Napa Auto Parts 2007 Annual Report Download - page 24

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Management’s฀Discussion฀and฀Analysis฀of฀Financial฀Condition฀and฀Results฀of฀Operations฀(continued)
2007
sales based on historical bad debt experience. is 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 eco-
nomic 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, 2007, 2006 and 2005, the Company
recorded provisions for bad debts of $13.5 million, $16.5 million
and $16.4 million, respectively.
Consideration Received from Vendors
e 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 vol-
ume purchasing levels and advertising allowances upon fulfilling
its obligations related to cooperative advertising programs. e
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 2008 and beyond, there can be no assurance that
vendors will continue to provide comparable amounts of incen-
tives 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. e Company’s judgments regarding the
existence of impairment indicators are based on market condi-
tions 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 impair-
ment loss could have a material adverse impact on the Company’s
financial condition and results of operations.
Employee Benefit Plans
e Company’s benefit 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. e pen-
sion plan investment strategy implemented by the Company’s
management is to achieve long-term objectives and invest the pen-
sion assets in accordance with the applicable pension legislation
in the U.S. and Canada and fiduciary standards. e 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 2008 pension expense
or income is 8.25% for the U.S. plan. e asset study forecasted
expected rates of return for the approximate duration of the
Company’s benefit obligations, using capital market data and
historical relationships.
e 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 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 matching analysis,
we selected a weighted average discount rate for the U.S. plans
of 6.49% at December 31, 2007.
Net periodic cost for our defined benefit pension plans was
$51.2 million, $48.2 million and $32.4 million for the years
ended December 31, 2007, 2006 and 2005, respectively. e
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.
Refer to Note 7 to the Consolidated Financial Statements for
more information regarding employee benefit plans.
On September 29, 2006, the Financial Accounting Standards
Board issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158
was effective for public companies for fiscal years ending after
December 15, 2006. e Company adopted the balance sheet rec-
ognition provisions of SFAS No. 158 at the end of fiscal year 2006.
e 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. e 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.