September 30, 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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 September 30, 2022
☐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)
Minnesota
41-0285640
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
88 - 11th Avenue N.E.
Minneapolis,
Minnesota
55413
(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 class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
GGG
The 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
☒
168,529,015 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of October 12, 2022.
The consolidated balance sheet of Graco Inc. and subsidiaries (the “Company”) as of September 30, 2022 and the related statements of earnings, comprehensive income and shareholders' equity for the three and nine months ended September 30, 2022 and September 24, 2021, and cash flows for the nine months ended September 30, 2022 and September 24, 2021 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 September 30, 2022, 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 2021 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
Effective January 1, 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 Company has three reportable segments: Industrial, Process and Contractor. Sales and operating earnings by segment were as follows (in thousands):
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended
Nine Months Ended
September 30, 2022
September 24, 2021
September 30, 2022
September 24, 2021
Net earnings available to common shareholders
$
116,232
$
103,829
$
334,453
$
319,634
Weighted average shares outstanding for basic earnings per share
169,166
169,834
169,368
169,459
Dilutive effect of stock options computed using the treasury stock method and the average market price
3,623
4,940
4,020
4,939
Weighted average shares outstanding for diluted earnings per share
172,789
174,774
173,388
174,398
Basic earnings per share
$
0.69
$
0.61
$
1.97
$
1.89
Diluted earnings per share
$
0.67
$
0.59
$
1.93
$
1.83
Stock options to purchase 1,618,000 and 428,000 shares were not included in the September 30, 2022 and September 24, 2021 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.
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 31, 2021
9,575
$
39.31
7,296
$
33.75
Granted
831
71.73
Exercised
(391)
24.00
Canceled
(40)
49.17
Outstanding, September 30, 2022
9,975
$
42.58
7,648
$
36.35
The Company recognized year-to-date share-based compensation of $17.9 million in 2022 and $19.9 million in 2021. As of September 30, 2022, there was $11.0 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.7 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:
Nine Months Ended
September 30, 2022
September 24, 2021
Expected life in years
7.3
7.5
Interest rate
1.9
%
1.2
%
Volatility
25.5
%
25.3
%
Dividend yield
1.2
%
1.0
%
Weighted average fair value per share
$
19.06
$
18.91
Under the Company’s Employee Stock Purchase Plan, the Company issued 316,000 shares in 2022 and 416,000 shares in 2021. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percentdiscount 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:
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 $350 million and other receivables of $14 million as of September 30, 2022 and $315 million and $10 million, respectively, as of December 31, 2021.
Allowance for Credit Losses
Following is a summary of activity in the year to date allowance for credit losses (in thousands):
September 30, 2022
September 24, 2021
Balance, beginning
$
3,254
$
3,745
Additions (reversals) charged to costs and expenses
3,262
164
Deductions from reserves (1)
(564)
(425)
Other additions (deductions) (2)
(452)
68
Balance, ending
$
5,500
$
3,552
(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):
September 30, 2022
December 31, 2021
Finished products and components
$
211,195
$
166,922
Products and components in various stages of completion
Components of other intangible assets were as follows (dollars in thousands):
Finite Life
Indefinite Life
Customer Relationships
Patents and Proprietary Technology
Trademarks, Trade Names and Other
Trade Names
Total
As of September 30, 2022
Cost
$
202,103
$
26,574
$
1,700
$
62,633
$
293,010
Accumulated amortization
(119,529)
(17,519)
(659)
—
(137,707)
Foreign currency translation
(12,791)
(1,042)
—
(4,522)
(18,355)
Book value
$
69,783
$
8,013
$
1,041
$
58,111
$
136,948
Weighted average life in years
13
10
5
N/A
As of December 31, 2021
Cost
$
194,505
$
26,074
$
900
$
62,633
$
284,112
Accumulated amortization
(108,657)
(15,734)
(452)
—
(124,843)
Foreign currency translation
(7,710)
(707)
—
(1,112)
(9,529)
Book value
$
78,138
$
9,633
$
448
$
61,521
$
149,740
Weighted average life in years
13
10
5
N/A
Amortization of intangibles for the quarter was $4.8 million in 2022 and $4.6 million in 2021 and for the year to date was $14.1 million in 2022 and $13.4 million in 2021. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
2022 (Remainder)
2023
2024
2025
2026
Thereafter
Estimated Amortization Expense
$
4,556
$
16,860
$
15,639
$
15,071
$
8,660
$
18,051
Changes in the carrying amount of goodwill for each reportable segment were as follows (in thousands):
Industrial
Process
Contractor
Total
Balance, December 31, 2021
$
185,733
$
141,304
$
29,218
$
356,255
Additions, adjustments from business acquisitions
—
16,994
—
16,994
Foreign currency translation
(10,162)
(3,442)
—
(13,604)
Balance, September 30, 2022
$
175,571
$
154,856
$
29,218
$
359,645
In the first quarter, the Company completed an acquisition of a business that is not material to the consolidated financial statements.
