GRACO INC 10-K

Item 8. Financial Statements and Supplementary Data Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control system was designed to provide reasonable assurance to management and the board of directors regarding the reliability of financial reporting and preparation of financial statements in accordance with generally accepted accounting principles. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment and those criteria, management believes the Company’s internal control over financial reporting is effective as of December 31, 2021. The Company’s independent auditors have issued an attestation report on the Company’s internal control over financial reporting. That report appears in this Annual Report on Form 10-K. 31 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Graco Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Graco Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 22, 2022, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota February 22, 2022 32 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Graco Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Graco Inc. and subsidiaries (the "Company") as of December 31, 2021 and December 25, 2020, the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 25, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Retirement Benefits – U.S. Pension Benefit Obligation – Refer to Note J to the financial statements Critical Audit Matter Description The Company has both funded and unfunded defined benefit pension plans. As of December 31, 2021, the pension benefit obligation balance was $418.1 million. The actuarial determination of the present value of the pension obligation on an annual basis requires management to make significant assumptions related to the selection of the discount rates used in the calculation of the net present value of future pension benefits. The Company establishes the discount rate assumptions for the U.S. pension plans by reference to a yield curve published by an actuary based on yields of highly rated corporate bonds and projected plan cash flows. Given the significance of the U.S. pension obligation and the requirement of management to make significant assumptions related to the selection of the discount rates, performing audit procedures to evaluate the reasonableness of the discount rates selected for the U.S. pension plans required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists. 33 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to selection of the discount rates for the U.S. pension obligation included the following, among others: a. We tested the effectiveness of internal controls over the valuation of the pension obligation, including management’s controls over selection of the discount rates. b. With the assistance of our actuarial specialists, we evaluated the reasonableness of the discount rates by: • Evaluating the methodology utilized to select the discount rates for conformity with applicable accounting guidance. • Testing the source information underlying the determination of the discount rates, including the methodology used to construct the yield curve, the characteristics of the bonds underlying the yield curve analysis, and the mathematical accuracy of the calculation. • Developing independent estimates using external published yield curves and comparing them to the discount rates selected by management. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota February 22, 2022 We have served as the Company’s auditor since at least 1969, however, an earlier year could not be readily determined. 34 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts) Years Ended December 31, 2021 December 25, 2020 December 27, 2019 Net Sales $ 1,987,608 $ 1,650,115 $ 1,646,045 Cost of products sold 953,659 795,178 786,289 Gross Profit 1,033,949 854,937 859,756 Product development 79,651 72,194 67,557 Selling, marketing and distribution 271,526 220,271 234,325 General and administrative 151,449 135,525 133,418 Impairment — 35,229 — Operating Earnings 531,323 391,718 424,456 Interest expense 10,215 11,280 13,110 Other expense, net 12,643 5,787 5,469 Earnings Before Income Taxes 508,465 374,651 405,877 Income taxes 68,599 44,195 62,024 Net Earnings $ 439,866 $ 330,456 $ 343,853 Basic Net Earnings per Common Share $ 2.59 $ 1.97 $ 2.06 Diluted Net Earnings per Common Share $ 2.52 $ 1.92 $ 2.00 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 31, 2021 December 25, 2020 December 27, 2019 Net Earnings $ 439,866 $ 330,456 $ 343,853 Components of other comprehensive income (loss) Cumulative translation adjustment ( 10,026 ) 46,030 1,902 Pension and postretirement medical liability adjustment 68,669 ( 645 ) ( 33,772 ) Income taxes - pension and postretirement medical liability ( 14,647 ) 237 6,940 Other comprehensive income (loss) 43,996 45,622 ( 24,930 ) Comprehensive Income $ 483,862 $ 376,078 $ 318,923 See notes to consolidated financial statements. 35 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2021 December 25, 2020 ASSETS Current Assets Cash and cash equivalents $ 624,302 $ 378,909 Accounts receivable, less allowances of $ 3,900 and $ 4,400 325,132 314,946 Inventories 382,301 285,704 Other current assets 31,886 44,242 Total current assets 1,363,621 1,023,801 Property, Plant and Equipment, net 451,061 350,750 Goodwill 356,255 347,603 Other Intangible Assets, net 149,740 160,669 Operating Lease Assets 30,046 37,807 Deferred Income Taxes 55,786 25,828 Other Assets 36,689 41,670 Total Assets $ 2,443,198 $ 1,988,128 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Notes payable to banks $ 43,489 $ 22,183 Current portion of long term debt 75,000 — Trade accounts payable 78,432 58,305 Salaries and incentives 82,941 52,005 Dividends payable 35,771 31,636 Other current liabilities 191,159 157,260 Total current liabilities 506,792 321,389 Long-term Debt 75,000 150,000 Retirement Benefits and Deferred Compensation 106,897 184,747 Operating Lease Liabilities 23,527 29,224 Deferred Income Taxes 10,661 10,264 Other Non-current Liabilities 10,978 8,600 Commitments and Contingencies (Note K) Shareholders’ Equity Common stock, $1 par value; 291,000,000 shares authorized; 170,307,412 and 168,567,919 shares outstanding in 2021 and 2020 170,308 168,568 Additional paid-in-capital 742,288 671,206 Retained earnings 876,916 568,295 Accumulated other comprehensive income (loss) ( 80,169 ) ( 124,165 ) Total shareholders’ equity 1,709,343 1,283,904 Total Liabilities and Shareholders’ Equity $ 2,443,198 $ 1,988,128 See notes to consolidated financial statements. 