | Manufacturing | Industrial | ||||||||||||||
| Rödermark, Germany | Leased | 41,000 | Office and warehouse | Industrial | ||||||||||||||
| Coventry, United Kingdom | Owned | 38,000 | Office and assembly | Process | ||||||||||||||
| Verona, Italy | Owned | 31,000 | Office and warehouse | Industrial | ||||||||||||||
| St. Gallen, Switzerland | Leased | Manufacturing | Industrial | |||||||||||||||
| Leased | ||||||||||||||||||
| Shanghai, P.R.C. | Asia Pacific headquarters | All segments | ||||||||||||||||
| Suzhou, P.R.C | Owned | 80,000 | Manufacturing, warehouse, office and product development | |||||||||||||||
| Gyeonggi-do, South Korea | Leased | 33,000 | Office | All segments | ||||||||||||||
| Shanghai, P.R.C. | Leased | 27,000 | Office and warehouse | Industrial | ||||||||||||||
| Derrimut, Australia | Leased | 22,000 | Warehouse | All segments | ||||||||||||||
| Yokohama, Japan | Leased | 19,000 | Office | All segments | ||||||||||||||
Item 3. Legal Proceedings
Our Company is engaged in routine litigation, administrative proceedings and regulatory reviews incident to our business. It is not possible to predict with certainty the outcome of these unresolved matters, but management believes that they will not have a material effect upon our operations or consolidated financial position.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers
The following are all the executive officers of Graco Inc. as of February 18, 2020:
Mark W. Sheahan, 57, became President and Chief Executive Officer in June 2007.2021. From June 2018 to June 2021, he served as Chief Financial Officer and Treasurer. He served aswas Vice President and General Manager, Lubrication EquipmentApplied Fluid Technologies Division from February 2008 until June 2003 to June 2007.2018. He served as Chief Administrative Officer from September 2005 until February 2008, and was Vice President Manufacturing and Distribution OperationsTreasurer from April 2001December 1998 to June 2003. He served as Vice President, Contractor Equipment Division from February 2000September 2005. Prior to April 2001. From September 1999 to February 2000,becoming Treasurer in December 1996, he was Vice President, Lubrication Equipment Division. Prior to September 1999, he held various manufacturing management positions in Minneapolis, Minnesota; Plymouth, Michigan; and Sioux Falls, South Dakota.Manager, Treasury Services. Mr. McHaleSheahan joined the Company in 1989.1995.
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David M. Ahlers, 61,63, became Executive Vice President, Human Resources and Corporate Communications in June 2018. From April 2010 to June 2018, he was Vice President, Human Resources and Corporate Communications. From September 2008 through March 2010, he served as the Company’s Vice President, Human Resources. Prior to joining Graco, Mr. Ahlers held various human resources positions, including, most recently, Chief Human Resources Officer and Senior Managing Director of GMAC Residential Capital from August 2003 to August 2008. HeMr. Ahlers joined the Company in 2008.
Caroline M. Chambers, 55,57, became President, EMEA, in August 2020. From August 2020 to January 2022, she also held the additional role of Executive Vice President, Information Systems. From June 2018 to August 2020, she served as Executive Vice President, Corporate Controller and Information Systems in June 2018.Systems. She has also served as the Company’s principal accounting officer sincefrom September 2007.2007 to August 2020. She was Vice President, Corporate Controller and Information Systems from December 2013 to June 2018. From April 2009 to December 2013, she was Vice President and Corporate Controller. She served as Vice President and Controller from December 2006 to April 2009. She was Corporate Controller from October 2005 to December 2006 and Director of Information Systems from July 2003 through September 2005. Prior to becoming Director of Information Systems, she held various management positions in the internal audit and accounting departments. Prior to joining Graco, Ms. Chambersshe was an auditor with Deloitte & Touche in Minneapolis, Minnesota and Paris, France. Ms. Chambers joined the Company in 1992.
Inge Grasdal, 51, became Executive Vice President, Corporate Development Industrial Products Division. He was Director, Manufacturing Operations, Industrial Products Division fromin January to October 2008. From 2001 to 2008, he was Manufacturing Operations Manager of a variety of Graco business divisions.2022. Prior to joining Graco, he was Vice President Corporate Development at Ecolab Inc., a global provider of water, hygiene and infection prevention solutions and services, from November 2018 to January 2022. Prior to joining Ecolab, he was Senior Director Corporate Development at 3M Company, a diversified global technology company, from 2012 to October 2018. From 2007 to 2012, he was Vice President Investment Banking at Piper Jaffray & Co. Prior to joining Piper Jaffray, he held various roles in finance, consulting and engineering, including most recently as Director of Finance – Analytics at United Health Group from 2003 to 2007. Mr. Eberlein worked as an engineer at Honeywell and at Sheldahl. HeGrasdal joined the Company in 1996.January 2022.
Dale D. Johnson, 65,67, became President, Worldwide Contractor Equipment Division in February 2017. From April 2001 through January 2017, he served as Vice President and General Manager, Contractor Equipment Division. From January 2000 through March 2001, he served as President and Chief Operating Officer. From December 1996 to January 2000, he was Vice President, Contractor Equipment Division. Prior to becoming Director of Marketing, Contractor Equipment Division in June 1996, he held various marketing and sales positions in the Contractor Equipment Division and the Industrial Equipment Division. HeMr. Johnson joined the Company in 1976.
Jeffrey P. Johnson, 60,62, became President, Electric Motor Division in April 2020. From December 2018 to April 2020, he was President, New Ventures in December 2018.Ventures. From June 2018 to December 2018, he was President, EMEA. He served as Vice President and General Manager, EMEA from January 2013 to June 2018. From February 2008 to December 2012, he was Vice President and General Manager, Asia Pacific. He served as Director of Sales and Marketing, Applied Fluid Technologies Division, from June 2006 until February 2008. Prior to joining Graco, he held various sales and marketing positions, including, most recently, President of Johnson Krumwiede Roads, a full-service advertising agency, and European sales manager at General Motors Corp. HeMr. Johnson joined the Company in 2006.
David M. Lowe, 64,66, became Chief Financial Officer and Treasurer in June 2021. From April 2020 until June 2021, he served as President, Worldwide Process Division. He was President, Worldwide Industrial Products Division infrom June 2018.
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2018 to April 2020. From April 2012 to June 2018, he was Executive Vice President, Industrial Products Division. From February 2005 to April 2012, he was Vice President and General Manager, Industrial Products Division. He was Vice President and General Manager, European Operations from September 1999 to February 2005. Prior to becoming Vice President, Lubrication Equipment Division in December 1996, he was Treasurer. Mr. Lowe joined the Company in 1995.
Christian E. Rothe, 46,48, became President, Worldwide Industrial Division in January 2022. From June 2018 to January 2022, he was President, Worldwide Applied Fluid Technologies Division in June 2018.Division. He was Chief Financial Officer and Treasurer from September 2015 to June 2018. From June 2011 through August 2015, he was Vice President and Treasurer. Prior to joining Graco, he held various positions in business development, accounting and finance, including, most recently, at Gardner Denver, Inc. as Vice President, Treasurer from January 2011 to June 2011, Vice President - Finance, Industrial Products Group from October 2008 to January 2011, and Director, Strategic Planning and Development from October 2006 to October 2008. Mr. Rothe joined the Company in 2011.
Timothy R. White, 50,52, became President, EMEAWorldwide Process Division in June 2021. From August 2020 to June 2021, he served as President, White Knight and QED Environmental Systems. From December 2018.2018 to August 2020, he served as President, EMEA. From August 2015 to December 2018, he was President of Q.E.D. Environmental Systems, Inc., a Graco subsidiary. He served as Director of Sales and Marketing, Applied Fluid Technologies Division, from April 2012 to August 2015. From May 2011 to April 2012, he was North American Sales Manager, Applied Fluid Technologies Division. From January 2008 until April 2011, he was Operations Director, Contractor Equipment Division. Prior to January 2008, he held various manufacturing management positions. Mr. White joined the Company in 1992.
Angela F. Wordell, 48,50, became Executive Vice President, Operations in January 2022. From April 2020 to January 2022, she was Executive Vice President, Operations, and President, Worldwide Oil & Natural Gas Division. From December 2018.2018 to April 2020, she was Executive Vice President, Operations. From April 2017 to December 2018, she was Purchasing Director. From January 2017 to April 2017, she served as Strategic Sourcing Director. From March 2010 until January 2017, she was Operations Director, Industrial Products Division and China Factory. From February 2008 until March 2010, she was Operations Manager, Industrial Products Division. Prior to February 2008, she held various manufacturing management and engineering positions. Ms. Wordell joined the Company in 1993.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Graco Common Stock
Graco common stock is traded on the New York Stock Exchange under the ticker symbol “GGG.” As of February 4, 2020January 14, 2022, the share price was $55.28$75.31 and there were 167,916,424170,351,046 shares outstanding and 1,8571,747 common shareholders of record, which includes nominees or broker dealers holding stock on behalf of an estimated 101,000129,352 beneficial owners.
The graph below compares the cumulative total shareholder return on the common stock of the Company for the last five fiscal years with the cumulative total return of the S&P 500 Index and the Dow Jones U.S. Industrial Machinery Index over the same period (assuming the value of the investment in Graco common stock and each index was $100 on December 31, 2014,2016, and all dividends were reinvested).
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||||||||||||||||
| Dow Jones U.S. Industrial Machinery | 100 | 133 | 114 | 155 | 180 | 223 | |||||||||||||||||||||||||||||
| S&P 500 | 100 | 122 | 116 | 153 | 181 | 233 | |||||||||||||||||||||||||||||
| Graco Inc. | 100 | 166 | 152 | 196 | 277 | 310 | |||||||||||||||||||||||||||||
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| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||
| Dow Jones U.S. Industrial Machinery | 100 | 88 | 119 | 158 | 135 | 185 | |||||
| S&P 500 | 100 | 101 | 114 | 138 | 132 | 174 | |||||
| Graco Inc. | 100 | 92 | 106 | 175 | 161 | 207 | |||||
Issuer Purchases of Equity Securities
On April 24, 2015, the Board of Directors authorized the purchase of up to 18 million shares of common stock, primarily through open market transactions. There were approximately 3.3 million shares remaining under the authorization on December 7, 2018, when the Board of Directors authorized the purchase of up to an additional 18 million shares. The authorizations are for an indefinite period of time or until terminated by the Board.
In addition to shares purchased under the Board authorization, 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 stock options or vesting of restricted stock.
