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 ~~March 31,~~June 30, 2023

☐ 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

☐

☒

~~168,340,317~~168,992,778 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of ~~April~~July 12, 2023.

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

1415

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2021

Item 4.

Controls and Procedures

2021

PART II - OTHER INFORMATION

Item 1A.

Risk Factors

2122

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 5.

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			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Net Sales	Net Sales		$	529,646		$	494,285	Net Sales	$	559,644	$	548,547	$	1,089,290	$	1,042,832
Cost of products sold	Cost of products sold		244,506			239,810		Cost of products sold	268,229		279,487		512,735		519,297
Gross Profit	Gross Profit		285,140			254,475		Gross Profit	291,415		269,060		576,555		523,535
Product development	Product development		20,479			19,078		Product development	21,286		19,967		41,765		39,045
Selling, marketing and distribution	Selling, marketing and distribution		65,383			62,995		Selling, marketing and distribution	68,380		62,076		133,763		125,071
General and administrative	General and administrative		42,610			44,039		General and administrative	44,697		38,337		87,307		82,376

Operating Earnings	Operating Earnings		156,668			128,363		Operating Earnings	157,052		148,680		313,720		277,043

Interest expense	Interest expense		1,347			5,287		Interest expense	1,798		1,726		3,145		7,013

Other (income) expense, net	Other (income) expense, net		(2,029)			153		Other (income) expense, net	(4,365)		607		(6,394)		760
Earnings Before Income Taxes	Earnings Before Income Taxes		157,350			122,923		Earnings Before Income Taxes	159,619		146,347		316,969		269,270
Income taxes	Income taxes		28,184			22,080		Income taxes	25,351		28,969		53,535		51,049
Net Earnings	Net Earnings		$	129,166		$	100,843	Net Earnings	$	134,268	$	117,378	$	263,434	$	218,221
Net Earnings per Common Share	Net Earnings per Common Share							Net Earnings per Common Share
Basic	Basic		$	0.77		$	0.59	Basic	$	0.80	$	0.69	$	1.56	$	1.29
Diluted	Diluted		$	0.75		$	0.58	Diluted	$	0.78	$	0.68	$	1.53	$	1.26

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Net Earnings	Net Earnings		$	129,166		$	100,843	Net Earnings	$	134,268	$	117,378	$	263,434	$	218,221
Components of other comprehensive income (loss)	Components of other comprehensive income (loss)							Components of other comprehensive income (loss)
Cumulative translation adjustment	Cumulative translation adjustment		4,975			(2,960)		Cumulative translation adjustment	4,553		(13,532)		9,528		(16,492)
Pension and postretirement medical liability adjustment	Pension and postretirement medical liability adjustment		1,132			894		Pension and postretirement medical liability adjustment	1,195		1,368		2,327		2,262
Income taxes - pension and postretirement medical liability adjustment	Income taxes - pension and postretirement medical liability adjustment		(244)			(194)		Income taxes - pension and postretirement medical liability adjustment	(264)		(320)		(508)		(514)
Other comprehensive income (loss)	Other comprehensive income (loss)		5,863			(2,260)		Other comprehensive income (loss)	5,484		(12,484)		11,347		(14,744)
Comprehensive Income	Comprehensive Income		$	135,029		$	98,583	Comprehensive Income	$	139,752	$	104,894	$	274,781	$	203,477

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands)


		March 31, 2023		December 30, 2022			June 30, 2023		December 30, 2022
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	395,313	$	339,196	Cash and cash equivalents	$	520,633	$	339,196
Accounts receivable, less allowances of $5,600 and $7,000		356,473		346,010
Accounts receivable, less allowances of $5,100 and $7,000						Accounts receivable, less allowances of $5,100 and $7,000	365,818		346,010
Inventories	Inventories	497,242		476,790		Inventories	479,095		476,790
Other current assets	Other current assets	39,433		43,624		Other current assets	44,907		43,624
Total current assets	Total current assets	1,288,461		1,205,620		Total current assets	1,410,453		1,205,620

Property, Plant and Equipment, net	Property, Plant and Equipment, net	633,482		607,609		Property, Plant and Equipment, net	680,040		607,609
Goodwill	Goodwill	370,103		368,171		Goodwill	371,880		368,171
Other Intangible Assets, net	Other Intangible Assets, net	134,131		137,507		Other Intangible Assets, net	131,089		137,507
Operating Lease Assets	Operating Lease Assets	29,742		29,785		Operating Lease Assets	29,158		29,785
Deferred Income Taxes	Deferred Income Taxes	56,183		57,090		Deferred Income Taxes	48,189		57,090
Other Assets	Other Assets	34,161		33,118		Other Assets	36,916		33,118
Total Assets	Total Assets	$	2,546,263	$	2,438,900	Total Assets	$	2,707,725	$	2,438,900
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	$	41,910	$	20,974	Notes payable to banks	$	49,099	$	20,974

Current portion of long term debt						Current portion of long term debt	75,000		—
Trade accounts payable	Trade accounts payable	80,375		84,218		Trade accounts payable	81,540		84,218
Salaries and incentives	Salaries and incentives	43,342		63,969		Salaries and incentives	55,150		63,969
Dividends payable	Dividends payable	39,457		39,963		Dividends payable	39,692		39,963
Other current liabilities	Other current liabilities	176,614		190,793		Other current liabilities	188,857		190,793
Total current liabilities	Total current liabilities	381,698		399,917		Total current liabilities	489,338		399,917
Long-term Debt	Long-term Debt	75,000		75,000		Long-term Debt	—		75,000
Retirement Benefits and Deferred Compensation	Retirement Benefits and Deferred Compensation	61,994		61,672		Retirement Benefits and Deferred Compensation	61,995		61,672
Operating Lease Liabilities	Operating Lease Liabilities	21,384		21,057		Operating Lease Liabilities	20,343		21,057
Deferred Income Taxes	Deferred Income Taxes	8,986		9,443		Deferred Income Taxes	8,730		9,443
Other Non-current Liabilities	Other Non-current Liabilities	10,858		12,159		Other Non-current Liabilities	11,012		12,159

Shareholders’ Equity	Shareholders’ Equity					Shareholders’ Equity
Common stock	Common stock	168,308		167,702		Common stock	168,985		167,702
Additional paid-in-capital	Additional paid-in-capital	821,570		784,477		Additional paid-in-capital	850,900		784,477
Retained earnings	Retained earnings	1,059,980		976,851		Retained earnings	1,154,453		976,851
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	(63,515)		(69,378)		Accumulated other comprehensive income (loss)	(58,031)		(69,378)
Total shareholders’ equity	Total shareholders’ equity	1,986,343		1,859,652		Total shareholders’ equity	2,116,307		1,859,652
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	2,546,263	$	2,438,900	Total Liabilities and Shareholders’ Equity	$	2,707,725	$	2,438,900

See notes to consolidated financial statements.

