UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June ~~26, 2020~~25, 2021

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-09249


GRACO INC.
(Exact name of registrant as specified in its charter)


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

88 - 11th Avenue N.E.

Minneapolis,

Minnesota

55413

(Address of principal executive offices)

(Zip Code)


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

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


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

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

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

☒

☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Yes

☐

☒

~~166,710,627~~169,741,603 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July ~~15, 2020.~~14, 2021.

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders' Equity

Notes to Consolidated Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2221

Item 4.

Controls and Procedures

2221

PART II - OTHER INFORMATION

Item 1A.

Risk Factors

2221

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.

EXHIBITS

PART I Item 1.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited) (In thousands except per share amounts)


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Net Sales	Net Sales	$	366,892	$	428,328	$	740,459	$	833,198	Net Sales	$	507,164	$	366,892	$	961,293	$	740,459
Cost of products sold	Cost of products sold	184,363		201,374		359,299		390,202		Cost of products sold	243,340		184,363		450,135		359,299
Gross Profit	Gross Profit	182,529		226,954		381,160		442,996		Gross Profit	263,824		182,529		511,158		381,160
Product development	Product development	17,948		17,324		35,029		33,893		Product development	21,406		17,948		40,977		35,029
Selling, marketing and distribution	Selling, marketing and distribution	48,831		60,441		106,219		121,258		Selling, marketing and distribution	69,126		48,831		131,354		106,219
General and administrative	General and administrative	36,015		36,828		70,365		70,957		General and administrative	39,449		36,015		76,698		70,365
Impairment	Impairment	34,962		—		34,962		—		Impairment	0		34,962		0		34,962
Operating Earnings	Operating Earnings	44,773		112,361		134,585		216,888		Operating Earnings	133,843		44,773		262,129		134,585

Interest expense	Interest expense	3,258		3,431		5,744		6,966		Interest expense	2,528		3,258		4,956		5,744

Other expense (income), net		(510)		1,119		4,713		1,388
Other expense, net										Other expense, net	(434)		(510)		(313)		4,713
Earnings Before Income Taxes	Earnings Before Income Taxes	42,025		107,811		124,128		208,534		Earnings Before Income Taxes	131,749		42,025		257,486		124,128
Income taxes	Income taxes	13,193		19,674		22,478		33,648		Income taxes	21,631		13,193		41,681		22,478
Net Earnings	Net Earnings	$	28,832	$	88,137	$	101,650	$	174,886	Net Earnings	$	110,118	$	28,832	$	215,805	$	101,650
Net Earnings per Common Share	Net Earnings per Common Share									Net Earnings per Common Share
Basic	Basic	$	0.17	$	0.53	$	0.61	$	1.05	Basic	$	0.65	$	0.17	$	1.27	$	0.61
Diluted	Diluted	$	0.17	$	0.51	$	0.59	$	1.02	Diluted	$	0.63	$	0.17	$	1.24	$	0.59

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Net Earnings	Net Earnings	$	28,832	$	88,137	$	101,650	$	174,886	Net Earnings	$	110,118	$	28,832	$	215,805	$	101,650
Components of other comprehensive income (loss)	Components of other comprehensive income (loss)									Components of other comprehensive income (loss)
Cumulative translation adjustment	Cumulative translation adjustment	6,756		1,232		2,079		2,401		Cumulative translation adjustment	5,693		6,756		(4,777)		2,079
Pension and postretirement medical liability adjustment	Pension and postretirement medical liability adjustment	2,446		1,910		5,195		4,037		Pension and postretirement medical liability adjustment	2,373		2,446		5,681		5,195
Income taxes - pension and postretirement medical liability adjustment	Income taxes - pension and postretirement medical liability adjustment	(554)		(423)		(1,169)		(893)		Income taxes - pension and postretirement medical liability adjustment	(535)		(554)		(1,207)		(1,169)
Other comprehensive income		8,648		2,719		6,105		5,545
Other comprehensive income (loss)										Other comprehensive income (loss)	7,531		8,648		(303)		6,105
Comprehensive Income	Comprehensive Income	$	37,480	$	90,856	$	107,755	$	180,431	Comprehensive Income	$	117,649	$	37,480	$	215,502	$	107,755

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands)


		June 26, 2020		December 27, 2019			June 25, 2021		December 25, 2020
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	432,708	$	220,973	Cash and cash equivalents	$	482,787	$	378,909
Accounts receivable, less allowances of $6,000 and $5,300		282,856		267,345
Accounts receivable, less allowances of $4,400 and $4,400						Accounts receivable, less allowances of $4,400 and $4,400	354,222		314,946
Inventories	Inventories	291,442		273,233		Inventories	337,525		285,704
Other current assets	Other current assets	31,286		29,917		Other current assets	29,418		44,242
Total current assets	Total current assets	1,038,292		791,468		Total current assets	1,203,952		1,023,801

Property, Plant and Equipment, net	Property, Plant and Equipment, net	327,476		325,546		Property, Plant and Equipment, net	387,906		350,750
Goodwill	Goodwill	338,735		307,663		Goodwill	358,449		347,603
Other Intangible Assets, net	Other Intangible Assets, net	162,271		162,623		Other Intangible Assets, net	159,861		160,669
Operating Lease Assets	Operating Lease Assets	28,807		29,891		Operating Lease Assets	38,931		37,807
Deferred Income Taxes	Deferred Income Taxes	33,968		39,327		Deferred Income Taxes	33,949		25,828
Other Assets	Other Assets	32,910		35,692		Other Assets	46,157		41,670
Total Assets	Total Assets	$	1,962,459	$	1,692,210	Total Assets	$	2,229,205	$	1,988,128
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities	Current Liabilities					Current Liabilities
Notes payable to banks	Notes payable to banks	$	20,597	$	7,732	Notes payable to banks	$	13,130	$	22,183

Trade accounts payable	Trade accounts payable	48,259		54,117		Trade accounts payable	76,074		58,305
Salaries and incentives	Salaries and incentives	35,223		51,301		Salaries and incentives	61,478		52,005
Dividends payable	Dividends payable	29,464		29,235		Dividends payable	31,893		31,636
Other current liabilities	Other current liabilities	176,837		142,937		Other current liabilities	176,149		157,260
Total current liabilities	Total current liabilities	310,380		285,322		Total current liabilities	358,724		321,389
Long-term Debt	Long-term Debt	400,000		164,298		Long-term Debt	150,000		150,000
Retirement Benefits and Deferred Compensation	Retirement Benefits and Deferred Compensation	184,486		182,707		Retirement Benefits and Deferred Compensation	184,973		184,747
Operating Lease Liabilities	Operating Lease Liabilities	21,860		24,176		Operating Lease Liabilities	31,639		29,224
Deferred Income Taxes	Deferred Income Taxes	10,165		10,776		Deferred Income Taxes	11,568		10,264
Other Non-current Liabilities	Other Non-current Liabilities	8,600		—		Other Non-current Liabilities	11,038		8,600

Shareholders’ Equity	Shareholders’ Equity					Shareholders’ Equity
Common stock	Common stock	166,693		167,287		Common stock	169,667		168,568
Additional paid-in-capital	Additional paid-in-capital	623,803		578,440		Additional paid-in-capital	715,635		671,206
Retained earnings	Retained earnings	400,154		448,991		Retained earnings	720,429		568,295
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	(163,682)		(169,787)		Accumulated other comprehensive income (loss)	(124,468)		(124,165)
Total shareholders’ equity	Total shareholders’ equity	1,026,968		1,024,931		Total shareholders’ equity	1,481,263		1,283,904
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	1,962,459	$	1,692,210	Total Liabilities and Shareholders’ Equity	$	2,229,205	$	1,988,128

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


		Six Months Ended							Six Months Ended
		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020
Cash Flows From Operating Activities	Cash Flows From Operating Activities					Cash Flows From Operating Activities
Net Earnings	Net Earnings	$	101,650	$	174,886	Net Earnings	$	215,805	$	101,650
Adjustments to reconcile net earnings to net cash provided by operating activities	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	Depreciation and amortization	26,966		24,087		Depreciation and amortization	29,812		26,966
Deferred income taxes	Deferred income taxes	1,366		(3,881)		Deferred income taxes	(10,313)		1,366
Share-based compensation	Share-based compensation	15,445		17,548		Share-based compensation	13,745		15,445
Impairment	Impairment	34,962		—		Impairment	0		34,962
Change in	Change in					Change in
Accounts receivable	Accounts receivable	(19,705)		(16,051)		Accounts receivable	(38,747)		(19,705)
Inventories	Inventories	(22,662)		(13,157)		Inventories	(51,359)		(22,662)
Trade accounts payable	Trade accounts payable	342		4,603		Trade accounts payable	14,496		342
Salaries and incentives	Salaries and incentives	(16,677)		(18,514)		Salaries and incentives	8,334		(16,677)
Retirement benefits and deferred compensation	Retirement benefits and deferred compensation	6,134		5,780		Retirement benefits and deferred compensation	5,980		6,134
Other accrued liabilities	Other accrued liabilities	12,578		(10,789)		Other accrued liabilities	32,399		12,578
Other	Other	2,151		(690)		Other	(105)		2,151
Net cash provided by operating activities	Net cash provided by operating activities	142,550		163,822		Net cash provided by operating activities	220,047		142,550
Cash Flows From Investing Activities	Cash Flows From Investing Activities					Cash Flows From Investing Activities
Property, plant and equipment additions	Property, plant and equipment additions	(32,613)		(70,186)		Property, plant and equipment additions	(54,759)		(32,613)
Acquisition of businesses, net of cash acquired	Acquisition of businesses, net of cash acquired	(27,173)		(6,176)		Acquisition of businesses, net of cash acquired	(19,322)		(27,173)
Other	Other	(245)		(828)		Other	(112)		(245)
Net cash provided by (used in) investing activities		(60,031)		(77,190)
Net cash used in investing activities						Net cash used in investing activities	(74,193)		(60,031)
Cash Flows From Financing Activities	Cash Flows From Financing Activities					Cash Flows From Financing Activities
Borrowings (payments) on short-term lines of credit, net	Borrowings (payments) on short-term lines of credit, net	(768)		(3,767)		Borrowings (payments) on short-term lines of credit, net	(9,282)		(768)
Borrowings on long-term lines of credit	Borrowings on long-term lines of credit	250,000		23,944		Borrowings on long-term lines of credit	0		250,000
Payments on long-term debt and lines of credit	Payments on long-term debt and lines of credit	—		(36,453)		Payments on long-term debt and lines of credit	(70)		0

