GRACO INC (GGG)

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 Expansion Markets. 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 channels and technologies.

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):

(1) See below for a reconciliation of adjusted non-GAAP financial measures to GAAP.

Net sales for the first quarter increased 2 percent, with 5 percentage points of sales growth from acquired operations and 3 percentage points of sales growth from the effects of changes in currency translation rates. Sales growth for the quarter was partially offset by a 6 percentage point organic decline.

The gross margin rate was lower than the first quarter last year, primarily due to unfavorable product and channel mix and lower margin rates of acquired operations. Price realization was able to mostly offset the impact of incremental tariffs of $7 million.

Operating expenses increased 7 percent, including 4 percentage points from acquired operations and 3 percentage points from the effects of currency translation.

Operating earnings decreased 4 percent, due to a lower gross margin rate and increased expenses.

Net earnings decreased 5 percent for the first quarter. Adjusted net earnings decreased 7 percent, driven by lower operating earnings and a prior year gain from the sale of a former manufacturing and distribution facility in Switzerland that did not repeat.

Excluding the impact of excess tax benefits from stock option exercises presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP adjusted measurements of earnings before income taxes, income taxes, effective income tax rate, net earnings and diluted earnings per share follows (in millions except per share amounts):

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The following table presents an overview of components of net earnings as a percentage of net sales:

Net Sales

The following table presents net sales by geographic region (in millions):

(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:

Gross Profit

The first quarter gross margin rate was lower than the first quarter last year, primarily due to unfavorable product and channel mix and lower margin rates of acquired operations. Price realization was able to mostly offset the impact of incremental tariffs of $7 million.

Operating Expenses

Total operating expenses for the first quarter increased $9 million (7 percent) compared to the same period last year, including approximately $5 million (4 percentage points) from acquired operations and $4 million (3 percentage points) from the effects of currency translation.

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Other (Income) Expense

Other non-operating income for the first quarter decreased $5 million compared to the same period last year due to a prior year gain from the sale of a former manufacturing and distribution facility in Switzerland that did not repeat.

Income Taxes

The effective income tax rate was 15 percent for the quarter, down approximately 3 percentage points from the first quarter last year. The decrease was due primarily to an increase in excess tax benefits related to stock option exercises.

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):

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

Contractor segment net sales increased 2 percent for the first quarter compared to the same period last year. Incremental sales from acquired operations and favorable changes in currency translation rates were partially offset by continued weakness in the worldwide construction markets. The operating margin rate was flat as price realization offset higher product costs, including increased tariff costs of $4 million.

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

Industrial segment sales growth for the first quarter included $20 million (8 percentage points) from acquired operations, which more than offset the impact of the timing of finishing system sales and other project activity compared to the first quarter last year. Higher product costs, including increased tariff costs of $3 million, and unfavorable product and channel mix drove a 2 percentage point decline in the operating margin rate for the quarter.

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):

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

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Net sales for the first quarter in the Expansion Markets segment decreased 4 percent, primarily due to lower semiconductor application sales in the Americas. The decline in sales volume was offset by lower expenses and an improved gross margin rate, resulting in an operating margin rate that was comparable to the same period last year.

Liquidity and Capital Resources

Net cash provided by operating activities of $120 million in the first quarter of 2026 decreased $5 million compared to the same period last year, mostly due to higher performance-based incentive payouts. Significant uses of cash in the first three months of 2026 included dividend payments of $49 million and plant and equipment additions of $12 million. Net proceeds from shares issued in 2026 totaled $40 million, which was partially offset by share repurchases of $12 million.

For the first three months of 2025, significant uses of cash included share repurchases of $238 million (partially offset by $28 million from shares issued) and dividend payments of $47 million.

