Graco Reports Record Third Quarter Sales

  Graco Reports Record Third Quarter Sales

                  Acquired Businesses Contribute to Results

Business Wire

MINNEAPOLIS -- October 24, 2012

Graco Inc. (NYSE: GGG) today announced results for the quarter and nine months
ended September 28, 2012.


Summary
$ in millions except per share amounts
           Thirteen Weeks Ended                 Thirty-nine Weeks Ended
             Sep 28,     Sep 30,     %          Sep 28,     Sep 30,     %
             2012          2011          Change     2012          2011          Change
                                                                 
Net          $   256.5     $   227.3     13%       $   758.8     $   679.7     12%
Sales
Net              37.1          36.6      2%            106.9         111.9     (5)%
Earnings
Diluted
Net
Earnings
per
Common       $   0.60      $   0.60      0%        $   1.73      $   1.82      (5)%
Share
                                                                                

  *Sales for the quarter increased 13 percent, all from the addition of
    Powder Finishing operations. Year-to-date sales increased 12 percent, with
    9 percentage points from Powder Finishing.
  *Changes in currency translation rates decreased sales by approximately $6
    million for the quarter and $14 million year-to-date, and decreased net
    earnings by approximately $2 million for the quarter and $5 million
    year-to-date.
  *For the quarter, sales at consistent translation rates and before
    acquisitions were up 5 percent in the Americas, up 4 percent in Europe and
    down 10 percent in Asia Pacific. On the same basis, year-to-date sales
    were up 7 percent in the Americas, up 3 percent in Europe and down 1
    percent in Asia Pacific.
  *On April 2, 2012, the Company completed the purchase of the finishing
    businesses of Illinois Tool Works Inc., including Powder Finishing and
    Liquid Finishing equipment operations. Costs and expenses related to the
    acquisition included:

       *Acquisition and divestiture-related expenses included in operating
         expenses were $4 million for the quarter and $15 million
         year-to-date, compared to $3 million and $6 million for the
         comparable periods last year, respectively.
       *Interest expense increased $2 million for the quarter and $9 million
         year-to-date.
       *Non-recurring charges totaling $7 million related to inventory that
         reduced gross margin percentages for the year-to-date.

  *Other expense (income) includes dividend income of $4 million for the
    quarter and $8 million year-to-date, received from the Liquid Finishing
    business held as a cost-method investment.

"Worldwide demand held steady in the third quarter as organic sales grew
slightly compared with the previous year,” stated Patrick J. McHale, Graco's
President and Chief Executive Officer. “We continued to see high variability
in demand across products and geographies. On an organic basis, excluding the
recently acquired Powder Finishing operations, sales in the Americas grew 5
percent, driven by double-digit growth in the Industrial and Lubrication
segments. Contractor segment sales in the Americas were down 5 percent,
negatively impacted by product mix and channel inventory realignment. On a
constant currency basis, Graco's legacy European sales increased 4 percent,
with increases posted in all segments, led by double-digit growth in
Lubrication sales and a 9 percent increase in Contractor sales. In Asia
Pacific, Graco’s legacy sales declined in every segment as business conditions
during the quarter were more difficult than anticipated. The acquired Powder
business is performing to expectations, and our overall factory performance
was strong during the quarter, contributing to nice gross margin results. We
remain committed to staying the course and executing our long-term growth
initiatives."

Consolidated Results

Sales for the quarter increased 13 percent (15 percent at consistent currency
translation rates), including increases of 11 percent in the Americas, 28
percent in Europe (38 percent at consistent translation rates) and 4 percent
in Asia Pacific. Year-to-date sales increased 12 percent (13 percent at
consistent translation rates), with increases of 11 percent in the Americas,
17 percent in Europe (24 percent at consistent translation rates) and 9
percent in Asia Pacific.

Sales for the quarter included $30 million from Powder Finishing operations
acquired at the beginning of April, including $7 million in the Americas, $16
million in Europe and $7 million in Asia Pacific. Year-to-date sales included
$62 million from Powder Finishing, including $13 million in the Americas, $32
million in Europe and $17 million in Asia Pacific. For the quarter, sales at
consistent translation rates and before acquisitions were up 5 percent in the
Americas, up 4 percent in Europe and down 10 percent in Asia Pacific. On the
same basis, year-to-date sales were up 7 percent in the Americas, up 3 percent
in Europe and down 1 percent in Asia Pacific.