Payments of debt issuance costs						Payments of debt issuance costs	(1,422)		0
Common stock issued	Common stock issued	42,217		33,954		Common stock issued	33,216		42,217
Common stock repurchased	Common stock repurchased	(102,143)		(2,438)		Common stock repurchased	0		(102,143)
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(1,796)		(1,268)		Taxes paid related to net share settlement of equity awards	0		(1,796)
Cash dividends paid	Cash dividends paid	(58,490)		(53,075)		Cash dividends paid	(63,414)		(58,490)
Net cash provided by (used in) financing activities		129,020		(39,103)
Net cash provided by financing activities						Net cash provided by financing activities	(40,972)		129,020
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	196		1,236		Effect of exchange rate changes on cash	(1,004)		196
Net increase (decrease) in cash and cash equivalents		211,735		48,765
Net increase in cash and cash equivalents						Net increase in cash and cash equivalents	103,878		211,735
Cash and Cash Equivalents	Cash and Cash Equivalents					Cash and Cash Equivalents
Beginning of year	Beginning of year	220,973		132,118		Beginning of year	378,909		220,973
End of period	End of period	$	432,708	$	180,883	End of period	$	482,787	$	432,708

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited) (In thousands)

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total

Three Months Ended June 26, 2020
Balance, March 27, 2020 $ 166,840 $ 612,698 $ 411,450 $ (172,330) $ 1,018,658
Shares issued 113 3,951 — — 4,064
Shares repurchased (260) (904) (10,950) — (12,114)
Stock compensation cost — 8,058 — — 8,058
Net earnings — — 28,832 — 28,832
Dividends declared ($0.175 per share) — — (29,178) — (29,178)
Other comprehensive income (loss) — — — 8,648 8,648
Balance, June 26, 2020 $ 166,693 $ 623,803 $ 400,154 $ (163,682) $ 1,026,968



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

Shares issued	254		8,838		0		0		9,092

Stock compensation cost	0		6,304		0		0		6,304

Restricted stock canceled (issued)	0		(2,336)		0		0		(2,336)
Net earnings	0		0		110,118		0		110,118
Dividends declared ($0.188 per share)	0		0		(31,948)		0		(31,948)

Other comprehensive income (loss)	0		0		0		7,531		7,531
Balance, June 25, 2021	$	169,667	$	715,635	$	720,429	$	(124,468)	$	1,481,263

Six Months Ended June 26, 2020
Balance, December 27, 2019 $ 167,287 $ 578,440 $ 448,991 $ (169,787) $ 1,024,931
Shares issued 1,733 39,418 — — 41,151
Shares repurchased (2,327) (8,047) (91,769) — (102,143)
Stock compensation cost — 13,992 — — 13,992
Net earnings — — 101,650 — 101,650
Dividends declared ($0.350 per share) — — (58,718) — (58,718)
Other comprehensive income (loss) — — — 6,105 6,105
Balance, June 26, 2020 $ 166,693 $ 623,803 $ 400,154 $ (163,682) $ 1,026,968


Three Months Ended June 28, 2019
Balance, March 29, 2019		$	166,364	539,067	281,038	$	(142,031)	$	844,438
Six Months Ended June 25, 2021										Six Months Ended June 25, 2021
Balance, December 25, 2020										Balance, December 25, 2020	$	168,568	$	671,206	$	568,295	$	(124,165)	$	1,283,904

Shares issued	Shares issued	428		8,678	—	—		9,106		Shares issued	1,099		34,453		0		0		35,552

Stock compensation cost	Stock compensation cost	—		8,425	—	—		8,425		Stock compensation cost	0		12,312		0		0		12,312

Restricted stock canceled (issued)										Restricted stock canceled (issued)	0		(2,336)		0		0		(2,336)
Net earnings	Net earnings	—		—	88,137	—		88,137		Net earnings	0		0		215,805		0		215,805
Dividends declared ($0.160 per share)		—		—	(26,867)	—		(26,867)
Dividends declared ($0.375 per share)										Dividends declared ($0.375 per share)	0		0		(63,671)		0		(63,671)

Other comprehensive income (loss)	Other comprehensive income (loss)	—		—	—	2,719		2,719		Other comprehensive income (loss)	0		0		0		(303)		(303)
Balance, June 28, 2019		$	166,792	556,170	342,308	$	(139,312)	$	925,958
Balance, June 25, 2021										Balance, June 25, 2021	$	169,667	$	715,635	$	720,429	$	(124,468)	$	1,481,263

Six Months Ended June 28, 2019
Balance, December 28, 2018 $ 165,171 $ 510,825 $ 220,734 $ (144,857) $ 751,873
Shares issued 1,621 31,064 — — 32,685
Stock compensation cost — 14,281 — — 14,281
Net earnings — — 174,886 — 174,886
Dividends declared ($0.320 per share) — — (53,312) — (53,312)
Other comprehensive income (loss) — — — 5,545 5,545
Balance, June 28, 2019 $ 166,792 $ 556,170 $ 342,308 $ (139,312) $ 925,958



Three Months Ended June 26, 2020
Balance, March 27, 2020	$	166,840	$	612,698	$	411,450	$	(172,330)	$	1,018,658

Shares issued	113		3,951		0		0		4,064
Shares repurchased	(260)		(904)		(10,950)		0		(12,114)
Stock compensation cost	0		8,058		0		0		8,058


Net earnings	0		0		28,832		0		28,832
Dividends declared ($0.175 per share)	0		0		(29,178)		0		(29,178)

Other comprehensive income (loss)	0		0		0		8,648		8,648
Balance, June 26, 2020	$	166,693	$	623,803	$	400,154	$	(163,682)	$	1,026,968



Six Months Ended June 26, 2020
Balance, December 27, 2019	$	167,287	$	578,440	$	448,991	$	(169,787)	$	1,024,931

Shares issued	1,733		39,418		0		0		41,151
Shares repurchased	(2,327)		(8,047)		(91,769)		0		(102,143)
Stock compensation cost	0		13,992		0		0		13,992


Net earnings	0		0		101,650		0		101,650
Dividends declared ($0.350 per share)	0		0		(58,718)		0		(58,718)

Other comprehensive income (loss)	0		0		0		6,105		6,105
Balance, June 26, 2020	$	166,693	$	623,803	$	400,154	$	(163,682)	$	1,026,968

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Basis of Presentation

The consolidated balance sheet of Graco Inc. and ~~Subsidiaries~~subsidiaries (the “Company”) as of June ~~26, 2020~~25, 2021 and the related statements of earnings, comprehensive income and shareholders' equity for the three and six months ended June ~~26, 2020~~25, 2021 and June ~~28, 2019,~~26, 2020, and cash flows for the six months ended June ~~26, 2020~~25, 2021 and June ~~28, 2019~~26, 2020 have been prepared by the Company and have not been audited.

In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June ~~26, 2020,~~25, 2021, and the results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s ~~2019~~2020 Annual Report on Form 10-K.

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

2.Segment Information

The Company has 3 reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands):


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Net Sales	Net Sales									Net Sales
Industrial	Industrial	$	133,287	$	188,507	$	291,971	$	377,607	Industrial	$	204,577	$	133,287	$	389,309	$	291,971
Process	Process	77,759		85,064		163,837		171,958		Process	97,233		77,759		188,606		163,837
Contractor	Contractor	155,846		154,757		284,651		283,633		Contractor	205,354		155,846		383,378		284,651
Total	Total	$	366,892	$	428,328	$	740,459	$	833,198	Total	$	507,164	$	366,892	$	961,293	$	740,459
Operating Earnings	Operating Earnings									Operating Earnings
Industrial	Industrial	$	37,001	$	64,428	$	87,234	$	129,631	Industrial	$	69,368	$	37,001	$	134,611	$	87,234
Process	Process	11,672		18,378		29,783		38,392		Process	21,676		11,672		43,409		29,783
Contractor	Contractor	41,109		40,054		69,739		66,593		Contractor	49,997		41,109		98,163		69,739
Unallocated corporate (expense)	Unallocated corporate (expense)	(10,047)		(10,499)		(17,209)		(17,728)		Unallocated corporate (expense)	(7,198)		(10,047)		(14,054)		(17,209)
Impairment	Impairment	(34,962)		—		(34,962)		—		Impairment	0		(34,962)		0		(34,962)
Total	Total	$	44,773	$	112,361	$	134,585	$	216,888	Total	$	133,843	$	44,773	$	262,129	$	134,585

Assets by segment were as follows (in thousands):


		June 26, 2020		December 27, 2019			June 25, 2021		December 25, 2020
Industrial	Industrial	$	621,314	$	615,486	Industrial	$	689,675	$	632,165
Process	Process	403,083		387,216		Process	418,473		404,370
Contractor	Contractor	420,983		368,832		Contractor	491,189		438,067
Unallocated corporate	Unallocated corporate	517,079		320,676		Unallocated corporate	629,868		513,526
Total	Total	$	1,962,459	$	1,692,210	Total	$	2,229,205	$	1,988,128

