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Graco Reports Record Fourth Quarter and Annual Sales - Fourth Quarter Profitability and EPS Growth Driven by Strong Operating

  Graco Reports Record Fourth Quarter and Annual Sales - Fourth Quarter
  Profitability and EPS Growth Driven by Strong Operating Performance

Business Wire

MINNEAPOLIS -- January 28, 2013

Graco Inc. (NYSE: GGG) today announced results for the quarter and year ended
December 28, 2012.

Summary
$ in millions except per share amounts

                   Quarter Ended               Year Ended
                     Dec 28,  Dec 30,  %        Dec 28,    Dec 30,  %
                     2012      2011      Change   2012        2011      Change
Net Sales            $ 253.7   $ 215.6   18  %    $ 1,012.5   $ 895.3   13  %
Net Earnings           42.3      30.4    39  %      149.1       142.3   5   %
Diluted Net
Earnings per         $ 0.68    $ 0.50    36  %    $ 2.42      $ 2.32    4   %
Common Share

  *Record sales in the fourth quarter included 15 percentage points of growth
    from Powder Finishing operations acquired in April 2012, while legacy
    business increased 3 percent.
  *Contractor segment sales for the quarter were up 13 percent, driven by
    growth in the Americas.
  *Fourth quarter gross margin rates for legacy operations improved by more
    than 2 percentage points over the comparable period last year.
  *Cash flow from operations for the year remained strong at $190 million, 17
    percent higher than last year.

"Fourth quarter performance for Graco was strong, despite ongoing weakness in
Europe and Asia," said Patrick J. McHale, President and Chief Executive
Officer. "Growth in the Americas was broad based, led by our Contractor
segment, reflecting a construction market that is on the path to recovery.
European sales were flat in the quarter, when compared to the prior year on a
constant currency basis and excluding acquisitions, with growth in the
emerging markets of Eastern Europe offset by continued strains in Southern
Europe. Activity levels in Asia Pacific also remain soft, with particular
weakness in the mining sector served by our Lubrication segment. Outstanding
factory-level execution and the acquisition of the Gema Powder Finishing
business contributed significantly to our increased earnings in the fourth
quarter. I would like to thank all of our employees worldwide for their
dedication to Graco and for constantly striving to improve our operations."

Consolidated Results

For the quarter, sales were up 18 percent, including increases of 20 percent
in the Americas and 39 percent in Europe, and a decrease of 5 percent in Asia
Pacific. Translation rates did not have a significant impact on sales growth
for the quarter. For the year, sales increased 13 percent (15 percent at
consistent translation rates), including increases of 13 percent in the
Americas, 22 percent in Europe (28 percent at consistent translation rates)
and 5 percent in Asia Pacific. Changes in currency translation rates decreased
sales for the year by approximately $15 million.

Sales for the quarter included $32 million from Powder Finishing operations
acquired at the beginning of April, including $6 million in the Americas, $20
million in Europe and $6 million in Asia Pacific. Sales for the year included
$93 million from Powder Finishing, including $19 million in the Americas, $52
million in Europe and $22 million in Asia Pacific. For the quarter, sales at
consistent translation rates and before acquisitions were up 14 percent in the
Americas, flat in Europe and down 17 percent in Asia Pacific. On the same
basis, sales for the year were up 9 percent in the Americas, up 2 percent in
Europe and down 5 percent in Asia Pacific.

Gross profit margin, expressed as a percentage of sales, was 55 percent for
the quarter, up slightly from last year, and 54 percent for the year, 1½
percentage points lower than last year. For the quarter and year, the effects
of strong operational performance in legacy businesses offset the unfavorable
effect of lower margin rates on acquired Powder Finishing operations.
Non-recurring purchase accounting effects totaling $7 million related to
acquired inventory were recognized in the second quarter, reducing gross
margin percentage for the year by approximately 1 percentage point.

Total operating expenses for the quarter increased $11 million, including $9
million from Powder Finishing operations. Operating expenses for the year
increased $45 million, including $25 million from Powder Finishing and an $8
million increase in acquisition and divestiture expenses.

The April purchase of Powder Finishing and Liquid Finishing equipment
operations had significant impacts on interest expense (increased $10 million
for the year) and other expense (income), which included dividend income of
$12 million ($4 million for the quarter) received from the Liquid Finishing
businesses held as a cost-method investment.

The effective income tax rate was 28 percent for the quarter and 31 percent
for the year, compared to 30 percent and 32 percent for the comparable periods
last year. This year’s effective rates were reduced by the effects of the
investment income from the Liquid Finishing businesses held separate and a tax
rate reduction resulting from a tax holiday in a foreign jurisdiction.