Gross profit margin, expressed as a percentage of sales, was 55 percent for
the quarter and 54 percent year-to-date, down 1 percentage point from the
third quarter last year and 2 percentage points lower than last year-to-date.
For the quarter and year-to-date, the unfavorable effects of currency
translation, higher material costs and lower margin rates on acquired Powder
Finishing operations were offset somewhat by realized price increases.
Non-recurring purchase accounting effects totaling $7 million related to
inventory reduced year-to-date gross margin percentage by approximately 1
percentage point.

Total operating expenses for the quarter increased $14 million, including $8
million from Powder Finishing operations. Increases in product development and
general and administrative costs were partially offset by changes in currency
translation rates. Year-to-date operating expenses increased $34 million,
including $16 million from Powder Finishing and a $9 million increase in
acquisition and divestiture expenses.

Interest expense increased $2 million for the quarter and $9 million
year-to-date due to higher borrowing levels. Other expense (income) includes
dividends of $4 million for the quarter and $8 million year-to-date, received
from the Liquid Finishing businesses that are required to be held separate
from the Company’s other businesses and accounted for as a cost-method
investment.

The effective income tax rates of 32 percent for the quarter and 33 percent
for the year-to-date are consistent with the comparable periods last year.
This year’s rate is reduced by the effect of the investment income from the
Liquid Finishing businesses held separate. Last year’s rate was reduced by the
effect of the federal R&D credit that is not available in 2012.


Segment Results

Certain measurements of segment operations are summarized below:

             Thirteen Weeks                              Thirty-nine Weeks
               Industrial   Contractor   Lubrication     Industrial   Contractor   Lubrication
                                                                                                
Net sales
(in            $   154.7      $   74.9       $    26.9       $   447.0      $   228.9      $    82.8
millions)
Percentage                                        
change
from last
year
Sales              24%           (4)%            7%            19%           0%             11%
Operating          11%           (23)%           22%           4%            (2)%            24%
earnings
Operating
earnings
as a
percentage
of net
sales
2012           30%           17%            20%           31%           19%            21%
2011           34%           21%            17%           35%           19%            18%
                                                                                                

Industrial segment sales increased 24 percent for the quarter and 19 percent
year-to-date, mostly from the addition of Powder Finishing operations. Without
the increase from Powder Finishing operations, sales for the quarter increased
12 percent in the Americas, decreased 7 percent in Europe (1 percent increase
at consistent translation rates) and decreased 12 percent in Asia Pacific. On
the same basis, year-to-date sales increased 10 percent in the Americas,
decreased 2 percent in Europe (4 percent increase at consistent translation
rates) and decreased 5 percent in Asia Pacific. Powder Finishing operations
contributed to segment operating earnings in the third quarter, but at a lower
rate on sales, which drove the decrease in the operating margin rate for this
segment.

Contractor segment sales decreased 4 percent for the quarter and were flat
year-to-date. Sales for the quarter decreased 5 percent in both the Americas
and in Asia Pacific and increased 1 percent in Europe (9 percent at consistent
translation rates). Year-to-date sales increased 1 percent in the Americas,
decreased 6 percent in Europe (increased 1 percent at consistent translation
rates) and increased 8 percent in Asia Pacific. Lower sales volume, product
mix and higher marketing and general spending led to lower third quarter
operating earnings in the Contractor segment. Year-to-date operating earnings
as a percentage of sales are consistent with last year.

Lubrication segment sales increased 7 percent for the quarter and 11 percent
year-to-date. Sales for the quarter increased 13 percent in the Americas, 8
percent in Europe (15 percent at consistent translation rates) and decreased
11 percent in Asia Pacific. Year-to-date sales increased 15 percent in the
Americas, decreased 2 percent in Europe (3 percent increase at consistent
translation rates) and increased 4 percent in Asia Pacific. Higher volume and
leveraging of expenses led to improved operating earnings in the Lubrication
segment.

