What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-20 compared with 2023-02-21 · 61 added, 97 removed, 860 unchanged (16% of the section changed)

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 30, 2022.

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 30, 2022.

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.

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 30, 2022, 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 30, 2022, 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 30, 2022, of the Company and our report dated February 21, 2023, 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 21, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Graco Inc.

Opinion on the Financial Statements

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The Company has both funded and unfunded defined benefit pension plans.

As of December 30, 2022, the pension benefit obligation balance was $315.8 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.

pension plans by reference to a yield curve published by an actuary and projected plan cash flows.

Given the significance of the U.S.

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General and administrative 171,444 153,783 151,449

Contingent consideration ( 8,600 ) — —

Impairment 7,800 — —

1 unchanged sentence

Interest expense 5,191 9,897 10,215

Other expense (income), net ( 2,921 ) 12,643 5,787

Other (income) expense, net 32,850 ( 2,921 ) 12,643

Earnings Before Income Taxes 608,802 565,724 508,465

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Notes payable to banks $ 30,036 $ 20,974

Current portion of long term debt — 75,000

Trade accounts payable 72,214 84,218

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Share-based compensation 30,229 24,695 24,931

Pension settlement loss 42,129 — 12,018

Contingent consideration ( 8,600 ) — —

Impairment 7,800 — —

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Borrowings on short-term lines of credit, net 9,725 ( 18,252 ) 20,497

Borrowings on long-term lines of credit — — 250,000

Payments on long-term debt ( 75,000 ) ( 75,000 ) ( 70 )

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Shares issued 1,740 51,560 — — 53,300

Shares repurchased ( 2,327 ) ( 8,047 ) ( 91,768 ) — ( 102,142 )

Stock compensation cost — 21,859 — — 21,859

Restricted stock canceled (issued) — ( 2,337 ) — — ( 2,337 )

Net earnings — — 439,866 — 439,866

4 unchanged sentences

Shares issued 946 33,454 — — 34,400

Shares repurchased ( 3,552 ) ( 15,481 ) ( 214,393 ) — ( 233,426 )

Stock compensation cost — 24,216 — — 24,216

Restricted stock canceled (issued) — ( 2,337 ) — — ( 2,337 )

Net earnings — — 460,645 — 460,645

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As of December 29, 2023, all subsidiaries are 100 percent controlled by the Company.

Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year presentation.

Foreign Currency Translation .

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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.

In the third quarter of 2023, the Company recognized a goodwill impairment related to the reorganization of a business acquired in 2020 that is not material to the consolidated financial statements.

We completed our annual impairment test of all long-lived assets in the fourth quarter of 2023.

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 2021 or 2020.

No additional impairment charges were recorded as a result of that review.

There were no impairment charges in 2022 or 2021.

Property, Plant and Equipment .

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Industrial Process Contractor Total

Balance, December 25, 2020 $ 140,997 $ 141,513 $ 65,093 $ 347,603

Balance, January 1, 2022 $ 137,155 $ 141,304 $ 77,796 $ 356,255

Additions, adjustments from business acquisitions — 16,994 — 16,994

2 unchanged sentences

Additions, adjustments from business acquisitions — — — —

Impairment — ( 7,800 ) — ( 7,800 )

Foreign currency translation 8,361 988 508 9,857

Balance, December 29, 2023 $ 143,132 $ 149,554 $ 77,542 $ 370,228

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

Components of other intangible assets, net were (dollars in thousands):

Finite Life Indefinite Life

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Estimated Amortization Expense $ 16,929 $ 16,459 $ 9,247 $ 6,423 $ 4,258 $ 8,284

The Company completed business acquisitions in 2022, 2021 and 2020 that were not material to the consolidated financial statements.

In 2022 and 2021 the Company completed acquisitions that were not material to the consolidated financial statements.

Other Assets.

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Changes in cash surrender value are recorded in other expense, net.

The cash surrender value decreased $ 4.0 million in 2022, and increased $ 3.3 million in 2021 and $ 2.2 million in 2020.

The cash surrender value increased $ 3.1 million in 2023, decreased $ 4.0 million in 2022 and increased $ 3.3 million in 2021.

Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation.

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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 30, 2022 and December 31, 2021.

