Napa Auto Parts 2002 Annual Report Download - page 24

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management’s discussion and analysis of financial condition
and results of operations (continued)
The ratio of current assets to current liabilities is 3.1 to 1 at
December 31, 2002, and the Company's cash position is
good. The Company believes existing credit facilities and cash
generated from operations will be sufficient to fund future
operations.
Critical Accounting Estimates
Inventories – Provisions for Slow Moving and Obsolescence
The Company identifies slow moving or obsolete inventories
and estimates appropriate loss provisions related thereto.
Historically, these loss provisions have not been significant as
the vast majority of the Company’s inventories are not highly
susceptible to obsolescence and are eligible for return under
various vendor return programs. While the Company has no
reason to believe its inventory return privileges will be discon-
tinued in the future, its risk of loss associated with obsolete or
slow moving inventories would increase if such were to occur.
Allowance for Doubtful Accounts – Methodology
The Company evaluates the collectibility of accounts receiv-
able based on a combination of factors. Initially, the Company
estimates an allowance for doubtful accounts as a percentage
of net sales based on historical bad debt experience. This ini-
tial estimate is periodically adjusted when the Company
becomes aware of a specific customer’s inability to meet its
financial obligations (e.g., bankruptcy filing) or as a result of
changes in the overall aging of accounts receivable. While the
Company has a large customer base that is geographically dis-
persed, a general economic downturn in any of the industry
segments in which the Company operates could result in high-
er than expected defaults, and, therefore, the need to revise
estimates for bad debts. For the years ended December 31,
2002, 2001 and 2000, the Company recorded provisions for
bad debts of $20.9 million, $26.5 million and $13.9 million,
respectively.
Consideration Received from Vendors
The Company enters into agreements at the beginning of each
year with many of its vendors providing for inventory purchase
rebates and advertising allowances. Generally, the Company
earns inventory purchase rebates upon achieving specified
volume purchasing levels and advertising allowances upon
fulfilling its obligations related to cooperative advertising
programs. The Company accrues for the receipt of inventory
purchase rebates as part of its inventory cost based on cumu-
lative purchases of inventory to date and projected inventory
purchases through the end of the year, and, in the case of
advertising allowances, upon completion of the Company’s
obligations related thereto. While management believes the
Company will continue to receive such amounts in 2003 and
beyond, there can be no assurance that vendors will continue
to provide comparable amounts of rebates and allowances in
the future.
Impairment of Property, Plant and Equipment and Goodwill
and Other Intangible Assets
At least annually, the Company evaluates property, plant
and equipment and goodwill and other intangible assets for
potential impairment indicators. The Company’s judgments
regarding the existence of impairment indicators are based on
legal factors, market conditions and operational performance.
Future events could cause the Company to conclude that
impairment indicators exist and that assets associated with a
particular operation are impaired. Evaluating the impairment
also requires the Company to estimate future operating results
and cash flows which require judgment by management.
Any resulting impairment loss could have a material adverse
impact on the Company’s financial condition and results of
operations.
Quarterly Results of Operations:
The preparation of interim consolidated financial statements
requires management to make estimates and assumptions for
the amounts reported in the condensed consolidated financial
statements. Specifically, the Company makes certain esti-
mates in its interim consolidated financial statements for the
accrual of bad debts, inventory adjustments, and volume
rebates earned. Bad debts are accrued based on a percent-
age of sales and volume rebates are estimated based upon
cumulative and projected purchasing levels. Inventory adjust-
ments are accrued on an interim basis and adjusted in the
fourth quarter based on the annual October 31 book-to-physi-
cal inventory adjustment. The methodology and practices