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Geographic information follows (in thousands):


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Net Sales (based on customer location)	Net Sales (based on customer location)									Net Sales (based on customer location)
United States	United States	$	205,789	$	221,565	$	404,032	$	424,450	United States	$	263,722	$	205,789	$	495,223	$	404,032
Other countries	Other countries	161,103		206,763		336,427		408,748		Other countries	243,442		161,103		466,070		336,427
Total	Total	$	366,892	$	428,328	$	740,459	$	833,198	Total	$	507,164	$	366,892	$	961,293	$	740,459


		June 26, 2020		December 27, 2019			June 25, 2021		December 25, 2020
Long-lived Assets	Long-lived Assets					Long-lived Assets
United States	United States	$	278,576	$	268,864	United States	$	326,395	$	301,643
Other countries	Other countries	48,900		56,682		Other countries	61,511		49,107
Total	Total	$	327,476	$	325,546	Total	$	387,906	$	350,750

3.Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Net earnings available to common shareholders	Net earnings available to common shareholders	$	28,832	$	88,137	$	101,650	$	174,886	Net earnings available to common shareholders	$	110,118	$	28,832	$	215,805	$	101,650
Weighted average shares outstanding for basic earnings per share	Weighted average shares outstanding for basic earnings per share	166,663		166,684		167,320		166,150		Weighted average shares outstanding for basic earnings per share	169,594		166,663		169,271		167,320
Dilutive effect of stock options computed using the treasury stock method and the average market price	Dilutive effect of stock options computed using the treasury stock method and the average market price	3,886		5,363		4,276		5,303		Dilutive effect of stock options computed using the treasury stock method and the average market price	4,978		3,886		4,939		4,276
Weighted average shares outstanding for diluted earnings per share	Weighted average shares outstanding for diluted earnings per share	170,549		172,047		171,596		171,453		Weighted average shares outstanding for diluted earnings per share	174,572		170,549		174,210		171,596
Basic earnings per share	Basic earnings per share	$	0.17	$	0.53	$	0.61	$	1.05	Basic earnings per share	$	0.65	$	0.17	$	1.27	$	0.61
Diluted earnings per share	Diluted earnings per share	$	0.17	$	0.51	$	0.59	$	1.02	Diluted earnings per share	$	0.63	$	0.17	$	1.24	$	0.59

Stock options to purchase ~~2,530,000~~737,000 and ~~1,532,000~~2,530,000 shares were not included in the June ~~26, 2020~~25, 2021 and June ~~28, 2019~~26, 2020 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

4.Share-Based Awards

Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):


		Option Shares	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price			Option Shares	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price
Outstanding, December 27, 2019		12,112	$	28.91	8,231	$	23.75
Outstanding, December 25, 2020								Outstanding, December 25, 2020	10,208	$	35.02	6,553	$	28.02
Granted	Granted	1,399	55.26					Granted	841	72.21
Exercised	Exercised	(1,371)	19.36					Exercised	(674)	22.69
Canceled	Canceled	(22)	45.43					Canceled	(14)	43.06
Outstanding, June 26, 2020		12,118	$	32.84	8,424	$	26.62
Outstanding, June 25, 2021								Outstanding, June 25, 2021	10,361	$	38.84	7,196	$	31.31

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The Company recognized year-to-date share-based compensation of $13.7 million in 2021 and $15.4 million in ~~2020 and $17.5 million in 2019.~~2020. As of June ~~26, 2020,~~25, 2021, there was ~~$14.6~~$17.9 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of ~~2.2~~3.0 years.

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


		Six Months Ended										Six Months Ended
		June 26, 2020			June 28, 2019				June 25, 2021			June 26, 2020
Expected life in years	Expected life in years	7.5			7.5			Expected life in years	7.5			7.5
Interest rate	Interest rate	1.5		%	2.6		%	Interest rate	1.2		%	1.5		%
Volatility	Volatility	22.0		%	24.6		%	Volatility	25.3		%	22.0		%
Dividend yield	Dividend yield	1.3		%	1.4		%	Dividend yield	1.0		%	1.3		%
Weighted average fair value per share	Weighted average fair value per share	$	12.18		$	12.26		Weighted average fair value per share	$	18.91		$	12.18

Under the Company’s Employee Stock Purchase Plan, the Company issued 416,000 shares in 2021 and 400,000 shares in ~~2020 and 398,000 shares in 2019.~~2020. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:


		Six Months Ended										Six Months Ended
		June 26, 2020			June 28, 2019				June 25, 2021			June 26, 2020
Expected life in years	Expected life in years	1.0			1.0			Expected life in years	1.0			1.0
Interest rate	Interest rate	1.5		%	2.6		%	Interest rate	0.1		%	1.5		%
Volatility	Volatility	21.9		%	22.7		%	Volatility	40.1		%	21.9		%
Dividend yield	Dividend yield	1.4		%	1.4		%	Dividend yield	1.1		%	1.4		%
Weighted average fair value per share	Weighted average fair value per share	$	11.55		$	11.36		Weighted average fair value per share	$	21.50		$	11.55

5.Retirement Benefits

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


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Pension Benefits	Pension Benefits									Pension Benefits
Service cost	Service cost	$	2,193	$	1,635	$	4,615	$	3,644	Service cost	$	2,724	$	2,193	$	5,445	$	4,615
Interest cost	Interest cost	3,227		3,572		6,634		7,310		Interest cost	2,976		3,227		5,957		6,634
Expected return on assets	Expected return on assets	(4,651)		(4,216)		(9,401)		(8,575)		Expected return on assets	(5,131)		(4,651)		(10,261)		(9,401)
Amortization and other	Amortization and other	2,517		1,838		5,238		3,817		Amortization and other	2,555		2,517		5,106		5,238
Net periodic benefit cost	Net periodic benefit cost	$	3,286	$	2,829	$	7,086	$	6,196	Net periodic benefit cost	$	3,124	$	3,286	$	6,247	$	7,086
Postretirement Medical	Postretirement Medical									Postretirement Medical
Service cost	Service cost	$	130	$	123	$	305	$	273	Service cost	$	175	$	130	$	350	$	305
Interest cost	Interest cost	260		264		508		581		Interest cost	250		260		500		508
Amortization	Amortization	190		29		367		137		Amortization	250		190		500		367
Net periodic benefit cost	Net periodic benefit cost	$	580	$	416	$	1,180	$	991	Net periodic benefit cost	$	675	$	580	$	1,350	$	1,180

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6.Shareholders’ Equity

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

Pension and
Postretirement
Medical Cumulative
Translation
Adjustment Total
Three Months Ended June 26, 2020
Balance, March 27, 2020 $ (111,587) $ (60,743) $ (172,330)
Other comprehensive income (loss) before reclassifications — 6,756 6,756
Reclassified to pension cost and deferred tax 1,892 — 1,892
Balance, June 26, 2020 $ (109,695) $ (53,987) $ (163,682)

Six Months Ended June 26, 2020
Balance, December 27, 2019 $ (113,721) $ (56,066) $ (169,787)
Other comprehensive income (loss) before reclassifications — 2,079 2,079
Reclassified to pension cost and deferred tax 4,026 — 4,026
Balance, June 26, 2020 $ (109,695) $ (53,987) $ (163,682)

Three Months Ended June 28, 2019
Balance, March 29, 2019 $ (85,232) $ (56,799) $ (142,031)
Other comprehensive income (loss) before reclassifications — 1,232 1,232
Reclassified to pension cost and deferred tax 1,487 — 1,487
Balance, June 28, 2019 $ (83,745) $ (55,567) $ (139,312)

Six Months Ended June 28, 2019
Balance, December 28, 2018 $ (86,889) $ (57,968) $ (144,857)
Other comprehensive income (loss) before reclassifications — 2,401 2,401
Reclassified to pension cost and deferred tax 3,144 — 3,144
Balance, June 28, 2019 $ (83,745) $ (55,567) $ (139,312)


	Pension and Postretirement Medical		Cumulative Translation Adjustment		Total
Three Months Ended June 25, 2021
Balance, March 26, 2021	$	(111,493)	$	(20,506)	$	(131,999)
Other comprehensive income (loss) before reclassifications	0		5,693		5,693
Reclassified to pension cost and deferred tax	1,838		0		1,838

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



Six Months Ended June 25, 2021
Balance, December 25, 2020	$	(114,129)	$	(10,036)	$	(124,165)
Other comprehensive income (loss) before reclassifications	0		(4,777)		(4,777)
Reclassified to pension cost and deferred tax	4,474		0		4,474

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



Three Months Ended June 26, 2020
Balance, March 27, 2020	$	(111,587)	$	(60,743)	$	(172,330)
Other comprehensive income (loss) before reclassifications	0		6,756		6,756
Reclassified to pension cost and deferred tax	1,892		0		1,892

Balance, June 26, 2020	$	(109,695)	$	(53,987)	$	(163,682)



Six Months Ended June 26, 2020
Balance, December 27, 2019	$	(113,721)	$	(56,066)	$	(169,787)
Other comprehensive income (loss) before reclassifications	0		2,079		2,079
Reclassified to pension cost and deferred tax	4,026		0		4,026

Balance, June 26, 2020	$	(109,695)	$	(53,987)	$	(163,682)

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

7.Receivables and Credit Losses

Accounts receivable includes trade receivables of $333 million and other receivables of $21 million as of June 25, 2021 and $302 million and $13 million, respectively, as of December 25, 2020.

