Graco 2005 Annual Report Download - page 31

Company also faces risks due to the transportation and logistical complexities inherent in increased
reliance on foreign sourcing.
The Company faces challenges and uncertainties as it transforms into a company that grows through
strong brands and new product innovation.
The Company is undergoing a transformation from a portfolio-holding company that grew through
acquisitions to a focused group of leadership platforms that generate internal growth driven by strong
brands and new product innovation. Although the process is well underway, there remain signiÑcant
challenges and uncertainties.
Impairment charges could have a material adverse eÅect on the Company's Ñnancial results.
Future events may occur that would adversely aÅect the reported value of the Company's assets and
require impairment charges. Such events may include, but are not limited to, strategic decisions made in
response to changes in economic and competitive conditions, the impact of the economic environment on
the Company's customer base, or a material adverse change in its relationship with signiÑcant customers.
Product liability claims or regulatory actions could adversely aÅect the Company's Ñnancial results or
harm its reputation or the value of its end-user brands.
Claims for losses or injuries purportedly caused by some of the Company's products arise in the
ordinary course of the Company's business. In addition to the risk of substantial monetary judgments,
product liability claims or regulatory actions could result in negative publicity that could harm the
Company's reputation in the marketplace or the value of its end-user brands. The Company could also be
required to recall possibly defective products, which could result in adverse publicity and signiÑcant
expenses. Although the Company maintains product liability insurance coverage, potential product liability
claims are subject to a self-insured retention or could be excluded under the terms of the policy.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is impacted by changes in interest rates, foreign currency exchange rates
and certain commodity prices. Pursuant to the Company's policies, natural hedging techniques and
derivative Ñnancial instruments may be utilized to reduce the impact of adverse changes in market prices.
The Company does not hold or issue derivative instruments for trading purposes.
The Company manages interest rate exposure through its conservative debt ratio target and its mix of
Ñxed and Öoating rate debt. Interest rate swaps may be used to adjust interest rate exposures when
appropriate based on market conditions, and, for qualifying hedges, the interest diÅerential of swaps is
included in interest expense.
The Company's foreign exchange risk management policy emphasizes hedging anticipated intercom-
pany and third party commercial transaction exposures of one-year duration or less. The Company focuses
on natural hedging techniques of the following form: 1) oÅsetting or netting of like foreign currency Öows,
2) structuring foreign subsidiary balance sheets with appropriate levels of debt to reduce subsidiary net
investments and subsidiary cash Öows subject to conversion risk, 3) converting excess foreign currency
deposits into U.S. dollars or the relevant functional currency and 4) avoidance of risk by denominating
contracts in the appropriate functional currency. In addition, the Company utilizes forward contracts and
purchased options to hedge commercial and intercompany transactions. Gains and losses related to
qualifying hedges of commercial and intercompany transactions are deferred and included in the basis of
the underlying transactions. Derivatives used to hedge intercompany loans are marked to market with the
corresponding gains or losses included in the Company's Consolidated Statements of Operations.
The Company purchases certain raw materials, including resin, corrugate, steel and aluminum, which
are subject to price volatility caused by unpredictable factors. While future movements of raw material
costs are uncertain, a variety of programs, including periodic raw material purchases, purchases of raw
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