True Value 2008 Annual Report Download - page 28

management’s discussion and analysis
of financial condition and results of operation
2008 FINAN CIA L REP OR T :: 7
capital and current ratio in 2008 compared to 2007 was primarily
due to lower accounts payable as a result of the lower prod-
uct purchases partially offset by lower accounts receivable as a
result of the 53rd week of collections exceeding the 53rd week
of sales. The increase in both True Value’s net working capital
and current ratio in 2007 compared to 2006 was primarily due to
its revolving credit facility being classified entirely as long-term
debt in 2007 based upon the level of year-end borrowings and
projected borrowings in 2008.
True Value’s management believes that its cash from operations
and existing Bank Facility will provide sufficient liquidity to meet
its working capital needs, planned capital expenditures, debt and
pension plan funding obligations due to be paid in 2009. The
Bank Facility should provide sufficient liquidity for future needs
until it expires in 2011.
CRITICAL ACCOUNTING POLICIES
True Value’s significant accounting policies are contained in the
accompanying Notes to Consolidated Financial Statements.
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and, accordingly, include amounts based on informed
estimates and judgments of management with due consideration
given to materiality. Accordingly, actual results could differ from
those estimates. The following represents those critical account-
ing policies where materially different amounts would be reported
under different conditions or using different assumptions.
• Accounts and notes receivable, net of allowance for doubt-
ful accounts – At January 3, 2009, accounts receivable, net
of $2,434 in allowance for doubtful accounts, was $202,055.
True Value determined the allowance based upon its evalu-
ation of known requirements, aging of receivables, historical
experience, the current economic conditions and the ability to
set off against unpaid receivables, amounts due to members
for stock, notes, interest, and declared and unpaid dividends.
While True Value believes it has appropriately considered
known or expected outcomes, its members’ ability to pay their
obligations, including those to True Value, could be adversely
affected by declining sales of hardware at retail resulting from
such factors as the current U.S. economic recession, loss
of memberships or intense competition from chain stores,
discount stores, home centers and warehouse stores.
Included in the accounts receivable amounts at January 3,
2009, was $27,001 for receivables from True Value Vendors,
primarily related to unpaid amounts for annual rebate programs
which are based on various contracted rebate percentages
applied to purchases made from Vendors during the fiscal
year. Besides the economic risks as previously noted, Vendor
receivables include risks associated with estimates of rebates
made at year end related to final purchases and invoice data
that may differ from actual computed rebates.
• Inventories, net of valuation reserves – At January 3, 2009,
inventories, net of $17,652 in valuation reserves, were $303,802,
and reflect the reductions from cost in order to state inventories
at the lower of cost or market. The lower of cost or market
valuation considers the estimated realizable value in the current
economic environment associated with disposing of surplus
and/or damaged/obsolete inventories. True Value estimated
realizable value based on an analysis of historical trends
related to its distressed inventory. This analysis compares
current levels of active, new and discontinued inventory
items to the prior 12-month actual demand, ages these
items based on such demand and then applies historical
loss rates to the aged items. In addition, based upon known
facts and circumstances, reserves for specific inventory items
were made. Also, a review of all inventory items over certain
thresholds was performed to ascertain if specific reserves
were required. Additional downward valuation adjustments
could be required should any of the following events occur:
1) retailers being unwilling to accept deliveries of advance
orders placed, 2) True Value electing not to ship inventories
to retailers who pose a greater credit risk than appropriate
or 3) an unanticipated decline in retail outlets or a significant
contraction in True Value’s warehouse stock replenishment
business for selected product categories. The depth and
duration of the current U.S. economic recession may have
a significant impact on these events. Potential additional
downward valuation adjustments would also be required by
True Value in the event of unanticipated additional excess
quantities of finished goods and raw materials and/or from
lower disposition values offered by the parties who normally
purchase surplus inventories.
• Goodwill – At January 3, 2009, the accompanying Consolidated
Balance Sheet reflects $91,474 of goodwill. Goodwill is tested
for impairment using a discounted cash flow analysis by
each reporting unit (Hardware and Paint manufacturing).
This test is completed annually unless significant events
necessitate a more frequent test. True Value determined
as of January 3, 2009, that no impairment exists. There
are inherent uncertainties related to the factors utilized
to assess impairment and in management’s judgment in
applying them to the analysis of goodwill impairment. Future
revenue and other financial assumptions were developed
($ in thousands)