GGG 10-Q Quarterly Report March 26, 2021 | Alphaminr
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GGG 10-Q Quarter ended March 26, 2021

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GRACO INC
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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 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

169,435,068 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of April 14, 2021.


TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 1A.
Item 2.
Item 6.
EXHIBITS
2
PART I     Item 1.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In thousands except per share amounts)
Three Months Ended
March 26,
2021 		March 27,
2020
Net Sales $ 454,129 $ 373,567
Cost of products sold 206,795 174,936
Gross Profit 247,334 198,631
Product development 19,571 17,081
Selling, marketing and distribution 62,228 57,388
General and administrative 37,249 34,350
Operating Earnings 128,286 89,812
Interest expense 2,428 2,486
Other expense, net 121 5,223
Earnings Before Income Taxes 125,737 82,103
Income taxes 20,050 9,285
Net Earnings $ 105,687 $ 72,818
Net Earnings per Common Share
Basic
$ 0.63 $ 0.43
Diluted
$ 0.61 $ 0.42
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
Three Months Ended
March 26,
2021 		March 27,
2020
Net Earnings $ 105,687 $ 72,818
Components of other comprehensive
income (loss)
Cumulative translation adjustment
( 10,470 ) ( 4,677 )
Pension and postretirement medical
liability adjustment 		3,308 2,749
Income taxes - pension and postretirement
medical liability adjustment 		( 672 ) ( 615 )
Other comprehensive income (loss) ( 7,834 ) ( 2,543 )
Comprehensive Income $ 97,853 $ 70,275
See notes to consolidated financial statements.
3
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
March 26,
2021 		December 25,
2020
ASSETS
Current Assets
Cash and cash equivalents $ 460,616 $ 378,909
Accounts receivable, less allowances of $ 5,000 and $ 4,400
323,197 314,946
Inventories 311,645 285,704
Other current assets 31,928 44,242
Total current assets 1,127,386 1,023,801
Property, Plant and Equipment, net 360,370 350,750
Goodwill 343,010 347,603
Other Intangible Assets, net 152,792 160,669
Operating Lease Assets 37,164 37,807
Deferred Income Taxes 22,902 25,828
Other Assets 44,096 41,670
Total Assets $ 2,087,720 $ 1,988,128
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks $ 31,661 $ 22,183
Trade accounts payable 66,242 58,305
Salaries and incentives 45,246 52,005
Dividends payable 31,718 31,636
Other current liabilities 148,653 157,260
Total current liabilities 323,520 321,389
Long-term Debt 150,000 150,000
Retirement Benefits and Deferred Compensation 183,576 184,747
Operating Lease Liabilities 30,020 29,224
Deferred Income Taxes 9,502 10,264
Other Non-current Liabilities 8,600 8,600
Shareholders’ Equity
Common stock 169,413 168,568
Additional paid-in-capital 702,829 671,206
Retained earnings 642,259 568,295
Accumulated other comprehensive income (loss) ( 131,999 ) ( 124,165 )
Total shareholders’ equity 1,382,502 1,283,904
Total Liabilities and Shareholders’ Equity $ 2,087,720 $ 1,988,128
See notes to consolidated financial statements.
4
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
Three Months Ended
March 26,
2021 		March 27,
2020
Cash Flows From Operating Activities
Net Earnings $ 105,687 $ 72,818
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 14,515 13,062
Deferred income taxes 1,842 ( 65 )
Share-based compensation 6,618 6,318
Change in
Accounts receivable ( 10,611 ) ( 10,139 )
Inventories ( 27,541 ) ( 17,726 )
Trade accounts payable 9,323 5,185
Salaries and incentives ( 6,949 ) ( 20,182 )
Retirement benefits and deferred compensation 2,867 3,172
Other accrued liabilities 4,493 1,441
Other 1,425 349
Net cash provided by operating activities 101,669 54,233
Cash Flows From Investing Activities
Property, plant and equipment additions ( 21,415 ) ( 18,944 )
Other ( 34 ) ( 256 )
Net cash used in investing activities ( 21,449 ) ( 19,200 )
Cash Flows From Financing Activities
Borrowings (payments) on short-term lines of credit, net 9,667 24,576
Borrowings on long-term lines of credit — 250,000
Payments of debt issuance costs ( 1,404 ) —
Common stock issued 26,460 38,882
Common stock repurchased — ( 82,176 )
Taxes paid related to net share settlement of equity awards — ( 1,796 )
Cash dividends paid ( 31,642 ) ( 29,333 )
Net cash provided by financing activities 3,081 200,153
Effect of exchange rate changes on cash ( 1,594 ) 497
Net increase in cash and cash equivalents 81,707 235,683
Cash and Cash Equivalents
Beginning of year 378,909 220,973
End of period $ 460,616 $ 456,656
See notes to consolidated financial statements.
5
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 March 26, 2021
Balance, December 25, 2020 $ 168,568 $ 671,206 $ 568,295 $ ( 124,165 ) $ 1,283,904
Shares issued 845 25,615 — — 26,460
Stock compensation cost — 6,008 — — 6,008
Net earnings — — 105,687 — 105,687
Dividends declared ($ 0.188 per share)
— — ( 31,723 ) — ( 31,723 )
Other comprehensive income (loss) — — — ( 7,834 ) ( 7,834 )
Balance, March 26, 2021 $ 169,413 $ 702,829 $ 642,259 $ ( 131,999 ) $ 1,382,502
Three Months Ended March 27, 2020
Balance, December 27, 2019 $ 167,287 $ 578,440 $ 448,991 $ ( 169,787 ) $ 1,024,931
Shares issued 1,620 35,467 — — 37,087
Shares repurchased ( 2,067 ) ( 7,143 ) ( 80,819 ) — ( 90,029 )
Stock compensation cost — 5,934 — — 5,934
Net earnings — — 72,818 — 72,818
Dividends declared ($ 0.175 per share)
— — ( 29,540 ) — ( 29,540 )
Other comprehensive income (loss) — — — ( 2,543 ) ( 2,543 )
Balance, March 27, 2020 $ 166,840 $ 612,698 $ 411,450 $ ( 172,330 ) $ 1,018,658
See notes to consolidated financial statements.
6
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 26, 2021 and the related statements of earnings, comprehensive income and shareholders' equity for the three months ended March 26, 2021 and March 27, 2020, and cash flows for the three months ended March 26, 2021 and March 27, 2020 have been prepared by the Company and have not been audited.

