Snapshot
Graco Inc reported $572M of revenue in Q2 2025, up 3.4% year over year, with diluted EPS of $0.76 and an operating margin of 27.5%.
- Revenue
- $572M
- YoY growth
- +3.4%
- Diluted EPS
- $0.76
- Operating margin
- 27.5%
What management said
- •Yesterday, Graco reported second quarter sales of $572 million, an increase of 3% from the second quarter of last year.
- •Reported net earnings decreased 4% to $128 million, or $0.76 per diluted share.
- •Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $127 million, or $0.75 per diluted share, a decrease of 3%.
- •The impact of acquisitions accounted for nearly 80 basis points of the decline, which will continue for the remainder of the year.
- •Excluding expenses of acquired operations, operating expenses declined $7 million, or 5%, on savings from the One Graco initiative, lower sales and earnings-based incentives, and timing of stock-based compensation expense.
- •Operating earnings decreased $4 million, or 2%, during the quarter due to decreased factory volume and the effect of tariffs.
- •Operating earnings as a percent of sales were 28% for the quarter, or one percentage point lower than the same period last year.
- •Contractor segment operating margin rate for the quarter was 26% compared to 31% for the same quarter last year, a decline of five percentage points.
- •The acquisition of COROB decreased the contractor operating margin rate by two percentage points, with the remaining decline due primarily to higher tariffs and lower factory volume.
- •The adjusted effective tax rate was 20%, which is consistent with our expected full-year tax rate of approximately 19.5%-20.5% on an as-adjusted basis.
- •Cash provided by operations totaled $308 million for the year, an increase of $50 million, or 19%.
- •Improved inventory management from consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the increase.
What went well
- •Second quarter sales rose 3% to $572 million, with the COROB acquisition contributing 6% growth and currency translation neutral in the quarter. Operating cash flow was a standout, totaling $308 million year-to-date, up $50 million or 19%, with cash conversion of 144% of adjusted net earnings for the quarter, driven by improved inventory management under the One Graco initiative and lower incentive payments. The AMEA and Asia-Pacific regions grew across all segments, including recovery in the semiconductor market and in China, which had been depressed for most of the prior year. Powder finishing system sales were strong with increased quoting activity in the Americas and Asia-Pacific. Management announced the acquisition of Color Service, an Italian precision dosing systems maker with roughly EUR 34 million in 2024 revenue, to expand the Gema powder division. The home center DIY channel's six-week run rate stabilized and exceeded the second-half run rate of the prior year.
What went wrong
- •Excluding acquisitions, organic sales declined 3%, with the Contractor segment accounting for more than 80% of the organic decline as North American core markets stayed soft amid housing affordability issues and a smaller project pipeline. Gross margin fell 200 basis points, with acquisitions accounting for nearly 80 bps and tariffs (up $4 million in the quarter) another 80 bps; price realization was not enough to offset higher product costs from lower factory volume and unfavorable mix. Contractor segment operating margin dropped five percentage points to 26%, hurt by tariffs, lower factory volume, and the COROB acquisition. The home center DIY channel was down low double digits in the first half and was the biggest challenge. Foreign currency volatility, especially against European currencies, caused roughly $5 million of exchange losses in the quarter. Expansion markets fell 3% as semiconductor strength was offset by a decline in the environmental business.
