Snapshot
Graco Inc reported $540M of revenue in Q1 2026, up 2.2% year over year, with diluted EPS of $0.70 and an operating margin of 25.5%.
- Revenue
- $540M
- YoY growth
- +2.2%
- Diluted EPS
- $0.70
- Operating margin
- 25.5%
What management said
- •Acquisitions contributed 5% growth and currency translation added 3% growth, partially offset by a 6% decline in organic sales.
- •Reported net earnings were $119 million, down 5% or 70 cents per diluted share.
- •Excluding excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were 66 cents per diluted share, down 6%.
- •Gross margin decreased 60 basis points versus the first quarter last year.
- •The benefit from our pricing actions helped offset higher product costs from lower factory volume, lower margin rates from acquired operations, and incremental tariffs.
- •Excluding $5 million in incremental expenses from acquired operations and the effects of currency translation, expenses were flat.
- •In the quarter, the operating margin rate in both our contractor and expansion market segments was 24%, consistent with the same period last year.
- •Industrial segment operating margin was 32%, down from 34% in the prior year quarter.
- •Total company operating earnings decreased $6 million or 4% in the quarter.
- •Operating earnings as a percentage of sales were 26% compared to 27% in the same period last year.
- •The adjusted effective tax rate was 20%, in line with our expected full-year adjusted tax rate of 20%-21%.
- •Cash provided by operations as a percentage of adjusted net earnings was 107% for the quarter.
What went well
- •First quarter sales rose 2% to $540 million, with acquisitions contributing 5% growth and currency translation adding 3%. Bookings were up 3% at actual currency rates, driving nearly a $26 million increase in backlog primarily in the industrial segment, and management noted an additional $21 million backlog build into April. The industrial segment grew 4% with bookings up 5% at actual currency, and industrial Americas delivered revenue growth with bookings up double digits across multiple end markets. The semiconductor business saw first quarter bookings up at least 20% in each region despite lapping an exceptionally strong prior year that grew 51%. Within contractor, foam, polyurea, and protective coatings businesses remained bright spots, supported by demand tied to infrastructure, border wall, and data center projects. Management emphasized the company remains highly profitable, generates strong cash flow, and converted 107% of adjusted net earnings into operating cash in the quarter.
What went wrong
- •Organic sales declined 6% in the quarter and started the year slower than expected, particularly in January, as orders came in at a softer pace early before improving. The company was unable to convert strong industrial bookings into revenue within the quarter, leaving roughly $26 million in backlog unbilled. Gross margin decreased 60 basis points year over year, hurt by lower factory volume, lower-margin acquired operations, unfavorable product mix, and $7 million of incremental tariff costs. Industrial segment operating margin fell to 32% from 34%, driven by unfavorable volume and tariffs not offset by price. Contractor construction demand remained softer than desired, particularly in the Americas, with the paint and home center channels down in the quarter.
