Black & Decker 2014 Annual Report Download - page 51

37
including goodwill. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds
the fair value, further analysis is performed to assess impairment. Such tests are completed separately with respect to the
goodwill of each of the Company’s reporting units. Accordingly, the Company applied the qualitative assessment for four of its
reporting units, while performing the two-step quantitative test for the remaining two reporting units. Based on the results of
the annual 2014 impairment testing, the Company determined that the fair values of each of its reporting units exceeded their
respective carrying amounts.
In performing the qualitative assessment, the Company identified and considered the significance of relevant key factors,
events, and circumstances that could affect the fair value of each reporting unit. These factors include external factors such as
macroeconomic, industry, and market conditions, as well as entity-specific factors, such as actual and planned financial
performance. The Company also assessed changes in each reporting unit's fair value and carrying value since the most recent
date a fair value measurement was performed. As a result of the qualitative assessments performed, the Company concluded
that it is more-likely-than-not that the fair value of each reporting unit exceeded its respective carrying value and therefore, no
additional quantitative impairment testing was performed.
With respect to the two-step quantitative tests, the Company assessed the fair value of the two reporting units using a
discounted cash flow valuation model, which is consistent with previous goodwill impairment tests. The key assumptions
applied to the cash flow projections were discount rates, which ranged from 8.5% to 9.0%, near-term revenue growth rates over
the next five years, which ranged from 0% to 7%, and a perpetual growth rate of 3.5%. These assumptions contemplated
business, market and overall economic conditions. 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 rates and perpetual growth rate in each of the reporting units. The discount rates were increased by 100 basis
points with no impairment indicated. The perpetual growth rate was decreased by 150 basis points with no impairment
indicated.
The fair values of indefinite-lived trade names were also assessed using a discounted cash flow valuation model. The key
assumptions used included discount rates, royalty rates, and perpetual growth rates applied to the projected sales. Based on
these quantitative impairment tests, the Company determined that the fair values of the indefinite-lived trade names exceeded
their respective carrying amounts.
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 analyses, 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
would be 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 rates for the United States and international pension plans were 3.75% and 3.25%,
respectively, at January 3, 2015. The Company’s weighted-average discount rate for the United States and international
pension plans was 4.50% and 4.00%, respectively at December 28, 2013. As discussed further in Note L, Employee Benefit
Plans, 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. The Company’s expected rate of return assumptions for the
United States and international pension plans were 7.00% and 5.75%, respectively, at January 3, 2015. The Company will use a
5.90% weighted-average expected rate of return assumption to determine the 2015 net periodic benefit cost. A 25 basis point
reduction in the expected rate of return assumption would increase 2015 net periodic benefit cost by approximately $5 million,
pre-tax.
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 periodic benefit cost in the following year. The projected benefit obligation for defined benefit
plans exceeded the fair value of plan assets by $781 million at January 3, 2015. This projected benefit obligation reflects the
adoption of new mortality tables used for the Company's US pension and post-retirement plans. A 25 basis point reduction in
the discount rate would have increased the projected benefit obligation by approximately $103 million at January 3, 2015. The