Graco Inc: Form 10-Q for the period ended Sep 25, 2026

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company supplies technology and expertise for the management of fluids and coatings in both industrial and commercial applications. It designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and coating materials. Management classifies the Company’s business into three reportable segments: Contractor, Industrial and Expansion Markets. Key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end-user markets, expanding distribution globally and completing strategic acquisitions that provide additional channels and technologies.

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes to the consolidated financial statements.

Tariffs

On February 20, 2026, the U.S. Supreme Court issued a decision invalidating certain tariffs imposed under the International Emergency Economic Powers Act ("IEEPA"). The U.S. Court of International Trade subsequently issued orders directing the U.S. Customs and Border Protection to refund previously collected IEEPA tariffs. Given the significant uncertainty involved, the Company determined to only recognize IEEPA tariff refunds upon receipt. The Company began receiving IEEPA tariff refunds during the second quarter of 2026. Through the nine months ended September 25, 2026, the Company received $9 million in refunds, net of related surcharges.

Consolidated Results

A summary of financial results follows (in millions except per share amounts):

(1) The adjusted measures of operating earnings, net earnings and diluted net earnings per common share reflect the Company's updated non-GAAP methodology introduced in the second quarter of 2026. See below for a reconciliation of GAAP to non-GAAP measurements.

Net sales for the third quarter increased by 8 percent, with 4 percentage points of organic sales growth and 4 percentage points of sales growth from acquired operations.

Operating earnings decreased 10 percent for the third quarter, primarily due to a non-cash gain of $14 million from the reduction in fair value of acquisition-related contingent consideration in the prior year that did not repeat. Adjusted operating earnings increased 1 percent, as price realization offset higher product costs in the quarter.

Net earnings decreased 12 percent for the third quarter, related to lower operating earnings and a higher effective tax rate. Adjusted net earnings increased 2 percent.

Beginning in the second quarter of 2026, the Company updated its non-GAAP adjusted measurements to exclude acquisition costs and amortization of acquired intangible assets. The Company excludes acquisition costs and amortization of acquired intangible assets to provide a consistent comparison of operating results across reporting periods. While the Company has a history of acquisition activity, the Company's acquisitions do not occur on a predictable cycle, and transactions vary in complexity, timing, size and nature. Acquisition costs include third-party legal, valuation, consulting and other incremental costs incurred in connection with acquisition activities as well as purchase accounting adjustments. Management uses these adjusted measures to evaluate operating performance and, for acquisition costs, in determining incentive compensation. These excluded items to the non-GAAP adjusted measurements provide supplemental information useful in evaluating the Company's underlying operating performance. Prior-period amounts have been recast to conform to the current presentation.

Excluding the impact of acquisition costs, amortization of acquired intangible assets, the related income tax effects of these items and excess tax benefits from stock option exercises presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP adjusted measurements of operating earnings, earnings before income taxes, income taxes, effective income tax rate, net earnings and diluted earnings per share follows (in millions except per share amounts):

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The following table presents an overview of components of net earnings as a percentage of net sales:

Net Sales

The following table presents net sales by geographic region (in millions):

(1) North, South and Central America, including the United States

(2) Europe, Middle East and Africa

The following table presents the components of net sales change by geographic region:

Gross Profit

The gross profit margin rate decreased approximately 3 percentage points for the third quarter compared to the same period last year, primarily driven by higher product costs, the unfavorable effects of lower margin rates of acquired operations and unfavorable product and channel mix. Tariff refunds and changes in tariff costs were not significant for the third quarter. The gross profit margin rate decreased 1 percentage point for the year to date, as the unfavorable effects of lower margin rates of acquired operations and unfavorable product and channel mix were partially offset by tariff refunds, net of related surcharges.

Operating Expenses

Total operating expenses increased $24 million (19 percent) for the third quarter and increased $32 million (8 percent) year to date compared to the same periods last year and included a non-cash gain of $14 million from the reduction in fair value of acquisition-related contingent consideration in the prior year that did not repeat. Other increases in operating expenses primarily related to incremental expenses from acquired operations of $7 million for the quarter and $18 million for the year to date and incremental acquisition costs of $2 million for the quarter and $3 million for the year to date.

Other Income, net

Other non-operating income increased by $1 million in both the third quarter and the year to date from the comparable periods last year, primarily due to lower foreign exchange losses on net assets of foreign operations. The year to date increase in other non-operating income was partially offset by a prior year gain of $5 million from the sale of a former manufacturing and distribution facility in Switzerland that did not repeat.

Income Taxes

The effective income tax rate was 20 percent for the third quarter and 19 percent for the year to date. Adjusted to exclude the impacts of certain non-GAAP adjustments (see reconciliation of GAAP to non-GAAP measurements), the adjusted effective income tax rate of 20 percent for both the third quarter and year to date was comparable to the respective periods last year.