Acquisition

On April 2, 2012, the Company completed the purchase of the finishing
businesses of Illinois Tool Works Inc., first announced in April 2011. The
acquisition includes Powder Finishing and Liquid Finishing equipment
operations, technologies and brands. Results of the Powder Finishing business
have been included in the Industrial segment since the date of acquisition.

In December 2011, the United States Federal Trade Commission (“FTC”) filed a
formal complaint to challenge the proposed acquisition on the grounds that the
addition of the Liquid Finishing business to Graco would be anti-competitive,
a position which Graco denied. In March 2012, the FTC issued an order (the
“Hold Separate Order”) that allowed the acquisition to proceed to closing on
April 2, 2012, subject to certain conditions while it evaluated a settlement
proposal from Graco. Pursuant to the Hold Separate Order, the Liquid Finishing
business was to be held separate from the rest of Graco’s businesses until the
FTC determined which portions, if any, of the Liquid Finishing business Graco
must divest.

In May 2012, the FTC issued a proposed decision and order (the “Decision and
Order”) which requires Graco to sell the Liquid Finishing business assets, no
later than 180 days from the date the order becomes final. The FTC has not yet
issued its final Decision and Order. The Company has retained the services of
an investment bank to help it market the Liquid Finishing business and
identify potential buyers. The sale process is expected to be completed within
the 180 days allowed by the Decision and Order.

While it seeks a buyer, Graco must continue to hold the Liquid Finishing
business separate from its other businesses and maintain them as viable and
competitive. In accordance with the Hold Separate Order, the Liquid Finishing
business is managed independently by experienced Liquid Finishing business
managers, under the supervision of a trustee appointed by the FTC, who reports
directly to the FTC.

Under terms of the Hold Separate Order, the Company does not control the
Liquid Finishing business, nor is it able to exert influence over the Liquid
Finishing operations. Consequently, the Company’s investment in the Liquid
Finishing business has been reflected as a cost-method investment, and its
financial results have not been consolidated with those of the Company. Income
is recognized based on dividends received from current earnings and is
included in other income.

The Liquid Finishing business generated sales of $70 million and EBITDA of $15
million in the third quarter, both of which were increases from the previous
quarter and the comparable period in the prior year.

Outlook

"We are expecting macroeconomic crosscurrents to continue into the fourth
quarter, with favorable conditions in the Americas and challenges in China,
India and Western Europe," stated McHale. "The investments we have made during
the past few years to broaden our geographic coverage and diversify our
product portfolio give us opportunities to outperform our end markets, while
the nascent housing recovery in the U.S. should be a positive for our
Contractor equipment business. We will forge ahead with new product
development, expansion of our distribution channel, conversion of end users
from manual painting to using equipment, and continue our efforts to expand
into adjacent new markets."

Cautionary Statement Regarding Forward-Looking Statements

A forward-looking statement is any statement made in this earnings release and
other reports that the Company files periodically with the Securities and
Exchange Commission, as well as in press releases, analyst briefings,
conference calls and the Company’s Overview report to shareholders, which
reflects the Company’s current thinking on market trends and the Company’s
future financial performance at the time they are made. All forecasts and
projections are forward-looking statements. The Company undertakes no
obligation to update these statements in light of new information or future
events.

The Company desires to take advantage of the “safe harbor” provisions of the
Private Securities Litigation Reform Act of 1995 by making cautionary
statements concerning any forward-looking statements made by or on behalf of
the Company. The Company cannot give any assurance that the results forecasted
in any forward-looking statement will actually be achieved. 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: economic
conditions in the United States and other major world economies, currency
fluctuations, political instability, changes in laws and regulations, and
changes in product demand. In addition, risk factors related to the Company’s
acquisition of the finishing businesses from ITW and proposed divestiture of
the Liquid Finishing equipment operations include: whether and when the
required regulatory approvals will be obtained, whether and when the Company
will be able to realize the expected financial results and accretive effect of
the transaction, how customers, competitors, suppliers and employees react to
the transaction, economic changes in global markets, the extent of the
acquired businesses required to be divested, whether the Company will be able
to find a suitable purchaser(s) and structure the divestiture on acceptable
terms, and whether the Company will be able to complete a divestiture in a
time frame that is satisfactory to the Federal Trade Commission. Please refer
to Item 1A of, and Exhibit 99 to, the Company’s Annual Report on Form 10-K for
fiscal year 2011 (and most recent 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/ir and the Securities and Exchange
Commission’s website at www.sec.gov.

