UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

            Quarterly Report Pursuant to Section 13 or 15 (d) of the
                         Securities Exchange Act of 1934



For the quarterly period ended March 30, 2001

Commission File Number:  001-9249
                         --------


                                   GRACO INC.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)



      Minnesota                                        41-0285640
- ------------------------                 ---------------------------------------
(State of incorporation)                 (I.R.S. Employer Identification Number)


      88 - 11th Avenue N.E.
     Minneapolis, Minnesota                                             55413
- ---------------------------------------                               ----------
(Address of principal executive offices)                              (Zip Code)


                                 (612) 623-6000
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months,  and (2) has been subject to such filing  requirements
for the past 90 days.


                                    Yes     X         No
                                         ------           -------

           30,794,894 common shares were outstanding as of May 3, 2001.





                           GRACO INC. AND SUBSIDIARIES

                                      INDEX

                                                                     Page Number

PART I   FINANCIAL INFORMATION


         Item 1.  Financial Statements

                     Consolidated Statements of Earnings                       3
                     Consolidated Balance Sheets                               4
                     Consolidated Statements of Cash Flows                     5
                     Notes to Consolidated Financial Statements              6-7


         Item 2.  Management's Discussion and Analysis
                     of Financial Condition and
                     Results of Operations                                  8-10

PART II  OTHER INFORMATION

         Item 6.  Exhibits and Reports on Form 8-K                            11

         SIGNATURES                                                           12


         2001 Executive Corporate and SBU Bonus Plan                  Exhibit 10

         Non-employee Director Stock Option Plan, as amended and
                  Restated February 23, 2001                        Exhibit 10.1

         Computation of Net Earnings per Common Share                 Exhibit 11






                                     PART I

                           GRACO INC. AND SUBSIDIARIES

Item I.              CONSOLIDATED STATEMENTS OF EARNINGS

                                   (Unaudited)



                                                            Thirteen Weeks Ended
                                                            --------------------
                                                    March 30, 2001      March 31, 2000
                                                    --------------      --------------
                                                 (In thousands except per share amounts)

                                                                        
Net Sales                                                 $109,814            $122,227

     Cost of products sold                                  54,676              60,098
                                                    --------------      --------------


Gross Profit                                                55,138              62,129

     Product development                                     6,287               5,024
     Selling, marketing and distribution                    20,672              23,814
     General and administrative                              7,696               8,644
                                                    --------------      --------------


Operating Profit                                            20,483              24,647

     Interest expense                                          450               1,235
     Other (income) expense, net                               213                 437
                                                    --------------      --------------


Earnings Before Income Taxes                                19,820              22,975

     Income taxes                                            6,700               8,000
                                                    --------------      --------------

Net Earnings                                              $ 13,120            $ 14,975
                                                    ==============      ==============

Basic Net Earnings Per Common Share                       $    .43            $    .49
                                                    ==============      ==============
Diluted Net Earnings Per Common Share                     $    .42            $    .48
                                                    ==============      ==============



