Graco Reports 2017 Financial Results

Finishes Year with Double-digit Percentage Annual Sales Growth

MINNEAPOLIS–(BUSINESS WIRE)–Graco Inc. (NYSE: GGG) today announced results for the fourth
quarter and year ended December 29, 2017.

• Sales for the quarter increased in all segments and regions. There
  were 14 weeks in the fiscal fourth quarter of 2016 compared to 13
  weeks in 2017. All segments finished with double-digit percentage
  growth for the year.
• Gross margin rates for the quarter and year remained strong.
• Increases in sales and earnings-based incentives, spending on growth
  initiatives and the pension settlement loss contributed to higher
  operating expenses in the fourth quarter of 2017.
• Diluted earnings per share in 2017 include a benefit of $0.09 for the
  quarter and $0.21 for the year from a required change in accounting
  for stock compensation.
• Non-recurring income tax adjustments reduced diluted earnings per
  share in 2017 by $0.17 for the quarter and $0.14 for the year.
• 2016 results included impairment charges that reduced diluted earnings
  per share for the quarter and year by $0.94.

“Outstanding execution throughout 2017 by Graco’s employees, suppliers,
channel partners and end users drove record quarterly sales in each
quarter of 2017 and double-digit growth for the year,” said Patrick J.
McHale, Graco’s President and CEO. “Our investments in product
development, new markets and geographic expansion are producing nice
returns. Contractor segment growth was particularly strong in the fourth
quarter, which resulted in rebate and growth incentives that pressured
gross and operating margins for the segment as well as an unfavorable
mix for the overall Company in the quarter. The tiers for these
incentives are reset at the beginning of each year based on sales levels
achieved in the prior year and have a history of driving growth, so we
are happy to pay for these programs.”

Consolidated Results

Sales for the quarter increased 7 percent, with increases of 5 percent
in the Americas, 11 percent in EMEA (4 percent at consistent translation
rates) and 11 percent in Asia Pacific (9 percent at consistent
translation rates). Sales for the year increased 11 percent, with
increases of 9 percent in the Americas, 10 percent in EMEA and 16
percent in Asia Pacific. Changes in currency translation rates increased
sales by approximately $7 million (2 percentage points) for the quarter
and did not have a significant impact on sales for the year.

Gross profit margin rates improved slightly for both the quarter and the
year. Favorable effects from currency translation, higher production
volume and realized pricing were partially offset by the unfavorable
impact of product mix.

The Company restructured its funded U.S. pension plan in 2017. The
restructuring resulted in a $12 million pension settlement loss that was
included in general and administrative expense in the fourth quarter and
reduced diluted earnings per share by $0.04. Total operating expenses
for 2016 included an impairment charge of $192 million in the fourth
quarter.

Total operating expenses for the quarter increased $25 million (25
percent) compared to the fourth quarter before impairment charges last
year. The increase includes the $12 million pension settlement loss, $3
million of increases in sales and earnings-based incentives and $1
million of incremental spending on growth initiatives. Operating
expenses for the year increased $30 million (8 percent), with volume and
rate-related increases and the pension settlement loss accounting for
most of the increase.

The effective income tax rate was 51 percent for the quarter and 27
percent for the year. Adoption of a new accounting standard, requiring
excess tax benefits related to stock option exercises to be credited to
the income tax provision (formerly credited to equity), reduced the tax
provision by $16 million for the quarter and $36 million for the year,
decreasing the effective tax rate for the quarter and year by 21 and 10
percentage points, respectively. U.S. federal income tax reform
legislation passed at the end of 2017 required a revaluation of net
deferred tax assets and instituted a toll charge on unrepatriated
foreign earnings that increased the tax provision by a total of $36
million, increasing the effective tax rate by 48 percentage points for
the quarter and 10 percentage points for the year. Effects of tax
planning and other non-recurring tax changes decreased the effective
rate by 6 percentage points for the quarter and 3 percentage points for
the year.

Segment Results

Management assesses performance of segments by reference to operating
earnings excluding unallocated corporate expenses and asset impairments.
For a reconciliation of segment operating earnings to consolidated
operating earnings, refer to the Segment Information table included in
the financial statement section of this release. Certain measurements of
segment operations are summarized below:

Contractor segment sales for the quarter and year increased in all
channels. Increases in volume-based customer incentives, product launch
and promotion costs and changes in product mix drove the operating
margin rate for the quarter 1 percentage point lower than last year.
Contractor segment operating margin rate for the year increased 2
percentage points compared to last year due to higher sales volume,
improved gross margin rate and favorable expense leverage.

