Napa Auto Parts 2005 Annual Report Download - page 21

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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 discon-
tinued 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, 2005, 2004
and 2003, the Company recorded provisions for bad debts of
$16.4 million, $20.7 million and $23.8 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 upon achieving specified
volume purchasing levels and advertising allowances upon
fulfilling its obligations related to cooperative advertising
programs. The Company accrues for the receipt of inventory
purchase incentives as part of its inventory cost based on
cumulative purchases of inventory to date and projected
inventory purchases through the end of the year and, in
the case of advertising allowances, upon completion of the
Company’s obligations related thereto. While management
believes the Company will continue to receive such amounts
in 2006 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, goodwill and other intangible assets for potential
impairment indicators. The Company’s judgments regarding
the existence of impairment indicators are based on market
conditions and operational performance, among other factors.
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 condition 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 implemented 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 and 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 expo-
sure to risk, protect the assets from erosion of purchasing
power and provide investment results that meet or exceed the
pension plan’s actuarially assumed long term rate of return.
Based on the investment policy for the U.S. pension plan,
as well as an asset study that was performed based on the
Company’s asset allocations and future expectations, the
Company’s expected rate of return on plan assets for measuring
2006 pension expense or income is 8.25% for the U.S. plan.
The asset study forecasted expected rates of return for the
approximate duration of the Company’s benefit obligations,
using capital market data and historical relationships.
The discount rate is chosen as the rate at which pension
obligations could be effectively settled and is based on capital
market conditions as of the measurement date. We have
matched the timing and duration of the expected cash flows
of our pension obligations to a yield curve generated from a
broad portfolio of high-quality fixed income debt instruments
to select our discount rate. Based upon this cash flow match-
ing analysis, we selected a discount rate for the U.S. plan of
5.75% at December 31, 2005.
Net periodic cost for our defined benefit pension plans was
$32.4 million, $26.4 million, and $17.7 million for the years
ended December 31, 2005, 2004 and 2003, respectively.The
increasing trend in pension cost over these periods was due
to the change in assumptions for the rate of return on plan
assets and the discount rate. These expenses are included in
SG&A expenses.
QUARTERLY RESULTS OF OPERATIONS
The preparation of interim consolidated financial statements
requires management to make estimates and assumptions for
the amounts reported in the interim condensed consolidated
financial statements. Specifically, the Company makes certain
estimates in its interim consolidated financial statements for
the accrual of bad debts, inventory adjustments and discounts
and volume incentives earned. Bad debts are accrued based
on a percentage of sales, and volume incentives are estimated
based upon cumulative and projected purchasing levels.
Inventory adjustments are accrued on an interim basis and
adjusted in the fourth quarter based on the annual October
31 book-to-physical inventory adjustment. The methodology
and practices used in deriving estimates for interim reporting
typically result in adjustments upon accurate determination
at year-end. The effect of these adjustments in 2005 and 2004
was not significant.