Graco Reports Record First Quarter Results; Sales Increase 27 Percent; Strong Underlying Growth Continues in All Segments and Regions.

MINNEAPOLIS -- Graco Inc. (NYSE:GGG) today announced first quarter net earnings of $27.0 million on net sales of $170.9 million - increases over the prior year of 21 percent and 27 percent, respectively. Diluted net earnings per share were $0.38 versus $0.32 last year, a 19 percent increase. Without acquisitions, sales were up 16 percent.

First quarter results include $15 million of sales from the previously announced acquisitions of Liquid Control and Gusmer. While the impact of adjusting inventory upward to its fair market value prevented these companies from contributing to net earnings in the first quarter, they did contribute to cash flow and it is anticipated that they will begin contributing to net earnings in the second half of the year.

The acquisitions have been accounted for as purchases under U.S. Generally Accepted Accounting Principles (GAAP). In the first quarter, gross profits were reduced by $3 million as the result of adjusting inventory upward from its cost to fair market value in accordance with GAAP. It is expected that gross profits will be reduced by a similar amount in the second quarter with no additional amounts thereafter. In addition, first quarter results include non-cash costs of approximately $1 million from the amortization of intangible assets. The twelve-month recurring non-cash expense associated with amortization of intangible assets from these acquisitions is expected to be approximately $4 million.

In the first quarter of 2005, sales in the Industrial/Automotive Equipment Division were $87.9 million, up 39 percent versus the same period last year. Without acquisitions, sales were 15 percent higher. Double-digit sales increases were experienced in all three regions and demand remained strong in each of the major product categories (finishing, process, protective coatings and sealants and adhesives). In Europe, sales were up 28 percent versus last year and were 15 percent higher without the impact of acquisitions. Similar results were seen in the Americas and Asia Pacific, where sales were up 54 and 22 percent, respectively. Without acquisitions, sales in the Americas and Asia were up 17 and 11 percent, respectively. Business remained at record levels heading into the second quarter with no apparent signs of weakness.

When compared to the first quarter of 2004, worldwide Contractor Equipment Division sales of $67.8 million increased 15 percent. In the Americas, double-digit sales increases were experienced in both the professional paint store channel and home center channel. In the professional paint channel, sales were particularly strong in the Southeastern and Southwestern regions of the United States, where construction activity is robust. Larger sprayers that are typically used on commercial jobs and entry-level professional units were particularly strong in the first quarter. Sales improved in the home center channel, driven by a combination of strength in the Southeastern and Southwestern regions of the United States, as well as the rollout of texture sprayers in over 600 new stores. In Europe, sales were up 27 percent as growth was experienced in virtually all regions including Germany, which has been weak for an extended period of time. Graco continues to focus on converting end users to airless spray, leveraging new products and gaining market share throughout Europe and Asia Pacific.

First quarter sales for the Lubrication Equipment Division were $15.3 million, up 20 percent from last year. Sales were strong in most product categories. A combination of enhanced pricing, new product introductions and strong car dealership activity led to the higher sales this quarter.

Sales continued to be strong in Graco's three regions which were all higher than last year's record first quarter. In the Americas, first quarter sales increased 28 percent to $114.0 million. Without acquisitions, sales were 16 percent higher. Double-digit volume increases were experienced in all three business segments during the first quarter. In Europe, net sales of $35.7 million were 28 percent higher than the first quarter of 2004. Sales without acquisitions and favorable exchange rates increased 14 percent. All three business segments experienced double-digit volume growth in Europe in the first quarter. In Asia Pacific, net sales of $21.2 million were 19 percent higher than the first quarter of 2004, and sales measured without acquisitions and favorable exchange rates increased 8 percent.

Graco's gross profit margin, expressed as a percentage of sales, was 50.2 percent for the quarter versus 54.4 percent for the same period last year. Approximately 300 basis points of this decline was the result of acquisitions, including the aforementioned inventory cost and the impact of the lower gross profit margins of the acquired businesses. It is anticipated that the gross profits of the acquired businesses will improve in the second half of this year. In addition to the impact of acquisitions, the remaining difference in gross margin from last year was the result of several factors, including the mixture of products sold in the Contractor Equipment and Industrial/Automotive Equipment segments and slightly higher manufacturing costs. Inventory increased in the first quarter as the result of the acquisitions and higher stocking levels to meet increased demand. Inventories of the acquired companies contributed approximately $17 million of the increase.

