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GRACO INC - Quarter Report: 2023 March (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2023

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number:  001-09249
GRACO INC.
(Exact name of registrant as specified in its charter)     
 
Minnesota41-0285640
(State or other jurisdiction of incorporation or organization)  (I.R.S. Employer Identification Number)     
 
88 - 11th Avenue N.E.
Minneapolis,Minnesota55413
(Address of principal executive offices)    (Zip Code)     
(612)623-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00 per shareGGGThe New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐No☒

168,340,317 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of April 12, 2023.


TABLE OF CONTENTS 
 Page
PART I - FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 1A.
Item 2.
Item 6.
EXHIBITS
2
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PART I     Item 1.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In thousands except per share amounts)
 Three Months Ended
 March 31,
2023		April 1,
2022
Net Sales$529,646 $494,285 
Cost of products sold244,506 239,810 
Gross Profit285,140 254,475 
Product development20,479 19,078 
Selling, marketing and distribution65,383 62,995 
General and administrative42,610 44,039 
Operating Earnings156,668 128,363 
Interest expense1,347 5,287 
Other (income) expense, net(2,029)153 
Earnings Before Income Taxes157,350 122,923 
Income taxes28,184 22,080 
Net Earnings$129,166 $100,843 
Net Earnings per Common Share
Basic
$0.77 $0.59 
Diluted
$0.75 $0.58 
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
 Three Months Ended
 March 31,
2023		April 1,
2022
Net Earnings$129,166 $100,843 
Components of other comprehensive
income (loss)
Cumulative translation adjustment
4,975 (2,960)
Pension and postretirement medical
liability adjustment		1,132 894 
Income taxes - pension and postretirement
medical liability adjustment		(244)(194)
Other comprehensive income (loss)5,863 (2,260)
Comprehensive Income$135,029 $98,583 
See notes to consolidated financial statements.
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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
March 31,
2023		December 30,
2022
ASSETS
Current Assets
Cash and cash equivalents$395,313 $339,196 
Accounts receivable, less allowances of $5,600 and $7,000
356,473 346,010 
Inventories497,242 476,790 
Other current assets39,433 43,624 
Total current assets1,288,461 1,205,620 
Property, Plant and Equipment, net633,482 607,609 
Goodwill370,103 368,171 
Other Intangible Assets, net134,131 137,507 
Operating Lease Assets29,742 29,785 
Deferred Income Taxes56,183 57,090 
Other Assets34,161 33,118 
Total Assets$2,546,263 $2,438,900 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable to banks$41,910 $20,974 
Trade accounts payable80,375 84,218 
Salaries and incentives43,342 63,969 
Dividends payable39,457 39,963 
Other current liabilities176,614 190,793 
Total current liabilities381,698 399,917 
Long-term Debt75,000 75,000 
Retirement Benefits and Deferred Compensation61,994 61,672 
Operating Lease Liabilities21,384 21,057 
Deferred Income Taxes8,986 9,443 
Other Non-current Liabilities10,858 12,159 
Shareholders’ Equity
Common stock168,308 167,702 
Additional paid-in-capital821,570 784,477 
Retained earnings1,059,980 976,851 
Accumulated other comprehensive income (loss)(63,515)(69,378)
Total shareholders’ equity1,986,343 1,859,652 
Total Liabilities and Shareholders’ Equity$2,546,263 $2,438,900 
See notes to consolidated financial statements.
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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 Three Months Ended
 March 31,
2023		April 1,
2022
Cash Flows From Operating Activities
Net Earnings$129,166 $100,843 
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization17,987 15,570 
Deferred income taxes230 10,973 
Share-based compensation8,914 7,088 
Change in
Accounts receivable(8,519)(14,296)
Inventories(18,959)(52,979)
Trade accounts payable(3,802)9,216 
Salaries and incentives(21,303)(35,341)
Retirement benefits and deferred compensation1,156 (136)
Other accrued liabilities(10,787)(8,690)
Other(3,254)(923)
Net cash provided by operating activities90,829 31,325 
Cash Flows From Investing Activities
Property, plant and equipment additions(38,290)(47,093)
Acquisition of businesses, net of cash acquired— (25,016)
Other(352)(134)
Net cash used in investing activities(38,642)(72,243)
Cash Flows From Financing Activities
Borrowings on short-term lines of credit, net20,721 (3,420)
Payments on long-term debt— (75,000)
Payments of debt issuance costs(6)— 
Common stock issued31,026 21,294 
Common stock repurchased(7,766)(108,706)
Taxes paid related to net share settlement of equity awards(1,225)(1,219)
Cash dividends paid(39,431)(35,801)
Net cash provided (used) in financing activities3,319 (202,852)
Effect of exchange rate changes on cash611 (45)
Net increase (decrease) in cash and cash equivalents56,117 (243,815)
Cash and Cash Equivalents
Beginning of year339,196 624,302 
End of period$395,313 $380,487 
See notes to consolidated financial statements.
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GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands)
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total

