Harman Kardon 2010 Annual Report Download - page 48

aged receivables based on historical experience. We must make judgments and estimates regarding accounts
receivable that may become uncollectible. These estimates affect our bad debt reserve and results of operations.
We base these estimates on many factors including historical collection rates, the financial stability and size of
our customers as well as the markets they serve and our analysis of aged accounts receivable. Our judgments and
estimates regarding collectability of accounts receivable have an impact on our financial statements.
Inventories, net
Inventories, net are stated at the lower of cost or market. Cost is determined principally by the first-in,
first-out method. We establish reserves for our inventory which requires us to analyze the aging and forecasted
demand for our inventories, to forecast future product sales prices, pricing trends and margins, and to make
judgments and estimates regarding obsolete, damaged or excess inventory. Markdown percentages are
determined based on our estimate of future demand and selling prices for our products. Future sales prices are
determined based on current and forecasted market expectations, as well as terms that have been established for
future orders under automotive platform arrangements. Our inventory reserves primarily relate to our raw
materials as our finished goods are primarily produced to order. We calculate inventory reserves on raw materials
by reviewing the levels of raw materials on-hand and comparing this to estimates of historical consumption and
future demand in order to assess whether we have excess materials on-hand. If it is determined that excess
materials are in inventory, an appropriate inventory reserve is established. Inventory reserves on finished goods
are primarily determined through inventory turnover measures. Products showing low turnover rates are assigned
a percentage reserve based on future estimates of sales volumes and margins. We make adjustments to our
inventory reserves based on the identification of specific situations and increase our inventory reserves
accordingly. As changes in future economic or industry conditions occur, we revise the estimates that were used
to calculate our inventory reserves.
If actual conditions are less favorable than those we have projected, we may need to increase our reserves
for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations.
The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory.
Such reserves are not reduced until the product is sold.
Although there was deterioration in economic conditions in the beginning of fiscal year 2010 and in fiscal
year 2009, we did not experience significant increases in our inventory write-downs, primarily due to a
significant portion of our inventories being produced as a result of specific customer orders within our
Automotive segment. After discussions with several of our significant customers, we concluded that the majority
of orders would be postponed and not cancelled. We were able to proactively adjust our supply chain demand to
match these new customer requirements, thereby reducing our exposure to inventory write-downs. There was no
significant movement in our inventory reserves in fiscal year 2010 compared with the prior fiscal year. At
June 30, 2010 and 2009 our inventory reserves were $75.1 million and $91.5 million, respectively. Refer to
Note 4 – Inventories, net in the Notes to the Consolidated Financial Statements for more information.
Goodwill
Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an
impairment loss may have been incurred. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment
of goodwill to reporting units, and determination of the fair value of each reporting unit. We estimate the fair
value of each reporting unit using a discounted cash flow methodology. This requires us to use significant
judgment including estimation of future cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business, the useful life over which cash flows will occur, determination of our
weighted average cost of capital, and relevant market data. Refer to the heading “Goodwill” below and
Note 8 – Goodwill in the Notes to the Consolidated Financial Statements for more information.
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