Allowance for Credit Losses

Following is a summary of activity in the year to date allowance for credit losses (in thousands):

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	June 25, 2021		June 26, 2020
Balance, beginning	$	3,745	$	4,828
Additions (reversals) charged to costs and expenses	265		631
Deductions from reserves (1)	(495)		(291)
Other additions (deductions) (2)	(4)		(9)
Balance, ending	$	3,511	$	5,159

(1) Represents amounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves.

(2) Includes amounts assumed or established in connection with acquisitions and effects of foreign currency translation.

8.Inventories

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


		June 26, 2020		December 27, 2019			June 25, 2021		December 25, 2020
Finished products and components	Finished products and components	$	145,299	$	132,128	Finished products and components	$	153,876	$	133,122
Products and components in various stages of completion	Products and components in various stages of completion	86,075		86,957		Products and components in various stages of completion	95,695		83,791
Raw materials and purchased components	Raw materials and purchased components	123,941		117,026		Raw materials and purchased components	152,657		129,319
Subtotal	Subtotal	355,315		336,111		Subtotal	402,228		346,232
Reduction to LIFO cost	Reduction to LIFO cost	(63,873)		(62,878)		Reduction to LIFO cost	(64,703)		(60,528)
Total	Total	$	291,442	$	273,233	Total	$	337,525	$	285,704

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8.9.Intangible Assets

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


		Finite Life												Indefinite Life			Finite Life						Indefinite Life
		Customer Relationships		Patents and Proprietary Technology		Trademarks, Trade Names and Other		Trade Names		Total			Customer Relationships		Patents and Proprietary Technology		Trademarks, Trade Names and Other		Trade Names		Total
As of June 26, 2020
As of June 25, 2021												As of June 25, 2021
Cost	Cost	$	187,012	$	25,313	$	1,200	$	61,920	$	275,445	Cost	$	194,505	$	26,074	$	900	$	62,633	$	284,112
Accumulated amortization	Accumulated amortization	(87,704)		(11,706)		(499)		—		(99,909)		Accumulated amortization	(101,173)		(14,312)		(376)		—		(115,861)
Foreign currency translation	Foreign currency translation	(9,795)		(828)		—		(2,642)		(13,265)		Foreign currency translation	(6,757)		(603)		0		(1,030)		(8,390)
Book value	Book value	$	89,513	$	12,779	$	701	$	59,278	$	162,271	Book value	$	86,575	$	11,159	$	524	$	61,603	$	159,861
Weighted average life in years	Weighted average life in years	13		10		4		N/A				Weighted average life in years	13		10		5		N/A


As of December 27, 2019
As of December 25, 2020												As of December 25, 2020
Cost	Cost	$	186,310	$	20,413	$	1,020	$	61,920	$	269,663	Cost	$	186,073	$	25,187	$	900	$	61,920	$	274,080
Accumulated amortization	Accumulated amortization	(80,764)		(10,526)		(650)		—		(91,940)		Accumulated amortization	(93,832)		(12,924)		(301)		—		(107,057)
Foreign currency translation	Foreign currency translation	(10,412)		(885)		(73)		(3,730)		(15,100)		Foreign currency translation	(6,004)		(538)		0		188		(6,354)
Book value	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	Weighted average life in years	13		10		4		N/A				Weighted average life in years	13		10		5		N/A

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Amortization of intangibles for the quarter was $4.6 million in 2021 and $4.1 million in 2020 ~~and $3.8 million in 2019~~ and for the year to date was $8.9 million in 2021 and $8.2 million in ~~2020 and $7.7 million in 2019.~~2020. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):

2020 2021 2022 2023 2024 Thereafter
Estimated Amortization Expense $ 16,595 $ 16,570 $ 16,483 $ 15,552 $ 14,009 $ 32,007


	2021 (Remainder)		2022		2023		2024		2025		Thereafter
Estimated Amortization Expense	$	9,003	$	17,964	$	17,076	$	15,518	$	14,946	$	23,751

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


		Industrial		Process		Contractor		Total			Industrial		Process		Contractor		Total
Balance, December 27, 2019		$	177,112	$	110,997	$	19,554	$	307,663
Balance, December 25, 2020										Balance, December 25, 2020	$	186,536	$	141,513	$	19,554	$	347,603
Additions, adjustments from business acquisitions	Additions, adjustments from business acquisitions	—		29,273		—		29,273		Additions, adjustments from business acquisitions	13,249		0		0		13,249
Foreign currency translation	Foreign currency translation	2,482		(683)		—		1,799		Foreign currency translation	(2,835)		432		0		(2,403)
Balance, June 26, 2020		$	179,594	$	139,587	$	19,554	$	338,735
Balance, June 25, 2021										Balance, June 25, 2021	$	196,950	$	141,945	$	19,554	$	358,449

In the second quarter the Company completed the acquisition of a business that is not material to the consolidated financial statements.

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9.10.Other Current Liabilities

Components of other current liabilities were as follows (in thousands):

June 26,
2020 December 27,
2019
Accrued self-insurance retentions $ 7,622 $ 7,570
Accrued warranty and service liabilities 12,578 12,785
Accrued trade promotions 6,144 8,390
Payable for employee stock purchases 6,257 13,722
Customer advances and deferred revenue 50,281 33,138
Income taxes payable 16,839 8,706
Right of return refund liability 13,730 13,791
Operating lease liability, current 8,822 7,690
Loss reserve 24,608 —
Other 29,956 37,145
Total $ 176,837 $ 142,937

In the second quarter, the Company entered into negotiations to sell its U.K.-based valve business (“Alco”). Based on the negotiations to sell, the Company revalued its investment in Alco, recording impairment charges of $35 million. A loss reserve was recognized within other current liabilities, representing $24 million of previously unrealized foreign currency translation losses recorded in accumulated other comprehensive income plus other disposal costs. The sale of Alco was completed in the third quarter, subject to post-closing adjustments.


	June 25, 2021		December 25, 2020
Accrued self-insurance retentions	$	8,209	$	8,041
Accrued warranty and service liabilities	13,748		13,082
Accrued trade promotions	12,699		12,140
Payable for employee stock purchases	7,126		14,554
Customer advances and deferred revenue	57,884		41,689
Income taxes payable	11,871		8,564
Right of return refund liability	18,072		16,303
Operating lease liabilities, current	9,760		11,178

Other	36,780		31,709
Total	$	176,149	$	157,260

A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):


Balance, December ~~27, 2019~~25, 2020	$	~~12,785~~13,082
Assumed in business acquisition	~~155~~24
Charged to expense	~~3,318~~5,271
Margin on parts sales reversed	~~1,080~~1,741
Reductions for claims settled	~~(4,760)~~(6,370)
Balance, June ~~26, 2020~~25, 2021	$	~~12,578~~13,748

Deferred Revenue

Revenue is deferred when cash payments are received or due in advance of performance, including amounts which are refundable. This is also the case for services associated with certain product sales. The balance in the deferred revenue

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and customer advances was ~~$50.3~~$57.9 million as of June ~~26, 2020~~25, 2021 and ~~$33.1~~$41.7 million as of December ~~27, 2019.~~25, 2020. Net sales for the year to date included $24.0 million in 2021 and $14.2 million in 2020 ~~and $29.9 million in 2019~~ that related to deferred revenue as of the beginning of each period.

~~10.~~11.Debt

On ~~January 29, 2020,~~March 25, 2021, the Company entered into an Amended and Restated Credit Agreement that amends, supersedes and restates in its entirety the Company's prior Credit Agreement with U.S. Bank National Association, as administrative agent (the “Agent”) and a ~~master note agreement with a sole~~ lender, and the other lenders that ~~expires on January 29, 2023.~~are parties thereto. The ~~note agreement sets forth certain terms on which~~Amended and Restated Credit Agreement extends the ~~Company may issue, and affiliates of the lender may purchase, up to $200 million~~maturity of the Company’s ~~senior notes. Interest on~~$500 million unsecured revolving credit facility from December 15, 2021 to March 25, 2026; includes a $250 million accordion feature; and provides mechanisms for two further one-year extensions of the ~~senior notes will~~maturity, subject to the consent of the extending banks.

Borrowings under the Amended and Restated Credit Agreement may be ~~determined~~denominated in U.S. Dollars or certain other currencies. Outstanding loans in currencies other than U.S. Dollars cannot exceed $200 million in the aggregate. Loans denominated in U.S. Dollars may bear interest, at the ~~time of issuance,~~Company’s option, at either a ~~fixed~~base rate or a LIBOR-based ~~floating rate at the option of the Company, provided that the maximum aggregate principal amount of notes bearing~~rate. Loans denominated in currencies other than U.S. Dollars will bear interest at a ~~floating~~LIBOR-based rate. The base rate ~~may not exceed $100 million. Fixed~~is an annual rate ~~notes issued under~~equal to a margin ranging from 0.00% to 0.75%, depending on the ~~agreement will mature no longer than 12 years~~Company’s cash flow leverage ratio, plus the highest of (i) the rate of interest from ~~date of issuance and variable~~time to time announced by the Agent as its prime rate, ~~notes will mature no longer than 10 years~~(ii) the federal funds effective rate plus 0.50%, or (iii) one-month LIBOR plus 1.50%. In general, LIBOR-based loans bear interest at a rate per annum equal to LIBOR, plus a margin ranging from ~~issuance. Under terms of~~1.00% to 1.75%, depending on the ~~note agreement,~~Company’s cash flow leverage ratio.

In addition to paying interest on the outstanding loans, the Company is required to ~~maintain certain financial ratios as~~pay a facility fee on the unused amount of the loan commitments at a rate per annum ranging from 0.125% to 0.25%, depending on the Company’s cash flow leverage ratio.