Outlook

“We are initiating an outlook for the full-year 2018 of mid single-digit
growth on an organic, constant currency basis, with growth expected in
every region and reportable segment,” said McHale. “Demand levels in the
fourth quarter remained solid and provide a foundation for our full-year
outlook. While Industrial segment sales growth in the fourth quarter was
low, bookings were better than billings and indicative of a capital
equipment environment that remains stable-to-improving.”

Financial Results Adjusted for Comparability

There were multiple events in the last two years that caused significant
fluctuations in financial results, including impairment charges recorded
in 2016, changes in accounting for tax benefits related to stock
compensation, federal income tax reform and pension plan restructuring
in 2017. Excluding the impacts of those events presents a more
consistent basis for comparison of financial results. A calculation of
the non-GAAP measurements of adjusted operating earnings, earnings
before income taxes, income taxes, effective income tax rates, net
earnings and diluted earnings per share follows (in millions except per
share amounts):

Cautionary Statement Regarding Forward-Looking Statements

The Company desires to take advantage of the “safe harbor” provisions
regarding forward-looking statements of the Private Securities
Litigation Reform Act of 1995 and is filing this Cautionary Statement in
order to do so. From time to time various forms filed by our Company
with the Securities and Exchange Commission, including our Form 10-K,
Form 10-Qs and Form 8-Ks, and other disclosures, including our 2016
Overview report, press releases, earnings releases, analyst briefings,
conference calls and other written documents or oral statements released
by our Company, may contain forward-looking statements. Forward-looking
statements generally use words such as “expect,” “foresee,”
“anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and
similar expressions, and reflect our Company’s expectations concerning
the future. All forecasts and projections are forward-looking
statements. Forward-looking statements are based upon currently
available information, but various risks and uncertainties may cause our
Company’s actual results to differ materially from those expressed in
these statements. The Company undertakes no obligation to update these
statements in light of new information or future events.

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: our Company’s growth strategies, which include
making acquisitions, investing in new products, expanding geographically
and targeting new industries; economic conditions in the United States
and other major world economies; changes in tax rates and interpretation
of related tax regulations; changes in currency translation rates;
changes in laws and regulations; compliance with anti-corruption and
trade laws; new entrants who copy our products or infringe on our
intellectual property; risks incident to conducting business
internationally; the ability to meet our customers’ needs and changes in
product demand; supply interruptions or delays; security breaches; the
possibility of asset impairments if acquired businesses do not meet
performance expectations; political instability; results of and costs
associated with litigation, administrative proceedings and regulatory
reviews incident to our business as well as indemnification claims under
our asset purchase agreement with Carlisle Companies Incorporated,
Carlisle Fluid Technologies, Inc., and Finishing Brands Holdings Inc.;
the possibility of decline in purchases from a few large customers of
the Contractor segment; variations in activity in the construction,
automotive, mining and oil and natural gas industries; our ability to
attract, develop and retain qualified personnel; and catastrophic
events. Please refer to Item 1A of our Annual Report on Form 10-K for
fiscal year 2016 (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
and the Securities and Exchange Commission’s website at www.sec.gov.
Shareholders, potential investors and other readers are urged to
consider these factors in evaluating forward-looking statements and are
cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above
and in Item 1A 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

Graco management will hold a conference call, including slides via
webcast, with analysts and institutional investors on Tuesday, Jan. 30,
2018, at 11 a.m. ET, 10 a.m. CT, to discuss Graco’s fourth 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.
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 p.m. ET on Jan. 30, 2018, by dialing
888-203-1112, Conference ID #1103021, if calling within the U.S. or
Canada. The dial-in number for international participants is
719-457-0820, with the same Conference ID #. The replay by telephone
will be available through Feb. 3, 2018.

About Graco

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 powder 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
or on Twitter @GracoInc.

Contacts

Graco Inc.
Financial Contact:
Christian Rothe, 612-623-6205
or
Media
Contact:
Charlotte Boyd, 612-623-6153
[email protected]