True Value 2010 Annual Report Download - page 29

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operation
8 True Value Company
• Goodwill – At January 1, 2011, 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 1,
2011, that no impairment exists. There are inherent uncertainties
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.
• Deferred tax assets – At January 1, 2011, the accompanying
Consolidated Balance Sheet reflects $40,319 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 $4,171, are offset by a full valuation allowance at January
1, 2011. True Value had approximately $9,158 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 1, 2011, 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 members,
and that a full valuation allowance is required. Deferred tax
assets will only be realized to the extent that 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 1, 2011, accruals related to benefit
plans were included in Accrued expenses of $61,074, Pension
of $12,120 and Other long-term liabilities of $29,439 in the
accompanying 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
analysis 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 1, January 2,
2011 2010
Measurement Date 1/1/2011 1/2/2010
Weighted average assumptions:
Discount rate 4.67% 5.50%
Lump sum rate 4.19% (2011) | 5.0% (2012+) 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 1, January 2, January 3,
2011 2010 2009
Measurement Date 1/2/2010 1/3/2009 12/29/2007
Weighted average assumptions:
Discount rate 5.50% 6.25% 6.00%
Expected return on assets 7.00% 8.00% 8.00%
Rate of compensation increase N/A N/A 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 beginning with 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 1/1/2011 $ 5,059 $ (4,466)
2010 Pension expense (15) 24
2010 Settlement expense 274 (275)
Total 2010 Pension expense $ 259 $ (251)
Sensitivity to Expected Return on Assets:
2010 Expected Return on Assets $ (574) $ 574
($ in thousands)