Graco Inc. (GGG) Cash Flow Statement

The OCF/NI ratio held at 1.36 in 2026Q3, broadly consistent with the trailing average despite gross margin erosion to 50.5% flagged in the income statement analysis. This divergence between reported earnings deterioration and resilient cash conversion may indicate that margin compression is reflected partly in non-cash charges or inventory valuation adjustments rather than a pure erosion of cash economics, though the interpretation warrants confirmation against the full accrual detail. However, the sharp seasonal drop in the ratio to 1.01 in both 2026Q1 and 2025Q1 highlights that investors should not extrapolate a single quarter's conversion strength into an annualized view.

The Q1 trough pattern (20.0% in 2026Q1 versus 21.7% in 2025Q1) is consistent and appears structurally seasonal rather than a genuine signal of deterioration, so the annual comparison carries more weight than any isolated print. The 730 basis point year-over-year compression in the Q3 comparison warrants scrutiny of whether it reflects working capital absorption, rising cash costs, or integration-related outflows following the $436M acquisition completed in 2026Q3. If the gap persists into 2026Q4, it would suggest the acquisition has not yet delivered the cash flow accretion investors might expect from Graco's historically disciplined bolt-on M&A approach, and should temper assumptions embedded in FCF-based valuation work.

CapEx/Revenue oscillated between a low of 0.6% (2025Q3) and a high of 6.6% (2024Q2), averaging roughly 2.9%, a level that appears light relative to typical maintenance requirements for precision manufacturing peers such as Nordson and IDEX. This capital-light profile directly supports the company's elite FCF margins, but if organic maintenance capex remains below D&A, Graco may be implicitly accepting gradual asset base aging or manufacturing intensity shifts that only become visible over longer horizons. The D&A-to-capex gap also inflates the reported FCF figure relative to what a steady-state reinvestment profile would generate, which should be haircut in any terminal value or normalizing cash flow assumption.

Q4 has been a consistent source of working capital release (+$35.7M in 2025Q4, +$67.0M in 2024Q4), likely reflecting year-end distributor stocking patterns and collections acceleration, while Q1 has been a persistent drag (negative in both 2025Q1 and 2026Q1). The swing from +$30.5M in 2026Q2 to only +$5.9M in 2026Q3 breaks this seasonal pattern somewhat and may indicate slower distributor cash collections or inventory build-up—consistent with the income statement flag on channel normalization. Investors should treat any single quarter's OCF figure with caution and prefer trailing twelve-month aggregations when assessing underlying operating momentum.

The buyback cadence was highly variable—ranging from zero in 2025Q3 and 2024Q4 to $319.4M in 2026Q2—suggesting opportunistic rather than programmatic repurchase activity, consistent with a fortress balance sheet that lets management act on price dislocations. Dividends remained remarkably steady at roughly $43-49M per quarter and appear comfortably covered by FCF, but the fact that aggregate deployment exceeds cumulative FCF indicates the return and acquisition program has been partly funded from the ~$624M cash position rather than internally generated cash flow. The $436M acquisition in 2026Q3 is the largest single deployment in the window and a meaningful step up from prior bolt-on deals; whether this marks a strategic inflection toward larger-scale M&A warrants monitoring of integration costs, organic contribution, and the pace of any subsequent cash rebuilding.

The divergence appears driven by three visible components: D&A exceeding capex by roughly $89M over the window, repeated working capital releases in Q3 and Q4 quarters, and modest but growing stock-based compensation add-backs that reached $8.0M in 2026Q3. The SBC drift higher—from a $4.6M trough in 2024Q4 to $8.0M currently—represents a real dilution cost that trims the quality of the cash conversion advantage, as buyback activity may partially offset rather than eliminate this dilution. Taken together, the structural gap between earnings and cash flows supports a higher quality-of-earnings view for Graco, but the shrinking delta between reported margins and cash margins in recent quarters suggests this premium may be modestly compressing.