The Amended and Restated Credit Agreement contains customary provisions for the replacement of the LIBOR-based rate as that rate is phased out in the lending market. The Amended and Restated Credit Agreement contains customary representations, warranties, covenants and events of default, including but not limited to covenants restricting the Company’s and its subsidiaries’ ability to (i) merge or consolidate with another entity, (ii) sell, transfer, lease or convey their assets, (iii) make any material change in the nature of the core business of the Company, (iv) make certain investments, or (v) incur secured indebtedness. The Credit Agreement also requires the Company to maintain a cash flow leverage ratio of not more than 3.50 to 1.00 (unless a significant acquisition has been consummated, in which case, not more than 4.00 to 1.00 during the four fiscal quarter period beginning with the quarter in which such acquisition occurs) and an interest coverage ~~similar~~ratio of not less than 3.00 to 1.00 (unless a significant acquisition has been consummated, in which case, not less than 2.50 to 1.00 during the ~~requirements~~four fiscal quarter period beginning with the quarter in which such acquisition occurs). A change in control of ~~its other debt agreements. There were no senior notes issued~~the Company will constitute an event of default under the ~~note agreement as of June 26, 2020.~~

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In March 2020, the Company borrowed $250 million under its $500 million revolving credit facility in order to increase its cash position and preserve financial flexibility. The proceeds from the advance are available to be used for working capital, general corporate or other purposes.Credit Agreement.

~~11.~~12.Fair Value

Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):


		Level	June 26, 2020		December 27, 2019			Level	June 25, 2021		December 25, 2020
Assets	Assets						Assets
Cash surrender value of life insurance	Cash surrender value of life insurance	2	$	16,108	$	17,702	Cash surrender value of life insurance	2	$	22,486	$	19,887
Forward exchange contracts	Forward exchange contracts	2	156		—		Forward exchange contracts	2	33		16
Total assets at fair value	Total assets at fair value		$	16,264	$	17,702	Total assets at fair value		$	22,519	$	19,903
Liabilities	Liabilities						Liabilities
Contingent consideration	Contingent consideration	3	$	11,565	$	9,072	Contingent consideration	3	$	10,884	$	9,454
Deferred compensation	Deferred compensation	2	4,415		4,719		Deferred compensation	2	5,689		5,099
Forward exchange contracts		2	—		87

Total liabilities at fair value	Total liabilities at fair value		$	15,980	$	13,878	Total liabilities at fair value		$	16,573	$	14,553

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

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compensation plans. ~~Changes in cash surrender value are recorded in other non-operating expense.~~ The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.

Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of certain acquired businesses based on future revenues.

Long-term notes payable with fixed interest rates had a carrying amount of $150 million and estimated fair value of $165 million as of ~~both~~ June ~~26, 2020~~25, 2021 and estimated fair value of $170 million as of December ~~27, 2019.~~25, 2020. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.

12~~Recent Accounting Pronouncements~~

~~Adoption of New Accounting Standard~~

In June 2016, the Financial Accounting Standards Board (FASB) issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. There was no significant impact on earnings or financial condition from the adoption of the new standard.

~~Accounting Policy~~

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. The Company evaluates the adequacy of the worldwide allowance amount quarterly, considering individual account reviews, historical write-offs, current sales levels and expected economic factors.

~~Accounts Receivable~~

~~Accounts receivable includes trade receivables of $270 million and other receivables of $13 million as of June 26, 2020 and $256 million and $11 million, respectively, as of December 27, 2019.~~

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~~Allowance for Credit Losses~~

~~Following is a summary of activity in the allowance for credit losses (in thousands):~~

Three Months Ended Six Months Ended
June 26, 2020 June 28, 2019 June 26, 2020 June 28, 2019
Balance, beginning $ 4,798 $ 4,412 $ 4,828 $ 4,771
Additions charged to costs and expenses 314 192 631 222
Deductions from reserves ⁽¹⁾
(38) 146 (291) (690)
Other additions (deductions) ⁽²⁾
85 (435) (9) 12
Balance, ending $ 5,159 $ 4,315 $ 5,159 $ 4,315

~~(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.~~

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Item 2. GRACO INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company supplies technology and expertise for the management of fluids and coatings in both industrial and commercial applications. It designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and coating materials. Management classifies the Company’s business into three reportable segments: Industrial, Process and Contractor. Key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end-user markets, expanding distribution globally and completing strategic acquisitions that provide additional channel and technologies.

The ongoing global COVID-19 pandemic and related governmental and business responses continue to have an impact on our operations, supply chains, distribution channels, and end-user customers. The timing and extent of the financial 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. While we have been able to meet current demand in our businesses, our manufacturing and purchasing operations may experience supply chain disruptions that constrain our ability to meet future demand.

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying notes to the financial statements.

Consolidated Results

A summary of financial results follows (in millions except per share amounts):


		Three Months Ended										Six Months Ended											Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		% Change		June 26, 2020		June 28, 2019		% Change			Jun 25, 2021		Jun 26, 2020		% Change		June 25, 2021		June 26, 2020		% Change
Net Sales	Net Sales	$	366.9	$	428.3	(14)	%	$	740.5	$	833.2	(11)	%	Net Sales	$	507.2	$	366.9	38	%	$	961.3	$	740.5	30	%
Operating Earnings	Operating Earnings	44.8		112.4		(60)	%	134.6		216.9		(38)	%	Operating Earnings	133.8		44.8		199	%	262.1		134.6		95	%
Operating Earnings, adjusted (1)														Operating Earnings, adjusted (1)	133.8		79.8		68	%	262.1		169.6		55	%
Net Earnings	Net Earnings	28.8		88.1		(67)	%	101.7		174.9		(42)	%	Net Earnings	110.1		28.8		282	%	215.8		101.7		112	%
Net Earnings, adjusted ⁽¹⁾	Net Earnings, adjusted ⁽¹⁾	62.3		85.9		(27)	%	127.5		166.0		(23)	%	Net Earnings, adjusted (1)	108.0		62.3		73	%	209.6		127.5		65	%
Diluted Net Earnings per Common Share	Diluted Net Earnings per Common Share	$	0.17	$	0.51	(67)	%	$	0.59	$	1.02	(42)	%	Diluted Net Earnings per Common Share	$	0.63	$	0.17	271	%	$	1.24	$	0.59	110	%
Diluted Net Earnings per Common Share, adjusted ⁽¹⁾	Diluted Net Earnings per Common Share, adjusted ⁽¹⁾	$	0.37	$	0.50	(26)	%	$	0.74	$	0.97	(24)	%	Diluted Net Earnings per Common Share, adjusted (1)	$	0.62	$	0.37	68	%	$	1.20	$	0.74	62	%

(1) See below for a reconciliation of adjusted non-GAAP financial measures to GAAP.

~~Increases~~All segments and regions experienced double-digit percentage organic net sales growth for the quarter and year to date. Changes in ~~Contractor~~currency translation rates increased worldwide sales by $12 million for the quarter and $23 million for the year to date.

Increased production volume, favorable product and channel mix and favorable changes in currency translation rates offset higher product costs and drove the gross profit margin rate for the quarter and year to date ~~partially offset~~approximately 2 percentage points higher than the ~~impact of double digit organic percentage declines in other segments. Changes in currency translation rates decreased worldwide sales by approximately $5 million~~comparable periods last year. Total operating expenses increased 26 percent for the quarter and ~~$9 million~~18 percent for the year to ~~date. Sales from acquired operations contributed approximately $7 million (2 percentage points)~~date primarily due to ~~the second quarter~~increases in sales and ~~$12 million (2 percentage points) to the year to date.~~earnings-based expenses.

~~Changes in product and channel mix, lower factory volume and changes in currency translation rates drove decreases in gross margin rates for the quarter and the year to date. Earnings~~2020 results for the quarter and year to date included non-cash impairment charges of $35 million ($34 million, $0.20 per diluted share, after tax effects) related to the divestiture of a U.K.-based valve business that was sold in the third quarter. Total operating expenses before impairment charges decreased 10 percent for the quarter and 6 percent for the year to date. Reductions in volume and earnings-based expenses more than offset increases in product development expenses.business.

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Excluding the impact of the prior year impairment ~~charges,~~and excess tax benefits related to stock option exercises ~~and certain tax provision adjustments~~ 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):


		Three Months Ended									Six Months Ended										Three Months Ended						Six Months Ended
		June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019				June 25, 2021			June 26, 2020			June 25, 2021			June 26, 2020
Operating earnings, as reported	Operating earnings, as reported	$	44.8		$	112.4		$	134.6		$	216.9		Operating earnings, as reported	$	133.8		$	44.8		$	262.1		$	134.6
Impairment	Impairment	35.0			—			35.0			—			Impairment	—			35.0			—			35.0
Operating earnings, adjusted	Operating earnings, adjusted	$	79.8		$	112.4		$	169.6		$	216.9		Operating earnings, adjusted	$	133.8		$	79.8		$	262.1		$	169.6

Earnings before income taxes, as reported		$	42.0		$	107.8		$	124.1		$	208.5
Earnings before income taxes														Earnings before income taxes	$	131.7		$	42.0		$	257.5		$	124.1
Impairment	Impairment	35.0			—			35.0			—			Impairment	—			35.0			—			35.0
Earnings before income taxes, adjusted	Earnings before income taxes, adjusted	$	77.0		$	107.8		$	159.1		$	208.5		Earnings before income taxes, adjusted	$	131.7		$	77.0		$	257.5		$	159.1

