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 June 28, 2002
Commission File Number: 001-9249
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GRACO INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
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(State of incorporation) (I.R.S. Employer Identification Number)
88 - 11th Avenue N.E.
Minneapolis, Minnesota 55413
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(Address of principal executive offices) (Zip Code)
(612) 623-6000
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(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
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47,583,000 common shares were outstanding as of July 26, 2002.
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 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-12
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBITS
Restated Bylaws as amended June 13, 2002 Exhibit 3
Executive Long Term Incentive Agreement. Form of
agreement used for award of restricted stock to
executive officers under the Graco Inc. Stock
Incentive Plan with schedule of awards current
as of June 28, 2002. Exhibit 10
Executive Group Long-Term Disability Policy Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
Certification of Chief Executive Officer Exhibit 99
Certification of Vice President & Treasurer Exhibit 99.1
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands except per share amounts)
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 28, 2002 June 29, 2001 June 28, 2002 June 29, 2001
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Net Sales $132,796 $130,873 $240,653 $240,687
Cost of products sold 65,655 66,620 118,349 121,296
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Gross Profit 67,141 64,253 122,304 119,391
Product development 4,527 5,711 8,688 11,998
Selling, marketing and distribution 22,096 20,441 41,888 41,113
General and administrative 8,785 9,597 16,502 17,293
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Operating Earnings 31,733 28,504 55,226 48,987
Interest expense 110 355 260 805
Other expense 207 601 204 814
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Earnings Before Income Taxes 31,416 27,548 54,762 47,368
Income taxes 9,900 9,300 17,700 16,000
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Net Earnings $ 21,516 $ 18,248 $ 37,062 $ 31,368
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Basic Net Earnings
Per Common Share $ .45 $ .39 $ .78 $ .68
============= ============= ============= =============
Diluted Net Earnings
Per Common Share $ .44 $ .39 $ .77 $ .67
============= ============= ============= =============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 28, 2002 Dec. 28, 2001
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ASSETS
Current Assets
Cash and cash equivalents $ 63,866 $ 26,531
Accounts receivable, less allowances
of $5,700 and $4,500 97,197 85,440
Inventories 28,657 30,333
Deferred income taxes 12,349 11,710
Prepaid expenses 1,833 1,483
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Total current assets 203,902 155,497
Property, Plant and Equipment:
Cost 213,744 211,523
Accumulated depreciation (119,356) (112,579)
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94,388 98,944
Intangible Assets, net 13,009 14,274
Other Assets 8,159 7,398
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$ 319,458 $ 276,113
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 9,649 $ 9,512
Current portion of long-term debt 500 550
Trade accounts payable 12,284 10,676
Salaries, wages and commissions 9,857 10,620
Accrued insurance liabilities 10,467 10,380
Accrued warranty and service liabilities 6,234 6,091
Income taxes payable 4,894 6,014
Other current liabilities 17,752 19,410
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Total current liabilities 71,637 73,253
Retirement Benefits and Deferred Compensation 28,297 27,359
Deferred Income Taxes 1,765 1,761
Shareholders' Equity
Common stock 47,643 31,113
Additional paid-in capital 69,485 54,269
Retained earnings 102,405 89,155
Other, net (1,774) (797)
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Total shareholders' equity 217,759 173,740
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$ 319,458 $ 276,113
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Twenty-six Weeks
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June 28, 2002 June 29, 2001
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Cash Flows from Operating Activities
Net Earnings $37,062 $31,368
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 9,416 8,946
Deferred income taxes (719) 123
Tax benefit related to stock options exercised 3,300 -
Change in:
Accounts receivable (9,197) (2,520)
Inventories 1,677 (2,013)
Trade accounts payable 1,551 732
Salaries, wages and commissions (970) (5,716)
Retirement benefits and deferred (189) (1,040)
compensation