As of March 27, 2026, the Company had available liquidity of $1,485 million, including cash and cash equivalents of $712 million, of which $223 million was held outside of the U.S., and available credit under existing committed credi

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s consolidated results of operations, financial condition and liquidity. This discussion should be read in conjunction with our financial statements and the accompanying notes to the financial statements. A discussion of changes in our financial condition and the results of operations from the year ended December 27, 2024 compared to December 29, 2023 can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 27, 2024. The discussion is organized in the following sections:

•Overview

•Results of Operations

•Segment Results

•Financial Condition and Cash Flow

•Critical Accounting Estimates

Overview

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. Graco sells primarily through independent third-party distributors worldwide to industrial and contractor end users. Graco’s business is classified by management into three reportable segments: Contractor, Industrial and Expansion Markets. Each segment is responsible for product development, manufacturing, marketing and sales of their products.

Graco’s key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end-user markets, expanding distribution globally and completing strategic acquisitions that provide additional channels and technologies. Long-term financial growth targets accompany these strategies, including our objectives of 10 percent revenue growth and 12 percent consolidated net earnings growth per annum. 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.

Manufacturing is a key competency of the Company. Our management team in Minneapolis provides strategic manufacturing expertise and is also responsible for factories not fully aligned with a single division. Our largest manufacturing facilities are in the U.S. We also manufacture some of our products in Switzerland (Industrial segment), Italy (Industrial and Contractor segment), the P.R.C. (all segments), India (Contractor segment), Belgium (all segments) and Romania (Industrial segment). Our primary distribution facilities are located in the U.S., Belgium, Switzerland, United Kingdom, P.R.C., Japan, Italy, South Korea, India, Australia and Brazil.

Results of Operations

A summary of financial results follows (in millions except per share amounts):

(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. See

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

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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. 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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Components of Net Earnings as a Percentage of Sales:

The following table presents an overview of components of net earnings as a percentage of net sales:

Net Sales

The following table presents net sales by geographic region (in millions):

(1)     North, Central and South America, including the U.S. Sales in the U.S. were $1,170 million in 2025 and $1,149 million in 2024.

(2)    Europe, Middle East and Africa.

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

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.

Gross Profit

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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 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 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.

Income Taxes

The effective income tax rate for 2025 was 19 percent, up 1 percentage point from 2024. The increase in 2025 was largely due to variations in excess tax benefits from stock option exercises.

Segment Results

The Company has four operating segments which are aggregated into three reportable segments: Contractor, Industrial and Expansion Markets. Refer to Part I Item 1. Business, for a description of the Company’s three reportable segments. Management assesses the performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments.

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

(1)    Unallocated corporate (expense) includes such items as stock compensation, certain acquisition transaction items, bad debt expense, charitable contributions, and certain facility expenses.

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Contractor Segment

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

The following table presents the components of net sales change by geographic region 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. Management also reviews gross domestic product for the regions and the level of the U.S. dollar versus the euro and other currencies.

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

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.

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):

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

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.

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Financial Condition and Cash Flow

Working Capital. The following table highlights several key measures of asset performance (dollars in millions):

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. At December 26, 2025, the Company’s capital structure included current notes payable of $23 million and shareholders’ equity of $2,654 million. At December 27, 2024, the Company’s capital structure included current notes payable of $29 million and shareholders’ equity of $2,584 million.

Shareholders’ equity increased by $70 million in 2025. The increase provided by current year earnings of $522 million was primarily offset by dividends of $185 million and share repurchases of $423 million. Other increases in shareholders' equity included share issuances, stock compensation and other comprehensive income of $157 million.

Liquidity and Capital Resources. The Company evaluates liquidity as its ability to generate cash to fund its operating, investing and financing activities. Historically the Company has funded cash requirements for working capital, capital expenditures, businesses acquisitions, repayment of debt obligations, retirement plans, dividends, and common stock repurchases, all as applicable, through cash provided by its operations. The Company's other primary source of liquidity includes funds available through various debt financing arrangements.

As of December 26, 2025, the Company had available liquidity of $1,401 million, including cash held in deposit accounts of $624 million, of which $192 million was held outside of the U.S., and available credit under existing committed credit facilities of $777 million.

Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2026, including its capital expenditure plan of approximately $100 million, planned dividends estimated at $195 million, share repurchases and acquisitions. If acquisition opportunities increase, the Company believes that reasonable financing alternatives are available for the Company to execute on those opportunities. The Company has no significant off-balance sheet debt or other unrecorded obligations. The Company believes it has the ability to meet its long-term cash requirements by using available cash and internally generated funds and to borrow under its committed and uncommitted credit facilities.

In December 2025, the Board of Directors increased the Company’s regular quarterly dividend from $0.275 to $0.295 per share, an increase of 7 percent.

Cash Flow. A summary of cash flow follows (in millions):

Cash Flows From Operating Activities. 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

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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 $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 $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. 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.

The Company repurchased and retired 5.2 million shares in 2025, 0.4 million shares in 2024 and 1.4 million shares in 2023. The Company has made and may continue to make opportunistic share repurchases in 2026 via open market transactions or short-dated accelerated share repurchase programs.

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Critical Accounting Estimates

The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). 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. GAAP, requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts will differ from those estimates. The Company considers the following policies to involve the most judgment in the preparation of the Company’s consolidated financial statements.

Retirement Benefits. The measurements of the Company’s pension and postretirement medical obligations are dependent on a number of assumptions including estimates of the present value of projected future payments, taking into consideration future events such as salary increases and demographic experience. These assumptions may have an impact on the expense and timing of future contributions.

The assumptions used in developing the required estimates for pension obligations include discount rate, inflation, salary increases, retirement rates, expected return on plan assets and mortality rates. The assumptions used in developing the required estimates for postretirement medical obligations include discount rates, rate of future increase in medical costs and participation rates.

For U.S. plans, the Company establishes its discount rate assumption by reference to a yield curve published by an actuary and projected plan cash flows. For plans outside the U.S., the Company establishes a rate by country by reference to highly rated corporate bonds. These reference points have been determined to adequately match expected plan cash flows. The Company bases its inflation assumption on an evaluation of external market indicators. The salary assumptions are based on actual historical experience, the near-term outlook and assumed inflation. Retirement rates are based on experience. The investment return assumption is based on the expected long-term performance of plan assets. In setting this number, the Company considers the input of actuaries and investment advisers, its long-term historical returns, the allocation of plan assets and projected returns on plan assets. For 2026, the Company will use an investment return assumption of 7.5 percent for the funded U.S. plan. The 2025 rate assumed was 7.3 percent for the funded U.S. plan. Mortality rates are based on current common group mortality tables for males and females.

At December 26, 2025, a one-half percentage point decrease in the indicated assumptions would have the following effects (in millions):

Goodwill and Other Intangible Assets. The Company performs impairment testing for goodwill annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company estimates the fair value of the reporting units using a present value of future cash flows calculation cross-checked by an allocation of market capitalization approach. The goodwill impairment test is performed by comparing the fair value of the relevant reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

The Company’s primary identifiable intangible assets include customer relationships, trademarks, trade names, proprietary technology and patents. Finite lived intangibles are amortized and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite lived intangibles are reviewed for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate the asset might be impaired.

A considerable amount of management judgment and assumptions are required in performing the impairment tests. Management makes several assumptions, including earnings and cash flow projections, discount rate, product offerings and market strategies, customer attrition, and royalty rates, each of which have a significant impact on the estimated fair values. Though management considers its judgments and assumptions to be reasonable, changes in these assumptions could impact the estimated fair value.

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We completed our annual impairment test of goodwill and other intangible assets in the fourth quarter of 2025. No impairment charges were recorded as a result of that review.

Income Taxes. In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet using statutory rates in effect for the year in which the differences are expected to reverse. These assets and liabilities are analyzed regularly, and management assesses the likelihood that deferred tax assets will be recoverable from future taxable income. A valuation allowance is established to the extent that management believes that recovery is not likely. Liabilities for uncertain tax positions are also established for potential and ongoing audits of federal, state and international issues. The Company routinely monitors the potential impact of such situations and believes that liabilities are properly stated. Valuations related to amounts owed and tax rates could be impacted by changes to tax codes and the Company’s interpretation thereof, changes in statutory rates, the Company’s future taxable income levels and the results of tax audits.