Segment Results

Certain measurements of segment operations are summarized below:

                                                   
               Quarter Ended                           Year Ended
               Industrial  Contractor  Lubrication   Industrial  Contractor  Lubrication
                                                                                     
Net sales
(in            $   156.4    $   69.9     $   27.4      $   603.4    $   298.8    $   110.2
millions)
Net sales
percentage
change             25  %        13  %        (3)  %        20  %        3   %        7    %
from last
year
Operating
earnings
as a
percentage
of net
sales
2012           30  %        16  %        20   %        31  %        18  %        20   %
2011           33  %        10  %        19   %        35  %        17  %        18   %
                                                                                          

Industrial segment sales increased 25 percent for the quarter, all from the
addition of Powder Finishing operations. Without Powder Finishing, sales for
the quarter increased 10 percent in the Americas, decreased 4 percent in
Europe and decreased 15 percent in Asia Pacific. On the same basis, sales for
the year increased 10 percent in the Americas, decreased 2 percent in Europe
(3 percent increase at consistent translation rates) and decreased 7 percent
in Asia Pacific. Powder Finishing operations contributed to segment operating
earnings in the third and fourth quarters, but at a lower rate on sales, which
drove the decrease in the operating margin rate for the Industrial segment.

Contractor segment sales increased 13 percent for the quarter and 3 percent
for the year. Sales for the quarter increased 25 percent in the Americas, but
decreased 4 percent in Europe and 6 percent in Asia Pacific. For the year,
sales increased 5 percent in the Americas, decreased 5 percent in Europe (flat
at consistent translation rates) and increased 4 percent in Asia Pacific.
Higher sales and the leveraging of expenses led to improvement in operating
earnings as a percentage of sales.

Lubrication segment sales decreased 3 percent for the quarter and increased 7
percent for the year. Sales for the quarter increased 8 percent in the
Americas and 16 percent in Europe, and decreased 39 percent in Asia Pacific.
For the year, sales increased 13 percent in the Americas, 2 percent in Europe
(7 percent at consistent translation rates) and decreased 10 percent in Asia
Pacific. For both the quarter and the year, improved gross margin rate and
leveraging of expenses led to improvement in operating earnings as a
percentage of sales.

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 businesses 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 businesses were to be held separate from the rest of Graco’s
businesses until the FTC determined which portions, if any, of the Liquid
Finishing businesses 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 businesses 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
businesses separate from its other businesses and maintain them as viable and
competitive. In accordance with the Hold Separate Order, the Liquid Finishing
businesses are 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 businesses, nor is it able to exert influence over the Liquid
Finishing operations. Consequently, the Company’s investment in the Liquid
Finishing businesses 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 businesses generated sales of $63 million and EBITDA of
$12 million in the fourth quarter, both of which were increases compared to
the prior year. Sales and EBITDA for the nine-month period since completion of
the purchase were $199 million and $39 million, respectively.

Outlook

"We expect growth in every region of the world in 2013," said Mr. McHale. "In
the Americas, the continued recovery in the construction market should provide
a tailwind for both our Contractor and Industrial segments. Further, we expect
the general economic environment for industrial manufacturing to remain stable
in the United States through 2013. Although the economies of Western Europe
are still struggling to find their footing, we expect growth from the emerging
markets of Eastern Europe to drive moderate growth in the EMEA region in 2013.
While our Asia Pacific region will continue to face weak economic conditions
and difficult comparables into the first half of 2013, we are hopeful that the
business will gain momentum as the year progresses. With a modest increase in
volumes, we expect factory performance in 2013 to remain solid and continue to
drive profitability. The Graco team is focused on executing our strategies for
growth in 2013."

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, results
of litigation, administrative proceedings and regulatory reviews incident to
our business, 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 Tuesday, January 29, 2013, at
11:00 a.m. ET, to discuss Graco’s fourth quarter and year-end 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 January 29, 2013, by dialing 800-406-7325,
Conference ID #4587286, 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 February 1,
2013.

Graco Inc. supplies technology and expertise for the management of fluids and
coatings in both industrial and commercial applications. It designs,
manufactures and markets systems and equipment to move, measure, control,
dispense and spray fluid and coating 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)
                                                             
                       Quarter Ended               Year Ended
(in thousands,
except per share       Dec 28,       Dec 30,       Dec 28,         Dec 30,
amounts)
                       2012          2011          2012            2011
Net Sales              $ 253,678     $ 215,594     $ 1,012,456     $ 895,283
Cost of products        114,790     98,581      461,926       395,078 
sold
Gross Profit             138,888       117,013       550,530         500,205
Product                  12,296        10,846        48,921          41,554
development
Selling, marketing       41,720        37,538        163,523         151,276
and distribution
General and             26,970      21,241      113,409       87,861  
administrative
Operating Earnings       57,902        47,388        224,677         219,514
Interest expense         4,992         3,658         19,273          9,131
Other expense           (5,752  )    6           (11,922   )    655     
(income), net
Earnings Before          58,662        43,724        217,326         209,728
Income Taxes
Income taxes            16,400      13,300      68,200        67,400  
Net Earnings           $ 42,262     $ 30,424     $ 149,126      $ 142,328 
                                                                     
Net Earnings per
Common Share
Basic                  $ 0.70        $ 0.51        $ 2.47          $ 2.36
Diluted                $ 0.68        $ 0.50        $ 2.42          $ 2.32
                                                                     
