Napa Auto Parts 2006 Annual Report Download - page 43

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8. Guarantees
The amended and restated master agreement to our $85,000,000
construction and lease agreement (the “Agreement”), discussed
further in Note 4, has a term of six years expiring in 2009 and
contains residual value guarantee provisions and other guaran-
tees which would become due in the event of a default under the
operating lease agreement, or at the expiration of the operating
lease agreement if the fair value of the leased properties is less
than the guaranteed residual value. The maximum amount of
the Company’s potential guarantee obligation, representing the
residual value guarantee, at December 31, 2006, is approximately
$72,640,000. The Company believes the likelihood of funding the
guarantee obligation under any provision of the operating lease
agreements is remote.
The Company also guarantees the borrowings of certain inde-
pendently controlled automotive parts stores (independents)
and certain other afliates in which the Company has a minority
equity ownership interest (afliates). Presently, the independents
are generally consolidated by unafliated enterprises that have
a controlling nancial interest through ownership of a majority
voting interest in the entity. The Company has no voting interest
or other equity conversion rights in any of the independents. The
Company does not control the independents or the afliates, but
receives a fee for the guarantee. The Company has concluded that
it is not the primary beneciary with respect to any of the inde-
pendents and that the afliates are not variable interest entities.
The Company’s maximum exposure to loss as a result of its
involvement with these independents and afliates is equal to
the total borrowings subject to the Company’s guarantee.
At December 31, 2006, the total borrowings of the independents
and afliates subject to guarantee by the Company were approxi-
mately $186,473,000. These loans generally mature over periods
from one to ten years. In the event that the Company is required
to make payments in connection with guaranteed obligations of
the independents or the afliates, the Company would obtain and
liquidate certain collateral (e.g. accounts receivable and inventory)
to recover all or a portion of the amounts paid under the guarantee.
When it is deemed probable that the Company will incur a loss in
connection with a guarantee, a liability is recorded equal to this
estimated loss. To date, the Company has had no signicant
losses in connection with guarantees of independents’ and
afliates’ borrowings.
Effective January 1, 2003, the Company adopted FIN No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guaran-
tees, Including Indirect Guarantees of Indebtedness of Others.
In accordance with FIN No. 45 and based on available information,
the Company has accrued for those guarantees related to the
independent and afliates’ borrowings and the construction
and lease agreement as of December 31, 2006 and 2005. These
liabilities are not material to the nancial position of the Company
and are included in other long-term liabilities in the accompanying
consolidated balance sheets.
9. Segment Data
The segment data for the past ve years presented on page 15
is an integral part of these consolidated nancial statements.
The Company’s automotive segment distributes replacement
parts (other than body parts) for substantially all makes and
models of automobiles, trucks and other vehicles.
The Company’s industrial segment distributes a wide variety
of industrial bearings, mechanical and uid power transmission
equipment, including hydraulic and pneumatic products, material
handling components, and related parts and supplies.
The Company’s ofce products segment distributes a wide variety
of ofce products, computer supplies, ofce furniture, and
business electronics.
The Company’s electrical/electronic materials segment distributes a
wide variety of electrical/electronic materials, including insulating and
conductive materials for use in electronic and electrical apparatus.
The Company’s reportable segments consist of automotive, indus-
trial, ofce products and electrical/electronic materials. Within the
reportable segments, certain of the Company’s operating segments
are aggregated because they have similar: economic characteristics,
products and services, type and class of customers, and distribu-
tion methods. Inter-segment sales are not signicant. Operating
prot for each industry segment is calculated as net sales less
operating expenses excluding general corporate expenses, inter-
est expense, equity in income from investees, amortization and
minority interests. Approximately $43,500,000, $39,700,000,
and $34,700,000 of income before income taxes was generated
in jurisdictions outside the United States for the years ending
December 31, 2006, 2005, and 2004, respectively. Net sales and
net long-lived assets by country relate directly to the Company’s
operations in the respective country. Corporate assets are prin-
cipally cash and cash equivalents and headquarters’ facilities and
equipment.
For management purposes, net sales by segment exclude the effect
of certain discounts, incentives and freight billed to customers. The
line item “other” represents the net effect of the discounts, incentives
and freight billed to customers, which are reported as a component of
net sales in the Company’s consolidated statements of income.