Table of Contents

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


		Three Months Ended					Six Months Ended
		March 31, 2023		April 1, 2022			June 30, 2023		July 1, 2022
Cash Flows From Operating Activities	Cash Flows From Operating Activities					Cash Flows From Operating Activities
Net Earnings	Net Earnings	$	129,166	$	100,843	Net Earnings	$	263,434	$	218,221
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	17,987		15,570		Depreciation and amortization	36,117		31,453
Deferred income taxes	Deferred income taxes	230		10,973		Deferred income taxes	7,650		14,743
Share-based compensation	Share-based compensation	8,914		7,088		Share-based compensation	18,417		14,386

Change in	Change in					Change in
Accounts receivable	Accounts receivable	(8,519)		(14,296)		Accounts receivable	(17,421)		(56,263)
Inventories	Inventories	(18,959)		(52,979)		Inventories	(184)		(70,879)
Trade accounts payable	Trade accounts payable	(3,802)		9,216		Trade accounts payable	(8,243)		8,369
Salaries and incentives	Salaries and incentives	(21,303)		(35,341)		Salaries and incentives	(10,179)		(29,201)
Retirement benefits and deferred compensation	Retirement benefits and deferred compensation	1,156		(136)		Retirement benefits and deferred compensation	1,953		349
Other accrued liabilities	Other accrued liabilities	(10,787)		(8,690)		Other accrued liabilities	(5,728)		(386)
Other	Other	(3,254)		(923)		Other	(3,493)		4,193
Net cash provided by operating activities	Net cash provided by operating activities	90,829		31,325		Net cash provided by operating activities	282,323		134,985
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	(38,290)		(47,093)		Property, plant and equipment additions	(92,232)		(88,861)
Acquisition of businesses, net of cash acquired	Acquisition of businesses, net of cash acquired	—		(25,016)		Acquisition of businesses, net of cash acquired	—		(25,296)
Other	Other	(352)		(134)		Other	(940)		(397)
Net cash used in investing activities	Net cash used in investing activities	(38,642)		(72,243)		Net cash used in investing activities	(93,172)		(114,554)
Cash Flows From Financing Activities	Cash Flows From Financing Activities					Cash Flows From Financing Activities
Borrowings on short-term lines of credit, net	Borrowings on short-term lines of credit, net	20,721		(3,420)		Borrowings on short-term lines of credit, net	28,966		13,830

Payments on long-term debt	Payments on long-term debt	—		(75,000)		Payments on long-term debt	—		(75,000)
Payments of debt issuance costs	Payments of debt issuance costs	(6)		—		Payments of debt issuance costs	(1,025)		—
Common stock issued	Common stock issued	31,026		21,294		Common stock issued	52,053		23,410
Common stock repurchased	Common stock repurchased	(7,766)		(108,706)		Common stock repurchased	(7,766)		(120,021)
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(1,225)		(1,219)		Taxes paid related to net share settlement of equity awards	(1,225)		(1,219)
Cash dividends paid	Cash dividends paid	(39,431)		(35,801)		Cash dividends paid	(78,991)		(71,341)
Net cash provided (used) in financing activities	Net cash provided (used) in financing activities	3,319		(202,852)		Net cash provided (used) in financing activities	(7,988)		(230,341)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	611		(45)		Effect of exchange rate changes on cash	274		(1,033)
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	56,117		(243,815)		Net increase (decrease) in cash and cash equivalents	181,437		(210,943)
Cash and Cash Equivalents	Cash and Cash Equivalents					Cash and Cash Equivalents
Beginning of year	Beginning of year	339,196		624,302		Beginning of year	339,196		624,302
End of period	End of period	$	395,313	$	380,487	End of period	$	520,633	$	413,359

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 30, 2023
Balance, March 31, 2023	$	168,308	$	821,570	$	1,059,980	$	(63,515)	$	1,986,343

Shares issued	677		20,350		—		—		21,027

Stock compensation cost	—		8,980		—		—		8,980


Net earnings	—		—		134,268		—		134,268
Dividends declared (0.2350 per share)	—		—		(39,795)		—		(39,795)

Other comprehensive income (loss)	—		—		—		5,484		5,484
Balance, June 30, 2023	$	168,985	$	850,900	$	1,154,453	$	(58,031)	$	2,116,307


Three Months Ended March 31, 2023
Six Months Ended June 30, 2023												Six Months Ended June 30, 2023
Balance, December 30, 2022	Balance, December 30, 2022	$	167,702	$	784,477	$	976,851	$	(69,378)	$	1,859,652	Balance, December 30, 2022	$	167,702	$	784,477	$	976,851	$	(69,378)	$	1,859,652

Shares issued	Shares issued	721		29,080		—		—		29,801		Shares issued	1,398		49,430		—		—		50,828
Shares repurchased	Shares repurchased	(115)		(539)		(7,112)		—		(7,766)		Shares repurchased	(115)		(539)		(7,112)		—		(7,766)
Stock compensation cost	Stock compensation cost	—		8,552		—		—		8,552		Stock compensation cost	—		17,532		—		—		17,532

Net earnings	Net earnings	—		—		129,166		—		129,166		Net earnings	—		—		263,434		—		263,434
Dividends declared ($0.235 per share)		—		—		(38,925)		—		(38,925)
Dividends declared ($0.470 per share)												Dividends declared ($0.470 per share)	—		—		(78,720)		—		(78,720)

Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		5,863		5,863		Other comprehensive income (loss)	—		—		—		11,347		11,347
Balance, March 31, 2023		$	168,308	$	821,570	$	1,059,980	$	(63,515)	$	1,986,343
Balance, June 30, 2023												Balance, June 30, 2023	$	168,985	$	850,900	$	1,154,453	$	(58,031)	$	2,116,307



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

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

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

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


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

Shares issued	Shares issued	437		19,638		—		—		20,075		Shares issued	507		21,685		—		—		22,192
Shares repurchased	Shares repurchased	(1,522)		(6,636)		(100,548)		—		(108,706)		Shares repurchased	(1,701)		(7,412)		(110,908)		—		(120,021)
Stock compensation cost	Stock compensation cost	—		6,670		—		—		6,670		Stock compensation cost	—		13,649		—		—		13,649

