Napa Auto Parts 2004 Annual Report Download - page 21

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This interest rate swap liability is included in long-term liabilities
in the Company’s consolidated balance sheet. Other than inter-
est rate swaps, we do not have any other derivative instruments.
We do not enter into derivatives for speculative or trading purposes.
At December 31, 2004, the Company had a fixed interest rate
payment swap agreement outstanding in the amount of $50
million with a maturity date of 2008. In addition, at December 31,
2004, approximately $500 million of the Company’s total borrow-
ings, which mature in approximately four and seven years, are at
fixed rates of interest. We do not believe that a moderate change
in interest rates would have a material adverse impact on future
earnings and cash flows of the Company.
Share Repurchases
On April 19, 1999, our Board of Directors authorized the
repurchase of 15 million shares of our common stock. Through
December 31, 2004, approximately 9 million shares have been
repurchased under this authorization.
CRITICAL ACCOUNTING ESTIMATES
General
Management’s Discussion and Analysis of Financial Condition and
Results of Operations is based upon our consolidated financial
statements, which have been prepared in accordance with gen-
erally accepted accounting principles in the United States. The
preparation of these financial statements requires management
to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses and related
disclosure of contingent assets and liabilities. Management bases
its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circum-
stances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is made,
and if different estimates that reasonably could have been used,
or changes in the accounting estimates that are reasonably likely
to occur periodically, could materially impact the financial state-
ments. Management believes the following critical accounting
policies reflect its more significant estimates and assumptions
used in the preparation of the consolidated financial statements.
For further information on the critical accounting policies, see
Note 1 of the notes to our consolidated financial statements.
Inventories - Provisions for Slow Moving and Obsolescence
The Company identifies slow moving or obsolete inventories and
estimates appropriate loss provisions related thereto. Historically,
these loss provisions have not been significant as the vast
majority of the Company’s inventories are not highly susceptible
to obsolescence and are eligible for return under various vendor
return programs. While the Company has no reason to believe
its inventory return privileges will be discontinued in the future,
its risk of loss associated with obsolete or slow moving inventories
would increase if such were to occur.
Allowance for Doubtful Accounts - Methodology
The Company evaluates the collectibility of accounts receivable
based on a combination of factors. Initially, the Company estimates
an allowance for doubtful accounts as a percentage of net sales
based on historical bad debt experience. This initial estimate is
periodically adjusted when the Company becomes aware of a
specific customer's inability to meet its financial obligations (e.g.,
bankruptcy filing) or as a result of changes in the overall aging of
accounts receivable. While the Company has a large customer
base that is geographically dispersed, a general economic
downturn in any of the industry segments in which the Company
operates could result in higher than expected defaults and,
therefore, the need to revise estimates for bad debts. For the
years ended December 31, 2004, 2003 and 2002, the Company
recorded provisions for bad debts of $20.7 million, $23.8 million
and $20.9 million, respectively.
Consideration Received from Vendors
The Company enters into agreements at the beginning of each
year with many of its vendors providing for inventory purchase
incentives and advertising allowances. Generally, the Company
earns inventory purchase incentives and advertising allowances
upon achieving specified volume purchasing levels or other criteria.
The Company accrues for the receipt of inventory purchase
incentives and advertising allowances as part of its inventory
cost based on cumulative purchases of inventory to date and
projected inventory purchases through the end of the year or, in
the case of specific advertising allowances, upon completion of
the Company’s obligations related thereto. While management
believes the Company will continue to receive consideration
from vendors in 2005 and beyond, there can be no assurance
that vendors will continue to provide comparable amounts of
incentives and allowances in the future.
Impairment of Property, Plant and Equipment
and Goodwill and Other Intangible Assets
At least annually, the Company evaluates property, plant and
equipment and goodwill and other intangible assets for potential
impairment indicators. The Company’s judgments regarding the
existence of impairment indicators are based on legal factors,
market conditions and operational performance. Future events
could cause the Company to conclude that impairment indicators
exist and that assets associated with a particular operation are
impaired. Evaluating the impairment also requires the Company
to estimate future operating results and cash flows which require
judgment by management. Any resulting impairment loss could
have a material adverse impact on the Company’s financial condi-
tion and results of operations.
Employee Benefit Plans
The Company’s benefit plan committees in the U.S. and Canada
establish investment policies and strategies and regularly monitor
the performance of the funds. The pension plan strategy imple-
mented by the Company’s management is to achieve long-term
objectives and invest the pension assets in accordance with the
applicable pension legislation in the U.S. and Canada, as well as
fiduciary standards. The long-term primary objectives for the
pension plan are to provide for a reasonable amount of long-term
growth of capital without undue exposure to risk, protect the assets