36 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2021 December 25, 2020 December 27, 2019 Cash Flows From Operating Activities Net Earnings $ 439,866 $ 330,456 $ 343,853 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 59,325 55,329 48,911 Deferred income taxes ( 46,572 ) 10,747 ( 6,411 ) Share-based compensation 24,931 25,153 26,669 Impairment — 35,229 — Change in Accounts receivable ( 13,801 ) ( 43,122 ) 8,934 Inventories ( 97,780 ) ( 13,086 ) 12,435 Trade accounts payable 12,397 6,820 ( 539 ) Salaries and incentives 29,089 ( 2,622 ) ( 14,069 ) Retirement benefits and deferred compensation 1,219 ( 6,703 ) 13,264 Other accrued liabilities 51,342 ( 3,772 ) ( 11,510 ) Other ( 3,120 ) ( 394 ) ( 2,803 ) Net cash provided by operating activities 456,896 394,035 418,734 Cash Flows From Investing Activities Property, plant and equipment additions ( 133,566 ) ( 71,338 ) ( 127,953 ) Acquisition of businesses, net of cash acquired ( 19,386 ) ( 27,557 ) ( 26,577 ) Other ( 347 ) ( 143 ) ( 939 ) Net cash used in investing activities ( 153,299 ) ( 99,038 ) ( 155,469 ) Cash Flows From Financing Activities Borrowings on short-term lines of credit, net 20,497 ( 1,986 ) ( 3,341 ) Borrowings on long-term lines of credit — 250,000 105,423 Payments on long-term debt and lines of credit ( 70 ) ( 250,000 ) ( 207,191 ) Payments of debt issuance costs ( 1,422 ) — — Common stock issued 50,963 83,438 48,250 Common stock repurchased — ( 102,143 ) ( 9,482 ) Taxes paid related to net share settlement of equity awards — ( 1,797 ) ( 1,268 ) Cash dividends paid ( 127,110 ) ( 116,983 ) ( 106,443 ) Net cash used in financing activities ( 57,142 ) ( 139,471 ) ( 174,052 ) Effect of exchange rate changes on cash ( 1,062 ) 2,410 ( 358 ) Net increase in cash and cash equivalents 245,393 157,936 88,855 Cash and Cash Equivalents Beginning of year 378,909 220,973 132,118 End of year $ 624,302 $ 378,909 $ 220,973 See notes to consolidated financial statements. 37 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance December 29, 2018 $ 165,171 $ 510,825 $ 220,734 $ ( 144,857 ) $ 751,873 Shares issued 2,274 44,707 — — 46,981 Shares repurchased ( 158 ) ( 490 ) ( 6,397 ) — ( 7,045 ) Stock compensation cost — 23,398 — — 23,398 Net earnings — — 343,853 — 343,853 Dividends declared ($ 0.6550 per share) — — ( 109,199 ) — ( 109,199 ) Other comprehensive income (loss) — — — ( 24,930 ) ( 24,930 ) Balance December 27, 2019 167,287 578,440 448,991 ( 169,787 ) 1,024,931 Shares issued 3,608 78,789 — — 82,397 Shares repurchased ( 2,327 ) ( 8,047 ) ( 91,768 ) — ( 102,142 ) Stock compensation cost — 22,024 — — 22,024 Net earnings — — 330,456 — 330,456 Dividends declared $ 0.7125 per share) — — ( 119,384 ) — ( 119,384 ) Other comprehensive income (loss) — — — 45,622 45,622 Balance December 25, 2020 168,568 671,206 568,295 ( 124,165 ) 1,283,904 Shares issued 1,740 51,560 — — 53,300 Stock compensation cost — 21,859 — — 21,859 Restricted stock canceled (issued) — ( 2,337 ) — — ( 2,337 ) Net earnings — — 439,866 — 439,866 Dividends declared ($ 0.7725 per share) — — ( 131,245 ) — ( 131,245 ) Other comprehensive income (loss) — — — 43,996 43,996 Balance December 31, 2021 $ 170,308 $ 742,288 $ 876,916 $ ( 80,169 ) $ 1,709,343 See notes to consolidated financial statements. 38 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Graco Inc. and Subsidiaries Years Ended December 31, 2021, December 25, 2020 and December 27, 2019 A. Summary of Significant Accounting Policies Fiscal Year . The fiscal year of Graco Inc. and Subsidiaries (the “Company”) is 52 or 53 weeks, ending on the last Friday in December. The year ended December 31, 2021 was a 53-week year whereas the years ended December 25, 2020 and December 27, 2019 were 52-week years. Basis of Statement Presentation . The consolidated financial statements include the accounts of the parent company and its subsidiaries after elimination of intercompany balances and transactions. As of December 31, 2021 , all subsidiaries are 100 percent controlled by the Company. Foreign Currency Translation . The functional currency of certain subsidiaries is the local currency. Accordingly, adjustments resulting from the translation of those subsidiaries’ financial statements into U.S. dollars are charged or credited to accumulated other comprehensive income (loss). The U.S. dollar is the functional currency for all other foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and transactions of those subsidiaries are included in other expense, net. Accounting Estimates . The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value Measurements. The three levels of inputs in the fair value measurement hierarchy are as follows: Level 1 – based on quoted prices in active markets for identical assets Level 2 – based on significant observable inputs Level 3 – based on significant unobservable inputs Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands): Level 2021 2020 Assets Cash surrender value of life insurance 2 $ 23,147 $ 19,887 Forward exchange contracts 2 — 16 Total assets at fair value $ 23,147 $ 19,903 Liabilities Contingent consideration 3 $ 12,274 $ 9,454 Deferred compensation 2 5,962 5,099 Forward exchange contracts 2 111 — Total liabilities at fair value $ 18,347 $ 14,553 Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds. The Company’s policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities. Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of certain acquired businesses based on future revenues. Disclosures related to other fair value measurements are included below in Impairment of Long-Lived Assets, in Note F 39 Table of Contents (Debt) and in Note J (Retirement Benefits). Cash Equivalents . All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Accounts Receivable. Accounts receivable includes trade receivables of $ 315 million in 2021 and $ 302 million in 2020. Other receivables totaled $ 10 million in 2021 and $ 13 million in 2020. Allowance for Credit Losses. Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Following is a summary of activity in the allowance for credit losses (in thousands): 2021 2020 2019 Balance, beginning $ 3,745 $ 4,828 $ 4,771 Additions (reversals) charged to costs and expenses ( 27 ) 647 836 Deductions from reserves (1) ( 676 ) ( 2,732 ) ( 858 ) Other additions (deductions) (2) 212 1,002 79 Balance, ending $ 3,254 $ 3,745 $ 4,828 (1) Represents amounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves. (2) Includes amounts assumed or established in connection with acquisitions and effects of foreign currency translation. Inventory Valuation . Inventories are stated at the lower of cost or net realizable value. The last-in, first-out (LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO) cost method. Other Current Assets. Amounts included in other current assets were (in thousands): 2021 2020 Prepaid income taxes $ 10,485 $ 22,317 Prepaid expenses and other 21,401 21,925 Total $ 31,886 $ 44,242 Impairment of Long-Lived Assets. The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We completed our annual impairment review of all long-lived assets in the fourth quarter of 2021. No impairment charges were recorded as a result of that review. In connection with the Company's sale of its U.K.-based valve business in 2020, impairment charges of $ 35 million were recorded. There were no additional impairment charges in 2020 or 2019. Property, Plant and Equipment . For financial reporting purposes, plant and equipment are depreciated over their estimated useful lives, primarily by using the straight-line method as follows: Buildings and improvements 10 to 30 years Leasehold improvements lesser of 5 to 10 years or life of lease Manufacturing equipment lesser of 5 to 10 years or life of equipment Office, warehouse and automotive equipment 3 to 10 years 40 Table of Contents Goodwill and Other Intangible Assets. Goodwill has been assigned to reporting units. Changes in the carrying amounts of goodwill for each reportable segment were (in thousands): Industrial Process Contractor Total Balance, December 27, 2019 $ 177,112 $ 110,997 $ 19,554 $ 307,663 Additions, adjustments from business acquisitions — 29,657 — 29,657 Foreign currency translation 9,424 859 — 10,283 Balance, December 25, 2020 186,536 141,513 19,554 347,603 Additions, adjustments from business acquisitions 13,321 — — 13,321 Foreign currency translation ( 4,460 ) ( 209 ) — ( 4,669 ) Balance, December 31, 2021 $ 195,397 $ 141,304 $ 19,554 $ 356,255 Components of other intangible assets were (dollars in thousands): Finite Life Indefinite Life Customer Relationships Patents and Proprietary Technology Trademarks, Trade Names and Other Trade Names Total As of December 31, 2021 Cost $ 194,505 $ 26,074 $ 900 $ 62,633 $ 284,112 Accumulated amortization ( 108,657 ) ( 15,734 ) ( 452 ) — ( 124,843 ) Foreign currency translation ( 7,710 ) ( 707 ) — ( 1,112 ) ( 9,529 ) Book value $ 78,138 $ 9,633 $ 448 $ 61,521 $ 149,740 Weighted average life in years 13 10 5 N/A 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 was $ 17.9 million in 2021, $ 16.7 million in 2020 and $ 15.5 million in 2019. Estimated future annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands): 2022 2023 2024 2025 2026 Thereafter Estimated Amortization Expense $ 17,893 $ 16,949 $ 15,394 $ 14,823 $ 7,959 $ 15,201 The Company completed business acquisitions in 2021, 2020 and 2019 that were not material to the consolidated financial statements. 