Graco 2012 Annual Report Download - page 52

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the rate of 5.3 Bolivar Fuerte to U.S. Dollar. The Company began applying the SITME rate of 5.3 Bolivar Fuerte to U.S. Dollar
in May 2010. The transition to the SITME rate from the parallel rate did not have a material impact on the Company’s consolidated
net sales or operating income for 2010 compared to using the parallel rate for the same period. The transition to the SITME rate
did result in a one-time foreign exchange gain of $5.6 million, which is recognized in other income in 2010. Since the introduction
of SITME in June 2010, the Venezuelan government held the rate constant at 5.3 Bolivar Fuerte to U.S. Dollar until February
2013. In February 2013, the exchange rate for Bolivar Fuertes declined to 6.3 Bolivar Fuertes to U.S. Dollar and the SITME rate
is no longer available. As a result, the Company expects to record an estimated $10 million one-time charge in the first quarter
of 2013, based on the decline in value of the net monetary assets of its Venezuelan operations that are denominated in Bolivar
Fuertes at the time the devaluation is effective. In addition, the Company’s 2013 reported net sales and operating income are
expected to be adversely impacted by an estimated $9 million and $5 million, respectively, due solely to the devaluation of the
Bolivar Fuerte.
The Company is unable to predict with certainty whether future devaluations will occur because of the economic uncertainty in
Venezuela; however, future devaluations would adversely impact the Company’s future financial results. Any change in the rate
would not impact reported changes in core sales, which exclude the impact of foreign currency.
Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, defined as the price that would be received to sell
an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Various valuation
techniques exist for measuring fair value, including the market approach (comparable market prices), the income approach (present
value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).
These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect the Company’s market assumptions. The authoritative accounting
guidance for fair value provides a hierarchy that prioritizes these two inputs to valuation techniques used to measure fair value
into three broad levels.
The following is a brief description of those three levels:
• Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
• Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability,
including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or
liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant
value drivers are observable.
• Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The Company’s assets and liabilities adjusted to fair value at least annually are its money market fund investments, included in
cash and cash equivalents; mutual fund investments, included in other assets; and derivative instruments, primarily included in
prepaid expenses and other, other assets, other accrued liabilities and other noncurrent liabilities, and these assets and liabilities
are therefore subject to the measurement and disclosure requirements outlined in the authoritative guidance. The Company
determines the fair value of its money market fund investments based on the values of the underlying assets (Level 2) and its
mutual fund investments based on quoted market prices (Level 1). The Company generally uses derivatives for hedging purposes,
and the Company’s derivatives are primarily foreign currency forward contracts and interest rate swaps. The Company determines
the fair value of its derivative instruments using standard pricing models and market-based assumptions for all significant inputs,
such as yield curves and quoted spot and forward exchange rates. Accordingly, the Company’s derivative instruments are classified
as Level 2.
Forward-Looking Statements
Forward-looking statements in this Report are made in reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements may relate to, but are not limited to, information or assumptions about the
effects of sales (including pricing), income/(loss), earnings per share, return on equity, return on invested capital, operating income,
operating margin or gross margin improvements or declines, Project Renewal, the European Transformation Plan, capital and
other expenditures, working capital, cash flow, dividends, capital structure, debt to capitalization ratios, debt ratings, availability
of financing, interest rates, restructuring and restructuring-related costs, impairment and other charges, potential losses on
divestitures, impacts of changes in accounting standards, pending legal proceedings and claims (including environmental matters),
future economic performance, costs and cost savings (including raw material and sourced product inflation, productivity and
streamlining), synergies, management’s plans, goals and objectives for future operations, performance and growth or the
assumptions relating to any of the forward-looking statements. These statements generally are accompanied by words such as