UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 25, 2020~~March 26, 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

☐

☒

~~167,541,097~~169,435,068 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of ~~October~~April 14, ~~2020.~~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

1514

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2120

Item 4.

Controls and Procedures

2120

PART II - OTHER INFORMATION

Item 1A.

Risk Factors

2220

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						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Net Sales	Net Sales	$	439,316	$	400,555	$	1,179,775	$	1,233,753	Net Sales	$	454,129	$	373,567
Cost of products sold	Cost of products sold	210,363		193,176		569,662		583,378		Cost of products sold	206,795		174,936
Gross Profit	Gross Profit	228,953		207,379		610,113		650,375		Gross Profit	247,334		198,631
Product development	Product development	17,715		16,723		52,744		50,616		Product development	19,571		17,081
Selling, marketing and distribution	Selling, marketing and distribution	54,009		55,538		160,228		176,796		Selling, marketing and distribution	62,228		57,388
General and administrative	General and administrative	31,957		31,719		102,322		102,676		General and administrative	37,249		34,350
Impairment		267		0		35,229		0

Operating Earnings	Operating Earnings	125,005		103,399		259,590		320,287		Operating Earnings	128,286		89,812

Interest expense	Interest expense	2,964		3,618		8,708		10,584		Interest expense	2,428		2,486

Other expense (income), net		1,025		2,972		5,738		4,360
Other expense, net										Other expense, net	121		5,223
Earnings Before Income Taxes	Earnings Before Income Taxes	121,016		96,809		245,144		305,343		Earnings Before Income Taxes	125,737		82,103
Income taxes	Income taxes	6,901		12,677		29,379		46,325		Income taxes	20,050		9,285
Net Earnings	Net Earnings	$	114,115	$	84,132	$	215,765	$	259,018	Net Earnings	$	105,687	$	72,818
Net Earnings per Common Share	Net Earnings per Common Share									Net Earnings per Common Share
Basic	Basic	$	0.68	$	0.50	$	1.29	$	1.56	Basic	$	0.63	$	0.43
Diluted	Diluted	$	0.66	$	0.49	$	1.26	$	1.51	Diluted	$	0.61	$	0.42

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)


		Three Months Ended						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Net Earnings	Net Earnings	$	114,115	$	84,132	$	215,765	$	259,018	Net Earnings	$	105,687	$	72,818
Components of other comprehensive income (loss)	Components of other comprehensive income (loss)									Components of other comprehensive income (loss)
Cumulative translation adjustment	Cumulative translation adjustment	30,966		(6,396)		33,045		(3,995)		Cumulative translation adjustment	(10,470)		(4,677)
Pension and postretirement medical liability adjustment	Pension and postretirement medical liability adjustment	2,313		2,268		7,508		6,305		Pension and postretirement medical liability adjustment	3,308		2,749
Income taxes - pension and postretirement medical liability adjustment	Income taxes - pension and postretirement medical liability adjustment	(512)		(505)		(1,681)		(1,398)		Income taxes - pension and postretirement medical liability adjustment	(672)		(615)
Other comprehensive income (loss)	Other comprehensive income (loss)	32,767		(4,633)		38,872		912		Other comprehensive income (loss)	(7,834)		(2,543)
Comprehensive Income	Comprehensive Income	$	146,882	$	79,499	$	254,637	$	259,930	Comprehensive Income	$	97,853	$	70,275

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands)


		September 25, 2020		December 27, 2019			March 26, 2021		December 25, 2020
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	424,674	$	220,973	Cash and cash equivalents	$	460,616	$	378,909
Accounts receivable, less allowances of $4,800 and $5,300		314,996		267,345
Accounts receivable, less allowances of $5,000 and $4,400						Accounts receivable, less allowances of $5,000 and $4,400	323,197		314,946
Inventories	Inventories	283,713		273,233		Inventories	311,645		285,704
Other current assets	Other current assets	37,806		29,917		Other current assets	31,928		44,242
Total current assets	Total current assets	1,061,189		791,468		Total current assets	1,127,386		1,023,801

Property, Plant and Equipment, net	Property, Plant and Equipment, net	332,268		325,546		Property, Plant and Equipment, net	360,370		350,750
Goodwill	Goodwill	342,340		307,663		Goodwill	343,010		347,603
Other Intangible Assets, net	Other Intangible Assets, net	160,660		162,623		Other Intangible Assets, net	152,792		160,669
Operating Lease Assets	Operating Lease Assets	28,191		29,891		Operating Lease Assets	37,164		37,807
Deferred Income Taxes	Deferred Income Taxes	35,339		39,327		Deferred Income Taxes	22,902		25,828
Other Assets	Other Assets	34,008		35,692		Other Assets	44,096		41,670
Total Assets	Total Assets	$	1,993,995	$	1,692,210	Total Assets	$	2,087,720	$	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	$	44,039	$	7,732	Notes payable to banks	$	31,661	$	22,183

Trade accounts payable	Trade accounts payable	55,463		54,117		Trade accounts payable	66,242		58,305
Salaries and incentives	Salaries and incentives	42,321		51,301		Salaries and incentives	45,246		52,005
Dividends payable	Dividends payable	29,350		29,235		Dividends payable	31,718		31,636
Other current liabilities	Other current liabilities	155,280		142,937		Other current liabilities	148,653		157,260
Total current liabilities	Total current liabilities	326,453		285,322		Total current liabilities	323,520		321,389
Long-term Debt	Long-term Debt	275,000		164,298		Long-term Debt	150,000		150,000
Retirement Benefits and Deferred Compensation	Retirement Benefits and Deferred Compensation	186,581		182,707		Retirement Benefits and Deferred Compensation	183,576		184,747
Operating Lease Liabilities	Operating Lease Liabilities	21,265		24,176		Operating Lease Liabilities	30,020		29,224
Deferred Income Taxes	Deferred Income Taxes	10,159		10,776		Deferred Income Taxes	9,502		10,264
Other Non-current Liabilities	Other Non-current Liabilities	8,600		0		Other Non-current Liabilities	8,600		8,600

Shareholders’ Equity	Shareholders’ Equity					Shareholders’ Equity
Common stock	Common stock	167,444		167,287		Common stock	169,413		168,568
Additional paid-in-capital	Additional paid-in-capital	644,199		578,440		Additional paid-in-capital	702,829		671,206
Retained earnings	Retained earnings	485,209		448,991		Retained earnings	642,259		568,295
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	(130,915)		(169,787)		Accumulated other comprehensive income (loss)	(131,999)		(124,165)
Total shareholders’ equity	Total shareholders’ equity	1,165,937		1,024,931		Total shareholders’ equity	1,382,502		1,283,904
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	1,993,995	$	1,692,210	Total Liabilities and Shareholders’ Equity	$	2,087,720	$	1,988,128

