Graco 2012 Annual Report Download - page 47

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control premium. The equity control premium is defined as the sum of the individual reporting units' estimated market values
compared to the Company's market value, with the sum of the individual values typically being larger than the market value of
the Company. The Company considers premiums paid by acquirers of comparable businesses to determine the reasonableness of
the implied control premium.
The EBITDA multiple observed in the marketplace for publicly traded companies that are comparable to the reporting units ranged
from 6 to 10. In using the EBITDA multiples, the Company compared the aggregate value of all reporting units to the Company's
total market value to validate the aggregate values of the reporting units resulted in a reasonable implied equity control premium.
The Company considers several factors in estimating the EBITDA multiple applicable to each reporting unit, including the reporting
unit's market position, brand awareness, gross and operating margins, and prospects for growth, among other factors. After adjusting
the EBITDA multiples for the reporting units, no potential goodwill impairment was indicated for reporting units for which this
approach was used. Furthermore, the Company's equity market value at July 1, 2012 of approximately $5.3 billion was significantly
in excess of its book value of stockholders' equity of approximately $2.0 billion. For the impairment test as of July 1, 2012, if each
reporting unit's EBITDA multiple were reduced by 1.0 from the 6 to 10 multiple used for each reporting unit, all reporting units
where the EBITDA multiple approach was used to value the reporting unit would have passed Step 1 of the goodwill impairment
test.
The Company relies on a discounted cash flow approach to value reporting units in certain circumstances, such as when the
reporting unit is growing at a significantly slower rate than planned, is declining at a significantly faster rate than the overall
market, has experienced significant losses, is in a stage of hyper-growth, is executing significant restructuring efforts, or is in a
stage of development where it has not yet fully realized the benefits of scale and operating efficiencies. The Company used the
discounted cash flow approach to value the Technology reporting unit for the annual impairment test as of July 1, 2012. The
material assumptions used to value a reporting unit using the discounted cash flow approach are the future financial performance
and cash flows of the reporting unit, the discount rate, long-term sales growth rate, and the working capital investment required.
Estimates of future financial performance include estimates of future sales growth rates, raw material and sourced product costs,
currency fluctuations, and operating efficiencies to be realized. The Company determines a discount rate based on an estimate of
a reasonable risk-adjusted return an investor would expect to realize on an investment in the reporting unit. In using the discounted
cash flow approach to value the Technology reporting unit in 2012, the Company used an average compound long-term sales
growth rate of 2%, average operating margins generally ranging from 14% to 18%, and a discount rate of 12%. The Company
concluded that the Technology reporting unit passed Step 1 of the goodwill impairment test based on the estimated fair value
determined using the discounted cash flow approach.
If the discount rate used to estimate the fair value of the Technology reporting unit increased 100 basis points, the estimated fair
value of the reporting unit would have declined by approximately $60 million and would have resulted in a fair value, which was
approximately 1% less than the net assets of the reporting unit. Additional valuation procedures would have been required to
determine whether the Technology reporting unit's goodwill was impaired, and to the extent goodwill was impaired, the magnitude
of the impairment charge. The carrying amount of goodwill assigned to the Technology reporting unit was approximately $360
million as of July 1, 2012.
The Company continues to implement specific restructuring projects and business and operational strategies to further strengthen
the profitability of the Technology reporting unit. The Company continues to monitor whether these initiatives are being executed
as planned and are successful in improving the financial performance of the reporting unit. To the extent the Company is not
successful in implementing these projects and strategies, it is possible the Company would record goodwill impairment charges
associated with the Technology reporting unit in future periods. The Technology reporting unit has been adversely affected by the
decline in government spending and its impact on the classroom technology industry, as well as weaker macroeconomic conditions
throughout Western Europe.
Other than the Technology reporting unit, the Company has no reporting units whose estimated fair values at July 1, 2012 exceeded
net assets by less than 10% of the reporting unit's net assets.
Indefinite-Lived Intangible Assets
The Company's indefinite-lived intangible assets totaled $310.1 million as of July 1, 2012. The Company adopted Accounting
Standards Update ("ASU") 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment," which permits an entity to first
perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. Under ASU
2012-02, the Company has an unconditional option to bypass the qualitative assessment for any indefinite-lived intangible asset
in any period and proceed directly to performing the quantitative impairment test. Additionally, the Company may resume
performing the qualitative assessment in any subsequent period.