Nautilus 2006 Annual Report Download - page 43

Table of Contents
Under SFAS 123(R), the Company recognizes compensation expense from share-
based payments over the requisite service periods of the
individual grants which generally equal the vesting periods. Consistent with prior years, the fair value of each equity award is estimated at the
date of grant using the Black-Scholes-Merton option pricing model which requires extensive use of accounting judgment, including estimates
of the expected volatility of the Company’s common stock price over the expected term, the dividend yield, expected term option holders will
retain their vested awards before exercising them, and the number of awards that will be forfeited prior to the completion of their vesting
requirements. The fair value of the Company’s equity awards was estimated utilizing the following assumptions:
Expected life represents the period that the Company’s equity awards are expected to be outstanding and was determined based on
historical experience with similar awards giving consideration to the contractual terms and vesting schedules of the equity awards. Risk-free
interest rate is based on the implied U.S. Treasury zero coupon yield curve in effect in the month of grant. Expected dividend yield is calculated
based on the amount of quarterly dividends in the amount of $0.10 per share paid in fiscal 2006. Expected volatility utilized in the model is
calculated using daily historical volatility of the Company’s stock price. When estimating forfeitures, the Company considers terminations as
well as anticipated retirements based on an analysis of historical data.
The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to its equity awards for the periods prior to adoption of SFAS 123(R):
As a result of adopting SFAS 123(R), the Company’s income before income taxes and net income for the year ended December 31, 2006
were $2.5 million and $1.8 million lower, respectively, than if it had continued to account for share-based compensation under APB 25. The
Company’s basic and diluted earnings per share for the year ended December 31, 2006 were $0.06 and $0.05 lower, respectively, than if it had
continued to account for share-based compensation under APB 25. The Company did not capitalize any of its share-based compensation costs
in any of the periods. A contra-equity balance of $1.9 million in “Unearned stock compensation” on the Consolidated Balance Sheet was
reversed as a change in accounting policy upon the adoption of SFAS 123(R) to “Additional paid-in capital” as of January 1, 2006.
41
2006
2005
2004
Dividend yield
2.7
%
2.2
%
2.5
%
Risk
-
free interest rate
4.7
%
4.2
%
4.3
%
Expected volatility
44
%
65
%
48
%
Expected life (years)
4.75
5.0
5.5
(In thousands, except per share amounts) 2005
2004
Net income, as reported
$
23,000
$
29,985
Add: Share
-
based employee compensation expense included in reported net income, net of tax
237
223
Deduct: Share-based employee compensation expense determined under fair value based method, net
of tax
(1,854
)
(2,967
)
Net income, pro
-
forma
$
21,383
$
27,241
Basic earnings per share:
As reported
$
0.69
$
0.92
Pro
-
forma
$
0.64
$
0.83
Diluted earnings per share:
As reported
$
0.68
$
0.90
Pro
-
forma
$
0.63
$
0.82