True Value 2009 Annual Report Download - page 22

Management’s Discussion and Analysis
of Financial Condition and Results of Operation
2009 Financial Report 7
True Value’s management believes that its cash from operations
and existing Bank Facility will provide sufficient liquidity to meet
its working capital needs, planned capital expenditures, debt and
pension plan funding obligations due to be paid in 2010. The
Bank Facility should provide sufficient liquidity for future needs
until it expires in 2011.
CRITICAL ACCOUNTING POLICIES
True Value’s significant accounting policies are contained in the
accompanying Notes to Consolidated Financial Statements.
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and, accordingly, include amounts based on 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 account-
ing policies where materially different amounts would be reported
under different conditions or using different assumptions.
• Accounts and notes receivable, net of allowance for doubt-
ful accounts – At January 2, 2010, accounts receivable, net of
$6,143 in allowance for doubtful accounts, was $191,972. True
Value determined the allowance based upon its evaluation of
known requirements, aging of receivables, historical experi-
ence, the current economic conditions and the ability to set
off against unpaid receivables, amounts due to members for
stock, notes, interest, and declared and unpaid dividends.
While True Value believes it has appropriately considered
known or expected outcomes, its members’ ability 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 the current U.S. economic recession, loss of
memberships or intense competition from chain stores, dis-
count stores, home centers and warehouse stores.
Included in the accounts receivable amounts at January 2,
2010, was $22,785 for receivables from True Value Vendors, pri-
marily related to unpaid amounts for annual rebate programs
which are based on various contracted rebate percentages
applied to purchases made from Vendors during the fiscal
year. Besides the economic risks as 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 January 2, 2010,
inventories, net of $18,040 in valuation reserves, were $271,460,
and reflect the reductions from cost in order to state inven-
tories 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 cir-
cumstances, 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) True Value elects
to accelerate the rate at which it is consolidating stock keep-
ing units (“SKUs”) across its warehouse network and 2) an
unanticipated decline in retail outlets or a significant contrac-
tion in True Value’s warehouse stock replenishment business
for selected product categories. The depth and duration of
the current U.S. economic recession may have a significant
impact on these events. Potential additional downward val-
uation adjustments would also be required by True Value in
the event of unanticipated additional excess quantities of
finished goods and raw materials and/or from lower dispo-
sition values offered by the parties who normally purchase
surplus inventories.
• Goodwill – At January 2, 2010, the accompanying Consolidated
Balance Sheet reflects $91,474 of goodwill. Goodwill is tested
for impairment using a discounted cash flow analysis by each
reporting unit (Hardware and Paint manufacturing). This test
is completed annually unless significant events necessitate a
more frequent test. True Value determined as of January 2,
2010, that no impairment exists. There are inherent uncertain-
ties related to the factors utilized to assess impairment and
in management’s judgment in applying them to the analysis
of goodwill impairment. Future revenue and other financial
assumptions were developed giving consideration to the
current and expected economic environment. It is possible that
assumptions underlying the impairment analysis will change in
such a manner that impairment in value may occur in the future.
($ in thousands)