Graco 2005 Annual Report Download - page 27

Other Long-Lived Assets
The Company tests its other long-lived assets for impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, ""Accounting for the Impairment or Disposal of Long-
Lived Assets.'' In accordance with SFAS No. 144, the Company evaluates if impairment indicators related
to its property, plant and equipment and other long-lived assets are present. These impairment indicators
may include a signiÑcant decrease in the market price of a long-lived asset or asset group, a signiÑcant
adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its
physical condition, or a current-period operating or cash Öow loss combined with a history of operating or
cash Öow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived
asset or asset group. If impairment indicators are present, the company estimates the future cash Öows for
the asset or group of assets. The sum of the undiscounted future cash Öows attributable to the asset or
group of assets is compared to their carrying amount. The cash Öows are estimated utilizing various
assumptions regarding future revenue and expenses, working capital, and proceeds from asset disposals on
a basis consistent with the strategic plan. If the carrying amount exceeds the sum of the undiscounted
future cash Öows, the Company discounts the future cash Öows using a risk-free discount rate and records
an impairment charge as the diÅerence between the fair value and the carrying value of the asset group.
Generally, the Company performs its testing of the asset group at the product-line level, as this is the
lowest level for which identiÑable cash Öows are available.
Product Liability Reserves
The Company has a self-insurance program for product liability that includes reserves for self-retained
losses and certain excess and aggregate risk transfer insurance. The Company uses historical loss
experience combined with actuarial evaluation methods, review of signiÑcant individual Ñles and the
application of risk transfer programs in determining required product liability reserves. The Company's
actuarial evaluation methods take into account claims incurred but not reported when determining the
Company's product liability reserve. The Company has product liability reserves of $28.3 million as of
December 31, 2005. While the Company believes that it has adequately reserved for these claims, the
ultimate outcome of these matters may exceed the amounts recorded by the Company and such additional
losses may be material to the Company's Consolidated Financial Statements.
Legal and Environmental Reserves
The Company is subject to losses resulting from extensive and evolving federal, state, local and
foreign laws and regulations, as well as, contract and other disputes. The Company evaluates the potential
legal and environmental losses relating to each speciÑc case and determines the probable loss based largely
on historical experience. The estimated losses take into account anticipated costs associated with
investigative and remediation eÅorts, including legal fees, where an assessment has indicated that a
probable liability has been incurred and the cost can be reasonably estimated. No insurance recovery is
taken into account in determining the Company's cost estimates or reserve, nor do the Company's cost
estimates or reserve reÖect any discounting for present value purposes, except with respect to long-term
operations and maintenance CERCLA matters which are estimated at present value. The Company's
estimate of environmental response costs associated with these matters as of December 31, 2005 ranged
between $12.8 million and $23.8 million. As of December 31, 2005, the Company had a reserve equal to
$15.4 million for such environmental response costs in the aggregate, which is included in other accrued
liabilities and other non-current liabilities in the Consolidated Balance Sheets.
Income Tax Contingencies
The Company establishes a tax contingency reserve for certain tax exposures when it is not probable
that the Company's tax position will be ultimately sustained. The Company eliminates a tax contingency
reserve balance when it becomes probable that the Company's tax position will ultimately be sustained,
which generally occurs when the statute of limitations for a speciÑc exposure item has expired or when the
Company has reached agreement with the taxing authorities on the treatment of an item. The Company
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