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


		Nine Months Ended							Three Months Ended
		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Cash Flows From Operating Activities	Cash Flows From Operating Activities					Cash Flows From Operating Activities
Net Earnings	Net Earnings	$	215,765	$	259,018	Net Earnings	$	105,687	$	72,818
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	40,714		36,401		Depreciation and amortization	14,515		13,062
Deferred income taxes	Deferred income taxes	(653)		(6,067)		Deferred income taxes	1,842		(65)
Share-based compensation	Share-based compensation	21,434		23,186		Share-based compensation	6,618		6,318
Impairment		35,229		0

Change in	Change in					Change in
Accounts receivable	Accounts receivable	(48,733)		(2,906)		Accounts receivable	(10,611)		(10,139)
Inventories	Inventories	(13,506)		(5,052)		Inventories	(27,541)		(17,726)
Trade accounts payable	Trade accounts payable	6,547		(776)		Trade accounts payable	9,323		5,185
Salaries and incentives	Salaries and incentives	(10,493)		(15,422)		Salaries and incentives	(6,949)		(20,182)
Retirement benefits and deferred compensation	Retirement benefits and deferred compensation	9,734		10,206		Retirement benefits and deferred compensation	2,867		3,172
Other accrued liabilities	Other accrued liabilities	4,868		198		Other accrued liabilities	4,493		1,441
Other	Other	1,813		695		Other	1,425		349
Net cash provided by operating activities	Net cash provided by operating activities	262,719		299,481		Net cash provided by operating activities	101,669		54,233
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	(45,756)		(102,496)		Property, plant and equipment additions	(21,415)		(18,944)
Acquisition of businesses, net of cash acquired		(27,557)		(19,216)

Other	Other	(70)		(961)		Other	(34)		(256)
Net cash provided by (used in) investing activities		(73,383)		(122,673)
Net cash used in investing activities						Net cash used in investing activities	(21,449)		(19,200)
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	21,506		(6,240)		Borrowings (payments) on short-term lines of credit, net	9,667		24,576
Borrowings on long-term lines of credit	Borrowings on long-term lines of credit	250,000		106,454		Borrowings on long-term lines of credit	0		250,000
Payments on long-term debt and lines of credit		(125,000)		(179,270)

Payments of debt issuance costs						Payments of debt issuance costs	(1,404)		0
Common stock issued	Common stock issued	57,949		36,244		Common stock issued	26,460		38,882
Common stock repurchased	Common stock repurchased	(102,143)		(5,121)		Common stock repurchased	0		(82,176)
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(1,797)		(1,268)		Taxes paid related to net share settlement of equity awards	0		(1,796)
Cash dividends paid	Cash dividends paid	(87,665)		(79,762)		Cash dividends paid	(31,642)		(29,333)
Net cash provided by (used in) financing activities		12,850		(128,963)
Net cash provided by financing activities						Net cash provided by financing activities	3,081		200,153
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	1,515		(2,657)		Effect of exchange rate changes on cash	(1,594)		497
Net increase (decrease) in cash and cash equivalents		203,701		45,188
Net increase in cash and cash equivalents						Net increase in cash and cash equivalents	81,707		235,683
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	$	424,674	$	177,306	End of period	$	460,616	$	456,656

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 September 25, 2020
Balance, June 26, 2020 $ 166,693 $ 623,803 $ 400,154 $ (163,682) $ 1,026,968
Shares issued 751 14,981 0 0 15,732
Shares repurchased 0 0 0 0 0
Stock compensation cost 0 5,415 0 0 5,415
Net earnings 0 0 114,115 0 114,115
Dividends declared ($0.175 per share) 0 0 (29,060) 0 (29,060)
Other comprehensive income (loss) 0 0 0 32,767 32,767
Balance, September 25, 2020 $ 167,444 $ 644,199 $ 485,209 $ (130,915) $ 1,165,937



Three Months Ended March 26, 2021
Balance, December 25, 2020	$	168,568	$	671,206	$	568,295	$	(124,165)	$	1,283,904

Shares issued	845		25,615		0		0		26,460

Stock compensation cost	0		6,008		0		0		6,008


Net earnings	0		0		105,687		0		105,687
Dividends declared ($0.188 per share)	0		0		(31,723)		0		(31,723)

Other comprehensive income (loss)	0		0		0		(7,834)		(7,834)
Balance, March 26, 2021	$	169,413	$	702,829	$	642,259	$	(131,999)	$	1,382,502


Nine Months Ended September 25, 2020
Three Months Ended March 27, 2020												Three Months Ended March 27, 2020
Balance, December 27, 2019	Balance, December 27, 2019	$	167,287	$	578,440	$	448,991	$	(169,787)	$	1,024,931	Balance, December 27, 2019	$	167,287	$	578,440	$	448,991	$	(169,787)	$	1,024,931

Shares issued	Shares issued	2,484		54,399		0		0		56,883		Shares issued	1,620		35,467		0		0		37,087
Shares repurchased	Shares repurchased	(2,327)		(8,047)		(91,769)		0		(102,143)		Shares repurchased	(2,067)		(7,143)		(80,819)		0		(90,029)
Stock compensation cost	Stock compensation cost	0		19,407		0		0		19,407		Stock compensation cost	0		5,934		0		0		5,934

Net earnings	Net earnings	0		0		215,765		0		215,765		Net earnings	0		0		72,818		0		72,818
Dividends declared ($0.525 per share)		0		0		(87,778)		0		(87,778)
Dividends declared ($0.175 per share)												Dividends declared ($0.175 per share)	0		0		(29,540)		0		(29,540)

Other comprehensive income (loss)	Other comprehensive income (loss)	0		0		0		38,872		38,872		Other comprehensive income (loss)	0		0		0		(2,543)		(2,543)
Balance, September 25, 2020		$	167,444	$	644,199	$	485,209	$	(130,915)	$	1,165,937
Balance, March 27, 2020												Balance, March 27, 2020	$	166,840	$	612,698	$	411,450	$	(172,330)	$	1,018,658

Three Months Ended September 27, 2019
Balance, June 28, 2019 $ 166,792 556,170 342,308 $ (139,312) $ 925,958
Shares issued 126 2,163 0 0 2,289
Shares repurchased (60) (186) (2,437) 0 (2,683)
Stock compensation cost 0 5,419 0 0 5,419
Net earnings 0 0 84,132 0 84,132
Dividends declared ($0.160 per share) 0 0 (26,686) 0 (26,686)
Other comprehensive income (loss) 0 0 0 (4,633) (4,633)
Balance, September 27, 2019 $ 166,858 563,566 397,317 $ (143,945) $ 983,796

Nine Months Ended September 27, 2019
Balance, December 28, 2018 $ 165,171 $ 510,825 $ 220,734 $ (144,857) $ 751,873
Shares issued 1,747 33,227 0 0 34,974
Shares repurchased (60) (186) (2,437) 0 (2,683)
Stock compensation cost 0 19,700 0 0 19,700
Net earnings 0 0 259,018 0 259,018
Dividends declared ($0.480 per share) 0 0 (79,998) 0 (79,998)
Other comprehensive income (loss) 0 0 0 912 912
Balance, September 27, 2019 $ 166,858 $ 563,566 $ 397,317 $ (143,945) $ 983,796

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 (the “Company”) as of ~~September 25, 2020~~March 26, 2021 and the related statements of earnings, comprehensive income and shareholders' equity for the three ~~and nine~~ months ended ~~September 25,~~March 26, 2021 and March 27, 2020, ~~and September 27, 2019,~~ and cash flows for the ~~nine~~three months ended ~~September 25,~~March 26, 2021 and March 27, 2020 ~~and September 27, 2019~~ have been prepared by the Company and have not been audited.

