GRACO INC 10-K

Item 8. Financial Statements and Supplementary Data 34 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 29, 2023 and December 30, 2022, the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 29, 2023, 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 29, 2023 and December 30, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2023, 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 29, 2023, 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 20, 2024, 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. 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 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. 35 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 20, 2024 We have served as the Company’s auditor since at least 1969, however, an earlier year could not be readily determined. 36 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts) Years Ended December 29, 2023 December 30, 2022 December 31, 2021 Net Sales $ 2,195,606 $ 2,143,521 $ 1,987,608 Cost of products sold 1,034,585 1,086,082 953,659 Gross Profit 1,161,021 1,057,439 1,033,949 Product development 82,822 80,008 79,651 Selling, marketing and distribution 260,712 250,948 271,526 General and administrative 171,444 153,783 151,449 Contingent consideration ( 8,600 ) — — Impairment 7,800 — — Operating Earnings 646,843 572,700 531,323 Interest expense 5,191 9,897 10,215 Other (income) expense, net 32,850 ( 2,921 ) 12,643 Earnings Before Income Taxes 608,802 565,724 508,465 Income taxes 102,291 105,079 68,599 Net Earnings $ 506,511 $ 460,645 $ 439,866 Basic Net Earnings per Common Share $ 3.01 $ 2.73 $ 2.59 Diluted Net Earnings per Common Share $ 2.94 $ 2.66 $ 2.52 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 29, 2023 December 30, 2022 December 31, 2021 Net Earnings $ 506,511 $ 460,645 $ 439,866 Components of other comprehensive income (loss) Cumulative translation adjustment 25,661 ( 9,582 ) ( 10,026 ) Pension and postretirement medical liability adjustment 11,426 25,630 68,669 Income taxes - pension and postretirement medical liability ( 2,704 ) ( 5,257 ) ( 14,647 ) Other comprehensive income 34,383 10,791 43,996 Comprehensive Income $ 540,894 $ 471,436 $ 483,862 See notes to consolidated financial statements. 37 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 29, 2023 December 30, 2022 ASSETS Current Assets Cash and cash equivalents $ 537,951 $ 339,196 Accounts receivable, less allowances of $ 5,300 and $ 7,000 354,439 346,010 Inventories 438,349 476,790 Other current assets 35,070 43,624 Total current assets 1,365,809 1,205,620 Property, Plant and Equipment, net 741,713 607,609 Goodwill 370,228 368,171 Other Intangible Assets, net 126,258 137,507 Operating Lease Assets 18,768 29,785 Deferred Income Taxes 61,381 57,090 Other Assets 37,850 33,118 Total Assets $ 2,722,007 $ 2,438,900 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Notes payable to banks $ 30,036 $ 20,974 Trade accounts payable 72,214 84,218 Salaries and incentives 64,802 63,969 Dividends payable 42,789 39,963 Other current liabilities 185,359 190,793 Total current liabilities 395,200 399,917 Long-term Debt — 75,000 Retirement Benefits and Deferred Compensation 80,347 61,672 Operating Lease Liabilities 11,785 21,057 Deferred Income Taxes 8,215 9,443 Other Non-current Liabilities 2,235 12,159 Commitments and Contingencies (Note K) Shareholders’ Equity Common stock, $ 1 par value; 291,000,000 shares authorized; 167,946,063 and 167,702,130 shares outstanding in 2023 and 2022 167,946 167,702 Additional paid-in-capital 863,336 784,477 Retained earnings 1,227,938 976,851 Accumulated other comprehensive income (loss) ( 34,995 ) ( 69,378 ) Total shareholders’ equity 2,224,225 1,859,652 Total Liabilities and Shareholders’ Equity $ 2,722,007 $ 2,438,900 See notes to consolidated financial statements. 