Restricted stock canceled (issued)	Restricted stock canceled (issued)	—		(1)		—		—		(1)		Restricted stock canceled (issued)	—		(1)		—		—		(1)
Net earnings	Net earnings	—		—		100,843		—		100,843		Net earnings	—		—		218,221		—		218,221
Dividends declared ($0.210 per share)		—		—		(35,708)		—		(35,708)
Dividends declared ($0.4200 per share)												Dividends declared ($0.4200 per share)	—		—		(71,365)		—		(71,365)

Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		(2,260)		(2,260)		Other comprehensive income (loss)	—		—		—		(14,744)		(14,744)
Balance, April 1, 2022		$	169,223	$	761,959	$	841,503	$	(82,429)	$	1,690,256
Balance, July 1, 2022												Balance, July 1, 2022	$	169,114	$	770,209	$	912,864	$	(94,913)	$	1,757,274

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 ~~March 31,~~June 30, 2023 and the related statements of earnings, comprehensive income and shareholders' equity for the three and six months ended ~~March 31,~~June 30, 2023 and ~~April~~July 1, 2022, and cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and ~~April~~July 1, 2022 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 ~~March 31,~~June 30, 2023, 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 2022 Annual Report on Form 10-K.

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

2.Segment Information

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


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Net Sales	Net Sales							Net Sales
Contractor	Contractor		$	245,971		$	234,592	Contractor	$	255,648	$	265,739	$	501,619	$	500,331
Industrial	Industrial		150,190			144,669		Industrial	163,523		158,325		313,713		302,994
Process	Process		133,485			115,024		Process	140,473		124,483		273,958		239,507
Total	Total		$	529,646		$	494,285	Total	$	559,644	$	548,547	$	1,089,290	$	1,042,832
Operating Earnings	Operating Earnings							Operating Earnings
Contractor	Contractor		$	73,772		$	58,947	Contractor	$	68,868	$	68,244	$	142,640	$	127,191
Industrial	Industrial		52,770			52,630		Industrial	55,887		55,201		108,657		107,831
Process	Process		40,565			27,488		Process	43,620		31,057		84,185		58,545
Unallocated corporate (expense)	Unallocated corporate (expense)		(10,439)			(10,702)		Unallocated corporate (expense)	(11,323)		(5,822)		(21,762)		(16,524)

Total	Total		$	156,668		$	128,363	Total	$	157,052	$	148,680	$	313,720	$	277,043

Assets by segment were as follows (in thousands):


		March 31, 2023		December 30, 2022			June 30, 2023		December 30, 2022
Contractor	Contractor	$	779,617	$	752,729	Contractor	$	769,654	$	752,729
Industrial	Industrial	603,494		578,302		Industrial	617,270		578,302
Process	Process	575,792		564,539		Process	583,002		564,539
Unallocated corporate	Unallocated corporate	587,360		543,330		Unallocated corporate	737,799		543,330
Total	Total	$	2,546,263	$	2,438,900	Total	$	2,707,725	$	2,438,900

Table of Contents

Geographic information follows (in thousands):


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Net Sales (based on customer location)	Net Sales (based on customer location)							Net Sales (based on customer location)
United States	United States		$	288,989		$	255,082	United States	$	301,953	$	296,009	$	590,942	$	551,091
Other countries	Other countries		240,657			239,203		Other countries	257,691		252,538		498,348		491,741
Total	Total		$	529,646		$	494,285	Total	$	559,644	$	548,547	$	1,089,290	$	1,042,832


		March 31, 2023		December 30, 2022			June 30, 2023		December 30, 2022
Long-lived Assets	Long-lived Assets					Long-lived Assets
United States	United States	$	550,124	$	532,401	United States	$	583,160	$	532,401
Other countries	Other countries	83,358		75,208		Other countries	96,880		75,208
Total	Total	$	633,482	$	607,609	Total	$	680,040	$	607,609

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			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Net earnings available to common shareholders	Net earnings available to common shareholders		$	129,166		$	100,843	Net earnings available to common shareholders	$	134,268	$	117,378	$	263,434	$	218,221
Weighted average shares outstanding for basic earnings per share	Weighted average shares outstanding for basic earnings per share		168,018			169,809		Weighted average shares outstanding for basic earnings per share	168,683		169,128		168,351		169,469
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		3,658			4,869		Dilutive effect of stock options computed using the treasury stock method and the average market price	3,868		3,570		3,763		4,219
Weighted average shares outstanding for diluted earnings per share	Weighted average shares outstanding for diluted earnings per share		171,676			174,678		Weighted average shares outstanding for diluted earnings per share	172,551		172,698		172,114		173,688
Basic earnings per share	Basic earnings per share		$	0.77		$	0.59	Basic earnings per share	$	0.80	$	0.69	$	1.56	$	1.29
Diluted earnings per share	Diluted earnings per share		$	0.75		$	0.58	Diluted earnings per share	$	0.78	$	0.68	$	1.53	$	1.26

Anti-dilutive shares not included in diluted earnings per share computation	Anti-dilutive shares not included in diluted earnings per share computation		3,235			1,250		Anti-dilutive shares not included in diluted earnings per share computation	1,868		1,632		2,206		1,625

Table of Contents

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 30, 2022	Outstanding, December 30, 2022	10,265	$	44.40	7,793	$	37.22	Outstanding, December 30, 2022	10,265	$	44.40	7,793	$	37.22
Granted	Granted	1,101	71.38					Granted	1,114	71.45
Exercised	Exercised	(427)	29.80					Exercised	(1,093)	30.74
Canceled	Canceled	(37)	66.85					Canceled	(62)	64.80
Outstanding, March 31, 2023		10,902	$	47.63	8,033	$	39.68
Outstanding, June 30, 2023								Outstanding, June 30, 2023	10,224	$	48.68	7,529	$	40.96

The Company recognized year-to-date share-based compensation of ~~$8.9~~$18.4 million in 2023 and ~~$7.1~~$12.9 million in 2022. As of ~~March 31,~~June 30, 2023, there was ~~$33.0~~$25.8 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of ~~3.1~~2.9 years.

