GRACO INC

(Unaudited)

1. Basis of Preparation

The consolidated balance sheet of Graco Inc. and subsidiaries (the “Company”) as of June 27, 2025 and the related statements of earnings, comprehensive income and shareholders' equity for the three and six months ended June 27, 2025 and June 28, 2024, and cash flows for the six months ended June 27, 2025 and June 28, 2024 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 June 27, 2025, 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 Annual Report on Form 10-K for the year ended December 27, 2024 (the "2024 Annual Report").

The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year presentation.

2. Segment Information

Effective January 1, 2025, the Company has classified its business into three reportable segments: Contractor, Industrial and Expansion Markets. The Industrial segment consists of the newly formed Industrial Division and the Powder Division. The Company’s former Industrial and Lubrication Equipment Divisions, along with the Process Transfer Equipment business that was part of the Company’s former Process Division, were combined to form the new global Industrial Division. The Powder Division remains unchanged. The Expansion Markets segment consists of the Expansion Markets Division. The Company’s environmental, semiconductor, high-pressure valves and electric motors businesses, together with select future ventures and acquisitions, reside within this division. The Contractor segment, consisting of the Contractor Division, remains unchanged as a reportable segment relative to prior periods. Prior year segment information has been recast to conform to the current organizational structure.

Segment information follows (in thousands):

Geographic information follows (in thousands):

3. Inventories

Major components of inventories were as follows (in thousands):

4. Shareholders’ Equity

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

Amounts related to pension and post-retirement medical adjustments are reclassified to non-service components of pension cost that are included within other income, net.

5. 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):

The Company recognized year-to-date share-based compensation of $17 million in 2025 and $20 million in 2024. As of June 27, 2025, there was $29 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.8 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:

Under the Company’s Employee Stock Purchase Plan, the Company issued 246,000 shares in 2025 and 330,000 shares in 2024. 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:

6. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

7. Retirement Benefits

The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):

8. Receivables and Credit Losses

Accounts receivable include trade receivables of $371 million and other receivables of $16 million as of June 27, 2025 and $348 million and $15 million of trade receivables and other receivables, respectively, as of December 27, 2024.

Allowance for Credit Losses

Following is a summary of activity for credit losses (in thousands):

(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.

9. Intangible Assets

Components of other intangible assets were as follows (dollars in thousands):

Amortization of intangibles for the year to date was $13 million in 2025 and $8 million in 2024. Estimated annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):

Changes in the carrying amount of goodwill for each reportable segment were as follows (in thousands):

10. Other Current Liabilities

Components of other current liabilities were as follows (in thousands):

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):

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 six months ended June 27, 2025, we recognized $17 million and $46 million, respectively, that was included in deferred revenue at December 27, 2024. During the three and six months ended June 28, 2024, we recognized $13 million and $42 million, respectively, that was included in deferred revenue at December 29, 2023.

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 liabilities represent 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.

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.

12. Acquisitions

On November 4, 2024, the Company acquired Corob S.p.A. ("Corob") for €230 million in cash, subject to normal post-closing purchase price adjustments, with up to €30 million in additional contingent consideration. As of June 27, 2025, the purchase price allocation remains preliminary as the Company completes its assessment, principally related to income taxes. Amounts within the tables below are revised related to the finalization of post-close price adjustments as reported from March 28, 2025.

The total purchase consideration consisted of the following (in thousands):

Preliminary purchase consideration was allocated to assets acquired and liabilities assumed based on estimated fair values as follows (in thousands):

Goodwill recognized from the Corob acquisition primarily reflects an intangible asset that does not qualify for separate recognition. None of the goodwill acquired with Corob is deductible for tax purposes.

Identifiable intangible assets and estimated useful life are as follows (in thousands):

The following unaudited pro forma information provides the results of operations for the periods ended June 27, 2025 and June 28, 2024, as if the acquisition had been completed at the beginning of fiscal year 2023 (in thousands, except per share amounts):

Unaudited pro forma information has been provided for comparative purposes only and the information does not necessarily reflect what the combined company's results of operations would have been had the acquisition occurred at the beginning of 2023. It also may not be useful in predicting the future results of operations of the combined company.

The Company completed another acquisition in 2024 that was not material to the consolidated financial statements.

Subsequent Event

On July 17, 2025, the Company entered into a definitive agreement to acquire Color Service s.r.l. ("Color Service") for €63 million, subject to certain customary adjustments. Color Service is a global leader in automated dosing systems for powder and liquid applications and serves a wide range of industries including textiles, rubber, cosmetics plastics and food. The acquisition is expected to be completed during the third quarter of fiscal year 2025 and its results will be included within the Powder Division in the Industrial Segment. The acquisition will be funded with cash on hand.