Graco 2010 Annual Report Download - page 38

Newell Rubbermaid Inc. 2010 Annual Report
34 NEWELL RUBBERMAID 2010 Annual Report
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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 and the working capital investment required. Estimates of future financial performance include estimates
of future sales growth rates, raw material 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 reporting units in 2010, the Company generally
used average compound long-term sales growth rates ranging from 2% to 3%, average operating margins of approximately 10% and
discount rates of 12% to 14%. The Company concluded these two reporting units passed step one of the goodwill impairment test
based on the values determined using the discounted cash flow approach.
If the discount rates used to estimate the fair value of the Baby & Parenting and Hardware reporting units increased 100 basis
points, the estimated fair values of the reporting units would have declined by $70 million and $18 million, respectively. If the
discount rates were increased by 100 basis points, the Hardware reporting unit would still have passed step one of the goodwill
impairment test, whereas the Baby & Parenting reporting unit would not have passed step one of the goodwill impairment test.
The Company had one reporting unit, Baby & Parenting, whose estimated fair value at July 1, 2010 exceeded net assets by
less than 10% of the reporting unit’s net assets using the adjusted EBITDA multiple or discounted cash flow approach, as applicable.
The estimated fair value of Baby & Parenting at July 1, 2010 exceeded net assets by less than 10% of the reporting unit’s net assets
using the discounted cash flow approach. The Baby & Parenting reporting unit has goodwill of $425.1 million as of July 1, 2010.
If the discount rate used to estimate the fair value of the Baby & Parenting reporting unit was increased by 100 basis points,
the estimated fair value of the reporting unit would have been approximately 7% less than the net assets of the reporting
unit. Additional valuation procedures would have been required to determine whether Baby & Parenting’s goodwill was impaired,
and to the extent goodwill was impaired, the magnitude of the impairment charge.
The Company continues to implement specific restructuring projects and business and operational strategies to further
strengthen the profitability of Baby & Parenting. The Company continues to monitor whether these initiatives are being executed
as planned and improve its financial performance. 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 Baby & Parenting in future
periods. Baby & Parenting has been adversely affected by the U.S. and Japanese economy and continues to integrate two acquired
international businesses. Baby & Parenting has undertaken and is executing restructuring projects to reduce supply chain costs
and administrative overhead worldwide and has taken steps to minimize the impact inflation has on its operating results, and to
reduce inventories. These efforts are being taken to reduce the working capital investment required in the short-term and improve
profitability over the mid- to long-term.
If the estimated fair value of a reporting unit is less than its carrying value, the Company measures the amount of goodwill
impairment, if any, based on the estimated fair value of the underlying assets and liabilities of the reporting unit, including any
unrecognized intangible assets, and estimates the implied fair value of goodwill. The Company identifies unrecognized intangible
assets, such as trade names and customer relationships, and uses discounted cash flow models to estimate the values of the
reporting unit’s recognized and unrecognized intangible assets. The estimated values of the reporting unit’s intangible assets
and net tangible assets are deducted from the reporting unit’s total fair value to determine the implied fair value of goodwill.
An impairment charge is recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill.
The Company’s indefinite-lived intangible assets totaled $315.6 million as of July 1, 2010. The Company assesses the fair value
of its indefinite-lived intangible assets using a discounted cash flow model using the relief from royalty method, which estimates
royalties to be derived in the future use of the asset were the Company to license the use of the trademark or trade name. An
impairment charge for indefinite-lived intangible assets is recorded if the carrying amount of an indefinite-lived intangible asset
exceeds the estimated fair value on the measurement date. The Company completed its annual impairment test of indefinite-
lived intangible assets as of July 1, 2010 and concluded none of the assets were impaired.
The Company considers qualitative and quantitative factors in determining whether impairment testing of the trademark
and trade name assets is necessary at dates other than the annual impairment testing date, such as whether the Company has
plans to abandon or significantly reduce the use of a trademark or trade name. Based on consideration of these factors, the
Company determined that no impairment indicators have been present, and therefore, impairment testing as of a date other
than July 1, 2010 is not required.
See Footnote 7 of the Notes to Consolidated Financial Statements for further information.
The Company cannot predict the occurrence of events that might adversely affect the reported value of goodwill and other
intangible assets. Such events may include, but are not limited to, strategic decisions made in response to economic and competitive
conditions, the impact of the economic environment on the Company’s customer base and net sales, a material negative change in
its relationships with significant customers or sustained declines in the Company’s market capitalization relative to its reported
stockholders’ equity. The Company periodically evaluates the impact of economic and other conditions on the Company and its
reporting units to assess whether impairment indicators are present. The Company may be required to perform impairment tests
based on changes in the economic environment and other factors, which could result in impairment charges in the future. If consumer
confidence and consumer spending decline significantly in the future or if commercial and industrial economic activity deteriorates
significantly from current levels, it is reasonably likely the Company will be required to record impairment charges in the future.
Capitalized Software Costs
The Company capitalizes costs associated with internal-use software during the application development stage after both the
preliminary project stage has been completed and the Company’s management has authorized and committed to funding for
further project development. Capitalized internal-use software costs include: (i) external direct costs of materials and services
consumed in developing or obtaining the software; (ii) payroll and payroll-related costs for employees who are directly associated
with and who devote time directly to the project; and (iii) interest costs incurred while developing the software. Capitalization
of these costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose.