What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-18 compared with 2024-02-20 · 53 added, 50 removed, 250 unchanged (29% of the section changed)

14 unchanged sentences

Each segment is responsible for product development, manufacturing, marketing and sales of their products.

Graco’s key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end-user markets, expanding distribution globally and completing strategic acquisitions that provide additional channel and technologies.

Long-term financial growth targets accompany these strategies, including our objectives of 10 percent revenue growth and 12 percent consolidated net earnings growth per annum.

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Our largest manufacturing facilities are in the U.S.

We also manufacture some of our products in Switzerland (Industrial segment), Italy (Industrial segment), the United Kingdom (Process segment), the People’s Republic of China (all segments), Belgium (all segments) and Romania (Industrial segment).

Our primary distribution facilities are located in the U.S., Belgium, Switzerland, United Kingdom, P.R.C., Japan, Italy, Korea, India, Australia and Brazil.

Supply Chain and Inflation

In 2023, the Company's supply chain stabilized, and the associated effects of inflation largely subsided.

While the Company experienced isolated supply chain disruptions in 2023, the impact was not as significant as compared to previous years in 2022 and 2021.

Pricing actions implemented in 2022 and 2023 have generally mitigated the effects of inflation.

We also manufacture some of our products in Switzerland (Industrial segment), Italy (Industrial and Contractor segment), the P.R.C.

(all segments), India (Contractor segment), Belgium (all segments) and Romania (Industrial segment).

Our primary distribution facilities are located in the U.S., Belgium, Switzerland, United Kingdom, P.R.C., Japan, Italy, South Korea, India, Australia and Brazil.

Results of Operations

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Diluted Net Earnings per Common Share, adjusted $ 2.77 $ 3.04

(1) Excludes the impact of a pension settlement loss, contingent consideration fair value adjustment, impairment charge, excess tax benefits from stock option exercises and certain non-recurring tax provision adjustments.

(1) Excludes impacts of business reorganization charges, excess tax benefits from stock option exercises, impairment charges, contingent consideration fair value adjustments, pension settlement losses and certain non-recurring tax

provision adjustments.

See Financial Results Adjusted for Comparability below for a reconciliation of adjusted non-GAAP financial measures to GAAP.

1 unchanged sentence

Excess tax benefits related to stock option exercises reduced income taxes by $15 million in 2024 and $10 million in 2023.

Business reorganization charges reduced operating earnings in 2024 by $8 million.

Other expense for 2023 included a $42 million non-cash pension settlement loss.

6 unchanged sentences

Impairment — 7.8

Business reorganization 7.7 —

Operating earnings, adjusted $ 577.8 $ 646.0

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Impairment — 7.8

Business reorganization 7.7 —

Earnings before income taxes, adjusted $ 597.0 $ 650.1

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Excess tax benefit from option exercises 14.9 10.3

Business reorganization tax effect 1.8 —

Income taxes, adjusted $ 119.9 $ 126.2

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Excess tax benefit from option exercises (14.9) (10.3)

Business reorganization 5.9 —

Net Earnings, adjusted $ 477.1 $ 523.9

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Interest expense 0.1 0.2

Other expense, net 1.6 (0.1)

Other (income) expense, net (1.0) 1.6

Earnings before income taxes 27.9 27.7

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Consolidated (4)% 1% (1)% (4)% 2% 0% 0% 2%

Sales in the Americas were up modestly in 2023, as conditions varied by end market.

Sales of industrial products remained favorable, however rising interest rates and other economic conditions adversely impacted sales in construction markets.

EMEA sales growth in 2023 benefited mostly from favorable changes in currency translation rates.

Lower finishing system sales in EMEA for 2023 offset broad-based sales growth in Western Europe and emerging countries.

In the Asia Pacific region, economic conditions in China and unfavorable changes in currency translation rates more than offset underlying growth in the rest of the region for 2023.

The gross profit margin rate for 2023 increased approximately 4 percentage points compared to 2022 mostly due to realized pricing.

In 2024, net sales declined in all regions and in most end markets compared to 2023.

Declines in global semiconductor markets drove sales lower in the Americas and Asia Pacific.

Reduced project activity for automotive, electronics and e-mobility end markets, especially in China, furthered sales declines in Asia Pacific.

In the Americas, strong finishing system sales were unable to offset soft residential and non-residential construction markets.

In EMEA, decreased industrial activity in Western Europe led to lower sales in 2024.

The gross profit margin rate for 2024 increased slightly as the favorable effects of realized pricing more than offset unfavorable product and channel mix, lower sales volume and higher product costs.

Operating Expenses

Total operating expenses for 2023 increased $29 million compared to 2022.

The increase includes increased spending on product development and other growth initiatives of $7 million, incremental share-based compensation of $6 million and higher sales and earnings-based expenses of $4 million.

Total operating expenses increased $38 million (7 percent) for 2024 compared to 2023.

