Napa Auto Parts 2007 Annual Report Download - page 43

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8. Guarantees
e amended and restated master agreement to our $85,000,000
construction and lease agreement (the Agreement), discussed
further in Note 4, has a term of six years expiring in 2009 and
contains residual value guarantee provisions and other guarantees
which would become due in the event of a default under the
operating lease agreement, or at the expiration of the operating
lease agreement if the fair value of the leased properties is less
than the guaranteed residual value. e maximum amount of
the Company’s potential guarantee obligation, representing the
residual value guarantee, at December 31, 2007, is approximately
$62,678,000. e Company believes the likelihood of funding
the guarantee obligation under any provision of the operating
lease agreements is remote.
e Company also guarantees the borrowings of certain inde-
pendently controlled automotive parts stores (independents) and
certain other affiliates in which the Company has a minority
equity ownership interest (affiliates). Presently, the independents
are generally consolidated by unaffiliated enterprises that have
a controlling financial interest through ownership of a majority
voting interest in the entity. e Company has no voting interest
or other equity conversion rights in any of the independents. e
Company does not control the independents or the affiliates, but
receives a fee for the guarantee. e Company has concluded that
it is not the primary beneficiary with respect to any of the inde-
pendents and that the affiliates are not variable interest entities.
e Company’s maximum exposure to loss as a result of its
involvement with these independents and affiliates is equal to
the total borrowings subject to the Company’s guarantee.
At December 31, 2007, the total borrowings of the independents
and affiliates subject to guarantee by the Company were approxi-
mately $173,928,000. ese loans generally mature over periods
from one to ten years. In the event that the Company is required
to make payments in connection with guaranteed obligations of
the independents or the affiliates, the Company would obtain
and liquidate certain collateral (e.g., accounts receivable and
inventory) to recover all or a portion of the amounts paid under
the guarantee. When it is deemed probable that the Company
will incur a loss in connection with a guarantee, a liability is
recorded equal to this estimated loss. To date, the Company has
had no significant losses in connection with guarantees of inde-
pendents’ and affiliates’ borrowings.
Effective January 1, 2003, the Company adopted FIN No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. In accordance
with FIN No. 45 and based on available information, the
Company has accrued for those guarantees related to the inde-
pendents’ and affiliates’ borrowings and the construction
and lease agreement as of December 31, 2007 and 2006.
ese liabilities are not material to the financial position of
the Company and are included in other long-term liabilities
in the accompanying consolidated balance sheets.
9. Segment Data
e segment data for the past five years presented on page 15
is an integral part of these consolidated financial statements.
e Company’s automotive segment distributes replacement
parts (other than body parts) for substantially all makes and
models of automobiles, trucks, and other vehicles.
e Company’s industrial segment distributes a wide variety of
industrial bearings, mechanical and fluid power transmission
equipment, including hydraulic and pneumatic products, material
handling components, and related parts and supplies.
e Company’s office products segment distributes a wide
variety of office products, computer supplies, office furniture,
and business electronics.
e Company’s electrical/electronic materials segment distrib-
utes a wide variety of electrical/electronic materials, including
insulating and conductive materials for use in electronic and
electrical apparatus.
e Company’s reportable segments consist of automotive,
industrial, office products, and electrical/electronic materials.
Within the reportable segments, certain of the Company’s
operating segments are aggregated because they have similar
economic characteristics, products and services, type and class
of customers, and distribution methods. Inter-segment sales are
not significant. Operating profit for each industry segment is
calculated as net sales less operating expenses excluding general
corporate expenses, interest expense, equity in income from
investees, amortization, and minority interests. Approximately
$46,900,000, $43,500,000 and $39,700,000 of income before
income taxes was generated in jurisdictions outside the United
States for the years ending December 31, 2007, 2006, and 2005,
respectively. Net sales and net long-lived assets by country relate
directly to the Company’s operations in the respective country.
Corporate assets are principally cash and cash equivalents and
headquarters’ facilities and equipment.
For management purposes, net sales by segment exclude the effect
of certain discounts, incentives, and freight billed to customers.
e line item “other” represents the net effect of the discounts,
incentives, and freight billed to customers, which are reported as a
component of net sales in the Company’s consolidated statements
of income.