Graco Reports Record 2004 Results; Net Sales Increase 13 Percent; Dilu

    Business Editors

    MINNEAPOLIS--(BUSINESS WIRE)--Jan. 27, 2005--Graco Inc. (NYSE:GGG) today announced record 2004 net earnings of $108.7 million on sales of $605.0 million. Diluted net earnings per share were $1.55 versus $1.23 last year, a 26 percent increase. In the fourth quarter of 2004, net sales of $160.8 million were 19 percent higher than last year. Diluted net earnings per share were $0.39 versus $0.30 last year, a 30 percent increase. Both fourth quarter and year-end results include an additional week when compared to last year.
    Twelve-month sales in the Contractor Equipment Division were $278.7 million versus $256.4 million last year, a 9 percent increase. This increase was driven by growth in the professional paint channel in the Americas and higher international sales. In the Industrial/Automotive Equipment Division, 2004 sales were $274.6 million versus $231.7 million last year, an 18 percent increase. Revenue growth was experienced in all of the major product categories and geographies. Lubrication Equipment Division sales were $51.7 million versus $46.9 million, a 10 percent increase. Higher product sales in the Americas was the primary driver for the double-digit revenue increase in Lubrication this year.
    Twelve-month sales in the Americas were $401.0 million versus $367.8 million last year, a 9 percent increase. In Europe, sales were $124.6 million versus $101.5 million last year, a 23 percent increase. Sales in Europe were 13 percent higher than last year when measured at constant exchange rates. Asia Pacific sales for the year were $79.5 million versus $65.8 million last year, a 21 percent increase. Sales in Asia Pacific were 18 percent higher than last year when measured at constant exchange rates.
    Fourth quarter Contractor Equipment sales were $69.5 million versus $59.4 million last year, a 17 percent increase. Higher sales in the professional paint channel in the Americas was the primary driver of this increase. Industrial/ Automotive Equipment sales were $77.5 million versus $64.4 million last year, a 20 percent increase. Across-the-board double-digit growth was experienced in all three regions this quarter. Lubrication Equipment sales in the fourth quarter were $13.8 million versus $11.5 million last year, a 19 percent increase. Strong sales in the Americas led to the higher Lubrication results.
    Fourth quarter sales in the Americas were $103.3 million versus $89.5 million last year, a 15 percent increase. In Europe, fourth quarter sales were $34.0 million versus $26.4 million last year, a 29 percent increase. Sales in Europe were 19 percent higher than last year when measured at constant exchange rates. Asia Pacific sales for the fourth quarter were $23.5 million versus $19.4 million last year, a 21 percent increase. Sales in Asia Pacific were 18 percent higher than last year when measured at constant exchange rates.
    In the fourth quarter the gross profit margin was 54.6 percent versus 53.6 percent last year. For the year, Graco's gross profit margin was 54.3 percent versus 52.9 percent last year. The higher gross margins in both periods were due to several factors, including product and manufacturing cost improvements, favorable exchange rates and improved fixed cost absorption from higher production volumes. These factors helped to offset higher prices for commodities such as steel. In the fourth quarter, the operating profit margin was 24.8 percent versus 23.2 percent for the same period last year. For the year, operating profit margin, expressed as a percentage of sales, was 26.7 percent versus 24.1 percent last year. For both periods, the improved operating profit margins were due to increased gross margins, which more than offset higher operating expenses.
    Fourth quarter operating expenses included approximately $1 million for educational and promotional tools associated with converting to Home Depot's new In Store Service Initiative (ISSI). Under the ISSI program, Home Depot will utilize third party organizations to assist with training associates and stocking products throughout their stores. Operating expenses also include approximately $2 million of additional performance incentives resulting from higher sales, and other decisions made in the fourth quarter. Finally, fourth quarter operating expenses include a $1 million contribution to the Company's charitable foundation and the additional expenses associated with the extra week this year.
    When compared to 2003 results, the weaker U.S. Dollar versus foreign currencies helped to increase fourth quarter and twelve-month net sales and net earnings. Favorable translation rates increased net sales by approximately $14 million for the year and $3.5 million for the fourth quarter. Favorable translation rates also increased net earnings by approximately $6.5 million for the year and $1.5 million for the fourth quarter.
    "I am proud of our accomplishments this year," said President and Chief Executive Officer David A. Roberts. "Graco has now posted eleven consecutive quarters of consolidated sales growth and six consecutive quarters where all three of its divisions reported higher sales when compared to the same periods in the prior year. We are especially pleased to leverage these improved sales into even higher net earnings and earnings per share. While our visibility is limited due to the short cycle nature of our business, the current sales tempo and backlog levels are encouraging. We continue to see healthy demand for our products and anticipate a strong start to the year. Given this early momentum and our planned initiatives in the areas of new product development, expanding distribution, entering new markets and making strategic acquisitions, I am cautiously optimistic that 2005 will be another record year for Graco."

