Black & Decker 2010 Annual Report Download - page 57

greater than its fair value, an impairment may exist. An impairment charge would be recorded to the extent
that the recorded value of goodwill exceeded the implied fair value.
The Company assesses the fair value of its reporting units based on a discounted cash flow valuation model.
The key assumptions used are discount rates and perpetual growth rates applied to cash flow projections. Also
inherent in the discounted cash flow valuation are near-term revenue growth rates over the next five years.
These assumptions contemplate business, market and overall economic conditions. The fair value of
indefinite-lived trade names is also assessed using a discounted cash flow valuation model. The key
assumptions used include discount rates, royalty rates, and perpetual growth rates applied to the projected
sales.
As required by the Company’s policy, goodwill and indefinite-lived trade names were tested for impairment in
the third quarter of 2010. Based on this testing, the Company determined that the fair value of its reporting
units and indefinite-lived trade names exceeded their carrying values. The discount rate used in testing
goodwill for impairment in the third quarter of 2010 was 9.5% for all reporting units. The near-term revenue
growth rates and the perpetual growth rates, which varied for each reporting unit, ranged from -4% to 8%, and
2% to 4%, respectively. In 2010 as compared with 2009, in consideration of market conditions, the discount
rate assumption decreased 100 basis points, and perpetual growth rates decreased 100 basis points in some
reporting units, which had the effect of reducing the estimated fair values. Management performed sensitivity
analyses on the fair values resulting from the discounted cash flows valuation utilizing more conservative
assumptions that reflect reasonably likely future changes in the discount rate, perpetual and near-term revenue
growth rates in all reporting units. The discount rate was decreased by 100 basis points with no impairment
indicated. The perpetual growth rates were decreased by 100 basis points with no impairment indicated. The
near-term revenue growth rates were reduced by 150 basis points with no impairment indicated. Based upon
the Company’s 2010 annual impairment testing analysis, including the consideration of reasonably likely
adverse changes in assumptions described above, management believes it is not reasonably likely that an
impairment will occur in any of the reporting units over the next twelve months.
In the event that the Company’s operating results in the future do not meet current expectations, management,
based upon conditions at the time, would consider taking restructuring or other actions as necessary to
maximize profitability. Accordingly, the above sensitivity analysis, while a useful tool, should not be used as a
sole predictor of impairment. A thorough analysis of all the facts and circumstances existing at that time
would need to be performed to determine if recording an impairment loss was appropriate.
DEFINED BENEFIT OBLIGATIONS — The valuation of pension and other postretirement benefits costs and
obligations is dependent on various assumptions. These assumptions, which are updated annually, include
discount rates, expected return on plan assets, future salary increase rates, and health care cost trend rates. The
Company considers current market conditions, including interest rates, to establish these assumptions. Discount
rates are developed considering the yields available on high-quality fixed income investments with maturities
corresponding to the duration of the related benefit obligations. The Company’s weighted-average discount rate
for both the United States and international pension plans was 5.25% and 5.75% at January 1, 2011 and
January 3, 2010, respectively. As discussed further in Note L, Employee Benefit Plans, of the Notes to
Consolidated Financial Statements, the Company develops the expected return on plan assets considering
various factors, which include its targeted asset allocation percentages, historic returns, and expected future
returns. For 2010 net periodic benefit cost the Company’s long-term rate of return assumption was 7.5% and
6.75% for United States and international plans, respectively. The Company will use a 7% expected rate of
return assumption for 2011 net periodic benefit cost reflecting a relatively higher proportion of fixed income
plan assets.
The Company believes that the assumptions used are appropriate; however, differences in actual experience or
changes in the assumptions may materially affect the Company’s financial position or results of operations. To
the extent that actual (newly measured) results differ from the actuarial assumptions, the difference is
recognized in accumulated other comprehensive income, and, if in excess of a specified corridor, amortized
over future periods. The expected return on plan assets is determined using the expected rate of return and the
fair value of plan assets. Accordingly, market fluctuations in the fair value of plan assets can affect the net
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