What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-02-17 compared with 2025-02-18 · 50 added, 64 removed, 239 unchanged (32% of the section changed)

8 unchanged sentences

• Critical Accounting Estimates

Graco designs, manufactures and markets systems and equipment used to move, measure, control, dispense and spray fluid and powder materials.

Graco designs, manufactures and markets systems and equipment used to move, measure, mix, control, dispense and spray a wide variety of fluid and powder materials.

The Company specializes in equipment for applications that involve difficult-to-handle materials with high viscosities, materials with abrasive or corrosive properties and multiple-component materials that require precise ratio control.

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Graco’s business is classified by management into three reportable segments:

Contractor, Industrial and Process.

Contractor, Industrial and Expansion Markets.

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

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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.

We continue to develop new products in each operating division that are expected to drive incremental sales growth, as well as continued refreshes and upgrades of existing product lines.

We continue to develop new products in each operating segment that are expected to drive incremental sales growth, as well as continued refreshes and upgrades of existing product lines.

Graco has made a number of strategic acquisitions that expand and complement organically developed products and provide new market and channel opportunities.

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Diluted Net Earnings per Common Share, adjusted $ 2.95 $ 2.77

(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) Excludes the impact of excess tax benefits from stock option exercises, contingent consideration fair value adjustments, certain non-recurring tax provision adjustments and prior year business reorganization charges.

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

Certain events in the last two years caused fluctuations in financial results.

Excess tax benefits related to stock option exercises reduced income taxes by $6 million in 2025 and $15 million in 2024.

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

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

In 2023, the Company recorded a goodwill impairment and contingent consideration adjustment related to an acquisition that was not material to the financial statements.

Other benefits from tax planning activities further reduced income taxes in 2023.

Excluding the impacts of those items presents a more consistent basis for comparison of financial results.

Other non-recurring tax provision adjustments from tax planning activities further reduced income taxes by $3 million in 2025.

Operating earnings were increased by contingent consideration fair value adjustments of $14 million in 2025 and reduced by business reorganization charges of $8 million in 2024.

Excluding the impacts of those items presents a more consistent basis for comparison of financial results, which management believes is useful information to help investors and others evaluate the Company's performance relative to other similarly-situated companies.

A calculation of the non-GAAP adjusted measurements of operating earnings, earnings before income taxes, income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):

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Contingent consideration (14.1) —

Impairment — 7.8

Business reorganization — 7.7

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Earnings before income taxes, as reported $ 641.2 $ 589.3

Pension settlement loss — 42.1

Contingent consideration (14.1) —

Impairment — 7.8

Business reorganization — 7.7

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Income taxes, as reported $ 119.4 $ 103.2

Pension settlement tax effect — 8.8

Other non-recurring tax benefit 2.9 —

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Net Earnings, as reported $ 521.8 $ 486.1

Pension settlement loss, net — 33.3

Contingent consideration (14.1) —

Impairment — 7.8

Other non-recurring tax benefit (2.9) —

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Contingent consideration (0.6) —

Impairment — 0.4

Operating earnings 27.9 27.0

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Consolidated 0% 5% 1% 6% (4)% 1% (1)% (4)%

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.

In 2025, net sales increased in all regions compared to 2024, driven mostly by acquisitions in the Contractor and Industrial segments.

Improved industrial and vehicle services end markets in the Americas were partially offset by continued softness in residential and non-residential construction markets.

In EMEA, increased industrial and finishing system project activity led to higher sales in 2025.

Sales growth in China in 2025 from improved construction and semiconductor end markets more than offset reduced industrial activity in the rest of the Asia Pacific region.

The gross profit margin rate for 2025 decreased approximately 1 percentage point compared to 2024 as price realization was unable to offset higher product costs, including $14 million of increased tariff costs, and the unfavorable effect of lower margin rates of acquired operations.

Operating Expenses

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.

Total operating expenses decreased $4 million (1 percent) for 2025 compared to 2024.

Operating expenses for 2025 included $36 million of expenses from acquired operations and were mostly offset by a $14 million non-cash gain from the reduction in the fair value of acquisition-related contingent consideration recognized in the current year and $21 million of litigation and business reorganization costs from the prior year that did not repeat.

Investment in new product development in 2025 was $82 million, approximately 4 percent of sales.

Operating Earnings

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.

Sales growth and decreased operating expenses led to a 10 percent increase in operating earnings.

Operating earnings expressed as a percentage of sales in 2025 increased approximately 1 percentage point compared to 2024 primarily due to a $14 million non-cash gain from the reduction in the fair value of acquisition-related contingent consideration in 2025.

Interest & Other (Income) Expense

Interest expense for 2025 was flat compared to 2024.

Other income decreased $3 million in 2025 compared to 2024 and included higher exchange losses on net liabilities of certain foreign operations of $8 million and decreased interest income of $8 million.

Partially offsetting these items were a $5 million gain in 2025 from the sale of a former manufacturing and distribution facility in Switzerland and $2 million of favorable market valuation changes on investments held to fund certain retirement benefits.