Components of other current liabilities were as follows (in thousands):
September 30, 2022
December 31, 2021
Accrued self-insurance retentions
$
9,306
$
9,303
Accrued warranty and service liabilities
14,263
14,463
Accrued trade promotions
13,670
15,872
Payable for employee stock purchases
12,244
15,746
Customer advances and deferred revenue
60,657
60,554
Income taxes payable
13,652
5,200
Right of return refund liability
18,219
18,614
Operating lease liabilities, current
9,193
9,096
Other
41,553
42,311
Total
$
192,757
$
191,159
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 31, 2021
$
14,463
Assumed in business acquisition
38
Charged to expense
6,251
Margin on parts sales reversed
1,811
Reductions for claims settled
(8,300)
Balance, September 30, 2022
$
14,263
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 and nine months ended September 30, 2022, we recognized $11.2 million and $52.0 million, respectively, that was included in deferred revenue at December 31, 2021. During the three and nine months ended September 24, 2021, we recognized $16.4 million and $40.4 million, respectively, that was included in deferred revenue at December 25, 2020.
11.Fair Value
Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
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 September 30, 2022. As of December 31, 2021, the long- term notes had a carrying amount of $150 million and estimated fair value of $165 million. 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.
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: Industrial, Process and Contractor. 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 ongoing global COVID-19 pandemic and related governmental, business and societal responses continue to have an impact on our operations, supply chains, distribution channels, and end-user customers. The timing, duration, and extent of the impact from the pandemic in our major geographies is still uncertain and we cannot predict the magnitude of the impact to the results of our operations or financial position.
The Company continues to experience logistical and production constraints associated with raw materials and purchased components. These constraints were due to limited raw material and component availability, reduced freight capacity, shipping delays, and labor shortages as a result of responses to the COVID-19 pandemic and other supply chain disruptions. We also have experienced the effects of price inflation related to raw materials, purchased components, and freight and transportation costs. The supply chain disruptions and associated effects of inflation have adversely impacted profitability in the near-term and limited our ability to satisfy strengthening customer demand, especially within our high-volume Contractor segment. We expect these challenges to continue through the remainder of 2022.
The Company also has historically sold products to customers located in or associated with Russia and Belarus. In response to Russia's invasion of Ukraine, the United States, the United Kingdom, the European Union, Switzerland and others have implemented sanctions and export controls targeting Russia and Belarus and entities associated with those countries, which significantly limits our ability to sell certain products, serve certain customers and collect on our outstanding receivables in those countries. In the first quarter of 2022, we decided to suspend sales into Russia and Belarus for the time being. Sales to Russia and Belarus accounted for approximately 1.5% of our 2021 net sales and were not material for the first three quarters of 2022.
The duration and extent to which the pandemic and trade sanctions against Russia and Belarus affect the Company's business will depend on future developments which still remain uncertain.
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.
