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Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts
for an estimate of the losses we will incur if our customers do
not make required payments. We perform periodic credit evaluations
of our customers and typically do not require collateral. Consistent
with industry practices, we require payment from our customers within
30 days except for sales under early buy programs for which we provide
extended payment terms to qualified customers. The extended terms
require payments in equal installments in April, May and June or
May and June, depending on geographical location. In the past, credit
losses have been within or better than our expectations.
As our business is seasonal, our customers’
businesses are also seasonal. Sales are lowest in the winter months,
and our past due accounts receivable balance as a percentage of
total receivables generally increases during this time. We provide
reserves for uncollectible accounts based on the accounts receivable
aging ranging from 0.12% for amounts currently due up to 100% for
specific accounts more than 60 days past due.
At the end of each year, we perform a reserve
analysis of all accounts with past due balances greater than $25,000.
Additionally, we perform a separate reserve analysis on the balance
of our accounts receivables with emphasis on the remainder of the
past due portion of the aging. As we review these past due accounts,
we evaluate collectibility based on a combination of factors, including:
- aging statistics and trends;
- customer payment history;
- independent credit reports; and
- discussions with customers.
During the year, we write off account balances
when we have exhausted reasonable collection efforts and determined
that the likelihood of collection is remote. Such write-offs are
charged against our allowance for doubtful accounts. In the past
five years, write-offs have averaged less than 0.2% of net sales.
If the balance of the accounts receivable
reserve increased or decreased by 20% at December 31, 2005, pretax
income would change by approximately $0.8 million and earnings per
share would change by approximately $0.01 per diluted share based
on the number of diluted shares outstanding at December 31, 2005.
Inventory Obsolescence
Product inventories represent the largest
asset on our balance sheet. Our goal is to manage our inventory
such that we minimize stock-outs to provide the highest level of
service to our customers. To do this, we maintain at each service
center an adequate inventory of stock keeping units (SKUs) with
the highest sales volume. At the same time, we continuously strive
to better manage our slower moving classes of inventory, which are
not as critical to our customers and thus, inherently have lower
velocity. Service centers classify products into 13 classes based
on sales at that location over the past 12 months. The table below
presents a description of these inventory classes:
| Classes 1-4 |
highest sales value items, which represent
approximately 80% of net sales at the service center |
| Classes 5-12 |
lower sales value items, which we
keep in stock to provide a high level of customer service |
| Class 13 |
products with no sales for the past
twelve months or special order products not yet delivered to
the customer |
There is little risk of obsolescence for products
in classes 1-4 because products in these classes generally turn
quickly. We establish our reserve for inventory obsolescence based
on inventory classes 5-13, which we believe represent some exposure
to inventory obsolescence, with particular emphasis on SKUs with
the least sales over the previous 12 months. The reserve is intended
to reflect the value of inventory that we may not be able to sell
at a profit. We provide a reserve of 5% for inventory in classes
5-13 as determined at the
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