38 Table of Contents GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 29, 2023 December 30, 2022 December 31, 2021 Cash Flows From Operating Activities Net Earnings $ 506,511 $ 460,645 $ 439,866 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 74,321 65,997 59,325 Deferred income taxes ( 8,502 ) ( 9,997 ) ( 46,572 ) Share-based compensation 30,229 24,695 24,931 Pension settlement loss 42,129 — 12,018 Contingent consideration ( 8,600 ) — — Impairment 7,800 — — Change in Accounts receivable ( 3,245 ) ( 29,944 ) ( 13,801 ) Inventories 42,716 ( 95,691 ) ( 97,780 ) Trade accounts payable ( 12,348 ) 4,195 12,397 Salaries and incentives ( 2,158 ) ( 18,442 ) 29,089 Retirement benefits and deferred compensation ( 13,661 ) ( 18,674 ) ( 10,799 ) Other accrued liabilities ( 5,269 ) ( 4,191 ) 51,342 Other 1,094 ( 1,199 ) ( 3,120 ) Net cash provided by operating activities 651,017 377,394 456,896 Cash Flows From Investing Activities Property, plant and equipment additions ( 184,775 ) ( 201,161 ) ( 133,566 ) Acquisition of businesses, net of cash acquired — ( 25,296 ) ( 19,386 ) Other ( 499 ) ( 362 ) ( 347 ) Net cash used in investing activities ( 185,274 ) ( 226,819 ) ( 153,299 ) Cash Flows From Financing Activities Borrowings on short-term lines of credit, net 9,725 ( 18,252 ) 20,497 Payments on long-term debt ( 75,000 ) ( 75,000 ) ( 70 ) Payments of debt issuance costs ( 1,025 ) — ( 1,422 ) Common stock issued 60,182 35,619 50,963 Common stock repurchased ( 102,344 ) ( 233,426 ) — Taxes paid related to net share settlement of equity awards ( 1,225 ) ( 1,219 ) — Cash dividends paid ( 158,323 ) ( 142,125 ) ( 127,110 ) Net cash used in financing activities ( 268,010 ) ( 434,403 ) ( 57,142 ) Effect of exchange rate changes on cash 1,022 ( 1,278 ) ( 1,062 ) Net increase (decrease) in cash and cash equivalents 198,755 ( 285,106 ) 245,393 Cash and Cash Equivalents Beginning of year 339,196 624,302 378,909 End of year $ 537,951 $ 339,196 $ 624,302 See notes to consolidated financial statements. 39 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 26, 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 Shares issued 946 33,454 — — 34,400 Shares repurchased ( 3,552 ) ( 15,481 ) ( 214,393 ) — ( 233,426 ) Stock compensation cost — 24,216 — — 24,216 Net earnings — — 460,645 — 460,645 Dividends declared $ 0.8650 per share) — — ( 146,317 ) — ( 146,317 ) Other comprehensive income (loss) — — — 10,791 10,791 Balance December 30, 2022 167,702 784,477 976,851 ( 69,378 ) 1,859,652 Shares issued 1,666 57,291 — — 58,957 Shares repurchased ( 1,422 ) ( 6,650 ) ( 94,272 ) — ( 102,344 ) Stock compensation cost — 28,218 — — 28,218 Net earnings — — 506,511 — 506,511 Dividends declared ($ 0.9600 per share) — — ( 161,152 ) — ( 161,152 ) Other comprehensive income (loss) — — — 34,383 34,383 Balance December 29, 2023 $ 167,946 $ 863,336 $ 1,227,938 $ ( 34,995 ) $ 2,224,225 See notes to consolidated financial statements. 40 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Graco Inc. and Subsidiaries Years Ended December 29, 2023, December 30, 2022 and December 31, 2021 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 29, 2023 and December 30, 2022 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 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 . 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 2023 2022 Assets Cash surrender value of life insurance 2 $ 22,255 $ 19,192 Liabilities Contingent consideration 3 $ 1,375 $ 14,914 Deferred compensation 2 6,445 5,842 Forward exchange contracts 2 422 520 Total liabilities at fair value $ 8,242 $ 21,276 Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds. 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 (Debt) and in Note J (Retirement Benefits). 41 Table of Contents 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 $ 343 million in 2023 and $ 334 million in 2022. Other receivables totaled $ 11 million in 2023 and $ 12 million in 2022. 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): 2023 2022 2021 Balance, beginning $ 6,130 $ 3,254 $ 3,745 Additions (reversals) charged to costs and expenses 1,125 3,567 ( 27 ) Deductions from reserves (1) ( 2,711 ) ( 633 ) ( 676 ) Other additions (deductions) (2) 111 ( 58 ) 212 Balance, ending $ 4,655 $ 6,130 $ 3,254 (1) Represents amounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves. (2) Includes effects of foreign currency translation. 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): 2023 2022 Prepaid income taxes $ 14,546 $ 18,702 Prepaid expenses and other 20,524 24,922 Total $ 35,070 $ 43,624 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. 