41 Table of Contents Other Assets. Components of other assets were (in thousands): 2021 2020 Cash surrender value of life insurance $ 23,147 $ 19,887 Capitalized software 2,394 2,737 Equity method investment 7,541 7,610 Prepaid pension — 9,144 Deposits and other 3,607 2,292 Total $ 36,689 $ 41,670 The Company has entered into contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts are used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company’s insolvency. Changes in cash surrender value are recorded in other expense, net. The cash surrender value increased $ 3.3 million in 2021, $ 2.2 million in 2020 and $ 3.4 million in 2019. Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation. Other Current Liabilities . Components of other current liabilities were (in thousands): 2021 2020 Accrued self-insurance retentions $ 9,303 $ 8,041 Accrued warranty and service liabilities 14,463 13,082 Accrued trade promotions 15,872 12,140 Payable for employee stock purchases 15,746 14,554 Customer advances and deferred revenue 60,554 41,689 Income taxes payable 5,200 8,564 Operating lease liabilities, current 9,096 11,178 Right of return refund liability 18,614 16,303 Other 42,311 31,709 Total $ 191,159 $ 157,260 Self-Insurance. The Company is self-insured for certain losses and costs relating to product liability, workers’ compensation, and employee medical benefit claims. The Company has stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insurance retentions are based on claims filed, estimates of claims incurred but not reported, and other actuarial assumptions. Self-insured reserves totaled $ 9.3 million as of December 31, 2021 , and $ 8.0 million as of December 25, 2020. Product Warranties. 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): 2021 2020 Balance, beginning of year $ 13,082 $ 12,785 Assumed in business acquisition 23 155 Charged to expense 10,764 8,270 Margin on parts sales reversed 3,475 2,960 Reductions for claims settled ( 12,881 ) ( 11,088 ) Balance, end of year $ 14,463 $ 13,082 42 Table of Contents Revenue Recognition . Revenue is recognized at a single point in time upon the satisfaction of performance obligations, which occurs when control of the good or service transfers to the customer. This is generally on the date of shipment; however certain sales have terms requiring recognition when received by the customer. In cases where there are specific customer acceptance provisions, revenue is recognized at the later of customer acceptance or shipment (subject to shipping terms). Payment terms are established based on the type of product, distributor capabilities and competitive market conditions, and do not exceed one year. Standalone selling prices are determined based on the prices charged to customers for all material performance obligations. Variable consideration is accounted for as a price adjustment (sales adjustment). Following are examples of variable consideration that affect the Company’s reported revenue. Early payment discounts are provided to certain customers and within certain regions. Rights of return are typically contractually limited and amounts are estimable. The Company records a refund liability and establishes a recovery asset for the value of product expected to be returned at the time revenue is recognized. This includes promotions when, from time to time, the Company may promote the sale of new products by agreeing to accept returns of superseded products. Provisions for sales returns are recorded as a reduction of net sales, and provisions for warranty claims are recorded in selling, marketing and distribution expenses. Historically, sales returns have been approximately 3 percent of sales. Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include rebates based on annual purchases and sales growth, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or free product. Rebates are accrued based on the program rates and progress toward the probability weighted estimate of annual sales amount and sales growth. Additional promotions include cooperative advertising arrangements. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company’s products. Estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense or cost of products sold, depending on the type of incentive offered. The considerations payable to customers are deemed as broad based and are not recorded against net sales. Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping and handling are included in net sales. 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 $ 60.6 million as of December 31, 2021 and $ 41.7 million as of December 25, 2020. Net sales for the year included $ 40.9 million that was in deferred revenue and customer advances as of December 25, 2020. Shipping and handling activities that occur after control of the related good transfers are accounted for as fulfillment activities instead of assessing such activities as performance obligations. Sales taxes related to revenue producing transactions collected from the customer for a governmental authority are excluded from the transaction price. Revenue standard requirements are applied to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. Promised goods or services are not assessed as performance obligations if they are immaterial in the context of the contract with the customer. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services are accrued. Incremental costs of obtaining a contract are generally expensed when incurred because the amortization period would be less than one year. Such costs primarily relate to sales commissions and are recorded in selling, marketing and distribution expense. Earnings Per Common Share . Basic net earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the year. Diluted net earnings per share is computed after giving effect to the exercise of all dilutive outstanding option grants. 