In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of 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 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 three reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands):
Three Months Ended
March 26,
2021 		March 27,
2020
Net Sales
Industrial $ 184,732 $ 158,684
Process 91,373 86,078
Contractor 178,024 128,805
Total $ 454,129 $ 373,567
Operating Earnings
Industrial $ 65,243 $ 50,233
Process 21,733 18,111
Contractor 48,166 28,630
Unallocated corporate (expense) ( 6,856 ) ( 7,162 )
Total $ 128,286 $ 89,812

Assets by segment were as follows (in thousands):
March 26,
2021 		December 25,
2020
Industrial
$ 626,256 $ 632,165
Process
411,804 404,370
Contractor
459,715 438,067
Unallocated corporate
589,945 513,526
Total
$ 2,087,720 $ 1,988,128

7
Geographic information follows (in thousands):
Three Months Ended
March 26,
2021 		March 27,
2020
Net Sales (based on customer location)
United States
$ 231,501 $ 198,243
Other countries
222,628 175,324
Total
$ 454,129 $ 373,567
March 26,
2021 		December 25,
2020
Long-lived Assets
United States
$ 312,836 $ 301,643
Other countries
47,534 49,107
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
March 26,
2021 		March 27,
2020
Net earnings available to common shareholders
$ 105,687 $ 72,818
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 4,900 4,665
Weighted average shares outstanding for diluted earnings per share 173,848 172,642
Basic earnings per share
$ 0.63 $ 0.43
Diluted earnings per share
$ 0.61 $ 0.42

Stock options to purchase 700,000 and 2,014,000 shares were not included in the March 26, 2021 and March 27, 2020 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

4. Share-Based Awards

Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):
Option
Shares 		Weighted Average
Exercise Price 		Options
Exercisable 		Weighted Average
Exercise Price
Outstanding, December 25, 2020 10,208 $ 35.02 6,553 $ 28.02
Granted 700 71.92
Exercised ( 448 ) 21.91
Canceled ( 4 ) 47.54
Outstanding, March 26, 2021 10,456 $ 38.05 7,334 $ 30.92

The Company recognized year-to-date share-based compensation of $ 6.6 million in 2021 and $ 6.3 million in 2020. As of March 26, 2021 , there was $ 19.8 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.2 years.
8