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 additional impairment charges were recorded as a result of that review. There were no impairment charges in 2022 or 2021. 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 42 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, January 1, 2022 $ 137,155 $ 141,304 $ 77,796 $ 356,255 Additions, adjustments from business acquisitions — 16,994 — 16,994 Foreign currency translation ( 2,384 ) ( 1,932 ) ( 762 ) ( 5,078 ) Balance, December 30, 2022 134,771 156,366 77,034 368,171 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, net 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 29, 2023 Cost $ 191,417 $ 14,174 $ 1,300 $ 62,633 $ 269,524 Accumulated amortization ( 128,248 ) ( 8,547 ) ( 561 ) — ( 137,356 ) Foreign currency translation ( 7,591 ) ( 344 ) — 2,025 ( 5,910 ) Book value $ 55,578 $ 5,283 $ 739 $ 64,658 $ 126,258 Weighted average life in years 13 9 6 N/A As of December 30, 2022 Cost $ 202,103 $ 26,374 $ 1,300 $ 62,633 $ 292,410 Accumulated amortization ( 123,603 ) ( 18,027 ) ( 330 ) — ( 141,960 ) Foreign currency translation ( 10,060 ) ( 894 ) — ( 1,989 ) ( 12,943 ) Book value $ 68,440 $ 7,453 $ 970 $ 60,644 $ 137,507 Weighted average life in years 13 10 6 N/A Amortization of intangibles was $ 17.6 million in 2023, $ 18.9 million in 2022 and $ 17.9 million in 2021. Estimated future annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands): 2024 2025 2026 2027 2028 Thereafter Estimated Amortization Expense $ 16,929 $ 16,459 $ 9,247 $ 6,423 $ 4,258 $ 8,284 In 2022 and 2021 the Company completed acquisitions that were not material to the consolidated financial statements. 43 Table of Contents Other Assets. Components of other assets were (in thousands): 2023 2022 Cash surrender value of life insurance $ 22,255 $ 19,192 Capitalized software 2,602 2,189 Equity method investment 9,661 8,767 Deposits and other 3,332 2,970 Total $ 37,850 $ 33,118 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 $ 3.1 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. Other Current Liabilities. Components of other current liabilities were (in thousands): 2023 2022 Accrued self-insurance retentions $ 8,654 $ 9,338 Accrued warranty and service liabilities 15,408 14,674 Accrued trade promotions 14,312 13,799 Payable for employee stock purchases 16,639 16,497 Customer advances and deferred revenue 51,578 50,747 Income taxes payable 9,837 15,987 Tax payable, other 12,289 9,614 Operating lease liabilities, current 8,242 9,555 Right of return refund liability 17,826 18,449 Other 30,574 32,133 Total $ 185,359 $ 190,793 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 $ 8.7 million as of December 29, 2023 and $ 9.3 million as of December 30, 2022. 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): 2023 2022 Balance, beginning of year $ 14,674 $ 14,463 Assumed in business acquisition — 38 Charged to expense 11,128 8,946 Margin on parts sales reversed 3,875 3,292 Reductions for claims settled ( 14,269 ) ( 12,065 ) Balance, end of year $ 15,408 $ 14,674 44 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 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). 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 $ 51.6 million as of December 29, 2023 and $ 50.7 million as of December 30, 2022. Net sales for 2023 included $ 49.6 million that was in deferred revenue and customer advances as of December 30, 2022. Net sales for 2022 included $ 60.4 million that was in deferred revenue and customer advances as of December 31, 2021. 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. 45 Table of Contents 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. 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 29, 2023, totaled $ 62 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): 2023 2022 Foreign Currency Contracts Assets $ 26 $ 157 Liabilities ( 448 ) ( 677 ) Net Assets (Liabilities) $ ( 422 ) $ ( 520 ) B. Segment Information The Company has five operating segments which are aggregated into three reportable segments: Contractor, Industrial and Process. Beginning with the first quarter of 2022, our high performance coatings and foam product offerings previously included 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. Prior year segment information has been restated to conform to the current organizational structure. The Contractor segment markets sprayers and equipment that apply paint to walls and other structures, texture to walls and ceilings, insulation to building walls and other items, highly viscous coatings to roofs, and markings on roads, parking lots, athletic fields and floors. The Industrial segment includes our Industrial and Powder 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, 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. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, 46 Table of Contents 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 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. Segment information follows (in thousands): 2023 2022 2021 Net Sales Contractor $ 985,675 $ 999,060 $ 987,606 Industrial 662,785 649,347 602,376 Process 547,146 495,114 397,626 Total $ 2,195,606 $ 2,143,521 $ 1,987,608 Operating Earnings Contractor $ 285,394 $ 249,833 $ 266,204 Industrial 234,054 231,298 199,856 Process 165,273 122,344 91,037 Unallocated corporate (expense) ( 38,678 ) ( 30,775 ) ( 25,774 ) Contingent consideration 8,600 — — Impairment ( 7,800 ) — — Total $ 646,843 $ 572,700 $ 531,323 Assets Contractor $ 712,224 $ 752,729 Industrial 640,487 578,302 Process 554,753 564,539 Unallocated corporate 814,543 543,330 Total $ 2,722,007 $ 2,438,900 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): 2023 2022 2021 Net Sales (based on customer location) United States $ 1,161,607 $ 1,116,012 $ 1,004,318 Other countries 1,033,999 1,027,509 983,290 Total $ 2,195,606 $ 2,143,521 $ 1,987,608 Long-lived Assets United States $ 622,430 $ 532,401 Other countries 119,283 75,208 Total $ 741,713 $ 607,609 47 Table of Contents 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 2023, 2022 and 2021. C. Inventories Major components of inventories were as follows (in thousands): 2023 2022 Finished products and components $ 221,847 $ 222,326 Products and components in various stages of completion 131,906 138,957 Raw materials and purchased components 202,294 248,636 Subtotal 556,047 609,919 Reduction to LIFO cost ( 117,698 ) ( 133,129 ) Total $ 438,349 $ 476,790 Inventories valued under the LIFO method were $ 211.4 million in 2023 and $ 253.6 million in 2022. 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. D. Property, Plant and Equipment Property, plant and equipment were as follows (in thousands): 2023 2022 Land and improvements $ 70,382 $ 65,066 Buildings and improvements 500,373 376,115 Manufacturing equipment 441,824 439,109 Office, warehouse and automotive equipment 61,594 59,988 Additions in progress 132,609 126,198 Total property, plant and equipment 1,206,782 1,066,476 Accumulated depreciation ( 465,069 ) ( 458,867 ) Net property, plant and equipment $ 741,713 $ 607,609 Depreciation expense was $ 55.0 million in 2023, $ 46.0 million in 2022 and $ 40.0 million in 2021. E. Income Taxes Earnings before income tax expense consist of (in thousands): 2023 2022 2021 Domestic $ 450,806 $ 401,405 $ 370,903 Foreign 157,996 164,319 137,562 Total $ 608,802 $ 565,724 $ 508,465 48 Table of Contents Income tax expense consists of (in thousands): 2023 2022 2021 Current Federal $ 79,732 $ 70,976 $ 77,703 State and local 7,282 5,948 7,493 Foreign 23,779 38,152 29,975 Current income tax expense 110,793 115,076 115,171 Deferred Domestic ( 6,919 ) ( 8,733 ) ( 42,413 ) Foreign ( 1,583 ) ( 1,264 ) ( 4,159 ) Deferred income tax expense (benefit) ( 8,502 ) ( 9,997 ) ( 46,572 ) Total $ 102,291 $ 105,079 $ 68,599 Income taxes paid were $ 111.3 million in 2023, $ 112.3 million in 2022 and $ 111.8 million in 2021. A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows: 2023 2022 2021 Statutory tax rate 21 % 21 % 21 % Tax effect of international operations ( 1 ) 1 ( 1 ) State taxes, net of federal effect 1 1 1 U.S. general business tax credits ( 1 ) ( 1 ) ( 1 ) Stock compensation excess tax benefit ( 1 ) ( 1 ) ( 2 ) Foreign Derived Intangible Income (FDII) ( 2 ) ( 2 ) ( 5 ) Effective tax rate 17 % 19 % 13 % 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): 2023 2022 Inventory valuations $ 1,005 $ 678 Accrued self-insurance retentions 1,390 1,626 Accrued warranty and service liabilities 2,290 2,279 Vacation accruals 3,450 3,409 Customer allowances 4,137 4,143 Excess of tax over book depreciation and amortization ( 44,197 ) ( 42,322 ) Pension benefit obligation 10,063 6,375 Postretirement medical benefit obligation 5,039 5,072 Stock compensation 12,686 12,390 Deferred compensation 2,205 2,283 Deferred revenue 2,024 2,160 Research and development 23,324 11,370 Prepayments from foreign subsidiaries 27,301 36,070 Other 2,449 2,114 Net deferred tax assets $ 53,166 $ 47,647 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. 