Other accrued liabilities (2,886) 2,421
Other (275) (916)
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38,770 31,385
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Cash Flows from Investing Activities
Property, plant and equipment additions (3,926) (12,084)
Proceeds from sale of property, plant and equipment 271 105
Acquisition of business, net of cash acquired - (15,949)
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(3,655) (27,928)
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Cash Flows from Financing Activities
Borrowings on notes payable and lines of credit 11,736 106,130
Payments on notes payable and lines of credit (12,329) (109,598)
Borrowings on long-term debt - 21,000
Payments on long-term debt (50) (27,810)
Common stock issued 11,567 10,951
Common stock retired (1,028) (2,025)
Cash dividends paid (6,905) (6,123)
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2,991 (7,475)
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Effect of exchange rate changes on cash (771) 162
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Net increase (decrease) in cash and cash equivalents 37,335 (3,856)
Cash and cash equivalents
Beginning of year 26,531 11,071
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End of period $ 63,866 $ 7,215
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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 June 28, 2002, and the related statements of earnings for the
thirteen and twenty-six weeks ended June 28, 2002 and June 29, 2001, and
cash flows for the twenty-six weeks ended June 28, 2002 and June 29, 2001
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
June 28, 2002, 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 2001 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):
June 28, 2002 Dec. 28, 2001
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Finished products and components $26,351 $23,863
Products and components in various stages
of completion 16,506 18,827
Raw materials and purchased components 16,833 18,899
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59,690 61,589
Reduction to LIFO cost (31,033) (31,256)
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$28,657 $30,333
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3. The Company has three reportable segments; Industrial/Automotive,
Contractor and Lubrication. The Company does not identify assets by
segment. Sales and operating earnings by segment for the thirteen and
twenty-six weeks ended June 28, 2002 and June 29, 2001 were as follows (in
thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 28, 2002 June 29, 2001 June 28, 2002 June 29,2001
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Net Sales
Industrial/Automotive $ 50,759 $ 51,449 $ 96,862 $ 99,098
Contractor 68,593 66,776 119,728 116,677
Lubrication 13,444 12,648 24,063 24,912
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Consolidated $132,796 $130,873 $240,653 $240,687
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Operating Earnings
Industrial/Automotive $ 13,223 $ 12,114 $ 24,960 $ 21,507
Contractor 17,243 15,537 28,108 24,157
Lubrication 3,129 3,072 5,521 6,028
Unallocated Corporate expenses (1,862) (2,219) (3,363) (2,705)
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Consolidated Operating Earnings $ 31,733 $ 28,504 $ 55,226 $ 48,987
============= ============= ============= ============
4. Total comprehensive income in 2002 was $21.5 million in the second quarter
and $37.1 million year-to-date. In 2001, comprehensive income was $17.6
million for the second quarter and $30.0 million for the six-month period.
There have been no significant changes to the components of comprehensive
income from those noted on the 2001 Form 10-K except as described in note 6
below, with respect to translation gains and losses.
5. Effective at the beginning of fiscal year 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets." Upon adoption of SFAS No. 142, amortization of
goodwill ceased, and results of initial goodwill impairment testing
indicated no impairment. Had SFAS No. 142 been effective at the beginning
of 2001, the non-amortization provisions would have increased net earnings
for the second quarter and six months ended June 29, 2001 by $140,000.
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Components of intangible assets were (in thousands):
June 28, 2002 Dec. 28, 2001
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Goodwill $ 7,939 $ 7,939
Other identifiable intangibles, net of
accumulated amortization of $7,700 and
$6,400 5,070 6,335
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$13,009 $14,274
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Amortization of intangibles was $624,000 in the second quarter of 2002 and
$1,266,000 year-to-date. Estimated annual amortization is as follows:
$2,400,000 in 2002, $1,600,000 in 2003, $800,000 in 2004, $400,000 in 2005
and $300,000 in 2006.