In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of ~~September 25, 2020,~~March 26, 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						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Net Sales	Net Sales									Net Sales
Industrial	Industrial	$	172,805	$	175,016	$	464,776	$	552,623	Industrial	$	184,732	$	158,684
Process	Process	78,773		84,090		242,610		256,048		Process	91,373		86,078
Contractor	Contractor	187,738		141,449		472,389		425,082		Contractor	178,024		128,805
Total	Total	$	439,316	$	400,555	$	1,179,775	$	1,233,753	Total	$	454,129	$	373,567
Operating Earnings	Operating Earnings									Operating Earnings
Industrial	Industrial	$	60,776	$	57,023	$	148,010	$	186,654	Industrial	$	65,243	$	50,233
Process	Process	16,187		18,194		45,970		56,586		Process	21,733		18,111
Contractor	Contractor	54,841		34,005		124,580		100,598		Contractor	48,166		28,630
Unallocated corporate (expense)	Unallocated corporate (expense)	(6,532)		(5,823)		(23,741)		(23,551)		Unallocated corporate (expense)	(6,856)		(7,162)
Impairment		(267)		0		(35,229)		0

Total	Total	$	125,005	$	103,399	$	259,590	$	320,287	Total	$	128,286	$	89,812

Assets by segment were as follows (in thousands):


		September 25, 2020		December 27, 2019			March 26, 2021		December 25, 2020
Industrial	Industrial	$	622,294	$	615,486	Industrial	$	626,256	$	632,165
Process	Process	398,770		387,216		Process	411,804		404,370
Contractor	Contractor	433,627		368,832		Contractor	459,715		438,067
Unallocated corporate	Unallocated corporate	539,304		320,676		Unallocated corporate	589,945		513,526
Total	Total	$	1,993,995	$	1,692,210	Total	$	2,087,720	$	1,988,128

Table of Contents

Geographic information follows (in thousands):


		Three Months Ended						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Net Sales (based on customer location)	Net Sales (based on customer location)									Net Sales (based on customer location)
United States	United States	$	247,197	$	214,468	$	651,229	$	638,918	United States	$	231,501	$	198,243
Other countries	Other countries	192,119		186,087		528,546		594,835		Other countries	222,628		175,324
Total	Total	$	439,316	$	400,555	$	1,179,775	$	1,233,753	Total	$	454,129	$	373,567


		September 25, 2020		December 27, 2019			March 26, 2021		December 25, 2020
Long-lived Assets	Long-lived Assets					Long-lived Assets
United States	United States	$	283,363	$	268,864	United States	$	312,836	$	301,643
Other countries	Other countries	48,905		56,682		Other countries	47,534		49,107
Total	Total	$	332,268	$	325,546	Total	$	360,370	$	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						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Net earnings available to common shareholders	Net earnings available to common shareholders	$	114,115	$	84,132	$	215,765	$	259,018	Net earnings available to common shareholders	$	105,687	$	72,818
Weighted average shares outstanding for basic earnings per share	Weighted average shares outstanding for basic earnings per share	167,102		166,848		167,248		166,383		Weighted average shares outstanding for basic earnings per share	168,948		167,977
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	4,551		4,929		4,367		5,178		Dilutive effect of stock options computed using the treasury stock method and the average market price	4,900		4,665
Weighted average shares outstanding for diluted earnings per share	Weighted average shares outstanding for diluted earnings per share	171,653		171,777		171,615		171,561		Weighted average shares outstanding for diluted earnings per share	173,848		172,642
Basic earnings per share	Basic earnings per share	$	0.68	$	0.50	$	1.29	$	1.56	Basic earnings per share	$	0.63	$	0.43
Diluted earnings per share	Diluted earnings per share	$	0.66	$	0.49	$	1.26	$	1.51	Diluted earnings per share	$	0.61	$	0.42

Stock options to purchase ~~1,281,000~~700,000 and ~~802,000~~2,014,000 shares were not included in the ~~September 25,~~March 26, 2021 and March 27, 2020 ~~and September 27, 2019~~ 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	700	71.92
Exercised	Exercised	(2,117)	19.87					Exercised	(448)	21.91
Canceled	Canceled	(43)	43.69					Canceled	(4)	47.54
Outstanding, September 25, 2020		11,351	$	33.79	7,677	$	27.20
Outstanding, March 26, 2021								Outstanding, March 26, 2021	10,456	$	38.05	7,334	$	30.92

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The Company recognized year-to-date share-based compensation of ~~$21.4~~$6.6 million in ~~2020~~2021 and ~~$23.2~~$6.3 million in ~~2019.~~2020. As of ~~September 25, 2020,~~March 26, 2021, there was ~~$10.4~~$19.8 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of ~~2.5~~2.2 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:


		Nine Months Ended										Three Months Ended
		September 25, 2020			September 27, 2019				March 26, 2021			March 27, 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	0.9		%	1.5		%
Volatility	Volatility	22.0		%	24.6		%	Volatility	25.2		%	21.7		%
Dividend yield	Dividend yield	1.3		%	1.4		%	Dividend yield	1.0		%	1.2		%
Weighted average fair value per share	Weighted average fair value per share	$	12.18		$	12.26		Weighted average fair value per share	$	17.66		$	12.44

Under the Company’s Employee Stock Purchase Plan, the Company issued 310,000 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:


		Nine Months Ended										Three Months Ended
		September 25, 2020			September 27, 2019				March 26, 2021			March 27, 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						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Pension Benefits	Pension Benefits									Pension Benefits
Service cost	Service cost	$	2,392	$	2,161	$	7,007	$	5,805	Service cost	$	2,721	$	2,422
Interest cost	Interest cost	3,351		3,711		9,985		11,021		Interest cost	2,981		3,407
Expected return on assets	Expected return on assets	(4,706)		(4,289)		(14,107)		(12,864)		Expected return on assets	(5,130)		(4,750)
Amortization and other	Amortization and other	2,777		3,095		8,015		6,912		Amortization and other	2,551		2,721
Net periodic benefit cost	Net periodic benefit cost	$	3,814	$	4,678	$	10,900	$	10,874	Net periodic benefit cost	$	3,123	$	3,800
Postretirement Medical	Postretirement Medical									Postretirement Medical
Service cost	Service cost	$	152	$	136	$	457	$	409	Service cost	$	175	$	175
Interest cost	Interest cost	254		291		762		872		Interest cost	250		248
Amortization	Amortization	183		68		550		205		Amortization	250		177
Net periodic benefit cost	Net periodic benefit cost	$	589	$	495	$	1,769	$	1,486	Net periodic benefit cost	$	675	$	600