49 Table of Contents 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 2017. 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 29, 2023, 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. F. Debt A summary of debt follows (dollars in thousands): Average Interest Rate as of December 29, 2023 Maturity 2023 2022 Private placement unsecured fixed-rate notes Series D 5.35 % July 2023 — 75,000 Unsecured revolving credit facility N/A December 2026 — — Unsecured revolving credit facility - offshore renminbi denominated 3.79 % N/A 28,099 14,327 Notes payable to banks — % 2024 1,937 6,647 Total debt $ 30,036 $ 95,974 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 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. dollars. The amendment also increased, from $ 250 million to $ 375 million, the amount by which the size of the credit facility may be increased upon exercise of an accordion feature. The accordion feature may be exercised by means of an increase in the revolving commitments or the addition of term loans. In addition, the second amendment increased the applicable margin percentages used for purposes of calculating the interest rates applicable to base rate loans and non-base rate loans (e.g., SOFR, EURIBOR, TIBOR and RFR loans). Under the amendment, the applicable margin percentages for base rate loans (which ranged from 0.000 % to 0.750 % under the prior credit agreement) range from 0.125 % to 0.875 %, and the applicable margin percentages for non-base rate loans (which ranged from 1.000 % to 1.750 % under the prior credit agreement) range from 1.125 % to 1.875 %. Borrowings under the amended and restated credit agreement may be denominated in U.S. dollars or certain other currencies. 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. 50 Table of Contents 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 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. On December 16, 2022, the Company entered into an amendment to its master note agreement that extends the period in which the Company may issue, and affiliates of the lender may purchase, the Company’s senior notes from January 29, 2023 to December 16, 2027. The amendment also increases the maximum aggregate principal amount of senior notes the Company may issue under the master note agreement from $ 200 million to $ 250 million, although the maximum aggregate amount of senior notes bearing interest at a floating rate that may be outstanding at any one time will continue to be $ 100 million. The amendment also extends the maturity and average life of each senior note bearing interest at a fixed rate that may be issued under the master note agreement from no more than 12 years after the date of issuance to no more than 15 years after the date of issuance, and includes customary provisions for the replacement of LIBOR with SOFR and customary benchmark replacement provisions with respect to senior notes bearing interest at a floating rate. All other material items of the master note agreement remain unchanged. Under the terms of the master 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 29, 2023, the Company had $ 842 million in lines of credit, including the $ 800 million in committed credit facilities described above and $ 42 million with foreign banks. The unused portion of committed credit lines was $ 775 million as of December 29, 2023. 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 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. 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 29, 2023. Annual maturities of debt are as follows (in thousands): 2024 2025 2026 2027 2028 Thereafter Maturities of debt $ 30,036 $ — $ — $ — $ — $ — Interest paid on debt was $ 5.7 million in 2023, $ 10.0 million in 2022 and $ 9.8 million in 2021. G. Shareholders’ Equity 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. 