Lumber Liquidators 2015 Annual Report Download - page 68

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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)
that the flooring is contributing to formaldehyde levels in a customer’s home at elevated rates, the Company
will work with the customer, at the Company’s discretion, to replace the customer’s floor or compensate the
customer for the cost of the floor as part of ‘‘Phase 3’’. Throughout 2015, the Company facilitated customers
with elevated Phase 1 testing results to complete Phase 2. To date, the Company did not record a reserve for
Phase 3 based on the results it has received to date from the testing of customer flooring samples. The
Company believes the test results and number of tests obtained to date provided a reasonable basis to support
its assertion that a material reserve related to the replacement of customer floors was not warranted. The
Company will, however, continue to evaluate the results of each phase of the indoor air quality testing
program. Should its results differ from current trends, the Company could record a material charge in future
periods.
The Company incurred $9,445 of direct costs primarily related to purchases of testing kits and
professional fees for the year ended December 31, 2015. At December 31, 2015, the Company had a reserve
of $809 for estimated future costs to evaluate whether the laminate flooring purchased from the Company was
the primary driver of the air quality testing results being above WHO standards. The reserve was based on
actual experience to date, estimated using information through the filing date of the financial statements and
was included in other current liabilities. Should the Company’s actual experience related to results of its
indoor air quality testing program and subsequent follow-up with customers differ from these estimates,
additional reserves may be recorded in the future.
A rollforward of the reserve for the Company’s air quality testing program was as follows:
Balance at December 31, 2014 ....................................... $ —
Provision .................................................... 10,873
Reversal .................................................... (1,428)
Payments .................................................... (8,636)
Balance at December 31, 2015 ....................................... $ 809
Additionally, for the year ended December 31, 2015, the Company incurred customer satisfaction costs of
$1,200, primarily related to projects using certain laminate or engineered hardwood products that were
incomplete as of the date sales of such laminate and engineered hardwood products were suspended during the
second quarter of 2015. These costs were incurred to ensure customers could complete their projects in a
satisfactory manner. Refer to Note 10, Commitments and Contingencies, for a discussion of these products.
The Company offers a range of limited warranties from the durability of the finish on its prefinished
products to its services provided. These limited warranties range from one to 100 years. Warranty reserves are
based primarily on claims experience, sales history and other considerations, including payments made to
satisfy customers for claims not directly related to the warranty on the Company’s products. Warranty costs
are recorded in cost of sales. This reserve was $1,688 and $1,568 at December 31, 2015 and 2014,
respectively. The Company is able to seek recovery from its vendors and installation providers for certain
amounts paid.
Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain
purchase levels and reimbursement for the cost of producing samples. Vendor allowances are accrued as
earned, with those allowances received as a result of attaining certain purchase levels accrued over the
incentive period based on estimates of purchases. Volume rebates earned are initially recorded as a reduction
in merchandise inventories and a subsequent reduction in cost of sales when the related product is sold.
Reimbursement received for the cost of producing samples is recorded as an offset against cost of sales.
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