Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 27, 2013 |
Summary of Significant Accounting Policies [Abstract] | ' |
Summary of Significant Accounting Policies [Text Block] | ' |
A. Summary of Significant Accounting Policies |
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Fiscal Year. The fiscal year of Graco Inc. and Subsidiaries (the “Company”) is 52 or 53 weeks, ending on the last Friday in December. The years ended December 27, 2013, December 28, 2012 and December 30, 2011, were 52-week years. |
Basis of Statement Presentation. The consolidated financial statements include the accounts of the parent company and its subsidiaries after elimination of intercompany balances and transactions. As of December 27, 2013, all subsidiaries are 100 percent owned. |
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As more fully described in Note L, the Company purchased the Powder Finishing and Liquid Finishing businesses in April 2012. The FTC issued an order requiring the Company to hold the Liquid Finishing businesses separate from the rest of the Company's businesses until the FTC determines which portions of the businesses must be divested. Under terms of the hold separate order, the Company does not have the power to direct the activities of the Liquid Finishing businesses that most significantly impact the economic performance of those businesses. Therefore, the Company has determined that the Liquid Finishing businesses are variable interest entities for which the Company is not the primary beneficiary, and that they should not be consolidated. Furthermore, the Company does not have a controlling interest in the Liquid Finishing businesses, nor is it able to exert significant influence over the Liquid Finishing businesses. Consequently, the Company's investment in the shares of the Liquid Finishing businesses, totaling $422 million, has been reflected as a cost-method investment on the Consolidated Balance Sheet as of December 27, 2013, and their results of operations have not been consolidated with those of the Company. |
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Foreign Currency Translation. The functional currency of certain subsidiaries is the local currency. Accordingly, adjustments resulting from the translation of those subsidiaries' financial statements into U.S. dollars are charged or credited to accumulated other comprehensive income (loss). The U.S. dollar is the functional currency for all other foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency balances and transactions of those subsidiaries are included in other expense, net. |
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Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Fair Value Measurements. The three levels of inputs in the fair value measurement hierarchy are as follows: |
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Level 1 – based on quoted prices in active markets for identical assets |
Level 2 – based on significant observable inputs |
Level 3 – based on significant unobservable inputs |
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Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands): |
| | Level | | 2013 | | 2012 | | | | | | | |
Assets | | | | | | | | | | | | | | |
| Cash surrender value of life insurance | 2 | | $ | 12,611 | | $ | 9,483 | | | | | | | |
| Forward exchange contracts | 2 | | | 291 | | | 491 | | | | | | | |
| Total assets at fair value | | | $ | 12,902 | | $ | 9,974 | | | | | | | |
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Liabilities | | | | | | | | | | | | | | |
| Deferred compensation | 2 | | $ | 2,296 | | $ | 1,759 | | | | | | | |
Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds. |
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The Company's policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities. |
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Disclosures related to non-recurring fair value measurements are included below in Impairment of Long-Lived Assets, in Note F (Debt) and in Note J (Retirement Benefits). |
Cash Equivalents. All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. |
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Accounts Receivable. Accounts receivable includes trade receivables of $178 million in 2013 and $161 million in 2012. Other receivables totaled $5 million in 2013 and $11 million in 2012. |
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Inventory Valuation. Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) cost method is used for valuing most U.S. inventories. Inventories of foreign subsidiaries are valued using the first-in, first-out (FIFO) cost method. |
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Other Current Assets. Amounts included in other current assets were (in thousands): |
| 2013 | | 2012 | | | | | | | | | | |
Prepaid income taxes | $ | 7,894 | | $ | 2,155 | | | | | | | | | | |
Prepaid expenses and other | | 6,739 | | | 5,474 | | | | | | | | | | |
Total | $ | 14,633 | | $ | 7,629 | | | | | | | | | | |
Property, Plant and Equipment. For financial reporting purposes, plant and equipment are depreciated over their estimated useful lives, primarily by using the straight-line method as follows: |
Buildings and improvements | 10 to 30 years | | | | | | | | | | | | | | |
Leasehold improvements | lesser of 5 to 10 years or life of lease | | | | | | | | | | | | | | |
Manufacturing equipment | lesser of 5 to 10 years or life of equipment | | | | | | | | | | | | | | |
Office, warehouse and automotive equipment | 3 to 10 years | | | | | | | | | | | | | | |
Goodwill and Other Intangible Assets. Goodwill has been assigned to reporting units. Changes in the carrying amounts of goodwill for each reportable segment were (in thousands): |