51 Table of Contents 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 26, 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 ) Other comprehensive income (loss) before reclassifications 16,083 ( 9,582 ) 6,501 Amounts reclassified from accumulated other comprehensive income 4,290 — 4,290 Balance, December 30, 2022 ( 39,734 ) ( 29,644 ) ( 69,378 ) Other comprehensive income (loss) before reclassifications ( 28,162 ) 25,661 ( 2,501 ) Amounts reclassified from accumulated other comprehensive income 36,884 — 36,884 Balance, December 29, 2023 $ ( 31,012 ) $ ( 3,983 ) $ ( 34,995 ) 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 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. 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 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. Under this arrangement, the Company issued 11,150 shares in 2023, 12,055 shares in 2022 and 12,070 shares in 2021. The expense related to this arrangement is not significant. 52 Table of Contents 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 26, 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 Granted 1,381 71.03 Exercised ( 645 ) 25.58 Canceled ( 46 ) 49.42 Outstanding, December 30, 2022 10,265 44.40 7,793 37.22 Granted 1,114 71.45 Exercised ( 1,354 ) 30.77 Canceled ( 121 ) 62.75 Outstanding, December 29, 2023 9,904 $ 49.09 7,274 $ 41.46 The following table summarizes information for options outstanding and exercisable at December 29, 2023 (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 $ 20-35 3,107 3.2 $ 26.85 3,107 $ 26.85 $ 35-50 2,392 5.8 44.75 2,365 44.75 $ 50-65 1,231 7.1 55.96 1,084 55.92 $ 65-80 3,174 9.4 71.48 718 71.94 $ 20-80 9,904 6.3 $ 49.09 7,274 $ 41.46 The aggregate intrinsic value of exercisable option shares was $ 329.6 million as of December 29, 2023, with a weighted average contractual term of 4.2 years. There were approximately 9.9 million vested share options and share options expected to vest as of December 29, 2023, with an aggregate intrinsic value of $ 373.2 million, a weighted average exercise price of $ 49.09 and a weighted average contractual term of 6.3 years. Information related to options exercised follows (in thousands): 2023 2022 2021 Cash received $ 40,708 $ 15,739 $ 32,610 Aggregate intrinsic value 61,624 28,193 65,319 Tax benefit realized 12,605 6,020 13,329 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 322,764 shares in 2023, 316,250 shares in 2022 and 415,995 shares in 2021. 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): 53 Table of Contents Total Shares Authorized Available for Future Issuance as of December 29, 2023 Stock Incentive Plan (2019) 10,000 4,743 Employee Stock Purchase Plan (2006) 21,000 11,423 Total 31,000 16,166 Amounts available for future issuance exclude outstanding options. Options outstanding as of December 29, 2023, include options granted under two 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): 2023 2022 2021 Share-based compensation $ 30,229 $ 24,695 $ 24,931 Tax benefit 3,177 2,319 1,705 Share-based compensation, net of tax $ 27,052 $ 22,376 $ 23,226 As of December 29, 2023, there was $ 17.3 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of approximately 2.3 years. 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: 2023 2022 2021 Expected life in years 6.7 6.4 7.5 Interest rate 4.0 % 2.7 % 0.9 % Volatility 26.3 % 26.2 % 25.2 % Dividend yield 1.3 % 1.2 % 1.0 % Weighted average fair value per share $ 21.76 $ 19.10 $ 17.87 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: 2023 2022 2021 Expected life in years 1.0 1.0 1.0 Interest rate 5.1 % 0.9 % 0.1 % Volatility 26.4 % 20.5 % 40.1 % Dividend yield 1.4 % 1.2 % 1.1 % Weighted average fair value per share $ 18.04 $ 16.01 $ 21.50 54 Table of Contents I. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): 2023 2022 2021 Net earnings available to common shareholders $ 506,511 $ 460,645 $ 439,866 Weighted average shares outstanding for basic earnings per share 168,442 168,952 169,635 Dilutive effect of stock options computed based on the treasury stock method using the average market price 3,757 3,941 4,891 Weighted average shares outstanding for diluted earnings per share 172,199 172,893 174,526 Basic earnings per share $ 3.01 $ 2.73 $ 2.59 Diluted earnings per share $ 2.94 $ 2.66 $ 2.52 Anti-dilutive stock options excluded from computations of diluted earnings per share totaled 2.0 million shares in 2023, 2.2 million shares in 2022 and 0.4 million 2021. 