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:
Three Months Ended
March 26,
2021 		March 27,
2020
Expected life in years
7.5 7.5
Interest rate
0.9 % 1.5 %
Volatility
25.2 % 21.7 %
Dividend yield
1.0 % 1.2 %
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. 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:
Three Months Ended
March 26,
2021 		March 27,
2020
Expected life in years
1.0 1.0
Interest rate
0.1 % 1.5 %
Volatility
40.1 % 21.9 %
Dividend yield
1.1 % 1.4 %
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
March 26,
2021 		March 27,
2020
Pension Benefits
Service cost
$ 2,721 $ 2,422
Interest cost
2,981 3,407
Expected return on assets
( 5,130 ) ( 4,750 )
Amortization and other
2,551 2,721
Net periodic benefit cost
$ 3,123 $ 3,800
Postretirement Medical
Service cost
$ 175 $ 175
Interest cost
250 248
Amortization
250 177
Net periodic benefit cost
$ 675 $ 600

9
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 March 26, 2021
Balance, December 25, 2020 $ ( 114,129 ) $ ( 10,036 ) $ ( 124,165 )
Other comprehensive income (loss) before reclassifications — ( 10,470 ) ( 10,470 )
Reclassified to pension cost and deferred tax 2,636 — 2,636
Balance, March 26, 2021 $ ( 111,493 ) $ ( 20,506 ) $ ( 131,999 )
Three Months Ended March 27, 2020
Balance, December 27, 2019 $ ( 113,721 ) $ ( 56,066 ) $ ( 169,787 )
Other comprehensive income (loss) before reclassifications — ( 4,677 ) ( 4,677 )
Reclassified to pension cost and deferred tax 2,134 — 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. Receivables and Credit Losses

Accounts receivable includes trade receivables of $ 306 million and other receivables of $ 17 million as 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):
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
Customer
Relationships 		Patents and
Proprietary
Technology 		Trademarks,
Trade Names
and Other 		Trade
Names 		Total
As of March 26, 2021
Cost
$ 186,073 $ 25,364 $ 900 $ 61,920 $ 274,257
Accumulated amortization
( 97,426 ) ( 13,603 ) ( 338 ) — ( 111,367 )
Foreign currency translation ( 7,625 ) ( 661 ) — ( 1,812 ) ( 10,098 )
Book value
$ 81,022 $ 11,100 $ 562 $ 60,108 $ 152,792
Weighted average life in years
13 10 5 N/A
As of December 25, 2020
Cost
$ 186,073 $ 25,187 $ 900 $ 61,920 $ 274,080
Accumulated amortization
( 93,832 ) ( 12,924 ) ( 301 ) — ( 107,057 )
Foreign currency translation ( 6,004 ) ( 538 ) — 188 ( 6,354 )
Book value
$ 86,237 $ 11,725 $ 599 $ 62,108 $ 160,669
Weighted average life in years
13 10 5 N/A

Amortization of intangibles for the quarter was $ 4.3 million in 2021 and $ 4.1 million in 2020. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
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 25, 2020 $ 186,536 $ 141,513 $ 19,554 $ 347,603
Foreign currency translation ( 4,727 ) 134 — ( 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.

11


10. Other Current Liabilities
Components of other current liabilities were (in thousands):
March 26,
2021 		December 25,
2020
Accrued self-insurance retentions
$ 9,407 $ 8,041
Accrued warranty and service liabilities
13,426 13,082
Accrued trade promotions
9,419 12,140
Payable for employee stock purchases
3,001 14,554
Customer advances and deferred revenue
45,200 41,689
Income taxes payable
6,926 8,564
Right of return refund liability 16,630 16,303
Operating lease liabilities, current 9,353 11,178
Other
35,291 31,709
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 25, 2020 $ 13,082
Charged to expense 2,701
Margin on parts sales reversed 835
Reductions for claims settled ( 3,192 )
Balance, March 26, 2021 $ 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 $ 45.2 million as of March 26, 2021 and $ 41.7 million as of December 25, 2020. Net sales for the year to date included $ 17.5 million in 2021 and $ 11.3 million in 2020 that related to deferred revenue as of the beginning of each period.