                 See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 30, 2001 Dec. 29, 2000 -------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 4,682 $ 11,071 Accounts receivable, less allowances of $4,800 and $4,700 83,301 85,836 Inventories 41,177 33,079 Deferred income taxes 11,627 11,574 Other current assets 2,565 2,182 -------------- ------------- Total current assets 143,352 143,742 Property, Plant and Equipment: Cost 193,942 186,872 Accumulated depreciation (106,615) (102,883) -------------- ------------- 87,327 83,989 Other Assets 20,840 10,245 -------------- ------------- $251,519 $ 237,976 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ 14,241 $ 15,713 Current portion of long-term debt 1,050 1,310 Trade accounts payable 12,742 12,899 Salaries, wages & commissions 7,962 14,532 Accrued insurance liabilities 10,925 10,622 Income taxes payable 10,678 4,642 Other current liabilities 20,026 22,123 -------------- ------------- Total current liabilities 77,624 81,841 Long-term Debt, less current portion 20,500 18,050 Retirement Benefits and Deferred 27,106 27,230 Compensation Shareholders' Equity: Common stock 30,778 20,274 Additional paid-in capital 45,902 39,954 Retained earnings 49,992 50,233 Other, net (383) 394 -------------- ------------- Total shareholders' equity 126,289 110,855 -------------- ------------- $251,519 $ 237,976 ============== =============
See notes to consolidated financial statements. GRACO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Thirteen Weeks -------------- March 30, 2001 March 31, 2000 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands) Net Earnings $13,120 $14,975 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,240 4,005 Deferred income taxes (182) 127 Change in: Accounts receivable 4,065 (9,733) Inventories (5,510) (4,255) Trade accounts payable (358) 1,941 Salaries, wages and commissions (6,569) (3,283) Retirement benefits and deferred compensation 272 124 Other accrued liabilities 2,832 5,267 Other (789) (356) -------------- -------------- 11,121 8,812 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (6,203) (2,968) Proceeds from sale of property, plant and equipment 45 58 Acquisition of business, net of cash acquired (15,949) - -------------- -------------- (22,107) (2,910) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on notes payable and lines of credit 36,274 47,979 Payments on notes payable and lines of credit (37,307) (49,939) Borrowings on long-term debt 23,000 20,000 Payments on long-term debt (20,810) (17,265) Common stock issued 6,320 6,632 Retirement of common stock (177) (15,300) Cash dividends paid (3,044) (2,862) -------------- -------------- 4,256 (10,755) -------------- -------------- Effect of exchange rate changes on cash 341 1,099 -------------- -------------- Net increase (decrease) in cash and cash (6,389) (3,754) equivalents Cash and cash equivalents: Beginning of year 11,071 6,588 -------------- -------------- End of Period $ 4,682 $ 2,834 ============== ==============
See notes to consolidated financial statements. GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company) as of March 30, 2001, and the related statements of earnings and cash flows for the thirteen weeks then ended, have been prepared by the Company without being audited. In the opinion of management, these consolidated statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Graco Inc. and Subsidiaries as of March 30, 2001, and the results of operations and cash flows for all periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2000 Form 10-K. The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year. 2. Major components of inventories were as follows (in thousands): Mar. 30, 2001 Dec. 29, 2000 ------------- ------------- Finished products and components $29,675 $26,812 Products and components in various stages of completion 21,961 20,153 Raw materials 22,601 19,259 ------------ ------------- 74,237 66,224 Reduction to LIFO cost (33,060) (33,145) ------------ ------------- $41,177 $33,079 ============ ============= GRACO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. The Company has three reportable segments; Industrial/Automotive, Contractor and Lubrication. The Company does not identify assets by segment. Sales and operating profit by segment for the thirteen weeks ended March 30, 2001 and March 31, 2000 are as follows (in thousands): Mar. 30, 2001 Mar. 31,2000 ------------- ------------ Net Sales Industrial/Automotive $ 47,649 $ 56,831 Contractor 49,901 54,481 Lubrication 12,264 10,915 ------------- ------------ Total $109,814 $122,227 ============= ============ Operating Profit Industrial/Automotive $ 9,394 $ 12,507 Contractor 8,620 10,486 Lubrication 2,956 2,316 Unallocated Corporate Expenses (487) (662) ------------- ------------ Consolidated Operating Profit $ 20,483 $ 24,647 ============= ============ 4. There have been no changes to the components of comprehensive income from those noted in the 2000 Form 10-K. Total comprehensive income for the quarter was $12.4 million in 2001 and $14.2 million in 2000. 5. The adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" on December 30, 2000, resulted in no transition adjustment. See Note A to financial statements included in the Company's 2000 Form 10-K for a description of the Company's use of derivative instruments and hedging activities. 6. On March 19, 2001, the Company purchased ASM Company, Inc. for $16 million cash. Based on management's estimates of value, the purchase price has been allocated to net tangible assets of approximately $5 million and intangible assets totaling approximately $11 million. Intangible assets are included in the other assets caption on the consolidated balance sheets. The purchase price allocation is subject to adjustment upon completion of an independent appraisal. ASM manufactures and markets spray tips, guns, poles and other accessories for the professional painter. ASM had sales of approximately $11 million in 2000. Item 2. GRACO INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Net sales and earnings in the first quarter decreased from last year. The impact of reduced sales on net earnings was mitigated by a reduction of expenses. The increase in product development expense was more than offset by reductions in other operating expenses. The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: Thirteen Weeks Ended -------------------- March 30, 2001 March 31,2000 -------------- ------------- Net Sales 100.0% 100.0% Cost of products sold 49.8 49.2 Product development 5.7 4.1 Selling, marketing and distribution 18.8 19.5 General and administrative 7.0 7.0 -------------- ------------- Operating Profit 18.7 20.2 Interest expense 0.4 1.0 Other (income) expense, net 0.2 0.4 -------------- ------------- Earnings Before Income Taxes 18.1 18.8 Income taxes 6.1 6.5 -------------- ------------- Net Earnings 12.0% 12.3% ============== ============= Net Sales Net sales in the first quarter of 2001 were down 10 percent from first quarter 2000. Economic conditions in North America led to reduced demand and lower sales in the Industrial / Automotive segment (down 16 percent) and the Contractor Equipment segment (down 8 percent). Lubrication Equipment segment sales (up 12 percent) were helped by new products launched last September and large sales to several key customers. Within the Contractor Equipment segment, sales in the home center channel were $9.3 million, up 3 percent from the first quarter of 2000. The Company began selling through the home center channel in January 2000, and most of the sales in the first quarter of 2000 were initial stocking orders. Geographically, sales in the Americas decreased 13 percent. In Europe, sales measured in local currencies increased 2 percent, but decreased 4 percent after unfavorable currency translation. Asia Pacific sales were 3 percent lower than last year, but would have increased 4 percent if translated at consistent exchange rates. Fluctuations in exchange rates adversely impacted consolidated net sales for the quarter by approximately $2 million. Gross Profit Gross profit as a percentage of net sales was 50.2 percent compared to 50.8 percent last year. Gross profit as a percentage of net sales would have decreased only .2 percentage points if sales and cost of products sold were translated at consistent exchange rates. Operating Expenses Product development expense increased 25 percent from the first quarter of 2000, as several new products approached launch dates. Other operating expenses decreased commensurate with reduced sales levels. Selling, marketing and distribution expense decreased 13 percent and decreased as a percentage of sales to 18.8 percent from 19.5 percent. First quarter 2000 included significant spending related to the introduction of new products and entry into the home center channel. General and administrative expenses were down 11 percent due to controls placed on spending, including restrictions on discretionary items, and the impact of reduced sales on incentive bonus provisions. Interest Expense and Other Income (Expense) Interest expense decreased due to reduced debt levels. Liquidity and Capital Resources - ------------------------------- The Company generated $11.1 million of cash flow from operating activities in the first three months of 2000, compared to $8.8 million for the same period last year. Significant uses of cash in 2001 included the acquisition of ASM Company, Inc. and the construction in progress of expanded manufacturing, warehouse and office facilities in Minneapolis. In 2000, the Company utilized cash flow to retire $15.3 million of common stock. The Company plans to expand its Sioux Falls, South Dakota manufacturing facilities to accommodate the move of ASM operations from its current location in California. The Company had unused lines of credit available at March 30, 2001 totaling $90 million. The available credit facilities and internally generated funds provide the Company with the financial flexibility to meet liquidity needs. Outlook - ------- The Company remains cautious about its outlook for 2001, as the North American economy has slowed down considerably from the levels of a year ago. Nonetheless, management remains confident that the Company will continue to post good results in light of the circumstances. Management expects to generate incremental revenues and profits by aggressively implementing growth strategies of developing new products, expanding distribution, entering new markets and pursuing strategic acquisitions. SAFE HARBOR CAUTIONARY STATEMENT The information in this 10-Q contains "forward-looking statements" about the Company's expectations of the future, which are subject to certain risk factors that could cause actual results to differ materially from those expectations. These factors include economic conditions in the United States and other major world economies, currency exchange fluctuations and additional factors identified in Exhibit 99 to the Company's Report on Form 10-K for fiscal year 2000. PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2001 Executive Corporate and SBU Bonus Plan Exhibit 10 Non-employee Director Stock Option Plan, as amended and restated February 23, 2001 Exhibit 10.1 Computation of Net Earnings per Common Share Exhibit 11 (b) Reports on Form 8-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GRACO INC. Date: May 1, 2001 By: /s/George Aristides -------------------------------- ----------------------------------- George Aristides Chief Executive Officer Date: May 1, 2001 By: /s/James A. Graner -------------------------------- --------------------------------- James A. Graner Vice President & Controller ("duly authorized officer")
                    2001 EXECUTIVE CORPORATE & SBU BONUS PLAN