Operating expenses for 2024 included $13 million in incremental litigation costs associated with a trial that concluded in December of 2024, $13 million of investments in new product development and other growth initiatives, $7 million of business reorganization costs and $7 million of expenses from acquired operations.

Reductions in volume and earnings-based expenses of $14 million for the year partially offset the increase in operating expenses.

Investment in new product development in 2024 was $87 million, approximately 4 percent of sales.

Operating Earnings

Sales growth led to an 8 percent increase in operating earnings.

Operating earnings expressed as a percentage of sales in 2023 increased 3 percentage points compared to 2022 as realized pricing more than offset higher product costs and operating expenses.

Other Expense

Interest expense decreased $5 million compared to 2022 as private placement debt was repaid in the first quarter of 2022 and in the third quarter of 2023.

Other non-operating expenses for 2023 included a non-cash pension settlement loss of $42 million in connection with the transfer of certain pension obligations to an insurance company.

Partially offsetting the pension settlement loss was an increase in interest income of approximately $11 million for the year.

The effective income tax rate for 2023 was 17 percent, down 2 percentage points from 2022.

The decrease in 2023 was due to additional non-recurring tax benefits and excess tax benefits from stock option exercises.

Sales declines and increased operating expenses led to a 12 percent decrease in operating earnings.

Operating earnings expressed as a percentage of sales in 2024 decreased approximately 3 percentage points compared to 2023 as lower sales, higher product costs and higher expenses impacted profitability for the year.

Interest & Other Expense

Interest expense was $2 million lower for 2024 compared to 2023 as private placement debt was repaid in the third quarter of 2023.

Excluding a prior year pension settlement loss of $42 million, other income increased $13 million for 2024, largely due to increased interest income.

The effective income tax rate for 2024 was 18 percent, up 1 percentage point from 2023.

The increase in 2024 was largely due to non-recurring tax benefits in 2023, variations in excess tax benefits from stock option exercises and the unfavorable effects of foreign earnings taxed at higher rates than the U.S.

Segment Results

3 unchanged sentences

Business, for a description of the Company’s three reportable segments.

Management assesses performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments.

Management assesses the performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments.

The following table presents net sales and operating earnings by reporting segment (in millions):

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Segment Total (1)% 2% (1)% 0% (1)% 0% 0% (1)%

Contractor segment sales decreased 1 percent for the year.

Favorable response to new product offerings was more than offset for the year by slower economic activity in worldwide construction markets.

The operating margin rate for this segment improved 4 percentage points for the year.

Realized pricing drove most of the improvement in the operating margin rate for the year.

Sales in the Americas represents the majority of sales for the Contractor segment.

Contractor segment sales in 2024 were flat compared to 2023.

Incremental sales from acquired operations, increased sales of protective coatings equipment and favorable response to new product offerings offset declines in North American construction markets.

The operating margin rate for this segment was 2 percentage points lower than last year due to higher product costs on lower sales volumes, the unfavorable effects of lower margin rates of acquired operations and litigation costs associated with a trial that concluded in December of 2024.

Sales in the Americas represent the majority of sales for the Contractor segment.

Management regularly reviews economic and financial indicators for North America, including levels of residential, commercial and institutional construction, remodeling rates and interest rates.

14 unchanged sentences

Segment Total (6)% 0% (1)% (7)% 2% 0% 0% 2%

Industrial segment sales increased 2 percent for the year as continued strength in the automotive, industrial and machinery end markets in the Americas was mostly offset by lower finishing system sales in EMEA and Asia Pacific.

The operating margin rate for this segment decreased 1 percentage point for the year as realized pricing and lower product costs were offset by unfavorable changes in currency translation rates and higher operating expenses.

Industrial segment sales decreased 7 percent for 2024 as finishing system sales in the Americas were unable to offset reduced project activity for automotive, e-mobility and electronic projects in Asia Pacific and weakened industrial activity in EMEA.

The operating margin rate for this segment decreased 2 percentage points for the year due to higher product costs from lower sales volumes, business reorganization expenses and the unfavorable effects of product and channel mix.

In this segment, sales in each geographic region are significant, and management looks at economic and financial indicators in each region, including gross domestic product, industrial production, capital investment rates, automobile production, building construction and the level of the U.S.

13 unchanged sentences

Segment Total (8)% 0% 0% (8)% 11% 0% 0% 11%

Process segment sales increased in all businesses and regions for the year, reflecting continued favorable conditions in many end markets, such as vehicle services, industrial pumps, oil and gas, mining, industrial lubrication and semi-conductors.

The operating margin rate for this segment increased 5 percentage points for the year, primarily due to realized pricing, lower product costs and expense leverage.

Process segment sales decreased in 2024 in all regions mainly due to decline in semiconductor end markets.

Other end markets, such as mining, oil and gas, industrial pumps and vehicle services were weaker in 2024 compared to 2023.