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6.Shareholders’ Equity

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

Pension and
Postretirement
Medical Cumulative
Translation
Adjustment Total
Three Months Ended September 25, 2020
Balance, June 26, 2020 $ (109,695) $ (53,987) $ (163,682)
Other comprehensive income (loss) before reclassifications 0 30,966 30,966
Reclassified to pension cost and deferred tax 1,801 0 1,801
Balance, September 25, 2020 $ (107,894) $ (23,021) $ (130,915)


	Pension and Postretirement Medical		Cumulative Translation Adjustment		Total
Three Months Ended March 26, 2021
Balance, December 25, 2020	$	(114,129)	$	(10,036)	$	(124,165)
Other comprehensive income (loss) before reclassifications	0		(10,470)		(10,470)
Reclassified to pension cost and deferred tax	2,636		0		2,636

Balance, March 26, 2021	$	(111,493)	$	(20,506)	$	(131,999)

Nine Months Ended September 25, 2020
Balance, December 27, 2019 $ (113,721) $ (56,066) $ (169,787)
Other comprehensive income (loss) before reclassifications 0 33,045 33,045
Reclassified to pension cost and deferred tax 5,827 0 5,827
Balance, September 25, 2020 $ (107,894) $ (23,021) $ (130,915)

Three Months Ended September 27, 2019
Balance, June 28, 2019 $ (83,745) $ (55,567) $ (139,312)
Other comprehensive income (loss) before reclassifications 0 (6,396) (6,396)
Reclassified to pension cost and deferred tax 1,763 0 1,763
Balance, September 27, 2019 $ (81,982) $ (61,963) $ (143,945)

Nine Months Ended September 27, 2019
Balance, December 28, 2018 $ (86,889) $ (57,968) $ (144,857)
Other comprehensive income (loss) before reclassifications 0 (3,995) (3,995)
Reclassified to pension cost and deferred tax 4,907 0 4,907
Balance, September 27, 2019 $ (81,982) $ (61,963) $ (143,945)

In connection with the Company's sale of its U.K.-based valve business (“Alco”) in July of 2020, $24 million of unrealized foreign currency translation losses recorded in accumulated other comprehensive income were reclassified to net earnings for the three and nine months ended September 25, 2020. A loss reserve liability of $24 million related to the unrealized foreign currency losses was previously recognized in the second quarter of 2020 with the impairment of Alco. This reserve liability was eliminated upon sale and offsets the impact of the foreign currency translation reclassification on net earnings.



Three Months Ended March 27, 2020
Balance, December 27, 2019	$	(113,721)	$	(56,066)	$	(169,787)
Other comprehensive income (loss) before reclassifications	0		(4,677)		(4,677)
Reclassified to pension cost and deferred tax	2,134		0		2,134

Balance, March 27, 2020	$	(111,587)	$	(60,743)	$	(172,330)

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.~~Inventories~~Receivables and Credit Losses

~~Major components~~Accounts receivable includes trade receivables of ~~inventories were~~$306 million and other receivables of $17 million as ~~follows~~of March 26, 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 allowance for credit losses (in thousands):

September 25,
2020 December 27,
2019
Finished products and components $ 135,281 $ 132,128
Products and components in various stages of completion 84,588 86,957
Raw materials and purchased components 127,151 117,026
Subtotal 347,020 336,111
Reduction to LIFO cost (63,307) (62,878)
Total $ 283,713 $ 273,233


	Three Months Ended
	March 26, 2021		December 25, 2020
Balance, beginning	$	3,745	$	4,025
Additions (reversals) charged to costs and expenses	158		309
Deductions from reserves (1)	(104)		(1,485)
Other additions (deductions) (2)	(75)		896
Balance, ending	$	3,724	$	3,745

(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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8.Inventories

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


	March 26, 2021		December 25, 2020
Finished products and components	$	149,906	$	133,122
Products and components in various stages of completion	86,801		83,791
Raw materials and purchased components	136,969		129,319
Subtotal	373,676		346,232
Reduction to LIFO cost	(62,031)		(60,528)
Total	$	311,645	$	285,704

9.Intangible Assets

Components of other intangible assets were (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 September 25, 2020
As of March 26, 2021												As of March 26, 2021
Cost	Cost	$	186,073	$	25,313	$	1,000	$	61,920	$	274,306	Cost	$	186,073	$	25,364	$	900	$	61,920	$	274,257
Accumulated amortization	Accumulated amortization	(90,280)		(12,380)		(358)		—		(103,018)		Accumulated amortization	(97,426)		(13,603)		(338)		—		(111,367)
Foreign currency translation	Foreign currency translation	(8,349)		(707)		0		(1,572)		(10,628)		Foreign currency translation	(7,625)		(661)		0		(1,812)		(10,098)
Book value	Book value	$	87,444	$	12,226	$	642	$	60,348	$	160,660	Book value	$	81,022	$	11,100	$	562	$	60,108	$	152,792
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

Amortization of intangibles for the quarter was ~~$4.2~~$4.3 million in ~~2020~~2021 and ~~$3.9~~$4.1 million in ~~2019 and for the year to date was $12.5 million in 2020 and $11.6 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 $ 16,868 $ 16,854 $ 16,765 $ 15,809 $ 14,267 $ 32,211


	2021 (Remainder)		2022		2023		2024		2025		Thereafter
Estimated Amortization Expense	$	12,679	$	16,796	$	15,920	$	14,245	$	13,796	$	19,248

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

Industrial Process Contractor Total
Balance, December 27, 2019 $ 177,112 $ 110,997 $ 19,554 $ 307,663
Additions, adjustments from business acquisitions 0 29,657 0 29,657
Foreign currency translation 5,253 (233) 0 5,020
Balance, September 25, 2020 $ 182,365 $ 140,421 $ 19,554 $ 342,340


	Industrial		Process		Contractor		Total
Balance, December 25, 2020	$	186,536	$	141,513	$	19,554	$	347,603

Foreign currency translation	(4,727)		134		0		(4,593)
Balance, March 26, 2021	$	181,809	$	141,647	$	19,554	$	343,010

Subsequent to the end of the first quarter, the Company completed the acquisition of a business that is not material to the consolidated financial statements.

