Nautilus 2003 Annual Report Download - page 25

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Table of Contents
collectibility is reasonably assured or probable. Revenue is recognized net of applicable promotional discounts, rebates, and return allowances.
For all of our products, except Nautilus commercial equipment, revenue from product sales is recognized when title and risk of loss have
passed. Revenue is recognized upon installation for the Nautilus commercial equipment if we are responsible for installation. Return
allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. In
addition, from time to time, we arrange for leases or other financing sources to enable certain of our commercial customers to purchase our
equipment. In the event that a guarantee of the commercial customer’s lease obligation is made, we record a liability and corresponding
reduction of revenue for the estimated fair value of the guarantee and then recognize revenue over the life of the lease obligation.
Stock
-Based Compensation
We measure compensation expense for our stock-based employee compensation plans using the method prescribed by Accounting Principles
Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees . In Note 2 of the Notes to Consolidated Financial Statements, we
provide pro forma disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation , had been applied in measuring compensation expense. A change to recognize compensation expense for all options granted
using a fair value approach in regularly reported financial results would have a significant impact on our results of operations.
Warranty Reserves
The product warranty reserve includes the cost to manufacture (raw materials, labor and overhead) or purchase warranty parts from our
suppliers as well as the cost to ship those parts to our customers. The cost of labor to install a warranted part on our manufactured commercial
equipment is also included. The warranty reserve is based on our historical experience with each product. A warranty reserve is established for
new products based on historical experience with similar products, adjusted for any technological advances in manufacturing or materials used.
We track warranty claims by part and reason for claim in order to identify any potential warranty trends. The warranty trends are evaluated
periodically with respect to future volume and nature of likely claims. Adjustments, if any are so indicated, are made to the warranty reserve to
reflect our judgment regarding the likely effect of the warranty trends on future claims. If we were to experience a significant volume of
warranty claims for a particular part or for a particular reason, we may need to make design changes to our product. A change in warranty
experience could have a significant impact on our financial position, results of operations and cash flows.
Product Safety Reinforcement (Recall) Program Reserve
The reserve for the product safety reinforcement (recall) program includes the cost of the reinforcement kits, the third-party call center costs to
process customer requests for the kit, and costs to mail the kit to our customers. The reserve is calculated based on historical customer response
rates for similar issues faced by other companies, as noted by the Consumer Product Safety Commission (the “CPSC”).
Although our estimates
are based on historical information, there remains a great deal of uncertainty due to the unique circumstances surrounding each company and
product. If actual customer response rates vary from existing estimates, adjustments will be made to the reserve to reflect any changes in our
judgment regarding ultimate customer response results. A change in program response rate from our estimates could have a significant impact
on our financial position, results of operations and cash flows.
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