Lumber Liquidators 2015 Annual Report Download - page 65

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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies − (continued)
Credit Programs
Credit is offered to the Company’s customers through a proprietary credit card, underwritten by a
third party financial institution and generally at no recourse to the Company. A credit line is offered to the
Company’s professional customers through the Lumber Liquidators Commercial Credit Program. This
commercial credit program is underwritten by a third party financial institution, generally with no recourse to
the Company.
As part of the credit program, the Company’s customers may tender their Lumber Liquidators credit card
to receive installation services provided by the Company’s third party installation provider, who is responsible
for all credits and program fees for the related transactions. The Company has agreed to indemnify the
financial institution against any losses related to these credits or fees. There are no maximum potential future
payments under the guarantee. The Company is able to seek recovery from the installation provider of any
amounts paid on its behalf. The Company believes that the risk of significant loss from the guarantee of these
obligations is remote.
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and
other liabilities approximate fair value because of the short-term nature of these items and the carrying amount
of obligations under our revolving credit facility approximate fair value due to the variable rate of interest.
Of these financial instruments, the cash equivalents are classified as Level 1 as defined in the Financial
Accounting Standards Board Accounting Standards Codification (‘‘FASB ASC’’) 820 fair value hierarchy.
Certain non-financial assets, including property and equipment, have been written down and measured in
the consolidated financial statements at fair value. Fair value was based on expected future cash flows using
Level 3 inputs under ASC 820.
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 $26,882 and $3,242 at December 31, 2015 and 2014, respectively.
On May 7, 2015, the Company suspended the sale of laminate products sourced from China after certain
allegations were made regarding these products. This inventory has been held in stores and distribution centers
as the Company has continued to evaluate and assess alternatives for the disposition of these products and the
potential implications these alternatives could have on the net realizable value of the laminate flooring
inventory sourced from China. During the quarter ended June 30, 2015, the Company recorded a charge of
approximately $339 related to its laminate flooring sourced from China, primarily for flooring with less than
job-lot quantities on hand as the Company did not intend to purchase additional quantities of such product.
During the quarter ended December 31, 2015, in connection with changes in the executive management team
and based on the most recent evaluation of the alternatives for disposal, which considered strategic and
operational considerations including potential distractions these products could have on the Company’s
employees and business, the Company determined that it would not sell the current inventory of laminate
flooring sourced from China in its stores. As a result of this decision, the Company recorded a charge to
reduce the remaining carrying value of this laminate flooring and related moldings to its net realizable value
of zero. The Company recorded total charges related to laminate flooring sourced from China of $22,499 in
cost of sales for the year ended December 31, 2015 in the accompanying consolidated statements of
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