This excerpt taken from the KAMN 10-K filed Feb 28, 2008.
Allowance for Doubtful Accounts
The company has three types of accounts receivables: (a) Trade receivables, which consist of amounts billed and currently due from customers; (b) U.S. Government contract receivables, which consist of (1) amounts billed and (2) costs and accrued profit earned but not yet billable under the terms of the contract; and (c) Commercial and other government contract receivables, which also includes (1) amounts billed and (2) costs and accrued profit earned but not yet billable under the terms of the contract. Contract receivables typically relate to balances due under long-term contractual arrangements under which there are progress or milestone billings in accordance with the terms of a contract. Trade receivables typically relate to products sold by the Industrial Distribution segment for which the sales occur generally upon shipment of the product.
The allowance for doubtful accounts represents managements best estimate of probable losses inherent in the receivable balance. These estimates are based on known past due amounts and historical write-off experience, as well as trends and factors impacting the credit risk associated with specific customers. In an effort to identify adverse trends for trade receivables, we perform ongoing reviews of account balances and the aging of receivables. Amounts are considered past due when payment has not been received within a pre-determined time frame based upon the credit terms extended. For our government and commercial contracts, we evaluate, on an ongoing basis, the amount of recoverable costs. The recoverability of costs is evaluated on a contract-by-contract basis based upon historical trends of payments, program viability and the customers credit-worthiness.
Judgment and Uncertainties
As of December 31, 2007 and 2006, our allowance for doubtful accounts was 1.1 percent of gross receivables for both years. Receivables written off, net of recoveries, in 2007 and 2006 were both $0.7 million. Write-offs are
charged directly against the allowance for doubtful accounts only after we have exhausted all collection efforts. Actual write-offs and adjustments could differ from the allowance estimates due to unanticipated changes in the business environment as well as factors and risks associated with specific customers.
Effect if Actual Results Differ From Assumptions
Currently we do not believe that we have a significant amount of risk relative to the allowance for doubtful accounts. A 10% increase in the allowance would have a $0.2 million effect on pre-tax earnings. There is additional exposure relative to amounts that we have earned but not billed relative to the SH-2G(A) program. As of December 31, 2007, we had $40.8 million of costs not billed that will be due and payable as the Helicopters segment satisfactorily completes the Australian SH-2G(A) program. When these costs are ultimately billed to the RAN, they will be offset by the application of $7.5 million of contract advances previously paid to the company by the RAN. If the Australian program is not resolved satisfactorily for both parties, we may not be able to collect the remaining amount unbilled. We are working with the RAN on the program and currently believe that these amounts are collectible.