Executive Summary / Key Takeaways

• Graco Inc. is strategically transforming through the "One Graco" initiative and targeted acquisitions, aiming to enhance operational efficiencies, expand market reach, and leverage its robust fluid handling technology. This proactive recalibration positions the company for sustained growth despite prevailing macro uncertainties.
• The company's core technological differentiators, including precision dispensing, gravimetric dosing, and advanced fluid management systems, provide tangible benefits to customers through improved efficiency, consistency, and cost control, reinforcing Graco's competitive moat.
• Despite a challenging market backdrop, Graco demonstrated financial resilience in the first nine months of 2025, with net sales increasing 5% to $1.64 billion and net earnings rising 3% to $389.35 million, driven by acquisitions and operational discipline.
• Graco maintains a strong liquidity position, with $1.4 billion in available liquidity as of September 26, 2025, and a robust cash flow generation, enabling continued strategic investments, shareholder returns, and opportunistic M&A.
• While facing headwinds from global trade uncertainty, tariffs, and housing affordability issues, Graco's strategic pricing actions, U.S. manufacturing advantage, and diversified segment performance support its outlook for low single-digit organic constant-currency sales growth in 2025.

The Fluid Dynamics of Growth

Graco Inc. (NYSE:GGG) stands as a foundational force in the industrial landscape, designing, manufacturing, and marketing sophisticated systems and equipment for the precise movement, measurement, control, dispensing, and spraying of fluid and coating materials. The company's overarching strategy centers on developing innovative products, expanding into new end-user markets, broadening global distribution, and executing strategic acquisitions that augment its channels and technological capabilities. This approach is particularly critical in a market characterized by evolving global trade policies, inflationary pressures, and varied regional demand.

Graco's competitive edge is deeply rooted in its differentiated technology. Its precision dispensing systems are engineered for high efficiency, minimizing waste in critical applications like industrial coatings. The recent acquisition of Color Service s.r.l. introduced advanced gravimetric dosing technology, which delivers precise weight-based material measurements, significantly improving consistency and efficiency in production across diverse industries such as textiles and tires. In the vehicle service sector, Graco's fluid management systems track dispensed fluid information by vehicle, enabling robust inventory management, demand planning, and service scheduling, thereby offering customers substantial cost control and operational efficiency. Furthermore, innovative products like the PowerShot XT electronic-powered airless paint gun empower contractors with extended operational time, allowing them to spray all day on a single charge. Graco's strategic U.S. manufacturing footprint also provides a notable advantage, offering supply chain resilience and potential cost benefits compared to competitors reliant on offshore manufacturing, particularly from China.

The competitive landscape for Graco includes diversified industrial players such as Nordson Corporation (NDSN), Dover Corporation (DOV), and IDEX Corporation (IEX). Graco differentiates itself from Nordson by offering versatile, multi-purpose equipment that caters to a broader range of fluids and powders, emphasizing durability and ease of integration into existing workflows. While Nordson may lead in specialized, high-tech automation, Graco's focus on cost-effective reliability helps it capture market share in price-sensitive segments. Against Dover, Graco's specialized fluid pumping and dispensing systems often provide greater precision in handling viscous materials compared to Dover's more generalized pump solutions. Graco's direct sales and distribution model fosters strong customer relationships, particularly in automotive and construction, while Dover leverages its larger scale for broader market penetration. Compared to IDEX, Graco's equipment offers superior versatility and durability under harsh conditions, contrasting with IDEX's more specialized, precision-focused products. Graco's global distribution network and user-friendly designs are key differentiators, though IDEX may excel in R&D-driven growth in tech-intensive niche markets.

Broader industry trends, such as the increasing energy demands from AI-driven data centers, could indirectly benefit Graco through demand for fluid systems in supporting infrastructure. However, shifts towards sustainability might necessitate additional investment, potentially impacting profitability.