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


		Three Months Ended							Six Months Ended
		March 31, 2023			April 1, 2022				June 30, 2023			July 1, 2022
Expected life in years	Expected life in years	6.7			7.3			Expected life in years	6.7			7.3
Interest rate	Interest rate	4.0		%	1.9		%	Interest rate	4.0		%	1.9		%
Volatility	Volatility	26.3		%	25.5		%	Volatility	26.3		%	25.5		%
Dividend yield	Dividend yield	1.3		%	1.2		%	Dividend yield	1.3		%	1.2		%
Weighted average fair value per share	Weighted average fair value per share	$	21.74		$	19.06		Weighted average fair value per share	$	21.76		$	19.06

Under the Company’s Employee Stock Purchase Plan, the Company issued 323,000 shares in 2023 and ~~298,000~~319,000 shares in 2022. 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~~option pricing model with the following assumptions and results:


		Three Months Ended							Six Months Ended
		March 31, 2023			April 1, 2022				June 30, 2023			July 1, 2022
Expected life in years	Expected life in years	1.0			1.0			Expected life in years	1.0			1.0
Interest rate	Interest rate	5.1		%	0.9		%	Interest rate	5.1		%	0.9		%
Volatility	Volatility	26.4		%	20.5		%	Volatility	26.4		%	20.5		%
Dividend yield	Dividend yield	1.4		%	1.2		%	Dividend yield	1.4		%	1.2		%
Weighted average fair value per share	Weighted average fair value per share	$	18.04		$	16.01		Weighted average fair value per share	$	18.04		$	16.01

Table of Contents

5.Retirement Benefits

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


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Pension Benefits	Pension Benefits							Pension Benefits
Service cost	Service cost		$	1,464		$	2,170	Service cost	$	1,467	$	1,964	$	2,931	$	4,134
Interest cost	Interest cost		3,777			2,738		Interest cost	3,798		2,766		7,575		5,504
Expected return on assets	Expected return on assets		(3,975)			(4,802)		Expected return on assets	(3,980)		(4,777)		(7,955)		(9,579)
Amortization and other	Amortization and other		440			1,076		Amortization and other	415		1,419		855		2,495
Net periodic benefit cost	Net periodic benefit cost		$	1,706		$	1,182	Net periodic benefit cost	$	1,700	$	1,372	$	3,406	$	2,554
Postretirement Medical	Postretirement Medical							Postretirement Medical
Service cost	Service cost		$	100		$	175	Service cost	$	100	$	83	$	200	$	258
Interest cost	Interest cost		210			225		Interest cost	210		195		420		420
Amortization	Amortization		90			175		Amortization	90		(2)		180		173
Net periodic benefit cost	Net periodic benefit cost		$	400		$	575	Net periodic benefit cost	$	400	$	276	$	800	$	851

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			Pension and Post-retirement Medical		Cumulative Translation Adjustment		Total
Three Months Ended March 31, 2023
Balance, December 30, 2022		$	(39,734)	$	(29,644)	$	(69,378)
Three Months Ended June 30, 2023								Three Months Ended June 30, 2023
Balance, March 31, 2023								Balance, March 31, 2023	$	(38,846)	$	(24,669)	$	(63,515)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	—		4,975		4,975		Other comprehensive income (loss) before reclassifications	—		4,553		4,553
Reclassified to pension cost and deferred tax	Reclassified to pension cost and deferred tax	888		—		888		Reclassified to pension cost and deferred tax	931		—		931

Balance, March 31, 2023		$	(38,846)	$	(24,669)	$	(63,515)
Balance, June 30, 2023								Balance, June 30, 2023	$	(37,915)	$	(20,116)	$	(58,031)

Three Months Ended April 1, 2022
Balance, December 31, 2021 $ (60,107) $ (20,062) $ (80,169)
Other comprehensive income (loss) before reclassifications — (2,960) (2,960)
Reclassified to pension cost and deferred tax 700 — 700
Balance, April 1, 2022 $ (59,407) $ (23,022) $ (82,429)



Six Months Ended June 30, 2023
Balance, December 30, 2022	$	(39,734)	$	(29,644)	$	(69,378)
Other comprehensive income (loss) before reclassifications	—		9,528		9,528
Reclassified to pension cost and deferred tax	1,819		—		1,819

Balance, June 30, 2023	$	(37,915)	$	(20,116)	$	(58,031)



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

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



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

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

Table of Contents

Amounts related to pension and ~~postretirement~~post-retirement 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~~include trade receivables of ~~$345~~$354 million and other receivables of ~~$11~~$12 million as of ~~March 31,~~June 30, 2023 and $334 million and $12 million, respectively, as of December 30, 2022.

Allowance for Credit Losses

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

~~Table of Contents~~


							Three Months Ended				Six Months Ended
		March 31, 2023		April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Balance, beginning	Balance, beginning	$	6,130	$	3,254	Balance, beginning	$	4,232	$	6,474	$	6,130	$	3,254
Additions (reversals) charged to costs and expenses		(137)		3,220
Additions charged to costs and expenses						Additions charged to costs and expenses	417		26		280		3,246
Deductions from reserves (1)	Deductions from reserves (1)	(1,820)		(33)		Deductions from reserves (1)	(449)		(542)		(2,269)		(575)
Other additions (deductions) (2)	Other additions (deductions) (2)	59		33		Other additions (deductions) (2)	(1)		(269)		58		(236)
Balance, ending	Balance, ending	$	4,232	$	6,474	Balance, ending	$	4,199	$	5,689	$	4,199	$	5,689

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

(2) Includes effects of foreign currency translation.

8.Inventories

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


		March 31, 2023		December 30, 2022			June 30, 2023		December 30, 2022
Finished products and components	Finished products and components	$	246,401	$	222,326	Finished products and components	$	245,480	$	222,326
Products and components in various stages of completion	Products and components in various stages of completion	147,687		138,957		Products and components in various stages of completion	138,264		138,957
Raw materials and purchased components	Raw materials and purchased components	232,913		248,636		Raw materials and purchased components	227,972		248,636
Subtotal	Subtotal	627,001		609,919		Subtotal	611,716		609,919
Reduction to LIFO cost	Reduction to LIFO cost	(129,759)		(133,129)		Reduction to LIFO cost	(132,621)		(133,129)
Total	Total	$	497,242	$	476,790	Total	$	479,095	$	476,790

Table of Contents

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 March 31, 2023
As of June 30, 2023												As of June 30, 2023
Cost	Cost	$	197,417	$	26,374	$	1,300	$	62,633	$	287,724	Cost	$	197,417	$	26,374	$	1,300	$	62,633	$	287,724
Accumulated amortization	Accumulated amortization	(122,816)		(18,738)		(388)		—		(141,942)		Accumulated amortization	(126,617)		(19,245)		(445)		—		(146,307)
Foreign currency translation	Foreign currency translation	(9,301)		(863)		—		(1,487)		(11,651)		Foreign currency translation	(8,803)		(848)		—		(677)		(10,328)
Book value	Book value	$	65,300	$	6,773	$	912	$	61,146	$	134,131	Book value	$	61,997	$	6,281	$	855	$	61,956	$	131,089
Weighted average life in years	Weighted average life in years	13		10		6		N/A				Weighted average life in years	13		9		6		N/A