Graco's operating profit margin, expressed as a percentage of sales, was 24.1 percent for the first quarter versus 24.8 percent last year. Lower operating expenses, expressed as a percentage of net sales, helped to substantially offset the decline in gross profit margin experienced in the first quarter. Despite higher expenses associated with the acquisitions, operating expenses were 26.1 percent of net sales versus 29.6 percent in the same period last year.

"We are pleased to report record first quarter results," said President and Chief Executive Officer David A. Roberts. "This represents our twelfth consecutive quarter of sales growth and it's the seventh consecutive quarter where all three divisions have reported higher sales when compared to the same periods in the prior year. These results were in line with our expectations and are very strong both with and without the impact of the acquisitions. We are especially pleased to report double-digit volume gains (excluding currency translation and acquisitions) in all three divisions this quarter. Industrial/Automotive sales remained strong with growth in all three geographic regions and across all of the major product categories. While our vision is limited due to the short cycle nature of this business, the sales tempo experienced throughout the quarter was very good and we continue to expect growth this year. Similarly, our Contractor segment remains robust, driven by a combination of new products, a favorable U.S. housing and construction market and growth from our channel expansion efforts. In Lubrication, sales were very good and we are excited about the prospects for continued growth, especially with the re-introduction of our Matrix(TM) fluid management system. Finally, our newly acquired businesses contributed both sales and cash flow in the first quarter. We expect that these businesses will also begin to contribute to our net earnings in the second half of this year. We have identified several opportunities to improve the profitability of these companies and are encouraged with the dedication and skills of the employees and management."

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 2004 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 Thursday, April 21, 2005 at 11:00 a.m. EDT to discuss Graco's first quarter 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. EDT on April 21, 2005, by dialing 800.405.2236, Conference ID# 11028325, 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 April 24, 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 Statement of Earnings

                                        First Quarter (13 weeks) Ended
                                        ------------------------------
(In thousands, except per share amounts) April 1, 2005  March 26, 2004
                                        --------------  --------------
Net Sales                                    $170,944        $134,982
   Cost of products sold                       85,078          61,578
                                        --------------  --------------
Gross Profit                                   85,866          73,404
   Product development                          6,244           5,122
   Selling, marketing and distribution         26,407          24,397
   General and administrative                  12,048          10,443
                                        --------------  --------------
Operating Earnings                             41,167          33,442
   Interest expense                               339             171
   Other expense (income), net                    189             (56)
                                        --------------  --------------
Earnings before Income Taxes                   40,639          33,327
   Income taxes                                13,600          11,000
                                        --------------  --------------
Net Earnings                                  $27,039         $22,327
                                        ==============  ==============

Net Earnings per Common Share
   Basic                                        $0.39           $0.32
   Diluted                                      $0.38           $0.32
                                        ==============  ==============
Weighted Average Number of Shares
   Basic                                       69,074          69,082
   Diluted                                     70,274          70,242
                                        ==============  ==============

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

                      GRACO INC. AND SUBSIDIARIES
                          Segment Information


                                        First Quarter (13 weeks) Ended
                                        ------------------------------
(In thousands)                          April 1, 2005   March 26, 2004
                                        -------------   --------------
Net Sales
   Industrial / Automotive                   $87,869          $63,251
   Contractor                                 67,780           58,975
   Lubrication                                15,295           12,756
                                        -------------   --------------
   Consolidated                             $170,944         $134,982
                                        =============   ==============

Operating Earnings
   Industrial / Automotive                   $21,964          $20,265
   Contractor                                 15,086           11,925
   Lubrication                                 4,199            3,002
   Unallocated Corporate Expense                 (82)          (1,750)
                                        -------------   --------------
   Consolidated                              $41,167          $33,442
                                        =============   ==============

Segment operating earnings for 2004 have been restated to conform to
2005, which includes amortization of intangibles formerly classified
as unallocated corporate expense. All figures are subject to audit and
adjustment at the end of the fiscal year.