    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 Annual 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 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. Please refer to Exhibit 99 to the Company's Annual Report on Form 10-K for fiscal year 2003 for a more comprehensive discussion of these and other risk factors.
    Investors should realize that factors other than those identified above and in Exhibit 99 might prove important to the Company's future results. It is not possible for management to identify each and every factor that may have an impact on the Company's operations in the future as new factors can develop from time to time.

    Conference Call

    A conference call for analysts and institutional investors will be held Friday, January 28, 2005, at 11:00 a.m. ET to discuss Graco's fourth quarter and year end results. Graco management will host the call.
    A real-time, listen-only Webcast of the conference call will be broadcast live over the Internet. Individuals wanting to listen can access the call at the Company's website at www.graco.com. 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 1:00 p.m. ET on January 28, 2005, by dialing 800.405.2236, passcode 11021236, if calling within the U.S. or Canada. The dial-in number for international participants is 303.590.3000, with the same passcode. The replay by telephone will be available through January 31, 2005.

    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.

GRACO INC. AND SUBSIDIARIES Consolidated Statements of Earnings

Fourth Quarter Twelve Months (14/13 weeks) (53/52 weeks) Ended Ended ------------------- ------------------- (In thousands, except per Dec. 31, Dec. 26, Dec. 31, Dec. 26, share amounts) 2004 2003 2004 2003 --------- --------- --------- --------- Net Sales $160,819 $135,286 $605,032 $535,098 Cost of products sold 73,075 62,822 276,622 252,296 --------- --------- --------- --------- Gross Profit 87,744 72,464 328,410 282,802 Product development 5,985 4,822 21,783 18,087 Selling, marketing and distribution 30,396 27,447 104,372 99,426 General and administrative 11,516 8,776 40,724 36,456 --------- --------- --------- --------- Operating Earnings 39,847 31,419 161,531 128,833 Interest expense 114 97 498 483 Other expense (income), net (25) 77 252 437 --------- --------- --------- --------- Earnings before Income Taxes 39,758 31,245 160,781 127,913 Income taxes 12,200 9,900 52,100 41,200 --------- --------- --------- --------- Net Earnings $27,558 $21,345 $108,681 $86,713 ========= ========= ========= =========

Net Earnings per Common Share Basic $0.40 $0.31 $1.57 $1.25 Diluted $0.39 $0.30 $1.55 $1.23 ========= ========= ========= ========= Weighted Average Number of Shares Basic 69,068 69,014 69,142 69,284 Diluted 70,238 70,194 70,251 70,416 ========= ========= ========= =========

All share and per share data reflects the three-for-two stock split on March 30, 2004

GRACO INC. AND SUBSIDIARIES Segment Information

Fourth Quarter Twelve Months (14/13 weeks) (53/52 weeks) Ended Ended --------------------------------------- Dec. 31, Dec. 26, Dec. 31, Dec. 26, (In thousands) 2004 2003 2004 2003 --------- --------- --------- --------- Net Sales Industrial / Automotive $77,547 $64,365 $274,574 $231,743 Contractor 69,508 59,381 278,713 256,441 Lubrication 13,764 11,540 51,745 46,914 --------- --------- --------- --------- Consolidated $160,819 $135,286 $605,032 $535,098 ========= ========= ========= =========