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10.Other Current Liabilities

Components of other current liabilities were (in thousands):


		September 25, 2020		December 27, 2019			March 26, 2021		December 25, 2020
Accrued self-insurance retentions	Accrued self-insurance retentions	$	7,578	$	7,570	Accrued self-insurance retentions	$	9,407	$	8,041
Accrued warranty and service liabilities	Accrued warranty and service liabilities	12,571		12,785		Accrued warranty and service liabilities	13,426		13,082
Accrued trade promotions	Accrued trade promotions	9,261		8,390		Accrued trade promotions	9,419		12,140
Payable for employee stock purchases	Payable for employee stock purchases	10,361		13,722		Payable for employee stock purchases	3,001		14,554
Customer advances and deferred revenue	Customer advances and deferred revenue	52,206		33,138		Customer advances and deferred revenue	45,200		41,689
Income taxes payable	Income taxes payable	6,331		8,706		Income taxes payable	6,926		8,564
Right of return refund liability	Right of return refund liability	15,112		13,791		Right of return refund liability	16,630		16,303
Operating lease liability, current		9,165		7,690
Operating lease liabilities, current						Operating lease liabilities, current	9,353		11,178

Other	Other	32,695		37,145		Other	35,291		31,709
Total	Total	$	155,280	$	142,937	Total	$	148,653	$	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~~
Charged to expense	~~5,495~~2,701
Margin on parts sales reversed	~~2,000~~835
Reductions for claims settled	~~(7,864)~~(3,192)
Balance, ~~September 25, 2020~~March 26, 2021	$	~~12,571~~13,426

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 and customer advances was ~~$52.2~~$45.2 million as of ~~September 25, 2020~~March 26, 2021 and ~~$33.1~~$41.7 million as of December ~~27, 2019.~~25, 2020. Net sales for the year to date included ~~$25.9~~$17.5 million in ~~2020~~2021 and ~~$34.9~~$11.3 million in ~~2019~~2020 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 its 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 from date of issuance and variable rate notes will mature no longer than 10 years from issuance. Under terms of the note agreement, the Company is required to maintain certain financial ratios as toCompany’s cash flow leverage ~~and~~ratio, plus the highest of (i) the rate of interest ~~coverage similar~~from time to time announced by the ~~requirements of~~Agent as its ~~other debt agreements. There were no senior notes issued under~~prime rate, (ii) the ~~note agreement as of September 25, 2020.~~

federal funds effective rate plus 0.50%, or (iii) one-month LIBOR plus 1.50%. In ~~March 2020,~~general, LIBOR-based loans bear interest at a rate per annum equal to LIBOR, plus a margin ranging from 1.00% to 1.75%, depending on the ~~Company borrowed $250 million under its $500 million revolving credit facility in order to increase its~~Company’s cash position and preserve financial flexibility. The proceeds from the advance are available to be used for working capital, general corporate or other purposes. In August 2020, the Company made a payment of $125 million against the revolving credit facility.flow leverage ratio.

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In addition to paying interest on the outstanding loans, the Company is required to 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.

~~11.~~

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 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 four fiscal quarter period beginning with the quarter in which such acquisition occurs). A change in control of the Company will constitute an event of default under the Credit Agreement.

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	September 25, 2020		December 27, 2019			Level	March 26, 2021		December 25, 2020
Assets	Assets						Assets
Cash surrender value of life insurance	Cash surrender value of life insurance	2	$	17,273	$	17,702	Cash surrender value of life insurance	2	$	21,238	$	19,887
Forward exchange contracts	Forward exchange contracts	2	388		0		Forward exchange contracts	2	164		16
Total assets at fair value	Total assets at fair value		$	17,661	$	17,702	Total assets at fair value		$	21,402	$	19,903
Liabilities	Liabilities						Liabilities
Contingent consideration	Contingent consideration	3	$	9,128	$	9,072	Contingent consideration	3	$	9,913	$	9,454
Deferred compensation	Deferred compensation	2	4,855		4,719		Deferred compensation	2	5,348		5,099
Forward exchange contracts		2	0		87

Total liabilities at fair value	Total liabilities at fair value		$	13,983	$	13,878	Total liabilities at fair value		$	15,261	$	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 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 and $170 million as of ~~both September 25, 2020~~March 26, 2021 and 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 $299 million and other receivables of $15 million as of September 25, 2020 and $256 million and $11 million, respectively, as of December 27, 2019.~~

~~Table of Contents~~

~~Allowance for Credit Losses~~

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

Three Months Ended Nine Months Ended
September 25, 2020 September 27, 2019 September 25, 2020 September 27, 2019
Balance, beginning $ 5,159 $ 4,315 $ 4,828 $ 4,771
Additions (reversals) charged to costs and expenses (293) 209 338 431
Deductions from reserves ⁽¹⁾
(956) (109) (1,247) (799)
Other additions (deductions) ⁽²⁾
115 (64) 106 (52)
Balance, ending $ 4,025 $ 4,351 $ 4,025 $ 4,351

~~(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 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										Nine Months Ended							Three Months Ended
		Sep 25, 2020		Sep 27, 2019		% Change		Sep 25, 2020		Sep 27, 2019		% Change			March 26, 2021		March 27, 2020		% Change
Net Sales	Net Sales	$	439.3	$	400.6	10	%	$	1,179.8	$	1,233.8	(4)	%	Net Sales	$	454.1	$	373.6	22	%
Operating Earnings	Operating Earnings	125.0		103.4		21	%	259.6		320.3		(19)	%	Operating Earnings	128.3		89.8		43	%
Net Earnings	Net Earnings	114.1		84.1		36	%	215.8		259.0		(17)	%	Net Earnings	105.7		72.8		45	%
Net Earnings, adjusted ⁽¹⁾	Net Earnings, adjusted ⁽¹⁾	101.8		77.4		32	%	229.2		243.4		(6)	%	Net Earnings, adjusted (1)	101.6		65.0		56	%
Diluted Net Earnings per Common Share	Diluted Net Earnings per Common Share	$	0.66	$	0.49	35	%	$	1.26	$	1.51	(17)	%	Diluted Net Earnings per Common Share	$	0.61	$	0.42	45	%
Diluted Net Earnings per Common Share, adjusted ⁽¹⁾	Diluted Net Earnings per Common Share, adjusted ⁽¹⁾	$	0.59	$	0.45	31	%	$	1.34	$	1.42	(6)	%	Diluted Net Earnings per Common Share, adjusted (1)	$	0.58	$	0.38	53	%

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

~~Double-digit~~Net sales increased by 22 percent with double-digit percentage growth in ~~the Contractor segment offset declines in other segments for the quarter. Sales declined in other segments for the year to date, although the rate of decline slowed~~all regions and in the ~~third quarter.~~Industrial and Contractor segments. Favorable currency translation contributed 4 percentage points of sales growth.

Gross margin rates increased more than 1 percentage point compared to the first quarter last year. Changes in currency translation rates ~~increased worldwide sales by~~accounted for approximately ~~$4 million~~half of the increase.

Operating expense leverage for the quarter and decreased sales by approximately $5 million year to date. Sales from acquired operations contributed approximately $4 million (1 percentage point) to the third quarter and $16 million (1 percentage point) year to date.

~~Gross margin rates for the quarter were up slightly from the comparable period last year as price realization and lower product costs offset the impacts of product and channel mix.~~remained strong. Total operating expenses ~~for the quarter were comparable~~increased 9 percent primarily due to ~~the prior year.~~increases in sales and earnings-based expenses.