                      GRACO INC. AND SUBSIDIARIES
                      Consolidated Balance Sheets


(In thousands)                           April 1, 2005    Dec.31, 2004
                                        --------------  --------------
ASSETS

Current Assets
     Cash and cash equivalents                $12,321         $60,554
     Accounts receivable, less
      allowances of $6,000 and $5,600         121,160         109,080
     Inventories                               63,168          40,219
     Deferred income taxes                     15,992          15,631
     Other current assets                       2,077           1,742
                                        --------------  --------------
          Total current assets                214,718         227,226
Property, Plant and Equipment, net            104,442          94,510
Prepaid Pension                                28,006          27,556
Goodwill                                       49,688           9,199
Other Intangible Assets, net                   39,771           8,959
Other Assets                                    4,070           4,264
                                        --------------  --------------
       Total Assets                          $440,695        $371,714
                                        ==============  ==============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
     Notes payable to banks                   $45,679          $6,021
     Trade accounts payable                    25,848          18,599
     Salaries, wages and commissions           12,119          19,804
     Dividends payable                          8,983           8,990
     Other current liabilities                 53,155          43,359
                                        --------------  --------------
         Total current liabilities           $145,784         $96,773

Retirement Benefits and Deferred
 Compensation                                  33,077          33,092

Deferred Income Taxes                          11,014          11,012

Shareholders' Equity
     Common stock                              69,178          68,979
     Additional paid-in capital               108,483         100,180
     Retained earnings                         74,276          62,773
  Accumulated Comprehensive income
   (loss) and other                            (1,117)         (1,095)
                                        --------------  --------------
         Total shareholders' equity           250,820         230,837
                                        --------------  --------------
       Total Liabilities and
        Shareholders' Equity                 $440,695        $371,714
                                        ==============  ==============

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


                      GRACO INC. AND SUBSIDIARIES
                 Consolidated Statements of Cash Flows


(In thousands)                                  First Quarter
                                            (Thirteen Weeks) Ended
                                        ------------------------------
                                         April 1, 2005  March 26, 2004
                                        --------------  --------------
Cash Flows from Operating Activities

  Net Earnings                                $27,039         $22,327
     Adjustments to reconcile net
      earnings to net cash provided by
      operating activities:
        Depreciation and amortization           5,703           4,602
        Deferred income taxes                    (766)           (901)
        Tax benefit related to stock
         options exercised                      1,000           2,500
        Change in:
           Accounts receivable                 (3,107)         (1,550)
           Inventories                         (2,329)         (3,949)
           Trade accounts payable               1,824           3,717
           Salaries, wages and
            commissions                        (9,472)         (4,911)
           Retirement benefits and
            deferred compensation                 (86)           (424)
           Other accrued liabilities            6,182           6,361
           Other                                 (186)             83
                                        --------------  --------------
Net Cash from Operating Activities             25,802          27,855
                                        --------------  --------------

Cash Flows from Investing Activities
  Property, plant and equipment
   additions                                   (3,735)         (3,838)
  Proceeds from sale of property, plant
   and equipment                                   32              14
  Capitalized software additions                   --            (785)
  Acquisition of business, net of cash
   acquired                                  (102,534)             --
                                        --------------  --------------
Net cash used in investing activities        (106,237)         (4,609)
                                        --------------  --------------
Cash Flows from Financing Activities
  Borrowings on notes payable and lines
   of credit                                   45,816           7,592
  Payments on notes payable and lines of
   credit                                      (6,062)         (2,123)
  Common stock issued                           7,946           8,652
  Common stock retired                         (7,017)        (15,202)
  Cash dividends paid                          (8,969)       (110,590)
                                        --------------  --------------
Net cash used in financing activities          31,714        (111,671)
                                        --------------  --------------
Effect of exchange rate changes on cash           488              (5)
                                        --------------  --------------
Net increase in cash and cash
 equivalents                                  (48,233)        (88,430)
Cash and cash equivalents
  Beginning of year                            60,554         112,118
                                        --------------  --------------
  End of period                               $12,321         $23,688
                                        ==============  ==============

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