What Management Said
Read the full Q3 2025 transcript ↗Yesterday, Graco reported third-quarter sales of $543 million, an increase of 5% from the same quarter last year. Excluding acquisitions, which contributed 6% growth, and currency translation, which contributed another 1% growth, organic sales declined 2% in the quarter. Reported net earnings increased 13% to $138 million or $0.82 per diluted share. During the quarter, we recognized a $14 million non-cash gain from a reduction in the fair value of contingent consideration related to last year's acquisition of Corab.
Excluding the impact of excess tax benefits from stock option exercises and this contingent consideration fair value gain, adjusted non-GAAP net earnings was $0.73 per diluted share, an increase of 3%. The gross margin rate was flat compared to the same quarter last year. Tariffs affected product costs by $5 million in the quarter, resulting in a 100 basis point decline in the gross margin rate. Operating earnings as a percent of sales was 28% for the quarter and consistent with the same period last year.
The adjusted effective tax rate was 20%, which is consistent with our expected full-year tax rate of 19.5%-20.5% on an as-adjusted basis. Cash provided by operations totaled $487 million for the year, an increase of $51 million or 12%. Improved inventory management from consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the increase. Cash provided by operations as a percentage of adjusted net earnings was 146% for the quarter and 132% for the year to date.
What went well
- Third-quarter sales rose 5% to $543 million, with acquisitions contributing 6% growth and currency adding 1%, while reported net earnings increased 13% to $138 million ($0.82 per diluted share).
- The targeted interim pricing actions began to take effect during the quarter and are gaining traction, helping to offset tariff costs, with management expecting price to fully cover tariffs by year end.
- Industrial profitability was extremely strong, with year-to-date incremental margins of 220%, reflecting benefits from One Graco cost initiatives.
- Cash provided by operations totaled $487 million year to date, up $51 million or 12%, with operating cash flow at 146% of adjusted net earnings for the quarter, driven by improved inventory management under One Graco.
- Backlog stabilized to about $225-$230 million, roughly where it began the year, signaling no further headwinds, and third-quarter order activity grew mid-single digits across all segments.
- Expansion markets and semiconductor (White Knight) demand recovered, protective coatings equipment had its best performance of the year, and the China business held up better than expected after several down years.
What went wrong
- Organic sales declined 2% in the quarter, with the contractor segment posting a 3% organic decline due to North American housing affordability concerns and weakness in both Pro Paint and Home Center channels.
- Tariffs added $5 million in product costs in the quarter ($9 million year to date), cutting the gross margin rate by 100 basis points, and pricing has not yet fully offset these costs.
- Industrial organic revenue fell 2%, hurt by the timing of powder finishing system sales and a drop in vertical powder coating systems in EMEA due to project timing.
- The semiconductor/expansion business remains below peak revenue and faces challenges in China around licenses and getting products into the country.
- Management noted North America has been more cautious than hoped due to the uncertain tariff landscape, and remodeling activity that was forecast to grow this year did not materialize.