Guidance changes
| Metric | Period | Previous | Current | Change |
|---|---|---|---|---|
| Organic constant-currency net sales | FY2025 | Low single-digit growth | Low single-digit growth (full-year organic flat described) | Maintained |
| Unallocated corporate expenses | FY2025 | — | $37 million–$40 million | — |
| Capital expenditures | FY2025 | — | $60 million–$70 million | — |
| Adjusted effective tax rate | FY2025 | — | ~19.5%–20.5% | — |
| Foreign currency impact on net sales | FY2025 | — | ~1% favorable (no impact on net earnings) | — |
| One Graco expense reduction | FY2025 | — | ~$16 million, on track | — |
Performance breakdown
| Metric | YoY change | Reason |
|---|---|---|
| Total net sales | +3% to $572M | COROB acquisition added 6%, offsetting a 3% organic decline; currency neutral |
| Reported net earnings | -4% to $128M ($0.76/diluted share) | Lower factory volume and tariff impact |
| Adjusted non-GAAP net earnings | -3% to $127M ($0.75/share) | Excludes excess tax benefits from stock option exercises |
| Gross margin rate | -200 bps | ~80 bps from acquisitions and ~80 bps from tariffs; insufficient price realization vs higher product costs |
| Operating earnings | -2% (-$4M) | Decreased factory volume and tariff effects; operating margin 28%, down 1 point |
| Contractor segment sales | -5% | Soft North American core markets, weak home center DIY, and tough comp vs prior-year channel fill from new product launches |
| Industrial segment sales | -1% | AMEA/Asia-Pacific growth not enough to offset Americas decline; powder finishing strong |
| Expansion markets sales | -3% | Semiconductor momentum offset by environmental business decline |
| Operating cash flow (YTD) | +19% (+$50M) to $308M | Improved inventory management under One Graco and lower incentive payments |
Earnings call themes & trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Tariffs and pricing actions | Patient/wait-and-see on tariff response | Targeted low-single-digit price increases beginning September to offset most of full-year tariff impact, plus product redesign and secondary vendor sourcing | Escalating |
| Trade-environment uncertainty | — | End users delaying project decisions, taking a wait-and-see approach pending trade/tariff clarity | Ongoing headwind |
| Housing affordability / construction softness | — | Affordability and high mortgage rates suppress new construction and DIY/remodeling; pent-up demand awaiting rate relief | Persistent headwind |
| M&A program build-out | Pipeline built from scratch since 2021 | Over $300M committed across two deals in nine months (COROB, Color Service); disciplined pipeline with active deals in works | Accelerating |
| One Graco initiative | Cost/efficiency program underway | Driving inventory reductions, cash flow gains, distributor satisfaction; Minneapolis facility closure to consolidate production | Progressing |
| Semiconductor recovery | Recovery began late last year | Continued momentum with reasonable backlogs and incoming orders; tough Q4 comp expected | Improving |
Q&A summary
How is this price increase different and can you size it? Is it all price or surcharges? (Deane Dray, RBC)
It is a price increase, not a surcharge, targeted at geographies and areas with the most input-cost pain, in the low single digits in select areas, intended only to offset tariff pressure for the rest of the year. Waiting was smart as the overall tariff impact lessened, and competitors raising prices gave confidence.
What drove the strong free cash flow conversion this quarter—any one-timers? (Deane Dray, RBC)
No one-timers; it reflects sustained focus on inventory turns and One Graco efficiencies (centers of excellence). Management views it as repeatable, though the contractor business has a seasonal component. Raw material built up during prior sourcing efforts has been worked down to more normalized levels.
What gives confidence in a better second half given a flat first half? (Jeff Hammond, KeyBanc)
A combination of the September price increase, consistent incoming order run rates, and easier comparisons versus the back half of last year. Management would prefer more than low single digits but feels reasonably confident in reaching the guide.
What green shoot is needed to revive core construction/DIY markets? (Paz/follow-up via Mark Sheahan)
Affordability is the biggest challenge; a rate reduction (without offsetting price rises) would help meaningfully. Many homeowners are locked into low mortgage rates and cannot move, creating substantial pent-up demand that should release once affordability improves.
Have you established Graco as an inorganic compounder, and what is the deal outlook? (Matt Summerville, D.A. Davidson)
Yes—management built detailed M&A pipelines from scratch, gained integration competency, and finds valuations more reasonable than in 2021. The pipeline looks strong with active opportunities, and the company sees a good chance to add inorganic growth on top of organic growth.
How do you balance more acquisitions against high return on invested capital? (Andrew Buscaglia, BNP Paribas Exane)
Targets are niche businesses with recurring revenue and essential applications—characteristics matching Graco's existing portfolio. Disciplined pricing (buyers control the price they pay) plus Graco's ability to invest in capacity and global footprint allows deals to create shareholder value while protecting returns.