43 Table of Contents Comprehensive Income. Comprehensive income is a measure of all changes in shareholders’ equity except those resulting from investments by and distributions to owners, and includes such items as net earnings, certain foreign currency translation items, changes in the value of qualifying hedges and pension liability adjustments. Derivative Instruments and Hedging Activities . The Company accounts for all derivatives, including those embedded in other contracts, as either assets or liabilities and measures those financial instruments at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. As part of its risk management program, the Company may periodically use forward exchange contracts to manage known market exposures. Terms of derivative instruments are structured to match the terms of the risk being managed and are generally held to maturity. The Company does not hold or issue derivative financial instruments for trading purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Company’s policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales. The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The Company enters into forward contracts or options, or borrows in various currencies, in order to hedge its net monetary positions. These instruments are recorded at fair value and the gains and losses are included in other expense, net. The notional amounts of contracts outstanding as of December 31, 2021 , totaled $ 54 million. The Company believes it uses strong financial counterparties in these transactions and that the resulting credit risk under these hedging strategies is not significant. The Company uses significant other observable inputs (level 2 in the fair value hierarchy) to value the derivative instruments used to hedge net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. Net derivative assets are reported on the balance sheet in accounts receivable and net derivative liabilities are reported as other current liabilities. The fair market value of such instruments follows (in thousands): 2021 2020 Foreign Currency Contracts Assets $ 239 $ 114 Liabilities ( 350 ) ( 98 ) Net Assets (Liabilities) $ ( 111 ) $ 16 B. Segment Information The Company has six operating segments which are aggregated into three reportable segments: Industrial, Process and Contractor. The Industrial segment includes our Industrial Products and Applied Fluid Technologies divisions. The Industrial segment markets equipment and solutions for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served include automotive and vehicle assembly and components production, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles and various other industries. The Process segment includes our Process, Oil and Natural Gas, and Lubrication divisions. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, lubricants and other fluids. Markets served include food and beverage, dairy, oil and natural gas, pharmaceutical, cosmetics, electronics, semiconductor fabrication, wastewater, mining, fast oil change facilities, service garages, fleet service centers, automobile dealerships and industrial lubrication applications. The Contractor segment markets sprayers for architectural coatings for painting, corrosion control, texture and line striping. 44 Table of Contents The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The cost of manufacturing for each segment is based on product cost, and expenses are based on actual costs incurred along with cost allocations of shared and centralized functions based on activities performed, sales or space utilization. Depreciation expense is charged to the manufacturing or operating cost center that utilizes the asset, and is then allocated to segments on the same basis as other expenses within that cost center. Reportable segments are defined by product. Segments are responsible for development, manufacturing, marketing and sales of their products. This allows for focused marketing and efficient product development. The segments share common purchasing, certain manufacturing, distribution and administration functions. Subsequent Event. Effective January 1, 2022, our high performance coatings and foam product offerings within the Applied Fluid Technologies division of the Industrial segment were realigned and are now managed under the Contractor segment. This change aligns the types of products offered and markets served within the segments. Segment operating results will be reported under the new organizational structure in the first quarter of 2022, in connection with the effective date of the realignment. Historic segment information restated to conform to the new organizational structure. Segment information follows (in thousands): 2021 2020 2019 Net Sales Industrial $ 840,256 $ 677,680 $ 747,396 Process 397,626 326,105 344,930 Contractor 749,726 646,330 553,719 Total $ 1,987,608 $ 1,650,115 $ 1,646,045 Operating Earnings Industrial $ 296,542 $ 226,575 $ 247,216 Process 91,037 64,498 76,367 Contractor 169,518 164,549 128,282 Unallocated corporate (expense) ( 25,774 ) ( 28,675 ) ( 27,409 ) Impairment — ( 35,229 ) — Total $ 531,323 $ 391,718 $ 424,456 Assets Industrial $ 713,657 $ 632,165 Process 436,198 404,370 Contractor 487,916 438,067 Unallocated corporate 805,427 513,526 Total $ 2,443,198 $ 1,988,128 Management assesses performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments. Unallocated corporate (expense) includes such items as stock compensation, certain acquisition transaction costs, bad debt expense, charitable contributions and certain facility expenses. Unallocated assets include cash, allowances and valuation reserves, deferred income taxes, certain capital and other assets. Geographic information follows (in thousands): 45 Table of Contents 2021 2020 2019 Net Sales (based on customer location) United States $ 1,004,318 $ 883,451 $ 840,659 Other countries 983,290 766,664 805,386 Total $ 1,987,608 $ 1,650,115 $ 1,646,045 Long-lived Assets United States $ 388,835 $ 301,643 Other countries 62,226 49,107 Total $ 451,061 $ 350,750 Sales to Major Customers. Worldwide sales to one customer in the Contractor and Industrial segments individually represented over 10 percent of the Company’s consolidated sales in 2021, 2020 and 2019. C. Inventories Major components of inventories were as follows (in thousands): 2021 2020 Finished products and components $ 166,922 $ 133,122 Products and components in various stages of completion 117,063 83,791 Raw materials and purchased components 185,291 129,319 Subtotal 469,276 346,232 Reduction to LIFO cost ( 86,975 ) ( 60,528 ) Total $ 382,301 $ 285,704 Inventories valued under the LIFO method were $ 211.1 million in 2021 and $ 150.1 million in 2020. All other inventory was valued on the FIFO method. D. Property, Plant and Equipment Property, plant and equipment were as follows (in thousands): 2021 2020 Land and improvements $ 42,195 $ 26,529 Buildings and improvements 280,947 277,449 Manufacturing equipment 384,617 340,838 Office, warehouse and automotive equipment 61,994 54,211 Additions in progress 105,520 39,354 Total property, plant and equipment 875,273 738,381 Accumulated depreciation ( 424,212 ) ( 387,631 ) Net property, plant and equipment $ 451,061 $ 350,750 Depreciation expense was $ 40.0 million in 2021, $ 38.0 million in 2020 and $ 32.0 million in 2019. 