Three Months Ended March 31, 2023
Balance, December 30, 2022$167,702 $784,477 $976,851 $(69,378)$1,859,652 
Shares issued721 29,080 — — 29,801 
Shares repurchased(115)(539)(7,112)— (7,766)
Stock compensation cost— 8,552 — — 8,552 
Net earnings— — 129,166 — 129,166 
Dividends declared ($0.235 per share)
— — (38,925)— (38,925)
Other comprehensive income (loss)— — — 5,863 5,863 
Balance, March 31, 2023$168,308 $821,570 $1,059,980 $(63,515)$1,986,343 

Three Months Ended April 1, 2022
Balance, December 31, 2021$170,308 $742,288 $876,916 $(80,169)$1,709,343 
Shares issued437 19,638 — — 20,075 
Shares repurchased(1,522)(6,636)(100,548)— (108,706)
Stock compensation cost— 6,670 — — 6,670 
Restricted stock canceled (issued)— (1)— — (1)
Net earnings— — 100,843 — 100,843 
Dividends declared ($0.210 per share)
— — (35,708)— (35,708)
Other comprehensive income (loss)— — — (2,260)(2,260)
Balance, April 1, 2022$169,223 $761,959 $841,503 $(82,429)$1,690,256 
See notes to consolidated financial statements.
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GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation

The consolidated balance sheet of Graco Inc. and subsidiaries (the “Company”) as of March 31, 2023 and the related statements of earnings, comprehensive income and shareholders' equity for the three months ended March 31, 2023 and April 1, 2022, and cash flows for the three months ended March 31, 2023 and April 1, 2022 have been prepared by the Company and have not been audited.

In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2023, and the results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2022 Annual Report on Form 10-K.

The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.

2.Segment Information

The Company has three reportable segments: Contractor, Industrial and Process. Sales and operating earnings by segment were as follows (in thousands): 
 Three Months Ended
 March 31,
2023		April 1,
2022
Net Sales
 Contractor$245,971 $234,592 
 Industrial150,190 144,669 
 Process133,485 115,024 
 Total$529,646 $494,285 
Operating Earnings
 Contractor$73,772 $58,947 
 Industrial52,770 52,630 
 Process40,565 27,488 
 Unallocated corporate (expense)(10,439)(10,702)
 Total$156,668 $128,363 

Assets by segment were as follows (in thousands): 
March 31,
2023		December 30,
2022
Contractor
$779,617 $752,729 
Industrial
603,494 578,302 
Process
575,792 564,539 
Unallocated corporate
587,360 543,330 
Total
$2,546,263 $2,438,900 

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Geographic information follows (in thousands):
 Three Months Ended
 March 31,
2023		April 1,
2022
Net Sales (based on customer location)
United States
$288,989 $255,082 
Other countries
240,657 239,203 
Total
$529,646 $494,285 

 March 31,
2023		December 30,
2022
Long-lived Assets
United States
$550,124 $532,401 
Other countries
83,358 75,208 
Total
$633,482 $607,609 


3.Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 Three Months Ended
 March 31,
2023		April 1,
2022
Net earnings available to common shareholders
$129,166 $100,843 
Weighted average shares outstanding for basic earnings per share168,018 169,809 
Dilutive effect of stock options computed using the treasury stock method and the average market price3,658 4,869 
Weighted average shares outstanding for diluted earnings per share171,676 174,678 
Basic earnings per share
$0.77 $0.59 
Diluted earnings per share
$0.75 $0.58 
Anti-dilutive shares not included in diluted earnings per share computation3,235 1,250 



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4.Share-Based Awards

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 30, 202210,265 $44.40 7,793 $37.22 
Granted1,101 71.38 
Exercised(427)29.80 
Canceled(37)66.85 
Outstanding, March 31, 202310,902 $47.63 8,033 $39.68 