Income taxes, as reported	Income taxes, as reported	$	13.2		$	19.7		$	22.5		$	33.6		Income taxes, as reported	$	21.6		$	13.2		$	41.7		$	22.5
Impairment tax benefit														Impairment tax benefit	—			1.2			—			1.2
Excess tax benefit from option exercises	Excess tax benefit from option exercises	0.3			2.2			8.0			7.4			Excess tax benefit from option exercises	2.1			0.3			6.2			8.0
Impairment tax benefit		1.2			—			1.2			—
Other non-recurring tax benefit		—			—			—			1.5

Income taxes, adjusted	Income taxes, adjusted	$	14.7		$	21.9		$	31.7		$	42.5		Income taxes, adjusted	$	23.7		$	14.7		$	47.9		$	31.7

Effective income tax rate	Effective income tax rate													Effective income tax rate
As reported	As reported	31.4		%	18.2		%	18.1		%	16.1		%	As reported	16.4		%	31.4		%	16.2		%	18.1		%
Adjusted	Adjusted	19.1		%	20.3		%	19.9		%	20.4		%	Adjusted	18.0		%	19.1		%	18.6		%	19.9		%

Net Earnings, as reported	Net Earnings, as reported	$	28.8		$	88.1		$	101.7		$	174.9		Net Earnings, as reported	$	110.1		$	28.8		$	215.8		$	101.7
Impairment, net	Impairment, net	33.8			—			33.8			—			Impairment, net	—			33.8			—			33.8
Excess tax benefit from option exercises	Excess tax benefit from option exercises	(0.3)			(2.2)			(8.0)			(7.4)			Excess tax benefit from option exercises	(2.1)			(0.3)			(6.2)			(8.0)
Other non-recurring tax benefit		—			—			—			(1.5)

Net Earnings, adjusted	Net Earnings, adjusted	$	62.3		$	85.9		$	127.5		$	166.0		Net Earnings, adjusted	$	108.0		$	62.3		$	209.6		$	127.5

Weighted Average Diluted Shares	Weighted Average Diluted Shares	170.5			172.0			171.6			171.5			Weighted Average Diluted Shares	174.6			170.5			174.2			171.6
Diluted Earnings per Share	Diluted Earnings per Share													Diluted Earnings per Share
As reported	As reported	$	0.17		$	0.51		$	0.59		$	1.02		As reported	$	0.63		$	0.17		$	1.24		$	0.59
Adjusted	Adjusted	$	0.37		$	0.50		$	0.74		$	0.97		Adjusted	$	0.62		$	0.37		$	1.20		$	0.74

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


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Net Sales	Net Sales	100.0	%	100.0	%	100.0	%	100.0	%	Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of products sold	Cost of products sold	50.2		47.0		48.5		46.8		Cost of products sold	48.0		50.2		46.8		48.5
Gross Profit	Gross Profit	49.8		53.0		51.5		53.2		Gross Profit	52.0		49.8		53.2		51.5
Product development	Product development	4.9		4.1		4.7		4.1		Product development	4.2		4.9		4.3		4.7
Selling, marketing and distribution	Selling, marketing and distribution	13.3		14.1		14.4		14.6		Selling, marketing and distribution	13.6		13.3		13.7		14.4
General and administrative	General and administrative	9.8		8.6		9.5		8.5		General and administrative	7.8		9.8		8.0		9.5
Impairment	Impairment	9.6		—		4.7		—		Impairment	—		9.6		—		4.7
Operating Earnings	Operating Earnings	12.2		26.2		18.2		26.0		Operating Earnings	26.4		12.2		27.2		18.2
Interest expense	Interest expense	0.9		0.8		0.8		0.8		Interest expense	0.5		0.9		0.5		0.8

Other expense (income), net		(0.2)		0.2		0.6		0.2
Other expense, net										Other expense, net	(0.1)		(0.2)		—		0.6
Earnings Before Income Taxes	Earnings Before Income Taxes	11.5		25.2		16.8		25.0		Earnings Before Income Taxes	26.0		11.5		26.8		16.8
Income taxes	Income taxes	3.6		4.6		3.1		4.0		Income taxes	4.3		3.6		4.3		3.1
Net Earnings	Net Earnings	7.9	%	20.6	%	13.7	%	21.0	%	Net Earnings	21.7	%	7.9	%	22.4	%	13.7	%

Net Sales

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


		Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
		June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019			June 25, 2021		June 26, 2020		June 25, 2021		June 26, 2020
Americas⁽¹⁾	Americas⁽¹⁾	$	227.7	$	253.7	$	452.5	$	485.7	Americas(1)	$	302.0	$	227.7	$	566.9	$	452.5
EMEA⁽²⁾	EMEA⁽²⁾	71.1		101.1		158.9		200.6		EMEA(2)	113.8		71.1		224.0		158.9
Asia Pacific	Asia Pacific	68.1		73.5		129.1		146.9		Asia Pacific	91.4		68.1		170.4		129.1
Consolidated	Consolidated	$	366.9	$	428.3	$	740.5	$	833.2	Consolidated	$	507.2	$	366.9	$	961.3	$	740.5

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

(2)Europe, Middle East and Africa

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


		Three Months							Six Months								Three Months		Six Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions and Divestitures	Currency	Total	Volume and Price	Acquisitions and Divestitures	Currency	Total
Americas	Americas	(11)%	1%	0%	(10)%	(7)%	0%	0%	(7)%	Americas	32%	0%	1%	33%	25%	0%	0%	25%
EMEA	EMEA	(30)%	2%	(2)%	(30)%	(21)%	2%	(2)%	(21)%	EMEA	49%	0%	11%	60%	32%	(1)%	10%	41%
Asia Pacific	Asia Pacific	(9)%	4%	(2)%	(7)%	(13)%	3%	(2)%	(12)%	Asia Pacific	31%	(6)%	9%	34%	28%	(4)%	8%	32%
Consolidated	Consolidated	(15)%	2%	(1)%	(14)%	(12)%	2%	(1)%	(11)%	Consolidated	35%	(1)%	4%	38%	27%	(1)%	4%	30%

Gross Profit

Gross profit margin rates improved approximately 2 percentage points for the quarter and year to ~~date decreased from the comparable periods last year. Strong price realization was not enough to offset the adverse impacts of unfavorable~~date. Increased production volume, favorable product and channel mix ~~(lower high-margin Industrial sales combined with growth in lower-margin Contractor segment sales), lower factory volume~~ and favorable changes in currency translation ~~rates.~~rates offset higher product costs.

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Operating Expenses

InTotal operating expenses increased $27 million (26 percentage points) for the ~~second~~ quarter ~~the Company entered into negotiations to sell its U.K.-based valve business (“Alco”), which has significant exposure to oil~~ and ~~natural gas markets, and has accumulated operating losses since acquired in 2014. Alco operations contributed $7~~$37 million ~~of sales~~(18 percentage points) for the year to date mostly due to increases in sales and ~~are included within the Company's Process segment. Based on the negotiations to sell, the Company revalued its investment~~earnings-based expenses and product development spending. Changes in ~~Alco, recording non-cash impairment charges of $35 million, including $24 million of previously unrealized foreign~~ currency translation ~~losses recorded in accumulated other comprehensive income. The impact on net earnings was $34 million or $0.20 per diluted share. The sale of Alco was completed in the third quarter.~~

~~Total~~rates increased operating expenses ~~before impairment charges decreased $12~~by $3 million ~~(10 percent)~~(2 percentage points) for the quarter and ~~$14~~$5 million ~~(6 percent)~~(2 percentage points) for the year to date compared to last year. Reductions in volume and earnings-based expenses more than offset increases in product development, which increased 4 percent for the quarter and 3 percent for the year to date, as the Company continued its development initiatives.date.

Other Expense

Other non-operating expenses ~~decreased $2 million~~were comparable for the quarter and ~~increased $3~~decreased $5 million for the year to date mostly due to favorable market valuation ~~fluctuations~~changes on investments held to fund certain retirement benefits liabilities.

Income Taxes

The effective income tax rate for the quarter ~~was 31 percent, up 13 percentage points from the comparable period last year, primarily due to non-deductible impairment charges. The effective income tax rate for the~~and year to date was 1816 percent, updown 15 percentage points and 2 percentage points from the comparable ~~period~~periods last ~~year.~~year, respectively. The ~~year-to-date increase from the~~decreases in effective tax rates were primarily due to non-deductible impairment charges ~~was~~in the prior year, partially offset by ~~the favorable impact of an increase~~changes in excess tax benefits ~~related to~~for stock option exercises.

~~Economic Uncertainty~~

The ongoing COVID-19 pandemic and related governmental and business responses had an adverse effect on our operations, supply chains, distribution channels, and end-user customers. Incoming order rates, on an organic, constant currency basis, declined by approximately 24 percent in April and improved sequentially in May and June, as government restrictions loosened in certain areas, and as our customers responded favorably to new product offerings. Current order rates for our Industrial and Process segments have not recovered to pre-pandemic levels. While our Contractor segment has seen growth in order rates, there is uncertainty with respect to the duration and level at which the activity will continue.

We manufacture and provide essential products and services to a variety of critical infrastructure customers. We have remained operational during the pandemic and we intend to continue providing our products and services to our customers. Our commercial teams are focused on customer service, maintaining end-user customer contact and providing support to our distributors. Our engineering teams continue to develop and launch new products.

As a result of the pandemic and various governmental orders, a significant number of our employees are working from home, and we altered our manufacturing operations to allow for appropriate social distancing, hygiene, cleaning and disinfecting. In our supply chain, we have experienced isolated instances of suppliers temporarily closing their operations, delaying order fulfillment or limiting their production, and we are utilizing alternative supply arrangements as needed. We have also experienced isolated instances of distributors reducing or closing their operations, impacting the ability of some of our end-user customers to procure our products through our traditional distribution channels. Some of our end-user customers are deferring capital equipment purchases, and have eliminated in-person sales meetings. In addition, trade shows, industry events and product demonstrations have been cancelled or postponed. As a result, our selling activities and our ability to convert those activities into sales have been and we expect will continue to be adversely impacted. We will continue to manage our working capital, such as receivables and inventory, to align with customer needs and changes in demand for our products and services.