As of December 30, 2022
Cost	$	202,103	$	26,374	$	1,300	$	62,633	$	292,410
Accumulated amortization	(123,603)		(18,027)		(330)		—		(141,960)
Foreign currency translation	(10,060)		(894)		—		(1,989)		(12,943)
Book value	$	68,440	$	7,453	$	970	$	60,644	$	137,507
Weighted average life in years	13		10		6		N/A

~~Table of Contents~~

Amortization of intangibles for the ~~year to date~~second quarter was ~~$4.5~~$4.4 million in 2023 and $4.6 million in 2022, and for the year to date was $8.9 million in 2023 and $9.4 million in 2022. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):

2023 (Remainder) 2024 2025 2026 2027 Thereafter
Estimated Amortization Expense $ 12,786 $ 16,311 $ 15,849 $ 9,050 $ 6,406 $ 12,583


	2023 (Remainder)		2024		2025		2026		2027		Thereafter
Estimated Amortization Expense	$	8,526	$	16,448	$	15,986	$	9,105	$	6,443	$	12,625

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


		Contractor		Industrial		Process		Total			Contractor		Industrial		Process		Total
Balance, December 30, 2022	Balance, December 30, 2022	$	77,034	$	134,771	$	156,366	$	368,171	Balance, December 30, 2022	$	77,034	$	134,771	$	156,366	$	368,171
Additions, adjustments from business acquisitions	Additions, adjustments from business acquisitions	—		—		—		—		Additions, adjustments from business acquisitions	—		—		—		—
Foreign currency translation	Foreign currency translation	259		1,257		416		1,932		Foreign currency translation	276		2,646		787		3,709
Balance, March 31, 2023		$	77,293	$	136,028	$	156,782	$	370,103
Balance, June 30, 2023										Balance, June 30, 2023	$	77,310	$	137,417	$	157,153	$	371,880

Table of Contents

10.Other Current Liabilities

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


		March 31, 2023		December 30, 2022			June 30, 2023		December 30, 2022
Accrued self-insurance retentions	Accrued self-insurance retentions	$	9,246	$	9,338	Accrued self-insurance retentions	$	9,203	$	9,338
Accrued warranty and service liabilities	Accrued warranty and service liabilities	14,917		14,674		Accrued warranty and service liabilities	15,413		14,674
Accrued trade promotions	Accrued trade promotions	8,951		13,799		Accrued trade promotions	11,434		13,799
Payable for employee stock purchases	Payable for employee stock purchases	1,055		16,497		Payable for employee stock purchases	7,515		16,497
Customer advances and deferred revenue	Customer advances and deferred revenue	45,134		50,747		Customer advances and deferred revenue	58,226		50,747
Income taxes payable	Income taxes payable	27,258		15,987		Income taxes payable	19,369		15,987
Tax payable, other	Tax payable, other	11,584		9,614		Tax payable, other	9,337		9,614
Right of return refund liability	Right of return refund liability	18,533		18,449		Right of return refund liability	18,257		18,449
Operating lease liabilities, current	Operating lease liabilities, current	9,451		9,555		Operating lease liabilities, current	9,126		9,555

Other	Other	30,485		32,133		Other	30,977		32,133
Total	Total	$	176,614	$	190,793	Total	$	188,857	$	190,793

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 30, 2022	$	14,674

Charged to expense	~~2,392~~5,229
Margin on parts sales reversed	~~1,351~~2,179
Reductions for claims settled	~~(3,500)~~(6,669)
Balance, ~~March 31,~~June 30, 2023	$	~~14,917~~15,413

Customer Advances and 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. During the three and six months ended ~~March 31,~~June 30, 2023, we recognized ~~$20.6~~$16.0 million and $36.6 million, respectively, that was included in deferred revenue at December 30, 2022. During the

~~Table of Contents~~

three and six months ended ~~April~~July 1, 2022, we recognized ~~$22.5~~$18.3 million and $40.8 million, respectively, that was included in deferred revenue at December 31, 2021.

11.Debt

On May 23, 2023 and June 8, 2023, the Company executed amendments to its amended and restated credit agreement that amended, superseded and restated in its entirety the Company's existing credit agreement with U.S. Bank National Association, as administrative agent and a lender, and the other lenders that are parties thereto. The first amendment removed references to LIBOR for calculating rates and replaced it with SOFR and its equivalent benchmark rates such as EURIBOR, TIBOR and RFR loans.

The second amendment increased, from $500 million to $750 million, the amount of availability under an unsecured revolving credit facility, as well as increasing, from $200 million to $375 million, the maximum amount of outstanding loans in currencies other than U.S. Dollars. The amendment also increased, from $250 million to $375 million, the amount by which the size of the credit facility may be increased upon exercise of an accordion feature. The accordion feature may be exercised by means of an increase in the revolving commitments or the addition of term loans.

In addition, the second amendment increased the applicable margin percentages used for purposes of calculating the interest rates applicable to base rate loans and non-base rate loans (e.g., SOFR, EURIBOR, TIBOR and RFR loans). Under the amendment, the applicable margin percentages for base rate loans (which ranged from 0.000% to 0.750% under the prior credit agreement) range from 0.125% to 0.875%, and the applicable margin percentages for non-base rate loans (which ranged from 1.000% to 1.750% under the prior credit agreement) range from 1.125% to 1.875%.

Table of Contents

Subsequent Event

In July 2023, the Company prepaid $75 million of its Series D private placement note in addition to a $0.7 million prepayment fee, which will be recognized as interest expense in the third quarter of 2023.

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	March 31, 2023		December 30, 2022			Level	June 30, 2023		December 30, 2022
Assets	Assets						Assets
Cash surrender value of life insurance	Cash surrender value of life insurance	2	$	20,239	$	19,192	Cash surrender value of life insurance	2	$	21,015	$	19,192

Forward exchange contracts							Forward exchange contracts	2	160		—
Total assets at fair value							Total assets at fair value		$	21,175	$	19,192
Liabilities	Liabilities						Liabilities
Contingent consideration	Contingent consideration	3	$	13,410	$	14,914	Contingent consideration	3	$	9,975	$	14,914
Deferred compensation	Deferred compensation	2	5,830		5,842		Deferred compensation	2	5,984		5,842
Forward exchange contracts	Forward exchange contracts	2	132		520		Forward exchange contracts	2	—		520
Total liabilities at fair value	Total liabilities at fair value		$	19,372	$	21,276	Total liabilities at fair value		$	15,959	$	21,276

Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.

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 $75 million and an estimated fair value of $75 million as of both ~~March 31,~~June 30, 2023 and December 30, 2022. 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.