Objectives
- ----------

o    To  create  shareholder  value  through  achievement  of  annual  financial
     objectives.

o    To  motivate  and retain  those key  executives  and  managers  who work in
     positions where they can impact the Company's annual financial objectives.


Plan Design
- -----------

The  Plan  links  the size of each  individual's  award  to  specific  financial
objectives.  These  objectives  are  tailored for the  Corporation  and for each
Business Unit. These objectives are:

     o    Corporation
          o    Corporate Sales and/or Net Earnings objectives

     o    Business Units
          o    Sales and/or Contribution Growth objectives


Eligibility Requirements
- ------------------------

Only those positions which carry clear  managerial  responsibility  for directly
contributing  to Graco's  Corporate  Sales  and/or Net  Earnings  objective  and
Business Unit Sales and/or  Contribution  Growth  objectives  are eligible to be
included in this Plan.

Only those  individuals  in eligible  positions  who have  demonstrated  and are
maintaining a performance level that meets the supervisor's  normal expectations
for that position are eligible for annual  participation in this Plan as well as
the receipt of any annual Bonus Payments.


Participation
- -------------

The  top  executive  in each  organizational  unit  may  nominate  managers  for
participation  in  this  Plan  when  the  established  position  and  individual
eligibility requirements have been met.

The Management  Organization and Compensation  Committee of the Graco Inc. Board
of  Directors  has sole  authority  to approve  the  participation  of the Chief
Executive Officer in the Plan.

The Chief  Executive  Officer of Graco  Inc.  has sole  authority  to select and
approve all other Plan participants.


Bonus Maximum
- -------------

Taken in conjunction with base salary market comparisons,  bonus maximum for all
positions will be:

     o    Commensurate  with  the  position's   ability  to  impact  the  annual
          Corporate Sales and/or Net Earnings  objective and Business Unit Sales
          and/or Contribution Growth objectives.
     o    Consistent  with  total  compensation  levels  prevalent  for  similar
          positions in the market place.

Based  on these  criteria,  bonus  maximums  ranging  from 10% to 90% have  been
established for each individual.


Bonus Payment
- -------------

The determination of a participant's  annual Bonus Payment will be calculated by
adding the bonus  results  attained  for  Corporate  Sales  and/or Net  Earnings
performance  (expressed  in  percent)  to the  bonus  results  attained  for any
applicable   Business  Unit's  Sales  and/or   Contribution  Growth  performance
(expressed  in  percent).  These  bonus  results  are  then  multiplied  by  the
participant's  Maximum Bonus Percentage and then multiplied by the participant's
Base Salary for the Plan Year, to determine the total Bonus Payment.

Example:

 --------------     ---------------
|Annual             Annual         |    Participant's    Participant's
|Corporate          Business       |    Maximum          Annual
|Performance    +   Unit           | x  Bonus         x  Base          =   Bonus
|Results            Performance    |    Salary           Salary
|                   Results        |
|                   (if            |
|      %            applicable)    |         $                $              $
|                                  |
|                         %        |
- --------------     ---------------


Administration
- --------------

The following rules have been established to ensure equitable  administration of
Graco's Annual Bonus Plan (the Plan):

1.   The  Plan  will  be  administered  by  the  Management   Organization   and
     Compensation Committee of the Board of Directors.  The Committee may cancel
     the Plan and interpret the Plan.

2.   The Management  Organization and Compensation Committee shall establish the
     Annual  Corporate  Bonus  Plan  financial  objectives.   Within  the  basic
     framework of the Plan, the Chief Executive Officer may establish the annual
     bonus plan financial  objectives for individual Business Units. The CEO may
     also establish  deadlines for filing  administrative  forms and adopt other
     administrative rules.

     The CEO has established the Bonus  Administrative  Committee  consisting of
     the CEO, the Vice President, Human Resources, and the Compensation Manager.
     This Committee is responsible  for making approval  recommendations  on all
     Annual Bonus Program  administrative  matters,  such as participation award
     payments,  performance measures,  and performance results. All requests for
     adjustments  or exceptions  are to be formally  submitted to this Committee
     for review through the Compensation Manager.