The effective income tax rate for 2025 was 19 percent, up 1 percentage point from 2024.

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.

The increase in 2025 was largely due to variations in excess tax benefits from stock option exercises.

Segment Results

The Company has five operating segments which are aggregated into three reportable segments:

Contractor, Industrial and Process.

The Company has four operating segments which are aggregated into three reportable segments:

Contractor, Industrial and Expansion Markets.

Refer to Part I Item 1.

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Industrial 996.8 958.0

Process 504.8 547.1

Expansion Markets

Total $ 2,236.6 $ 2,113.3

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Industrial 334.6 311.7

Process 141.7 165.3

Expansion Markets 41.5 31.5

Unallocated corporate (expense) (1)

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Contingent consideration 14.1 —

Impairment — (7.8)

Total $ 624.8 $ 570.1

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Segment Total (2)% 10% 0% 8% (1)% 2% (1)% 0%

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.

Contractor segment net sales growth for the year included $100 million from acquired operations, which more than offset continued softness in worldwide residential and non-residential construction markets.

The operating margin rate for this segment in 2025 was 2 percentage points lower than 2024 as price realization and 2024 litigation costs that did not repeat were unable to offset higher product costs from increased tariffs and the lower margin rates of acquired operations.

Sales in the Americas represent the majority of sales for the Contractor segment, although an acquisition completed in 2024 expanded this segment's global geographic presence.

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

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Segment Total 2% 1% 1% 4% (5)% 0% 0% (5)%

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.

Industrial segment net sales increased 4 percent for the year, including 1 percentage point each from acquired operations and favorable changes in foreign currency translation rates.

The operating margin rate for this segment increased approximately 1 percentage point for the year as price realization and expense leverage more than offset unfavorable product and channel mix from lower margin finishing system sales and higher product costs from increased tariffs.

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.

dollar versus the euro, the Swiss franc, the Canadian dollar, the Chinese renminbi and various other Asian currencies.

Process Segment

The following table presents net sales and operating earnings as a percentage of sales for the Process segment (dollars in millions):

Expansion Markets Segment

The following table presents net sales and operating earnings as a percentage of sales for the Expansion Markets segment (dollars in millions):

Americas $ 101.2 $ 107.1

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Operating Earnings as a Percentage of Sales 25 % 19 %

The following table presents the components of net sales change by geographic region for the Process segment:

The following table presents the components of net sales change by geographic region for the Expansion Markets segment:

Volume and Price Acquisitions Currency Total Volume and Price Acquisitions Currency Total

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Segment Total 1% 0% 0% 1% (13)% 0% 0% (13)%

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.

Expansion Markets net sales increased 1 percent for the current year compared to last year.

Net sales growth in the semiconductor and electric motor product applications in 2025 was partially offset by decreases in the environmental and high-pressure valves product applications.

The operating margin rate for this segment for the year increased 6 percentage points compared to last year mostly due to the favorable margin impact of upfront license fees in the electric motor product application.

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

Financial Condition and Cash Flow

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Inventory turnover (LIFO) 2.6 2.3

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

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.

The current ratio increased in 2024 in line with the changes in working capital.

Lower cash and cash equivalent balances primarily drove decreases in working capital in 2025, in addition to increases in trade accounts payable and sales and earnings-based accruals.

Changes in receivables were consistent with higher sales levels.

Reductions to inventory levels in 2025 as the result of an inventory reduction program were offset by the effect of acquired inventory on working capital, but improved inventory turnover in 2025.

The current ratio decreased in 2025 in line with the changes in working capital.

Capital Structure.

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Effect of exchange rates on cash 14.0 (1.6)

Net cash provided 137.4 198.7

Net cash (used) provided (51.2) 137.4

Cash and cash equivalents at end of year $ 624.1 $ 675.3

Cash Flows From Operating Activities .

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

Net cash provided by operating activities was $684 million in 2025, up $62 million compared to 2024, due primarily to higher net earnings.

Fewer inventory purchases in 2025 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.

reduction program, as well as other decreases in working capital further contributed to the increase in cash provided by operating activities.

Cash Flows Used in Investing Activities.

Cash flows used in investing activities totaled $173 million in 2025, including $135 million for business acquisitions and $46 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 $343 million in 2024, including $242 million for business acquisitions and $107 million for capital additions.

Cash Flows Used in Financing Activities .

Cash flows used in financing activities totaled $576 million in 2025 and included dividends of $183 million and share repurchases of $423 million, partially offset by net proceeds from share issuances of $37 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 $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.

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.

The authorization is for an indefinite period of time or until terminated by the Board.

On December 5, 2025, the Board of Directors authorized the Company to purchase up to an additional 15 million shares of its outstanding stock.

The authorizations are for an indefinite period of time or until terminated by the Board.

As of December 26, 2025, approximately 23 million shares remain available for purchase under the authorization.

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The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S.

The Company’s most significant accounting policies are disclosed in Note A (Summary of Significant Accounting Policies) to the consolidated financial statements.

The Company’s most significant accounting policies are disclosed in Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements.

The preparation of the consolidated financial statements, in conformity with U.S.

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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