1314

Table of Contents

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: Contractor, Industrial and Process. 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 Company continued to experience supply chain disruptions and the associated effects of inflation in the first ~~quarter~~half of 2023; however, the impact was not as significant as compared to the same period in the prior year. Pricing actions implemented have generally mitigated the effects of increased costs and expenses. The Company expects isolated supply chain disruptions and an overall inflationary environment to continue through the remainder of 2023.

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			Three Months Ended								Six Months Ended
			Mar 31, 2023			Apr 1, 2022		% Change			Jun 30, 2023		Jul 1, 2022		% Change		Jun 30, 2023		Jul 1, 2022		% Change
Net Sales	Net Sales		$	529.6		$	494.3	7	%	Net Sales	$	559.6	$	548.5	2	%	$	1,089.3	$	1,042.8	4	%
Operating Earnings	Operating Earnings		156.7			128.4		22	%	Operating Earnings	157.1		148.7		6	%	313.7		277.0		13	%

Net Earnings	Net Earnings		129.2			100.8		28	%	Net Earnings	134.3		117.4		14	%	263.4		218.2		21	%
Net Earnings, adjusted (1)	Net Earnings, adjusted (1)		126.6			99.3		27	%	Net Earnings, adjusted (1)	128.8		117.0		10	%	255.3		216.3		18	%
Diluted Net Earnings per Common Share	Diluted Net Earnings per Common Share		$	0.75		$	0.58	29	%	Diluted Net Earnings per Common Share	$	0.78	$	0.68	15	%	$	1.53	$	1.26	21	%
Diluted Net Earnings per Common Share, adjusted (1)	Diluted Net Earnings per Common Share, adjusted (1)		$	0.74		$	0.57	30	%	Diluted Net Earnings per Common Share, adjusted (1)	$	0.75	$	0.68	10	%	$	1.48	$	1.25	18	%

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

Sales increased 72 percent for the ~~quarter, led by double-digit~~quarter. Strong growth in the Process segment more than offset a decrease in the Contractor segment. Sales increases in the Americas and EMEA were partially offset by a decrease in Asia Pacific. Changes in currency translation rates decreased sales and net earnings by approximately ~~$11~~$3 million and ~~$6 million, respectively, for the quarter. Sales from acquired operations contributed approximately~~ $2 million, for the ~~quarter.~~quarter and $14 million and $8 million for the year to date, respectively.

Gross profit margin rate for the quarter was more than 23 percentage points higher than the ~~first~~second quarter last year mainly due to the ~~impact of price changes~~realized pricing and favorable product and channel mix.

Total operating expenses increased 212 percentage points ~~but decreased~~and increased as a percentage of sales by 12 percentage ~~point.~~points.

1415

Table of Contents

Excluding the impact of excess tax benefits related to stock option exercises presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements of adjusted income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):


		Three Months Ended				Three Months Ended								Six Months Ended
			March 31, 2023				April 1, 2022				June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022

Earnings before income taxes	Earnings before income taxes		$	157.4			$	122.9		Earnings before income taxes	$	159.6		$	146.3		$	317.0		$	269.3

Income taxes, as reported	Income taxes, as reported		$	28.2			$	22.1		Income taxes, as reported	$	25.4		$	29.0		$	53.5		$	51.1

Excess tax benefit from option exercises	Excess tax benefit from option exercises		2.6				1.5			Excess tax benefit from option exercises	5.5			0.4			8.1			1.9

Income taxes, adjusted	Income taxes, adjusted		$	30.8			$	23.6		Income taxes, adjusted	$	30.9		$	29.4		$	61.6		$	53.0

Effective income tax rate	Effective income tax rate									Effective income tax rate
As reported	As reported		17.9		%		18.0		%	As reported	15.9		%	19.8		%	16.9		%	19.0		%
Adjusted	Adjusted		19.5		%		19.2		%	Adjusted	19.4		%	20.0		%	19.4		%	19.7		%

Net Earnings, as reported	Net Earnings, as reported		$	129.2			$	100.8		Net Earnings, as reported	$	134.3		$	117.4		$	263.4		$	218.2

Excess tax benefit from option exercises	Excess tax benefit from option exercises		(2.6)				(1.5)			Excess tax benefit from option exercises	(5.5)			(0.4)			(8.1)			(1.9)

Net Earnings, adjusted	Net Earnings, adjusted		$	126.6			$	99.3		Net Earnings, adjusted	$	128.8		$	117.0		$	255.3		$	216.3

Weighted Average Diluted Shares	Weighted Average Diluted Shares		171.7				174.7			Weighted Average Diluted Shares	172.6			172.7			172.1			173.7
Diluted Earnings per Share	Diluted Earnings per Share									Diluted Earnings per Share
As reported	As reported		$	0.75			$	0.58		As reported	$	0.78		$	0.68		$	1.53		$	1.26
Adjusted	Adjusted		$	0.74			$	0.57		Adjusted	$	0.75		$	0.68		$	1.48		$	1.25

1516

Table of Contents

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


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Net Sales	Net Sales		100.0	%		100.0	%	Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of products sold	Cost of products sold		46.2			48.5		Cost of products sold	47.9		51.0		47.1		49.8
Gross Profit	Gross Profit		53.8			51.5		Gross Profit	52.1		49.0		52.9		50.2
Product development	Product development		3.9			3.9		Product development	3.8		3.6		3.8		3.7
Selling, marketing and distribution	Selling, marketing and distribution		12.3			12.7		Selling, marketing and distribution	12.2		11.3		12.3		12.0
General and administrative	General and administrative		8.0			8.9		General and administrative	8.0		7.0		8.0		7.9

Operating Earnings	Operating Earnings		29.6			26.0		Operating Earnings	28.1		27.1		28.8		26.6
Interest expense	Interest expense		0.3			1.1		Interest expense	0.3		0.3		0.3		0.7

Other (income) expense, net	Other (income) expense, net		(0.4)			—		Other (income) expense, net	(0.8)		0.1		(0.6)		0.1
Earnings Before Income Taxes	Earnings Before Income Taxes		29.7			24.9		Earnings Before Income Taxes	28.5		26.7		29.1		25.8
Income taxes	Income taxes		5.3			4.5		Income taxes	4.5		5.3		4.9		4.9
Net Earnings	Net Earnings		24.4	%		20.4	%	Net Earnings	24.0	%	21.4	%	24.2	%	20.9	%