Information on issuer purchases of equity securities follows:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (at end of period) | ||||||||||||||||||||||
| Sep 25, 2021 - Oct 29, 2021 | — | $ | — | — | 18,517,834 | |||||||||||||||||||||
| Oct 30, 2021 - Nov 26, 2021 | — | $ | — | — | 18,517,834 | |||||||||||||||||||||
| Nov 27, 2021 - Dec 31, 2021 | — | $ | — | — | 18,517,834 | |||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (at end of period) | |||||||||
| September 28, 2019 - October 25, 2019 | 94,597 | $ | 44.44 | 94,597 | 20,847,631 | ||||||||
| October 26, 2019 - November 22, 2019 | 3,500 | $ | 45.02 | 3,500 | 20,844,131 | ||||||||
| November 23, 2019 - December 27, 2019 | — | $ | — | — | 20,844,131 | ||||||||
Item 6. Selected Financial Data[Reserved]
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| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Net sales | $ | 1,646.0 | $ | 1,653.3 | $ | 1,474.7 | $ | 1,329.3 | $ | 1,286.5 | |||||||||
| Net earnings | 343.9 | 341.1 | 252.4 | 40.7 | 345.7 | ||||||||||||||
Per common share(1) | |||||||||||||||||||
| Basic net earnings | $ | 2.06 | $ | 2.04 | $ | 1.50 | $ | 0.24 | $ | 2.00 | |||||||||
| Diluted net earnings | 2.00 | 1.97 | 1.45 | 0.24 | 1.95 | ||||||||||||||
| Cash dividends declared | 0.66 | 0.56 | 0.49 | 0.45 | 0.41 | ||||||||||||||
| Total assets | $ | 1,692.2 | $ | 1,472.7 | $ | 1,390.6 | $ | 1,243.1 | $ | 1,391.4 | |||||||||
| Long-term debt (including current portion) | 164.3 | 266.4 | 226.0 | 305.7 | 392.7 | ||||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s consolidated results of operations, financial condition and liquidity. This discussion should be read in conjunction with our financial statements and the accompanying notes to the financial statements. Certain prior year disclosures have been revised to conform with current year reporting. The discussion is organized in the following sections:
Overview
Graco designs, manufactures and markets systems and equipment used to move, measure, control, dispense and spray fluid and powder materials. The Company specializes in equipment for applications that involve difficult-to-handle materials with high viscosities, materials with abrasive or corrosive properties and multiple-component materials that require precise ratio control. Graco sells primarily through independent third-party distributors worldwide to industrial and contractor end users. Graco’s business is classified by management into three reportable segments: Industrial, Process and Contractor. Each segment is responsible for product development, manufacturing, marketing and sales of their products.
Graco’s 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. Long-term financial growth targets accompany these strategies, including our expectation of 10 percent revenue growth and 12 percent consolidated net earnings growth.growth per annum. We continue to develop new products in each operating division that are expected to drive incremental sales growth, as well as continued refreshes and upgrades of existing product lines. Graco has made a number of strategic acquisitions that expand and complement organically developed products and provide new market and channel opportunities.
Manufacturing is a key competency of the Company. Our management team in Minneapolis provides strategic manufacturing expertise, and is also responsible for factories not fully aligned with a single division. Our largest manufacturing facilities are in the U.S. We also manufacture some of our products in Switzerland (Industrial segment), Italy (Industrial segment), the United Kingdom (Process segment), the People’s Republic of China (“P.R.C.”) (all segments), Belgium (all segments) and Romania (Industrial segment). Our primary distribution facilities are located in the U.S., Belgium, Switzerland, United Kingdom, P.R.C., Japan, Italy, Korea, Australia and Brazil.
The ongoing global COVID-19 pandemic and related governmental, business and societal responses continue to have an impact on our operations, supply chains, distribution channels, and end-user customers. The timing, duration, and extent of the impact from the pandemic in our major geographies is still uncertain and we cannot predict the magnitude of the impact to the results of our operations or financial position.
In 2021, the Company experienced logistical and production constraints associated with raw materials and purchased components. These constraints were due to limited raw material and component availability, reduced freight capacity, shipping delays, and labor shortages as a result of responses to the COVID-19 pandemic and other supply chain disruptions. We also experienced the effects of price inflation related to raw materials, purchased components, and freight and transportation costs. The supply chain disruptions and associated effects of inflation have adversely impacted profitability in the near-term and limited our ability to satisfy strengthening customer demand, especially within our high-volume Contractor segment. We expect these challenges to continue into at least the first half of 2022.
Results of Operations
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A summary of financial results follows (in millions except per share amounts):
| 2021 | 2020 | ||||||||||
| Net Sales | $ | 1,987.6 | $ | 1,650.1 | |||||||
| Operating Earnings | 531.3 | 391.7 | |||||||||
| Net Earnings | 439.9 | 330.5 | |||||||||
| Diluted Net Earnings per Common Share | $ | 2.52 | $ | 1.92 | |||||||
Adjusted (non-GAAP)(1): | |||||||||||
| Net Earnings, adjusted | 425.7 | 335.2 | |||||||||
| Diluted Net Earnings per Common Share, adjusted | $ | 2.44 | $ | 1.95 | |||||||
(1) Excludes impacts of pension settlement loss, prior year impairment, excess tax benefits from stock option exercises and certain non-recurring income tax provision adjustments. See adjusted financial results below for a reconciliation of the adjusted non-GAAP financial measures to GAAP.
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| 2019 | 2018 | 2017 | |||||||||
| Net Sales | $ | 1,646.0 | $ | 1,653.3 | $ | 1,474.7 | |||||
| Operating Earnings | 424.5 | 436.4 | 378.7 | ||||||||
| Net Earnings | 343.9 | 341.1 | 252.4 | ||||||||
| Diluted Net Earnings per Common Share | $ | 2.00 | $ | 1.97 | $ | 1.45 | |||||
Adjusted (non-GAAP)(1): | |||||||||||
| Net Earnings, adjusted | 325.4 | 326.1 | 249.4 | ||||||||
| Diluted Net Earnings per Common Share, adjusted | $ | 1.90 | $ | 1.88 | $ | 1.43 | |||||
Multiple events in the last threetwo years caused significant fluctuations in financial results. The restructuring of the Company’s funded U.S. pension plan resulted inOther expense for 2021 included a $12 million non-cash pension settlement loss in 2017. U.S. federal income tax reform legislation passed atloss. In 2020, operating expenses included $35 million of non-cash impairment charges related to the endsale of 2017 required a revaluation of net deferred tax assets and instituted a toll charge on unrepatriated foreign earnings that together increased income taxes by a total of $36 million in 2017.the Company's U.K.-based valve business (Alco). Excess tax benefits related to stock option exercises reduced income taxes by $10$12 million in both 20192021 and 2018, and $36$21 million in 2017.2020. Other benefits from tax planning activities further reduced income taxes in 2019, 20182021 and 2017.2020. Excluding the impacts of those items presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements of adjusted operating earnings, earnings before income taxes, income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):
| 2021 | 2020 | ||||||||||
| Operating earnings, as reported | $ | 531.3 | $ | 391.7 | |||||||
| Impairment | — | 35.2 | |||||||||
| Operating earnings, adjusted | $ | 531.3 | $ | 426.9 | |||||||
| Earnings before income taxes, as reported | $ | 508.5 | $ | 374.7 | |||||||
| Impairment | — | 35.2 | |||||||||
| Pension settlement loss | 12.0 | — | |||||||||
| Earnings before income taxes, adjusted | $ | 520.5 | $ | 409.9 | |||||||
| Income taxes, as reported | $ | 68.6 | $ | 44.2 | |||||||
| Impairment tax benefit | — | 1.2 | |||||||||
| Pension settlement tax effect | 2.5 | — | |||||||||
| Excess tax benefit from option exercises | 11.5 | 21.3 | |||||||||
| Other non-recurring tax benefit | 12.2 | 8.0 | |||||||||
| Income taxes, adjusted | $ | 94.8 | $ | 74.7 | |||||||
| Effective income tax rate | |||||||||||
| As reported | 13.5 | % | 11.8 | % | |||||||
| Adjusted | 18.2 | % | 18.2 | % | |||||||
| Net Earnings, as reported | $ | 439.9 | $ | 330.5 | |||||||
| Impairment, net | — | 34.0 | |||||||||
| Pension settlement loss, net | 9.5 | — | |||||||||
| Excess tax benefit from option exercises | (11.5) | (21.3) | |||||||||
| Other non-recurring tax benefit | (12.2) | (8.0) | |||||||||
| Net Earnings, adjusted | $ | 425.7 | $ | 335.2 | |||||||
| Weighted Average Diluted Shares | 174.5 | 172.0 | |||||||||
| Diluted Net Earnings per Share | |||||||||||
| As reported | $ | 2.52 | $ | 1.92 | |||||||
| Adjusted | $ | 2.44 | $ | 1.95 | |||||||
22
| 2019 | 2018 | 2017 | |||||||||
| Earnings before income taxes, as reported | $ | 405.9 | $ | 410.8 | $ | 347.1 | |||||
| Pension settlement loss | — | — | 12.1 | ||||||||
| Earnings before income taxes, adjusted | $ | 405.9 | $ | 410.8 | $ | 359.2 | |||||
| Income taxes, as reported | $ | 62.0 | $ | 69.7 | $ | 94.7 | |||||
| Excess tax benefit from option exercises | 10.4 | 10.0 | 36.3 | ||||||||
| Income tax reform | — | — | (35.6 | ) | |||||||
| Other non-recurring tax changes | 8.1 | 5.0 | 10.0 | ||||||||
| Tax effects of adjustments | — | — | 4.4 | ||||||||
| Income taxes, adjusted | $ | 80.5 | $ | 84.7 | $ | 109.8 | |||||
| Effective income tax rate | |||||||||||
| As reported | 15.3 | % | 17.0 | % | 27.3 | % | |||||
| Adjusted | 19.8 | % | 20.6 | % | 30.6 | % | |||||
| Net Earnings, as reported | $ | 343.9 | $ | 341.1 | $ | 252.4 | |||||
| Pension settlement loss, net | — | — | 7.7 | ||||||||
| Excess tax benefit from option exercises | (10.4 | ) | (10.0 | ) | (36.3 | ) | |||||
| Income tax reform | — | — | 35.6 | ||||||||