3.   Key executives  and managers  selected to participate in the Plan after its
     annual effective date (January 1st) may be included on a pro-rata basis.

4.   Participation   in  the  Plan  one  year   does  not   necessarily   assure
     participation in subsequent  years.  Eligibility  requirements for both the
     position and individual performance must be met continually.

5.   Participation  continues  during  any  paid  time  off  such as  short-term
     disability (up to six months). Participation ceases with retirement, death,
     or  long-term  disability  (over six  months).  In the event  participation
     ceases due to retirement,  death, or long term disability,  the Participant
     will be eligible for a Bonus  Payment,  calculated  using the Maximum Bonus
     Percent and Base Salary up to the time of retirement,  death,  or long-term
     disability  and  the  annual  performance  results  for the  year in  which
     retirement, death, or long-term disability occurs.

6.   A participant who transfers to a position (e.g.  through job posting or job
     elimination)  that  is not  eligible  for  inclusion  in the  Plan  will be
     eligible  for a pro-rata  award  based on the actual  time  employed in the
     eligible position during the year.

     If, due to unique skills  possessed by a participant,  the company requests
     that the participant  accept a transfer to a non-bonus  eligible  position,
     the participant will remain on the Plan. The participant's eligibility will
     be reviewed annually as noted in Administrative Rule #4.

7.   A  participant  must be an employee  in good  standing on 12/31 of the Plan
     Year in  order  to  receive  a  bonus.  A  participant  who  resigns  or is
     terminated effective during the Plan Year is ineligible for a bonus.

     Participants  must maintain  satisfactory  performance  throughout the Plan
     year in order to be eligible to receive a bonus award payment.

     In addition, a participant whose employment  termination has been requested
     due  to job  elimination,  performance  or  otherwise  for  cause  will  be
     ineligible  for a bonus  payment  even  though  the  participant  is  still
     employed at year-end.

8.   Targets and actual  performance for Corporate and Division measures will be
     at actual exchange rates.  Targets and actual performance for international
     measures where  business is conducted in foreign  currency will be at prior
     year's actual rates.

9.   Acquisitions  and divestitures not included in the annual business plan for
     the Plan Year will be excluded from the Corporate Sales and/or Net Earnings
     calculations.

10.  Significant  changes in historical FASB accounting  practices or income tax
     rates will be included in corporate earnings calculations at the discretion
     of the Management  Organization and Compensation  Committee of the Board of
     Directors.

11.  Payments will be made by March 15th of the year following  each  successive
     Corporate and Business Unit performance year.



These Administrative  Rules indicate Graco's intent.  Situations may arise which
are not specifically covered by these rules and will require the use of judgment
and discretion.  Final responsibility for interpretation of these Administrative
Rules rests solely with the Vice President, Human Resources.

                                                               February 23, 2001

                GRACO INC. NONEMPLOYEE DIRECTOR STOCK OPTION PLAN


1.    Purpose

      The purpose of the Graco Inc.  Nonemployee Director Stock Option Plan (the
      "Plan") is to secure for Graco Inc. (the  "Company") and its  shareholders
      the benefits of the  long-term  incentives  inherent in  increased  common
      stock  ownership by the members of the Board of Directors (the "Board") of
      the Company who are not  employees  of the Company or its  Affiliates,  by
      strengthening  the  identification  of  Nonemployee   Directors  with  the
      interests of all Graco shareholders.


2.    Definitions

      The terms  defined in this  Section 2 shall have the  following  meanings,
      unless the context otherwise requires.

     a.   Affiliate shall mean any  corporation,  partnership,  joint venture or
          other  entity in which the Company  holds an equity,  profit or voting
          interest of more than fifty percent (50%).

     b.   Annual  Meeting  of  Shareholders  shall  mean the  annual  meeting of
          shareholders of the Company held each calendar year.

     c.   Code shall mean the Internal  Revenue Code of 1986, as amended to date
          and as it may be amended from time to time.

     d.   Company shall mean Graco Inc., a Minnesota corporation.

     e.   ERISA shall mean the Employee  Retirement Income Security Act of 1974,
          as amended to date and as it may be amended from time to time.

     f.   Fair Market Value per Share shall mean as of any day

          (1)  The fair market value of a share of the Company's common stock is
               the last sale price  reported  on the  composite  tape by the New
               York Stock Exchange on the business day immediately preceding the
               date as of which fair  market  value is being  determined  or, if
               there  were no sales of  shares  of the  Company's  common  stock
               reported on the composite  tape on such day, on the most recently
               preceding day on which there were sales, or

          (2)  if the shares of the  Company's  stock are not listed or admitted
               to trading on the New York Stock  Exchange on the day as of which
               the  determination is made, the amount determined by the Board or
               its delegate to be the fair market value of a share on such day.

     g.   Nonemployee  Director shall mean a member of the Board of Directors of
          the  Company  who is not  also an  officer  or other  employee  of the
          Company or an Affiliate.

     h.   Nonstatutory  Stock Option  ("NSO") shall mean a stock  option,  which
          does not qualify for special tax treatment  under  Sections 421 or 422
          of the Internal Revenue Code.

     i.   Option  shall mean either a First Option or an Annual  Option  granted
          pursuant to the provisions of Section 4 of this Plan.

     j.   Participant  shall mean any person who holds an Option  granted  under
          this Plan.

     k.   Plan  shall mean this Graco Inc.  Nonemployee  Director  Stock  Option
          Plan.


