Graco 2012 Annual Report Download - page 64

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Inventories
Inventories are stated at the lower of cost or market value using the last-in, first-out (LIFO) or first-in, first-out (FIFO) methods
(see Footnote 5 for additional information). 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 estimates
about future demand and market conditions. As of December 31, 2012 and 2011, the Company’s reserves for excess and obsolete
inventory and shrink totaled $56.9 million and $59.3 million, respectively. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred. Depreciation
expense is calculated principally on the straight-line basis. Useful lives determined by the Company are as follows: buildings and
improvements (20-40 years) and machinery and equipment (3-12 years).
Goodwill and Other Indefinite-Lived Intangible Assets
The Company conducts its annual test for impairment of goodwill and indefinite-lived intangible assets in the third quarter because
it coincides with its annual strategic planning process.
The Company evaluates goodwill for impairment annually at the reporting unit level. 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.
If the carrying amount of the reporting unit is greater than the fair value, impairment may be present. The Company assesses the
fair value of each reporting unit for its goodwill impairment test based on a discounted cash flow model, an earnings multiple or
an actual sales offer received from a prospective buyer, if available. Estimates critical to the Company’s fair value estimates using
earnings multiples include the projected financial performance of the reporting unit and the applicable earnings multiple. Estimates
critical to the Company’s fair value estimates under the discounted cash flow model include the discount rate, projected average
revenue growth, projected long-term growth rates in the determination of terminal values and product costs.
The Company measures the amount of any goodwill impairment based upon 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. An
impairment charge is recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill.
The Company evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. The
Company also tests for impairment if events and circumstances indicate that it is more likely than not that the fair value of an
indefinite-lived intangible asset is below its carrying amount. Estimates critical to the Company’s evaluation of indefinite-lived
intangible assets for impairment include the discount rate, royalty rates used in its evaluation of trade names, projected average
revenue growth and projected long-term growth rates in the determination of terminal values. An impairment charge is recorded
if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
See Footnote 7 for additional detail on goodwill and other intangible assets.
Other Long-Lived Assets
The Company tests its other long-lived assets for impairment in accordance with relevant authoritative guidance. The Company
evaluates if impairment indicators related to its property, plant and equipment and other long-lived assets are present. These
impairment indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant
adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a
current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates
continuing losses associated with the use of a long-lived asset or asset group. If impairment indicators are present, the Company
estimates the future cash flows for the asset or group of assets. The sum of the undiscounted future cash flows attributable to the
asset or group of assets is compared to their carrying amount. The cash flows are estimated utilizing various projections of revenues
and expenses, working capital and proceeds from asset disposals on a basis consistent with the strategic plan. If the carrying
amount exceeds the sum of the undiscounted future cash flows, the Company determines the assets’ fair value by discounting the
future cash flows using a discount rate required for a similar investment of like risk and records an impairment charge as the
difference between the fair value and the carrying value of the asset group. Generally, the Company performs its testing of the
asset group at the product-line level, as this is the lowest level for which identifiable cash flows are available.
Shipping and Handling Costs
The Company records shipping and handling costs as a component of cost of products sold.