| Other non-recurring tax changes | (8.1 | ) | (5.0 | ) | (10.0 | ) | |||||
| Net Earnings, adjusted | $ | 325.4 | $ | 326.1 | $ | 249.4 | |||||
| Weighted Average Diluted Shares | 171.6 | 173.2 | 174.3 | ||||||||
| Diluted Net Earnings per Share | |||||||||||
| As reported | $ | 2.00 | $ | 1.97 | $ | 1.45 | |||||
| Adjusted | $ | 1.90 | $ | 1.88 | $ | 1.43 | |||||
Components of Net Earnings as a Percentage of Sales:
The following table presents an overview of components of net earnings as a percentage of net sales:
| 2021 | 2020 | ||||||||||
| Net Sales | 100.0 | % | 100.0 | % | |||||||
| Cost of products sold | 48.0 | 48.2 | |||||||||
| Gross profit | 52.0 | 51.8 | |||||||||
| Product development | 4.0 | 4.4 | |||||||||
| Selling, marketing and distribution | 13.7 | 13.4 | |||||||||
| General and administrative | 7.6 | 8.2 | |||||||||
| Impairment | — | 2.1 | |||||||||
| Operating earnings | 26.7 | 23.7 | |||||||||
| Interest expense | 0.5 | 0.7 | |||||||||
| Other expense, net | 0.6 | 0.3 | |||||||||
| Earnings before income taxes | 25.6 | 22.7 | |||||||||
| Income taxes | 3.5 | 2.7 | |||||||||
| Net Earnings | 22.1 | % | 20.0 | % | |||||||
| Net Earnings, adjusted (see non-GAAP measurements above) | 21.4 | % | 20.3 | % | |||||||
| 2019 | 2018 | 2017 | ||||||
| Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
| Cost of products sold | 47.8 | 46.6 | 46.1 | |||||
| Gross profit | 52.2 | 53.4 | 53.9 | |||||
| Product development | 4.1 | 3.8 | 4.0 | |||||
| Selling, marketing and distribution | 14.2 | 14.9 | 15.7 | |||||
| General and administrative | 8.1 | 8.3 | 8.5 | |||||
| Operating earnings | 25.8 | 26.4 | 25.7 | |||||
| Interest expense | 0.8 | 0.9 | 1.1 | |||||
| Other expense, net | 0.3 | 0.7 | 1.1 | |||||
| Earnings before income taxes | 24.7 | 24.8 | 23.5 | |||||
| Income taxes | 3.8 | 4.2 | 6.4 | |||||
| Net Earnings | 20.9 | % | 20.6 | % | 17.1 | % | ||
| Net Earnings, adjusted (see non-GAAP measurements above) | 19.8 | % | 19.7 | % | 16.9 | % | ||
Net Sales
The following table presents net sales by geographic region (in millions):
| 2021 | 2020 | ||||||||||
Americas(1) | $ | 1,150.2 | $ | 996.5 | |||||||
EMEA(2) | 464.1 | 371.8 | |||||||||
| Asia Pacific | 373.3 | 281.8 | |||||||||
| Consolidated | $ | 1,987.6 | $ | 1,650.1 | |||||||
| 2019 | 2018 | 2017 | |||||||||
Americas(1) | $ | 960.8 | $ | 926.4 | $ | 850.5 | |||||
EMEA(2) | 406.5 | 393.1 | 343.3 | ||||||||
| Asia Pacific | 278.7 | 333.8 | 280.9 | ||||||||
| Consolidated | $ | 1,646.0 | $ | 1,653.3 | $ | 1,474.7 | |||||
(2)Europe, Middle East and Africa |
The following table presents the components of net sales change by geographic region:
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Volume and Price | Acquisitions/Divestitures | Currency | Total | Volume and Price | Acquisitions/Divestitures | Currency | Total | ||||||||||||||||||||||||||||||||||||||||
| Americas | 15% | 0% | 0% | 15% | 3% | 1% | 0% | 4% | |||||||||||||||||||||||||||||||||||||||
| EMEA | 21% | 0% | 4% | 25% | (11)% | 1% | 1% | (9)% | |||||||||||||||||||||||||||||||||||||||
| Asia Pacific | 30% | (3)% | 6% | 33% | (1)% | 2% | 0% | 1% | |||||||||||||||||||||||||||||||||||||||
| Consolidated | 19% | 0% | 1% | 20% | (1)% | 1% | 0% | 0% | |||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||
| Volume and Price | Acquisitions | Currency | Total | Volume and Price | Acquisitions | Currency | Total | ||||||||
| Americas | 4% | 0% | 0% | 4% | 8% | 1% | 0% | 9% | |||||||
| EMEA | 7% | 1% | (5)% | 3% | 4% | 7% | 4% | 15% | |||||||
| Asia Pacific | (15)% | 1% | (3)% | (17)% | 13% | 4% | 2% | 19% | |||||||
| Consolidated | 1% | 0% | (1)% | 0% | 8% | 3% | 1% | 12% | |||||||
Gross Profit
Gross profit margin rate for 2018 was2021 increased slightly lower thancompared to 2020, as increased volume, realized pricing and favorable changes in currency translation rates were able to offset higher product costs due to supply chain disruptions and the rate for 2017. The unfavorable effects of lower margin ratesinflation.
23
Operating Expenses
Total operating expenses for 2021 were $39 million higher than 2020, including the non-cash impairment charge of $35 million in 2020. Excluding the impairment charge, total operating expenses for 2021 increased $75 million. This increase includes $29 million of increases in sales and higher factory spending and material costs more than offset the favorable effects ofearnings-based expenses, $5 million related to foreign currency translation, and realized pricing.
Operating Earnings
Operating earnings in 2019 decreased 3 percent compared to 2018 as expense reductions did not fully offset the effects of lower sales and margin rates.
Other Expense
Other expense for 2021 included market-baseda non-cash pension costsettlement loss of $5$12 million in 2019, $8 million in 2018 and $18 million in 2017, including a $12 million loss relatedconnection with the transfer of certain pension obligations to the restructuring of the Company’s funded U.S. pension plan.an insurance company. Other expense also included exchange lossesincreased $7 million for 2021 as favorable market valuation changes on net assets of foreign operations of $2 million in 2019 and $3 million in 2018, and gains of $2 million in 2017.investments held to fund certain retirement benefits liabilities partially offset the pension settlement loss.
Income Taxes
The effective income tax rate for 2021 was 1513 percent, for 2019, down approximately 2up 1 percentage pointspoint from 2018. Revaluation of deferred taxes pursuant2020. The increase was primarily due to a tax rate changedecrease in a foreign jurisdiction and an increase in non-recurring benefits from other tax planning activities drove the decrease.
Segment Results
The Company has six operating segments which are aggregated into three reportable segments: Industrial, Process and Contractor. Refer to Part I Item 1. Business, for a description of the Company’s three reportable segments. Management assesses performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments.
The following table presents net sales and operating earnings by reporting segment (in millions):
| 2021 | 2020 | ||||||||||
| Sales | |||||||||||
| Industrial | $ | 840.3 | $ | 677.7 | |||||||
| Process | 397.6 | 326.1 | |||||||||
| Contractor | 749.7 | 646.3 | |||||||||
| Total | $ | 1,987.6 | $ | 1,650.1 | |||||||
| Operating Earnings | |||||||||||
| Industrial | $ | 296.5 | $ | 226.6 | |||||||
| Process | 91.0 | 64.5 | |||||||||
| Contractor | 169.5 | 164.5 | |||||||||
Unallocated corporate (expense) (1) | (25.7) | (28.7) | |||||||||
| Impairment | $ | — | $ | (35.2) | |||||||
| Total | $ | 531.3 | $ | 391.7 | |||||||
(1) Unallocated corporate (expense) includes such items as stock compensation, certain acquisition transaction items, bad debt expense, charitable contributions, and certain facility expenses.
24
| 2019 | 2018 | 2017 | |||||||||
| Sales | |||||||||||
| Industrial | $ | 747.4 | $ | 781.0 | $ | 692.0 | |||||
| Process | 344.9 | 338.0 | 294.6 | ||||||||
| Contractor | 553.7 | 534.3 | 488.1 | ||||||||
| Total | $ | 1,646.0 | $ | 1,653.3 | $ | 1,474.7 | |||||
| Operating Earnings | |||||||||||
| Industrial | $ | 247.2 | $ | 271.3 | $ | 237.7 | |||||
| Process | 76.4 | 68.5 | 52.2 | ||||||||
| Contractor | 128.3 | 120.9 | 113.9 | ||||||||
Unallocated corporate (expense) (1) | (27.4 | ) | (24.3 | ) | (25.1 | ) | |||||
| Total | $ | 424.5 | $ | 436.4 | $ | 378.7 | |||||
Industrial Segment
The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment (dollars in millions):
| 2021 | 2020 | ||||||||||
| Sales | |||||||||||
| Americas | $ | 354.5 | $ | 294.4 | |||||||
| EMEA | 256.6 | 207.1 | |||||||||
| Asia Pacific | 229.2 | 176.2 | |||||||||
| Total | $ | 840.3 | $ | 677.7 | |||||||
| Operating Earnings as a Percentage of Sales | 35 | % | 33 | % | |||||||
| 2019 | 2018 | 2017 | |||||||||
| Sales | |||||||||||
| Americas | $ | 324.3 | $ | 314.9 | $ | 299.5 | |||||
| EMEA | 240.1 | 234.3 | 199.2 | ||||||||
| Asia Pacific | 183.0 | 231.8 | 193.3 | ||||||||
| Total | $ | 747.4 | $ | 781.0 | $ | 692.0 | |||||
| Operating Earnings as a Percentage of Sales | 33 | % | 35 | % | 34 | % | |||||
The following table presents the components of net sales change by geographic region for the Industrial segment:
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Volume and Price | Acquisitions | Currency | Total | Volume and Price | Acquisitions | Currency | Total | ||||||||||||||||||||||||||||||||||||||||
| Americas | 20% | 0% | 0% | 20% | (9)% | 0% | 0% | (9)% | |||||||||||||||||||||||||||||||||||||||
| EMEA | 19% | 2% | 3% | 24% | (15)% | 0% | 1% | (14)% | |||||||||||||||||||||||||||||||||||||||
| Asia Pacific | 25% | 0% | 5% | 30% | (4)% | 0% | 0% | (4)% | |||||||||||||||||||||||||||||||||||||||
| Segment Total | 21% | 1% | 2% | 24% | (10)% | 0% | 1% | (9)% | |||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||
| Volume and Price | Acquisitions | Currency | Total | Volume and Price | Acquisitions | Currency | Total | ||||||||
| Americas | 3% | 0% | 0% | 3% | 5% | 0% | 0% | 5% | |||||||
| EMEA | 7% | 0% | (5)% | 2% | 3% | 11% | 4% | 18% | |||||||
| Asia Pacific | (19)% | 0% | (2)% | (21)% | 12% | 6% | 2% | 20% | |||||||
| Segment Total | (2)% | 0% | (2)% | (4)% | 6% | 5% | 2% | 13% | |||||||
Improved worldwide economic activity drove Industrial segment sales declined in 2019 as weakness in worldwide manufacturing markets more than offset the impact of strong finishing system sales in EMEA. Automotive project demand was down substantially,higher for 2021, particularly in Asia Pacific,general industry, construction, automotive, electrical equipment and uncertainty around trade wars caused many manufacturers to postpone factory investments. Operatingalternative energy end markets. For 2021, the operating margin rate in this segment decreased compared to 2018increased as thehigher production volume, favorable effects ofproduct and channel mix and realized pricing were more thanable to offset by the adverse impacts of higher material costs, lower sales and factory volume, product and channel mix, and currency translation.costs.