Self-insured reserves totaled $ 8.7 million as of December 29, 2023 and $ 9.3 million as of December 30, 2022.

Product Warranties.

10 unchanged sentences

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.

This is generally on the date of shipment for product sales;

however certain sales have terms requiring recognition when the goods are 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).

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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.

Markets served include automotive and vehicle assembly and components production, including Electro or e-mobility, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles and various other industries.

The Process segment includes our Process and Lubrication divisions.

20 unchanged sentences

Unallocated corporate (expense) ( 38,678 ) ( 30,775 ) ( 25,774 )

Contingent consideration 8,600 — —

Impairment ( 7,800 ) — —

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All other inventory was valued on the FIFO method.

In 2023, certain inventory quantities were reduced, resulting in liquidation of LIFO inventory quantities, although increases in current product costs offset the impact of the decrement.

The impact on net earnings was not significant.

Property, Plant and Equipment

32 unchanged sentences

general business tax credits ( 1 ) ( 1 ) ( 1 )

Loss on sale of business — — 2

Stock compensation excess tax benefit ( 1 ) ( 1 ) ( 2 )

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Total deferred tax assets were $ 61.4 million and $ 57.1 million, and total deferred tax liabilities were $ 8.2 million and $ 9.4 million on December 29, 2023 and December 30, 2022, 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 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.

The Company files income tax returns in the U.S.

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A summary of debt follows (dollars in thousands):

Average Interest Rate

Average Interest Rate as of

December 29, 2023 Maturity 2023 2022

Private placement unsecured fixed-rate notes

Series B 5.01 % January 2022 — 75,000

Series D 5.35 % July 2023 — 75,000

Unsecured revolving credit facility N/A March 2026 — —

Unsecured revolving credit facility N/A December 2026 — —

Unsecured revolving credit facility - offshore renminbi denominated 3.79 % N/A 28,099 14,327

1 unchanged sentence

Total debt $ 30,036 $ 95,974

The estimated fair value of the fixed interest rate private placement debt was $ 75 million on December 30, 2022 and $ 165 million on December 31, 2021.

The estimated fair value of the fixed interest rate Series D private placement debt was $ 75 million on December 30, 2022.

This debt was repaid in July of 2023.

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.

On May 23, 2023 and June 8, 2023, the Company executed amendments to its amended and restated credit agreement that amended, superseded and restated in its entirety the Company's existing credit agreement with U.S.

Bank National Association, as administrative agent and a lender, and the other lenders that are parties thereto.

The first amendment removed references to LIBOR for calculating rates and replaced them with SOFR and its equivalent benchmark rates such as EURIBOR, TIBOR and RFR loans.

The second amendment increased, from $ 500 million to $ 750 million, the amount of availability under an unsecured revolving credit facility, as well as increased, from $ 200 million to $ 375 million, the maximum amount of outstanding loans in currencies other than U.S.

The amendment also increased, from $ 250 million to $ 375 million, the amount by which the size of the credit facility may be increased upon exercise of an accordion feature.

The accordion feature may be exercised by means of an increase in the revolving commitments or the addition of term loans.

In addition, the second amendment increased the applicable margin percentages used for purposes of calculating the interest rates applicable to base rate loans and non-base rate loans (e.g., SOFR, EURIBOR, TIBOR and RFR loans).

Under the amendment, the applicable margin percentages for base rate loans (which ranged from 0.000 % to 0.750 % under the prior credit agreement) range from 0.125 % to 0.875 %, and the applicable margin percentages for non-base rate loans (which ranged from 1.000 % to 1.750 % under the prior credit agreement) range from 1.125 % to 1.875 %.

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.

The amended and restated credit agreement contains customary provisions for the replacement of the LIBOR-based rate as that rate is expected to be phased out by July 1, 2023.

Currently, 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.

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 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).

4 unchanged sentences

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 Chinese renminbi (offshore) bear interest at a LIBOR-based rate based on the Chinese offshore rate.

dollars bear interest, at the Company’s option, at either a base rate or a HIBOR-based rate.

Loans denominated in Chinese renminbi (offshore) bear interest at a HIBOR-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.

7 unchanged sentences

In addition, the Company has unused, uncommitted lines of credit with foreign banks totaling $ 24 million.

Borrowing rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit and the London Interbank market.