11. Debt

On 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 lender, and the other lenders that are parties thereto. The Amended and Restated Credit Agreement extends the maturity of the Company’s $ 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 maturity, subject to the consent of the extending banks.
Borrowings under the Amended and Restated Credit Agreement may be 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 Company’s option, at either a base rate or a LIBOR-based rate. Loans denominated in currencies other than U.S. Dollars will bear interest at a LIBOR-based rate. The base rate is an annual rate equal to a margin ranging from 0.00 % to 0.75 %, depending on the Company’s cash flow leverage ratio, plus the highest of (i) the rate of interest from time to time announced by the Agent as its prime rate, (ii) the federal funds effective rate plus 0.50 %, or (iii) one-month LIBOR plus 1.50 %. In general, LIBOR-based loans bear interest at a rate per annum equal to LIBOR, plus a margin ranging from 1.00 % to 1.75 %, depending on the Company’s cash flow leverage ratio.

12
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.

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 March 26,
2021 		December 25,
2020
Assets
Cash surrender value of life insurance 2 $ 21,238 $ 19,887
Forward exchange contracts 2 164 16
Total assets at fair value $ 21,402 $ 19,903
Liabilities
Contingent consideration 3 $ 9,913 $ 9,454
Deferred compensation 2 5,348 5,099
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. 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 March 26, 2021 and December 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.

13
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
March 26,
2021 		March 27,
2020 		%
Change
Net Sales
$ 454.1 $ 373.6 22 %
Operating Earnings
128.3 89.8 43 %
Net Earnings
105.7 72.8 45 %
Net Earnings, adjusted (1)
101.6 65.0 56 %
Diluted Net Earnings per Common Share
$ 0.61 $ 0.42 45 %
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.

Net sales increased by 22 percent with double-digit percentage growth in all regions and in the 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 accounted for approximately half of the increase.
Operating expense leverage for the quarter remained strong. Total operating expenses increased 9 percent primarily due to increases in sales and earnings-based expenses.
14

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
March 26,
2021 		March 27,
2020
Earnings before income taxes $ 125.7 $ 82.1
Income taxes, as reported $ 20.0 $ 9.3
Excess tax benefit from option exercises 4.1 7.8
Income taxes, adjusted $ 24.1 $ 17.1
Effective income tax rate
As reported 15.9 % 11.3 %
Adjusted 19.2 % 20.8 %
Net Earnings, as reported $ 105.7 $ 72.8
Excess tax benefit from option exercises (4.1) (7.8)
Net Earnings, adjusted $ 101.6 $ 65.0
Weighted Average Diluted Shares 173.8 172.6
Diluted Earnings per Share
As reported $ 0.61 $ 0.42
Adjusted $ 0.58 $ 0.38


15
The following table presents an overview of components of net earnings as a percentage of net sales:
Three Months Ended
March 26,
2021 		March 27,
2020
Net Sales 100.0 % 100.0 %
Cost of products sold 45.5 46.8
Gross Profit 54.5 53.2
Product development 4.3 4.6
Selling, marketing and distribution 13.8 15.4
General and administrative 8.2 9.2
Operating Earnings 28.2 24.0
Interest expense 0.5 0.6
Other expense, net — 1.4
Earnings Before Income Taxes 27.7 22.0
Income taxes 4.4 2.5
Net Earnings 23.3 % 19.5 %

Net Sales

The following table presents net sales by geographic region (in millions):
Three Months Ended
March 26,
2021 		March 27,
2020
Americas (1)
$ 264.9 $ 224.8
EMEA (2)
110.2 87.8
Asia Pacific 79.0 61.0
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
Volume and Price Acquisitions Currency Total
Americas 17% 1% 0% 18%
EMEA 18% (1)% 8% 25%
Asia Pacific 25% (3)% 8% 30%
Consolidated 19% (1)% 4% 22%

Gross Profit

Gross profit margin rate for the quarter increased by 1 percentage point from the comparable period last year. Favorable changes in currency translation rates, realized pricing and higher production volume were partially offset by unfavorable effects of product and channel mix.


16
Operating Expenses

Total operating expenses for the quarter increased $10 million (9 percentage points) mostly due to increases in sales and earnings-based expenses.

Other Expense

Other non-operating expenses decreased $5 million for the quarter mostly due to market valuation changes on investments held to fund certain retirement benefits liabilities.
Income Taxes

The effective income tax rate for the quarter was 16 percent, up 5 percentage points from the first quarter last year, primarily due to a decrease in excess tax benefits related to stock option exercises.

