Graco Inc.

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GRACO INC filed this Form 10-K on 02/16/2016
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For goodwill, the Company performs impairment reviews for the Company’s reporting units using a fair-value method based on management’s judgments and assumptions. The Company estimates the fair value of the reporting units using a present value of future cash flows calculation cross-checked by an allocation of market capitalization approach. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. Based on our most recent goodwill impairment assessment performed during the fourth quarter of 2015, the fair value of each reporting unit exceeded its carrying value. Accordingly, step two of the impairment analysis was not required.

In completing the goodwill impairment analysis during the fourth quarter of 2015, we determined that the estimated fair value of all reporting units substantially exceeded carrying value except for our Oil and Natural Gas reporting unit, which exceeded its carrying value by 14 percent. As of December 25, 2015, goodwill for the Oil and Natural Gas reporting unit was $157 million. As part of our step one process for determining the estimated fair value of our reporting units, we make several assumptions based on existing and projected market conditions, including earnings and cash flow projections and discount rate, each of which have a significant impact on these values. For our Oil and Natural Gas division, if cash flow projections decreased by 11 percent per year or if the discount rate increased by 1 percentage point, we would have failed step one of the impairment test for this reporting unit, requiring a step two analysis. We continue to monitor operational performance measures and general economic conditions in the oil and natural gas industries noting that prolonged or deepened weakness could subject the goodwill to impairment in the future.

Our primary identifiable intangible assets include customer relationships, trade names and trademarks, proprietary technology and patents. Identifiable intangibles with finite lives are amortized and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We complete our annual impairment test during the fourth quarter each year for indefinite lived intangibles by performing a separate impairment test based on estimated future use and discounting estimated future cash flows. A considerable amount of management judgment and assumptions are required in performing the impairment tests. Though management considers its judgments and assumptions to be reasonable, changes in economic or market conditions, product offerings or marketing strategies could change the estimated fair values and result in impairment charges.

Income Taxes. In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet using statutory rates in effect for the year in which the differences are expected to reverse. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be recoverable from future taxable income. A valuation allowance is established to the extent that management believes that recovery is not likely. Liabilities for uncertain tax positions are also established for potential and ongoing audits of federal, state and international issues. The Company routinely monitors the potential impact of such situations and believes that liabilities are properly stated. Valuations related to amounts owed and tax rates could be impacted by changes to tax codes, changes in statutory rates, the Company’s future taxable income levels and the results of tax audits.

Retirement Obligations. The measurements of the Company’s pension and postretirement medical obligations are dependent on a number of assumptions including estimates of the present value of projected future payments, taking into consideration future events such as salary increase and demographic experience. These assumptions may have an impact on the expense and timing of future contributions.

The assumptions used in developing the required estimates for pension obligations include discount rate, inflation, salary increases, retirement rates, expected return on plan assets and mortality rates. The assumptions used in developing the required estimates for postretirement medical obligations include discount rates, rate of future increase in medical costs and participation rates.

For U.S. plans, the Company establishes its discount rate assumption by reference to a yield curve published by an actuary and projected plan cash flows. For plans outside the U.S., the Company establishes a rate by country by reference to highly rated corporate bonds. These reference points have been determined to adequately match expected plan cash flows. The Company bases its inflation assumption on an evaluation of external market indicators. The salary assumptions are based on actual historical experience, the near-term outlook and assumed inflation. Retirement rates are based on experience. The investment return assumption is based on the expected long-term performance of plan assets. In setting this number, the Company considers the input of actuaries and investment advisors, its long-term historical returns, the allocation of plan assets and projected returns on plan assets. The Company decreased its investment return assumption for its U.S. plan to 7.5 percent for 2016. Mortality rates are based on current common group mortality tables for males and females.


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