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 $ 11.5 million in 2023, $ 11.0 million in 2022 and $ 10.0 million in 2021. 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. 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. 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). For U.S. plans, benefits are based on years of service and the highest 5 consecutive years’ earnings in the 10 years preceding retirement. Plans are funded annually in amounts consistent with minimum funding levels and maximum tax deduction limits, although the Company may make additional voluntary contributions from time to time to improve the funded status of its plans. 55 Table of Contents 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 52 percent equity securities, 32 percent fixed income securities and 16 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 $ 2.3 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. 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. Assets of all plans by category and fair value measurement level were as follows (in thousands): Level December 29, 2023 December 30, 2022 Cash and cash equivalents 1 $ 1,425 $ 351 Insurance contract 3 36,151 32,163 Investments categorized in fair value hierarchy 37,576 32,514 Equity U.S. Large Cap N/A 40,726 74,838 U.S. Small/Mid Cap N/A — 5,191 International N/A 17,554 37,862 Total equity 58,280 117,891 Fixed income N/A 49,595 93,262 Real estate and other N/A 15,400 37,508 Investments measured at net asset value 123,275 248,661 Total $ 160,851 $ 281,175 The following table is a reconciliation of pension assets measured at fair value using level 3 inputs (in thousands): 2023 2022 Balance, beginning of year $ 32,163 $ 30,926 Purchases 2,593 2,431 Redemptions ( 2,833 ) ( 669 ) Unrealized gains (losses) 4,228 ( 525 ) Balance, end of year $ 36,151 $ 32,163 56 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 29, 2023, and December 30, 2022, and a statement of the funded status as of the same dates (in thousands): Pension Benefits Postretirement Medical Benefits 2023 2022 2023 2022 Change in benefit obligation Obligation, beginning of year $ 315,807 $ 418,051 $ 22,930 $ 32,122 Service cost 5,729 8,242 348 516 Interest cost 16,535 10,996 1,165 839 Actuarial (gain) loss 32,763 ( 110,467 ) ( 237 ) ( 9,044 ) Benefit payments ( 12,103 ) ( 9,122 ) ( 1,552 ) ( 1,503 ) Plan amendments ( 250 ) ( 267 ) — Settlements ( 149,212 ) — — — Exchange rate changes 4,306 ( 1,626 ) — — Obligation, end of year $ 213,575 $ 315,807 $ 22,654 $ 22,930 Change in plan assets Fair value, beginning of year $ 281,175 $ 347,900 $ — $ — Actual return on assets 14,504 ( 80,078 ) — — Employer contributions 23,066 22,756 1,552 1,503 Benefit payments ( 12,103 ) ( 9,122 ) ( 1,552 ) ( 1,503 ) Settlements ( 149,212 ) — — — Exchange rate changes 3,421 ( 281 ) — — Fair value, end of year $ 160,851 $ 281,175 $ — $ — Unfunded status $ ( 52,724 ) $ ( 34,632 ) $ ( 22,654 ) $ ( 22,930 ) Amounts recognized in consolidated balance sheets Non-current assets $ 215 $ 5,398 $ — $ — Current liabilities 1,749 1,860 1,745 1,763 Non-current liabilities 51,190 38,170 20,909 21,167 Net $ 52,724 $ 34,632 $ 22,654 $ 22,930 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. qualified defined benefit plans. The accumulated benefit obligation as of year-end for all defined benefit pension plans was $ 186 million for 2023 and $ 297 million for 2022. Information for plans with an accumulated benefit obligation in excess of plan assets follows (in thousands): 2023 2022 Projected benefit obligation $ 89,206 $ 72,190 Accumulated benefit obligation 81,701 69,395 Fair value of plan assets 36,150 32,164 57 Table of Contents The components of net periodic benefit cost for the plans for 2023, 2022 and 2021 were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2023 2022 2021 2023 2022 2021 Service cost-benefits earned during the period $ 5,729 $ 8,242 $ 9,355 $ 348 $ 516 $ 670 Interest cost on projected benefit obligation 16,535 10,996 11,409 1,165 839 832 