Nautilus 2007 Annual Report Download - page 31

Table of Contents
INFLATION AND PRICE CHANGES
We are experiencing cost increases for products and components manufactured in China reflecting increases in foreign currency exchange rates,
and Chinese wages, taxes and raw material costs which our third party sourcing partners are seeking to pass along to the Company. Raw material
costs have also increased for products manufactured by Nautilus owned facilities in the United States. Gross margins may be negatively
impacted if these conditions continue and the Company is unable to find other cost savings opportunities or increase prices enough to offset the
cost increases.
During both 2007 and 2006, we experienced increases in transportation costs due to increases in the price for fuel. To the extent these costs
continue to increase and we are unable to pass these costs to the customer, our gross margins may continue to be negatively impacted.
SEASONALITY
In general, based on historic trends, we expect our sales from fitness equipment products both in the U.S. and internationally to vary seasonally
with sales typically the strongest in the fourth quarter, followed by the first and third quarters, and the weakest in the second quarter. We believe
that such factors as the broadcast of national network season finales and seasonal weather patterns influence television viewership and cause our
television commercials on national cable television to be less effective in the second quarter than in other periods of the year. In addition, during
the spring and summer consumers tend to do more activities outside including exercise, which impacts sales of fitness equipment used indoors.
We expect the fluctuation in our net sales between our highest and lowest quarters to be approximately 37%.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements.
As described by the Securities and Exchange Commission (“SEC”),
critical accounting estimates and assumptions are those that may be material
due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change,
and that have a material impact on the financial condition or operating performance of the company. Based on this definition, we believe the
items listed below are our critical accounting estimates and assumptions.
Management and our independent auditors regularly discuss with our audit committee each of our critical accounting estimates and assumptions,
as well as critical accounting policies presented in Note 1 to the consolidated financial statements located at Item 8 of this Form 10-K, and the
development and selection of these accounting estimates and the disclosure about each estimate in the MD&A. These discussions typically occur
at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in
and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to
these estimates, including significant issues concerning accounting principles and financial statement presentation.
Revenue Recognition
We recognize revenue when products are shipped and we have no significant remaining obligations, persuasive evidence of an arrangement
exists, the price to the buyer is fixed or determinable, collectibility is reasonably assured or probable, and title and risk of loss have passed.
Revenue is recognized net of applicable promotional discounts, rebates, and return allowances, some of which need to be estimated at the time
we recognize revenue. In addition, revenue is recognized upon final installation for the Nautilus commercial equipment if we are
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