In this segment, sales in each geographic region are significant and management looks at economic and financial indicators in each region, including gross domestic product, industrial production, capital investment rates, automobile production, building construction and the level of the U.S. dollar versus the euro, the Swiss franc, the Canadian dollar, the Chinese renminbi and various other Asian currencies.
Process Segment
The following table presents net sales and operating earnings as a percentage of sales for the Process segment (dollars in millions):
| 2021 | 2020 | ||||||||||
| Sales | |||||||||||
| Americas | $ | 242.7 | $ | 206.4 | |||||||
| EMEA | 60.1 | 53.1 | |||||||||
| Asia Pacific | 94.8 | 66.6 | |||||||||
| Total | $ | 397.6 | $ | 326.1 | |||||||
| Operating Earnings as a Percentage of Sales | 23 | % | 20 | % | |||||||
25
| 2019 | 2018 | 2017 | |||||||||
| Sales | |||||||||||
| Americas | $ | 222.2 | $ | 215.9 | $ | 187.6 | |||||
| EMEA | 61.5 | 58.5 | 56.0 | ||||||||
| Asia Pacific | 61.2 | 63.6 | 51.0 | ||||||||
| Total | $ | 344.9 | $ | 338.0 | $ | 294.6 | |||||
| Operating Earnings as a Percentage of Sales | 22 | % | 20 | % | 18 | % | |||||
The following table presents the components of net sales change by geographic region for the Process segment:
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Volume and Price | Acquisitions/Divestitures | Currency | Total | Volume and Price | Acquisitions/Divestitures | Currency | Total | ||||||||||||||||||||||||||||||||||||||||
| Americas | 17% | 0% | 1% | 18% | (10)% | 3% | 0% | (7)% | |||||||||||||||||||||||||||||||||||||||
| EMEA | 14% | (5)% | 4% | 13% | (19)% | 5% | 0% | (14)% | |||||||||||||||||||||||||||||||||||||||
| Asia Pacific | 48% | (10)% | 5% | 43% | (2)% | 11% | 0% | 9% | |||||||||||||||||||||||||||||||||||||||
| Segment Total | 23% | (3)% | 2% | 22% | (10)% | 5% | 0% | (5)% | |||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||
| Volume and Price | Acquisitions | Currency | Total | Volume and Price | Acquisitions | Currency | Total | ||||||||
| Americas | 3% | 0% | 0% | 3% | 14% | 1% | 0% | 15% | |||||||
| EMEA | 3% | 5% | (3)% | 5% | 1% | 0% | 3% | 4% | |||||||
| Asia Pacific | (5)% | 4% | (3)% | (4)% | 23% | 1% | 1% | 25% | |||||||
| Segment Total | 1% | 2% | (1)% | 2% | 13% | 1% | 1% | 15% | |||||||
The Process segment had strongorganic sales growth in all product applications in 2018,2021, reflecting favorable conditions in many end markets, such as vehicle services, industrial pumps, industrial lubrication, environmental, semi-conductors mining and some recovery in oil and natural gas. New product introductions also contributed to sales growth.mining. Operating margin raterates for this segment improved by 23 percentage points driven by higher salesfor 2021, as increased production volume and expense leverage.leverage more than offset the adverse effects of higher product costs and increased sales and earnings-based expenses.
Although the Americas represent the substantial majority of sales for the Process segment, and indicators in that region are the most significant, management monitors indicators such as levels of gross domestic product, capital investment, industrial production, oil and natural gas markets and mining activity worldwide.
Contractor Segment
The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment (dollars in millions):
| 2021 | 2020 | ||||||||||
| Sales | |||||||||||
| Americas | $ | 553.0 | $ | 495.7 | |||||||
| EMEA | 147.4 | 111.6 | |||||||||
| Asia Pacific | 49.3 | 39.0 | |||||||||
| Total | $ | 749.7 | $ | 646.3 | |||||||
| Operating Earnings as a Percentage of Sales | 23 | % | 25 | % | |||||||
| 2019 | 2018 | 2017 | |||||||||
| Sales | |||||||||||
| Americas | $ | 414.3 | $ | 395.6 | $ | 363.4 | |||||
| EMEA | 104.9 | 100.4 | 88.1 | ||||||||
| Asia Pacific | 34.5 | 38.3 | 36.6 | ||||||||
| Total | $ | 553.7 | $ | 534.3 | $ | 488.1 | |||||
| Operating Earnings as a Percentage of Sales | 23 | % | 23 | % | 23 | % | |||||
The following table presents the components of net sales change by geographic region for the Contractor segment:
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Volume and Price | Acquisitions | Currency | Total | Volume and Price | Acquisitions | Currency | Total | ||||||||||||||||||||||||||||||||||||||||
| Americas | 11% | 0% | 1% | 12% | 20% | 0% | 0% | 20% | |||||||||||||||||||||||||||||||||||||||
| EMEA | 28% | 0% | 4% | 32% | 5% | 0% | 1% | 6% | |||||||||||||||||||||||||||||||||||||||
| Asia Pacific | 21% | 0% | 6% | 27% | 14% | 0% | (1)% | 13% | |||||||||||||||||||||||||||||||||||||||
| Segment Total | 15% | 0% | 1% | 16% | 17% | 0% | 0% | 17% | |||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||
| Volume and Price | Acquisitions | Currency | Total | Volume and Price | Acquisitions | Currency | Total | ||||||||
| Americas | 5% | 0% | 0% | 5% | 8% | 1% | 0% | 9% | |||||||
| EMEA | 9% | 0% | (5)% | 4% | 10% | 0% | 4% | 14% | |||||||
| Asia Pacific | (6)% | 0% | (4)% | (10)% | 4% | 0% | 1% | 5% | |||||||
| Segment Total | 5% | 0% | (1)% | 4% | 8% | 1% | 0% | 9% | |||||||
Contractor segment sales growthincreased for the quarter and year due to continued strength in 2019, with favorable response to new product offeringsNorth American construction markets and the on-going favorable construction environmentimproved demand in the AmericasEMEA and EMEA. Operating margin rate was consistent with the 2018 rate.
In this segment, sales in all regions are significant and management reviews economic and financial indicators in each region, including levels of residential, commercial and institutional construction, remodeling rates and interest rates. Management also reviews gross domestic product for the regions and the level of the U.S. dollar versus the euro and other currencies.
26
Financial Condition and Cash Flow
Working Capital. The following table highlights several key measures of asset performance (dollars in millions):
| 2021 | 2020 | ||||||||||
| Working capital | $ | 856.8 | $ | 702.4 | |||||||
| Current ratio | 2.7 | 3.2 | |||||||||
| Days of sales in receivables outstanding | 60 | 64 | |||||||||
| Inventory turnover (LIFO) | 2.8 | 2.8 | |||||||||
| 2019 | 2018 | ||||||
| Working capital | $ | 506.1 | $ | 423.4 | |||
| Current ratio | 2.8 | 2.4 | |||||
| Days of sales in receivables outstanding | 59 | 60 | |||||
| Inventory turnover (LIFO) | 2.7 | 2.9 | |||||
Higher cash and cash equivalent balances primarily drove the increases in working capital andin 2021. The current ratio. Decreasesratio decreased primarily due to a change in classification of a debt obligation from long-term to current. The debt obligation was repaid subsequent to December 31, 2021 (See Note F, Debt).
Increases in accounts receivable and inventories were consistent with higher sales levels and salesinventories increased to meet higher demand and earnings based accruals also decreased.service levels.
Capital Structure. At December 27, 2019,31, 2021, the Company’s capital structure included current notes payable of $8$43 million, long-term debt, including current portion, of $164$150 million and shareholders’ equity of $1,025$1,709 million. At December 28, 2018,25, 2020, the Company’s capital structure included current notes payable of $11$22 million, long-term debt of $266$150 million and shareholders’ equity of $752$1,284 million.
Shareholders’ equity increased by $273$425 million in 2019.2021. The increase from current year earnings of $344$440 million was offset by dividends of $109 million, other comprehensive loss of $25$131 million and share repurchasesrestricted stock issuances of $7$2 million. Increases related to shares issued, and stock compensation and other comprehensive income totaled $70$119 million.
Liquidity and Capital Resources. The Company evaluates liquidity as its ability to generate cash to fund its operating, investing and financing activities. Historically the Company has funded cash requirements for working capital, capital expenditures, businesses acquisitions, repayment of debt obligations, retirement plans, dividends, and common stock repurchases, all as applicable, through cash provided by its operations. The Company's other primary source of liquidity includes funds available through various debt financing arrangements.
As of December 31, 2021, the Company had available liquidity of $1,149 million, including cash held in deposit accounts totaling $221of $624 million, at December 27, 2019, and $132of which $120 million as of December 28, 2018. The Company asserted that it will indefinitely reinvest earnings of foreign subsidiaries to support expansion of its international business. As of December 27, 2019, the amount of cashwas held outside the U.S. was not significant to the Company’s liquidity and was available to fund investments abroad.
Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2020,2022, including its capital expenditure plan of approximately $80$190 million, including $40$140 million for building projects to expand production and distribution capacity, planned dividends estimated at $117$143 million, share repurchases and acquisitions. If acquisition opportunities increase, the Company believes that reasonable financing alternatives are available for the Company to execute on those opportunities. The Company has no significant off-balance sheet debt or other unrecorded obligations.
In December 2019,2021, the Company’s Board of Directors increased the Company’s regular quarterly dividend to $0.175$0.21 from $0.160$0.1875 per share, an increase of 912 percent.
