Graco 2012 Annual Report Download - page 53

47
“intend,” “anticipate,” “believe,” “estimate,” “project,” “target,” “plan,” “expect,” “will,” “should,” “would” or similar statements.
The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting
future results. Actual results could differ materially from those expressed or implied in the forward-looking statements. Important
factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are
not limited to, the Company’s dependence on the strength of retail, commercial and industrial sectors of the economy in light of
the continuation or escalation of the global economic slowdown or regional sovereign debt issues; currency fluctuations;
competition with other manufacturers and distributors of consumer products; major retailers’ strong bargaining power; changes
in the prices of raw materials and sourced products and the Company’s ability to obtain raw materials and sourced products in a
timely manner from suppliers; the Company’s ability to develop innovative new products and to develop, maintain and strengthen
its end-user brands; the Company’s ability to expeditiously close facilities and move operations while managing foreign regulations
and other impediments; the Company’s ability to implement successfully information technology solutions throughout its
organization; the Company’s ability to improve productivity and streamline operations; changes to the Company’s credit ratings;
significant increases in the funding obligations related to the Company’s pension plans due to declining asset values, declining
interest rates or otherwise; the imposition of tax liabilities greater than the Company’s provisions for such matters; the risks inherent
in the Company’s foreign operations and those matters set forth in this Report generally and Item 1A to this Report. In addition,
there can be no assurance that the Company has correctly identified and assessed all of the factors affecting the Company or that
the publicly available and other information the Company receives with respect to these factors is complete or correct.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 financial instruments may be utilized to
reduce the impact of adverse changes in rates and prices. The Company does not hold or issue derivative instruments for trading
purposes.
Interest Rates
Interest rate risk is present with both fixed- and floating-rate debt. The Company manages its interest rate exposure through its
mix of fixed- and floating-rate debt and its conservative debt ratio target. Interest rate swap agreements designated as fair value
hedges are used to mitigate the Company’s exposure to changes in the fair value of fixed-rate debt resulting from fluctuations in
benchmark interest rates. Accordingly, benchmark interest rate fluctuations impact the fair value of the Company’s fixed-rate debt,
which are offset by corresponding changes in the fair value of the swap agreements. Interest rate swaps may also be used to adjust
interest rate exposures when appropriate, based on market conditions, and for qualifying hedges, the interest differential of swaps
is included in interest expense. Excluding debt for which a fixed rate has been swapped for a floating rate, fixed-rate debt represented
approximately 48.3% of the Company’s $1.92 billion of total debt as of December 31, 2012.
Foreign Currency Exchange Rates
The Company is exposed to foreign currency risk in the ordinary course of business since a portion of the Company’s sales,
expenses and operating transactions is conducted on a global basis in various foreign currencies. To the extent that business
transactions are not denominated in the functional currency of the entity entering into the transaction, the Company is exposed to
transactional foreign currency exchange rate risk. The Company’s foreign exchange risk management policy emphasizes hedging
anticipated intercompany and third-party commercial transaction exposures of one-year duration or less. The Company uses foreign
exchange forward contracts as economic hedges for commercial transactions and to offset the future impact of gains and losses
resulting from changes in the expected amount of functional currency cash flows to be received or paid upon settlement of the
anticipated intercompany and third-party commercial transactions. Gains and losses related to the settlement of qualifying hedges
of commercial and intercompany transactions are deferred and included in the basis of the underlying transactions. The Company
also uses natural hedging techniques such as offsetting or netting like foreign currency flows and denominating contracts in the
appropriate functional currency.
The Company also realizes gains and losses recorded within shareholders’ equity due to the translation of the financial statements
from the functional currency of its subsidiaries to U.S. Dollars. The Company utilizes capital structures of foreign subsidiaries
combined with forward contracts to minimize its exposure to foreign currency risk. The Company may hedge portions of its net
investments in foreign subsidiaries, including intercompany loans, with forward contracts and cross-currency hedges. Gains and
losses related to qualifying forward exchange contracts and cross-currency hedges, which are generally used to hedge intercompany
loans and net investments in foreign subsidiaries, are recognized in other comprehensive income (loss).