Segment Results

Certain measurements of segment operations compared to last year are summarized below:

Contractor Segment

The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment

(dollars in millions):

The following table presents the components of net sales change by geographic region for the Contractor segment:

Contractor segment incremental sales from acquired operations for the third quarter and year to date included $7 million and $20 million, respectively. Organic sales growth in the Americas for the third quarter was primarily driven by growth within the professional paint channel. For the year to date, sales growth was broad-based with growth in the protective coating and spray foam product categories as well as within the professional paint and home center channels. The operating margin rate for this segment was flat for the quarter and increased 2 percentage points for the year to date, primarily driven by the net impact of tariff refunds and related surcharges.

Industrial Segment

The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment

(dollars in millions):

The following table presents the components of net sales change by geographic region for the Industrial segment:

Industrial segment sales growth included incremental sales from acquired operations of $13 million for the third quarter and $43 million for the year to date. The timing of finishing system sales and other project-related activity contributed to an increase of 6 percentage points in sales for the third quarter, while resulting in a decrease of 2 percentage points in sales for the year to date. The operating margin rate for this segment decreased 6 percentage points for the third quarter and 3 percentage points for the year to date, primarily due to unfavorable product and channel mix and the impact of acquired operations. Tariff refunds, net of related surcharges, partially offset the year-to-date decrease.

Expansion Markets Segment

The following table presents net sales and operating earnings as a percentage of sales for the Expansion Markets segment (dollars in millions):

The following table presents the components of net sales change by geographic region for the Expansion Markets segment:

Expansion Markets net sales increased $3 million for both the third quarter and year to date compared to the same periods last year due to improved sales volume in the semiconductor and environmental product applications. The segment's operating margin rate for the third quarter decreased 1 percentage point, primarily due to upfront license fees related to the electric motor product application in the prior year that did not recur. The year to date operating margin rate was flat.

Liquidity and Capital Resources

Net cash provided by operating activities of $463 million in the first nine months of 2026 decreased by $24 million compared to the same period last year. Increases in accounts receivable and accounts payable reflect growth in business activity in the third quarter of 2026. Significant uses of cash in the first nine months of 2026 included business acquisitions of $436 million, share repurchases of $463 million (partially offset by $45 million of net proceeds from shares issued), dividend payments of $145 million and plant and equipment additions of $48 million.

In the third quarter of 2026, the Company borrowed $219 million under its $750 million revolving credit facility in order to fund previously announced business acquisitions. In the third quarter of 2026, the Company made payments of $119 million against the revolving credit facility.

For the first nine months of 2025, significant uses of cash included share repurchases of $361 million (partially offset by $32 million from shares issued) and dividend payments of $138 million, business acquisitions totaling $70 million and plant and equipment additions of $34 million.

As of September 25, 2026, the Company had available liquidity of $808 million, including cash and cash equivalents of $140 million, of which $122 million was held outside of the U.S., and available credit under existing committed credit facilities of $668 million.

Cash balances and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs for the next 12 months and beyond, including its capital expenditure plan, planned dividends, share repurchases, potential future acquisitions and operating requirements. Capital expenditures for 2026 are expected to be approximately $80 million. The Company may make opportunistic share repurchases going forward.

Outlook

While end market conditions remain mixed, we have confidence in the position of our businesses and the opportunities ahead. We remain focused on executing our strategy and delivering sustainable long-term growth and shareholder value.

The Company estimates fourth quarter total company sales of $610 million to $640 million, including the acquisition of Valco Melton.

Cautionary Statement Regarding Forward-Looking Statements

The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including our Form 10-K, Form 10-Qs and Form 8-Ks, and other disclosures, including our 2025 Overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.

Future results could differ materially from those expressed, due to the impact of changes in various factors. These risk factors include, but are not limited to, risks relating to the demand for our products and the level of commercial, industrial and construction activity worldwide; changes in currency translation rates; international and domestic instability; interest rate fluctuations and changes in credit markets; global sourcing of materials; inflationary cost pressures and our ability to raise prices without decreasing demand for our products; interruptions of or intrusions into our information systems; intellectual property rights; the use of generative artificial intelligence and other emerging technologies; conducting business internationally; catastrophic events; our ability to attract, develop and retain qualified personnel; public health crises; our growth strategies and acquisitions; potential goodwill impairment; our ability to compete effectively; our dependence on a few large customers; our dependence on cyclical industries; changes in laws and regulations; climate-related laws, regulations and accords; environmental, social and governance-related expectations and requirements; compliance with anti-corruption and trade laws; changes in tax or tariff rates or the adoption of new tax or tariff legislation; and costs associated with legal proceedings. Please refer to Item 1A of our 2025 Annual Report on Form 10-K and Item 1A of this Form 10-Q for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com (http://www.graco.com) and the Securities and Exchange Commission’s website at www.sec.gov (http://www.sec.gov). Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

There have been no material changes related to market risk from the disclosures made in the 2025 Annual Report on Form 10-K.

Evaluation of disclosure controls and procedures

As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer and the Chief Financial Officer and Treasurer. Based upon that evaluation, the Company’s President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective.

Changes in internal controls

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART IIOTHER INFORMATION

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2025 Annual Report on Form 10-K.