Guidance changes
| Metric | Period | Previous | Current | Change |
|---|---|---|---|---|
| Organic revenue growth (constant currency) | FY2026 | low single-digit | low single-digit (maintained) | maintained |
| Total revenue growth incl. acquisitions | FY2026 | mid-single digit | mid-single digit (maintained) | maintained |
| Currency impact on net sales | FY2026 | — | 1% favorable | — |
| Currency impact on net earnings | FY2026 | — | 2% favorable | — |
| Unallocated corporate expenses | FY2026 | $40M-$43M | $40M-$43M (maintained) | maintained |
| Capital expenditures | FY2026 | $90M-$100M | $90M-$100M (maintained, ~$50M for facility expansion) | maintained |
| Adjusted effective tax rate | FY2026 | — | 20%-21% | — |
Performance breakdown
| Metric | YoY change | Reason |
|---|---|---|
| Total sales | +2% to $540M | Acquisitions +5% and currency +3%, partially offset by 6% organic decline |
| Reported net earnings | -5% ($119M, $0.70/diluted share) | Lower operating earnings; adjusted non-GAAP EPS $0.66, down 6% |
| Gross margin | -60 bps | Lower factory volume, lower-margin acquired operations, unfavorable mix, and incremental tariffs, partially offset by pricing |
| Contractor segment sales | +2% | Acquisitions +3% and currency +3% offsetting 4% organic decline; soft Americas construction |
| Industrial segment sales | +4% | Acquisitions +8% and currency +4% offsetting 8% organic decline tied to project timing in EMEA and Asia Pacific |
| Industrial segment operating margin | 32% vs 34% | Unfavorable volume and tariffs not offset by price realization |
| Expansion markets segment organic revenue | -5% | Semiconductor lapping an exceptionally strong prior-year comparison (prior year +51%) |
| Operating earnings | -4% (26% of sales vs 27%) | Lower volume and margin pressure |
Earnings call themes & trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Backlog and order-to-revenue conversion | — | Roughly $26M backlog build (plus $21M into April) expected to convert mainly in the second half; low cancellation risk | up |
| Tariffs | — | $7M cost headwind, largely offset by pricing; new Section 232 component-based structure under assessment but absolute level similar to before; refunds to be highlighted as received | stable |
| Contractor / construction demand | — | Soft, particularly Americas; housing starts roughly flat, market limited growth over past four years expected to persist | down |
| Semiconductor | Prior-year Q1 grew 51%, largest quarter of 2025 | Organic decline on tough comp but bookings up 20%+ in each region; demand solid | stable |
| Pricing actions | — | Annual pricing adjustments underway globally; key North America channel-partner increases going live early/in Q2 | up |
| M&A pipeline | — | Favorable market, well-populated pipeline; more activity on industrial side; ~30% of 2025 revenue from acquired businesses; long-term target 10% top-line growth, one-third from M&A | stable |
Q&A summary
Across major verticals and geographies, what surprised you versus expectations, and what is the Middle East exposure?
Industrial bookings were up mid-single digits across finishing, process, lubrication and vehicle service, though not all converted to revenue; powder/Gema was in line with low single-digit full-year expectations; paint and home center channels were a headwind. Europe is doing okay, Asia started slower (adhesives), North America bookings up low- to mid-single digits. Middle East is about $35M of full-year sales with no significant demand impact yet; contractor (protective coatings) would be most exposed.
How much price action have you taken on the $7M tariff headwind, and is a second price increase possible?
Pricing actions are offsetting input cost pressure and tariffs have been covered; the gross margin pinch was mostly volume and unfavorable mix, not price-cost. Annual global pricing adjustments are underway, started earlier than usual, and several key North America channel-partner increases go live early or in Q2.
What gives confidence in the low single-digit organic guide given the slow start?
First quarter bookings were up low single digits, aligning with the guide, and backlog built in Q1 plus another ~$21M into April supports it. Conversion may be lumpy quarter to quarter but management expects to reach the range by year-end.
On the revised Section 232 tariff framework, is there a meaningful change to net cost, and any competitive advantage as a domestic manufacturer?
No obvious competitive advantage; the absolute tariff level under the new structure is similar to before. The shift to taxing full component value rather than just steel/aluminum is still being assessed, but most products are manufactured domestically with metals imported in raw form. Refunds will be highlighted as they come in.
What drove the gross margin pressure and how much came from acquisitions?
It was mostly mix and some volume; price-cost was not a headwind outside lower factory volume to absorb overhead. Acquired revenue accounted for about 50 basis points of the total-company margin impact, with the majority flowing through the industrial segment.
Is there visibility on backlog conversion and risk of cancellation or slippage into next year?
Management sees no meaningful risk; most backlog is expected to convert in the second half. Cancellations are rare in both legacy and Gema businesses; Gema system orders require a substantial down payment (approaching half the project cost), and over eight or nine years of involvement only one project was canceled.