The Company recognized year-to-date share-based compensation of $8.9 million in 2023 and $7.1 million in 2022. As of March 31, 2023, there was $33.0 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 3.1 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:
 Three Months Ended
 March 31,
2023		April 1,
2022
Expected life in years
6.77.3
Interest rate
4.0 %1.9 %
Volatility
26.3 %25.5 %
Dividend yield
1.3 %1.2 %
Weighted average fair value per share
$21.74 $19.06 

Under the Company’s Employee Stock Purchase Plan, the Company issued 323,000 shares in 2023 and 298,000 shares in 2022. The fair value of the employees’ purchase rights under this 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:
 Three Months Ended
 March 31,
2023		April 1,
2022
Expected life in years
1.01.0
Interest rate
5.1 %0.9 %
Volatility
26.4 %20.5 %
Dividend yield
1.4 %1.2 %
Weighted average fair value per share
$18.04 $16.01 

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5.Retirement Benefits

The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):
 Three Months Ended
 March 31,
2023		April 1,
2022
Pension Benefits
Service cost
$1,464 $2,170 
Interest cost
3,777 2,738 
Expected return on assets
(3,975)(4,802)
Amortization and other
440 1,076 
Net periodic benefit cost
$1,706 $1,182 
Postretirement Medical
Service cost
$100 $175 
Interest cost
210 225 
Amortization
90 175 
Net periodic benefit cost
$400 $575 

6.Shareholders’ Equity

Changes in components of accumulated other comprehensive income (loss), net of tax were as follows (in thousands):


Pension and
Postretirement
Medical		Cumulative
Translation
Adjustment		Total
Three Months Ended March 31, 2023
Balance, December 30, 2022$(39,734)$(29,644)$(69,378)
Other comprehensive income (loss) before reclassifications— 4,975 4,975 
Reclassified to pension cost and deferred tax888 — 888 
Balance, March 31, 2023$(38,846)$(24,669)$(63,515)

Three Months Ended April 1, 2022
Balance, December 31, 2021$(60,107)$(20,062)$(80,169)
Other comprehensive income (loss) before reclassifications— (2,960)(2,960)
Reclassified to pension cost and deferred tax700 — 700 
Balance, April 1, 2022$(59,407)$(23,022)$(82,429)

Amounts related to pension and postretirement medical adjustments are reclassified to non-service components of pension cost that are included within other non-operating expenses.


7.Receivables and Credit Losses

Accounts receivable includes trade receivables of $345 million and other receivables of $11 million as of March 31, 2023 and $334 million and $12 million, respectively, as of December 30, 2022.

Allowance for Credit Losses

Following is a summary of activity in the year to date allowance for credit losses (in thousands):
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March 31,
2023		April 1,
2022
Balance, beginning$6,130 $3,254 
Additions (reversals) charged to costs and expenses(137)3,220 
Deductions from reserves (1)
(1,820)(33)
Other additions (deductions) (2)
59 33 
Balance, ending$4,232 $6,474 

(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.


8.Inventories

Major components of inventories were as follows (in thousands):
March 31,
2023		December 30,
2022
Finished products and components$246,401 $222,326 
Products and components in various stages of completion147,687 138,957 
Raw materials and purchased components232,913 248,636 
Subtotal627,001 609,919 
Reduction to LIFO cost(129,759)(133,129)
Total$497,242 $476,790 

9.Intangible Assets

Components of other intangible assets were as follows (dollars in thousands):
Finite LifeIndefinite Life
Customer
Relationships		Patents and
Proprietary
Technology		Trademarks,
Trade Names
and Other		Trade
Names		Total
As of March 31, 2023
Cost
$197,417 $26,374 $1,300 $62,633 $287,724 
Accumulated amortization
(122,816)(18,738)(388)— (141,942)
Foreign currency translation(9,301)(863)— (1,487)(11,651)
Book value
$65,300 $6,773 $912 $61,146 $134,131 
Weighted average life in years
13106N/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
13106N/A

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Amortization of intangibles for the year to date was $4.5 million in 2023 and $4.6 million in 2022. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
2023 (Remainder)2024202520262027Thereafter
Estimated Amortization Expense$12,786 $16,311 $15,849 $9,050 $6,406 $12,583 

Changes in the carrying amount of goodwill for each reportable segment were as follows (in thousands): 
Contractor    Industrial    Process    Total    
Balance, December 30, 2022$77,034 $134,771 $156,366 $368,171 
Additions, adjustments from business acquisitions— — — — 
Foreign currency translation259 1,257 416 1,932 
Balance, March 31, 2023$77,293 $136,028 $156,782 $370,103 





