Lumber Liquidators 2009 Annual Report Download - page 53

Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
(amounts in thousands, except share data and per share amounts)
into a three-year underwriting agreement with GE Money Bank (“GE”). As part of the credit program with GE, the
Company’s customers may use their Lumber Liquidators credit card to tender installation services provided by the
Company’s installation partner, The Home Service Store, Inc. (“HSS”). These HSS installation transactions are not processed
through the Company’s point of sales system and are not reflected in net sales. GE funds HSS directly for these transactions
and HSS is responsible for all credits and program fees. If GE is not able to collect net credits or fees from HSS within 60
days, the Company has agreed to indemnify GE against any losses related to HSS credits or fees. There are no maximum
potential future payments under the guarantee. The Company is able to seek recovery from HSS of any amounts paid on their
behalf. The Company believes that the risk of significant loss from the guarantee of these obligations is remote.
Prior to October 2009, the primary underwriter of the Lumber Liquidators card credit was HSBC Bank (“HSBC”). The
Company terminated this agreement effective December 31, 2009. As a result of the termination, the Company transferred
$1,500 of cash to HSBC as prepayment for certain fees, returns or other net credits. The Company has included $1,000 of
this amount in prepaid expenses at December 31, 2009.
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash and cash equivalents, notes receivable, accounts payable and
other liabilities approximate fair value because of the short-term nature of these items. Of these financial instruments, the
cash equivalents are classified as Level 1 as defined in the Financial Accounting Standards Board (“FASB”) ASC 820 fair
value hierarchy.
Merchandise Inventories
The Company values merchandise inventories at the lower of cost or market value. Merchandise cost is determined
using the average cost method. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and
in immediate saleable form. The Company adds the finish to, and boxes, various species of unfinished product, to produce
certain proprietary products, primarily Bellawood, at its finishing facility. These finishing and boxing costs are included in
the average unit cost of related merchandise inventory. The Company maintains an inventory reserve for loss or
obsolescence, based on historical results and current sales trends. This reserve was $602 and $516 at December 31, 2009 and
2008, respectively.
Impairment of Long-Lived Assets
The Company evaluates potential impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets may be impaired, and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. If impairment exists and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amount of those assets, an impairment loss is recorded based on the
difference between the carrying value and fair value of the assets. No impairment charges were recognized in 2009, 2008 or
2007.
Goodwill and Other Indefinite-Lived Intangibles
Other assets include $1,050 of goodwill and $800 for an indefinite-lived intangible asset for the phone number
1-800-HARDWOOD and related internet domain names. The Company evaluates these assets for impairment on an annual
basis, or whenever events or changes in circumstance indicate that the reporting unit carrying value exceeds its fair value.
Based on the analysis performed, the Company has concluded that no impairment in the value of these assets has occurred.
Self Insurance
Effective June 1, 2008, the Company self-insures for certain employee health benefit claims. Management estimates a
liability for aggregate losses below stop-loss coverage limits based on estimates of the ultimate costs to be incurred to settle
known claims and claims not reported as of the balance sheet date. The estimated liability is not discounted and is based on a
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