6. During the third quarter of 2001, the Company announced plans to relocate
the operations of its German subsidiary, Graco Verfahrenstechnik (GV) to
other Company facilities in Belgium and the U.S. This included termination
of approximately 50 employees, termination of leases and consolidation of
product lines.
General and administrative expense in the third quarter of 2001 included a
$1.4 million charge to establish a restructuring accrual for incremental
costs associated with relocating GV operations. Through the end of the
second quarter of 2002, there were no significant payments charged against
the accrual, but the Company expects that all amounts accrued will be paid
by the end of 2002.
The economic facts and circumstances considered in determining the
functional currency of GV changed as a result of relocating GV operations.
Consequently, the Company determined that the functional currency of GV
changed from the euro to the U.S. dollar. Effective at the beginning of
2002, adjustments resulting from the translation of GV financial statements
into U.S. dollars are no longer charged or credited to shareholders'
equity, but are now included in other expense (income).
7. Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" was effective for the
Company at the beginning of fiscal year 2002. This standard provides for a
single accounting model to be used for long-lived assets to be disposed of,
and broadens the presentation of discontinued operations to include more
disposal transactions. The adoption of SFAS No. 144 had no effect on the
Company's 2002 financial position or operating results.
8. On May 7, 2002, the Board of Directors declared a three-for-two split of
the Company's common stock, distributed on June 6, 2002 to shareholders of
record on May 21, 2002. Share and per share amounts for all periods
presented reflect the stock split.
Also on May 7, 2002, the Company issued 36,750 shares of restricted common
stock to key employees under the Stock Incentive Plan. Compensation cost
totaling $1,069,000 related to the restricted shares will be charged to
operations over the three-year vesting period.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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Increased sales, improved gross profit rate and lower expenses resulted in
higher net earnings for the second quarter. Year-to-date, sales are flat
compared to last year, but improved gross profit rate and lower expenses
resulted in increased net earnings.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 28, 2002 June 29, 2001 June 28, 2002 June 29, 2001
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Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 49.4 50.9 49.2 50.4
Product development 3.4 4.4 3.6 5.0
Selling, marketing and distribution 16.7 15.6 17.4 17.1
General and administrative 6.6 7.3 6.9 7.2
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Operating Earnings 23.9 21.8 22.9 20.3
Interest expense 0.1 0.3 0.1 0.3
Other (income) expense, net 0.1 0.5 - 0.3
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Earnings Before Income Taxes 23.7 21.0 22.8 19.7
Income taxes 7.5 7.1 7.4 6.7
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Net Earnings 16.2% 13.9% 15.4% 13.0%
============= ============= ============= =============
Net Sales
Sales in the Industrial / Automotive segment have yet to recover from weak
economic conditions in the U.S. and Japan. Sales in the Contractor segment were
higher due to increased sales in the home center channel. Sales in the
Lubrication segment improved in the second quarter, but were still lower than
last year's year-to-date sales, which included large sales to key customers.
Sales by geographic area were as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
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June 28, 2002 June 29, 2001 June 28, 2002 June 29,2001
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Americas $ 97,220 $ 97,095 $175,798 $176,088
Europe 22,942 20,857 42,744 41,579
Asia Pacific 12,634 12,921 22,111 23,020
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Consolidated $132,796 $130,873 $240,653 $240,687
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For the second quarter, the strengthening of the euro versus the dollar had a
small favorable effect on the Company's profits. Sales in Europe increased 10
percent but would have been only 6 percent higher than last year if translated
at consistent exchange rates. Changes in exchange rates had no significant
impact on sales reported for the quarter in Asia Pacific. Year-to-date, changes
in exchange rates had no significant impact on the translation of
euro-denominated sales in Europe, but sales in Asia Pacific decreased 4 percent
and would have decreased only 1 percent if translated at consistent exchange
rates.
Gross Profit
High factory productivity, product cost improvements, product mix and price
increases all contributed to higher gross profit rates compared to the same
periods last year.
