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Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 29, 2023
Accounting Policies [Abstract] |
Significant Accounting Policies | Summary of Significant Accounting Policies 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 year ended December 31, 2021 was a 53-week year whereas the years ended December 29, 2023 and December 30, 2022 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 29, 2023, all subsidiaries are 100 percent controlled by the Company. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year presentation. 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. Accounting Estimates. The preparation of financial statements in conformity with U.S. GAAP 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: 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 Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):
| Level |  | 2023 |  | 2022
Assets |  |  |  |  |
Cash surrender value of life insurance | 2 |  | $ | 22,255 |  |  | $ | 19,192 |
Liabilities |  |  |  |  |
Contingent consideration | 3 |  | $ | 1,375 |  |  | $ | 14,914 |
Deferred compensation | 2 |  | 6,445 |  |  | 5,842 |
Forward exchange contracts | 2 |  | 422 |  |  | 520 |
Total liabilities at fair value |  |  | $ | 8,242 |  |  | $ | 21,276 |
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. The Company’s policy and accounting for forward exchange contracts are described below, in Derivative Instruments and Hedging Activities. Contingent consideration liability represents the estimated value (using a probability-weighted expected return approach) of future payments to be made to previous owners of certain acquired businesses based on future revenues. Disclosures related to other 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. Accounts Receivable. Accounts receivable includes trade receivables of $343 million in 2023 and $334 million in 2022. Other receivables totaled $11 million in 2023 and $12 million in 2022. Allowance for Credit Losses. Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Following is a summary of activity in the allowance for credit losses (in thousands):
|  |  |  | 2023 |  | 2022 |  | 2021
Balance, beginning |  |  |  | $ | 6,130 |  |  | $ | 3,254 |  |  | $ | 3,745 |
Additions (reversals) charged to costs and expenses |  |  |  | 1,125 |  |  | 3,567 |  |  | (27) |
Deductions from reserves (1) |  |  |  | (2,711) |  |  | (633) |  |  | (676) |
Other additions (deductions) (2) |  |  |  | 111 |  |  | (58) |  |  | 212 |
Balance, ending |  |  |  | $ | 4,655 |  |  | $ | 6,130 |  |  | $ | 3,254 |
(1) Represents amounts determined to be uncollectible and charged against reserves, net of collections on accounts previously charged against reserves. (2) Includes effects of foreign currency translation. Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. 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. Other Current Assets. Amounts included in other current assets were (in thousands):
| 2023 |  | 2022
Prepaid income taxes | $ | 14,546 |  |  | $ | 18,702 |
Prepaid expenses and other | 20,524 |  |  | 24,922 |
Total | $ | 35,070 |  |  | $ | 43,624 |
Impairment of Long-Lived Assets. The Company evaluates long-lived assets (including property and equipment, goodwill and other intangible assets) for impairment annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In the third quarter of 2023, the Company recognized a goodwill impairment related to the reorganization of a business acquired in 2020 that is not material to the consolidated financial statements. We completed our annual impairment test of all long-lived assets in the fourth quarter of 2023. No additional impairment charges were recorded as a result of that review. There were no impairment charges in 2022 or 2021. 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 |  | Process |  | Contractor |  | Total
Balance, January 1, 2022 | $ | 137,155 |  |  | $ | 141,304 |  |  | $ | 77,796 |  |  | $ | 356,255 |
Additions, adjustments from business acquisitions | — |  |  | 16,994 |  |  | — |  |  | 16,994 |
Foreign currency translation | (2,384) |  |  | (1,932) |  |  | (762) |  |  | (5,078) |
Balance, December 30, 2022 | 134,771 |  |  | 156,366 |  |  | 77,034 |  |  | 368,171 |
Additions, adjustments from business acquisitions | — |  |  | — |  |  | — |  |  | — |
Impairment | — |  |  | (7,800) |  |  | — |  |  | (7,800) |
Foreign currency translation | 8,361 |  |  | 988 |  |  | 508 |  |  | 9,857 |
Balance, December 29, 2023 | $ | 143,132 |  |  | $ | 149,554 |  |  | $ | 77,542 |  |  | $ | 370,228 |