3.    Administration

     a.   The Plan  shall be  administered  by the  Board.  The  Board  may,  by
          resolution,  delegate  part or all of its  administrative  powers with
          respect to the Plan.

     b.   The Board  shall have all of the  powers  vested in it by the terms of
          the Plan,  such  powers to include  the  authority,  within the limits
          prescribed  herein,  to establish the form of the agreement  embodying
          grants of Options made under the Plan.

     c.   The Board shall, subject to the provisions of the Plan, have the power
          to construe the Plan, to determine all  questions  arising  thereunder
          and  to  adopt  and  amend   such  rules  and   regulations   for  the
          administration   of  the   Plan  as  it  may  deem   desirable,   such
          administrative decisions of the Board to be final and conclusive.

     d.   The Board shall have no discretion to select the Nonemployee Directors
          to receive  Option  grants under the Plan,  to determine the number of
          shares of the  Company's  common stock  subject to the Plan or to each
          grant,  nor the exercise price of the Options granted  pursuant to the
          Plan.

     e.   The  Board  may  authorize  any  one or more of  their  number  or the
          Secretary  or any other  officer of the Company to execute and deliver
          documents  on behalf of the Board.  The Board  hereby  authorizes  the
          Secretary to execute and deliver all  documents to be delivered by the
          Board pursuant to the Plan.

     f.   The expenses of the Plan shall be borne by the Company.


4.   Automatic Grants to Nonemployee Directors

     a.   As of the day upon which  shareholders vote to elect directors at each
          annual meeting of the Company,  each Nonemployee Director of the Board
          shall be granted  an option to  purchase  two  thousand  five  hundred
          (2,500)  shares  of the  Company's  common  stock  under the Plan (the
          "Annual  Option");  and a Nonemployee  Director who has not previously
          been  elected  as a member of the Board of  Directors  of the  Company
          shall be granted a First  Option;  i.e.,  an option to purchase  three
          thousand  (3,000) shares of the Company's common stock under the Plan,
          on the first business day of the  Nonemployee  Director's  election to
          the Board,  including  election  by the Board of  Directors  to fill a
          vacancy on the Board.

     b.   The automatic grants to Nonemployee  Directors shall not be subject to
          the discretion of any person.

     c.   Each Option  granted  under the Plan shall be  evidenced  by a written
          Agreement.  Each Agreement  shall be subject to, and  incorporate,  by
          reference or otherwise, the applicable terms of this Plan.

     d.   During the lifetime of a Participant, each Option shall be exercisable
          only by the  Participant.  No Option  granted  under the Plan shall be
          assignable or  transferable by the  Participant,  except by will or by
          the laws of descent and distribution.


5.   Shares of Stock Subject to the Plan

     a.   Subject to  adjustment  as  provided  in  Section  11 of the Plan,  an
          aggregate  of four  hundred  fifty  thousand  (450,000)  shares of the
          Company's  common  stock,  $1.00 par  value,  shall be  available  for
          issuance to Nonemployee Directors under the Plan. No fractional shares
          shall be issued.

     b.   First Option  Grants and Annual  Option Grants shall reduce the shares
          available for issuance  under the Plan by the number of shares subject
          thereto.  The shares  deliverable  upon  exercise of any First  Option
          Grant or Annual Option Grant may be made available from authorized but
          unissued shares or shares reacquired by the Company,  including shares
          purchased  in the  open  market  or in  private  transactions.  If any
          unexercised  First Option Grant or Annual Option Grant shall terminate
          for any reason,  the shares subject to, but not delivered under,  such
          First Option Grant or Annual Option Grant shall be available for other
          First Option Grants or Annual Option Grants.


6.   Nonstatutory Options.

     a.   All  Options  granted to  Nonemployee  Directors  pursuant to the Plan
          shall be NSOs.


7.   Exercise Price.

     a.   The price per share of the shares of the Company's  common stock which
          may be purchased upon exercise of an Option  ("Exercise  Price") shall
          be one hundred  percent  (100%) of the Fair Market  Value per Share on
          the date the  Option is  granted  and shall be  payable in full at the
          time the Option is exercised as follows:

          (1)  in cash or by certified check,

          (2)  by delivery of shares of common stock to the Company  which shall
               have  been  owned  for at least  six (6)  months  and have a Fair
               Market  Value  per  Share on the date of  surrender  equal to the
               exercise price, or

          (3)  by delivery to the Company of a properly executed exercise notice
               together with  irrevocable  instructions  to a broker to promptly
               deliver  to the  Company  from sale or loan  proceeds  the amount
               required to pay the exercise price.

     b.   Such price  shall be subject to  adjustment  as provided in Section 11
          hereof.


8.   Duration and Vesting of Options.

     a.   The term of each Option granted to a Nonemployee Director shall be for
          ten (10)  years  from the date of  grant,  unless  terminated  earlier
          pursuant to the provisions of Section 10 hereof.

     b.   Each  Option  shall  vest  and  become  exercisable  according  to the
          following schedule:

          (1)  twenty-five  percent (25%) of the total number of shares  covered
               by the Option shall become  exercisable  beginning with the first
               anniversary date of the grant of the Option;

          (2)  thereafter  twenty-five  percent  (25%) of the  total  number  of
               shares  covered by the Option  shall become  exercisable  on each
               subsequent  anniversary date of the grant of the Option until the
               fourth anniversary date of the grant of the Option upon which the
               total   number  of  shares   covered  by  Option   shall   become
               exercisable.