The timing and extent of the economic recovery 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. We do not expect the pandemic to have a significant effect on our liquidity as operating cash flows and available liquidity are sufficient to support operations at current order rates (see Liquidity and Capital Resources below).

~~Table of Contents~~

Segment Results

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

Industrial Segment

The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment

(dollars in millions):


		Three Months Ended									Six Months Ended										Three Months Ended						Six Months Ended
		June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019				June 25, 2021			June 26, 2020			June 25, 2021			June 26, 2020
Net Sales	Net Sales													Net Sales
Americas	Americas	$	58.4		$	80.7		$	132.8		$	161.6		Americas	$	87.1		$	58.4		$	167.1		$	132.8
EMEA	EMEA	34.8			59.1			81.0			117.2			EMEA	60.0			34.8			116.7			81.0
Asia Pacific	Asia Pacific	40.0			48.7			78.1			98.8			Asia Pacific	57.5			40.0			105.5			78.1
Total	Total	$	133.2		$	188.5		$	291.9		$	377.6		Total	$	204.6		$	133.2		$	389.3		$	291.9
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales	28		%	34		%	30		%	34		%	Operating earnings as a percentage of net sales	34		%	28		%	35		%	30		%

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


		Three Months							Six Months								Three Months		Six Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	Americas	(27)%	0%	(1)%	(28)%	(17)%	0%	(1)%	(18)%	Americas	48%	0%	1%	49%	25%	0%	1%	26%
EMEA	EMEA	(40)%	0%	(1)%	(41)%	(29)%	0%	(2)%	(31)%	EMEA	55%	5%	12%	72%	32%	2%	10%	44%
Asia Pacific	Asia Pacific	(16)%	0%	(2)%	(18)%	(19)%	0%	(2)%	(21)%	Asia Pacific	35%	0%	8%	43%	27%	0%	8%	35%
Segment Total	Segment Total	(28)%	0%	(1)%	(29)%	(22)%	0%	(1)%	(23)%	Segment Total	46%	1%	6%	53%	28%	0%	5%	33%

Industrial segment sales for the quarter and year to date ~~declined~~increased sharply in all regions ~~with worldwide government actions that severely reduced economic activity in major geographies. While gross~~as end markets strengthened from last year. Operating margin rates ~~in this segment remained relatively strong, decreases in operating expenses did not keep pace with the drop in sales~~increased mostly due to higher production volume ~~driving operating earnings as a percentage~~and expense leverage.

Table of ~~sales down compared to last year.~~Contents

Process Segment

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

(dollars in millions):


		Three Months Ended									Six Months Ended										Three Months Ended						Six Months Ended
		June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019				June 25, 2021			June 26, 2020			June 25, 2021			June 26, 2020
Net Sales	Net Sales													Net Sales
Americas	Americas	$	45.9		$	55.1		$	101.0		$	112.2		Americas	$	59.7		$	45.9		$	116.5		$	101.0
EMEA	EMEA	13.2			14.3			29.0			30.1			EMEA	15.8			13.2			30.6			29.0
Asia Pacific	Asia Pacific	18.6			15.7			33.8			29.7			Asia Pacific	21.7			18.6			41.5			33.8
Total	Total	$	77.7		$	85.1		$	163.8		$	172.0		Total	$	97.2		$	77.7		$	188.6		$	163.8
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales	15		%	22		%	18		%	22		%	Operating earnings as a percentage of net sales	22		%	15		%	23		%	18		%

~~Table of Contents~~

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


		Three Months							Six Months								Three Months		Six Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions and Divestitures	Currency	Total	Volume and Price	Acquisitions and Divestitures	Currency	Total
Americas	Americas	(20)%	4%	0%	(16)%	(13)%	3%	0%	(10)%	Americas	30%	(1)%	1%	30%	15%	0%	0%	15%
EMEA	EMEA	(17)%	11%	(2)%	(8)%	(11)%	9%	(2)%	(4)%	EMEA	22%	(9)%	6%	19%	8%	(8)%	5%	5%
Asia Pacific	Asia Pacific	1%	20%	(3)%	18%	(1)%	18%	(3)%	14%	Asia Pacific	30%	(21)%	8%	17%	34%	(18)%	7%	23%
Segment Total	Segment Total	(16)%	8%	(1)%	(9)%	(11)%	7%	(1)%	(5)%	Segment Total	29%	(7)%	3%	25%	17%	(5)%	3%	15%

~~Acquired operations in the~~The Process segment ~~contributed~~had organic sales ~~of $7 million~~growth in all applications for the quarter and ~~$12 million for the~~ year to date. ~~Lower~~Higher production volume, ~~higher product costs, unfavorable channel~~the impact of divested operations and ~~product mix, and lower operating margins of acquired operations~~expense leverage combined to ~~decrease~~increase the operating ~~earnings as a percentage of sales~~margin rate for ~~both~~ the quarter and ~~the~~ year to date.

Contractor Segment

The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment

(dollars in millions):


		Three Months Ended									Six Months Ended										Three Months Ended						Six Months Ended
		June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019				June 25, 2021			June 26, 2020			June 25, 2021			June 26, 2020
Net Sales	Net Sales													Net Sales
Americas	Americas	$	123.3		$	118.0		$	218.6		$	211.9		Americas	$	155.2		$	123.3		$	283.3		$	218.6
EMEA	EMEA	23.0			27.7			48.8			53.3			EMEA	38.0			23.0			76.7			48.8
Asia Pacific	Asia Pacific	9.5			9.1			17.2			18.4			Asia Pacific	12.2			9.5			23.4			17.2
Total	Total	$	155.8		$	154.8		$	284.6		$	283.6		Total	$	205.4		$	155.8		$	383.4		$	284.6
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales	26		%	26		%	24		%	23		%	Operating earnings as a percentage of net sales	24		%	26		%	26		%	24		%

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


		Three Months							Six Months								Three Months		Six Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	Americas	5%	0%	(1)%	4%	3%	0%	0%	3%	Americas	25%	0%	1%	26%	29%	0%	1%	30%
EMEA	EMEA	(15)%	0%	(2)%	(17)%	(6)%	0%	(2)%	(8)%	EMEA	52%	0%	13%	65%	45%	0%	12%	57%
Asia Pacific	Asia Pacific	9%	0%	(4)%	5%	(3)%	0%	(4)%	(7)%	Asia Pacific	17%	0%	12%	29%	25%	0%	12%	37%
Segment Total	Segment Total	1%	0%	0%	1%	1%	0%	(1)%	0%	Segment Total	29%	0%	3%	32%	32%	0%	3%	35%

Contractor segment sales increased by ~~1 percent at consistent currency translation rates for both the quarter and the year to date. Favorable response to new product offerings and continued stability~~double-digit percentages in ~~construction markets in the Americas drove the increase. Operating margin rate was steady~~all regions for the quarter and year to date as construction markets remain robust. The operating margin rate for the quarter decreased 2 percentage points as increased bysales volume and favorable changes in currency translation rates were unable to offset the adverse impacts of higher material costs, increased factory spending and higher sales and earnings-based expenses. Increased sales volume and favorable changes in currency translation rates drove the operating margin rate 1 percentage point higher for the year to ~~date, as the favorable effects of strong realized pricing and expense leverage offset unfavorable effects of product and channel mix and higher factory spending.~~date.

Liquidity and Capital Resources

Net cash provided by operating activities ~~totaled $143~~of $220 million increased $77 million from the first half of last year, mostly driven by the increase in net earnings, partially offset by increases in accounts receivable and inventories that reflect growth in business activity in the first half of 2020, down $21 million from the comparable period of 2019. The decrease was driven by lower sales and net earnings. Purchases of Company common stock totaling $102 million in 2020 were partially offset by net proceeds from shares issued totaling $40 million. Other significant2021. Significant uses of cash in 2021 included dividend payments of ~~$58~~$63 million, property, plant and equipment additions of ~~$33~~$55 million and business acquisitions of ~~$27 million. The Company may make additional opportunistic share purchases going forward.~~

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~~Significant uses of cash in 2019 included cash dividends of $53 million, property, plant and equipment additions of $70 million and business acquisitions of $6~~$19 million. Proceeds from shares issued in the first half of ~~2019~~2021 totaled $33 ~~million, partially offset by $2 million~~million. Although the Company did not repurchase any shares in the first half of ~~payments for shares repurchased in 2018 and settled in 2019.~~2021, it may make opportunistic purchases going forward.

At June ~~26, 2020,~~25, 2021, the Company had various lines of credit totaling ~~$595~~$596 million, of which ~~$326~~$586 million was unused. In addition to its lines of credit, under the terms of a master note agreement with a sole lender expiring in January 2023, the Company may issue up to $200 million of senior notes. Interest on the notes will be determined at the time of issuance, at a fixed or LIBOR-based floating rate at the option of the Company, provided that the maximum aggregate principal amount of notes bearing interest at a floating rate may not exceed $100 million. Fixed rate notes issued under the agreement will mature no longer than 12 years from date of issuance and variable rate notes will mature no longer than 10 years from date of issuance.

Significant uses of cash in 2020 included purchases of Company common stock totaling $102 million, which were partially offset by net proceeds from shares issued totaling $42 million. Other significant uses of cash in 2020 included dividend payments of $58 million, property, plant and equipment additions of $33 million and business acquisitions of $27 million.