Net Sales

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


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2023			April 1, 2022			June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Americas(1)	Americas(1)		$	331.9		$	293.2	Americas(1)	$	345.8	$	338.1	$	677.7	$	631.3
EMEA(2)	EMEA(2)		108.8			106.2		EMEA(2)	115.7		108.3		224.6		214.5
Asia Pacific	Asia Pacific		88.9			94.9		Asia Pacific	98.1		102.1		187.0		197.0
Consolidated	Consolidated		$	529.6		$	494.3	Consolidated	$	559.6	$	548.5	$	1,089.3	$	1,042.8

(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		Three Months						Six Months
			Volume and Price		Acquisitions	Currency	Total		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	Americas		13%		1%	(1)%	13%	Americas	2%	0%	0%	2%	7%	0%	0%	7%
EMEA	EMEA		7%		0%	(5)%	2%	EMEA	5%	0%	2%	7%	6%	0%	(1)%	5%
Asia Pacific	Asia Pacific		(1)%		0%	(5)%	(6)%	Asia Pacific	0%	0%	(4)%	(4)%	(1)%	0%	(4)%	(5)%
Consolidated	Consolidated		10%		0%	(3)%	7%	Consolidated	3%	0%	(1)%	2%	6%	0%	(2)%	4%

Gross Profit

Gross profit margin ~~rate~~rates for the quarter ~~was more than 2~~and year to date increased approximately 3 percentage points ~~higher than~~from the ~~first quarter~~comparable periods last year. ~~Favorable effects of realized pricing~~Strong price realization and favorable product and channel mix more than offset ~~the adverse impacts of~~ higher product ~~costs and changes in currency translation rates.~~costs.

1617

Table of Contents

Operating Expenses

Total operating expenses for the quarter increased $2$14 million (2(12 percent) ~~compared to~~from the ~~first quarter~~comparable period last year. The increase includes ~~higher stock~~$4 million of incremental share-based compensation and $3 million of $2increased spending related to product development and other growth initiatives. Total operating expenses for the year to date increased $16 million ~~and volume~~(7 percent) from the comparable period last year. Volume and rate-related increases, higher product development spending and incremental share-based compensation accounted for most of ~~$5 million.~~the increase. Partially offsetting the year-to-date increase ~~was $2 million of favorable changes in currency translation rates and~~were $3 million of credit losses on customer receivables in Russia in the prior year that did not ~~repeat.~~repeat and $2 million from favorable changes in currency translation rates.

Interest and Other (Income) Expense

Interest expense was flat for the quarter and for the year to date decreased $4 million as private placement debt was repaid in the first quarter last year. Other non-operating expenses decreased $5 million for the quarter ~~decreased by $2~~and $7 million for the year-to-date mostly due to increased interest income and favorable market valuation changes on investments held to fund certain retirement benefits.

Income Taxes

The effective income tax rate ~~of 18~~was 16 percent for the quarter ~~was flat compared with~~and 17 percent for the ~~first quarter~~year to date, down 4 percentage points and 2 percentage points, respectively, from the comparable periods last ~~year.~~year, primarily due to increases in excess tax benefits from stock option exercises.

Segment Results

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

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				Three Months Ended								Six Months Ended
			March 31, 2023				April 1, 2022				June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Net Sales	Net Sales									Net Sales
Americas	Americas		$	184.1			$	170.5		Americas	$	188.4		$	199.7		$	372.5		$	370.2
EMEA	EMEA		42.1				41.2			EMEA	48.4			45.0			90.6			86.2
Asia Pacific	Asia Pacific		19.7				22.9			Asia Pacific	18.8			21.0			38.5			43.9
Total	Total		$	245.9			$	234.6		Total	$	255.6		$	265.7		$	501.6		$	500.3
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales		30		%		25		%	Operating earnings as a percentage of net sales	27		%	26		%	28		%	25		%

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


		Three Months		Three Months						Six Months
			Volume and Price		Acquisitions	Currency	Total		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	Americas		8%		0%	0%	8%	Americas	(5)%	0%	(1)%	(6)%	1%	0%	0%	1%
EMEA	EMEA		7%		0%	(5)%	2%	EMEA	6%	0%	2%	8%	6%	0%	(1)%	5%
Asia Pacific	Asia Pacific		(8)%		0%	(6)%	(14)%	Asia Pacific	(6)%	0%	(5)%	(11)%	(7)%	0%	(5)%	(12)%
Segment Total	Segment Total		7%		0%	(2)%	5%	Segment Total	(3)%	0%	(1)%	(4)%	1%	0%	(1)%	0%

Table of Contents

Slower economic activity in construction markets in the Americas and Asia Pacific drove Contractor segment sales ~~increased 5~~down 4 percent ~~with~~for the quarter. For the year to date, favorable response to new product offerings and improved product ~~availability. Price~~availability were able to offset reduced demand. Operating margin rates for the quarter and year to date increased 1 percentage point and 3 percentage points, respectively, as price realization and favorable product and channel mix ~~drove the operating margin rate 5 percentage points higher.~~more than offset higher product costs and increased spending on product development and growth initiatives.

Industrial Segment

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

(dollars in millions):

~~Table of Contents~~


		Three Months Ended				Three Months Ended								Six Months Ended
			March 31, 2023				April 1, 2022				June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Net Sales	Net Sales									Net Sales
Americas	Americas		$	63.3			$	54.3		Americas	$	65.7		$	61.5		$	129.0		$	115.8
EMEA	EMEA		48.1				47.9			EMEA	49.1			45.6			97.2			93.5
Asia Pacific	Asia Pacific		38.8				42.5			Asia Pacific	48.7			51.2			87.5			93.7
Total	Total		$	150.2			$	144.7		Total	$	163.5		$	158.3		$	313.7		$	303.0
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales		35		%		36		%	Operating earnings as a percentage of net sales	34		%	35		%	35		%	36		%

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


		Three Months		Three Months						Six Months
			Volume and Price		Acquisitions	Currency	Total		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	Americas		17%		0%	0%	17%	Americas	7%	0%	0%	7%	11%	0%	0%	11%
EMEA	EMEA		5%		0%	(5)%	0%	EMEA	5%	0%	3%	8%	5%	0%	(1)%	4%
Asia Pacific	Asia Pacific		(3)%		0%	(6)%	(9)%	Asia Pacific	(1)%	0%	(4)%	(5)%	(2)%	0%	(5)%	(7)%
Segment Total	Segment Total		7%		0%	(3)%	4%	Segment Total	4%	0%	(1)%	3%	6%	0%	(2)%	4%

~~Underlying sales~~Sales growth in the Americas and EMEA for the quarter and year to date was partially offset by weakness in Asia Pacific, where declines in finishing system sales and other project activity ~~decreased.~~continued. The unfavorable effects of currency translation drove a 1 percentage point decrease in the operating margin ~~rate.~~rate for the quarter and year to date.