Strategic Evolution and Operational Excellence

Graco's journey, originating in 1926 with vehicle service equipment and establishing its Minneapolis manufacturing base by the 1940s, has consistently emphasized innovation and operational rigor. This historical foundation directly informs its current strategic responses to market dynamics. The company's recent transformation, particularly the "One Graco" initiative, marks a pivotal moment in its strategic evolution. Launched on January 1, 2025, this global customer-centric operating structure aims to streamline operations, eliminate redundancies in sales, marketing, and engineering, and foster a more cohesive approach to customer engagement. This initiative has already yielded margin improvements from cost-saving measures implemented in 2024, with the Industrial segment's impressive 220% year-to-date incremental margins serving as a testament to its effectiveness.

The "One Graco" framework is also enhancing commercial synergies, enabling distributors to carry a wider array of Graco products, leading to increased MRO business and deeper penetration in international markets like Mexico. Management notes that customers and distributors are "really happy" with the removal of "walls" that previously limited access to diverse product categories. Further consolidating its manufacturing footprint, Graco announced in May 2025 the relocation of its Minneapolis operations to existing facilities in Minnesota, South Dakota, and Ohio. This move is expected to generate additional efficiencies and reduce overhead costs, aligning with the "One Graco" ethos.

Strategic acquisitions are another cornerstone of Graco's growth. The November 2024 acquisition of Corob S.p.A. for $230 million brought high-tech dispensing and mixing solutions, expanding Graco's presence in the paint and coating machinery sector. Corob's integration is progressing as expected, contributing to revenue growth and offering opportunities to leverage Graco's North American channel partners where Corob's penetration was historically lower. In the third quarter of 2025, Graco further bolstered its Industrial segment with the $77 million acquisition of Color Service s.r.l., a global leader in gravimetric dosing systems. This acquisition not only adds advanced technology but also opens new markets such as textiles and tires, diversifying Graco's revenue streams.

Financial Resilience Amidst Macro Currents

Graco's financial performance in the first nine months of 2025 reflects a company demonstrating resilience in a challenging environment, underpinned by its strategic initiatives and operational discipline. For the three months ended September 26, 2025, net sales increased 5% to $543.36 million, with acquisitions contributing a strong 6% growth and currency translation adding 1%, offsetting a 2% organic decline. Net earnings for the quarter rose 13% to $137.63 million, or $0.82 per diluted share. Over the nine-month period, net sales grew 5% to $1.64 billion, and net earnings increased 3% to $389.35 million, or $2.30 per diluted share.

Profitability metrics show a mixed but strategically managed picture. The consolidated gross profit margin remained flat at 53.2% for the third quarter, as price realization and a favorable product mix counteracted higher product costs and the dilutive effect of acquired operations. For the nine-month period, the gross profit margin decreased by approximately 1 percentage point to 52.7%. Operating earnings for the third quarter increased 13% to $164.72 million, with the operating margin expanding to 30.3% from 28.1% in the prior year period. This was notably aided by a $14 million non-cash gain from the reduction in fair value of acquisition-related contingent consideration.

Segment-specific performance highlights the impact of market conditions and strategic responses:

• Contractor Segment: Net sales increased 8% in Q3 2025 to $262.43 million, primarily due to acquisitions. However, organic sales declined 3%, reflecting continued weakness in North American construction and cautious consumer sentiment. The operating margin rate for the segment declined 3 percentage points to 26% for the quarter, and 5 percentage points to 25% year-to-date, mainly due to higher product costs from increased tariffs and lower margins from acquired operations. Management noted that price realization improved as the quarter progressed.
• Industrial Segment: This segment delivered a 1% sales increase in Q3 2025 to $238.59 million, supported by acquisitions and favorable exchange rates. Profitability was "extremely strong," with incremental margins of 220% year-to-date. The operating margin rate increased 1 percentage point to 34% for both the quarter and year-to-date, driven by realized pricing and a favorable product and channel mix offsetting higher product costs.
• Expansion Markets Segment: Net sales increased 3% in Q3 2025 to $42.34 million, and 4% year-to-date, fueled by momentum in the semiconductor and electric motor applications. The operating margin rate improved for both periods, reaching 25% for the quarter and 24% year-to-date.