| | Industrial | | Contractor | | Lubrication | | Total | | | |
27-Dec-13 | | | | | | | | | | | | | | | |
Beginning balance | | $ | 148,999 | | $ | 12,732 | | $ | 19,497 | | $ | 181,228 | | | |
Additions from business acquisitions | | | 6,626 | | | - | | | - | | | 6,626 | | | |
Foreign currency translation | | | 2,998 | | | - | | | - | | | 2,998 | | | |
Other | | | -885 | | | - | | | - | | | -885 | | | |
Ending balance | | $ | 157,738 | | $ | 12,732 | | $ | 19,497 | | $ | 189,967 | | | |
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28-Dec-12 | | | | | | | | | | | | | | | |
Beginning balance | | $ | 61,171 | | $ | 12,732 | | $ | 19,497 | | $ | 93,400 | | | |
Additions from business acquisitions | | | 89,044 | | | - | | | - | | | 89,044 | | | |
Foreign currency translation | | | -1,216 | | | - | | | - | | | -1,216 | | | |
Ending balance | | $ | 148,999 | | $ | 12,732 | | $ | 19,497 | | $ | 181,228 | | | |
Components of other intangible assets were (dollars in thousands): |
| | | Estimated | | | | | | | | Foreign | | | |
| | | Life | | | | Accumulated | | Currency | | Book |
| | | (years) | | Cost | | Amortization | | Translation | | Value |
27-Dec-13 | | | | | | | | | | | | | | |
Customer relationships | | 14-Mar | | $ | 121,205 | | $ | -26,377 | | $ | 1,458 | | $ | 96,286 |
Patents, proprietary technology | | | | | | | | | | | | | | |
| and product documentation | | 11-Mar | | | 16,125 | | | -5,869 | | | 118 | | | 10,374 |
Trademarks, trade names and other | | 5 | | | 175 | | | -9 | | | - | | | 166 |
| | | | | | 137,505 | | | -32,255 | | | 1,576 | | | 106,826 |
Not Subject to Amortization | | | | | | | | | | | | | | |
| Brand names | | | | | 40,400 | | | - | | | 714 | | | 41,114 |
Total | | | | $ | 177,905 | | $ | -32,255 | | $ | 2,290 | | $ | 147,940 |
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28-Dec-12 | | | | | | | | | | | | | | |
Customer relationships | | 14-Feb | | $ | 132,245 | | $ | -30,041 | | $ | -1,510 | | $ | 100,694 |
Patents, proprietary technology | | | | | | | | | | | | | | |
| and product documentation | | 11-Mar | | | 20,830 | | | -9,679 | | | -147 | | | 11,004 |
Trademarks, trade names and other | | 5-Jan | | | 85 | | | -27 | | | - | | | 58 |
| | | | | | 153,160 | | | -39,747 | | | -1,657 | | | 111,756 |
Not Subject to Amortization | | | | | | | | | | | | | | |
| Brand names | | | | | 40,580 | | | - | | | -563 | | | 40,017 |
Total | | | | $ | 193,740 | | $ | -39,747 | | $ | -2,220 | | $ | 151,773 |
Amortization of intangibles was $12.5 million in 2013, $15.0 million in 2012 and $10.9 million in 2011. Estimated future annual amortization is as follows: $10.0 million in 2014, $9.5 million in 2015, $9.2 million in 2016, $9.0 million in 2017, $8.9 million in 2018 and $60.2 million thereafter. |
Other Assets. Components of other assets were (in thousands): |
| 2013 | | 2012 | | | | | | | | | | |
Cash surrender value of life insurance | $ | 12,611 | | $ | 9,483 | | | | | | | | | | |
Capitalized software | | 3,448 | | | 3,291 | | | | | | | | | | |
Equity method investment | | 5,569 | | | 5,224 | | | | | | | | | | |
Deposits and other | | 3,017 | | | 3,645 | | | | | | | | | | |
Total | $ | 24,645 | | $ | 21,643 | | | | | | | | | | |
The Company paid $1.5 million in each of 2013 and 2012 for contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts will be used to fund the non-qualified pension and deferred compensation arrangements. The insurance contracts are held in a trust and are available to general creditors in the event of the Company's insolvency. Changes in cash surrender value are recorded in operating expense and were not significant in 2012 and 2011. In 2013, increases in cash surrender value totaled $1.6 million and were offset by expenses related to the non-qualified pension and deferred compensation plans funded by the insurance contracts. |
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Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation. |
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Impairment of Long-Lived Assets. The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Goodwill and other intangible assets not subject to amortization are also reviewed for impairment annually in the fourth quarter. There were no write-downs of long-lived assets in the periods presented. |
Other Current Liabilities. Components of other current liabilities were (in thousands): |
| 2013 | | 2012 | | | | | | | | | | |
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Accrued self-insurance retentions | $ | 6,381 | | $ | 6,952 | | | | | | | | | | |
Accrued warranty and service liabilities | | 7,771 | | | 7,943 | | | | | | | | | | |
Accrued trade promotions | | 7,245 | | | 5,669 | | | | | | | | | | |
Payable for employee stock purchases | | 7,908 | | | 7,203 | | | | | | | | | | |
Customer advances and deferred revenue | | 11,693 | | | 10,617 | | | | | | | | | | |
Income taxes payable | | 4,561 | | | 4,305 | | | | | | | | | | |
Other | | 23,608 | | | 22,704 | | | | | | | | | | |
Total | $ | 69,167 | | $ | 65,393 | | | | | | | | | | |
Self-Insurance. The Company is self-insured for certain losses and costs relating to product liability, workers' compensation and employee medical benefits claims. The Company has purchased stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insured retentions are based on claims filed and estimates of claims incurred but not reported. |
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Product Warranties. A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands): |
| 2013 | | 2012 | | | | | | | | | | |
Balance, beginning of year | $ | 7,943 | | $ | 6,709 | | | | | | | | | | |
Assumed in business acquisition | | - | | | 1,121 | | | | | | | | | | |
Charged to expense | | 6,119 | | | 6,182 | | | | | | | | | | |