Components of other intangible assets, net were (dollars in thousands):
| Finite Life |  | Indefinite Life |  |
| Customer Relationships |  | Patents and Proprietary Technology |  | Trademarks, Trade Names and Other |  | Trade Names |  | Total
As of December 29, 2023 |  |  |  |  |  |  |  |  |
Cost | $ | 191,417 |  |  | $ | 14,174 |  |  | $ | 1,300 |  |  | $ | 62,633 |  |  | $ | 269,524 |
Accumulated amortization | (128,248) |  |  | (8,547) |  |  | (561) |  |  | — |  |  | (137,356) |
Foreign currency translation | (7,591) |  |  | (344) |  |  | — |  |  | 2,025 |  |  | (5,910) |
Book value | $ | 55,578 |  |  | $ | 5,283 |  |  | $ | 739 |  |  | $ | 64,658 |  |  | $ | 126,258 |
Weighted average life in years | 13 |  | 9 |  | 6 |  | N/A |  |
As of December 30, 2022 |  |  |  |  |  |  |  |  |
Cost | $ | 202,103 |  |  | $ | 26,374 |  |  | $ | 1,300 |  |  | $ | 62,633 |  |  | $ | 292,410 |
Accumulated amortization | (123,603) |  |  | (18,027) |  |  | (330) |  |  | — |  |  | (141,960) |
Foreign currency translation | (10,060) |  |  | (894) |  |  | — |  |  | (1,989) |  |  | (12,943) |
Book value | $ | 68,440 |  |  | $ | 7,453 |  |  | $ | 970 |  |  | $ | 60,644 |  |  | $ | 137,507 |
Weighted average life in years | 13 |  | 10 |  | 6 |  | N/A |  |
Amortization of intangibles was $17.6 million in 2023, $18.9 million in 2022 and $17.9 million in 2021. Estimated future annual amortization expense based on the current carrying amount of other intangible assets is as follows (in thousands):
| 2024 |  | 2025 |  | 2026 |  | 2027 |  | 2028 |  | Thereafter
Estimated Amortization Expense | $ | 16,929 |  |  | $ | 16,459 |  |  | $ | 9,247 |  |  | $ | 6,423 |  |  | $ | 4,258 |  |  | $ | 8,284 |
In 2022 and 2021 the Company completed acquisitions that were not material to the consolidated financial statements. Other Assets. Components of other assets were (in thousands):
| 2023 |  | 2022
Cash surrender value of life insurance | $ | 22,255 |  |  | $ | 19,192 |
Capitalized software | 2,602 |  |  | 2,189 |
Equity method investment | 9,661 |  |  | 8,767 |
Deposits and other | 3,332 |  |  | 2,970 |
Total | $ | 37,850 |  |  | $ | 33,118 |
The Company has entered into contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans. These insurance contracts are 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 other expense, net. The cash surrender value increased $3.1 million in 2023, decreased $4.0 million in 2022 and increased $3.3 million in 2021. Capitalized software is amortized over its estimated useful life (generally 2 to 5 years) beginning at date of implementation. Other Current Liabilities. Components of other current liabilities were (in thousands):
| 2023 |  | 2022
Accrued self-insurance retentions | $ | 8,654 |  |  | $ | 9,338 |
Accrued warranty and service liabilities | 15,408 |  |  | 14,674 |
Accrued trade promotions | 14,312 |  |  | 13,799 |
Payable for employee stock purchases | 16,639 |  |  | 16,497 |
Customer advances and deferred revenue | 51,578 |  |  | 50,747 |
Income taxes payable | 9,837 |  |  | 15,987 |
Tax payable, other | 12,289 |  |  | 9,614 |
Operating lease liabilities, current | 8,242 |  |  | 9,555 |
Right of return refund liability | 17,826 |  |  | 18,449 |
Other | 30,574 |  |  | 32,133 |
Total | $ | 185,359 |  |  | $ | 190,793 |
Self-Insurance. The Company is self-insured for certain losses and costs relating to product liability, workers’ compensation, and employee medical benefit claims. The Company has stop-loss coverage in order to limit its exposure to significant claims. Accrued self-insurance retentions are based on claims filed, estimates of claims incurred but not reported, and other actuarial assumptions. Self-insured reserves totaled $8.7 million as of December 29, 2023 and $9.3 million as of December 30, 2022. 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):
| 2023 |  | 2022
Balance, beginning of year | $ | 14,674 |  |  | $ | 14,463 |
Assumed in business acquisition | — |  |  | 38 |
Charged to expense | 11,128 |  |  | 8,946 |
Margin on parts sales reversed | 3,875 |  |  | 3,292 |
Reductions for claims settled | (14,269) |  |  | (12,065) |
Balance, end of year | $ | 15,408 |  |  | $ | 14,674 |