Segment Results

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

Industrial Segment

The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment
(dollars in millions):
Three Months Ended
March 26,
2021 		March 27,
2020
Net Sales
Americas
$ 80.0 $ 74.4
EMEA
56.7 46.2
Asia Pacific
48.0 38.1
Total
$ 184.7 $ 158.7
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
Volume and Price Acquisitions and Divestitures Currency Total
Americas 8% 0% 0% 8%
EMEA 14% 0% 9% 23%
Asia Pacific 19% 0% 7% 26%
Segment Total 12% 0% 4% 16%

Increased activity in worldwide manufacturing facilities contributed to Industrial segment sales growth in the first quarter. Changes in currency translation rates, lower product costs due to higher factory volumes and expense leverage drove the first quarter operating margin rate 3 percentage 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):
17
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
Volume and Price Acquisitions and Divestitures Currency Total
Americas 2% 1% 0% 3%
EMEA (3)% (7)% 4% (6)%
Asia Pacific 38% (15)% 7% 30%
Segment Total 7% (3)% 2% 6%

The Process segment had strong organic sales growth in most applications for the quarter. Favorable changes in currency translation rates and the impact of divested 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
March 26,
2021 		March 27,
2020
Net Sales
Americas
$ 128.1 $ 95.3
EMEA
38.7 25.8
Asia Pacific
11.2 7.7
Total
$ 178.0 $ 128.8
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
Volume and Price Acquisitions and Divestitures Currency Total
Americas 34% 0% 0% 34%
EMEA 38% 0% 12% 50%
Asia Pacific 36% 0% 10% 46%
Segment Total 35% 0% 3% 38%

Contractor segment sales increased double-digit percentages in all channels. Operating margin rates for this segment increased 5 percentage points driven by higher sales and favorable expense leverage, partially offset by unfavorable product and channel mix.

18
Liquidity and Capital Resources

Net cash provided by operating activities totaled $102 million in the first quarter of 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 reflect growth in business activity in the first quarter of 2021. Significant uses of cash in 2021 included dividend payments of $32 million and property, plant and equipment additions of $21 million. Proceeds from shares issued in the first quarter of 2021 totaled $26 million. Although the Company did not repurchase any shares in the first quarter of 2021, it may make opportunistic purchases going forward.

At March 26, 2021, the Company had various lines of credit totaling $596 million, of which $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 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 2021, including its capital expenditure plan, planned dividends, share repurchases, acquisitions and operating requirements.

Outlook

Demand for our products is solid across major end markets and product categories. Revenue and incoming order rates have improved for both the Industrial and Process 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 demand environment that may affect certain end markets and geographies for the remainder of 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 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, variations in activity in the construction, automotive, mining and oil and natural gas industries, and the impact of declines in interest rates, asset values and investment returns on pension costs and required pension contributions. Please refer to
19
Item 1A of our Annual Report on Form 10-K for fiscal year 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 2020 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

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

Changes in internal controls

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

PART II OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2020 Annual Report on Form 10-K.
20
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)
Dec 26,2020 - Jan 22, 2021 — $ — — 18,517,834
Jan 23, 2021 - Feb 19, 2021 — $ — — 18,517,834
Feb 20, 2021 - March 26, 2021 — $ — — 18,517,834


21
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
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.)
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a).
Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a).
Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C.
Press Release Reporting First Quarter Earnings dated April 21, 2021.
101 Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language).
104 Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101).
22

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 21, 2021 By: /s/ Patrick J. McHale
Patrick J. McHale
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 21, 2021 By: /s/ Mark W. Sheahan
Mark W. Sheahan
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: April 21, 2021 By: /s/ Kathryn L. Schoenrock
Kathryn L. Schoenrock
Executive Vice President, Corporate Controller
(Principal Accounting Officer)

TABLE OF CONTENTS
Part I Item 1Item 2. Graco Inc. and SubsidiariesItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart Iiother InformationPart IIItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits

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 February14, 2014.(Incorporated by reference to Exhibit 3.2 to the Companys 2013 Annual Report on Form10-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 toExhibit 10.1to 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 Companys Reporton Form8-K filed March 25, 2021.) 31.1 Certification of President and Chief Executive Officer pursuant to Rule13a-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 Quarter Earnings dated April 21, 2021.