Pier 1 2016 Annual Report Download - page 38

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
at substantially all stores and distribution and fulfillment centers during each period presented in the financial statements.
Although inventory shrinkage rates have not fluctuated significantly in recent years, should actual rates differ from the Company’s
estimates, revisions to the inventory shrinkage expense may be required.
Insurance provision — The Company maintains insurance for workers’ compensation and general liability claims with
deductibles of $1.0 million per occurrence. The liability recorded for such claims is determined by estimating the total future
claims cost for events that occurred prior to the balance sheet date. The estimates consider historical claims loss development
factors as well as information obtained from and projections made by the Company’s broker, actuary, insurance carriers and third
party claims administrators. The recorded liabilities for workers’ compensation and general liability claims include claims occurring
in prior years but not yet settled and reserves for fees.
The assumptions made in determining the above estimates are reviewed monthly and the liability adjusted accordingly as new
facts are developed. Changes in circumstances and conditions affecting the assumptions used in determining the liabilities could
cause actual results to differ from the Company’s recorded amounts.
Defined benefit plans — The Company maintains supplemental retirement plans for certain of its current and former executive
officers. These plans provide that upon death, disability, reaching retirement age or certain termination events, a participant will
receive benefits based on highest compensation, years of service and years of plan participation. The benefit costs are
dependent upon numerous factors, assumptions and estimates. Benefit costs may be significantly affected by changes in key
actuarial assumptions such as discount rates, compensation rates or retirement dates used to determine the projected benefit
obligation. Additionally, changes made to the provisions of the plans may impact current and future benefit costs.
Stock-based compensation — The Company’s stock-based compensation relates to stock options, restricted stock awards
and director deferred stock units. Accounting guidance requires all companies to measure and recognize compensation expense
at an amount equal to the fair value of share-based payments granted. Compensation expense is recognized for any unvested
stock option awards and restricted stock awards on a straight-line basis or ratably over the requisite service period. Stock option
exercise prices equal the fair market value of the shares on the date of the grant. The fair value of stock options is calculated
using a Black-Scholes option pricing model. For time-based and certain performance-based restricted stock awards,
compensation expense is measured and recorded using the closing price of the Company’s stock on the date of grant. If the
date of grant for stock options or restricted stock awards occurs on a day when the Company’s stock is not traded, the closing
price on the last trading day before the date of grant is used. The time-based awards typically vest ratably over the requisite
service period provided that the participant is employed on the vesting date. A portion of the performance-based shares vests
upon the Company satisfying certain performance targets. Performance-based shares are considered granted for accounting
purposes on the date the performance targets are set. The Company records compensation expense for these awards with a
performance condition when it is probable that the condition will be achieved. The compensation expense ultimately recognized,
if any, related to these awards will equal the grant date fair value for the number of shares for which the performance condition
has been satisfied. The remaining performance-based shares are based on a market condition and may vest if certain annual
equivalent returns of total shareholder return targets are achieved in comparison to a peer group. The fair value for these
performance-based shares was determined using a lattice valuation model in accordance with accounting guidelines, and will be
expensed on a straight-line basis over the performance period.
Income taxes — The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax
assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. Deferred tax assets and liabilities are recorded in the Company’s consolidated balance sheets and are classified as
noncurrent. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than
not that such assets will be realized. In assessing the need for a valuation allowance, all available evidence is considered
including past operating results, estimates of future income and tax planning strategies. The Company is subject to income tax in
many jurisdictions, including the United States, various states, provinces, localities and foreign countries, for which the Company
records estimated reserves for unrecognized tax benefits for both domestic and foreign income tax issues. At any point in time,
multiple tax years are subject to audit by these various jurisdictions. The timing of these audits and negotiations with taxing
authorities may affect the ultimate settlement of these issues. If different assumptions had been used, the Company’s tax
expense or benefit, assets and liabilities could have varied from recorded amounts. If actual results differ from estimated results or
if the Company adjusts these assumptions in the future, the Company may need to adjust its reserves for unrecognized tax
benefits or its deferred tax assets or liabilities, which could impact its effective tax rate.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the operations of the Company during the preceding three years. However, the
Company’s management cannot be certain of the effect inflation may have on the Company’s operations in the future.
32 PIER 1 IMPORTS, INC. 2016 Form 10-K