True Value 2009 Annual Report Download - page 23

Management’s Discussion and Analysis
of Financial Condition and Results of Operation
8 True Value Company
• Deferred tax assets – At January 2, 2010, the accompanying
Consolidated Balance Sheet reflects $40,827 of deferred tax
assets, principally related to net operating loss carryforwards,
deferred gain recognition and nonqualified notices of alloca-
tion. These deferred tax assets, net of deferred tax liabilities
of $3,418, are offset by a full valuation allowance at January 2,
2010. True Value had approximately $10,474 of tax operating
loss carryforwards available to offset future taxable income. In
general, such carryforwards must be utilized within 20 years of
incurring the net operating loss. At January 2, 2010, 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 fully realized due to True Value’s minimal taxable earnings
after the distribution of the patronage dividend to the mem-
bers, and that a full valuation allowance is required. Deferred
tax assets will only be realized to the extent net future earn-
ings, after the distribution of the patronage dividend to the
members, are retained and after accumulated net operating
losses are exhausted by True Value.
• Benefit plans – At January 2, 2010, accruals related to benefit
plans were included in Accrued expenses of $53,621, Pension of
$18,402 and Other long-term liabilities of $24,814 in the accom-
panying Consolidated Balance Sheet. True Value works with
an actuarial firm in the valuation of benefit obligations. True
Value selects certain actuarial assumptions on which to base
the calculation of the actuarial valuation of the obligation, such
as the discount rate (interest rate used to determine present
value of obligations payable in the future), expected return
on assets and expected mortality to determine the expected
future benefit obligations. The discount rate was based on an
analysis of bond rates with terms that have similar duration
as the pension liabilities. The expected return on assets was
based on an analysis of expected long-term rates of return on
asset classes reflective of True Value’s portfolio mix. This anal-
ysis produced a best-estimate range of rates from which True
Value selected the rate to use. To the extent that the actual
rates, and other demographic assumptions such as turnover
and mortality, vary from the assumptions used to determine
the present actuarial valuation of these benefits, True Value
may have to increase its provision for expenses.
The assumptions used to determine True Value’s pension obliga-
tions for all plans were as follows for the years ended:
January 2, January 3,
2010 2009
Measurement Date 1/2/2010 1/3/2009
Weighted average assumptions:
Discount rate 5.50% 6.25%
Lump sum rate 5.00% 5.00%
The assumptions used to determine True Value’s net periodic
pension cost for all plans were as follows for the years ended:
January 2, January 3, December 29,
2010 2009 2007
Measurement Date 1/3/2009 12/29/2007 12/30/2006
Weighted average assumptions:
Discount rate 6.25% 6.00% 5.75%
Expected return on assets 8.00% 8.00% 8.00%
Rate of compensation increase N/A 3.50% 3.50%
As of September 30, 2008, all True Value sponsored pension plans
were frozen; therefore, the rate of compensation increase was no
longer applicable for fiscal year 2009 as shown in the chart above.
Assumed discount rates and expected return on assets have a
significant effect on the amounts reported for the pension plans.
A one-percentage-point change in assumed discount rates and
expected return on assets would have the following effects:
One One
Percent Percent
($ in thousands) Decrease Increase
Sensitivity to Discount Rate:
Projected Benefit Obligation
as of 1/2/2010 $ 4,280 $ (3,819)
2009 Pension expense (2) 16
2009 Settlement expense 182 (182)
Total 2009 Pension expense $ 180 $ (166)
Sensitivity to Expected Return on Assets:
2009 Expected Return on Assets $ (585) $ 585
($ in thousands)