Audiovox 2008 Annual Report Download - page 29

Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and current credit
worthiness, as determined by a review of current credit information. We continuously monitor collections from our customers and
maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have
been identified. We record charges for estimated credit losses against operating expenses and charges for price adjustments against
net sales in the consolidated financial statements. The reserve for estimated credit losses at February 29, 2008 and February 28, 2007
was $6,386 and $5,062, respectively. While such credit losses have historically been within management's expectations and the
provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced
in the past. Since our accounts receivable are concentrated in a relatively few number of large customers, a significant change in the
liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of accounts
receivable and our results of operations.
Inventories
We value our inventory at the lower of the actual cost to purchase (primarily on a weighted moving average basis) and/or the current
estimated market value of the inventory less expected costs to sell the inventory. We regularly review inventory quantities on-hand
and record a provision, in cost of sales, for excess and obsolete inventory based primarily from selling price reductions subsequent to
the balance sheet date, indications from customers based upon current negotiations, and purchase orders. A significant sudden increase
in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in
demand could result in an increase in the amount of excess inventory quantities on-hand. In addition, our industry is characterized by
rapid technological change and frequent new product introductions that could result in an increase in the amount of obsolete inventory
quantities on-hand. During the years ended February 29, 2008, February 28, 2007, the three months ended February 28, 2006 and the
year ended November 30, 2005, we recorded inventory write-downs of $4,925, $2,977, $689, and $16,924, respectively.
Estimates of excess and obsolete inventory may prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. Although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on
the carrying value of inventory and our results of operations.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets, which consists of the excess cost over fair value of assets acquired (goodwill) and other
intangible assets (patents, contracts, trademarks and customer relationships) amounted to $124,435 at February 29, 2008 and $75,388
at February 28, 2007. Goodwill, which includes equity investment goodwill, is calculated as the excess of the cost of purchased
businesses over the value of their underlying net assets. Goodwill and other intangible assets that have an indefinite useful life are not
amortized. Intangible assets that have a definite useful life are amortized over their estimated useful life.
On an annual basis, we test goodwill and other intangible assets for impairment. To determine the fair value of these intangible assets,
there are many assumptions and estimates used that directly impact the results of the testing. We have the ability to influence the
outcome and ultimate results based on the assumptions and estimates we choose. To mitigate undue influence, we set criteria that are
reviewed and approved by various levels of management. Additionally, we evaluate our recorded intangible assets with 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 $13,272
and $5,856 at February 29, 2008 and February 28 2007, 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.
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Source: AUDIOVOX CORP, 10-K, May 14, 2008