10.Other Current Liabilities
Components of other current liabilities were as follows (in thousands):
March 31,
2023		December 30,
2022
Accrued self-insurance retentions
$9,246 $9,338 
Accrued warranty and service liabilities
14,917 14,674 
Accrued trade promotions
8,951 13,799 
Payable for employee stock purchases
1,055 16,497 
Customer advances and deferred revenue
45,134 50,747 
Income taxes payable
27,258 15,987 
Tax payable, other11,584 9,614 
Right of return refund liability18,533 18,449 
Operating lease liabilities, current 9,451 9,555 
Other
30,485 32,133 
Total
$176,614 $190,793 

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):
Balance, December 30, 2022$14,674 
Charged to expense2,392 
Margin on parts sales reversed1,351 
Reductions for claims settled(3,500)
Balance, March 31, 2023$14,917 

Customer Advances and Deferred Revenue

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. During the three months ended March 31, 2023, we recognized $20.6 million that was included in deferred revenue at December 30, 2022. During the
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three months ended April 1, 2022, we recognized $22.5 million that was included in deferred revenue at December 31, 2021.

11.Fair Value

Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
Level   March 31,
2023		December 30,
2022
Assets
Cash surrender value of life insurance2$20,239 $19,192 
Liabilities
Contingent consideration3$13,410 $14,914 
Deferred compensation25,830 5,842 
Forward exchange contracts2132 520 
Total liabilities at fair value$19,372 $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.

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.

Long-term notes payable with fixed interest rates had a carrying amount of $75 million and estimated fair value of $75 million as of both March 31, 2023 and December 30, 2022. 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.

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Item 2. GRACO INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company supplies technology and expertise for the management of fluids and coatings in both industrial and commercial applications. It designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and coating materials. Management classifies the Company’s business into three reportable segments: Contractor, Industrial and Process. 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.

The Company continued to experience supply chain disruptions and the associated effects of inflation in the first quarter of 2023; however, the impact was not as significant as compared to the same period in the prior year. Pricing actions implemented have generally mitigated the effects of increased costs and expenses. The Company expects isolated supply chain disruptions and an overall inflationary environment to continue through the remainder of 2023.

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying notes to the financial statements.

Consolidated Results

A summary of financial results follows (in millions except per share amounts):
 Three Months Ended
 Mar 31,
2023		Apr 1,
2022		%
 Change
Net Sales
$529.6 $494.3 7 %
Operating Earnings
156.7 128.4 22 %
Net Earnings
129.2 100.8 28 %
Net Earnings, adjusted (1)
126.6 99.3 27 %
Diluted Net Earnings per Common Share
$0.75 $0.58 29 %
Diluted Net Earnings per Common Share, adjusted (1)
$0.74 $0.57 30 %
(1) See below for a reconciliation of adjusted non-GAAP financial measures to GAAP.

Sales increased 7 percent for the quarter, led by double-digit growth in the Process segment. Sales increases in the Americas and EMEA were partially offset by a decrease in Asia Pacific. Changes in currency translation rates decreased sales and net earnings by approximately $11 million and $6 million, respectively, for the quarter. Sales from acquired operations contributed approximately $2 million for the quarter.
Gross profit margin rate was more than 2 percentage points higher than the first quarter last year mainly due to the impact of price changes and favorable product and channel mix.
Total operating expenses increased 2 percentage points, but decreased as a percentage of sales by 1 percentage point.
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Excluding the impact of excess tax benefits related to stock option exercises presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements of adjusted income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):
Three Months Ended
March 31,
2023		April 1,
2022
Earnings before income taxes$157.4 $122.9 
Income taxes, as reported$28.2 $22.1 
Excess tax benefit from option exercises2.6 1.5 
Income taxes, adjusted$30.8 $23.6 
Effective income tax rate
   As reported17.9 %18.0 %
   Adjusted19.5 %19.2 %
Net Earnings, as reported$129.2 $100.8 
Excess tax benefit from option exercises(2.6)(1.5)
Net Earnings, adjusted$126.6 $99.3 
Weighted Average Diluted Shares171.7 174.7 
Diluted Earnings per Share
   As reported$0.75 $0.58 
   Adjusted$0.74 $0.57 