Graco's liquidity remains robust, with $1.399 billion in available liquidity as of September 26, 2025, comprising $619 million in cash and cash equivalents and $780 million in available credit facilities. Net cash provided by operating activities increased by $51 million to $487.26 million in the first nine months of 2025, largely due to improved inventory management and lower incentive payouts. This strong cash generation supports significant capital allocation, including $361 million in share repurchases and $138 million in dividend payments during the nine-month period.

Outlook: Strategic Clarity in an Uncertain Environment

Graco's full-year 2025 outlook projects low single-digit sales growth on an organic constant-currency basis. Management acknowledges that the company is likely to achieve the lower end of this guidance, reflecting persistent macro headwinds. This outlook is underpinned by steady incoming order rates, the positive impact of incremental pricing actions, and easier year-to-year comparisons, particularly in the Contractor segment. Capital expenditures for 2025 are expected to be between $50 million and $60 million, with an adjusted effective tax rate of 19.5% to 20.5%.

The company's proactive stance on pricing is critical. Targeted price increases, implemented in late Q3 2025 across most business units, are expected to offset the impact of tariffs, with price-cost dynamics anticipated to turn positive in Q4 2025. Further price increases for North American Pro Paint and Home Center channels are planned for January. While global trade uncertainty, particularly with China, could negatively impact full-year revenue guidance by 1% to 2%, Graco has implemented mitigation strategies, including inventory positioning and exploring alternative sourcing and product redesigns. The company holds approximately three months of finished goods inventory in China and components in U.S. manufacturing locations to buffer against immediate tariff impacts.

Despite the challenges, Graco's U.S.-based manufacturing footprint is a strategic advantage, offering resilience against trade conflicts. The Contractor segment is expected to see a stronger second half of 2025, benefiting from easier comparisons, pricing actions, and new product releases, including the PowerShot XT electronic-powered airless paint gun. The new product pipeline for 2026 in Contractor is described as a "normal year" with additions in paint, line striping, and texture categories, expected to drive demand. Management believes that even a small increase in volume, combined with pricing, will significantly improve Contractor margins, which have been impacted by higher product costs and lower margins from acquired operations.

The Expansion Markets segment, particularly the semiconductor business, is showing positive momentum, although still below peak revenue levels and facing some challenges in China related to licenses and product access. The environmental business, after a Q2 2025 decline, is expected to stabilize, with long-term expectations unchanged. The recent acquisitions of Corob and Color Service are projected to contribute low single-digit growth in 2025, with Corob expected to be fully EPS accretive in 2026.

Conclusion

Graco Inc. is executing a deliberate and comprehensive strategy to fortify its market position and drive long-term value. The "One Graco" initiative, coupled with strategic acquisitions like Corob and Color Service, is enhancing operational efficiencies, expanding its technological portfolio, and deepening customer relationships across diverse fluid handling markets. While the company operates within a complex macroeconomic environment marked by global trade uncertainties, inflationary pressures, and persistent housing affordability challenges in North America, its robust financial health, disciplined capital allocation, and U.S. manufacturing advantage provide a strong foundation.

Graco's commitment to technological differentiation, from precision dispensing to advanced fluid management systems, underpins its competitive moat, offering tangible benefits to customers and supporting resilient profitability. The company's outlook for low single-digit organic growth in 2025, supported by strategic pricing and operational synergies, reflects a pragmatic yet confident approach to navigating current headwinds. Investors should recognize Graco's proactive strategic recalibration and its capacity to leverage technological leadership and operational excellence to deliver consistent returns, even as it adapts to evolving market dynamics and competitive pressures.