Operating Expenses
Product development expenses were down as a result of actions taken last year.
Selling, marketing and distribution expenses increased compared to last year due
in part to increased sales incentives and marketing programs. Efforts to control
costs have been successful in most general and administrative areas, with the
largest decrease coming from information systems.
Year-to-date operations include a $.5 million pension credit related to the
Company's U.S. defined benefit pension plan, compared to a $1.7 million credit
in the same period last year. These credits resulted from recognition of
investment gains attributable to pension plan assets, and are included in cost
of products sold and operating expenses based on salaries and wages.
Interest Expense and Other Expense
Interest expense decreased due to reduced debt levels and interest income
(included in Other Expense) increased due to higher interest-bearing cash
balances.
Liquidity and Capital Resources
Cash generated from operations in the first six months of 2002 increased cash
and cash equivalents by $37 million. Accounts receivable increased in 2002 due
to extended terms on selected accounts and higher sales in the second quarter.
Issuance of common stock (from stock options exercised and employee stock
purchase plan) was a significant source of cash. In 2001, significant uses of
cash included the construction of expanded manufacturing, warehouse and office
facilities in Minneapolis, Minnesota and Sioux Falls, South Dakota, the
acquisition of ASM, and reduction of debt.
The Company had unused lines of credit available at June 28, 2002 totaling $37
million. The available credit facilities, cash balances of $64 million at June
28, 2002, and internally generated funds provide the Company with the financial
flexibility to meet liquidity needs.
Outlook
Contractor Equipment segment sales continue to benefit from the introduction of
new products and a strong housing market. Even though sales in the Industrial /
Automotive segment have yet to recover from economic weakness, management
believes that the segment is well positioned to benefit from a recovery in North
American capital equipment spending. While internal sales growth may be
challenged by continued difficult economic conditions, management remains
committed to high profitability while funding the Company's long-term growth
strategies of introducing new products, entering new markets, expanding
distribution coverage and pursuing strategic acquisitions. Management is
cautiously optimistic that 2002 will be a year of higher net earnings for the
Company.
SAFE HARBOR CAUTIONARY STATEMENT
A forward-looking statement is any statement made in this report and other
reports that the Company files periodically with the Securities and Exchange
Commission, as well as in press or earnings releases, analyst briefings and
conference calls, 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 2001 for a more comprehensive discussion of these and other risk
factors.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 7, 2002, David A. Koch, Lee R.
Mitau, James H. Moar, Martha A.M. Morfitt and David A. Roberts were elected to
the Office of Director with the following votes (prior to stock split):
FOR WITHHELD
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David A. Koch 27,998,318 1,038,713
Lee R. Mitau 20,715,895 8,321,136
James H. Moar 28,548,656 488,375
Martha A.M. Morfitt 28,566,460 470,571
David A. Roberts 21,502,764 7,534,267
At the same meeting, the selection of Deloitte & Touche LLP as independent
auditors for the current year was approved and ratified, with the following
votes (prior to stock split):
FOR AGAINST ABSTENTIONS BROKER NON-VOTE
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27,707,199 1,302,366 27,466 0
No other matters were voted on at the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 Restated Bylaws as amended June 13, 2002
10 Executive Long Term Incentive Agreement. Form of agree-
ment used for award of restricted stock to executive
officers under the Graco Inc. Stock Incentive Plan with
schedule of awards current as of June 28, 2002
10.1 Executive Group Long-Term Disability Policy
11 Computation of Net Earnings per Common Share
99 Certification of Chief Executive Officer
99.1 Certification of Vice President and Treasurer
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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: August 1, 2002 By: /s/David A. Roberts
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David A. Roberts
President & Chief Executive Officer
Date: July 30, 2002 By: /s/James A. Graner
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James A. Graner
Vice President & Controller
Date: July 30, 2002 By: /s/Mark W. Sheahan
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Mark W. Sheahan
Vice President & Treasurer