Operating Earnings Industrial / Automotive $24,291 $19,678 $88,271 $65,931 Contractor 14,231 11,247 68,381 59,433 Lubrication 2,711 2,719 11,807 9,855 Unallocated Corporate Expense (1,386) (2,225) (6,928) (6,386) --------- --------- --------- --------- Consolidated $39,847 $31,419 $161,531 $128,833 ========= ========= ========= =========

GRACO INC. AND SUBSIDIARIES Consolidated Balance Sheets

Dec. 31, Dec. 26, (In thousands) 2004 2003 ----------- ----------- ASSETS

Current Assets Cash and cash equivalents $60,554 $112,118 Accounts receivable, less allowances of $5,600 and $5,700 109,080 98,853 Inventories 40,219 29,018 Deferred income taxes 15,631 14,909 Other current assets 1,742 1,208 ----------- ----------- Total current assets 227,226 256,106

Property, Plant and Equipment Cost 231,819 221,233 Accumulated depreciation (137,309) (126,916) ----------- ----------- 94,510 94,317

Prepaid Pension 27,556 25,444 Goodwill 9,199 9,199 Other Intangible Assets, net 8,959 10,622 Other Assets 4,264 1,702 ----------- ----------- $371,714 $397,390 =========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities Notes payable to banks $6,021 $4,189 Trade accounts payable 18,599 15,752 Salaries, wages and commissions 19,804 16,384 Dividends payable 8,990 110,304 Other current liabilities 43,359 41,318 ----------- ----------- Total current liabilities 96,773 187,947

Retirement Benefits and Deferred Compensation 33,092 30,567

Deferred Income Taxes 11,012 9,066

Shareholders' Equity Common stock 68,979 46,040 Additional paid-in capital 100,180 81,405 Retained earnings 62,773 43,295 Other, net (1,095) (930) ----------- ----------- Total shareholders' equity 230,837 169,810 ----------- ----------- $371,714 $397,390 =========== ===========

GRACO INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows

Twelve Months (53/52 Weeks) (In thousands) Ended ------------------- Dec, 31, Dec. 26, 2004 2003 --------- --------- Cash Flows from Operating Activities

Net Earnings $108,681 $86,713 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 17,808 18,747 Deferred income taxes 1,403 4,721 Tax benefit related to stock options exercised 6,782 3,673 Change in: Accounts receivable (7,290) 563 Inventories (11,031) 4,694 Trade accounts payable 2,790 1,231 Salaries, wages and commissions 3,020 1,402 Retirement benefits and deferred compensation (1,067) (17,394) Other accrued liabilities 1,539 4,808 Other 273 649 --------- --------- Net Cash from Operating Activities 122,908 109,807 --------- ---------

Cash Flows from Investing Activities

Property, plant and equipment additions (16,893) (15,515) Proceeds from sale of property, plant and equipment 175 257 Capitalized software additions (2,446) -- Acquisition of business -- (13,514) --------- --------- (19,164) (28,772) --------- ---------

Cash Flows from Financing Activities

Borrowings on notes payable and lines of credit 25,399 14,675 Payments on notes payable and lines of credit (23,647) (24,283) Common stock issued 15,117 10,514 Common stock retired (40,792) (55,496) Cash dividends paid (129,910) (15,253) --------- --------- (153,833) (69,843) --------- --------- Effect of exchange rate changes on cash (1,475) (2,407) --------- --------- Net increase (decrease) in cash and cash equivalents (51,564) 8,785

Cash and cash equivalents

Beginning of year 112,118 103,333 --------- --------- End of year $60,554 $112,118 ========= =========

--30--CR/ms*

CONTACT: Graco Inc., Minneapolis Mark W. Sheahan, 612-623-6656

KEYWORD: MINNESOTA INDUSTRY KEYWORD: CHEMICALS/PLASTICS FOREST PRODUCTS MANUFACTURING EARNINGS CONFERENCE CALLS SOURCE: Graco Inc.

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