9.   Change of Control

     a.   Notwithstanding  Section 8b(1) and (2) hereof, all outstanding Options
          not yet exercisable shall become  immediately and fully exercisable on
          the day  following  a  "Change  of  Control"  and shall  remain  fully
          exercisable  until  either  exercised  or expiring by their  terms.  A
          "Change of Control" means:

          (1)  acquisition  by any  individual,  entity,  or group  (within  the
               meaning of Section  13(d)(3) or 14(d)(2) of the  Exchange  Act of
               1934), (a "Person"),  of beneficial ownership (within the meaning
               of Rule 13d-3 under the 1934 Act) which results in the beneficial
               ownership by such Person of 25% or more of either

               (a)  the then  outstanding  shares of common stock of the Company
                    (the "Outstanding Company Common Stock") or

               (b)  the  combined  voting power of the then  outstanding  voting
                    securities of the Company  entitled to vote generally in the
                    election  of  directors  (the  "Outstanding  Company  Voting
                    Securities");

               provided,  however,  that  the  following  acquisitions  will not
               result in a Change of Control:

                    (i)  an acquisition directly from the Company,

                    (ii) an acquisition by the Company,

                    (iii)an acquisition by an employee  benefit plan (or related
                         trust)  sponsored or  maintained  by the Company or any
                         corporation controlled by the Company,

                    (iv) an  acquisition  by any  Person  who is  deemed to have
                         beneficial  ownership  of the Company  common  stock or
                         other  Company  voting  securities  owned by the  Trust
                         Under the Will of  Clarissa L. Gray  ("Trust  Person"),
                         provided that such  acquisition  does not result in the
                         beneficial  ownership  by such Person of 32% or more of
                         either  the  Outstanding  Company  Common  Stock or the
                         Outstanding  Company  Voting  Securities,  and provided
                         further  that for  purposes of this  Section 9, a Trust
                         Person shall not be deemed to have beneficial ownership
                         of the Company  common  stock or other  Company  voting
                         securities   owned  by  The  Graco  Foundation  or  any
                         employee  benefit  plan  of  the  Company,   including,
                         without limitations, the Graco Employee Retirement Plan
                         and the Graco Employee Stock Ownership Plan,

                    (v)  an acquisition by the Nonemployee Director or any group
                         that includes the Nonemployee Director, or

                    (vi) an  acquisition  by  any  corporation   pursuant  to  a
                         transaction  that  complies  with clauses (a), (b), and
                         (c) of subsection (4) below; and

               provided,  further,  that if any Person's beneficial ownership of
               the  Outstanding  Company  Common  Stock or  Outstanding  Company
               Voting  Securities  is 25% or more as a result  of a  transaction
               described   in  clause  (i)  or  (ii)  above,   and  such  Person
               subsequently   acquires   beneficial   ownership  of   additional
               Outstanding  Company Common Stock or  Outstanding  Company Voting
               Securities as a result of a transaction other than that described
               in clause (i) or (ii) above, such subsequent  acquisition will be
               treated as an  acquisition  that causes such Person to own 25% or
               more of the  Outstanding  Company  Common  Stock  or  Outstanding
               Company Voting Securities and be deemed a Change of Control;  and
               provided  further,  that in the  event any  acquisition  or other
               transaction  occurs which results in the beneficial  ownership of
               32% or more of either the Outstanding Company Common Stock or the
               Outstanding  Company Voting  Securities by any Trust Person,  the
               Incumbent  Board may by  majority  vote  increase  the  threshold
               beneficial ownership percentage to a percentage above 32% for any
               Trust Person; or

          (2)  Individuals  who, as of the date hereof,  constitute the Board of
               Directors of the Company (the  "Incumbent  Board")  cease for any
               reason to constitute at least a majority of said Board; provided,
               however,  that any individual  becoming a director  subsequent to
               the date hereof whose election, or nomination for election by the
               Company's  shareholders,  was  approved  by a vote of at  least a
               majority of the directors  then  comprising  the Incumbent  Board
               will be considered as though such individual were a member of the
               Incumbent  Board,  but  excluding,  for  this  purpose,  any such
               individual  whose  initial  membership  on the Board  occurs as a
               result of an actual or threatened  election  contest with respect
               to the  election  or  removal  of  directors  or other  actual or
               threatened solicitation of proxies or consents by or on behalf of
               a Person other than the Board; or

          (3)  The commencement or announcement of an intention to make a tender
               offer or exchange offer,  the  consummation of which would result
               in the  beneficial  ownership  by a Person  of 25% or more of the
               Outstanding  Company Common Stock or  Outstanding  Company Voting
               Securities; or

          (4)  The   approval   by  the   shareholders   of  the  Company  of  a
               reorganization,  merger, consolidation,  or statutory exchange of
               Outstanding  Company Common Stock or  Outstanding  Company Voting
               Securities or sale or other  disposition of all or  substantially
               all of the assets of the Company ("Business  Combination") or, if
               consummation of such Business Combination is subject, at the time
               of  such  approval  by  stockholders,   to  the  consent  of  any
               government or governmental  agency, the obtaining of such consent
               (either  explicitly  or implicitly  by  consummation)  excluding,
               however, such a Business combination pursuant to which

               (a)  all or substantially all of the individuals and entities who
                    were the beneficial owners of the Outstanding Company Common
                    Stock or Outstanding  Company Voting Securities  immediately
                    prior  to  such  Business   Combination   beneficially  own,
                    directly or indirectly, more than 80% of, respectively,  the
                    then  outstanding  shares of common  stock and the  combined
                    voting  power  of the  then  outstanding  voting  securities
                    entitled to vote generally in the election of directors,  as
                    the case may be,  of the  corporation  resulting  from  such
                    Business  Combination  (including,   without  limitation,  a
                    corporation  that as a result of such  transaction  owns the
                    Company or all or substantially  all of the Company's assets
                    either  directly  or through  one or more  subsidiaries)  in
                    substantially  the  same  proportions  as  their  ownership,
                    immediately  prior  to  such  Business  Combination  of  the
                    Outstanding  Company  Common  Stock or  Outstanding  Company
                    Voting Securities,