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The following table presents an overview of components of net earnings as a percentage of net sales:
Three Months Ended
March 31,
2023		April 1,
2022
Net Sales100.0 %100.0 %
Cost of products sold46.2 48.5 
Gross Profit53.8 51.5 
Product development3.9 3.9 
Selling, marketing and distribution12.3 12.7 
General and administrative8.0 8.9 
Operating Earnings29.6 26.0 
Interest expense0.3 1.1 
Other (income) expense, net(0.4)— 
Earnings Before Income Taxes29.7 24.9 
Income taxes5.3 4.5 
Net Earnings24.4 %20.4 %

Net Sales

The following table presents net sales by geographic region (in millions):
 Three Months Ended
 March 31,
2023		April 1,
2022
Americas(1)
$331.9 $293.2 
EMEA(2)
108.8 106.2 
Asia Pacific88.9 94.9 
Consolidated$529.6 $494.3 
(1)     North, South and Central America, including the United States
(2)    Europe, Middle East and Africa

The following table presents the components of net sales change by geographic region:
Three Months
Volume and PriceAcquisitions CurrencyTotal
Americas13%1%(1)%13%
EMEA7%0%(5)%2%
Asia Pacific(1)%0%(5)%(6)%
Consolidated10%0%(3)%7%

Gross Profit

Gross profit margin rate for the quarter was more than 2 percentage points higher than the first quarter last year. Favorable effects of realized pricing and product and channel mix offset the adverse impacts of higher product costs and changes in currency translation rates.


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Operating Expenses

Total operating expenses for the quarter increased $2 million (2 percent) compared to the first quarter last year. The increase includes higher stock compensation of $2 million and volume and rate-related increases of $5 million. Partially offsetting the increase was $2 million of favorable changes in currency translation rates and $3 million of credit losses on customer receivables in Russia in the prior year that did not repeat.

Interest and Other (Income) Expense

Interest expense for the quarter decreased $4 million as private placement debt was repaid in the first quarter last year. Other non-operating expenses for the quarter decreased by $2 million due to increased interest income and favorable market valuation changes on investments held to fund certain retirement benefits.
Income Taxes

The effective income tax rate of 18 percent for the quarter was flat compared with the first quarter last year.

Segment Results

Certain measurements of segment operations compared to last year are summarized below:

Contractor Segment

The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment
(dollars in millions):
 Three Months Ended
 March 31,
2023		April 1,
2022
Net Sales
Americas
$184.1 $170.5 
EMEA
42.1 41.2 
Asia Pacific
19.7 22.9 
Total
$245.9 $234.6 
Operating earnings as a percentage of net sales
30 %25 %

The following table presents the components of net sales change by geographic region for the Contractor segment:
Three Months
Volume and PriceAcquisitions CurrencyTotal
Americas8%0%0%8%
EMEA7%0%(5)%2%
Asia Pacific(8)%0%(6)%(14)%
Segment Total7%0%(2)%5%

Contractor segment sales increased 5 percent, with favorable response to new product offerings and improved product availability. Price realization and favorable product and channel mix drove the operating margin rate 5 percentage points higher.

Industrial Segment

The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment
(dollars in millions):
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 Three Months Ended
 March 31,
2023		April 1,
2022
Net Sales
Americas
$63.3 $54.3 
EMEA
48.1 47.9 
Asia Pacific
38.8 42.5 
Total
$150.2 $144.7 
Operating earnings as a percentage of net sales
35 %36 %

The following table presents the components of net sales change by geographic region for the Industrial segment:
Three Months
Volume and PriceAcquisitions CurrencyTotal
Americas17%0%0%17%
EMEA5%0%(5)%0%
Asia Pacific(3)%0%(6)%(9)%
Segment Total7%0%(3)%4%

Underlying sales growth in the Americas and EMEA was partially offset by weakness in Asia Pacific, where finishing system sales and other project activity decreased. The unfavorable effects of currency translation drove a 1 percentage point decrease in the operating margin rate.


Process Segment

The following table presents net sales and operating earnings as a percentage of sales for the Process segment
(dollars in millions):
 Three Months Ended
 March 31,
2023		April 1,
2022
Net Sales
Americas
$84.5 $68.4 
EMEA
18.6 17.1 
Asia Pacific
30.4 29.5 
Total
$133.5 $115.0 
Operating earnings as a percentage of net sales
30 %24 %

The following table presents the components of net sales change by geographic region for the Process segment:
Three Months
Volume and PriceAcquisitions CurrencyTotal
Americas22%2%0%24%
EMEA12%1%(4)%9%
Asia Pacific6%0%(3)%3%
Segment Total16%2%(2)%16%

The Process segment had sales growth in all product applications. The operating margin rate for this segment increased 6 percentage points primarily due to price realization and expense leverage.
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Liquidity and Capital Resources

Net cash provided by operating activities of $91 million in the first quarter of 2023 increased $60 million from the comparable period of 2022, mostly driven by higher net earnings, decreased inventory purchases, and decreased salary and incentive payments. Significant uses of cash in 2023 included dividend payments of $39 million and plant and equipment additions of $38 million. Net proceeds from shares issued in 2023 totaled $30 million, which was partially offset by share repurchases of $8 million.