46 Table of Contents E. Income Taxes Earnings before income tax expense consist of (in thousands): 2021 2020 2019 Domestic $ 370,903 $ 289,708 $ 294,402 Foreign 137,562 84,943 111,475 Total $ 508,465 $ 374,651 $ 405,877 Income tax expense consists of (in thousands): 2021 2020 2019 Current Federal $ 77,703 $ 11,509 $ 39,015 State and local 7,493 3,217 3,347 Foreign 29,975 18,722 26,270 Current income tax expense 115,171 33,448 68,632 Deferred Domestic ( 42,413 ) 12,856 ( 151 ) Foreign ( 4,159 ) ( 2,109 ) ( 6,457 ) Deferred income tax expense (benefit) ( 46,572 ) 10,747 ( 6,608 ) Total $ 68,599 $ 44,195 $ 62,024 Income taxes paid were $ 111.8 million in 2021, $ 44.0 million in 2020 and $ 67.1 million in 2019. A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows: 2021 2020 2019 Statutory tax rate 21 % 21 % 21 % Tax effect of international operations ( 1 ) ( 2 ) ( 1 ) State taxes, net of federal effect 1 1 1 U.S. general business tax credits ( 1 ) ( 1 ) ( 1 ) Loss on sale of business — 2 — Stock compensation excess tax benefit ( 2 ) ( 6 ) ( 3 ) Global Intangible Low-taxed Income (GILTI) — — 1 Foreign Derived Intangible Income (FDII) ( 5 ) ( 3 ) ( 3 ) Effective tax rate 13 % 12 % 15 % 47 Table of Contents Deferred income taxes are provided for temporary differences between the financial reporting and the tax basis of assets and liabilities. The deferred tax assets (liabilities) resulting from these differences were as follows (in thousands): 2021 2020 Inventory valuations $ 1,181 $ 586 Accrued self-insurance retentions 1,534 1,164 Accrued warranty and service liabilities 2,285 2,062 Vacation accruals 3,261 3,249 Customer allowances 4,028 3,650 Excess of tax over book depreciation and amortization ( 39,785 ) ( 49,377 ) Pension benefit obligation 16,022 30,942 Postretirement medical benefit obligation 5,028 4,808 Acquisition costs — 389 Stock compensation 11,442 11,743 Deferred compensation 2,595 2,075 Net operating loss carryforward — 440 Deferred revenue 2,427 1,792 Prepayments from foreign subsidiaries 32,969 — Other 2,138 2,041 Net deferred tax assets $ 45,125 $ 15,564 Total deferred tax assets were $ 55.8 million and $ 67.0 million, and total deferred tax liabilities were $ 10.7 million and $ 51.4 million on December 31, 2021 and December 25, 2020, respectively. The difference between the deferred income tax provision and the change in net deferred income taxes is due to the changes in other comprehensive income (loss) items and acquisition purchase accounting. The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015. The Company continues to assert that it will indefinitely reinvest earnings of foreign subsidiaries to support expansion of its international business. No additional income or withholding taxes have been provided for any remaining undistributed foreign earnings, as these amounts continue to be indefinitely reinvested in foreign operations. As of December 31, 2021 , the amount of cash held outside the U.S. was not significant to the Company’s liquidity and was available to fund investments abroad. The Company records penalties and accrued interest related to uncertain tax positions in income tax expense. Total reserves for uncertain tax positions were not material. 48 Table of Contents F. Debt A summary of debt follows (dollars in thousands): Average Interest Rate December 31, 2021 Maturity 2021 2020 Private placement unsecured fixed-rate notes Series B 5.01 % March 2023 75,000 75,000 Series D 5.35 % July 2026 75,000 75,000 Unsecured revolving credit facility N/A March 2026 — — Unsecured revolving credit facility - CNH 3.52 % N/A 39,222 7,668 Notes payable to banks 1.11 % 2022 4,267 14,515 Total debt $ 193,489 $ 172,183 The estimated fair value of the fixed interest rate private placement debt was $ 165 million on December 31, 2021 and $ 170 million on 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. On March 25, 2021, the Company entered into an amended and restated credit agreement that amends, supersedes and restates in its entirety the Company's prior credit agreement with U.S. Bank National Association, as administrative agent (the “Agent”) and a 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. 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 amended and restated 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 amended and restated credit agreement. The Company maintains a revolving credit agreement with a sole lender that provides up to $ 50 million of committed credit, available for general corporate purposes, working capital needs, share repurchases and acquisitions. Under the terms of the agreement, loans may be denominated in U.S. dollars or Chinese renminbi (offshore). Loans denominated in U.S. dollars bear interest, at the Company’s option, at either a base rate or a LIBOR-based rate. Loans denominated in 49 Table of Contents Chinese renminbi (offshore) bear interest at a LIBOR-based rate based on the Chinese offshore rate. Other terms of this revolving credit agreement are substantially similar to those of the Company’s amended and restated credit agreement that expires in March 2026. On January 29, 2020, the Company entered into a master note agreement with a sole lender that expires on January 29, 2023 . The note agreement sets forth certain terms on which the Company may issue, and affiliates of the lender may purchase, up to $ 200 million of the Company’s senior notes. Interest on the senior 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 issuance. Under terms of the note agreement, the Company is required to maintain certain financial ratios as to cash flow leverage and interest coverage similar to the requirements of its other debt agreements. On December 31, 2021 , the Company had $ 595 million in lines of credit, including the $ 550 million in committed credit facilities described above and $ 45 million with foreign banks. The unused portion of committed credit lines was $ 525 million as of December 31, 2021 . In addition, the Company has unused, uncommitted lines of credit with foreign banks totaling $ 28 million. Borrowing rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit and the London Interbank market. The Company pays facility fees at an annual rate of up to 0.15 on certain of these lines. No compensating balances are required. Various debt agreements require the Company to maintain certain financial ratios as to cash flow leverage and interest coverage. The Company is in compliance with all financial covenants of its debt agreements as of December 31, 2021 . Annual maturities of debt are as follows (in thousands): 2022 2023 2024 2025 2026 Thereafter Maturities of debt $ 118,489 $ — $ — $ — $ 75,000 $ — Interest paid on debt was $ 9.8 million in 2021, $ 11.3 million in 2020 and $ 13.5 million in 2019. Subsequent Event. In January 2022, we repaid $ 75 million of our Series B private placement note in addition to a $ 3.5 million prepayment fee, which will be recognized as interest expense in the first quarter of 2022. G. Shareholders’ Equity At December 31, 2021 , the Company had 22,549 authorized, but not issued, cumulative preferred shares, $ 100 par value. The Company also has authorized, but not issued, a separate class of 3 million shares of preferred stock, $ 1 par value. Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands): Pension and Postretirement Medical Cumulative Translation Adjustment Total Balance, December 29, 2018 $ ( 86,889 ) $ ( 57,968 ) $ ( 144,857 ) Other comprehensive income (loss) before reclassifications ( 33,938 ) 1,902 ( 32,036 ) Amounts reclassified from accumulated other comprehensive income 7,106 — 7,106 Balance, December 27, 2019 ( 113,721 ) ( 56,066 ) ( 169,787 ) Other comprehensive income (loss) before reclassifications ( 7,852 ) 46,030 38,178 Amounts reclassified from accumulated other comprehensive income 7,444 — 7,444 Balance, December 25, 2020 ( 114,129 ) ( 10,036 ) ( 124,165 ) Other comprehensive income (loss) before reclassifications 34,953 ( 10,026 ) 24,927 Amounts reclassified from accumulated other comprehensive income 19,069 — 19,069 Balance, December 31, 2021 $ ( 60,107 ) $ ( 20,062 ) $ ( 80,169 ) 50 Table of Contents In connection with the Company's sale of its U.K.