               (b)  no Person  [excluding any employee  benefit plan (or related
                    trust) of the  Company or such  corporation  resulting  from
                    such Business  Combination]  beneficially owns,  directly or
                    indirectly,  25% or more of the then  outstanding  shares of
                    common stock of the corporation resulting from such Business
                    Combination  or  the  combined  voting  power  of  the  then
                    outstanding  voting securities of such corporation except to
                    the extent that such ownership existed prior to the Business
                    Combination, and

               (c)  at least a majority of the members of the board of directors
                    of the corporation  resulting from such Business Combination
                    were  members  of the  Incumbent  Board  at the  time of the
                    execution of the initial agreement,  or of the action of the
                    Board, providing for such Business Combination; or

          (5)  approval  by  the  stockholders  of  the  Company  of a  complete
               liquidation or dissolution of the Company.

     b.   A Change of Control  shall not be deemed to have occurred with respect
          to a Nonemployee Director if:

          (1)  the  acquisition  of the 25% or greater  interest  referred to in
               subsection  a(1) of  this  Section  9 is by a  group,  acting  in
               concert, that includes the Nonemployee Director or

          (2)  if at least 25% of the then outstanding  common stock or combined
               voting power of the then  outstanding  company voting  securities
               (or voting equity  interests) of the surviving  corporation or of
               any corporation (or other entity)  acquiring all or substantially
               all of the assets of the  Company  shall be  beneficially  owned,
               directly  or  indirectly,  immediately  after  a  reorganization,
               merger, consolidation,  statutory share exchange,  disposition of
               assets, liquidation or dissolution referred to in subsections (4)
               or (5) of this  section  by a  group,  acting  in  concert,  that
               includes that Nonemployee Director.


10.  Effect of Termination of Membership on the Board.

     a.   The right to  exercise  an Option  granted to a  Nonemployee  Director
          shall be limited as follows,  provided  the actual date of exercise is
          in no event after the expiration of the term of the Option:

          (1)  If a Nonemployee  Director ceases being a director of the Company
               for any reason other than the reasons  identified in subparagraph
               (2) of this Section 10, the  Nonemployee  Director shall have the
               right  to  exercise  the  Options  as  follows,  subject  to  the
               condition  that  no  Option  shall  be   exercisable   after  the
               expiration of the term of the Option:

               (a)  If the  Nonemployee  Director  was a member  of the Board of
                    Directors  of the Company  for five (5) or more  years,  all
                    outstanding Options become immediately  exercisable upon the
                    date the Nonemployee  Director ceases being a director.  The
                    Nonemployee  Director  may exercise the Options for a period
                    of  thirty-six  months  (36)  from the date the  Nonemployee
                    Director  ceased  being  a  director,  provided  that if the
                    Nonemployee  Director dies before the thirty-six  (36) month
                    period has  expired,  the  Options may be  exercised  by the
                    Nonemployee  Director's legal  representative  or any person
                    who  acquires  the right to  exercise an Option by reason of
                    the Nonemployee Director's death for a period of twelve (12)
                    months from the date of the Nonemployee Director's death.

               (b)  If the  Nonemployee  Director  was a member  of the Board of
                    Directors  of the Company for less than five (5) years,  the
                    Nonemployee Director may exercise the Options, to the extent
                    they were  exercisable at the date the Nonemployee  Director
                    ceases  being a member of the Board,  for a period of thirty
                    (30) days following the date the Nonemployee Director ceased
                    being a director, provided that, if the Nonemployee Director
                    dies  before the thirty  (30) day  period has  expired,  the
                    Options may be exercised by the Nonemployee Director's legal
                    representative,  or any  person  who  acquires  the right to
                    exercise an Option by reason of the  Nonemployee  Director's
                    death,  for a period of twelve  (12) months from the date of
                    the Nonemployee Director's death.

               (c)  If the  Nonemployee  Director  dies  while a  member  of the
                    Board,  the  Options,  to  the  extent  exercisable  by  the
                    Nonemployee  Director at the date of death, may be exercised
                    by the Nonemployee  Director's legal representative,  or any
                    person  who  acquires  the  right to  exercise  an Option by
                    reason of the Nonemployee  Director's death, for a period of
                    twelve  (12)  months  from  the  date  of  the   Nonemployee
                    Director's death.

               (d)  In the  event  any  Option is  exercised  by the  executors,
                    administrators, legatees, or distributees of the estate of a
                    deceased optionee,  the Company shall be under no obligation
                    to issue  stock  thereunder  unless and until the Company is
                    satisfied  that the person or persons  exercising the Option
                    are the duly appointed legal representatives of the deceased
                    optionee's  estate or the proper  legatees  or  distributees
                    thereof.

          (2)  If a Nonemployee  Director ceases being a director of the Company
               due to an act of

               (a)  fraud or intentional misrepresentation or

               (b)  embezzlement,  misappropriation  or  conversion of assets or
                    opportunities of the Company or any Affiliate of the Company
                    or

               (c)  any other gross or willful misconduct

               as  determined  by  the  Board,   in  its  sole  and   conclusive
               discretion,  all  Options  granted to such  Nonemployee  Director
               shall immediately be forfeited as of the date of the misconduct.