Borrowing rates under these credit lines vary with the prime rate, rates on domestic certificates of deposit and other benchmark rates (e.g.

SOFR, EURIBOR, HIBOR, TIBOR and RFR).

The Company pays facility fees at an annual rate of up to 0.15 % on certain of these lines.

6 unchanged sentences

Interest paid on debt was $ 5.7 million in 2023, $ 10.0 million in 2022 and $ 9.8 million in 2021.

In January 2022, we repaid $ 75 million of our Series B private placement note in addition to a $ 3.5 million prepayment fee, which was recognized as interest expense.

Shareholders’ Equity

At December 30, 2022 , the Company had 22,549 authorized, but not issued, cumulative preferred shares, $ 100 par value.

At December 29, 2023, the Company had 22,549 authorized, but unissued, 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.

13 unchanged sentences

Balance, December 29, 2023 $ ( 31,012 ) $ ( 3,983 ) $ ( 34,995 )

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 classified 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.

Included in the 2023 and 2021 reclassifications were $ 42 million and $ 12 million, respectively, of pension settlement losses.

See Note J for additional details regarding pension and postretirement medical plans.

8 unchanged sentences

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 a benefit of $ 0.2 million in 2022, and expense of $ 3.1 million in 2021 and $ 2.4 million in 2020.

Compensation cost related to the stock appreciation plan was expense of $ 2.0 million in 2023, a benefit of $ 0.2 million in 2022 and expense of $ 3.1 million in 2021.

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.

101 unchanged sentences

subsidiaries.

The Company restructured one of its U.S.

qualified defined benefit plans in 2021.

Under the restructuring, the plan transferred $ 63 million of liabilities and assets associated with certain plan participants to an insurance company via the purchase of a group annuity contract, and the Company recognized a $ 12 million settlement loss, included in 2021 other expense, net.

This charge represents the acceleration of deferred charges previously accrued in accumulated other comprehensive income.

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.

The benefits offered to the plans’ participants were unchanged.

In December of 2023, the Company entered into an agreement under which approximately $ 147 million of pension obligations of its U.S.

funded defined benefit pension plan were transferred to an insurance company.

Under the agreement, the Company purchased a group annuity contract for approximately 651 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.

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 $ 42 million as a result of the transaction.

This charge represents the acceleration of deferred charges currently accrued in accumulated other comprehensive income (loss).

plans, benefits are based on years of service and the highest 5 consecutive years’ earnings in the 10 years preceding retirement.

9 unchanged sentences

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 $ 2.3 million as of December 30, 2022 and $ 2.4 million as of December 31, 2021.

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 $ 2.3 million as of December 29, 2023 and December 30, 2022.

The Company maintains a defined contribution plan covering employees of a Swiss subsidiary, funded by Company and employee contributions.

5 unchanged sentences

Assets of all plans by category and fair value measurement level were as follows (in thousands):

Level 2022 2021

Level December 29, 2023 December 30, 2022

Cash and cash equivalents 1 $ 1,425 $ 351

13 unchanged sentences

Redemptions ( 2,833 ) ( 669 )

Unrealized losses ( 525 ) ( 825 )

Unrealized gains (losses) 4,228 ( 525 )

Balance, end of year $ 36,151 $ 32,163

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Net $ 52,724 $ 34,632 $ 22,654 $ 22,930

Changes in discount rates used to value pension obligations were the main drivers of actuarial gains in 2022 and 2021.

Changes in discount rates used to value pension obligations were the main drivers of actuarial losses in 2023 and gains in 2022.

In 2023 and 2022, the Company made a $ 20 million voluntary contribution each year to one of its U.S.

21 unchanged sentences

2023 2022 2023 2022

Net gain (loss) arising during the period $ 11,189 $ 42,039 $ 9,044 $ 2,391

Amortization of net (gain) loss 4,701 9,248 345 1,002

Net (loss) gain arising during the period $ ( 37,132 ) $ 11,189 $ 237 $ 9,044

Amortization of net loss (gain) 5,999 4,701 ( 133 ) 345

Prior service credit (cost) arising during the period 250 267 — —

Settlement (gain) loss — 12,285 — —

Settlement loss 42,169 — — —

Amortization of prior service (credit) cost 36 84 — —

80 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data