Graco 2005 Annual Report Download - page 45

Download and view the complete annual report

Please find page 45 of the 2005 Graco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 81

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81

The Company also has designated certain interest rate swaps as fair value hedges. The Company has
structured all existing interest rate swap agreements to be 100% eÅective. These instruments include
commodity swaps, interest rate swaps, long-term cross currency interest rate swaps, forward exchange
contracts and option contracts. The Company's forward exchange contracts, long-term cross currency
interest rate swaps, and option contracts do not subject the Company to risk due to foreign exchange rate
movement, because gains and losses on these instruments generally oÅset gains and losses on the assets,
liabilities, and other transactions being hedged. Gains or losses resulting from the early termination of
interest rate swaps are deferred as an increase or decrease to the carrying value of the related debt and
amortized as an adjustment to the yield of the related debt instrument over the remaining period originally
covered by the swap. The cash received or paid relating to the termination of interest rate swaps is
included in Other as an operating activity in the Consolidated Statements of Cash Flows.
Foreign Currency Management: The Company utilizes forward exchange contracts and options to
manage foreign exchange risk related to both known and anticipated intercompany transactions and third-
party commercial transaction exposures of approximately one year in duration or less. The eÅective portion
of the changes in fair value of these instruments is reported in other comprehensive income and
reclassiÑed into earnings in the same period or periods in which the hedged transactions aÅect earnings.
Any ineÅective portion is immediately recognized in earnings.
The Company also utilizes long-term cross currency interest rate swaps to hedge long-term
intercompany Ñnancing transactions. Derivative instruments used to hedge intercompany Ñnancing
transactions are marked to market with the corresponding gains or losses included in accumulated other
comprehensive income.
The fair value of foreign currency hedging instruments is recorded in the captions Prepaid expenses
and other, Other assets, Other accrued liabilities or Other non-current liabilities on the Consolidated
Balance Sheets depending on the maturity of the Company's cross currency interest rate swaps and
forward contracts at December 31, 2005 and 2004. The earnings impact of cash Öow hedges relating to
forecasted purchases of inventory is generally reported in cost of products sold to match the underlying
transaction being hedged. For hedged forecasted transactions, hedge accounting is discontinued if the
forecasted transaction is no longer probable of occurring, in which case previously deferred hedging gains
or losses would be recorded to earnings immediately.
Disclosures about Fair Value of Financial Instruments: The Company's Ñnancial instruments
include cash and cash equivalents, accounts receivable, notes payable and short and long-term debt. The
fair value of these instruments approximates carrying values due to their short-term duration, except as
follows:
Qualifying Derivative Instruments: The fair value of the Company's qualifying derivative instruments is
recorded in the Consolidated Balance Sheets and is described in more detail in Footnote 11.
Long-term Debt: The fair values of the Company's long-term debt issued under the medium-term note
program and the junior convertible subordinated debentures were $1,473.6 million and $345.4 million,
respectively, at December 31, 2005, based on quoted market prices. All other signiÑcant long-term debt is
pursuant to Öoating rate instruments whose carrying amounts approximate fair value.
Foreign Currency Translation: Assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at the rates of exchange in eÅect at year-end. The related translation adjustments are made
directly to accumulated other comprehensive income. Income and expenses are translated at the average
monthly rates of exchange in eÅect during the year. Gains and losses from foreign currency transactions of
these subsidiaries are included in net income. International subsidiaries operating in highly inÖationary
economies translate non-monetary assets at historical rates, while net monetary assets are translated at
current rates, with the resulting translation adjustment included in net income as other non-operating
(income) expenses.
44