True Value 2008 Annual Report Download - page 29

management’s discussion and analysis
of financial condition and results of operation
8 :: TR UE VALUE C OMPAN Y
giving consideration to the current and expected economic
environment. It is possible that assumptions underlying
the impairment analysis will change in such a manner that
impairment in value may occur in the future.
• Deferred tax assets – At January 3, 2009, the accompanying
Consolidated Balance Sheet reflects $42,669 of deferred tax
assets, principally related to net operating loss carryforwards,
deferred gain recognition and nonqualified notices of alloca-
tion. These deferred tax assets, net of deferred tax liabilities
of $1,626, are offset by a full valuation allowance at January 3,
2009. True Value had approximately $19,924 of tax operating
loss carryforwards available to offset future taxable income. In
general, such carryforwards must be utilized within 20 years
of incurring the net operating loss. At January 3, 2009, True
Value concluded that, based on the weight of available evi-
dence, it is more likely than not that the deferred tax assets
will not be fully realized due to True Value’s minimal taxable
earnings after the distribution of the patronage dividend to
the members, and that a full valuation allowance is required.
Deferred tax assets will only be realized to the extent net
future earnings, after the distribution of the patronage div-
idend to the members, are retained and after accumulated
net operating losses are exhausted by True Value.
• Benefit plans – At January 3, 2009, accruals related to benefit
plans were included in Accrued expenses of $55,398, Pension
of $24,627 and Other long-term liabilities of $23,335 in the
accompanying Consolidated Balance Sheet. True Value works
with an actuarial firm in the valuation of benefit obligations.
True Value selects certain actuarial assumptions on which to
base the calculation of the actuarial valuation of the obligation,
such as the discount rate (interest rate used to determine
present value of obligations payable in the future), medical cost
trend rate, expected return on assets and expected mortality
to determine the expected future benefit obligations. The
discount rate was based on an analysis of bond rates with
terms that have similar duration as the pension liabilities. The
medical cost trend rate was based on an analysis of inflation
rates and medical inflation rates and the long-term trend for
these rates. The expected return on assets was based on
an analysis of historical real returns on True Value’s portfolio
mix over 30-year periods. This analysis produced a range of
rates that True Value adjusted for a future inflation factor and
the impact of trust fees. True Value used a rate within this
range of rates. To the extent that the actual rates, and other
demographic assumptions such as turnover and mortality, vary
from the assumptions used to determine the present actuarial
valuation of these benefits, True Value may have to increase
its provision for expenses.
The assumptions used to determine True Value’s pension obliga-
tions for all plans were as follows for the years ended:
January 3, December 29,
2009 2007
Measurement Date 1/3/2009 12/29/2007
Weighted average assumptions:
Discount rate 6.25% 6.00%
Lump sum rate 5.00% 5.50%
The assumptions used to determine True Value’s net periodic
pension cost for all plans were as follows for the years ended:
January 3, December 29, December 30,
2009 2007 2006
Measurement Date 12/29/2007 12/30/2006 12/31/2005
Weighted average assumptions:
Discount rate 6.00% 5.75% 5.25%
Expected return on assets 8.00% 8.00% 8.00%
Rate of compensation increase 3.50% 3.50% 3.50%
Assumed discount rates and expected return on assets have a
significant effect on the amounts reported for the pension plans.
A one-percentage-point change in assumed discount rates and
expected return on assets would have the following effects:
One One
Percent Percent
($ in thousands) Decrease Increase
Sensitivity to Discount Rate:
Projected Benefit Obligation
as of 1/3/2009 $ 3,968 $ (3,736)
2008 Pension expense 106 246
2008 Settlement expense 184 (191)
Total 2008 Pension expense $ 290 $ 55
Sensitivity to Expected Return on Assets:
2008 Expected Return on Assets $ (649) $ 649
($ in thousands)