-based valve business in 2020, $ 24 million of unrealized foreign currency translation losses recorded in accumulated other comprehensive income were reclassified to net earnings. 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. Included in the 2021 reclassification is $ 12 million related to a pension settlement loss. See Note J for additional details regarding pension and postretirement medical plans. H. Share-Based Awards, Purchase Plans and Compensation Cost Stock Option and Award Plan. The Company has a stock incentive plan under which it grants stock options and share awards to directors, officers and other employees. Option price is the market price on the date of grant. Options become exercisable at such time, generally over 3 years or 4 years, and in such installments as set by the Company, and expire 10 years from the date of grant. Restricted share awards have been made to certain key employees under the plan. The market value of restricted stock at the date of grant is charged to operations over the vesting period. Compensation cost related to restricted shares is not significant. The Company has a stock appreciation plan that provides for payments of cash to eligible foreign employees based on the change in the market price of the Company’s common stock over a period of time. Compensation cost related to the stock appreciation plan was $ 3.1 million in 2021, $ 2.4 million in 2020 and $ 3.3 million in 2019. Individual nonemployee directors of the Company may elect to receive, either currently or deferred, all or part of their retainer in the form of shares of the Company’s common stock instead of cash. Under this arrangement, the Company issued 12,070 shares in 2021, 15,243 shares in 2020 and 15,016 shares in 2019. The expense related to this arrangement is not significant. 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 29, 2018 12,270 $ 24.67 7,312 $ 20.17 Granted 1,781 46.36 Exercised ( 1,886 ) 17.64 Canceled ( 53 ) 33.13 Outstanding, December 27, 2019 12,112 28.91 8,231 23.75 Granted 1,400 55.26 Exercised ( 3,238 ) 20.81 Canceled ( 66 ) 41.24 Outstanding, December 25, 2020 10,208 35.02 6,553 28.02 Granted 843 72.22 Exercised ( 1,309 ) 24.91 Canceled ( 167 ) 55.59 Outstanding, December 31, 2021 9,575 $ 39.31 7,296 $ 33.75 51 Table of Contents The following table summarizes information for options outstanding and exercisable at December 31, 2021 (in thousands, except exercise prices and contractual term amounts): Options Outstanding Options Exercisable Range of Prices Options Outstanding Weighted Average Remaining Contractual Term in Years Weighted Average Exercise Price Options Exercisable Weighted Average Exercise Price $10 - $30 3,474 3.2 $ 24.23 3,474 $ 24.23 $30 - $45 2,401 5.7 36.78 2,168 35.99 $45 - $60 2,905 7.6 50.44 1,619 50.35 $60 - $75 795 9.2 72.23 35 71.92 $10 - $75 9,575 5.7 $ 39.31 7,296 $ 33.75 The aggregate intrinsic value of exercisable option shares was $ 342.0 million as of December 31, 2021 , with a weighted average contractual term of 4.9 years. There were approximately 9.6 million vested share options and share options expected to vest as of December 31, 2021 , with an aggregate intrinsic value of $ 395.6 million, a weighted average exercise price of $ 39.31 and a weighted average contractual term of 5.7 years. Information related to options exercised follows (in thousands): 2021 2020 2019 Cash received $ 32,610 $ 66,625 $ 32,749 Aggregate intrinsic value 65,319 120,395 57,419 Tax benefit realized 13,329 25,000 12,000 Employee Stock Purchase Plan. Under the Company’s Employee Stock Purchase Plan, the purchase price of the shares is the lesser of 85 percent of the fair market value on the first day or the last day of the plan year. Under this plan, the Company issued 415,995 shares in 2021, 399,567 shares in 2020 and 397,833 shares in 2019. Authorized Shares. In April 2019, shareholders of the Company approved the Graco Inc. 2019 Stock Incentive Plan. The Plan provides for issuance of up to 10 million shares of Graco common stock. Shares authorized for issuance under the stock option and purchase plans are shown below (in thousands): Total Shares Authorized Available for Future Issuance as of December 31, 2021 Stock Incentive Plan (2019) 10,000 7,149 Employee Stock Purchase Plan (2006) 21,000 12,080 Total 31,000 19,229 Amounts available for future issuance exclude outstanding options. Options outstanding as of December 31, 2021 , include options granted under three plans that were replaced by subsequent plans. No shares are available for future grants under those plans. Share-based Compensation. The Company recognized share-based compensation cost as follows (in thousands): 2021 2020 2019 Share-based compensation $ 24,931 $ 25,153 $ 26,669 Tax benefit 1,705 1,700 2,100 Share-based compensation, net of tax $ 23,226 $ 23,453 $ 24,569 As of December 31, 2021 , there was $ 9.8 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of approximately 2.4 years. 52 Table of Contents 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: 2021 2020 2019 Expected life in years 7.5 7.5 6.8 Interest rate 0.9 % 1.4 % 2.3 % Volatility 25.2 % 22.0 % 24.0 % Dividend yield 1.0 % 1.3 % 1.4 % Weighted average fair value per share $ 17.87 $ 12.18 $ 11.31 Expected life is estimated based on vesting terms and exercise and termination history. Interest rate is based on the U.S. Treasury rate on zero-coupon issues with a remaining term equal to the expected life of the option. Expected volatility is based on historical volatility over a period commensurate with the expected life of options. The fair value of employees’ purchase rights under the Employee Stock Purchase 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: 2021 2020 2019 Expected life in years 1.0 1.0 1.0 Interest rate 0.1 % 1.5 % 2.6 % Volatility 40.1 % 21.9 % 22.7 % Dividend yield 1.1 % 1.4 % 1.4 % Weighted average fair value per share $ 21.50 $ 11.55 $ 11.36 I. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): 2021 2020 2019 Net earnings available to common shareholders $ 439,866 $ 330,456 $ 343,853 Weighted average shares outstanding for basic earnings per share 169,635 167,462 166,515 Dilutive effect of stock options computed based on the treasury stock method using the average market price 4,891 4,546 5,109 Weighted average shares outstanding for diluted earnings per share 174,526 172,008 171,624 Basic earnings per share $ 2.59 $ 1.97 $ 2.06 Diluted earnings per share $ 2.52 $ 1.92 $ 2.00 Anti-dilutive stock options excluded from computations of diluted earnings per share totaled 0.4 million shares in 2021 and 0.3 million shares in both 2020 and 2019. J. Retirement Benefits The Company has a defined contribution plan, under Section 401(k) of the Internal Revenue Code, which provides retirement benefits to most U.S. employees. For all employees who choose to participate, the Company matches employee contributions at a 100 percent rate, up to 3 percent of the employee’s compensation. For employees not covered by a defined benefit plan, the Company contributed an amount equal to 2 percent of the employee’s compensation. Employer contributions totaled $ 10.0 million in 2021, $ 8.7 million in 2020 and $ 8.4 million in 2019. The Company’s postretirement medical plan provides certain medical benefits for retired U.S. employees. Employees hired before