Conference Call

Graco management will hold a conference call, including slides via webcast,
with analysts and institutional investors on Thursday, October 25, 2012, at
11:00 a.m. ET, to discuss Graco’s third quarter results.

A real-time webcast of the conference call will be broadcast live over the
Internet. Individuals wanting to listen and view slides can access the call at
the Company’s website at www.graco.com/ir. Listeners should go to the website
at least 15 minutes prior to the live conference call to install any necessary
audio software.

For those unable to listen to the live event, a replay will be available soon
after the conference call at Graco’s website, or by telephone beginning at
approximately 2:00 p.m. ET on October 25, 2012, by dialing 800-406-7325,
Conference ID #4568468, if calling within the U.S. or Canada. The dial-in
number for international participants is 303-590-3030, with the same
Conference ID #. The replay by telephone will be available through October 28,
2012.

Graco Inc. supplies technology and expertise for the management of fluids in
both industrial and commercial applications. It designs, manufactures and
markets systems and equipment to move, measure, control, dispense and spray
fluid materials. A recognized leader in its specialties, Minneapolis-based
Graco serves customers around the world in the manufacturing, processing,
construction and maintenance industries. For additional information about
Graco Inc., please visit us at www.graco.com/ir.



GRACO INC. AND SUBSIDIARIES
Consolidated Statement of Earnings (Unaudited)
                                                          
                   Thirteen Weeks Ended            Thirty-nine Weeks Ended
(in thousands,
except per         Sep 28,         Sep 30,         Sep 28,         Sep 30,
share amounts)
                   2012            2011            2012            2011
Net Sales          $ 256,472       $ 227,347       $ 758,778       $ 679,689
Cost of             116,539       100,998       347,136       296,497 
products sold
Gross Profit         139,933         126,349         411,642         383,192
Product              12,485          10,423          36,625          30,708
development
Selling,
marketing and        41,230          36,673          121,803         113,738
distribution
General and         29,887        22,451        86,439        66,620  
administrative
Operating            56,331          56,802          166,775         172,126
Earnings
Interest             5,233           3,125           14,281          5,473
expense
Other expense       (3,233  )      325           (6,170  )      649     
(income), net
Earnings
Before Income        54,331          53,352          158,664         166,004
Taxes
Income taxes         17,200        16,800        51,800        54,100  
Net Earnings       $ 37,131       $ 36,552       $ 106,864      $ 111,904 
Net Earnings
per Common
Share
Basic              $ 0.61          $ 0.60          $ 1.77          $ 1.85
Diluted            $ 0.60          $ 0.60          $ 1.73          $ 1.82
Weighted
Average Number
of Shares
Basic                60,570          60,430          60,369          60,474
Diluted              61,778          61,415          61,640          61,615
                                                                     
Segment Information (Unaudited)
                                                                     
                   Thirteen Weeks Ended            Thirty-nine Weeks Ended
                   Sep 28,         Sep 30,         Sep 28,         Sep 30,
                   2012            2011            2012            2011
Net Sales
Industrial         $ 154,704       $ 124,502       $ 447,027       $ 376,636
Contractor           74,851          77,757          228,943         228,664
Lubrication         26,917        25,088        82,808        74,389  
Total              $ 256,472      $ 227,347      $ 758,778      $ 679,689 
Operating
Earnings
Industrial         $ 47,162        $ 42,632        $ 138,646       $ 132,996
Contractor           12,835          16,700          43,339          44,239
Lubrication          5,356           4,380           16,988          13,652
Unallocated
corporate           (9,022  )      (6,910  )      (32,198 )      (18,761 )
(expense)
Total              $ 56,331       $ 56,802       $ 166,775      $ 172,126 


All figures are subject to audit and adjustment at the end of the fiscal year.

The consolidated Balance Sheets, Consolidated Statements of Cash Flows and
Management's Discussion and Analysis are available in our Quarterly Report on
Form 10-Q on our website at www.graco.com/ir.

Contact:

Graco Inc.
James A. Graner, 612-623-6635