Nautilus 2012 Annual Report Download - page 42

Table of Contents
replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods
range from sixty days to, in limited circumstances, the lifetime of certain product components. The Company records a liability at the time of
sale for the estimated costs of fulfilling future warranty claims. If necessary, the Company adjusts its liability for specific warranty-related
matters when they become known and are reasonably estimable. Estimated warranty expense is included in cost of sales, based on historical
warranty claim experience and available product quality data. Warranty expense is 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 warranty expense differs from previous estimates, or if circumstances change such that the assumptions inherent in
previous estimates are no longer valid, the amount of product warranty liability is adjusted accordingly. For further information regarding
product warranty obligations, see Note 9, Product Warranties.
Litigation and loss contingencies
- From time to time, the Company may be involved in various claims, lawsuits and other proceedings. Such
litigation involves uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to
occur. Nautilus records expenses for litigation and loss contingencies when it is probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. The Company estimates the probability of such losses based on the advice of internal and external counsel, the
outcomes from similar litigation, the status of the lawsuits (including settlement initiatives), legislative developments and other factors. Due to
the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the
related loss contingencies are subject to substantial uncertainties. The Company regularly monitors its estimated exposure to these contingencies
and, as additional information becomes known, may change its estimates accordingly. For further information regarding litigation and loss
contingencies, see Note 15, Commitments and Contingencies.
Advertising and promotion
- Nautilus expenses its advertising and promotion costs as incurred. Production costs of television advertising
commercials are recorded as prepaid expenses until the initial broadcast, at which time such costs are expensed. Advertising and promotion costs
are included in selling and marketing expenses. Total advertising and promotion expenses were $30.9 million , $28.6 million and $40.6 million
for the years ended December 31, 2012 , 2011 and 2010 , respectively. Prepaid advertising and promotion costs were $1.3 million and $0.8
million as of December 31, 2012 and 2011 , respectively.
Research and development
- Internal research and development costs, which primarily consist of salaries and wages, employee benefits,
expenditures for materials, and fees to use licensed technologies, are expensed as incurred. Third party research and development costs for
products under development or being researched, if any, are expensed as the contracted work is performed.
Income taxes
- Nautilus accounts for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when
the temporary differences are expected to be included, as income or expense, in the applicable tax return. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in the period of the enactment. Valuation allowances are provided against deferred income tax
assets if the Company determines it is more likely than not that such assets will not be realized.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained based on
the technical merits of the position upon examination, including resolutions of any related appeals or litigation.
Foreign currency translation - Nautilus translates the accounts of its non-U.S. subsidiaries into U.S. dollars as follows: revenues, expenses,
gains and losses are translated at weighted-
average exchange rates during the year; and assets and liabilities are translated at the exchange rate on
the balance sheet date. Translation gains and losses are reported in the Company's consolidated balance sheets as a component of accumulated
other comprehensive income in stockholders' equity. In the fourth quarter of 2012, the Company substantially completed the liquidation of its
investment in foreign subsidiaries formerly associated with the Commercial business. As a result, an accumulated translation adjustment of $6.2
million was removed from accumulated other comprehensive income and recognized as a gain of the discontinued operation.
Gains and losses arising from foreign currency transactions, including transactions between the Company and its non-U.S. subsidiaries, are
recorded as a component of other income (expense) in the Company's consolidated statements of operations.
Fair value of financial instruments - Financial instruments include cash and cash equivalents, trade receivables, trade payables, long-term note
payable, letters of credit and guarantees entered into in the ordinary course of business. The carrying
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