January 1, 2005, are eligible for these benefits upon retirement and fulfillment of other eligibility requirements as specified by the plan. 53 Table of Contents The Company has both funded and unfunded noncontributory defined benefit pension plans that together cover most U.S. employees hired before January 1, 2006, certain directors and some of the employees of the Company’s non-U.S. subsidiaries. For U.S. plans, benefits are based on years of service and the highest 5 consecutive years’ earnings in the 10 years preceding retirement. The Company funds annually in amounts consistent with minimum funding levels and maximum tax deduction limits. In October of 2021, the Company entered into an agreement under which approximately $ 63 million of pension obligations of its two U.S. funded defined benefit pension plans were transferred to an insurance company. Under the agreement, the Company purchased a group annuity contract for approximately 417 plan participants that provides for an irrevocable commitment to make annuity payments to the affected participants. The payment obligation and administration thereof for the affected participants was transferred from the pension plans to the insurance company. The transfer did not change the amount of the monthly pension benefits received by the affected participants. Subsequent to the transfer of pension obligations, the smaller of the two pension plans was merged into the larger plan in December of 2021, with the larger plan being the surviving funded pension plan. This arrangement is part of the Company’s effort to reduce the overall size and volatility of its pension plan obligations. The purchase of the group annuity contract was funded through existing plan assets. The Company recognized a non-cash pension settlement loss of approximately $ 12 million as a result of the transaction. This charge represents the acceleration of deferred charges currently accrued in accumulated other comprehensive income. Investment policies and strategies of the U.S. funded pension plan are based on participant demographics. As the plan covers active participants and retirees with higher benefit amounts, investments are based on a long-term view of economic growth and weighted toward equity securities. The primary goal of the plan’s investments is to ensure that the plan’s liabilities are met over time. In developing strategic asset allocation guidelines, an emphasis is placed on the long-term characteristics of individual asset classes, and the benefits of diversification among multiple asset classes. The plan invests primarily in domestic and international equities, fixed income securities, which include treasuries, highly-rated corporate bonds and high-yield bonds and real estate. Strategic target allocations for plan assets are 53 percent equity securities, 42 percent fixed income securities and 5 percent real estate and alternative investments. Plan assets are held in a trust for the benefit of plan participants and are invested in various commingled funds, most of which are sponsored by the trustee. The fair values for commingled equity, fixed-income and real estate investments are measured using net asset values, which take into consideration the value of underlying fund investments, as well as the other accrued assets and liabilities of a fund, in order to determine a per share market value. Certain trustee-sponsored funds allow redemptions monthly or quarterly, with 10 days or 60 days advance notice, while most of the funds allow redemptions daily . The plan had unfunded commitments to make additional investments in certain funds totaling $ 2.4 million as of December 31, 2021 and December 25, 2020. The Company maintains a defined contribution plan covering employees of a Swiss subsidiary, funded by Company and employee contributions. Responsibility for pension coverage under Swiss law has been transferred to a Swiss insurance company. Plan assets are invested in an insurance contract that guarantees a federally mandated annual rate of return. The value of the plan assets is effectively the value of the insurance contract. The performance of the underlying assets held by the insurance company has no direct impact on the surrender value of the insurance contract. The insurance backed assets have no active market and are classified as level 3 in the fair value hierarchy. 54 Table of Contents Assets of all plans by category and fair value measurement level were as follows (in thousands): Level 2021 2020 Cash and cash equivalents 1 $ 303 $ 1,234 Insurance contract 3 30,926 31,877 Investments categorized in fair value hierarchy 31,229 33,111 Equity U.S. Large Cap N/A 110,569 89,003 U.S. Small/Mid Cap N/A 11,338 20,313 International N/A 56,128 56,761 Total equity 178,035 166,077 Fixed income N/A 130,774 161,706 Real estate and other N/A 7,862 12,671 Investments measured at net asset value 316,671 340,454 Total $ 347,900 $ 373,565 The following table is a reconciliation of pension assets measured at fair value using level 3 inputs (in thousands): 2021 2020 Balance, beginning of year $ 31,877 $ 27,675 Purchases 2,430 2,255 Redemptions ( 2,556 ) ( 1,425 ) Unrealized gains ( 825 ) 3,372 Balance, end of year $ 30,926 $ 31,877 55 Table of Contents The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the periods ending December 31, 2021 , and December 25, 2020, and a statement of the funded status as of the same dates (in thousands): Pension Benefits Postretirement Medical Benefits 2021 2020 2021 2020 Change in benefit obligation Obligation, beginning of year $ 510,652 $ 449,419 $ 34,458 $ 30,646 Service cost 9,355 9,361 670 609 Interest cost 11,409 13,313 832 1,016 Actuarial (gain) loss ( 31,093 ) 46,545 ( 2,391 ) 3,572 Benefit payments ( 13,360 ) ( 13,602 ) ( 1,447 ) ( 1,385 ) Plan amendments ( 1,458 ) ( 529 ) — — Settlements ( 64,886 ) — — — Exchange rate changes ( 2,568 ) 6,145 — — Obligation, end of year $ 418,051 $ 510,652 $ 32,122 $ 34,458 Change in plan assets Fair value, beginning of year $ 373,565 $ 303,944 $ — $ — Actual return on assets 30,984 58,068 — — Employer contributions 22,493 22,237 1,447 1,385 Benefit payments ( 13,360 ) ( 13,602 ) ( 1,447 ) ( 1,385 ) Settlements ( 64,886 ) — — — Exchange rate changes ( 896 ) 2,918 — — Fair value, end of year $ 347,900 $ 373,565 $ — $ — Funded status $ ( 70,151 ) $ ( 137,087 ) $ ( 32,122 ) $ ( 34,458 ) Amounts recognized in consolidated balance sheets Non-current assets $ — $ 9,144 $ — $ — Current liabilities 1,769 1,750 1,768 1,714 Non-current liabilities 68,382 144,481 30,354 32,744 Net $ 70,151 $ 137,087 $ 32,122 $ 34,458 Changes in discount rates used to value pension obligations were the main drivers of actuarial gains in 2021 and actuarial losses in 2020. In 2021 and 2020, the Company made a $ 20 million voluntary contribution each year to one of its U.S. qualified defined benefit plans. The accumulated benefit obligation as of year-end for all defined benefit pension plans was $ 388 million for 2021 and $ 465 million for 2020. Information for plans with an accumulated benefit obligation in excess of plan assets follows (in thousands): 2021 2020 Projected benefit obligation $ 91,678 $ 463,959 Accumulated benefit obligation 88,927 418,372 Fair value of plan assets 30,926 317,727 56 Table of Contents The components of net periodic benefit cost for the plans for 2021, 2020 and 2019 were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2021 2020 2019 2021 2020 2019 Service