Nautilus 2009 Annual Report Download - page 25

Table of Contents
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. 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 purchases from manufacturers accordingly.
Product Warranty Obligations
Our products carry limited defined warranties for defects in materials or workmanship. Our product warranties generally obligate us to pay for
the cost of replacement parts, cost of shipping the parts to our customers and, in certain instances, service labor costs. At the time of sale, we
record a liability for the estimated costs of fulfilling future warranty claims. The estimated warranty costs are recorded as a component of cost of
sales, based on historical warranty claim experience and available product quality data. If necessary, we adjust our liability for specific warranty
matters when they become known and are reasonably estimable. Our estimates of warranty expenses are based on significant judgment, and the
frequency and cost of warranty claims are subject to variation. 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 variances in
expected repair costs. If warranty costs differ from our previous estimates, or if circumstances change such that the assumptions inherent in our
previous estimates are no longer valid, we adjust our warranty reserve amount accordingly. 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.
Estimating the fair value of our stock-based awards involves inherent uncertainties and the application of management judgment. The valuation
of our stock options requires us to make assumptions regarding the expected term of our options, expected future volatility in the market price of
our common stock, future risk-free interest rates and future dividends, if any, expected to be approved by our Board of Directors.
We estimate future forfeitures, at the time of grant and in subsequent periods, based on historical experience, and recognize compensation
expense only for those awards that are expected to vest. We reevaluate our estimate of forfeitures each quarter and, if applicable, recognize a
cumulative effect adjustment in the period of the change if the revised estimate of forfeitures differs significantly from the previous estimate.
To the extent a stock-based award is subject to performance conditions, the amount of expense we record in a given period, if any, may fluctuate
depending upon our assessment of the probability of achieving the performance targets.
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