Napa Auto Parts 2009 Annual Report Download - page 22

Table of Contents
repurchase plans were announced on August 21, 2006 and November 17, 2008, respectively. The authorization for these repurchase
plans continues until all such shares have been repurchased or the repurchase plan is terminated by action of the Board of Directors. In
2009, the Company repurchased approximately 722,000 shares and the Company had remaining authority to purchase approximately
17.8 million shares at December 31, 2009.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our
consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of
assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and
judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about
matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in
the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.
Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the
preparation of the consolidated financial statements. For further information on the critical accounting policies, see Note 1 of the notes to
our consolidated financial statements.
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 discontinued 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 receivable 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 initial 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
dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than
expected defaults and, therefore, the need to revise estimates for bad debts. For the years ended December 31, 2009, 2008 and 2007, the
Company recorded provisions for bad debts of $28.5 million, $23.9 million, and $13.5 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
incentives and advertising allowances. Generally, the Company earns inventory purchase incentives 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 incentives as part of its inventory cost based on cumulative 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 2010
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