Napa Auto Parts 2006 Annual Report Download - page 24

22
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
2006
Allowance for Doubtful Accounts – Methodology
The Company evaluates the collectibility of accounts receivable
based on a combination of factors. Initially, the Company esti-
mates 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
specic customer’s inability to meet its nancial obligations (e.g.,
bankruptcy ling) 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, 2006, 2005 and 2004, the Company recorded
provisions for bad debts of $16.5 million, $16.4 million and
$20.7 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 specied
volume purchasing levels and advertising allowances upon fullling
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 2007 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 ows which require
judgment by management. Any resulting impairment loss could
have a material adverse impact on the Company’s nancial condi-
tion and results of operations.
Employee Benet Plans
The Company’s benet plan committees in the U.S. and Canada
establish investment policies and strategies and regularly monitor
the performance of the Company’s pension plan assets. The pen-
sion plan investment 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 duciary standards. The long-term
primary objectives for the pension plan funds are to provide for a
reasonable amount of long-term growth of capital without undue
exposure 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 2007 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 benet obligations, using capital market data and
historical relationships.
The discount rate is chosen as the rate at which pension obliga-
tions 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 ows of our pension
obligations to a yield curve generated from a broad portfolio of
high-quality xed income debt instruments to select our discount
rate. Based upon this cash ow matching analysis, we selected a
discount rate for the U.S. plan of 6.00% at December 31, 2006.
Net periodic cost for our dened benet pension plans was $48.2
million, $32.4 million, and $26.4 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The increasing
trend in pension cost over these periods was primarily due to
the change in assumptions for the rate of return on plan assets,
the discount rate and the rate of compensation increases. These
expenses are included in SG&A expenses. Refer to Note 7 to the
Consolidated Financial Statements for more information regarding
employee benet plans.
On September 29, 2006, the Financial Accounting Standards
Board issued SFAS No. 158 Employers’ Accounting for Dened
Benet Pension and Other Postretirement Plans.
SFAS No. 158
was effective for public companies for scal years ending after
December 15, 2006. The Company adopted the balance sheet
recognition provisions of SFAS No. 158 at the end of scal 2006.
Refer to Note 7 to the Consolidated Financial Statements for
details regarding the incremental effect of adopting SFAS No. 158.
The Company has evaluated the potential impact of the Pension
Protection Act (“the Act”), which was passed into law on August
17, 2006, on future U.S. pension plan funding requirements based
on current market conditions. The Act is not anticipated to have a
material effect on the level of future funding requirements or on
the Company’s liquidity and capital resources.