Nautilus 2005 Annual Report Download - page 49

Table of Contents
Sales Returns – The sales return reserve is maintained based on our historical experience of direct-marketed product return rates during
the period in which a customer can return a product for refund of the full purchase price, less shipping and handling in certain instances. The
return periods for direct-marketed product lines are typically six weeks depending on the specific product. We track product returns in order to
identify any potential negative customer satisfaction trends. The Company also provides for estimated sales returns from customers in our retail
channel. The estimates are based on historical rates of product returns. Sales return reserve activity for the years ended December 31, 2005,
2004 and 2003 is as follows:
The fitness equipment direct channel sales return reserve of $823 and $1,785 as of December 31, 2005 and 2004, respectively, is
presented on the Consolidated Balance Sheets as part of accrued liabilities. The fitness equipment retail channel sales return reserve of $5,323
and $3,170 as of December 31, 2005 and 2004, respectively, are presented on the Consolidated Balance Sheets as a reduction of trade
receivables. The fitness apparel channel sales return reserve of $227 as of December 31, 2005 is presented on the Consolidated Balance Sheets
as part of accrued liabilities.
Warranty Costs – The Company’s warranty policy provides for coverage of defects in materials and workmanship. Warranty periods on
the Company’s products range from two years to limited lifetime on the Bowflex lines of fitness products, and one to five years on Bowflex
TreadClimbers, depending on the model and part, on a prorated basis. The commercial and retail line of fitness products include a lifetime
warranty on the frame and structural parts, a four month to three year warranty on parts, labor, electronics, upholstery, grips and cables, and
typically a five year warranty on motors. Warranty costs are estimated based on the Company’s experience and are charged to cost of sales as
sales are recognized or as such estimates change. Warranty reserve activity for the years ended December 31, 2005, 2004 and 2003 is as
follows:
Research and Development – Internal research and development costs relating to the development of new products, including significant
improvements and refinements to existing products, are expensed as incurred and included separately in operating expenses. Third party
research and development costs are expensed when the contracted work has been performed.
Advertising – The Company expenses advertising costs as incurred, except for commercial advertising production costs which are
expensed at the time the first commercial is shown on television. Advertising expense was $79,306, $82,766 and $89,485 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Income Taxes – The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
48
Balance at
Beginning
of Period
Charged to
Sales and Costs
and Expenses
Deductions*
Balance at
End of
Period
Sales return reserves:
2005
$
4,955
$
16,990
(1)
$
15,573
$
6,372
2004
1,702
15,702
12,449
4,955
2003
2,550
8,346
9,194
1,702
*
Deductions represent product returns.
(1)
Includes $1.0 million from acquisitions that was not charged to expense.
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions*
Balance at
End of
Period
Warranty reserves:
2005
$
7,537
$
11,114
$
8,441
$
10,210
2004
7,348
7,362
7,173
7,537
2003
5,358
5,845
3,855
7,348
*
Deductions represent warranty claims paid out in the form of service costs and/or product replacements.