Revenue Recognition. Revenue is recognized at a single point in time upon the satisfaction of performance obligations, which occurs when control of the good or service transfers to the customer. This is generally on the date of shipment for product sales; however certain sales have terms requiring recognition when the goods are 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, and do not exceed one year. Standalone selling prices are determined based on the prices charged to customers for all material performance obligations. Variable consideration is accounted for as a price adjustment (sales adjustment). Following are examples of variable consideration that affect the Company’s reported revenue. Early payment discounts are provided to certain customers and within certain regions. Rights of return are typically contractually limited and amounts are estimable. The Company records a refund liability and establishes a recovery asset for the value of product expected to be returned at the time revenue is recognized. This includes promotions when, from time to time, the Company may promote the sale of new products by agreeing to accept returns of superseded products. 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. Historically, sales returns have been approximately 3 percent of sales. Trade promotions are offered to distributors and end users through various programs, generally with terms of one year or less. Such promotions include rebates based on annual purchases and sales growth, coupons and reimbursement for competitive products. Payment of incentives may take the form of cash, trade credit, promotional merchandise or free product. Rebates are accrued based on the program rates and progress toward the probability weighted estimate of annual sales amount and sales growth. Additional promotions include cooperative advertising arrangements. 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. 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. The considerations payable to customers are deemed as broad based and are not recorded against net sales. Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping and handling are included in net sales. Revenue is deferred when cash payments are received or due in advance of performance, including amounts which are refundable. This is also the case for services associated with certain product sales. The balance in the deferred revenue and customer advances was $51.6 million as of December 29, 2023 and $50.7 million as of December 30, 2022. Net sales for 2023 included $49.6 million that was in deferred revenue and customer advances as of December 30, 2022. Net sales for 2022 included $60.4 million that was in deferred revenue and customer advances as of December 31, 2021. Shipping and handling activities that occur after control of the related good transfers are accounted for as fulfillment activities instead of assessing such activities as performance obligations. Sales taxes related to revenue producing transactions collected from the customer for a governmental authority are excluded from the transaction price. Revenue standard requirements are applied to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. Promised goods or services are not assessed as performance obligations if they are immaterial in the context of the contract with the customer. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services are accrued. Incremental costs of obtaining a contract are generally expensed when incurred because the amortization period would be less than one year. Such costs primarily relate to sales commissions and are recorded in selling, marketing and distribution expense. 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. 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. 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. As part of its risk management program, the Company may periodically use forward exchange contracts 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. 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 29, 2023, totaled $62 million. The Company believes it uses strong financial counterparties in these transactions and that the resulting credit risk under these hedging strategies is not significant. The Company uses significant other observable inputs (level 2 in the fair value hierarchy) to value the derivative instruments used to hedge net monetary positions, including reference to market prices and financial models that incorporate relevant market assumptions. Net derivative assets are reported on the balance sheet in accounts receivable and net derivative liabilities are reported as other current liabilities. The fair market value of such instruments follows (in thousands):
| 2023 |  | 2022
Foreign Currency Contracts |  |  |
Assets | $ | 26 |  |  | $ | 157 |
Liabilities | (448) |  |  | (677) |
Net Assets (Liabilities) | $ | (422) |  |  | $ | (520) |

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