Guidance Changes
| Metric | Period | Current guidance |
|---|---|---|
| Organic revenue growth (full year, constant currency) | FY2025 | Low single-digit growth (likely low end) (Maintained) |
| Currency impact on net sales and net earnings | FY2025 | 1% favorable |
| Adjusted effective tax rate | FY2025 | 19.5%-20.5% |
| Unallocated corporate expenses | FY2025 | $35M-$38M |
| Capital expenditures | FY2025 | $50M-$60M |
Performance Breakdown
| Metric | YoY | Note |
|---|---|---|
| Total sales | +5% | Acquisitions contributed 6% and currency 1%, offsetting a 2% organic decline |
| Reported net earnings | +13% | Included a $14 million non-cash gain from a reduction in fair value of contingent consideration related to the Corab acquisition |
| Adjusted non-GAAP EPS | +3% | $0.73 per diluted share, excluding excess tax benefits and the contingent consideration gain |
| Contractor segment sales | +8% | Acquisitions added 11%, more than offsetting a 3% organic decline from North American affordability concerns |
| Industrial segment sales | +1% | Acquisitions and currency offset a 2% organic decline; Americas grew 3% organically on vehicle service and automotive OEM, while EMEA powder coating fell on project timing |
| Expansion market sales | +3% | Good semiconductor activity partially offset by declines in the environmental business |
| Gross margin rate | Flat | Pricing offset higher product costs from lower factory volume, lower-margin acquired operations, and a 100 bp tariff drag |
| Operating expenses | -5% (-$6M) | Driven by the non-cash contingent consideration gain; excluding it, opex rose 6% on $10M of acquisition expenses |
Earnings Call Themes & Trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Tariff cost recovery via pricing | Pricing actions underway | Targeted price increases announced in Q3 gaining traction; expect to fully offset tariffs by year end; Pro Paint and Home Center increases queued for January 2026 | Improving |
| North American contractor/housing weakness | Subdued construction and cautious consumers | Continued affordability headwinds; lowest housing sales since before 1995; remodeling growth forecast did not materialize; easier Q4 comps ahead | Persistent / stabilizing |
| One Graco reorganization | New organizational structure implemented | Early days but driving margin improvement, factory consolidation (Minneapolis into MN/SD/OH), cross-selling of product lines, and stronger cash conversion | Progressing |
| M&A pipeline and integration | Active funnel | Color Service acquisition announced in the quarter; Corab performing in line with deal model; pipeline remains strong with expected activity over next 6-12 months | Active |
| China / semiconductor demand | Multi-year declines | China held up better than expected; semiconductor recovering but below peak with licensing challenges | Recovering |
| Backlog normalization | Backlog unwinding from supply-chain-crisis peak of ~$500M | Stable at ~$225-$230M, near start-of-year levels; largely back to book-and-ship except project-based Gama powder | Normalized |
Q&A Summary
Can you walk through end-market and regional performance versus expectations and recent order trends? (Deane Dray, RBC)
Industrial demand is steady but not robust, with targeted opportunities in vehicle service, process pumps, and liquid finishing (air-to-electric conversions). North America has shown more customer caution due to tariff uncertainty. China was a positive surprise after years of declines, helped by mining, adhesives, sealants, and powder. Housing indicators are flat, but the 30-year rate at 6.1% gives hope for improvement.
It's rare for you to do a second price increase in September. How was it introduced, is it sticking, and will it fully offset tariffs? (Deane Dray, RBC)
Increases were announced early in Q3 to give channel partners time to digest and took effect late in the quarter. They were low- to mid-single-digit across business units and regions, except for North American Pro Paint and Home Center channels, which are queued to go in January.
What's driving the implied positive Q4 above normal seasonality, and when does price/cost turn positive? (Mike Halloran, Baird)
It is more steady demand plus incremental pricing and an easy contractor comp rather than a fundamental improvement; results will likely land at the low end of guidance. Price/cost will turn positive in Q4, and excluding the Corab acquisition, Q3 gross margins were actually up.
Given strong free cash flow conversion above 100% for a second year, is this the new normal? (Andrew Buscaglia, BNP Paribas)
Management would not commit to it being permanent but emphasized strong focus on cash. One Graco consolidated factories, warehouses, and operations, driving inventory and receivables improvements, with more opportunity ahead.
Why did you provide new backlog disclosure this quarter and what should it signal? (Joe Ritchie, Goldman Sachs)
It was meant to be helpful given last year's Q3 included roughly $25-$30 million of backlog flowing through revenue (Gama powder, sealants/adhesives, and contractor). Backlog is now about $225-$230 million, near start-of-year levels, down from a ~$500 million supply-chain-crisis peak, so the business is largely back to book-and-ship.
How should we think about contractor incremental margins and volume needed to return to a 29%-30% range ex-Corab? (Brad Hewitt, Wolfe Research)
Not much volume is needed; pricing will offset tariff costs and even a small volume increase would unlock factory efficiencies, so management has no concerns about returning to those margin rates.
More on Graco Inc
Reported 2025-10-23 · figures from the Graco Inc Q3 2025 earnings call.
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