What Graco (GGG) Said on Its Q3 Earnings Call

Key Points

• Record Q3 performance: Graco’s sales rose 8% year over year to $586 million, with 4% organic growth and contributions from all segments and regions. Adjusted EPS increased 5% to $0.81, while the operating margin fell nearly 180 basis points to 27% due largely to product and channel mix.
• Demand remains positive but uneven: Organic orders increased 7% in the quarter, and backlog excluding acquisitions rose 18% from the start of the year. Management forecast fourth-quarter revenue of $610 million to $640 million, while noting delays in larger Industrial projects and variable market conditions.
• Growth investments continue: Graco is integrating Valco Melton and targeting an increase in its EBITDA margin from the high teens to the mid-20% range within three years. The company also signed a technology agreement with ABB for data-center cooling applications and continued deploying capital toward acquisitions, share repurchases and dividends.

Graco NYSE: GGG reported record third-quarter fiscal 2026 sales of $586 million, up 8% from a year earlier and including 4% organic growth, as all three operating segments and reportable regions contributed to growth. Management said incoming organic orders rose 7% during the quarter and 4% year to date, while backlog excluding acquisitions increased $51 million, or 18%, from the beginning of the year through Oct. 16.

Adjusted operating earnings totaled $161 million, while adjusted earnings per share increased 5% to $0.81. Adjusted operating margin was 27% of sales, down nearly 180 basis points from the prior-year quarter, largely due to product and channel mix, including a higher mix of powder finishing systems.

CEO Mark Sheahan said the company’s fourth-quarter revenue outlook is $610 million to $640 million, based on current order trends and backlog. He cautioned that demand conditions vary by market and that timing of larger projects can shift revenue between periods.

Order activity and segment performance

Graco said third-quarter organic revenue, excluding the recently acquired Valco Melton business, finished slightly below the company’s prior guidance range of $580 million to $600 million. CFO Sanjiv Gupta attributed the shortfall primarily to the Industrial segment, where larger capital projects faced longer decision cycles and some projects were delayed or pushed out.

Gupta said the company was not seeing broad-based demand deterioration, citing order activity. He added that Graco’s fourth-quarter outlook does not assume an acceleration in demand.

• Contractor: Sales rose 5%, including acquisitions, and organic sales increased 2%. Growth occurred across regions and was led by professional paint sales in the Americas. Sheahan said adoption of products including QuickShot II and ProReach supported sell-through in key channels. Segment bookings increased 7% in the quarter and 2% year to date.
• Industrial: Sales increased 11%, supported by the core business and acquisitions. Growth was led by project activity in powder finishing systems, while maintenance and repair spending remained strong. Graco also cited greater adoption of QUANTM electric pumps and continued automatic lubrication growth. Year-to-date bookings rose 1%.
• Expansion Markets: Sales rose 8%. Semiconductor posted its strongest quarterly revenue in several years as customers invested in advanced manufacturing capacity and more complex production processes. Environmental sales also grew by double digits. Segment bookings increased 62% in the quarter and 44% year to date.

Sheahan said Contractor’s underlying activity remained positive despite the residential housing backdrop, with commercial activity, infrastructure-related work, protective coatings and foam applications contributing to momentum. The home-center channel was down slightly during the quarter, he said, but management did not identify a fundamental change in that channel.

Within Industrial, management said broader conditions remained somewhat sluggish, particularly for larger capital projects. However, Sheahan said bookings improved during the latter part of the third quarter and that the improvement had continued into the fourth quarter. Gupta said Industrial growth in the third quarter was spread across geographies, though it was more subdued in the U.S.

Valco Melton integration and margins

During the quarter, Graco completed its acquisition of Valco Melton, adding precision adhesive dispensing and quality-assurance capabilities. Management said its integration priorities include cross-selling through complementary customer relationships and channels, leveraging procurement and manufacturing capabilities, and maintaining customer service and business momentum.

Graco is targeting expansion of Valco Melton’s EBITDA margin from the high teens to the mid-20% range within three years of the acquisition’s closing. Sheahan said Valco Melton sells directly to customers and has an established direct sales organization, but he did not see structural factors that would prevent its long-term margin profile from approaching that of Graco’s general industrial businesses.

Contractor operating earnings rose 5% to $71 million, with margins stable year over year. Excluding Valco Melton and related costs, Industrial operating earnings were flat at $74 million, while the segment’s margin declined by nearly one percentage point due primarily to product and channel mix. Expansion Markets operating earnings increased 5% to $11 million, aided by semiconductor strength but facing a comparison that included a prior-year upfront license fee related to an electric motor application.

Management said realized pricing offset higher net input costs during the quarter. Price-cost was flat, and Sheahan said he expected that relationship to remain broadly similar in the fourth quarter.

ABB technology agreement and capital allocation

Sheahan also highlighted a newly announced technology agreement between Graco’s ETM business and ABB. Under the agreement, ABB will license ETM’s patented transverse flux motor technology for data-center cooling towers, heat-rejection systems and related thermal-management applications.

The companies are targeting their first data-center installations by the end of 2029. Sheahan said ABB is expected to begin launching Graco motor technology into other applications, including conveyor systems and factories, next year under a separate licensing agreement announced previously.

Year-to-date operating cash flow was $463 million, equal to 116% of adjusted net earnings. Graco repurchased $467 million of shares, paid $145 million in dividends, invested $436 million in acquisitions net of cash acquired, and spent $48 million on capital expenditures. Gupta said the company maintained a slightly positive net cash position despite those investments.

Management said it intends to maintain a balanced capital-allocation approach, combining share repurchases with acquisitions. Sheahan said the acquisition pipeline includes more businesses in faster-growing end markets than it did several years ago, citing semiconductor and water and wastewater management as areas of focus.

About Graco (NYSE:GGG)

Graco Inc is a global manufacturer of equipment used to move, measure, control, dispense and apply fluids and other materials. Its products are used in industrial, commercial and residential applications involving paints, coatings, sealants, adhesives, lubricants, chemicals and other fluids.

The company's product portfolio includes pumps, valves, meters, regulators, fluid-management systems, lubrication equipment, spray-applied coating and finishing systems, sealant and adhesive equipment, and contractor-oriented painting and texture application tools.

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