MANAGEMENT’S DISCUSSION AND ANALYSIS  (CONTINUED) and have minimal risk. Astec Financial Services, Inc. sold both finance and operating leases with limited recourse, generally not exceeding 15% of the purchase price, subject to elimination of recourse responsibilities through remarketing of equipment. The Company is contingently liable under letters of credit of approximately $21,300,000 primarily related to Industrial Revenue Bonds. Based on information available, management believes the Company has adequately reserved for potential environ- mental liabilities and does not believe the potential liability will materially impact the future financial position of the Company. The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Application of these principles requires the Company to make esti- mates and judgments that affect the amounts as reported in the consolidated financial statements. Accounting policies that are critical to aid in understanding and evaluating the results of operations and finan- cial position of the Company include the following: Inventory Valuation :Inventories are valued at the lower of cost or market. The most significant component of the Company’s inventories is steel. Open market prices, which are subject to volatility, determine the cost of steel for the Company. During periods when open market prices decline, the Company may need to provide an allowance to reduce the carrying value of the inventory. In addition, certain items in inventory may be con- sidered obsolete, and as such, the Company may establish an allowance to reduce the carrying value of these items to their net realizable value. The amounts in these inventory allowances are determined by the Company based on certain estimates, assumptions and judgments made from the information available at that time. Allowance for Doubtful Accounts : The Company evaluates its ability to collect accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts is recorded against amounts due to reduce the net rec- ognized receivable to the amount reasonably expected to be collected. Additionally, a general percentage of past due receivables is reserved, based on the Company’s past experience of collectibility. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations), estimates of the recoverability of amounts due could be reduced by a material amount. Litigation Contingencies : As a normal course of business in the industry, the Company is named as a defen- dant in a number of legal proceedings associated with product liability matters. The Company does not believe they are a party to any legal proceedings that will have a material adverse effect on the consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions related to these proceedings. As discussed in Note 12 of the consolidated financial statements, as of December 31, 2002, the Company has accrued its best estimate of the probable cost for the resolution of these claims. This estimate has been developed in consultation with outside counsel that is handling the defense in these matters and is based upon a combination of litigation and settlement strategies. Certain litigation is being addressed before juries in states where past jury awards have been significant. To the extent additional information arises or strategies change, it is possible that the Company’s best estimate of the probable liability in these matters may change. New Accounting Standards  - In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,  Accounting for Stock-Based Compensation - Transition and Disclosure . This statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. SFAS No. 148 prohibits companies from using the prospective method of transition in fiscal years beginning after December 15, 2003. However, the statement permits two transition methods, the modified perspective and retroactive restatement methods, for companies that adopt the fair value method of accounting for stock-based compensation. Although, Statement 148 does not Environmental Matters Critical Accounting Policies