Cash balances and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in ~~2020,~~2021, including its capital expenditure plan, planned dividends, share repurchases, acquisitions and operating requirements.

Outlook

~~While weak economic~~We are initiating an outlook for the full-year 2021 of mid-to-high teen sales growth on an organic, constant currency basis, with growth expected in every region and reportable segment. Demand levels in the Industrial and Process segments remain strong across major end markets and product categories. Our outlook for the Contractor segment remains positive as favorable conditions ~~affected our business~~continue, however comparisons in the second ~~quarter, we remain committed to our long-term strategy. Our initiatives for 2021 and beyond have continued as usual. We~~half will use this difficult period to strengthen our competitive position, expand our product offering, build our global channel and enter new market spaces. These initiatives may put pressure on our short-term financial results, but will position us to capitalize when market conditions normalize. We also recognize that the timing and shape of a recovery is highly uncertain. We will remain agile and have contingency plans in place to appropriately respond to conditions as they unfold.be challenging.

Cautionary Statement Regarding Forward-Looking Statements

The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including our Form 10-K, Form 10-Qs and Form 8-Ks, and other disclosures, including our ~~2019~~2020 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,~~

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“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 impact of the COVID-19 pandemic on our business; economic conditions in the United States and other major world economies; our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; changes in currency translation rates; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; catastrophic events; changes in laws and regulations; compliance with anti-corruption and trade laws; changes in tax rates or the adoption of new tax legislation; the possibility of asset impairments if acquired businesses do not meet performance expectations; political instability; results of and costs associated with litigation, administrative proceedings and regulatory reviews incident to our business; our ability to attract, develop and retain qualified personnel; the possibility of decline in purchases from a few large customers of the Contractor ~~segment; and~~segment, variations in activity in the construction, automotive, mining and oil and natural gas ~~industries.~~industries, and the impact of declines in interest rates, asset values and investment returns on pension costs and required pension contributions. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year ~~2019~~2020 and Item 1A of this Form 10-Q for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com and the Securities and Exchange Commission’s website at www.sec.gov. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

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Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes related to market risk from the disclosures made in the Company’s ~~2019~~2020 Annual Report on Form 10-K.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures

As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer and the Chief Financial Officer and Treasurer. Based upon that evaluation, the Company's President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective.

Changes in internal controls

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

PART IIOTHER INFORMATION

Item 1A.Risk Factors

~~Except as noted below, there~~There have been no material changes to the Company’s risk factors from those disclosed in the Company’s ~~2019~~2020 Annual Report on Form 10-K.

Coronavirus Disease 2019 (COVID-19) - The COVID-19 pandemic, the governmental responses to the pandemic, and the resulting decline in 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.

In response to the COVID-19 pandemic, federal, provincial, state, county and local governments and public health organizations and authorities around the world implemented a variety of measures intended to control the spread of the virus, including quarantines, “shelter-in-place,” “stay-at-home” and similar orders, travel restrictions, school closures, business curtailments and closures, social distancing and hygiene requirements, and other measures. While there has been a loosening of some of these measures in certain areas, the ongoing pandemic and outbreaks of COVID-19 in various areas has resulted in, and may continue to result in, reinstating these measures or implementing new or additional measures in certain areas.

We manufacture and provide essential products and services to a variety of critical infrastructure customers around the globe. We have remained operational during the pandemic, and we intend to continue providing our products and services to our customers. However, the COVID-19 pandemic and related governmental and business responses have had, and will likely continue to have, an adverse effect on our operations, supply chains, distribution channels, and end-user customers. For example, as a result of the pandemic and various governmental orders, a significant number of our employees are working from home, and we substantially altered our manufacturing operations to allow for appropriate social distancing and hygiene, which could lead to decreased efficiency and productivity in our workforce and our operations. In our supply chain, we have experienced isolated instances of suppliers temporarily closing their operations, delaying order fulfillment or limiting their production due to the pandemic, and we are utilizing alternative supply arrangements where appropriate or necessary, which may lead to increased costs, delays, and difficulties sourcing certain products. Similarly, we have experienced isolated instances of distributors reducing or closing their operations, impacting the ability of some of our end-user customers to procure our products through our traditional distribution channels. Some

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of our end-user customers are deferring capital equipment purchases and have eliminated in-person sales meetings. In addition, trade shows, industry events and product demonstrations have been cancelled and are continuing to be cancelled or postponed. As a result, our selling activities and our ability to convert those activities into actual sales have been and will continue to be adversely impacted. In addition, management is focused on mitigating the effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time, energy, resources and focus.

The extent to which the 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; the duration and scope of the pandemic; whether there is a second wave of the pandemic; whether there are increases or spikes in COVID-19 cases in the areas in which we or our suppliers, distributors or end-user customers operate; governmental, business, 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 become ill, are quarantined as a result of exposure, or are reluctant to show up for work; 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 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 impacts to our business as a result of the economic recession that has occurred and any economic recession that may occur in the future. The COVID-19 pandemic could also exacerbate or trigger other risks discussed in our 2019 Annual Report on Form 10-K, any of which could have a material and adverse effect on our business, results of operations and financial condition.

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

Issuer Purchases of Equity Securities

On April 24, 2015, the Board of Directors authorized the Company to purchase up to ~~18,000,000~~18 million shares of its outstanding 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~~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 authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax due upon exercise of options or vesting of restricted stock.

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)
Mar 28,2020 - Apr 24, 2020 261,467 $ 46.33 — 18,517,834
Apr 25, 2020 - May 22, 2020 — $ — — 18,517,834
May 23, 2020 - Jun 26, 2020 — $ — — 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)
March 27, 2021 - April 23, 2021	—	$	—	—	18,517,834
April 24, 2021 - May 21, 2021	—	$	—	—	18,517,834
May 22, 2021 - June 25, 2021	—	$	—	—	18,517,834

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Item 6.Exhibits


3.1	Restated Articles of Incorporation as amended December 8, 2017. (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K filed December 8, 2017.)

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

10.1		~~Amendment No. 5 dated as~~Key Employee Agreement. Form of agreement offered to the Company’s CEO, CFO and each other executive officer in June of 2021, and to be offered to all other persons hired or promoted to be executive officers of the Company after April ~~17, 2020 to Note Agreement dated as of March 11, 2011.~~ 22, 2021. ((Incorporated by reference to Exhibit ~~10.4~~10.1 to the Company’s Report on Form ~~10-Q for the thirteen weeks ended March~~8-K filed April 27, ~~2020.)~~2021

~~10.2~~	Fifth Amendment to Credit Agreement dated as of April 17, 2020, amending the Credit Agreement among Graco Inc., the borrowing subsidiaries from time to time party thereto, the banks from time to time party thereto and U.S. Bank National Association, as administrative agent. ~~(Incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 10-Q for the thirteen weeks ended March 27, 2020.~~.)

31.1	Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a).

31.2	Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a).

32	Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C.

99.1	Press Release Reporting Second Quarter Earnings dated July ~~22, 2020.~~21, 2021.

101	Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language).

104	Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GRACO INC.

Date:

July ~~22, 2020~~21, 2021

By:

/s/ ~~Patrick J. McHale~~Mark W. Sheahan

~~Patrick J. McHale~~Mark W. Sheahan

President and Chief Executive Officer

(Principal Executive Officer)

Date:

July ~~22, 2020~~21, 2021

By:

/s/ ~~Mark W. Sheahan~~David M. Lowe

~~Mark W. Sheahan~~David M. Lowe

Chief Financial Officer and Treasurer

(Principal Financial Officer)

Date:

July ~~22, 2020~~21, 2021

By:

/s/ ~~Caroline M. Chambers~~Kathryn L. Schoenrock

~~Caroline M. Chambers~~Kathryn L. Schoenrock

Executive Vice President, Corporate Controller
~~and Information Systems~~

(Principal Accounting Officer)



Six Months Ended June 28, 2019
Balance, December 28, 2018	$	165,171	$	510,825	$	220,734	$	(144,857)	$	751,873

Shares issued	1,621		31,064		—		—		32,685

Stock compensation cost	—		14,281		—		—		14,281


Net earnings	—		—		174,886		—		174,886
Dividends declared ($0.320 per share)	—		—		(53,312)		—		(53,312)

Other comprehensive income (loss)	—		—		—		5,545		5,545
Balance, June 28, 2019	$	166,792	$	556,170	$	342,308	$	(139,312)	$	925,958



Three Months Ended June 28, 2019
Balance, March 29, 2019	$	(85,232)	$	(56,799)	$	(142,031)
Other comprehensive income (loss) before reclassifications	—		1,232		1,232
Reclassified to pension cost and deferred tax	1,487		—		1,487

Balance, June 28, 2019	$	(83,745)	$	(55,567)	$	(139,312)


Six Months Ended June 28, 2019
Balance, December 28, 2018	$	(86,889)	$	(57,968)	$	(144,857)
Other comprehensive income (loss) before reclassifications	—		2,401		2,401
Reclassified to pension cost and deferred tax	3,144		—		3,144

Balance, June 28, 2019	$	(83,745)	$	(55,567)	$	(139,312)


	2020		2021		2022		2023		2024		Thereafter
Estimated Amortization Expense	$	16,595	$	16,570	$	16,483	$	15,552	$	14,009	$	32,007


	Three Months Ended						Six Months Ended
	June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019
Balance, beginning	$	4,798	$	4,412	$	4,828	$	4,771
Additions charged to costs and expenses	314		192		631		222
Deductions from reserves ⁽¹⁾	(38)		146		(291)		(690)
Other additions (deductions) ⁽²⁾	85		(435)		(9)		12
Balance, ending	$	5,159	$	4,315	$	5,159	$	4,315