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				Three Months Ended								Six Months Ended
			March 31, 2023				April 1, 2022				June 30, 2023			July 1, 2022			June 30, 2023			July 1, 2022
Net Sales	Net Sales									Net Sales
Americas	Americas		$	84.5			$	68.4		Americas	$	91.7		$	77.0		$	176.2		$	145.4
EMEA	EMEA		18.6				17.1			EMEA	18.2			17.6			36.8			34.7
Asia Pacific	Asia Pacific		30.4				29.5			Asia Pacific	30.6			29.9			61.0			59.4
Total	Total		$	133.5			$	115.0		Total	$	140.5		$	124.5		$	274.0		$	239.5
Operating earnings as a percentage of net sales	Operating earnings as a percentage of net sales		30		%		24		%	Operating earnings as a percentage of net sales	31		%	25		%	31		%	24		%

Table of Contents

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


		Three Months		Three Months						Six Months
			Volume and Price		Acquisitions	Currency	Total		Volume and Price	Acquisitions	Currency	Total	Volume and Price	Acquisitions	Currency	Total
Americas	Americas		22%		2%	0%	24%	Americas	19%	0%	0%	19%	20%	1%	0%	21%
EMEA	EMEA		12%		1%	(4)%	9%	EMEA	3%	0%	1%	4%	7%	0%	(1)%	6%
Asia Pacific	Asia Pacific		6%		0%	(3)%	3%	Asia Pacific	5%	0%	(3)%	2%	6%	0%	(3)%	3%
Segment Total	Segment Total		16%		2%	(2)%	16%	Segment Total	14%	0%	(1)%	13%	15%	1%	(2)%	14%

~~The~~Double-digit sales growth continued in the Process segment ~~had sales~~for the quarter and year to date from the comparable periods last year. Sales growth for the quarter and year to date was particularly strong in ~~all~~the automatic lubrication, vehicle service and semiconductor product applications. The operating margin rate for this segment increased 6 percentage points for the quarter and 7 percentage points year to date from the comparable periods last year primarily due to price realization and expense leverage.

~~Table of Contents~~

Liquidity and Capital Resources

Net cash provided by operating activities of ~~$91~~$282 million inincreased $147 million compared to the first ~~quarter~~half of ~~2023 increased $60 million from the comparable period of 2022,~~last year, mostly driven by higher net earnings, decreased inventory purchases and ~~decreased~~lower salary and incentive payments. Inventory purchases were lower in the first six months of 2023 compared to the same period last year as logistical and production constraints from disruptions in the supply chain improved. Increases in accounts receivable reflect growth in business activity in the first half of 2023. Significant uses of cash in 2023 included ~~dividend payments of $39 million and~~ plant and equipment additions of ~~$38~~$92 million and dividend payments of $79 million. Net proceeds from shares issued in 2023 totaled ~~$30~~$52 million, which was partially offset by share repurchases of $8 million.

~~Significant~~In 2022, significant uses of cash ~~in the first quarter of 2022~~ included share repurchases of ~~$109~~$120 million, ~~payments of long-term debt of $75 million, property,~~ plant and equipment additions of ~~$47~~$89 million, long-term debt payments of $75 million, dividend payments of ~~$36~~$71 million, and $25 million to acquire businesses that were not material to the consolidated financial statements. Proceeds from shares issued in ~~the first quarter of~~ 2022 totaled ~~$21~~$23 million.

As of ~~March 31,~~June 30, 2023, the Company had available liquidity of ~~$917~~$1,280 million, including cash and cash equivalents of ~~$395~~$521 million, of which ~~$146~~$206 million was held outside of the U.S., and available credit under existing committed credit facilities of ~~$522~~$759 million.

Cash balances and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2023, including its capital expenditure plan, planned dividends, share repurchases, acquisitions and operating requirements. Capital expenditures for 2023 are expected to be approximately $200 million, including $130 million in facility expansion projects. The Company may make opportunistic share repurchases going forward.

Outlook

~~While end market activity and demand trends~~Incoming order rates are in line with the Company's expectations of revenue growth for the ~~Company's new and existing products are solid, the Company remains cautious given the current macroeconomic uncertainty. The Company is confirming the revenue outlook for the~~full year of low ~~single-digit growth~~single-digits on an organic, constant currency basis.

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 2022 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

Table of Contents

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; Russia's invasion of Ukraine, and the sanctions and actions taken against Russia and Belarus in response to the invasion; 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,~~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 2022 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

~~Table of Contents~~

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 2022 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.

2021

Table of Contents

PART IIOTHER INFORMATION

Item 1A.Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2022 Annual Report on Form 10-K.

2122

Table of Contents

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

Issuer Purchases of Equity Securities

On December 7, 2018, the Board of Directors authorized the purchase of up to 18 million shares of common stock, primarily through open market transactions. The authorization is for an indefinite period of time or until terminated by the Board.

In addition to shares purchased under the Board authorization, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax due upon exercise of 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)
December 31, 2022 - January 27, 2023 — $ — — 14,971,377
January 28, 2023 - February 24, 2023 115,297 $ 67.36 — 14,856,080
February 25, 2023 - March 31, 2023 — $ — — 14,856,080


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)
April 1, 2023 - April 28, 2023	—	$	—	—	14,856,080
April 29, 2023 - May 26, 2023	—	$	—	—	14,856,080
May 27, 2023 - June 30, 2023	—	$	—	—	14,856,080

2223

Table of Contents

Item 5.Other Information

During the three months ended June 30, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).

Table of Contents

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 17, 2023. (Incorporated by reference to Exhibit 3.2 to the Company’s 20 22 2022 Annual Report on Form 10-K.)

10.1						Amendment No. 1 to Amended and Restated Credit Agreement, dated May 23, 2023, 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 May 23, 2023.)

10.2						Amendment No. 2 to Amended and Restated Credit Agreement, dated June 8, 2023, 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 June 8, 2023.)

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 ~~First~~Second Quarter Earnings dated ~~April~~July 26, 2023.

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).

2325

Table of Contents

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:

~~April~~July 26, 2023

By:

/s/ Mark W. Sheahan

Mark W. Sheahan

President and Chief Executive Officer

(Principal Executive Officer)

Date:

~~April~~July 26, 2023

By:

/s/ David M. Lowe

David M. Lowe

Chief Financial Officer and Treasurer

(Principal Financial Officer)

Date:

~~April~~July 26, 2023

By:

/s/ ~~Kathryn L. Schoenrock~~Christopher D. Knutson

~~Kathryn L. Schoenrock~~Christopher D. Knutson

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

(Principal Accounting Officer)