Expected return on assets ( 19,141 ) ( 19,754 ) ( 20,767 ) — — — Amortization of prior service cost 36 84 246 — — — Amortization of net loss 5,999 4,701 9,248 ( 133 ) 345 1,002 Settlement loss 42,169 — 12,285 — — — Cost of pension plans which are not significant and have not adopted ASC 715 368 284 368 N/A N/A N/A Net periodic benefit cost $ 51,695 $ 4,553 $ 22,144 $ 1,380 $ 1,700 $ 2,504 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 $ 44 million in 2023, $ 1 million in 2022 and $ 12 million in 2021. Amounts recognized in other comprehensive income (loss) in 2023 and 2022 were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2023 2022 2023 2022 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 loss 42,169 — — — Amortization of prior service (credit) cost 36 84 — — Total $ 11,322 $ 16,241 $ 104 $ 9,389 Amounts included in accumulated other comprehensive income (loss) as of December 29, 2023 and December 30, 2022, that had not yet been recognized as components of net periodic benefit cost, were as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2023 2022 2023 2022 Prior service cost $ 2,163 $ 1,668 $ — $ — Net gain (loss) ( 44,195 ) ( 55,084 ) 1,995 1,891 Net gain (loss) before income taxes ( 42,032 ) ( 53,416 ) 1,995 1,891 Income taxes 9,464 12,207 ( 439 ) ( 416 ) Net $ ( 32,568 ) $ ( 41,209 ) $ 1,556 $ 1,475 58 Table of Contents Assumptions used to determine the Company’s benefit obligations are shown below: Pension Benefits Postretirement Medical Benefits Weighted average assumptions 2023 2022 2023 2022 U.S. Plans Discount rate 5.3 % 5.6 % 5.3 % 5.6 % Rate of compensation increase 2.7 % 2.7 % N/A N/A Non-U.S. Plans Discount rate 2.1 % 2.4 % N/A N/A Rate of compensation increase 1.7 % 1.8 % 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 2023 2022 2021 2023 2022 2021 U.S. Plans Discount rate 5.6 % 3.0 % 2.6 % 5.6 % 2.9 % 2.6 % Rate of compensation increase 2.7 % 2.7 % 2.7 % N/A N/A N/A Expected return on assets 7.6 % 6.3 % 6.3 % N/A N/A N/A Non-U.S. Plans Discount rate 0.4 % 0.4 % 0.4 % N/A N/A N/A Rate of compensation increase 1.3 % 1.3 % 1.3 % N/A N/A N/A Expected return on assets 1.6 % 1.0 % 1.0 % 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 8.2 percent for 2024, 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 $ 1.7 million to its unfunded pension plans and $ 1.7 million to the postretirement medical plan in 2024. The Company will not be required to make contributions to the funded pension plan under minimum funding requirements for 2024. Estimated future benefit payments are as follows (in thousands): Pension Benefits Postretirement Medical Benefits 2024 $ 7,165 $ 1,745 2025 6,455 1,717 2026 9,455 1,689 2027 11,380 1,697 2028 11,270 1,670 Years 2029-2033 67,316 7,974 59 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. Supplemental information related to the Company's lease activities is as follows (in thousands): 2023 2022 Operating lease expense $ 11,688 $ 12,307 Operating lease payments 11,903 11,886 Non-cash additions to operating lease assets 6,141 8,859 Additional information related to operating leases is as follows: 2023 2022 Weighted average remaining lease term (years) 3.1 3.0 Weighted average discount rate 5.13 % 3.00 % Variable lease costs and short term lease costs were not significant for the twelve months ended December 29, 2023 and December 30, 2022. As of December 29, 2023, future maturities of operating lease liabilities were as follows (in thousands): 2024 $ 8,242 2025 7,339 2026 3,552 2027 1,240 2028 612 Thereafter 616 Total lease payments $ 21,601 Present value adjustment ( 1,574 ) Operating lease liabilities $ 20,027 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 $ 156 million at December 29, 2023. 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 $ 56 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 $ 10 million in 2024, $ 5 million in 2025, $ 2 million in 2026 and $ 1 million thereafter. 60 Table of Contents In addition, the Company could be obligated to perform under standby letters of credit totaling $ 11 million at December 29, 2023. The Company has also guaranteed the debt of its subsidiaries for up to $ 5 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. 61 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.