Audiovox 2005 Annual Report Download - page 30

the assistance of a third−party valuation firm, as necessary. These impairment
tests may result in impairment losses that could have a material adverse impact
on our results of operations.
Warranties
We offer warranties of various lengths depending upon the specific product.
Our standard warranties require us to repair or replace defective product
returned by both end users and customers during such warranty period at no cost.
We record an estimate for warranty related costs, in cost of sales, based upon
actual historical return rates and repair costs at the time of sale. The
estimated liability for future warranty expense, which has been included in
accrued expenses and other current liabilities, amounted to $7,947 and $6,142 at
November 30, 2004 and 2005, respectively. While warranty costs have historically
been within expectations and the provisions established, we cannot guarantee
that we will continue to experience the same warranty return rates or repair
costs that have been experienced in the past. A significant increase in product
return rates, or a significant increase in the costs to repair products, could
have a material adverse impact on our operating results.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". We record a
valuation allowance to reduce our deferred tax assets to the amount of future
tax benefit that is more likely than not to be realized. We decrease the
valuation allowance when, based on the weight of available evidence, it is more
likely than not that the amount of future tax benefit will be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, there is
no assurance that the valuation allowance will not need to be increased to cover
additional deferred tax assets that may not be realized. Any increase or decline
in the valuation allowance could have a material adverse impact on our income
tax provision and net income in the period in which such determination is made.
Furthermore, the Company provides tax reserves for federal, state and
international exposures relating to potential tax examination issues, planning
initiatives and compliance responsibilities. The development of these reserves
requires judgments about tax issues, potential outcomes and timing.
SEGMENT
We have determined that we operate in one segment, the Electronics Group
based on review of SFAS No. 131. Characteristics of our operations which are
relied on in making and reviewing business decisions include the similarities in
our products, the commonality of our customers across brands, our unified
marketing strategy, and the nature of the financial information used by our
Executive Officers. Management reviews the financial results of the Company
based on the performance of the Electronics Group, which is supported by the
Corporate Administrative Group.
RESULTS OF OPERATIONS
As you read this discussion and analysis, refer to the accompanying
consolidated statements of operations, which present the results of our
operations for the years ended November 30, 2003, 2004 and 2005. We analyze and
explain the differences between periods in the specific line items of the
consolidated statements of earnings. Certain reclassifications have been made to
the fiscal 2003 and 2004 consolidated financial statements in order to conform
to the fiscal 2005 presentation.
25