A summary of financial results follows (in millions except per share amounts):
Three Months Ended
Nine Months Ended
Sep 30, 2022
Sep 24, 2021
% Change
Sep 30, 2022
Sep 24, 2021
% Change
Net Sales
$
545.6
$
486.7
12
%
$
1,588.5
$
1,448.0
10
%
Operating Earnings
143.1
124.6
15
%
420.2
386.7
9
%
Net Earnings
116.2
103.8
12
%
334.5
319.6
5
%
Net Earnings, adjusted (1)
114.8
100.3
14
%
331.3
309.9
7
%
Diluted Net Earnings per Common Share
$
0.67
$
0.59
14
%
$
1.93
$
1.83
5
%
Diluted Net Earnings per Common Share, adjusted (1)
$
0.66
$
0.57
16
%
$
1.91
$
1.78
7
%
(1) See below for a reconciliation of adjusted non-GAAP financial measures to GAAP.
Sales increased 12 percent for the quarter and 10 percent year to date, with increases in all segments. Changes in currency translation rates reduced worldwide sales by $20 million (5 percentage points) for the quarter and $43 million (3 percentage points) for the year to date. Sales from acquired operations contributed approximately $3 million (1 percentage point) for the quarter and $8 million (1 percentage point) for the year to date.
Gross profit margin rates for the quarter and year to date decreased 3 percentage points as strong realized pricing was unable to offset higher product costs and unfavorable currency translation.
Total operating expenses decreased $6 million (5 percentage points) for the quarter and $8 million (2 percentage points) for the year to date primarily due to lower sales and earnings-based expenses. Expense leverage largely offset the effects of lower gross profit margin rates on operating earnings.
Excluding the impact of excess tax benefits related to stock option exercises and certain non-recurring tax provision adjustments 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):
The following table presents an overview of components of net earnings as a percentage of net sales:
Three Months Ended
Nine Months Ended
September 30, 2022
September 24, 2021
September 30, 2022
September 24, 2021
Net Sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of products sold
52.2
49.0
50.6
47.6
Gross Profit
47.8
51.0
49.4
52.4
Product development
3.6
4.1
3.7
4.2
Selling, marketing and distribution
11.3
13.6
11.7
13.6
General and administrative
6.8
7.8
7.5
7.9
Operating Earnings
26.2
25.6
26.5
26.7
Interest expense
0.3
0.5
0.5
0.5
Other expense (income), net
(0.2)
0.1
—
—
Earnings Before Income Taxes
26.1
25.0
25.9
26.2
Income taxes
4.8
3.7
4.9
4.1
Net Earnings
21.3
%
21.3
%
21.1
%
22.1
%
Net Sales
The following table presents net sales by geographic region (in millions):
Three Months Ended
Nine Months Ended
September 30, 2022
September 24, 2021
September 30, 2022
September 24, 2021
Americas(1)
$
333.4
$
280.4
$
964.8
$
847.3
EMEA(2)
111.3
115.0
325.8
339.0
Asia Pacific
100.9
91.3
297.9
261.7
Consolidated
$
545.6
$
486.7
$
1,588.5
$
1,448.0
(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
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
18%
1%
0%
19%
13%
1%
0%
14%
EMEA
10%
0%
(13)%
(3)%
5%
1%
(10)%
(4)%
Asia Pacific
17%
1%
(8)%
10%
18%
1%
(5)%
14%
Consolidated
16%
1%
(5)%
12%
12%
1%
(3)%
10%
Gross Profit
Gross profit margin rates for the quarter and year to date decreased 3 percentage points from the comparable periods last year. Realized pricing was unable to offset continued increases in product costs and the adverse impacts of changes in currency translation rates.
Total operating expenses for the quarter decreased $6 million (5 percent) compared to the third quarter last year. Reductions of $5 million from the impact of currency translation and $3 million from lower sales and earnings-based expenses were partially offset by volume and rate related increases. Year-to-date operating expenses decreased $8 million compared to the same period last year. Reductions of $10 million from the impact of currency translation and $10 million from lower sales and earnings-based expenses were partially offset by $3 million of allowances for credit losses on customer receivables in Russia and other volume and rate related increases.