11.  Adjustments and Changes in the Stock

     a.   If there is any change in the common stock of the Company by reason of
          any  stock  dividend,   stock  split,  spin-off,   split-up,   merger,
          consolidation,  recapitalization,   reclassification,  combination  or
          exchange  of  shares,  or  any  other  similar  corporate  event,  the
          aggregate  number of shares  available  under the Plan, and the number
          and the  price of  shares  of  common  stock  subject  to  outstanding
          Options, shall be appropriately adjusted automatically.

     b.   No  right  to  purchase   fractional  shares  shall  result  from  any
          adjustment in Options pursuant to this Section 11. In case of any such
          adjustment,  the shares subject to the Option shall be rounded down to
          the nearest whole share.

     c.   Notice of any adjustment  shall be given by the Company to each holder
          of any Option  which shall have been so adjusted  and such  adjustment
          (whether or not such notice is given) shall be  effective  and binding
          for all purposes of the Plan.


12.  Effective Date of the Plan

     a.   The Plan shall  become  effective  on the date it is  approved  by the
          shareholders of the Company.

     b.   Any amendment to the Plan shall become  effective  when adopted by the
          Board,  unless  specified  otherwise,  but no Option granted under any
          increase in shares  authorized  to be issued  under this Plan shall be
          exercisable until the increase is approved in the manner prescribed in
          Section 13 of this Plan.


13.  Amendment of the Plan

     a.   The Board of Directors may amend, suspend or terminate the Plan at any
          time, but without shareholder  approval, no amendment shall materially
          increase  the maximum  number of shares  which may be issued under the
          Plan  (other  than   adjustments   pursuant  to  Section  11  hereof),
          materially  increase the benefits  accruing to Participants  under the
          Plan,  materially  modify  the  requirements  as  to  eligibility  for
          participation  or  extend  the  term  of  the  Plan.  Approval  of the
          shareholders may be obtained, at a meeting of shareholders duly called
          and held, by the affirmative  vote of a majority of the holders of the
          Company's voting stock who are present or represented by proxy and are
          entitled to vote on the Plan.

     b.   It is intended  that the Plan meet the  requirements  of Rule 16b-3 or
          any  successor  thereto  promulgated  by the  Securities  and Exchange
          Commission  under the  Securities  Exchange  Act of 1934,  as amended,
          including any applicable  requirements regarding shareholder approval.
          Amendments   to  the  Plan  shall  be  subject  to   approval  by  the
          shareholders  of the Company to the extent  determined by the Board of
          Directors to be necessary  to satisfy such  requirements  as in effect
          from time to time.

     c.   Rights and  obligations  under any Option granted before any amendment
          of this  Plan  shall  not be  materially  and  adversely  affected  by
          amendment of the Plan, except with the consent of the person who holds
          the Option, which consent may be obtained in any manner that the Board
          or its delegate deems appropriate.


14.  Termination of the Plan

     a.   The Plan, unless sooner terminated,  shall terminate at the end of ten
          (10) years from the date the Plan is approved by the  shareholders  of
          the Company. No Option may be granted under the Plan while the Plan is
          suspended or after it is terminated.

     b.   Rights or  obligations  under any Option  granted while the Plan is in
          effect,  including the maximum duration and vesting provisions,  shall
          not be altered or impaired by suspension or  termination  of the Plan,
          except  with the  consent of the person  who holds the  Option,  which
          consent may be  obtained in any manner that the Board or its  delegate
          deems appropriate.


15.  Registration, Listing, Qualification, Approval of Stock and Options

     a.   If the Board shall determine, in its discretion,  that it is necessary
          or desirable that the shares of common stock subject to any Option

          (1)  be registered,  listed or qualified on any securities exchange or
               under any applicable law, or

          (2)  be approved by any governmental regulatory body, or

          (3)  approved by the shareholders of the Company,

          as a condition of, or in connection with, the granting of such Option,
          or the issuance or purchase of shares upon exercise of the Option, the
          Option  may  not  be  exercised  in  whole  or  in  part  unless  such
          registration,  listing,  qualification  or approval has been  obtained
          free of any condition not acceptable to the Board of Directors.


16.  No Right to Option or as Shareholder

     a.   No Nonemployee  Director or other person shall have any claim or right
          to be granted an Option under the Plan,  except as expressly  provided
          herein.  Neither  the Plan nor any  action  taken  hereunder  shall be
          construed as giving any Nonemployee  Director any right to be retained
          in the service of the Company.

     b.   Neither a  Nonemployee  Director,  the  Nonemployee  Director's  legal
          representative,  nor any person who  acquires the right to exercise an
          Option by reason of the Nonemployee Director's death shall be, or have
          any of the rights or privileges  of, a  shareholder  of the Company in
          respect of any shares of common stock  receivable upon the exercise of
          any Option  granted under this Plan,  in whole or in part,  unless and
          until certificates for such shares shall have been issued.


17.  Governing Law

     The validity,  construction,  interpretation,  administration and effect of
     this Plan and any rules, regulations and actions relating to this Plan will
     be governed by and construed exclusively in accordance with the laws of the
     State of Minnesota.


                                                                      EXHIBIT 11

                          GRACO INC. AND SUBSIDIARIES

                  COMPUTATION OF NET EARNINGS PER COMMON SHARE

                                  (Unaudited)

                                                Thirteen Weeks Ended
                                           -------------------------------
                                           Mar. 30, 2001     Mar. 31, 2000
                                           -------------     -------------
                                       (in thousands except per share amounts)

Net earnings applicable to common
    shareholders for basic and
    diluted earnings per share                   $13,120           $14,975


Weighted average shares outstanding
    for basic earnings per share                  30,561            30,590

Dilutive effect of stock options
    computed using the treasury stock
    method and the average market price              568               479


Weighted average shares outstanding
    for diluted earnings per share                31,129            31,068

Basic earnings per share                         $  0.43           $  0.49

Diluted earnings per share                       $  0.42           $  0.48