Graco Inc. Q2 FY2026 earnings call

Overall Financial Performance

• Delivered record Q2 2026 sales of $591 million, a 3% year-over-year increase, with acquisitions contributing 3% growth, currency translation adding 1%, partially offset by a 1% organic headwind from finishing systems order timing
• Reported net earnings of $145 million (87 cents per diluted share), a 14% year-over-year increase; adjusted diluted EPS was 91 cents, up 17% year-over-year
• Gross margin expanded 130 basis points year-over-year, driven by price realization, improved manufacturing performance, and a $9 million net benefit from tariff refunds; operating margin reached 30% of sales, up from 26% in the prior year quarter, while operating expenses remained flat despite inflation and acquisition additions
• Organic orders for the full company increased 5% in the quarter; the most recent six-week average booking rate is up 14% year-over-year, and backlog (excluding acquisitions) increased $57 million (28%) from the start of the year
• Generated strong cash flow, maintaining a strong balance sheet and cash position for strategic investments and shareholder returns

Strategic Updates and M&A

• Completed announcement of the acquisition of Velco Melt-On, one of Graco's largest acquisitions in over a decade, which is a strategic fit adding complementary technology, products, and customer relationships in the high-growth packaging dispense market
• Graco plans to apply its existing manufacturing expertise, operating discipline, and global distribution reach to improve Velco Melt-On's profitability over time, following the successful playbook used for prior acquisitions
• The company continues to actively evaluate additional M&A opportunities, targeting 1/3 of total revenue growth over a full business cycle to come from acquisitions
• Maintains a balanced capital allocation framework: prioritizes organic growth investment, strategic M&A that meets financial and strategic thresholds, then returns remaining capital to shareholders via dividends and opportunistic share repurchases; in H1 2026, the company repurchased 4.2 million shares for $331 million, paid $98 million in dividends, and invested $29 million in capital expenditures including strategic facility expansion

Product and Operational Highlights

• In the Contractor segment, new product launches including the next-generation QuickShot, ProReach extension system, and new autonomous/semi-autonomous striping solutions are focused on improving customer productivity, reducing labor needs, and cutting material waste
• The Industrial segment benefited from a more coordinated commercial approach that improved execution on large opportunities and won more specifications with OEM customers
• Diversified end market and geographic portfolio provides stability, with growth supported by non-residential infrastructure investment including data centers, energy projects, and semiconductor manufacturing build-out that Graco participates in across multiple segments

1. Contractor Segment: Record quarterly sales and earnings, with total revenue up 4% year-over-year. Organic sales grew across both paint and home center markets in the Americas for the first time in nearly two years. The segment achieved 4% organic bookings growth, with the most recent six-week order trends reaching 14% year-over-year growth. Margins expanded in the quarter. This segment contributes the largest share of Graco's overall revenue, though specific revenue contribution percentages were not disclosed.

2. Industrial Segment: Total sales increased 3% year-over-year. The segment saw broad-based activity across process manufacturing, machinery manufacturing, general industrial applications, and semiconductor-related investment, with healthy demand also in MRO channels. Anticipated headwinds included lower counter-finishing systems revenue due to order timing, and slower activity in Asia (particularly China, driven by prior year tariff-related order pull-forward and softer automotive demand). Organic bookings are up 3% year-to-date through July 17, with the most recent six-week period seeing 11% year-over-year growth. The segment maintained steady profitability, with revenue impacted by project timing.

3. Expansion Markets Segment: Total sales grew 3% year-over-year, with growth across all key businesses. Semiconductor demand remained particularly strong, especially in Asia Pacific, driven by ongoing global investment in semiconductor manufacturing capacity. Quarterly bookings increased 58% year-over-year, bringing year-to-date bookings growth to 33%, with the most recent six-week average up 36% year-over-year. Backlog remains strong, and margins expanded in the quarter.

• Management maintains Graco's full-year 2026 financial outlook, which was originally released in January 2026
• Graco is initiating quarterly sales guidance for Q3 2026, calling for revenue of $580 million to $600 million, excluding contribution from Velco Melt-On (which is expected to close during the third quarter)
• Full-year sales and earnings are expected to see a 1% favorable impact from currency translation at current exchange rates
• Unallocated corporate expenses are projected to be between $39 million and $42 million for the full year
• Management expects full-year revenue to be back-half loaded, with stronger performance in H2 2026 relative to H1 driven by growing backlog, easier year-over-year comparisons for the powder finishing business, and improving order momentum across segments

No explicit new material risks were disclosed in the prepared remarks or Q&A section of the call. Management noted that all forward-looking statements are subject to existing risks and uncertainties disclosed in prior SEC filings and earnings releases. General business risks include quarter-to-quarter volatility in large industrial project orders, macroeconomic uncertainty affecting residential and non-residential construction end markets, and cyclicality in the semiconductor end market that could lead to slower growth after the current multi-year expansion period.

Q: Why is Graco starting to provide quarterly sales guidance now, and will this be a permanent practice going forward?

A: Management said the decision stems from improved near-term visibility (13-week outlook) driven by strong backlog and clear order momentum, and that it will help provide more transparency to investors and analysts. This is a permanent change to Graco's guidance practice, not just a one-off update for the current quarter.

Q: How do current strong bookings and backlog translate to second half 2026 revenue, and what is driving improved visibility?

A: Graco built backlog in both Q1 and Q2, with Q1 organic growth suppressed by delayed shipments despite solid order intake. The $57 million year-to-date backlog increase provides significant momentum for the second half. Easier comps for the powder finishing business, better-than-expected momentum in the Contractor segment in North America, and rapid semiconductor growth all support confidence that full year guidance will be met, with revenue concentrated in the back half.

Q: What is the profile of the Velco Melt-On acquisition, including margin structure and facility breakdown?

A: Velco Melt-On has gross margins above 50%, with over half of revenue coming from high-margin parts and accessories. It has delivered 9% organic CAGR historically, operates in a rational pricing environment, and is a strategic complementary fit for Graco's existing packaging dispense business. Of its 27 total facilities, approximately 5 are manufacturing locations, with the remainder being sales and service offices.

Q: Is the strong growth in Expansion Markets (led by semiconductors) sustainable, and when will the delayed powder finishing projects be recognized in revenue?

A: Management noted semiconductor demand is cyclical and lumpy, but current strong momentum is expected to be sustained through at least the end of 2026 and into 2027, supported by the multi-year global build-out of semiconductor and AI-related capacity. Delayed large powder finishing systems projects are expected to be recognized primarily in Q4 2026, consistent with historical seasonal patterns for that business.

Q: Is the recent pickup in share repurchases a change in capital allocation strategy?

A: Graco's balanced capital allocation framework has not changed: organic growth investment comes first, followed by strategic M&A that meets return thresholds, then returning remaining cash to shareholders via dividends and opportunistic buybacks. Recent higher buyback activity was opportunistic, as management views Graco's current share price as an attractive buying opportunity given the company's strong underlying performance and cash conversion.