Napa Auto Parts 2004 Annual Report Download - page 30

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notes to consolidated financial statements
(continued)
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No. 142 requires that
entities assess the fair value of the net assets underlying all
acquisition-related goodwill on a reporting unit basis effective
beginning in 2002. When the fair value is less than the related
carrying value, entities are required to reduce the amount of
goodwill. The approach to evaluating the recoverability of good-
will as outlined in SFAS No. 142 requires the use of valuation
techniques utilizing estimates and assumptions about projected
future operating results and other variables. The impairment only
approach required by SFAS No. 142 may have the effect of
increasing the volatility of the Company’s earnings if additional
goodwill impairment occurs at a future date.
SFAS No. 142 also requires that entities discontinue amortization
of all purchased goodwill, including amortization of goodwill
recorded in past business combinations. Accordingly, the
Company no longer amortizes goodwill beginning in 2002.
Other Assets
Other assets consist primarily of a prepaid pension asset, an
investment accounted for under the cost method and the cash
surrender value of certain life insurance policies. The investment
accounted for under the cost method was $21,400,000 at both
December 31, 2004 and 2003, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Land and
buildings include certain leases capitalized at December 31, 2004.
Depreciation and amortization is primarily determined on a
straight-line basis over the following estimated useful life of each
asset: buildings and improvements, 10 to 40 years; machinery
and equipment, 5 to 15 years.
Long-Lived Assets Other Than Goodwill
The Company assesses its long-lived assets other than goodwill
for impairment annually or whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable.
To analyze recoverability, the Company projects undiscounted
net future cash flows over the remaining life of such assets. If
these projected cash flows are less than the carrying amount,
an impairment would be recognized, resulting in a write-down
of assets with a corresponding charge to earnings. Impairment
losses, if any, are measured based upon the difference between
the carrying amount and the fair value of the assets.
Other Long-Term Liabilities
Other long-term liabilities consist primarily of certain benefit and
workers’ compensation liabilities, the fair value of an interest rate
swap agreement and obligations under capital leases.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is comprised of the
following:
(in thousands) December 31 2004 2003
Foreign currency translation $ 38,813 $ 11,611
Net unrealized loss on derivative instruments,
net of taxes (3,990) (6,776)
Minimum pension liability, net of taxes (8,345) —
Total accumulated other comprehensive income $ 26,478 $ 4,835
Fair Value of Financial Instruments
The carrying amount reflected in the consolidated balance
sheets for cash and cash equivalents, trade accounts receivable
and trade accounts payable approximate their respective fair
values based on the short-term nature of these instruments.
The fair value of interest rate swap agreements, included in other
long-term liabilities in the consolidated balance sheets, was
approximately $5,592,000 and $11,586,000 at December 31,
2004 and 2003, respectively. The fair value of derivative financial
instruments has been determined based on quoted market
prices. At December 31, 2004 and 2003, the carrying amount for
variable rate long-term debt approximates fair market value since
the interest rates on these instruments are reset periodically to
current market rates. At December 31, 2004 and 2003, the fair
market value of fixed rate long-term debt was approximately
$534,000,000 and $543,000,000, respectively, based primarily
on quoted prices for these or similar instruments. The fair value
of fixed rate long-term debt was estimated by calculating the
present value of anticipated cash flows. The discount rate used
was an estimated borrowing rate for similar debt instruments
with like maturities.
Derivative Instruments and Hedging Activities
From time to time, the Company uses interest rate swap agree-
ments to synthetically manage the interest rate characteristics
of a portion of its outstanding debt and to limit the Company’s
exposure to rising interest rates. The Company designates at
inception that interest rate swap agreements hedge risks associ-
ated with future variable interest payments and monitors each
swap agreement to determine if it remains an effective hedge.
The effectiveness of the derivative as a hedge is based on a
high correlation between changes in the value of the underlying
hedged item. Ineffectiveness related to the Company’s derivative
transactions is not material. The Company records amounts to
be received or paid as a result of interest rate swap agreements
as an adjustment to interest expense. All of the Company’s interest
rate swaps are designated as cash flow hedges. Gains or losses
on terminations or redesignation of interest rate swap agreements
are deferred and amortized as an adjustment to interest expense
of the related debt instrument over the remaining term of the
original contract life of the agreements. The Company does not
enter into derivatives for speculative or trading purposes.