True Value 2007 Annual Report Download - page 29

8 | TRUE VALUE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
($ in thousands)
informed estimates and judgments of management with due
consideration given to materiality. Accordingly, actual results
could differ from those estimates. The following represents
those critical accounting policies where materially different
amounts would be reported under different conditions or using
different assumptions.
• Accounts and notes receivable, net of allowance for doubtful
accounts – At December 29, 2007, accounts receivable, net
of $1,094 in allowance for doubtful accounts, was $222,618.
True Value determined the allowance based upon its evalua-
tion of known requirements, aging of receivables, historical
experience, the current economic conditions and the ability
to set off against unpaid receivables, amounts due to mem-
bers for stock, notes, interest and declared and unpaid
dividends. While True Value believes it has appropriately
considered known or expected outcomes, its members’ abil-
ity to pay their obligations, including those to True Value,
could be adversely affected by declining sales of hardware at
retail resulting from such factors as contraction in the econ-
omy, loss of memberships or intense competition from chain
stores, discount stores, home centers and warehouse stores.
Included in the accounts receivable amounts at December
29, 2007, was $31,122 for receivables from True Value Ven-
dors, primarily related to unpaid amounts for annual rebate
programs which are based on various contracted rebate per-
centages applied to purchases made from Vendors during
the fiscal year. Besides the economic risks previously noted,
Vendor receivables include risks associated with estimates of
rebates made at year end related to final purchases and
invoice data, that may differ from actual computed rebates.
• Inventories, net of valuation reserves – At December 29, 2007,
inventories, net of $14,618 in valuation reserves, were $313,934,
and reflect the reductions from cost in order to state invento-
ries at the lower of cost or market. The lower of cost or market
valuation considers the estimated realizable value in the
current economic environment associated with disposing of
surplus and/or damaged/obsolete inventories. True Value
estimated realizable value based on an analysis of historical
trends related to its distressed inventory. This analysis com-
pares current levels of active, new and discontinued inventory
items to the prior 12-month actual demand, ages these items
based on such demand and then applies historical loss rates
to the aged items. In addition, based upon known facts and
circumstances, reserves for specific inventory items were
made. Also, a review of all inventory items over certain
thresholds was performed to ascertain if specific reserves
were required. Additional downward valuation adjustments
could be required should any of the following events occur:
1) a significant contraction in the current economic climate,
resulting in retailers being unwilling to accept deliveries of
advance orders placed, 2) True Value electing not to ship
inventories to retailers who pose a greater credit risk than
appropriate or 3) an unanticipated decline in retail outlets
or a significant contraction in True Value’s warehouse stock
replenishment business for selected product categories.
Potential additional downward valuation adjustments would
also be required by True Value in the event of unanticipated
additional excess quantities of finished goods and raw mate-
rials and/or from lower disposition values offered by the
parties who normally purchase surplus inventories.
• Goodwill – At December 29, 2007, the accompanying Con-
solidated Balance Sheet reflects $91,474 of goodwill.
Goodwill is tested for impairment using a discounted cash
flow analysis by each reporting unit (Hardware and Paint
manufacturing). This test is completed annually unless sig-
nificant events necessitate a more frequent test. True Value
determined as of December 29, 2007, that no impairment
exists. There are inherent uncertainties related to the factors
utilized to assess impairment and in management’s judg-
ment in applying them to the analysis of goodwill impairment.
It is possible that assumptions underlying the impairment
analysis will change in such a manner that impairment in
value may occur in the future.
• Deferred tax assets – At December 29, 2007, the accompany-
ing Consolidated Balance Sheet reflects $46,625 of deferred
tax assets, principally related to net operating loss carry-
forwards, deferred gain recognition and nonqualified notices
of allocation. These deferred tax assets, net of deferred tax
liabilities of $1,997, are offset by a full valuation allowance at
December 29, 2007. True Value had approximately $13,421 of
tax operating loss carryforwards available to offset future tax-
able income. In general, such carryforwards must be utilized
within 20 years of incurring the net operating loss. At Decem-
ber 29, 2007, True Value concluded that, based on the weight
of available evidence, it is more likely than not that the
deferred tax assets will not be realized and that a full valuation
allowance is required. Deferred tax assets will only be realized
to the extent future earnings are retained by True Value and
not distributed to members as patronage dividends.