Significant uses of cash in the first quarter of 2022 included share repurchases of $109 million, payments of long-term debt of $75 million, property, plant and equipment additions of $47 million, dividend payments of $36 million and $25 million to acquire businesses that were not material to the consolidated financial statements. Proceeds from shares issued in the first quarter of 2022 totaled $21 million.

As of March 31, 2023, the Company had available liquidity of $917 million, including cash and cash equivalents of $395 million, of which $146 million was held outside of the U.S., and available credit under existing committed credit facilities of $522 million.

Cash balances and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2023, including its capital expenditure plan, planned dividends, share repurchases, acquisitions and operating requirements. Capital expenditures for 2023 are expected to be approximately $200 million, including $130 million in facility expansion projects. The Company may make opportunistic share repurchases going forward.

Outlook

While end market activity and demand trends for the Company's new and existing products are solid, the Company remains cautious given the current macroeconomic uncertainty. The Company is confirming the revenue outlook for the year of low single-digit growth on an organic, constant currency basis.

Cautionary Statement Regarding Forward-Looking Statements

The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including our Form 10-K, Form 10-Qs and Form 8-Ks, and other disclosures, including our 2022 Overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.

Future results could differ materially from those expressed due to the impact of changes in various factors. These risk factors include, but are not limited to: the impact of the COVID-19 pandemic on our business; Russia's invasion of Ukraine, and the sanctions and actions taken against Russia and Belarus in response to the invasion; economic conditions in the United States and other major world economies; our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; changes in currency translation rates; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; catastrophic events; changes in laws and regulations; compliance with anti-corruption and trade laws; changes in tax rates or the adoption of new tax legislation; the possibility of asset impairments if acquired businesses do not meet performance expectations; political instability; results of and costs associated with litigation, administrative proceedings and regulatory reviews incident to our business; our ability to attract, develop and retain qualified personnel; the possibility of decline in purchases from a few large customers of the Contractor segment, variations in activity in the construction, automotive, mining and oil and natural gas industries, and the impact of declines in interest rates, asset values and investment returns on pension costs and required pension contributions. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year 2022 and Item 1A of this Form 10-Q for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com and
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the Securities and Exchange Commission’s website at www.sec.gov. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.


Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes related to market risk from the disclosures made in the Company’s 2022 Annual Report on Form 10-K.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures

As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer and the Chief Financial Officer and Treasurer. Based upon that evaluation, the Company's President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective.

Changes in internal controls

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART IIOTHER INFORMATION

Item 1A.Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2022 Annual Report on Form 10-K.


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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

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.

In addition to shares purchased under the Board authorization, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax due upon exercise of options or vesting of restricted stock.

Information on issuer purchases of equity securities follows:
PeriodTotal Number
of Shares Purchased  		Average Price
Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be
Purchased Under the Plans or Programs
(at end of period)
December 31, 2022 - January 27, 2023— $— — 14,971,377 
January 28, 2023 - February 24, 2023115,297 $67.36 — 14,856,080 
February 25, 2023 - March 31, 2023— $— — 14,856,080 


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Item 6.Exhibits
3.1 
3.2 
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a).
Certification of Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a).
Certification of President and Chief Executive Officer and Chief Financial Officer and Treasurer pursuant to Section 1350 of Title 18, U.S.C.
Press Release Reporting First Quarter Earnings dated April 26, 2023.
101 Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language).
104 Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101).
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GRACO INC.
Date:April 26, 2023By:/s/ Mark W. Sheahan
Mark W. Sheahan
President and Chief Executive Officer
(Principal Executive Officer)
Date:April 26, 2023By:/s/ David M. Lowe
David M. Lowe
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date:April 26, 2023By:/s/ Kathryn L. Schoenrock
Kathryn L. Schoenrock
Executive Vice President, Corporate Controller and Information Systems
(Principal Accounting Officer)