Cash Flow. A summary of cash flow follows (in millions):
| 2021 | 2020 | ||||||||||
| Operating activities | $ | 456.9 | $ | 394.0 | |||||||
| Investing activities | (153.3) | (99.0) | |||||||||
| Financing activities | (57.1) | (139.5) | |||||||||
| Effect of exchange rates on cash | (1.1) | 2.4 | |||||||||
| Net cash provided | 245.4 | 157.9 | |||||||||
| Cash and cash equivalents at end of year | $ | 624.3 | $ | 378.9 | |||||||
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| 2019 | 2018 | 2017 | |||||||||
| Operating activities | $ | 418.7 | $ | 368.0 | $ | 337.9 | |||||
| Investing activities | (155.5 | ) | (66.3 | ) | (68.5 | ) | |||||
| Financing activities | (174.0 | ) | (282.7 | ) | (217.1 | ) | |||||
| Effect of exchange rates on cash | (0.3 | ) | 0.2 | (1.0 | ) | ||||||
| Net cash provided | 88.9 | 19.2 | 51.3 | ||||||||
| Cash and cash equivalents at end of year | $ | 221.0 | $ | 132.1 | $ | 112.9 | |||||
Cash Flows From Operating Activities. Net cash provided by operating activities was $419$457 million in 2019,2021, up $51$63 million compared to 2018. A $40 million voluntary contribution in 2018 to one of the Company’s U.S. qualified defined benefit retirement plans was not repeated in 2019. Net cash provided by operating activities was $368 million in 2018, up $30 million compared to 2017.2020. The impact of the increase in net earnings in 2021 was partially offset by the $40 million pension contribution.increases in working capital that reflect growth in business activity.
Cash Flows Used in Investing Activities. Cash flows used in investing activities totaled $155$153 million in 2019,2021, including $128$134 million for capital additions and $27$19 million for business acquisitions. Capital additions in 2019 included $97 million related to building expansion projects to increase production and distribution capacity. Cash flows used in investing activities totaled $66$99 million in 20182020 including $54 million for capital additions and $11 million for business acquisitions. Cash outflows from investing activities totaled $68 million in 2017 including $40$71 million for capital additions and $28 million for business acquisitions.
Cash Flows Used in Financing Activities. Cash flows used in financing activities totaled $174$57 million in 20192021 and included dividends of $106$127 million and net payments on long-term debt and outstanding lines of credit of $105 million (including a $75 million prepayment of private placement debt that was due in 2020), partially offset by net proceeds from share issuances and repurchases totaling $37$51 million. Cash flows used in financing activities totaled $283$139 million in 20182020 and included dividends of $89$117 million and net payments from share repurchases of $245 million (partially offset by net proceeds from shareand issuances of $25 million) and taxes paid related to net share settlement of equity awards of $16totaling $21 million. Inflows from net borrowings totaled $42 million. Cash flows used in financing activities totaled $217 million in 2017 and included dividends of $80 million, net payments of $83 million on long-term debt and outstanding lines of credit (including a $75 million prepayment of private placement debt that was due in 2018) and share repurchases of $90 million (partially offset by proceeds from share issuances of $61 million).
On April 24, 2015, the Board of Directors authorized the purchase of up to 18 million shares of common stock, primarily through open market transactions. There were approximately 3.3 million shares remaining under the authorization on December 7, 2018, when the Board of Directors authorized the purchase of up to an additional 18 million shares. The authorizations are for an indefinite period of time or until terminated by the Board. As of December 27, 2019,31, 2021, approximately 20.818.5 million shares remain available for purchase under the authorizations.
The Company did not repurchase and retire shares in 2021, compared to 2.3 million shares that were repurchased and retired 0.2 million shares in 2019, compared to 5.8 million shares in 2018 and 2.6 million shares in 2017.2020. The Company has made and may continue to make opportunistic share repurchases in 20202022 via open market transactions or short-dated accelerated share repurchase (“ASR”) programs.
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| Payments due by period | |||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Long-term debt | $ | 164.3 | $ | — | $ | 14.3 | $ | 75.0 | $ | 75.0 | |||||||||
| Interest on long-term debt | 39.9 | 8.4 | 15.5 | 9.0 | 7.0 | ||||||||||||||
| Operating leases | 35.7 | 8.2 | 13.9 | 6.1 | 7.5 | ||||||||||||||
| Service contracts | 20.7 | 10.5 | 9.4 | 0.5 | 0.3 | ||||||||||||||
Purchase obligations (1) | 127.0 | 127.0 | — | — | — | ||||||||||||||
Unfunded pension and postretirement medical benefits (2) | 40.0 | 3.5 | 7.1 | 7.7 | 21.7 | ||||||||||||||
| Total | $ | 427.6 | $ | 157.6 | $ | 60.2 | $ | 98.3 | $ | 111.5 | |||||||||
Critical Accounting Estimates
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company’s most significant accounting policies are disclosed in Note A (Summary of Significant Accounting Policies) to the consolidated financial statements. The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts will differ from those estimates. The Company considers the following policies to involve the most judgment in the preparation of the Company’s consolidated financial statements.
Retirement Benefits. The measurements of the Company’s pension and postretirement medical obligations are dependent on a number of assumptions including estimates of the present value of projected future payments, taking into consideration future events such as salary increaseincreases and demographic experience. These assumptions may have an impact on the expense and timing of future contributions.
The assumptions used in developing the required estimates for pension obligations include discount rate, inflation, salary increases, retirement rates, expected return on plan assets and mortality rates. The assumptions used in developing the required estimates for postretirement medical obligations include discount rates, rate of future increase in medical costs and participation rates.
For U.S. plans, the Company establishes its discount rate assumption by reference to a yield curve published by an actuary and projected plan cash flows. For plans outside the U.S., the Company establishes a rate by country by reference to highly rated corporate bonds. These reference points have been determined to adequately match expected plan cash flows. The Company bases its inflation assumption on an evaluation of external market indicators. The salary assumptions are based on actual historical experience, the near-term outlook and assumed inflation. Retirement rates are based on experience. The investment return assumption is based on the expected long-term performance of plan assets. In setting this number, the Company considers the input of actuaries and investment advisers, its long-term historical returns, the allocation of plan assets and projected returns on plan assets. For 2020,2022, the Company will use an investment return assumptionsassumption of 7.06.25 percent for the larger of its two funded U.S. plans and 6.0 percent for the smaller plan, down 0.250.05 percentage pointpoints from the ratesrate assumed for 2019.2021. Mortality rates are based on current common group mortality tables for males and females.
At December 27, 2019,31, 2021, a one-half percentage point decrease in the indicated assumptions would have the following effects (in millions):
| Assumption | Funded Status | Expense | Assumption | Funded Status | Expense | |||||||||||||||||||||||||||||
| Discount rate | $ | 34.3 | $ | 2.7 | Discount rate | $ | (30.8) | $ | 3.4 | |||||||||||||||||||||||||
| Expected return on assets | — | 1.3 | Expected return on assets | — | 1.7 | |||||||||||||||||||||||||||||
Goodwill and Other Intangible Assets. The Company performs impairment testing for goodwill annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company estimates the fair value of the reporting units using a present value of future cash flows calculation cross-checked by an allocation of market capitalization approach. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit. If the estimated fair value exceeds its carrying value, step two of the impairment analysis is not required. If the estimated fair value is less than its carrying amount, impairment is indicated and the second step must be completed in order to determine the amount, if any, of the impairment. In the second step, an impairment loss is recognized for the difference between the implied value of goodwill and the carrying value.
The Company’s primary identifiable intangible assets include customer relationships, trademarks, trade names, proprietary technology and patents. Finite lived intangibles are amortized and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite lived intangibles are reviewed for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate the asset might be impaired.
A considerable amount of management judgment and assumptions are required in performing the impairment tests. Management makes several assumptions, including earnings and cash flow projections, discount rate, product offerings and market strategies, customer attrition, and royalty rates, each of which have a significant impact on the estimated fair
29
values. Though management considers its judgments and assumptions to be reasonable, changes in these assumptions could impact the estimated fair value.
In 2019,2021, we completed our annual impairment testing of goodwill and other intangible assets in the fourth quarter. No impairment charges were recorded as a result of that review.
Income Taxes. In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet using statutory rates in effect for the year in which the differences are expected to reverse. These assets and liabilities are analyzed regularly, and management assesses the likelihood that deferred tax assets will be recoverable from future taxable income. A valuation allowance is established to the extent that management believes that recovery is not likely. Liabilities for uncertain tax positions are also established for potential and ongoing audits of federal, state and international issues. The Company routinely monitors the potential impact of such situations and believes that liabilities are properly stated. Valuations related to amounts owed and tax rates could be impacted by changes to tax codes and the Company’s interpretation thereof, changes in statutory rates, the Company’s future taxable income levels and the results of tax audits.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company sells and purchases products and services in currencies other than the U.S. dollar and pays variable interest rates on borrowings under certain credit facilities. Consequently, the Company is subject to profitability risk arising from exchange and interest rate movements. The Company may use a variety of financial and derivative instruments to manage foreign currency and interest rate risks. The Company does not enter into any of these instruments for trading purposes to generate revenue. Rather, the Company’s objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange and interest rates.
The Company may use forward exchange contracts, options and other hedging activities to hedge the U.S. dollar value resulting from anticipated currency transactions and net monetary asset and liability positions. At December 27, 2019,31, 2021, the currencies to which the Company had the most significant balance sheet exchange rate exposure were the euro, Swiss franc, Canadian dollar, British pound, Japanese yen, Australian dollar, Chinese yuan renminbi and South Korean won. It is not possible to determine the true impact of currency rate changes; however, the direct translation effect on net sales and net earnings can be estimated. In 2019,2021, changes in currency translation rates increased sales by approximately $26 million and increased net earnings by approximately $29 million and $12 million, respectively.million. In 2018,2020, changes in currency translation rates increased sales and net earnings by approximately $15$4 million and $7 million, respectively. In 2017, changes in currency translation rates reduced sales andhad an immaterial impact on net earnings by approximately $2 million and $1 million, respectively.earnings.
At January 20202022 exchange rates, assuming the same volumes, mix of products and mix of business by currency as in 2019,2021, the movement in foreign currencies would have an immaterialunfavorable impact of approximately 1 percent on sales and 3 percent on operating earnings in 2020, with a modest unfavorable impact in the first half of the year.2022.
The Company’s backlog is not large enough to be a good indicator of future long-term business levels. In addition to economic growth, the successful launch of new products and expanded distribution coverage, the sales outlook is dependent on many factors, including realization of price increases and stable foreign currency exchange rates.
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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 this Annual Report on Form 10-K and our Form 10-Qs and Form 8-Ks, and other disclosures, including our 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, the factors discussed in Item 1A of this Annual Report on Form 10-K. 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 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 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control system was designed to provide reasonable assurance to management and the board of directors regarding the reliability of financial reporting and preparation of financial statements in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 27, 2019.31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment and those criteria, management believes the Company’s internal control over financial reporting is effective as of December 27, 2019.31, 2021.
