Nautilus 2008 Annual Report Download - page 28

Table of Contents
Accounts Receivable Valuation
We evaluate the collectibility of our accounts receivable based on a combination of factors including: an aging of receivable balances, historical
collection experience, our understanding of the current financial status of key customers and overall economic conditions. We periodically
review the credit worthiness of our customers to help gauge collectibility and increase our allowance for doubtful accounts when collection is at
risk. We believe that by analyzing historical trends and monitoring potential collection problems, we have sufficient information to establish a
reasonable estimate of the portion of our receivable balances that will not be collected. However, since we cannot predict, with certainty, future
changes in the financial stability of our customers or in the general economy, our actual future losses from uncollectible accounts may differ
from our estimates. Our ability to collect the amounts due from our customers could be impacted by various factors including: a deterioration in
the financial condition of a key customer, inability of customers to obtain bank credit lines, a significant slow-down in the economy, our efforts
to pursue collections, product quality matters or other customer disputes. Even though portions of our accounts receivable are protected by a
security interest in products held by customers, any of the factors noted above may affect our ability to collect all, or a portion of, our receivable
balances and could have a material impact on our financial position, results of operations and cash flows.
Inventory Valuation
Our inventory is reported at the lower of cost or market, with cost determined based on the first-in, first-out method. Any abnormal amounts of
idle facility expense, freight, handling costs and spoilage are recognized as current period charges. Further, any unallocated overhead remaining
after the allocation of fixed production overhead to inventory, based on the normal capacity of the production facilities, are expensed in the
period in which they are incurred. We establish provisions for excess, slow moving and obsolete inventory based on inventory levels, expected
product life and forecasted sales demand. In assessing the ultimate realization of inventory values, we are required to make judgments regarding
the salability of our products, including an assessment of future demand compared with existing inventory levels, competitive factors, and
changes in technology and product life cycles. A significant change in any of the aforementioned factors could have a material impact on our
financial position, results of operation and cash flows. It is also possible that an increase in our inventory provisions may be required in the
future if there is a significant decline in demand for our products and we do not adjust our production activities or our purchases from third-
party
contract manufacturers accordingly.
Product Warranties
The Company’s products carry limited defined warranties for defects in materials or workmanship. Our warranties generally obligate us to pay
for the costs to manufacture or purchase warranty parts, ship the parts to our customers, and, in certain instances, service costs to replace the
warranty part. We record a liability, at the time of sale, for the estimated costs of responding to future warranty claims. The liability is recorded
as a component of cost of sales and is estimated based on historical warranty claim experience and available product quality data. If necessary,
the Company adjusts its liability for specific warranty matters when they become known and are reasonably estimable. Warranty expenses are
affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to
the customer, product failure rates, and higher or lower than expected repair costs. If estimated costs differ from actual warranty costs incurred,
or if circumstances change such that the assumptions inherent in our previous estimates are no longer valid, we adjust our warranty reserve
accordingly. Our estimates of warranty expenses are based on significant judgment, and the amount and value of warranty claims are subject to
variation for the reasons noted above. Changes in the aforementioned factors or other warranty-related assumptions could have a significant
impact on our results of operations, financial position and cash flows.
Stock-Based Compensation
We recognize stock-based compensation on a straight-line basis, over the applicable vesting period, based on the grant-date fair value of our
awards. We estimate the fair value of our stock options using the Black-Scholes-Merton option valuation model and determine the fair value of
our restricted stock awards based on the closing market price on the day preceding the grant.
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