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Excluding the impact of ~~impairment charges,~~ 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									Nine Months Ended							Three Months Ended
		September 25, 2020			September 27, 2019			September 25, 2020			September 27, 2019				March 26, 2021			March 27, 2020
Operating earnings, as reported		$	125.0		$	103.4		$	259.6		$	320.3
Impairment		0.3			—			35.2			—
Operating earnings, adjusted		$	125.3		$	103.4		$	294.8		$	320.3

Earnings before income taxes, as reported		$	121.0		$	96.8		$	245.1		$	305.3
Impairment		0.3			—			35.2			—
Earnings before income taxes, adjusted		$	121.3		$	96.8		$	280.3		$	305.3

Earnings before income taxes														Earnings before income taxes	$	125.7		$	82.1

Income taxes, as reported	Income taxes, as reported	$	6.9		$	12.7		$	29.4		$	46.3		Income taxes, as reported	$	20.0		$	9.3
Impairment tax benefit		—			—			1.2			—

Excess tax benefit from option exercises	Excess tax benefit from option exercises	4.6			0.7			12.6			8.1			Excess tax benefit from option exercises	4.1			7.8
Other non-recurring tax benefit		8.0			6.0			8.0			7.5

Income taxes, adjusted	Income taxes, adjusted	$	19.5		$	19.4		$	51.2		$	61.9		Income taxes, adjusted	$	24.1		$	17.1

Effective income tax rate	Effective income tax rate													Effective income tax rate
As reported	As reported	5.7		%	13.1		%	12.0		%	15.2		%	As reported	15.9		%	11.3		%
Adjusted	Adjusted	16.1		%	20.0		%	18.3		%	20.3		%	Adjusted	19.2		%	20.8		%

Net Earnings, as reported	Net Earnings, as reported	$	114.1		$	84.1		$	215.8		$	259.0		Net Earnings, as reported	$	105.7		$	72.8
Impairment, net		0.3			—			34.0			—

Excess tax benefit from option exercises	Excess tax benefit from option exercises	(4.6)			(0.7)			(12.6)			(8.1)			Excess tax benefit from option exercises	(4.1)			(7.8)
Other non-recurring tax benefit		(8.0)			(6.0)			(8.0)			(7.5)

Net Earnings, adjusted	Net Earnings, adjusted	$	101.8		$	77.4		$	229.2		$	243.4		Net Earnings, adjusted	$	101.6		$	65.0

Weighted Average Diluted Shares	Weighted Average Diluted Shares	171.7			171.8			171.6			171.6			Weighted Average Diluted Shares	173.8			172.6
Diluted Earnings per Share	Diluted Earnings per Share													Diluted Earnings per Share
As reported	As reported	$	0.66		$	0.49		$	1.26		$	1.51		As reported	$	0.61		$	0.42
Adjusted	Adjusted	$	0.59		$	0.45		$	1.34		$	1.42		Adjusted	$	0.58		$	0.38

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


		Three Months Ended						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Net Sales	Net Sales	100.0	%	100.0	%	100.0	%	100.0	%	Net Sales	100.0	%	100.0	%
Cost of products sold	Cost of products sold	47.9		48.2		48.3		47.3		Cost of products sold	45.5		46.8
Gross Profit	Gross Profit	52.1		51.8		51.7		52.7		Gross Profit	54.5		53.2
Product development	Product development	4.0		4.3		4.5		4.1		Product development	4.3		4.6
Selling, marketing and distribution	Selling, marketing and distribution	12.3		13.9		13.7		14.3		Selling, marketing and distribution	13.8		15.4
General and administrative	General and administrative	7.3		7.9		8.7		8.3		General and administrative	8.2		9.2
Impairment		0.1		—		3.0		—

Operating Earnings	Operating Earnings	28.5		25.8		22.0		26.0		Operating Earnings	28.2		24.0
Interest expense	Interest expense	0.7		0.9		0.7		0.9		Interest expense	0.5		0.6

Other expense (income), net		0.2		0.7		0.5		0.4
Other expense, net										Other expense, net	—		1.4
Earnings Before Income Taxes	Earnings Before Income Taxes	27.5		24.2		20.8		24.7		Earnings Before Income Taxes	27.7		22.0
Income taxes	Income taxes	1.6		3.2		2.6		3.8		Income taxes	4.4		2.5
Net Earnings	Net Earnings	26.0	%	21.0	%	18.3	%	21.0	%	Net Earnings	23.3	%	19.5	%

Net Sales

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


		Three Months Ended						Nine Months Ended					Three Months Ended
		September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019			March 26, 2021		March 27, 2020
Americas⁽¹⁾	Americas⁽¹⁾	$	277.1	$	243.0	$	729.6	$	728.9	Americas(1)	$	264.9	$	224.8
EMEA⁽²⁾	EMEA⁽²⁾	93.0		94.0		251.9		294.5		EMEA(2)	110.2		87.8
Asia Pacific	Asia Pacific	69.2		63.6		198.3		210.4		Asia Pacific	79.0		61.0
Consolidated	Consolidated	$	439.3	$	400.6	$	1,179.8	$	1,233.8	Consolidated	$	454.1	$	373.6

(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							Nine Months					Three Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions	Currency	Total
Americas	Americas	13%	1%	0%	14%	0%	1%	(1)%	0%	Americas	17%	1%	0%	18%
EMEA	EMEA	(5)%	0%	4%	(1)%	(15)%	1%	0%	(14)%	EMEA	18%	(1)%	8%	25%
Asia Pacific	Asia Pacific	5%	2%	2%	9%	(8)%	3%	(1)%	(6)%	Asia Pacific	25%	(3)%	8%	30%
Consolidated	Consolidated	8%	1%	1%	10%	(5)%	1%	0%	(4)%	Consolidated	19%	(1)%	4%	22%

Gross Profit

~~The third quarter gross~~Gross profit margin rate ~~was up slightly~~for the quarter increased by 1 percentage point from the comparable period last ~~year as price realization, lower product costs and favorable~~year. Favorable changes in currency translation rates, realized pricing and higher production volume were partially offset ~~the impacts~~by unfavorable effects of product and channel mix. For the year to date, the gross margin rate declined by 1 percentage point. Price realization was not enough to offset the impacts of unfavorable product and channel mix (lower high-margin Industrial segment sales combined with growth in lower-margin Contractor segment sales).

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Operating Expenses

Operating expenses for the quarter and year to date included $0.3 million and $35 million, respectively, of non-cash impairment charges related to the third quarter sale of the Company's U.K.-based valve business (“Alco”). The impact of the impairment on net earnings for the year to date was $34 million or $0.20 per diluted share. Total operating expenses for the quarter ~~were comparable~~increased $10 million (9 percentage points) mostly due to ~~the prior year period and down $15 million (4 percent) year to date. Reductions~~increases in ~~volume~~sales and earnings-based ~~expenses offset increases in product development spending for the quarter and more than offset increases in product development spending for the year to date.~~expenses.

Other Expense

Other non-operating expenses decreased $2$5 million for the quarter ~~and increased $1 million year to date~~ mostly due to market valuation ~~fluctuations~~changes on investments held to fund certain retirement benefits liabilities.