The Company’s independent auditors have issued an attestation report on the Company’s internal control over financial reporting. That report appears in this Annual Report on Form 10-K.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Graco Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Graco Inc. and subsidiaries (the “Company”“Company”) as of December 27, 2019,31, 2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2019,31, 2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 27, 201931, 2021, of the Company and our report dated February 18, 202022, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that;that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 18, 202022, 2022
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Graco Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Graco Inc. and subsidiaries (the “Company”"Company") as of December 27, 201931, 2021 and December 28, 2018,25, 2020, the related consolidated statements of earnings, comprehensive income, shareholders’shareholders' equity, and cash flows for each of the three years in the period ended December 27, 2019,31, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 201931, 2021 and December 28, 2018,25, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 27, 2019,31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 27, 2019,31, 2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 202022, 2022, expressed an unqualified opinion on the Company’sCompany's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Retirement Benefits-U.S.Benefits – U.S. Pension Benefit Obligation-ReferObligation – Refer to Note J to the financial statements
Critical Audit Matter Description
The Company has both funded and unfunded defined benefit pension plans. As of December 27, 2019,31, 2021, the pension benefit obligation balance was $449.4$418.1 million. The actuarial determination of the present value of the pension obligation on an annual basis requires management to make significant assumptions related to the selection of the discount rates used in the calculation of the net present value of future pension benefits. The Company establishes the discount rate assumptions for the U.S. pension plans by reference to a yield curve published by an actuary based on yields of highly rated corporate bonds and projected plan cash flows.
Given the significance of the U.S. pension obligation and the requirement of management to make significant assumptions related to the selection of the discount rates, performing audit procedures to evaluate the reasonableness of the discount rates selected for the U.S. pension plans required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to selection of the discount rates for the U.S. pension obligation included the following, among others:
a.We tested the effectiveness of internal controls over the valuation of the pension obligation, including management’s controls over selection of the discount rates.
b.With the assistance of our actuarial specialists, we evaluated the reasonableness of the discount rates by:
•Evaluating the methodology utilized to select the discount rates for conformity with applicable accounting guidance.
•Testing the source information underlying the determination of the discount rates, including the methodology used to construct the yield curve, the characteristics of the bonds underlying the yield curve analysis, and the mathematical accuracy of the calculation.
•Developing independent estimates using external published yield curves and comparing them to the discount rates selected by management.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 18, 202022, 2022
We have served as the Company’s auditor since at least 1969, however, an earlier year could not be readily determined.
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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
| Years Ended | Years Ended | |||||||||||||||||||||||||||
| December 27, 2019 | December 28, 2018 | December 29, 2017 | December 31, 2021 | December 25, 2020 | December 27, 2019 | |||||||||||||||||||||||
| Net Sales | $ | 1,646,045 | $ | 1,653,292 | $ | 1,474,744 | Net Sales | $ | 1,987,608 | $ | 1,650,115 | $ | 1,646,045 | |||||||||||||||
| Cost of products sold | 786,289 | 770,753 | 679,542 | Cost of products sold | 953,659 | 795,178 | 786,289 | |||||||||||||||||||||
| Gross Profit | 859,756 | 882,539 | 795,202 | Gross Profit | 1,033,949 | 854,937 | 859,756 | |||||||||||||||||||||
| Product development | 67,557 | 63,124 | 59,217 | Product development | 79,651 | 72,194 | 67,557 | |||||||||||||||||||||
| Selling, marketing and distribution | 234,325 | 245,473 | 231,364 | Selling, marketing and distribution | 271,526 | 220,271 | 234,325 | |||||||||||||||||||||
| General and administrative | 133,418 | 137,515 | 125,876 | General and administrative | 151,449 | 135,525 | 133,418 | |||||||||||||||||||||
| Impairment | Impairment | — | 35,229 | — | ||||||||||||||||||||||||
| Operating Earnings | 424,456 | 436,427 | 378,745 | Operating Earnings | 531,323 | 391,718 | 424,456 | |||||||||||||||||||||
| Interest expense | 13,110 | 14,385 | 16,202 | Interest expense | 10,215 | 11,280 | 13,110 | |||||||||||||||||||||
| Other expense, net | 5,469 | 11,276 | 15,449 | Other expense, net | 12,643 | 5,787 | 5,469 | |||||||||||||||||||||
| Earnings Before Income Taxes | 405,877 | 410,766 | 347,094 | Earnings Before Income Taxes | 508,465 | 374,651 | 405,877 | |||||||||||||||||||||
| Income taxes | 62,024 | 69,712 | 94,682 | Income taxes | 68,599 | 44,195 | 62,024 | |||||||||||||||||||||
| Net Earnings | $ | 343,853 | $ | 341,054 | $ | 252,412 | Net Earnings | $ | 439,866 | $ | 330,456 | $ | 343,853 | |||||||||||||||
| Basic Net Earnings per Common Share | $ | 2.06 | $ | 2.04 | $ | 1.50 | Basic Net Earnings per Common Share | $ | 2.59 | $ | 1.97 | $ | 2.06 | |||||||||||||||
| Diluted Net Earnings per Common Share | $ | 2.00 | $ | 1.97 | $ | 1.45 | Diluted Net Earnings per Common Share | $ | 2.52 | $ | 1.92 | $ | 2.00 | |||||||||||||||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| Years Ended | |||||||||||||||||
| December 31, 2021 | December 25, 2020 | December 27, 2019 | |||||||||||||||
| Net Earnings | $ | 439,866 | $ | 330,456 | $ | 343,853 | |||||||||||
| Components of other comprehensive income (loss) | |||||||||||||||||
| Cumulative translation adjustment | (10,026) | 46,030 | 1,902 | ||||||||||||||
| Pension and postretirement medical liability adjustment | 68,669 | (645) | (33,772) | ||||||||||||||
| Income taxes - pension and postretirement medical liability | (14,647) | 237 | 6,940 | ||||||||||||||
| Other comprehensive income (loss) | 43,996 | 45,622 | (24,930) | ||||||||||||||
| Comprehensive Income | $ | 483,862 | $ | 376,078 | $ | 318,923 | |||||||||||
| Years Ended | |||||||||||
| December 27, 2019 | December 28, 2018 | December 29, 2017 | |||||||||
| Net Earnings | $ | 343,853 | $ | 341,054 | $ | 252,412 | |||||
| Components of other comprehensive income (loss) | |||||||||||
| Cumulative translation adjustment | 1,902 | (8,609 | ) | 16,443 | |||||||
| Pension and postretirement medical liability adjustment | (33,772 | ) | 8,793 | (3,321 | ) | ||||||
| Income taxes - pension and postretirement medical liability | 6,940 | (1,799 | ) | 1,317 | |||||||
| Other comprehensive income (loss) | (24,930 | ) | (1,615 | ) | 14,439 | ||||||
| Comprehensive Income | $ | 318,923 | $ | 339,439 | $ | 266,851 | |||||
See notes to consolidated financial statements.
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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| December 27, 2019 | December 28, 2018 | December 31, 2021 | December 25, 2020 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current Assets | Current Assets | |||||||||||||||||
| Cash and cash equivalents | $ | 220,973 | $ | 132,118 | Cash and cash equivalents | $ | 624,302 | $ | 378,909 | |||||||||
| Accounts receivable, less allowances of $5,300 and $5,300 | 267,345 | 274,608 | ||||||||||||||||
| Accounts receivable, less allowances of $3,900 and $4,400 | Accounts receivable, less allowances of $3,900 and $4,400 | 325,132 | 314,946 | |||||||||||||||
| Inventories | 273,233 | 283,982 | Inventories | 382,301 | 285,704 | |||||||||||||
| Other current assets | 29,917 | 32,508 | Other current assets | 31,886 | 44,242 | |||||||||||||
| Total current assets | 791,468 | 723,216 | Total current assets | 1,363,621 | 1,023,801 | |||||||||||||
| Property, Plant and Equipment, net | 325,546 | 229,295 | Property, Plant and Equipment, net | 451,061 | 350,750 | |||||||||||||
| Goodwill | 307,663 | 293,846 | Goodwill | 356,255 | 347,603 | |||||||||||||
| Other Intangible Assets, net | 162,623 | 166,310 | Other Intangible Assets, net | 149,740 | 160,669 | |||||||||||||
| Operating Lease Assets | 29,891 | — | Operating Lease Assets | 30,046 | 37,807 | |||||||||||||
| Deferred Income Taxes | 39,327 | 32,055 | Deferred Income Taxes | 55,786 | 25,828 | |||||||||||||
| Other Assets | 35,692 | 28,019 | Other Assets | 36,689 | 41,670 | |||||||||||||
| Total Assets | $ | 1,692,210 | $ | 1,472,741 | Total Assets | $ | 2,443,198 | $ | 1,988,128 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
| Current Liabilities | Current Liabilities | |||||||||||||||||
| Notes payable to banks | $ | 7,732 | $ | 11,083 | Notes payable to banks | $ | 43,489 | $ | 22,183 | |||||||||
| Current portion of long term debt | Current portion of long term debt | 75,000 | — | |||||||||||||||
| Trade accounts payable | 54,117 | 56,902 | Trade accounts payable | 78,432 | 58,305 | |||||||||||||
| Salaries and incentives | 51,301 | 62,297 | Salaries and incentives | 82,941 | 52,005 | |||||||||||||
| Dividends payable | 29,235 | 26,480 | Dividends payable | 35,771 | 31,636 | |||||||||||||
| Other current liabilities | 142,937 | 143,041 | Other current liabilities | 191,159 | 157,260 | |||||||||||||
| Total current liabilities | 285,322 | 299,803 | Total current liabilities | 506,792 | 321,389 | |||||||||||||
| Long-term Debt | 164,298 | 266,391 | Long-term Debt | 75,000 | 150,000 | |||||||||||||
| Retirement Benefits and Deferred Compensation | 182,707 | 133,388 | Retirement Benefits and Deferred Compensation | 106,897 | 184,747 | |||||||||||||
| Operating Lease Liabilities | 24,176 | — | Operating Lease Liabilities | 23,527 | 29,224 | |||||||||||||
| Deferred Income Taxes | 10,776 | 16,586 | Deferred Income Taxes | 10,661 | 10,264 | |||||||||||||
| Other Non-current Liabilities | — | 4,700 | Other Non-current Liabilities | 10,978 | 8,600 | |||||||||||||
| Commitments and Contingencies (Note K) | Commitments and Contingencies (Note K) | |||||||||||||||||
| Shareholders’ Equity | Shareholders’ Equity | |||||||||||||||||
| Common stock, $1 par value; 291,000,000 shares authorized; 167,286,836 and 165,170,888 shares outstanding in 2019 and 2018 | 167,287 | 165,171 | ||||||||||||||||
Common stock, $1 par value; 291,000,000 shares authorized; 170,307,412 and 168,567,919 shares outstanding in 2021 and 2020 | Common stock, $1 par value; 291,000,000 shares authorized; 170,307,412 and 168,567,919 shares outstanding in 2021 and 2020 | 170,308 | 168,568 | |||||||||||||||
| Additional paid-in-capital | 578,440 | 510,825 | Additional paid-in-capital | 742,288 | 671,206 | |||||||||||||
| Retained earnings | 448,991 | 220,734 | Retained earnings | 876,916 | 568,295 | |||||||||||||
| Accumulated other comprehensive income (loss) | (169,787 | ) | (144,857 | ) | Accumulated other comprehensive income (loss) | (80,169) | (124,165) | |||||||||||
| Total shareholders’ equity | 1,024,931 | 751,873 | Total shareholders’ equity | 1,709,343 | 1,283,904 | |||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 1,692,210 | $ | 1,472,741 | Total Liabilities and Shareholders’ Equity | $ | 2,443,198 | $ | 1,988,128 | |||||||||
See notes to consolidated financial statements.