The operating margin rate for this segment decreased approximately 2 percentage points for the year as price realization was not enough to offset unfavorable expense leverage on lower sales volume.

Although the Americas represent the majority of sales for the Process segment, management monitors indicators such as levels of gross domestic product, capital investment, industrial production, oil and natural gas markets and mining activity worldwide.

7 unchanged sentences

Higher cash and cash equivalent balances primarily drove increases in working capital in 2024.

Changes in receivables were consistent with higher sales levels.

Inventories decreased as supply chain disruptions eased and the associated effects of inflation subsided.

Decreased receivables from lower sales activity were more than offset by the incremental effect of acquired operations.

An effort to reduce inventory levels in 2024 more than offset the effect of acquired inventory.

As inventory purchases decreased, trade accounts payable decreased.

2 unchanged sentences

At December 27, 2024, the Company’s capital structure included current notes payable of $29 million and shareholders’ equity of $2,584 million.

At December 30, 2022, the Company’s capital structure included current notes payable of $21 million, long-term debt of $75 million and shareholders’ equity of $1,860 million.

At December 29, 2023, the Company’s capital structure included current notes payable of $30 million and shareholders’ equity of $2,224 million.

Shareholders’ equity increased by $360 million in 2024.

6 unchanged sentences

As of December 27, 2024, the Company had available liquidity of $1,453 million, including cash held in deposit accounts of $675 million, of which $144 million was held outside of the U.S., and available credit under existing committed credit facilities of $778 million.

Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2024, including its capital expenditure plan of approximately $120 million, including $60 million for building projects to expand production capacity, planned dividends estimated at $171 million, share repurchases and acquisitions.

Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2025, including its capital expenditure plan of approximately $60 million, planned dividends estimated at $186 million, share repurchases and acquisitions.

If acquisition opportunities increase, the Company believes that reasonable financing alternatives are available for the Company to execute on those opportunities.

10 unchanged sentences

Cash Flows From Operating Activities .

Net cash provided by operating activities was $651 million in 2023, up $274 million compared to 2022, due primarily to higher net earnings and fewer inventory purchases in 2023.

Other decreases in working capital further contributed to the increase in cash provided by operating activities in 2023.

Net cash provided by operating activities was $622 million in 2024, down $29 million compared to 2023, due primarily to lower net earnings.

Fewer inventory purchases in 2024 as part of an inventory

reduction program, as well as other decreases in working capital partially offset the effects of lower net earnings on cash provided by operating activities.

Cash Flows Used in Investing Activities.

Cash flows used in investing activities totaled $343 million in 2024, including $242 million for business acquisitions and $107 million for capital additions.

Cash flows used in investing activities totaled $185 million in 2023, including $185 million for capital additions.

Cash flows used in investing activities totaled $227 million in 2022 including $201 million for capital additions and $25 million for business acquisitions.

Cash Flows Used in Financing Activities .

Cash flows used in financing activities totaled $140 million in 2024 and included dividends of $172 million and share repurchases of $31 million, partially offset by net proceeds from share issuances of $66 million.

Cash flows used in financing activities totaled $268 million in 2023 and included share repurchases of $102 million (partially offset by net proceeds from share issuances of $60 million), dividends of $158 million, and net payments on long-term debt and outstanding lines of credit of $65 million.

Cash flows used in financing activities totaled $434 million in 2022 and included dividends of $142 million and net proceeds from share issuances totaling $36 million.

On December 7, 2018, the Board of Directors authorized the purchase of up to 18 million shares of common stock, primarily through open market transactions.

1 unchanged sentence

As of December 27, 2024, approximately 13 million shares remain available for purchase under the authorization.

The Company repurchased and retired 1.4 million shares in 2023 and 3.6 million shares in 2022.

The Company did not repurchase and retire shares in 2021.

The Company has made and may continue to make opportunistic share repurchases in 2024 via open market transactions or short-dated accelerated share repurchase (“ASR”) programs.

The Company repurchased and retired 0.4 million shares in 2024, 1.4 million shares in 2023 and 3.6 million shares in 2022.

The Company has made and may continue to make opportunistic share repurchases in 2025 via open market transactions or short-dated accelerated share repurchase programs.

Critical Accounting Estimates

19 unchanged sentences

For 2025, the Company will use an investment return assumption of 7.3 percent for the funded U.S.

plan, consistent with the rate assumed for 2023.

The 2024 rate assumed was 7.6 percent for the funded U.S.

Mortality rates are based on current common group mortality tables for males and females.

14 unchanged sentences

Though management considers its judgments and assumptions to be reasonable, changes in these assumptions could impact the estimated fair value.

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 testing of goodwill and other intangible assets in the fourth quarter of 2023.

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

We completed our annual impairment test of goodwill and other intangible assets in the fourth quarter of 2024.

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

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

Income Taxes.

8 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 7. Management’s Discussion and Analysis