cost-benefits earned during the period $ 9,355 $ 9,361 $ 7,735 $ 670 $ 609 $ 545 Interest cost on projected benefit obligation 11,409 13,313 15,103 832 1,016 1,162 Expected return on assets ( 20,767 ) ( 18,814 ) ( 17,152 ) — — — Amortization of prior service cost 246 294 279 — — — Amortization of net loss 9,248 10,243 8,392 1,002 733 273 Settlement loss 12,285 — — — — — Cost of pension plans which are not significant and have not adopted ASC 715 368 168 110 N/A N/A N/A Net periodic benefit cost $ 22,144 $ 14,565 $ 14,467 $ 2,504 $ 2,358 $ 1,980 Net periodic benefit cost is disaggregated between service cost presented as operating expense and other components of pension cost presented as non-operating expense. Other components of pension cost and changes in cash surrender value of insurance contracts intended to fund certain non-qualified pension and deferred compensation arrangements included in non-operating expenses totaled $ 12 million in 2021, $ 5 million in 2020 and $ 5 million in 2019. Amounts recognized in other comprehensive income (loss) in 2021 and 2020 were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2021 2020 2021 2020 Net gain (loss) arising during the period $ 42,039 $ ( 8,872 ) $ 2,391 $ ( 3,572 ) Amortization of net (gain) loss 9,248 10,243 1,002 733 Prior service credit (cost) arising during the period 1,458 529 — — Settlement (gain) loss 12,285 — — — Amortization of prior service (credit) cost 246 294 — — Total $ 65,276 $ 2,194 $ 3,393 $ ( 2,839 ) Amounts included in accumulated other comprehensive income (loss) as of December 31, 2021 and December 25, 2020, that had not yet been recognized as components of net periodic benefit cost, were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2021 2020 2021 2020 Prior service cost $ 1,293 $ ( 439 ) $ — $ — Net loss ( 70,995 ) ( 134,469 ) ( 7,498 ) ( 10,891 ) Net before income taxes ( 69,702 ) ( 134,908 ) ( 7,498 ) ( 10,891 ) Income taxes 15,443 29,274 1,650 2,396 Net $ ( 54,259 ) $ ( 105,634 ) $ ( 5,848 ) $ ( 8,495 ) 57 Table of Contents Assumptions used to determine the Company’s benefit obligations are shown below: Pension Benefits Postretirement Medical Benefits Weighted average assumptions 2021 2020 2021 2020 U.S. Plans Discount rate 3.0 % 2.6 % 2.9 % 2.6 % Rate of compensation increase 2.7 % 2.7 % N/A N/A Non-U.S. Plans Discount rate 0.4 % 0.4 % N/A N/A Rate of compensation increase 1.3 % 1.3 % N/A N/A Assumptions used to determine the Company’s net periodic benefit cost are shown below: Pension Benefits Postretirement Medical Benefits Weighted average assumptions 2021 2020 2019 2021 2020 2019 U.S. Plans Discount rate 2.6 % 3.5 % 4.5 % 2.6 % 3.4 % 4.5 % Rate of compensation increase 2.7 % 2.8 % 2.8 % N/A N/A N/A Expected return on assets 6.3 % 6.8 % 7.0 % N/A N/A N/A Non-U.S. Plans Discount rate 0.4 % 0.4 % 1.3 % N/A N/A N/A Rate of compensation increase 1.3 % 1.3 % 1.4 % N/A N/A N/A Expected return on assets 1.0 % 1.5 % 2.0 % N/A N/A N/A Several sources of information are considered in determining the expected rate of return assumption, including the allocation of plan assets, the input of actuaries and professional investment advisers, and historical long-term returns. In setting the return assumption, the Company recognizes that historical returns are not always indicative of future returns and also considers the long-term nature of its pension obligations. The Company’s U.S. retirement medical plan limits the annual cost increase that will be paid by the Company to 3 percent. In measuring the accumulated postretirement benefit obligation (APBO), the annual trend rate for health care costs was assumed to be 7.6 percent for 2022, decreasing each year to a constant rate of 4.5 percent for 2038 and thereafter, subject to the plan’s annual increase limitation. The Company expects to contribute $ 1.8 million to its unfunded pension plans and $ 1.8 million to the postretirement medical plan in 2022. The Company will not be required to make contributions to the funded pension plan under minimum funding requirements for 2022. Estimated future benefit payments are as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2022 $ 13,553 $ 1,768 2023 15,097 1,775 2024 16,801 1,755 2025 16,182 1,734 2026 18,073 1,713 Years 2027-2031 102,198 8,362 58 Table of Contents K. Commitments and Contingencies Operating Lease Liabilities and Assets The Company owns most of the assets used in its operations, but leases certain buildings and land, vehicles, office equipment and other rental assets. The Company determines if an arrangement is a lease at inception. All of the Company’s current lease arrangements are classified as operating leases. The Company historically has not entered into financing leases. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease expense is recognized by amortizing the amount recorded as an asset on a straight-line basis over the lease term. In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments. As of December 31, 2021, the weighted average remaining lease term was 5 years and the weighted average discount rate used to determine the operating lease liability was 2.2 percent. For the twelve months ended December 31, 2021, expense related to operating leases was $ 11.6 million, operating lease payments included in operating cash flows totaled $ 11.6 million, and non-cash additions to operating lease assets totaled $ 1.6 million. Variable lease costs and short term lease costs were not significant for the twelve months ended December 31, 2021. As of December 31, 2021, future maturities of operating lease liabilities were as follows (in thousands): 2022 $ 9,096 2023 7,753 2024 5,553 2025 3,874 2026 3,230 Thereafter 4,948 Total lease payments $ 34,454 Present value adjustment ( 1,831 ) Operating lease liabilities $ 32,623 Other Commitments. The Company is committed to pay suppliers under the terms of open purchase orders issued in the normal course of business totaling approximately $ 237 million at December 31, 2021 . The Company also has commitments with certain suppliers to purchase minimum quantities, and under the terms of certain agreements, the Company is committed for certain portions of the supplier’s inventory. The Company does not purchase, or commit to purchase, quantities in excess of normal usage or amounts that cannot be used within one year. The Company estimates that the maximum commitment amount under such agreements does not exceed $ 74 million. The Company enters into contracts with vendors to receive services. Commitments under these service contracts with non-cancelable terms of more than one year totaled $ 8 million in 2022, $ 5 million in 2023, $ 4 million in 2024 and $ 5 million thereafter. In addition, the Company could be obligated to perform under standby letters of credit totaling $ 3 million at December 31, 2021 . The Company has also guaranteed the debt of its subsidiaries for up to $ 9 million. All debt of subsidiaries is reflected in the consolidated balance sheets. Contingencies. The Company is party to various legal proceedings arising in the normal course of business. The Company is actively pursuing and defending these matters and has recorded an estimate of the probable costs where appropriate. Management does not expect that resolution of these matters will have a material adverse effect on the Company, although the ultimate outcome cannot be determined based on available information. 59 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.