36
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended | Years Ended | |||||||||||||||||||||||||||
| December 27, 2019 | December 28, 2018 | December 29, 2017 | December 31, 2021 | December 25, 2020 | December 27, 2019 | |||||||||||||||||||||||
| Cash Flows From Operating Activities | Cash Flows From Operating Activities | |||||||||||||||||||||||||||
| Net Earnings | $ | 343,853 | $ | 341,054 | $ | 252,412 | Net Earnings | $ | 439,866 | $ | 330,456 | $ | 343,853 | |||||||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities | Adjustments to reconcile net earnings to net cash provided by operating activities | |||||||||||||||||||||||||||
| Depreciation and amortization | 48,911 | 47,754 | 45,583 | Depreciation and amortization | 59,325 | 55,329 | 48,911 | |||||||||||||||||||||
| Deferred income taxes | (6,411 | ) | 15,405 | 34,446 | Deferred income taxes | (46,572) | 10,747 | (6,411) | ||||||||||||||||||||
| Share-based compensation | 26,669 | 25,565 | 23,652 | Share-based compensation | 24,931 | 25,153 | 26,669 | |||||||||||||||||||||
| Impairment | Impairment | — | 35,229 | — | ||||||||||||||||||||||||
| Change in | Change in | |||||||||||||||||||||||||||
| Accounts receivable | 8,934 | (12,402 | ) | (37,669 | ) | Accounts receivable | (13,801) | (43,122) | 8,934 | |||||||||||||||||||
| Inventories | 12,435 | (30,719 | ) | (32,011 | ) | Inventories | (97,780) | (13,086) | 12,435 | |||||||||||||||||||
| Trade accounts payable | (539 | ) | (1,976 | ) | 4,588 | Trade accounts payable | 12,397 | 6,820 | (539) | |||||||||||||||||||
| Salaries and incentives | (14,069 | ) | 2,336 | 11,431 | Salaries and incentives | 29,089 | (2,622) | (14,069) | ||||||||||||||||||||
| Retirement benefits and deferred compensation | 13,264 | (27,237 | ) | 6,920 | Retirement benefits and deferred compensation | 1,219 | (6,703) | 13,264 | ||||||||||||||||||||
| Other accrued liabilities | (11,510 | ) | 7,517 | 35,321 | Other accrued liabilities | 51,342 | (3,772) | (11,510) | ||||||||||||||||||||
| Other | (2,803 | ) | 688 | (6,809 | ) | Other | (3,120) | (394) | (2,803) | |||||||||||||||||||
| Net cash provided by operating activities | 418,734 | 367,985 | 337,864 | Net cash provided by operating activities | 456,896 | 394,035 | 418,734 | |||||||||||||||||||||
| Cash Flows From Investing Activities | Cash Flows From Investing Activities | |||||||||||||||||||||||||||
| Property, plant and equipment additions | (127,953 | ) | (53,854 | ) | (40,194 | ) | Property, plant and equipment additions | (133,566) | (71,338) | (127,953) | ||||||||||||||||||
| Acquisition of businesses, net of cash acquired | (26,577 | ) | (10,769 | ) | (27,905 | ) | Acquisition of businesses, net of cash acquired | (19,386) | (27,557) | (26,577) | ||||||||||||||||||
| Other | (939 | ) | (1,624 | ) | (348 | ) | Other | (347) | (143) | (939) | ||||||||||||||||||
| Net cash provided by (used in) investing activities | (155,469 | ) | (66,247 | ) | (68,447 | ) | ||||||||||||||||||||||
| Net cash used in investing activities | Net cash used in investing activities | (153,299) | (99,038) | (155,469) | ||||||||||||||||||||||||
| Cash Flows From Financing Activities | Cash Flows From Financing Activities | |||||||||||||||||||||||||||
| Borrowings (payments) on short-term lines of credit, net | (3,341 | ) | 4,931 | (3,026 | ) | |||||||||||||||||||||||
| Borrowings on short-term lines of credit, net | Borrowings on short-term lines of credit, net | 20,497 | (1,986) | (3,341) | ||||||||||||||||||||||||
| Borrowings on long-term lines of credit | 105,423 | 620,746 | 315,920 | Borrowings on long-term lines of credit | — | 250,000 | 105,423 | |||||||||||||||||||||
| Payments on long-term debt and lines of credit | (207,191 | ) | (583,212 | ) | (395,570 | ) | Payments on long-term debt and lines of credit | (70) | (250,000) | (207,191) | ||||||||||||||||||
| Payments of debt issuance costs | Payments of debt issuance costs | (1,422) | — | — | ||||||||||||||||||||||||
| Common stock issued | 48,250 | 24,634 | 60,685 | Common stock issued | 50,963 | 83,438 | 48,250 | |||||||||||||||||||||
| Common stock repurchased | (9,482 | ) | (244,814 | ) | (90,160 | ) | Common stock repurchased | — | (102,143) | (9,482) | ||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | (1,268 | ) | (16,151 | ) | (24,448 | ) | Taxes paid related to net share settlement of equity awards | — | (1,797) | (1,268) | ||||||||||||||||||
| Cash dividends paid | (106,443 | ) | (88,845 | ) | (80,477 | ) | Cash dividends paid | (127,110) | (116,983) | (106,443) | ||||||||||||||||||
| Net cash provided by (used in) financing activities | (174,052 | ) | (282,711 | ) | (217,076 | ) | ||||||||||||||||||||||
| Net cash used in financing activities | Net cash used in financing activities | (57,142) | (139,471) | (174,052) | ||||||||||||||||||||||||
| Effect of exchange rate changes on cash | (358 | ) | 187 | (1,032 | ) | Effect of exchange rate changes on cash | (1,062) | 2,410 | (358) | |||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 88,855 | 19,214 | 51,309 | |||||||||||||||||||||||||
| Cash, Cash Equivalents and Restricted Cash | ||||||||||||||||||||||||||||
| Net increase in cash and cash equivalents | Net increase in cash and cash equivalents | 245,393 | 157,936 | 88,855 | ||||||||||||||||||||||||
| Cash and Cash Equivalents | Cash and Cash Equivalents | |||||||||||||||||||||||||||
| Beginning of year | 132,118 | 112,904 | 61,595 | Beginning of year | 378,909 | 220,973 | 132,118 | |||||||||||||||||||||
| End of year | $ | 220,973 | $ | 132,118 | $ | 112,904 | End of year | $ | 624,302 | $ | 378,909 | $ | 220,973 | |||||||||||||||
| Reconciliation to Consolidated Balance Sheets | ||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 220,973 | $ | 132,118 | $ | 103,662 | ||||||||||||||||||||||
| Restricted cash included in other current assets | — | — | 9,242 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash | $ | 220,973 | $ | 132,118 | $ | 112,904 | ||||||||||||||||||||||
See notes to consolidated financial statements.
37
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Balance December 29, 2018 | Balance December 29, 2018 | $ | 165,171 | $ | 510,825 | $ | 220,734 | $ | (144,857) | $ | 751,873 | |||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Balance December 30, 2016 | $ | 55,834 | $ | 453,394 | $ | 206,820 | $ | (142,228 | ) | $ | 573,820 | |||||||||||||||||||||||||||||||||||||
| Stock split | 112,879 | — | (112,879 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued | 1,489 | 35,164 | — | — | 36,653 | Shares issued | 2,274 | 44,707 | — | — | 46,981 | |||||||||||||||||||||||||||||||||||||
| Shares repurchased | (883 | ) | (7,172 | ) | (82,105 | ) | — | (90,160 | ) | Shares repurchased | (158) | (490) | (6,397) | — | (7,045) | |||||||||||||||||||||||||||||||||
| Stock compensation cost | — | 18,963 | — | — | 18,963 | Stock compensation cost | — | 23,398 | — | — | 23,398 | |||||||||||||||||||||||||||||||||||||
| Restricted stock canceled (issued) | — | (415 | ) | — | — | (415 | ) | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | 252,412 | — | 252,412 | Net earnings | — | — | 343,853 | — | 343,853 | |||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.4925 per share) | — | — | (82,649 | ) | — | (82,649 | ) | |||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.6550 per share) | Dividends declared ($0.6550 per share) | — | — | (109,199) | — | (109,199) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 14,439 | 14,439 | Other comprehensive income (loss) | — | — | — | (24,930) | (24,930) | |||||||||||||||||||||||||||||||||||||
| Balance December 29, 2017 | 169,319 | 499,934 | 181,599 | (127,789 | ) | 723,063 | ||||||||||||||||||||||||||||||||||||||||||
| Balance December 27, 2019 | Balance December 27, 2019 | 167,287 | 578,440 | 448,991 | (169,787) | 1,024,931 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued | 1,657 | 7,598 | — | — | 9,255 | Shares issued | 3,608 | 78,789 | — | — | 82,397 | |||||||||||||||||||||||||||||||||||||
| Shares repurchased | (5,805 | ) | (17,140 | ) | (224,307 | ) | — | (247,252 | ) | Shares repurchased | (2,327) | (8,047) | (91,768) | — | (102,142) | |||||||||||||||||||||||||||||||||
| Stock compensation cost | — | 21,205 | — | — | 21,205 | Stock compensation cost | — | 22,024 | — | — | 22,024 | |||||||||||||||||||||||||||||||||||||
| Net earnings | Net earnings | — | — | 330,456 | — | 330,456 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends declared $0.7125 per share) | Dividends declared $0.7125 per share) | — | — | (119,384) | — | (119,384) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | Other comprehensive income (loss) | — | — | — | 45,622 | 45,622 | ||||||||||||||||||||||||||||||||||||||||||
| Balance December 25, 2020 | Balance December 25, 2020 | 168,568 | 671,206 | 568,295 | (124,165) | 1,283,904 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued | Shares issued | 1,740 | 51,560 | — | — | 53,300 | ||||||||||||||||||||||||||||||||||||||||||
| Stock compensation cost | Stock compensation cost | — | 21,859 | — | — | 21,859 | ||||||||||||||||||||||||||||||||||||||||||
| Restricted stock canceled (issued) | — | (772 | ) | — | — | (772 | ) | Restricted stock canceled (issued) | — | (2,337) | — | — | (2,337) | |||||||||||||||||||||||||||||||||||
| Net earnings | — | — | 341,054 | — | 341,054 | Net earnings | — | — | 439,866 | — | 439,866 | |||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.5575 per share) | — | — | (93,065 | ) | — | (93,065 | ) | |||||||||||||||||||||||||||||||||||||||||
| Reclassified to retained earnings from AOCI | — | — | 15,453 | (15,453 | ) | — | ||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.7725 per share) | Dividends declared ($0.7725 per share) | — | — | (131,245) | — | (131,245) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (1,615 | ) | (1,615 | ) | Other comprehensive income (loss) | — | — | — | 43,996 | 43,996 | |||||||||||||||||||||||||||||||||||
| Balance December 28, 2018 | 165,171 | 510,825 | 220,734 | (144,857 | ) | 751,873 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued | 2,274 | 44,707 | — | — | 46,981 | |||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased | (158 | ) | (490 | ) | (6,397 | ) | — | (7,045 | ) | |||||||||||||||||||||||||||||||||||||||
| Stock compensation cost | — | 23,398 | — | — | 23,398 | |||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | 343,853 | — | 343,853 | |||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.6550 per share) | — | — | (109,199 | ) | — | (109,199 | ) | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (24,930 | ) | (24,930 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance December 27, 2019 | $ | 167,287 | $ | 578,440 | $ | 448,991 | $ | (169,787 | ) | $ | 1,024,931 | |||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | Balance December 31, 2021 | $ | 170,308 | $ | 742,288 | $ | 876,916 | $ | (80,169) | $ | 1,709,343 | |||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graco Inc. and Subsidiaries
Years Ended December 27, 2019,31, 2021, December 28, 201825, 2020 and December 29, 201727, 2019
A. Summary of Significant Accounting Policies
Fiscal Year. The fiscal year of Graco Inc. and Subsidiaries (the “Company”) is 52 or 53 weeks, ending on the last Friday in December. The year ended December 31, 2021 was a 53-week year whereas the years ended December 27, 2019, December 28, 201825, 2020 and December 29, 201727, 2019 were 52-week years.