Income Taxes

The effective income tax rate for the quarter was 616 percent, ~~down 7~~up 5 percentage points from the ~~comparable period~~first quarter last year, primarily due to ~~additional foreign tax benefits and an increase~~a decrease in excess tax benefits related to stock option exercises. The effective income tax rate for the year to date was 12 percent, down 3 percentage points from the comparable period last year. The year to date decrease was due primarily to additional foreign tax benefits and excess tax benefits related to stock option exercises partially offset by non-deductible impairment charges.

~~Economic Uncertainty~~

The ongoing COVID-19 pandemic and related governmental and business responses continue to have an adverse effect on our operations, supply chains, distribution channels, and end-user customers. Incoming 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).

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):

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		Three Months Ended									Nine Months Ended							Three Months Ended
		September 25, 2020			September 27, 2019			September 25, 2020			September 27, 2019				March 26, 2021			March 27, 2020
Net Sales	Net Sales													Net Sales
Americas	Americas	$	76.1		$	77.6		$	209.0		$	239.2		Americas	$	80.0		$	74.4
EMEA	EMEA	52.7			55.3			133.7			172.5			EMEA	56.7			46.2
Asia Pacific	Asia Pacific	44.0			42.1			122.1			140.9			Asia Pacific	48.0			38.1
Total	Total	$	172.8		$	175.0		$	464.8		$	552.6		Total	$	184.7		$	158.7
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales	35		%	33		%	32		%	34		%	Operating earnings as a percentage of net sales	35		%	32		%

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


		Three Months							Nine Months					Three Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions and Divestitures	Currency	Total
Americas	Americas	(1)%	0%	(1)%	(2)%	(12)%	0%	(1)%	(13)%	Americas	8%	0%	0%	8%
EMEA	EMEA	(9)%	0%	4%	(5)%	(22)%	0%	0%	(22)%	EMEA	14%	0%	9%	23%
Asia Pacific	Asia Pacific	3%	0%	1%	4%	(12)%	0%	(1)%	(13)%	Asia Pacific	19%	0%	7%	26%
Segment Total	Segment Total	(3)%	0%	2%	(1)%	(15)%	0%	(1)%	(16)%	Segment Total	12%	0%	4%	16%

Increased activity in worldwide manufacturing facilities contributed to Industrial segment sales ~~declined for~~growth in the quarter and year to date as most geographies continued to be impacted by government actions that reduced economic activity. Operating earnings as a percentage of sales increased 2 percentage points for the quarter driven by price realization,first quarter. Changes in currency translation rates, lower product costs due to higher factory volumes and expense leverage drove the first quarter operating ~~expense leverage. While gross~~ margin ~~rates in this segment remained relatively strong year to date, decreases in operating expenses did not keep pace with the drop in sales volume, driving operating earnings as a~~rate 3 percentage ~~of sales down 2 percentage points.~~points higher than last year.

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 Nine Months Ended
September 25,
2020 September 27,
2019 September 25,
2020 September 27,
2019
Net Sales
Americas $ 52.2 $ 55.2 $ 153.2 $ 167.5
EMEA 11.5 15.4 40.5 45.5
Asia Pacific 15.1 13.5 48.9 43.1
Total $ 78.8 $ 84.1 $ 242.6 $ 256.1
Operating earnings as a percentage of net sales 21 % 22 % 19 % 22 %

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	Three Months Ended
		March 26, 2021			March 27, 2020
Net Sales
Americas		$	56.8		$	55.1
EMEA		14.8			15.8
Asia Pacific		19.8			15.2
Total		$	91.4		$	86.1
Operating earnings as a percentage of net sales		24		%	21		%

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


		Three Months							Nine Months					Three Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions and Divestitures	Currency	Total
Americas	Americas	(10)%	4%	0%	(6)%	(12)%	4%	(1)%	(9)%	Americas	2%	1%	0%	3%
EMEA	EMEA	(29)%	2%	2%	(25)%	(18)%	7%	0%	(11)%	EMEA	(3)%	(7)%	4%	(6)%
Asia Pacific	Asia Pacific	2%	9%	2%	13%	0%	15%	(1)%	14%	Asia Pacific	38%	(15)%	7%	30%
Segment Total	Segment Total	(12)%	5%	1%	(6)%	(11)%	6%	0%	(5)%	Segment Total	7%	(3)%	2%	6%

~~Sales from acquired operations in the~~The Process segment ~~were unable to offset volume declines~~had strong organic sales growth in ~~organic businesses. Operating earnings as a percentage of sales decreased 1 percentage point~~most applications for the ~~quarter~~quarter. Favorable changes in currency translation rates and ~~3 percentage points year~~

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~~to date driven by lower volume and unfavorable product and channel mix, partially offset by~~ the impact of divested ~~operations.~~operations combined to increase the first quarter operating margin rate.

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									Nine Months Ended							Three Months Ended
		September 25, 2020			September 27, 2019			September 25, 2020			September 27, 2019				March 26, 2021			March 27, 2020
Net Sales	Net Sales													Net Sales
Americas	Americas	$	148.7		$	110.2		$	367.4		$	322.2		Americas	$	128.1		$	95.3
EMEA	EMEA	28.9			23.3			77.7			76.5			EMEA	38.7			25.8
Asia Pacific	Asia Pacific	10.1			8.0			27.3			26.4			Asia Pacific	11.2			7.7
Total	Total	$	187.7		$	141.5		$	472.4		$	425.1		Total	$	178.0		$	128.8
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales	29		%	24		%	26		%	24		%	Operating earnings as a percentage of net sales	27		%	22		%

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


		Three Months							Nine Months					Three Months
		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total		Volume and Price	Acquisitions and Divestitures	Currency	Total
Americas	Americas	35%	0%	0%	35%	14%	0%	0%	14%	Americas	34%	0%	0%	34%
EMEA	EMEA	19%	0%	5%	24%	2%	0%	(1)%	1%	EMEA	38%	0%	12%	50%
Asia Pacific	Asia Pacific	24%	0%	2%	26%	6%	0%	(3)%	3%	Asia Pacific	36%	0%	10%	46%
Segment Total	Segment Total	32%	0%	1%	33%	11%	0%	0%	11%	Segment Total	35%	0%	3%	38%

Contractor segment sales increased double-digit percentages in all ~~geographies~~channels. Operating margin rates for ~~the quarter~~this segment increased 5 percentage points driven by higher sales and ~~year to date. Favorable response to new~~favorable expense leverage, partially offset by unfavorable product ~~offerings~~ and continued strength in construction and home improvement markets drove the increase. Increased volume contributed to the increase in operating earnings as a percentage of sales for the quarter and year to date.channel mix.

