Graco 2012 Annual Report Download - page 46

40
Sales Recognition
Sales of merchandise and freight billed to customers are recognized when title passes and all substantial risks of ownership transfer,
which generally occurs either upon shipment or upon delivery based upon contractual terms. Sales are net of provisions for cash
discounts, returns, customer discounts (such as volume or trade discounts), cooperative advertising and other sales-related discounts.
Recovery of Accounts Receivable
The Company evaluates the collectibility of accounts receivable based on a combination of factors. When aware of a specific
customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s
operating results or financial position, the Company records a specific reserve for bad debt to reduce the related receivable to the
amount the Company reasonably believes is collectible. The Company also records reserves for bad debt for all other customers
based on a variety of factors, including the length of time the receivables are past due and historical collection experience. Accounts
are reviewed for potential write-off on a case-by-case basis. Accounts deemed uncollectible are written off, net of expected
recoveries. If circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables
could be further adjusted.
Inventory Reserves
The Company reduces its inventory value for estimated obsolete and slow-moving inventory in an amount equal to the difference
between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions.
Net provisions for excess and obsolete inventories, including shrink reserves, totaled $38.3 million, $26.9 million and $18.4 million
in 2012, 2011 and 2010, respectively, and are included in cost of products sold. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill
The Company performs its annual impairment testing of goodwill at a reporting unit level, and all of the Company's goodwill is
assigned to the Company's reporting units. For the Company’s annual impairment testing in 2012, reporting units, which were
referred to as the Company's Global Business Units (“GBU”), were one level below the operating segment level. Effective January
1, 2012, the Company, as part of Project Renewal, implemented certain changes to its organizational structure that resulted in the
consolidation of the Company's 13 global business units ("GBU") into nine; and, as a result, the Company performed its annual
goodwill impairment testing for the nine GBUs. Acquired businesses, if any, including goodwill arising from such transactions,
are integrated into the Company's existing reporting units.
As of July 1, 2012, the Company had nine reporting units with total goodwill of $2.4 billion. Four of the Company's nine reporting
units accounted for over 70 percent of the Company's total goodwill. These four reporting units were as follows: Writing & Creative
Expression; Commercial Products; Technology; and Industrial Products & Services.
The Company conducts its annual test of impairment of goodwill as of the first day of the third quarter because it generally
coincides with its annual strategic planning process. The Company also tests for impairment if events and circumstances indicate
that it is more likely than not that the fair value of a reporting unit is below its carrying amount. For example, if macroeconomic
factors, such as consumer demand and consumer confidence, deteriorate materially such that the Company's reporting units'
projected sales and operating income decline significantly relative to previous estimates, the Company will perform an interim
test to assess whether goodwill is impaired. Other than the annual impairment test, the Company determined that no tests of
impairment were necessary during 2012.
In the Company's goodwill impairment testing, if the carrying amount of a reporting unit is greater than its fair value, impairment
may be present. Estimates made by management in performing its impairment testing may impact whether or not an impairment
charge is necessary and the magnitude of the corresponding impairment charge to the extent one is recorded. The Company uses
multiple valuation approaches in its impairment testing, each of which requires estimates to arrive at an estimate of fair value. For
the Company's reporting units that are stable businesses and have a history of generating positive operating income and cash flows,
the Company relies on a multiple of earnings approach to assess fair value. The material assumptions used to value a reporting
unit using this approach are the reporting units' estimated financial performance for the remainder of the year and the applicable
multiple to apply to earnings before interest, taxes, depreciation and amortization (“EBITDA”). The estimated financial
performance for the remainder of the year is based on the Company's internal forecasting process. To determine the EBITDA
multiple, the Company obtains information from third parties on EBITDA multiples observed for recent acquisitions and other
transactions in the marketplace for comparable businesses. The Company also evaluates the EBITDA multiples of publicly traded
companies that are in the same industry and are comparable to each reporting unit and compares the EBITDA multiples of the
publicly traded companies to the multiples used by the Company to estimate the fair value of each reporting unit. The Company
evaluates the EBITDA multiples used to value the reporting units relative to the Company's market capitalization plus an equity