Margin on parts sales reversed | | 3,819 | | | 2,244 | | | | | | | | | | |
Reductions for claims settled | | -10,110 | | | -8,313 | | | | | | | | | | |
Balance, end of year | $ | 7,771 | | $ | 7,943 | | | | | | | | | | |
Revenue Recognition. Sales are recognized when revenue is realized or realizable and has been earned. The Company's policy is to recognize revenue when risk and title passes to the customer. This is generally on the date of shipment, however certain sales have terms requiring recognition when received by the customer. In cases where there are specific customer acceptance provisions, revenue is recognized at the later of customer acceptance or shipment (subject to shipping terms). Payment terms are established based on the type of product, distributor capabilities and competitive market conditions. Rights of return are typically contractually limited, amounts are estimable, and the Company records provisions for anticipated returns and warranty claims at the time revenue is recognized. Historically, sales returns have been approximately 2 percent of sales. Provisions for sales returns are recorded as a reduction of net sales, and provisions for warranty claims are recorded in selling, marketing and distribution expenses. From time to time, the Company may promote the sale of new products by agreeing to accept returns of superseded products. In such cases, provisions for estimated returns are recorded as a reduction of net sales. |
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Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include cooperative advertising arrangements, rebates based on annual purchases, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or free product. Under cooperative advertising arrangements, the Company reimburses the distributor for a portion of its advertising costs related to the Company's products; estimated costs are accrued at the time of sale and classified as selling, marketing and distribution expense. Rebates are accrued based on the program rates and progress toward the estimated annual sales amount, and are recorded as a reduction of sales (cash, trade credit) or cost of products sold (free goods). The estimated costs related to coupon programs are accrued at the time of sale and classified as selling, marketing and distribution expense or cost of products sold, depending on the type of incentive offered. |
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Shipping and Handling. Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold in the accompanying Consolidated Statements of Income. Amounts billed to customers for shipping and handling are included in net sales. |
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Earnings Per Common Share. Basic net earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the year. Diluted net earnings per share is computed after giving effect to the exercise of all dilutive outstanding option grants. |
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Comprehensive Income. Comprehensive income is a measure of all changes in shareholders' equity except those resulting from investments by and distributions to owners, and includes such items as net earnings, certain foreign currency translation items, changes in the value of qualifying hedges and pension liability adjustments. |
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Derivative Instruments and Hedging Activities. The Company accounts for all derivatives, including those embedded in other contracts, as either assets or liabilities and measures those financial instruments at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. |
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As part of its risk management program, the Company may periodically use forward exchange contracts and interest rate swaps to manage known market exposures. Terms of derivative instruments are structured to match the terms of the risk being managed and are generally held to maturity. The Company does not hold or issue derivative financial instruments for trading purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Company's policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales. |
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The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The Company enters into forward contracts or options, or borrows in various currencies, in order to hedge its net monetary positions. These instruments are recorded at fair value and the gains and losses are included in other expense, net. The notional amounts of contracts outstanding as of December 27, 2013 totaled $22 million. The Company believes it uses strong financial counterparts in these transactions and that the resulting credit risk under these hedging strategies is not significant. |
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The Company uses significant other observable inputs (level 2 in the fair value hierarchy) to value the derivative instruments used to hedge interest rate volatility and net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. The fair market value and balance sheet classification of such instruments follows (in thousands): |
| | Balance Sheet Classification | | 2013 | | 2012 | | | | | | | |
Gain (loss) on foreign currency forward contracts | | | | | | | | | | | | | | |
| Gains | | | $ | 306 | | $ | 553 | | | | | | | |
| Losses | | | | -15 | | | -62 | | | | | | | |
| Net | Accounts receivable | | $ | 291 | | $ | 491 | | | | | | | |
Recent Accounting Pronouncements. The accounting standards updates issued by The Financial Accounting Standards Board (FASB) that will be effective for the Company in 2014 will not have a significant impact on the Company's consolidated financial statements. |