GRACO INC

(Unaudited)

1. Basis of Preparation

The consolidated balance sheet of Graco Inc. and subsidiaries (the “Company”) as of September 25, 2026 and the related statements of earnings, comprehensive income and shareholders' equity for the three and nine months ended September 25, 2026 and September 26, 2025, and cash flows for the nine months ended September 25, 2026 and September 26, 2025 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 25, 2026, 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 26, 2025 (the "2025 Annual Report").

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 classifies its business into three reportable segments: Contractor, Industrial and Expansion Markets.

Segment information follows (in thousands):

Geographic information follows (in thousands):

3. Inventories

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

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):

The Company recognized year-to-date share-based compensation of $24 million in 2026 and $25 million in 2025. As of September 25, 2026, there was $29 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 2.6 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 235,000 shares in 2026 and 257,000 shares in 2025. 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:

5. Earnings per Share

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

6. Retirement Benefits

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

7. Receivables and Credit Losses

Accounts receivable includes trade receivables of $428 million and other receivables of $18 million as of September 25, 2026, and $376 million and $18 million of trade receivables and other receivables as of December 26, 2025.

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.

8. Intangible Assets

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

Amortization of acquired and other intangible assets for the year to date was $20 million in both 2025 and 2026. 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):

9. 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 nine months ended September 25, 2026, the Company recognized $18 million and $81 million, respectively, that was included in deferred revenue at December 26, 2025. During the three and nine months ended September 26, 2025, the Company recognized $4 million and $50 million, respectively, that was included in deferred revenue at December 27, 2024.

10. 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.

11. Acquisitions

On August 31, 2026, the Company acquired Valco Cincinnati LLC and certain affiliated entities (collectively "Valco Melton"). Under the terms of the purchase agreement, the purchase price of $447 million was adjusted for cash acquired, estimated unpaid pre-close liabilities of the selling shareholders and estimated excess working capital. The acquisition was completed for the total cash consideration of approximately $462 million, subject to normal post-closing purchase price adjustments. The purchase price was funded with cash on hand and borrowings under the Company's revolving credit facility. Valco Melton is a global provider of adhesive application and quality assurance systems. The acquired business expands and complements the Company’s Industrial segment.

Results of operations for Valco Melton have been included in the Company's Industrial segment since the acquisition date and included sales of $12 million and operating losses of $5 million for the period ended September 25, 2026. As of September 25, 2026, the purchase price allocation remains preliminary as the Company completes its assessment of certain acquired assets and assumed liabilities, principally related to the valuation of intangible assets, income taxes and the finalization of post-closing purchase price adjustments. Based on the preliminary purchase price allocation, the Company recorded goodwill of $220 million and intangible assets of $159 million. Identifiable intangible assets include $33 million related to indefinite-lived trade names and $126 million related to amortizable intangible assets with estimated useful lives ranging from 0.5 to 15 years. The preliminary amounts recognized are subject to adjustment during the measurement period as additional information becomes available and valuations are finalized. Such adjustments may be material to the amounts allocated to acquired assets and liabilities, including goodwill. The purchase price allocation is expected to be finalized as soon as practicable, but no later than one year from the acquisition date.

Consideration transferred was preliminarily allocated to assets acquired and liabilities assumed based on estimated fair values as follows (in thousands):

Goodwill recognized from the Valco Melton acquisition primarily reflects an intangible asset that does not qualify for separate recognition. Approximately $150 million of goodwill acquired with Valco Melton is deductible for tax purposes.

The following unaudited pro forma information provides the results of operations for the periods ended September 25, 2026 and September 26, 2025, as if the acquisition of Valco Melton had been completed at the beginning of fiscal year 2025 (in thousands, except per share amounts):

The unaudited pro forma information includes the impact of intangible asset amortization of approximately $6 million in 2026 and $9 million in 2025. The nine months ended September 25, 2026, excludes the impact of $6 million of transaction-related expenses and non-recurring expense, related to the fair value adjustment to acquisition-date inventory. The nine months ended September 26, 2025 was adjusted to include transaction-related expenses and nonrecurring expenses related to the fair value adjustment to acquisition-date inventory. The information also reflects the pro forma cost of foregone interest income but does not reflect the effect of any synergies or integration costs that may result from the acquisition.

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 Valco Melton acquisition occurred at the beginning of fiscal year 2025. It also may not be useful in predicting the future results of operations of the combined company.

Subsequent to the end of the third quarter, the Company completed the acquisition of a business that is not material to the consolidated financial statements.