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Liquidity and Capital Resources

Net cash provided by operating activities ~~of $263~~totaled $102 million ~~decreased $36 million compared to~~in the first ~~nine months~~quarter of ~~last year. Changes~~2021, up $47 million from the comparable period of 2020. The increase was driven by higher sales and net earnings. Increases in accounts receivable and inventories ~~drove the decrease, and~~ reflect growth in business activity ~~of the Contractor segment~~ in the ~~third~~first quarter of ~~2020. Purchases of Company common stock totaling $102 million in 2020 were partially offset by net proceeds from shares issued totaling $56 million. Other significant~~2021. Significant uses of cash in 2021 included dividend payments of ~~$88~~$32 million and property, plant and equipment additions of ~~$46 million and business acquisitions of $28 million. The Company may make additional opportunistic share purchases going forward.~~

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. In August 2020, the Company made a payment of $125 million against the revolving credit facility.

Significant uses of cash in 2019 included cash dividends of $80 million, property, plant and equipment additions of $102 million, prepayment of $75 million of private placement debt that was due in 2020, and business acquisitions totaling $19$21 million. Proceeds from shares issued in the first ~~half~~quarter of ~~2019~~2021 totaled ~~$36 million, partially offset by $5 million~~$26 million. Although the Company did not repurchase any shares in the first quarter of ~~payments for shares repurchased.~~2021, it may make opportunistic purchases going forward.

At ~~September 25, 2020,~~March 26, 2021, the Company had various lines of credit totaling $596 million, of which ~~$429~~$566 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

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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 $82 million, which were partially offset by net proceeds from shares issued totaling $37 million. Other significant uses of cash in 2020 included dividend payments of $29 million and property, plant and equipment additions of $19 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

~~Weak global economic conditions continued to affect most of~~Demand for our ~~business in~~products is solid across major end markets and product categories. Revenue and incoming order rates have improved for both the ~~third quarter. We remain committed to our long-term strategy as our initiatives for 2021~~Industrial and beyond have continued as usual. We 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 thatProcess segments, although the timing of projects can impact orders. Our outlook for the Contractor segment remains positive as favorable conditions continue in all regions. Uncertainty remains in both the supply chain and ~~shape~~demand environment that may affect certain end markets and geographies for the remainder of ~~a recovery is highly uncertain. We will remain agile and have contingency plans in place to appropriately respond to conditions as they unfold.~~the year.

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,” “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

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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.

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

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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. Someof 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 are additional waves of the pandemic; whether there are continued increases or spikes in COVID-19 cases in the areas in which we or our suppliers, distributors or end-user customers operate; governmental, business, 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

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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 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 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)
~~Jun 27,2020~~Dec 26,2020 - ~~Jul 24, 2020~~	—	$	—	��	~~18,517,834~~
~~Jul 25, 2020 - Aug 21, 2020~~Jan 22, 2021	—	$	—	—	18,517,834
~~Aug 22, 2020~~Jan 23, 2021 - ~~Sep 25, 2020~~Feb 19, 2021	—	$	—	—	18,517,834
Feb 20, 2021 - March 26, 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						Executive Officer Restricted Stock Unit Agreement. Form of agreement used to award restricted stock units to Dale D. Johnson under the Graco Inc. 2019 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K filed February 26, 2021.)

10.2						Amended and Restated Credit Agreement, dated March 25, 2021, 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 10.1 to the Company’s Report on Form 8-K filed March 25, 2021.)

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 ~~Third~~First Quarter Earnings dated ~~October~~April 21, ~~2020.~~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:

~~October~~April 21, ~~2020~~2021

By:

/s/ Patrick J. McHale

Patrick J. McHale

President and Chief Executive Officer

(Principal Executive Officer)

Date:

~~October~~April 21, ~~2020~~2021

By:

/s/ Mark W. Sheahan

Mark W. Sheahan

Chief Financial Officer and Treasurer

(Principal Financial Officer)

Date:

~~October~~April 21, ~~2020~~2021

By:

/s/ Kathryn L. Schoenrock

Kathryn L. Schoenrock

Executive Vice President, Corporate Controller

(Principal Accounting Officer)



Three Months Ended September 25, 2020
Balance, June 26, 2020	$	166,693	$	623,803	$	400,154	$	(163,682)	$	1,026,968

Shares issued	751		14,981		0		0		15,732
Shares repurchased	0		0		0		0		0
Stock compensation cost	0		5,415		0		0		5,415


Net earnings	0		0		114,115		0		114,115
Dividends declared ($0.175 per share)	0		0		(29,060)		0		(29,060)

Other comprehensive income (loss)	0		0		0		32,767		32,767
Balance, September 25, 2020	$	167,444	$	644,199	$	485,209	$	(130,915)	$	1,165,937



Three Months Ended September 27, 2019
Balance, June 28, 2019	$	166,792	556,170	342,308	$	(139,312)	$	925,958

Shares issued	126		2,163	0	0		2,289
Shares repurchased	(60)		(186)	(2,437)	0		(2,683)
Stock compensation cost	0		5,419	0	0		5,419


Net earnings	0		0	84,132	0		84,132
Dividends declared ($0.160 per share)	0		0	(26,686)	0		(26,686)

Other comprehensive income (loss)	0		0	0	(4,633)		(4,633)
Balance, September 27, 2019	$	166,858	563,566	397,317	$	(143,945)	$	983,796



Nine Months Ended September 27, 2019
Balance, December 28, 2018	$	165,171	$	510,825	$	220,734	$	(144,857)	$	751,873

Shares issued	1,747		33,227		0		0		34,974
Shares repurchased	(60)		(186)		(2,437)		0		(2,683)
Stock compensation cost	0		19,700		0		0		19,700


Net earnings	0		0		259,018		0		259,018
Dividends declared ($0.480 per share)	0		0		(79,998)		0		(79,998)

Other comprehensive income (loss)	0		0		0		912		912
Balance, September 27, 2019	$	166,858	$	563,566	$	397,317	$	(143,945)	$	983,796



Three Months Ended September 27, 2019
Balance, June 28, 2019	$	(83,745)	$	(55,567)	$	(139,312)
Other comprehensive income (loss) before reclassifications	0		(6,396)		(6,396)
Reclassified to pension cost and deferred tax	1,763		0		1,763

Balance, September 27, 2019	$	(81,982)	$	(61,963)	$	(143,945)


Nine Months Ended September 27, 2019
Balance, December 28, 2018	$	(86,889)	$	(57,968)	$	(144,857)
Other comprehensive income (loss) before reclassifications	0		(3,995)		(3,995)
Reclassified to pension cost and deferred tax	4,907		0		4,907

Balance, September 27, 2019	$	(81,982)	$	(61,963)	$	(143,945)


	2020		2021		2022		2023		2024		Thereafter
Estimated Amortization Expense	$	16,868	$	16,854	$	16,765	$	15,809	$	14,267	$	32,211


	Three Months Ended						Nine Months Ended
	September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019
Balance, beginning	$	5,159	$	4,315	$	4,828	$	4,771
Additions (reversals) charged to costs and expenses	(293)		209		338		431
Deductions from reserves ⁽¹⁾	(956)		(109)		(1,247)		(799)
Other additions (deductions) ⁽²⁾	115		(64)		106		(52)
Balance, ending	$	4,025	$	4,351	$	4,025	$	4,351