Graco Q4 Earnings Call Highlights

Key Points

• Q4 results: Sales rose 8% to $593 million and reported net earnings increased 22% to $133 million ($0.79), with adjusted EPS up 20% to $0.77 and gross margin improving ~80 bps despite tariffs that cut gross margin by ~70 bps in the quarter ($4M) and $14M for the year.
• 2026 outlook: Management guides to low single-digit organic growth (mid-single-digit including recent acquisitions) with pricing expected to contribute about 1%–1.5%, while describing the outlook as cautious but supported by recent order trends.
• Cash flow & capital allocation: Operating cash flow was $684 million (up 10%), the company repurchased $423 million of stock and paid $183 million in dividends, ended the year with about $600 million net cash, and plans $90–100 million of capex plus roughly $50 million for facility expansion/HQ spend in 2026.

Graco NYSE: GGG executives highlighted record sales and higher earnings in the company’s fourth-quarter conference call, pointing to contributions from acquisitions, modest organic growth, and margin improvement despite tariff-related cost pressure. Management also provided an outlook for 2026 calling for low single-digit organic growth, supported by pricing actions and continued execution of its “One Graco” operating model.

Fourth-quarter results: sales up 8%, earnings up 22%

Vice President, Controller and Chief Accounting Officer Chris Knutson said fourth-quarter sales were $593 million, up 8% from the prior year. The company attributed the growth to 4% from acquisitions, 2% from currency translation, and 2% from organic sales.

Reported net earnings increased 22% to $133 million, or $0.79 per diluted share. On an adjusted non-GAAP basis—excluding the impact of excess tax benefits from stock option exercises, a non-recurring tax benefit, and prior-year business reorganization charges—adjusted earnings were $0.77 per diluted share, up 20%.

Gross margin improved by 80 basis points year over year. Knutson said targeted interim pricing actions more than offset higher product costs tied to lower factory volumes, the lower margins of acquired operations, and incremental tariffs. He noted tariffs increased product costs by $4 million in the quarter, reducing gross margin by 70 basis points. For the full year, tariffs totaled $14 million and reduced gross margin by 60 basis points.

Operating expenses declined $1 million, or 1%, primarily because the prior year included $7 million in business reorganization costs and $9 million in litigation spending that did not recur. Those savings were partly offset by $7 million of incremental expenses from acquired operations and higher incentive-based costs. Total company adjusted operating earnings rose $21 million, or 15%, and adjusted operating margin was 27% versus 25% a year earlier.

Segment performance: industrial strength, contractor modestly positive

In the contractor segment, Knutson reported an operating margin rate of 24% for the quarter, consistent with the prior year when excluding reorganization charges and litigation spending. Segment sales increased 8%, including 5% from acquisitions, 2% from currency translation, and 1% organic growth.

Mark Sheahan said contractor demand remained constrained by “sluggish conditions in core construction markets,” but the company saw improved performance in the home center channel and “double-digit growth” in the Corob business. Sheahan said Corob grew 25% in the quarter and delivered its “largest fourth quarter in the past three years.” He added that while home center sales increased, foot traffic remained light, and the overall market for contractor equipment was “flat,” with affordability concerns keeping activity subdued.

Graco’s industrial segment posted the strongest growth, with sales up 11% in the quarter. Sheahan said organic growth of 5% was driven by completions in powder finishing systems and “good growth in the Americas and EMEA,” offset partly by declines in Asia-Pacific, “particularly China.” He also pointed to unusually strong incremental margins for the segment—76% for the quarter and 117% for the full year—crediting benefits from the company’s One Graco approach.

Expansion markets sales declined 6% in the quarter but rose for the full year, with Sheahan citing “high single-digit” full-year sales growth in the semiconductor business. He said quarterly declines were seen in semiconductor, high-pressure valve, and environmental businesses compared with a strong prior-year period, though the quarter still represented the segment’s largest revenue quarter of the year due to sequential improvement.

Licensing revenue from electric motor technology called “lumpy”

Management discussed upfront licensing fee revenue tied to Graco’s electric motor technology. Knutson said expansion markets included $5 million of upfront electric motor license fee revenue in the quarter and $7 million for the full year, boosting the segment’s operating margin by 9 percentage points in the quarter and 3 percentage points for the full year.

In Q&A, executives said Graco acquired ETM several years ago for its “high torque, quiet, compact motor” technology and later pivoted from selling motors to licensing the technology to non-competitive OEMs and motor manufacturers. Management described the upfront licensing revenue as likely “lumpy,” and said 2026 guidance does not assume additional upfront fees. They said royalties may follow over time and will be discussed when meaningful.

Cash flow, capital allocation, and balance sheet

Operating cash flow for the year totaled $684 million, up 10% from 2024, which Knutson said was driven in part by inventory reductions. Excluding acquisitions, inventory ended the year at $336 million, down $46 million for the year and down $140 million from the end of 2022. Knutson said inventory was at its lowest level since June 2021.

For the year, Graco used cash for share repurchases of $423 million (5.1 million shares), dividends of $183 million, acquisitions of $135 million, and capital expenditures of $46 million, partially offset by $37 million of share issuances. Sheahan said the company ended the year with net cash of $600 million and described the balance sheet as providing flexibility to pursue long-term objectives.

Looking ahead, Knutson provided several planning assumptions:

• Based on current exchange rates and similar volumes and mix as 2025, currency could have a 1% favorable impact on 2026 net sales and net earnings.
• The effective tax rate is expected to be 20% to 21%, excluding excess tax benefits from stock option exercises and other one-time items.
• Unallocated corporate expenses are projected at $40 million to $43 million.
• Capital expenditures are projected at $90 million to $100 million, excluding about $50 million for facility expansion projects.
• 2027 will be a 53-week year with an extra week in the fourth quarter.

During Q&A, management said a major driver of higher 2026 capital spending will be construction of a new corporate headquarters building at the company’s French Lake campus, which they said has a planned cost of about $50 million, with most spending expected in 2026. They also noted the company plans to vacate and sell its Northeast Minneapolis campus, which could offset spending, though it was not included in the figures provided.

2026 outlook: low single-digit organic growth, pricing of ~1% to 1.5%

Sheahan said Graco is guiding to low single-digit organic revenue growth in 2026 on a constant-currency basis, and mid-single-digit growth including incremental revenue from the Color Service and Radia acquisitions. Management described the outlook as “pretty cautious,” while noting that recent order trends supported the guidance.

On pricing, executives said they expect about 1% to 1.5% benefit during 2026. They also said some 2026 price adjustments were accelerated into the third and fourth quarters of 2025, with additional adjustments for key channel partners typically occurring around mid-year.

On acquisitions, Sheahan said Corob has been successfully integrated and that Corob, Radia, and Color Service together are expected to generate nearly $190 million in full-year revenue. He said the acquisition pipeline remains strong, with “well over 100 names” under consideration at any given time, and reiterated a long-term objective to generate one-third of revenue growth through disciplined M&A.

About Graco NYSE: GGG

Graco Inc is a leading manufacturer of fluid handling systems and components, headquartered in Minneapolis, Minnesota. Founded in 1926, the company has built a reputation for innovation in spray finishing, lubrication, and fluid management technologies. Graco's solutions are designed to address the needs of paint and coatings applicators, general industry, and process fluids in a variety of end markets.

The company's product portfolio includes airless and air-assisted spray equipment, pumps for oil and gas applications, industrial lubrication systems, and automated dispensing equipment.

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