GRACO INC (GGG)·Q4 2024 Earnings Summary

Executive Summary

• Q4 2024 revenue was $548.7M (-3% YoY) and diluted EPS was $0.63; adjusted EPS was $0.64 as litigation, reorg and acquisition-related items weighed on operating margin, which fell to 24% from 30% YoY .
• Management initiated 2025 guidance for low single-digit organic, constant-currency sales growth, with expected FX headwinds (-1 pt to sales, -2 pts to net earnings), reorg savings (~$16M annual), capex of $50–$60M, and unallocated corporate expense of $39–$42M .
• Segment trends: Contractor grew 3% on acquisitions but had litigation costs and lower margin rate (20% vs 29% prior-year); Industrial declined 14% on China weakness and powder project timing (margin 31%); Process was flat with 27% margin and strong bookings in the quarter .
• Strategic catalysts: Corob acquisition contributed ~3% to Q4 sales and is expected to be low single-digit growth in 2025 with EPS accretion more likely in 2026; reorganization complete and targeted at cross-selling, efficiencies, and M&A expansion into adjacent markets .
• Wall Street consensus estimates from S&P Global were unavailable due to access limits; comparisons to consensus cannot be provided for this quarter.

What Went Well and What Went Wrong

• What Went Well
  • Process segment bookings were the largest in two years; sequential sales up 13% with growth in Americas and strength across vehicle service, industrial lubrication and environmental .
  • Protective Coatings remained strong across regions, supported by infrastructure, container market improvement in APAC, and energy-related activity in the Middle East .
  • Corob integration on track; initial results as expected with ~3% Q4 sales contribution, positioning for low single-digit growth in 2025; expansion of North American reach via Graco’s brand and channels .
• What Went Wrong
  • Industrial segment revenue declined 13–14% in Q4 on sharp APAC (China) weakness in sealants/adhesives and timing of powder finishing systems; margin down vs prior-year .
  • Gross margin rate fell ~200 bps in Q4, with unfavorable mix and lower-margin acquired operations; operating expenses rose $19M including litigation ($7M), reorg ($7M), and acquired operations ($7M) .
  • Contractor underperformed expectations due to lack of typical year-end orders; Q4 margins pressured by $9M litigation in the quarter and $16M for the year (not excluded from non-GAAP in segments) .

Financial Results

Segment breakdown (sales, operating earnings, margins):

KPIs and profitability drivers:

Note: Q4 gross margin rate declined ~200 bps YoY; mix and lower-margin acquired operations reduced gross margin while realized pricing was insufficient to offset volume declines .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We are initiating a full year outlook for 2025 of low single-digit sales growth on an organic constant currency basis.”
• “The reported results were lower… excluding initiatives and unusual items… revenue declined 6%, resulting in a 12% reduction in operating earnings, which is consistent with the full year.”
• “Protective Coatings activities remained strong with growth in all regions… container market improved throughout the year in Asia Pacific.”
• “Business reorganization charge of $8 million in the fourth quarter… annual savings is estimated to be approximately $16 million.”
• “Corob brings high-tech dispensing and mixing solutions… acquisition will enable us to leverage our existing products and channel while expanding our global manufacturing footprint.”

Q&A Highlights

• Orders and Outlook: Recent order rates softened in Nov–Dec but support low single-digit 2025 guide; outlook assumes steady state demand plus pricing/new products without embedding improvement .
• Contractor margins: Litigation and acquisition step-up charges pressured Q4; apples-to-apples margin ~25–26% ex step-up; onetime charges expected to roll off after Q1 .
• Reorg savings: Benefits begin immediately in Q1 2025; largest savings tied to Industrial consolidation; roughly two-thirds of Process revenue moves to Industrial under recast .
• Litigation: ~$16M full-year cost (Contractor), ~$9M in Q4; not excluded from non-GAAP in segment reporting .
• Corob integration and 2025 contribution: Low single-digit growth expected; EPS slightly accretive more likely in 2026 after one-time costs normalize .

Estimates Context

• S&P Global consensus for Q4 2024 revenue and EPS was unavailable due to access limits at the time of this analysis; therefore, estimate comparison cannot be provided this quarter.
• Given management’s 2025 guide (low single-digit organic growth), reorg savings (~$16M), FX headwinds (-1 pt sales, -2 pts earnings), and litigation cost roll-off, sell-side models may revisit margin trajectory and segment mix assumptions for 2025 to reflect lower noise and steady demand assumptions .

Key Takeaways for Investors

• 2025 setup: Low single-digit organic growth with immediate reorg savings and pricing/new products as key levers; FX headwinds modest but present (-1 pt sales, -2 pts earnings) .
• Near-term margin normalization: Contractor margin should recover as litigation and acquisition step-up charges fade post-Q1; Industrial margin supported by consolidation efficiencies .
• Semis/China stabilizing: Bookings improving; management expects firmer semis and China growth in 2025 (easier comps), reducing a major 2024 headwind .
• Powder backlog supports H1/H2: Elevated backlog and order firmness in powder finishing suggest flow-through beyond Q1/Q2 .
• Corob as strategic adjacency: Low single-digit growth expected in 2025; stronger North America access via Graco; EPS accretion more likely in 2026 .
• Cash generation remains robust: FY CFO $621.7M (128% of net earnings), providing flexibility for M&A, dividends, and product investment .
• Dividend increased: Quarterly dividend raised 7.8% to $0.275 per share, payable Feb 5, 2025—supportive of shareholder return profile .