Ace Hardware 2005 Annual Report Download - page 32

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2005 ANNUAL REPORT A REVIEW OF ACE’S STRONG RESULTS
(7) Retirement Plans
The Company has one defined benefit pension plan covering
a limited number of non-union employees, the Employees’
Retirement Income Plan and Trust. Benefits under this plan
are based on years of service, highest average compensation (as
defined) and the related profit sharing and primary social security
benefit. Contributions to the plan are based on the Entry Age
Normal, Frozen Initial Liability actuarial funding method and
are limited to amounts that are currently deductible for tax
reporting purposes. As of December 31, 2005, plan assets in the
Employees’ Retirement Income Plan and Trust were held in a
group annuity contract.
The aggregate benefit obligation under this plan was $2,464,000
and $2,296,000 at the end of 2005 and 2004, respectively. The fair
value of plan assets was $1,903,000 and $1,854,000 at the end of
2005 and 2004, respectively. The weighted average discount rate
used in determining the actuarial present value of the projected
benefit obligation was 5.75% in 2005 and 5.90% in 2004. The
related expected long-term rate of return on plan assets was 7.0%
in 2005 and 2004. The rate of increase in future compensation
levels was projected using actuarial salary tables plus 1.0% in 2005
and 2004.
The Company participates in several multi-employer plans covering
union employees. Amounts charged to expense and contributed to
these plans totaled approximately $297,000, $295,000 and
$293,000 in 2005, 2004 and 2003, respectively.
The Company also maintains a profit sharing plan for substantially
all employees. Profit sharing plan contributions for 2005, 2004
and 2003 were approximately $18,958,000, $19,191,000 and
$18,579,000, respectively.
(8) Income Taxes
Income tax expense (benefit) includes the following components:
December 31, January 1, January 3,
Periods Ended 2005 2005 2004
(In thousands)
Current:
Federal ...................... $ 2,212 $ 13,501 $ 350
State .......................... 591 1,498 428
Foreign ...................... 104 302 157
Total .......................... 2,907 15,301 935
Deferred:
Federal ...................... (5,548) (19,694) (13)
State .......................... (382) (2,050) —
Total .......................... (5,930) (21,744) (13)
Income tax expense
(benefit) ................... $ (3,023) $ (6,443) $ 922
In 2004, income taxes include the effects of recognizing previously
unrecorded federal and state deferred tax assets of $8,131,000. The
Company made tax payments of $2,307,000, $6,408,000 and
$464,000 during 2005, 2004 and 2003, respectively.
Deferred income taxes reflect the tax effects of temporary
differences between the carrying amounts of existing assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Deferred tax assets are shown net of any
related valuation reserve. Significant components of the Company’s
deferred tax assets and liabilities are as follows:
Dec. 31, Jan. 1,
2005 2005
(In thousands)
Deferred tax assets:
AMT credit carryforwards $ 3,477 $ 2,013
Capital loss carryovers 6,998 6,634
Unearned insurance premium
and loss reserves 1,566 1,945
Investments in unconsolidated
subsidiaries —3,154
Retailer incentives and
other reserves 37,686 31,766
Total deferred tax assets 49,727 45,512
Valuation allowance (non-current) (6,998) (6,634)
Deferred tax assets $42,729 $38,878
Deferred tax liabilities:
Depreciation and deferred gains
on property and equipment $ 8,972 $ 5,968
Prepaid expenses and
deferred income 492 4,031
Inventory valuation 9,766 6,258
Deferred tax liabilities 19,230 16,257
Net deferred tax assets $23,499 $ 22,621
At December 31, 2005 the Company has capital loss carryforwards
available for offset against capital gains through the 2008 tax year.
A valuation allowance has been established against the tax effects
of the capital loss carryforward benefit as the Company believes
that it is more likely than not that the tax effect of the capital loss
benefit will not be realized. In 2005, the valuation allowance for
deferred tax assets was increased by the tax effect of capital losses
realized in the current period.
Income tax expense on income differs from the amount computed
by applying the U.S. Federal income tax rate of 35% to income
before income taxes because of the effect of the following items:
Dec. 31, Jan. 1, Jan. 3,
Periods Ended 2005 2005 2004
(In thousands)
Expected tax at U.S. Federal
income tax rate ......................... $ 34,089 $ 33,286 $ 35,353
State income taxes, net of U.S.
Federal income tax benefit ....... 138 207 278
Patronage dividend deductions ... (36,268) (35,122) (35,703)
Adjustment of deferred
tax assets .................................. —(8,131) —
Other, net .................................... (982) 3,317 994
Income tax expense (benefit) ..... $ (3,023) $ (6,443) $ 922