Weighted Average
Number of Shares
Basic                    60,697        59,723        60,451          60,286
Diluted                  61,920        60,635        61,711          61,370
                                                                     
Segment Information (Unaudited)
                                                                     
                       Quarter Ended               Year Ended
                       Dec 28,       Dec 30,       Dec 28,         Dec 30,
                       2012          2011          2012            2011
Net Sales
Industrial             $ 156,371     $ 125,205     $ 603,398       $ 501,841
Contractor               69,868        62,068        298,811         290,732
Lubrication             27,439      28,321      110,247       102,710 
Total                  $ 253,678    $ 215,594    $ 1,012,456    $ 895,283 
                                                                     
Operating Earnings
Industrial             $ 47,483      $ 40,698      $ 186,129       $ 173,694
Contractor               10,971        6,342         54,310          50,581
Lubrication              5,547         5,276         22,535          18,928
Unallocated             (6,099  )    (4,928  )    (38,297   )    (23,689 )
Corporate expenses
Total                  $ 57,902     $ 47,388     $ 224,677      $ 219,514 
                                                                             


GRACO INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(In thousands)
                                                    Dec 28,      Dec 30,
                                                     2012          2011
ASSETS
Current Assets
Cash and cash equivalents                            $ 31,120      $ 303,150
Accounts receivable, less allowances of $6,600 and     172,143       150,912
$5,500
Inventories                                            121,549       105,347
Deferred income taxes                                  17,742        17,674
Investment in businesses held separate                 426,813       -
Other current assets                                  7,629        5,887
Total current assets                                   776,996       582,970
                                                                     
Property, Plant and Equipment
Cost                                                   389,067       358,235
Accumulated depreciation                              (237,523)    (219,987)
Property, plant and equipment, net                     151,544       138,248
                                                                     
Goodwill                                               181,228       93,400
Other Intangible Assets, net                           151,773       18,118
Deferred Income Taxes                                  38,550        29,752
Other Assets                                          21,643       11,821
Total Assets                                         $ 1,321,734   $ 874,309
                                                                     
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to banks                               $ 8,133       $ 8,658
Trade accounts payable                                 28,938        27,402
Salaries and incentives                                34,001        32,181
Dividends payable                                      15,206        13,445
Other current liabilities                             65,393       49,596
Total current liabilities                              151,671       131,282
                                                                     
Long-term Debt                                         556,480       300,000
Retirement Benefits and Deferred Compensation          137,779       120,287
Deferred Income Taxes                                  21,690        -
                                                                     
Shareholders' Equity
Common stock                                           60,767        59,747
Additional paid-in-capital                             287,795       242,007
Retained earnings                                      189,297       97,467
Accumulated other comprehensive income (loss)         (83,745)     (76,481)
Total shareholders' equity                            454,114      322,740
Total Liabilities and Shareholders' Equity           $ 1,321,734   $ 874,309
                                                                     


GRACO INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
                                                  Year Ended
                                                   Dec 28,       Dec 30,
                                                   2012           2011
Cash Flows From Operating Activities
Net Earnings                                       $ 149,126      $ 142,328
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization                        38,762         32,483
Deferred income taxes                                (10,786  )     (1,814   )
Share-based compensation                             12,409         10,994
Excess tax benefit related to share-based            (4,217   )     (2,195   )
payment arrangements
Change in
Accounts receivable                                  (2,752   )     (26,767  )
Inventories                                          5,941          (13,440  )
Trade accounts payable                               (952     )     5,974
Salaries and incentives                              (4,251   )     (3,469   )
Retirement benefits and deferred compensation        3,209          7,228
Other accrued liabilities                            3,288          8,148
Other                                               (95      )    2,574    
Net cash provided by operating activities           189,682      162,044  
Cash Flows From Investing Activities
Property, plant and equipment additions              (18,234  )     (23,854  )
Acquisition of businesses, net of cash acquired      (240,068 )     (2,139   )
Investment in businesses held separate               (426,813 )     -
Other                                               (9,405   )    (2,004   )
Net cash used in investing activities               (694,520 )    (27,997  )
Cash Flows From Financing Activities
Borrowings (payments) on short-term lines of         (619     )     497
credit, net
Borrowings on long-term notes and line of credit     649,325        402,175
Payments on long-term line of credit                 (392,845 )     (172,430 )
Payments of debt issuance costs                      (1,921   )     (1,131   )
Excess tax benefit related to share-based            4,217          2,195
payment arrangements
Common stock issued                                  30,194         22,231
Common stock repurchased                             (1,378   )     (43,250  )
Cash dividends paid                                 (54,302  )    (50,646  )
Net cash provided by (used in) financing            232,671      159,641  
activities
Effect of exchange rate changes on cash             137          (129     )
Net increase (decrease) in cash and cash             (272,030 )     293,559
equivalents
Cash and cash equivalents:
Beginning of year                                   303,150      9,591    
End of year                                        $ 31,120      $ 303,150  
                                                                             

Contact:

Graco Inc.
James A. Graner, 612-623-6635
or
Media Contact: Bryce Hallowell, 612-623-6679