Basis of Statement Presentation. The consolidated financial statements include the accounts of the parent company and its subsidiaries after elimination of intercompany balances and transactions. As of December 27, 2019,31, 2021, all subsidiaries are 100 percent controlled by the Company. Certain prior year disclosures have been revised to conform with current year reporting.
Foreign Currency Translation. The functional currency of certain subsidiaries is the local currency. Accordingly, adjustments resulting from the translation of those subsidiaries’ financial statements into U.S. dollars are charged or credited to accumulated other comprehensive income (loss). The U.S. dollar is the functional currency for all other foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and transactions of those subsidiaries are included in other expense, net.
Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principlesU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Measurements. The three levels of inputs in the fair value measurement hierarchy are as follows:
Level 1 – based on quoted prices in active markets for identical assets
Level 2 – based on significant observable inputs
Level 3 – based on significant unobservable inputs
Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
| Level | 2021 | 2020 | |||||||||||||||
| Assets | |||||||||||||||||
| Cash surrender value of life insurance | 2 | $ | 23,147 | $ | 19,887 | ||||||||||||
| Forward exchange contracts | 2 | — | 16 | ||||||||||||||
| Total assets at fair value | $ | 23,147 | $ | 19,903 | |||||||||||||
| Liabilities | |||||||||||||||||
| Contingent consideration | 3 | $ | 12,274 | $ | 9,454 | ||||||||||||
| Deferred compensation | 2 | 5,962 | 5,099 | ||||||||||||||
| Forward exchange contracts | 2 | 111 | — | ||||||||||||||
| Total liabilities at fair value | $ | 18,347 | $ | 14,553 | |||||||||||||
| Level | 2019 | 2018 | |||||||
| Assets | |||||||||
| Cash surrender value of life insurance | 2 | $ | 17,702 | $ | 14,320 | ||||
| Forward exchange contracts | 2 | — | 82 | ||||||
| Total assets at fair value | $ | 17,702 | $ | 14,402 | |||||
| Liabilities | |||||||||
| Contingent consideration | 3 | $ | 9,072 | $ | 7,200 | ||||
| Deferred compensation | 2 | 4,719 | 4,203 | ||||||
| Forward exchange contracts | 2 | 87 | — | ||||||
| Total liabilities at fair value | $ | 13,878 | $ | 11,403 | |||||
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.
The Company’s policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities.
Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of certain acquired businesses based on future revenues.
Disclosures related to other fair value measurements are included below in Impairment of Long-Lived Assets, in Note F
39
Cash Equivalents. All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents.
Accounts Receivable. Accounts receivable includes trade receivables of $256$315 million in 20192021 and $262$302 million in 2018.2020. Other receivables totaled $11$10 million in 20192021 and $13 million in 2018.2020.
Allowance for Credit Losses. Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors.
Following is a summary of activity in the allowance for credit losses (in thousands):
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||
| Balance, beginning | $ | 3,745 | $ | 4,828 | $ | 4,771 | ||||||||||||||||||||
| Additions (reversals) charged to costs and expenses | (27) | 647 | 836 | |||||||||||||||||||||||
Deductions from reserves (1) | (676) | (2,732) | (858) | |||||||||||||||||||||||
Other additions (deductions) (2) | 212 | 1,002 | 79 | |||||||||||||||||||||||
| Balance, ending | $ | 3,254 | $ | 3,745 | $ | 4,828 | ||||||||||||||||||||
(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.
Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. The last-in, first-out (LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO) cost method.
Other Current Assets. Amounts included in other current assets were (in thousands):
| 2021 | 2020 | ||||||||||
| Prepaid income taxes | $ | 10,485 | $ | 22,317 | |||||||
| Prepaid expenses and other | 21,401 | 21,925 | |||||||||
| Total | $ | 31,886 | $ | 44,242 | |||||||
| 2019 | 2018 | ||||||
| Prepaid income taxes | $ | 13,462 | $ | 14,762 | |||
| Prepaid expenses and other | 16,455 | 17,746 | |||||
| Total | $ | 29,917 | $ | 32,508 | |||
Impairment of Long-Lived Assets. The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
We completed our annual impairment review of all long-lived assets in the fourth quarter of 2019. NaN2021. No impairment charges were recorded as a result of that review. In connection with the Company's sale of its U.K.-based valve business in 2020, impairment charges of $35 million were recorded. There were 0no additional impairment charges in 20182020 or 2017.2019.
Property, Plant and Equipment. For financial reporting purposes, plant and equipment are depreciated over their estimated useful lives, primarily by using the straight-line method as follows:
| Buildings and improvements | 10 to 30 years | |||||||
| Leasehold improvements | lesser of 5 to 10 years or life of lease | |||||||
| Manufacturing equipment | lesser of 5 to 10 years or life of equipment | |||||||
| Office, warehouse and automotive equipment | 3 to 10 years | |||||||
40
Goodwill and Other Intangible Assets. Goodwill has been assigned to reporting units. Changes in the carrying amounts of goodwill for each reportable segment were (in thousands):
| Industrial | Process | Contractor | Total | ||||||||||||||||||||
| Balance, December 27, 2019 | $ | 177,112 | $ | 110,997 | $ | 19,554 | $ | 307,663 | |||||||||||||||
| Additions, adjustments from business acquisitions | — | 29,657 | — | 29,657 | |||||||||||||||||||
| Foreign currency translation | 9,424 | 859 | — | 10,283 | |||||||||||||||||||
| Balance, December 25, 2020 | 186,536 | 141,513 | 19,554 | 347,603 | |||||||||||||||||||
| Additions, adjustments from business acquisitions | 13,321 | — | — | 13,321 | |||||||||||||||||||
| Foreign currency translation | (4,460) | (209) | — | (4,669) | |||||||||||||||||||
| Balance, December 31, 2021 | $ | 195,397 | $ | 141,304 | $ | 19,554 | $ | 356,255 | |||||||||||||||
| Industrial | Process | Contractor | Total | ||||||||||||
| Balance, December 29, 2017 | $ | 161,673 | $ | 97,971 | $ | 19,145 | $ | 278,789 | |||||||
| Additions, adjustments from business acquisitions | 17,544 | 170 | 409 | 18,123 | |||||||||||
| Foreign currency translation | (2,093 | ) | (973 | ) | — | (3,066 | ) | ||||||||
| Balance, December 28, 2018 | 177,124 | 97,168 | 19,554 | 293,846 | |||||||||||
| Additions, adjustments from business acquisitions | — | 13,444 | — | 13,444 | |||||||||||
| Foreign currency translation | (12 | ) | 385 | — | 373 | ||||||||||
| Balance, December 27, 2019 | $ | 177,112 | $ | 110,997 | $ | 19,554 | $ | 307,663 | |||||||
Components of other intangible assets were (dollars in thousands):
| Finite Life | Indefinite Life | ||||||||||||||||||||||||||||
| Customer Relationships | Patents and Proprietary Technology | Trademarks, Trade Names and Other | Trade Names | Total | |||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||
| Finite Life | Indefinite Life | |||||||||||||||||||||||||||||||||||||||||||||||
| Customer Relationships | Patents and Proprietary Technology | Trademarks, Trade Names and Other | Trade Names | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of December 27, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| As of December 25, 2020 | As of December 25, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost | $ | 186,310 | $ | 20,413 | $ | 1,020 | $ | 61,920 | $ | 269,663 | Cost | $ | 186,073 | $ | 25,187 | $ | 900 | $ | 61,920 | $ | 274,080 | |||||||||||||||||||||||||||
| Accumulated amortization | (80,764 | ) | (10,526 | ) | (650 | ) | — | (91,940 | ) | Accumulated amortization | (93,832) | (12,924) | (301) | — | (107,057) | |||||||||||||||||||||||||||||||||
| Foreign currency translation | (10,412 | ) | (885 | ) | (73 | ) | (3,730 | ) | (15,100 | ) | Foreign currency translation | (6,004) | (538) | — | 188 | (6,354) | ||||||||||||||||||||||||||||||||
| Book value | $ | 95,134 | $ | 9,002 | $ | 297 | $ | 58,190 | $ | 162,623 | Book value | $ | 86,237 | $ | 11,725 | $ | 599 | $ | 62,108 | $ | 160,669 | |||||||||||||||||||||||||||
| Weighted average life in years | 13 | 10 | 4 | N/A | Weighted average life in years | 13 | 10 | 5 | N/A | |||||||||||||||||||||||||||||||||||||||