Interest Expense
Interest expense increased $1 million for the year to date and includes a $3.5 million fee related to the prepayment of private placement debt in the first quarter of 2022.
Income Taxes
The effective income tax rate was 18 percent for the quarter and 19 percent for the year to date, up 3 percentage points, respectively, from the comparable periods last year. The increase was primarily due to decreases 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
Certain measurements of segment operations compared to last year are summarized below:
Industrial Segment
The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment
(dollars in millions):
Three Months Ended
Nine Months Ended
September 30, 2022
September 24, 2021
September 30, 2022
September 24, 2021
Net Sales
Americas
$
60.1
$
54.1
$
175.9
$
152.3
EMEA
48.1
53.9
141.6
144.5
Asia Pacific
47.9
46.4
141.7
132.0
Total
$
156.1
$
154.4
$
459.2
$
428.8
Operating earnings as a percentage of net sales
35
%
33
%
35
%
32
%
The following table presents the components of net sales change by geographic region for the Industrial segment:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
11%
0%
0%
11%
16%
0%
(1)%
15%
EMEA
3%
0%
(14)%
(11)%
9%
0%
(11)%
(2)%
Asia Pacific
11%
0%
(8)%
3%
12%
0%
(5)%
7%
Segment Total
8%
0%
(7)%
1%
12%
0%
(5)%
7%
For both the quarter and year to date, strong Industrial segment sales growth in the Americas and Asia Pacific was partially offset by weakness in EMEA due to unfavorable macroeconomic conditions. The operating margin rate increased for both the quarter and year to date as strong realized pricing and expense leverage more than offset higher product costs and the adverse impacts of currency translation.
The following table presents net sales and operating earnings as a percentage of sales for the Process segment
(dollars in millions):
Three Months Ended
Nine Months Ended
September 30, 2022
September 24, 2021
September 30, 2022
September 24, 2021
Net Sales
Americas
$
76.6
$
58.6
$
222.0
$
175.1
EMEA
16.6
13.8
51.4
44.4
Asia Pacific
32.2
23.8
91.5
65.3
Total
$
125.4
$
96.2
$
364.9
$
284.8
Operating earnings as a percentage of net sales
24
%
22
%
24
%
23
%
The following table presents the components of net sales change by geographic region for the Process segment:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
27%
4%
0%
31%
24%
3%
0%
27%
EMEA
30%
1%
(11)%
20%
22%
1%
(7)%
16%
Asia Pacific
40%
1%
(7)%
34%
44%
1%
(5)%
40%
Segment Total
30%
4%
(4)%
30%
28%
2%
(2)%
28%
The Process segment had broad-based double-digit sales growth in all product applications and regions for the quarter and year to date. The operating margin rate for this segment increased 2 percentage points for the quarter and 1 percentage point for the year to date as increased volume and expense leverage offset higher product costs, unfavorable product and channel mix and the adverse impacts of currency translation.
Contractor Segment
The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment
The following table presents the components of net sales change by geographic region for the Contractor segment:
Three Months
Nine Months
Volume and Price
Acquisitions
Currency
Total
Volume and Price
Acquisitions
Currency
Total
Americas
18%
0%
(1)%
17%
9%
0%
0%
9%
EMEA
12%
0%
(13)%
(1)%
(4)%
1%
(9)%
(12)%
Asia Pacific
7%
0%
(8)%
(1)%
6%
0%
(5)%
1%
Segment Total
16%
0%
(4)%
12%
6%
1%
(3)%
4%
Contractor segment sales increased 12 percent for the quarter compared to last year due to improved product availability. Sales increased 4 percent for the year to date primarily due to continued strength in North American construction markets. Price realization, favorable product and channel mix and expense leverage offset higher product costs for the quarter, which resulted in a consistent operating margin rate compared to last year. For the year to date, the operating margin rate decreased 3 percentage points primarily due to higher product costs and the adverse impacts of currency translation.
