Company Overview

Graco Inc. (GGG) is a leading manufacturer of fluid handling equipment, catering to a diverse range of industries, including manufacturing, processing, construction, and maintenance. With a rich history spanning over nine decades, the company has established itself as a trusted partner, providing innovative solutions that drive efficiency, quality, and environmental sustainability.

Incorporated in 1926 and headquartered in Minneapolis, Minnesota, Graco has grown to become a global player, with operations spanning North America, Europe, Asia Pacific, and other regions. The company's impressive portfolio includes a wide array of products, from sprayers and equipment for paint and texture applications to pumps, valves, and accessories for fluid handling in various industrial and commercial settings. Graco's equipment is used in manufacturing, processing, construction, and maintenance industries, offering technology and expertise for the management of fluids and coatings in industrial and commercial applications.

History and Growth

Throughout its history, Graco has consistently focused on growth through strategic acquisitions, expanding its product offerings, enhancing capabilities in end-user markets, broadening its manufacturing and distribution base, and strengthening its geographic presence. A notable example is the 2012 acquisition of the ITW Finishing Group, which included the Gema brand of powder coating equipment. This move significantly expanded Graco's portfolio of finishing solutions and increased its global footprint.

The company has demonstrated resilience in the face of challenges. In the early 2000s, Graco experienced a significant decline in sales due to economic downturn and increased competition from low-cost foreign manufacturers. However, the company successfully navigated this period by investing in new product development, expanding its distribution network, and implementing cost-cutting measures, which helped it regain financial stability and return to profitability.

More recently, Graco has had to contend with supply chain disruptions and inflationary pressures caused by the COVID-19 pandemic. The company has actively worked with its suppliers to mitigate these challenges and implemented pricing actions to offset increased costs. Despite these headwinds, Graco has maintained its position as a leading manufacturer of fluid handling equipment.

Innovation and Product Development

Graco's unwavering commitment to product innovation has been a key driver of its success. In 2024, the company invested $87.2 million in research and development, representing approximately 4% of its total sales. This consistent investment has enabled Graco to introduce a steady stream of cutting-edge products, including the PowerShot XT electronic-powered airless paint gun, Stellair ACE, Stellair, and E-Mix XT, among others. These new offerings have been well-received by customers, contributing to the company's market share gains and solidifying its position as an industry leader.

The company's strategic acquisitions have also played a pivotal role in strengthening its capabilities and expanding its reach. In November 2024, Graco completed the acquisition of Corob S.p.A., a global leader in high-performance volumetric and gravimetric dispense, mixing, and shaking equipment. This move not only broadened Graco's product portfolio but also enhanced its presence in key growth markets, such as the paint and coating machinery industry.

Financial Performance

Financials and Liquidity

Despite the challenges posed by the uncertain macroeconomic environment, Graco has demonstrated resilience and the ability to navigate through turbulent times. In 2024, the company reported net sales of $2.11 billion, a 4% decrease from the previous year, driven by softness in certain end markets, including semiconductors and industrial activity in China. Annual net income for 2024 was $486.1 million, with annual operating cash flow of $621.7 million and annual free cash flow of $515 million.

For the most recent quarter, Graco reported revenue of $548.7 million, representing a 3% year-over-year decline mainly due to lower demand in the Industrial segment. Quarterly net income was $108.7 million, a 2% decrease compared to the same period last year.

Graco's diversified business model and geographic footprint have helped mitigate the impact of these headwinds. The company's Contractor segment, which accounts for nearly half of its total sales, remained relatively stable, with a 1% decline in 2024. This was largely due to the resilience of the protective coatings market, which experienced growth across all regions, offsetting the weakness in the residential and non-residential construction sectors.

The company maintains a strong financial position with a debt-to-equity ratio of 0.0158. As of December 27, 2024, Graco had cash and cash equivalents of $675.3 million. The company also has access to an $800 million committed credit facility, of which $778 million was unused as of the same date. Additionally, Graco has $20 million in uncommitted credit lines. The company's current ratio stands at 3.70, and its quick ratio is 2.69, indicating strong liquidity.

Performance by Geographic Markets

Graco's global presence is reflected in its sales distribution across different regions. The Americas represented approximately 63% of total sales, while Europe, Middle East, and Africa (EMEA) accounted for 21%, and Asia Pacific contributed 16% to the company's overall sales.

Segment Performance

Graco operates in three main reportable segments: Contractor, Industrial, and Process.

The Contractor segment, Graco's largest, accounted for 47% of total sales in 2024. This segment markets various spraying equipment used for painting, texturing, applying insulation and protective coatings, and marking roads and athletic fields. Contractor segment sales were flat in 2024 compared to 2023, as increased demand for protective coatings equipment and new product offerings offset declines in North American construction markets. The operating margin rate for this segment decreased by 2 percentage points in 2024 due to higher product costs, the impact of lower-margin acquired operations, and increased litigation costs.

The Industrial segment, which includes the Industrial and Powder divisions, represented 29% of Graco's total sales in 2024. This segment experienced a 7% decline in sales in 2024 as reduced project activity in Asia Pacific and weaker industrial activity in Europe offset stronger finishing system sales in the Americas. The operating margin rate for this segment decreased by 2 percentage points in 2024 due to higher product costs, business reorganization expenses, and unfavorable product and channel mix.

The Process segment, which includes the Process and Lubrication divisions, accounted for 24% of Graco's total sales in 2024. Process segment sales declined 8% in 2024, primarily due to weaknesses in semiconductor and other industrial end markets. The operating margin rate for this segment decreased by approximately 2 percentage points as price increases were unable to fully offset the impact of lower sales volumes.

Future Outlook

Looking ahead, Graco is well-positioned to capitalize on emerging trends and opportunities. The company's focus on developing innovative products, expanding its distribution channels, and pursuing strategic acquisitions aligns with its long-term growth strategy. Additionally, the recent reorganization of its operating structure into three global segments – Industrial, Expansion Markets, and Contractor – is expected to drive operational efficiencies and enhance the company's ability to serve its customers more effectively.

For 2025, Graco is initiating a full-year outlook of low single-digit sales growth on an organic constant currency basis. Foreign currency movements are expected to have an unfavorable impact of 1 percentage point on 2025 net sales and 2 percentage points on net earnings. Unallocated corporate expenses are projected to be $39-$42 million in 2025, and the effective tax rate is expected to be 19.5%-20.5%, excluding any impact from excess tax benefits. Capital expenditures are expected to be $50-$60 million in 2025 as major expansion projects are now complete. The company also expects $16 million in annual savings from the business reorganization starting in 2025.

Despite the persistent headwinds, Graco's robust financial position, with a strong balance sheet and healthy cash flow generation, provides the necessary resources to navigate the current challenges and invest in future growth initiatives. In 2024, the company reported operating cash flow of $621.7 million, representing a conversion rate of 128% of its net earnings.

The fluid and coating equipment industry has seen steady growth, with a compound annual growth rate (CAGR) of approximately 4-6% over the past 5 years. Demand has been driven by growth in end markets such as construction, automotive, and industrial manufacturing. Graco's diversified product portfolio, focus on innovation, and strategic acquisition strategy have helped the company navigate challenging market conditions and maintain its position as a leading manufacturer of fluid handling solutions.

In conclusion, Graco's unwavering commitment to innovation, strategic acquisitions, and operational excellence positions the company for continued success, even in the face of ongoing market uncertainties. With a diversified product portfolio, global reach, and a proven track record of navigating through economic cycles, Graco remains well-equipped to capitalize on the emerging opportunities in the fluid handling equipment industry.