True Value 2010 Annual Report Download - page 28

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operation
Financial Report 2010 7
The net excess cash generated from operating and investing
activities in 2010, 2009 and 2008, as well as the net decrease in
cash and cash equivalents in 2010, was used primarily for financing
activities, which used cash of $42,668, $68,458 and $30,799 for
2010, 2009 and 2008, respectively. In particular, True Value utilized
cash to pay patronage dividends, debt and drafts payable, as
well as to redeem Class A and Class B common stock.
True Value’s net working capital at January 1, 2011, January 2,
2010 and January 3, 2009, was $171,118, $174,712 and $186,637,
respectively. The current ratio at January 1, 2011, January 2,
2010 and January 3, 2009, was 1.50, 1.54 and 1.56, respectively.
The decrease in both True Value’s net working capital and cur-
rent ratio in 2010 compared to 2009 was primarily due to higher
current maturities of long-term debt, notes and capital lease
obligations resulting from the recent change in promissory note
renewal terms from three-years to six-months (see Note 4, “Debt
Arrangements – Subordinated Promissory and Subordinated
Promissory Installment Notes,” to the Consolidated Financial
Statements) and lower cash and cash equivalents, partially offset
by higher accounts receivable and inventory levels. The decrease
in both True Value’s net working capital and current ratio in 2009
compared to 2008 was primarily due to lower inventory levels, a
result of the lower product purchases, partially offset by higher
levels of cash and cash equivalents at year-end.
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 2011. The
Bank Facility should provide sufficient liquidity for future needs
until it expires in 2015.
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 accounting
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 1, 2011, accounts receivable, net of
$6,111 in allowance for doubtful accounts, was $209,849. 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 environment, loss
of memberships or intense competition from chain stores,
discount stores, home centers and warehouse stores.
Included in the accounts receivable amounts at January 1, 2011,
was $19,757 for receivables from True Value vendors, primarily
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 1, 2011,
inventories, net of $12,903 in valuation reserves, were $282,585,
and reflect the reductions from cost necessary to state inven-
tories at the lower of cost or market. The lower of cost or
market valuation considers the estimated realizable value in
the current economic environment associated with disposing
of surplus and/or damaged/obsolete inventories. True Value
estimated realizable value based on an analysis of historical
trends related to its distressed inventory. This analysis com-
pares current levels of active, new and discontinued inventory
items to the prior 12-month actual demand, ages these items
based on such demand and then applies historical loss rates
to the aged items. In addition, based upon known facts and
circumstances, reserves for specific inventory items were made.
Also, a review of all inventory items over certain thresholds
was performed to ascertain if specific reserves were required.
Additional downward valuation adjustments could be required
should any of the following events occur: 1) True Value elects
to accelerate the rate at which it is consolidating stock keep-
ing units (“SKUs”) across its warehouse network and 2) an
unanticipated decline in retail outlets or a significant contrac-
tion in True Value’s warehouse stock replenishment business
for selected product categories. The current U.S. economic
environment may have a significant impact on these events.
Potential additional downward valuation adjustments would
also be required by True Value in the event of unanticipated
additional excess quantities of finished goods and raw materi-
als and/or from lower disposition values offered by the parties
who normally purchase surplus inventories.
($ in thousands)