Liquidity and Capital Resources
Net cash provided by operating activities of $272 million decreased $86 million from the comparable period last year, mostly driven by increased salary and incentive payments, increased inventory purchases to meet demand levels and higher accounts receivable that reflect growth in business activity through the 2022 year to date. Significant uses of cash in 2022 included share repurchases of $155 million, plant and equipment additions of $147 million, dividend payments of $107 million, prepayment of long-term debt of $75 million, and $25 million to acquire businesses that were not material to the consolidated financial statements. Proceeds from shares issued in 2022 totaled $28 million.
Significant uses of cash in 2021 included dividend payments of $95 million, property, plant and equipment additions of $83 million and $19 million to acquire businesses that were not material to the consolidated financial statements. Proceeds from shares issued in 2021 totaled $40 million.
As of September 30, 2022, the Company had available liquidity of $941 million, including cash and cash equivalents of $415 million, of which $275 million was held outside of the U.S., and available credit under existing committed credit facilities of $526 million.
Cash balances and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2022, including its capital expenditure plan, planned dividends, share repurchases, acquisitions and operating requirements. Capital expenditures for 2022 are expected to be approximately $230 million, including $130 million in facility expansion projects. The Company may make opportunistic share repurchases going forward.
Outlook
Demand worldwide remains solid despite uncertain macroeconomic conditions. For the full-year 2022, the Company is raising its target to low double-digit sales growth on an organic, constant currency basis.
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 2021 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 2021 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 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 2021 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.
Except as noted below, there have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2021 Annual Report on Form 10-K.
Russian Invasion of Ukraine – Russia’s invasion of Ukraine, and the sanctions and actions taken against Russia and Belarus in response to the invasion, could adversely impact our business.
While our sales into Russia and Belarus are not material to our overall business, and we do not have any physical operations in Russia or Belarus or source raw materials or components directly from either country, the Russian invasion of Ukraine and the resulting sanctions and actions taken against Russia and Belarus by the United States, the United Kingdom, the European Union, Switzerland and others have considerably depressed demand for our products in Russia and Belarus and restricted our ability to sell certain products in those countries. As a result, we have decided to suspend sales into Russia and Belarus for the time being. We expect demand for our products in Russia and Belarus to remain depressed, and our ability to sell certain products in Russia and Belarus to continue to be restricted, for the foreseeable future. A significant escalation or expansion of the conflict beyond its current geographic, political and economic scope and scale could have a material adverse effect on our business, results of operations and financial condition, and could exacerbate other risks discussed in our 2021 Annual Report on Form 10-K. Such risks include, but are not limited to: an increase in the frequency and severity of the cybersecurity threats we and various third parties with whom we do business experience; unfavorable changes in exchange rates; further shortages, delivery delays and price inflation in a wide variety of raw materials and components; widespread reductions in end-user demand; and increased logistical challenges.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On April 24, 2015, the Board of Directors authorized the Company to purchase up to 18 million shares of its outstanding common stock, primarily through open-market transactions. There were approximately 3.3 million shares remaining under the authorization on December 7, 2018, when the Board of Directors authorized the purchase of up to an additional 18 million shares. The authorizations are for an indefinite period of time or until terminated by the Board. Shares available for purchase under the April 2015 authorization were exhausted in the first quarter of 2022. Therefore, the Company will no longer purchase shares under the April 2015 authorization, and all purchases during the third quarter of 2022 were made under the December 2018 authorization.
In addition to shares purchased under the Board authorizations, 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:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (at end of period)
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:
October 26, 2022
By:
/s/ Mark W. Sheahan
Mark W. Sheahan
President and Chief Executive Officer
(Principal Executive Officer)
Date:
October 26, 2022
By:
/s/ David M. Lowe
David M. Lowe
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date:
October 26, 2022
By:
/s/ Kathryn L. Schoenrock
Kathryn L. Schoenrock
Executive Vice President, Corporate Controller and Information Systems
