Nautilus 2007 Annual Report Download - page 32

Table of Contents
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 that revenue over the life of the lease
obligation, unless a loss is actually incurred related to such guarantee. We recognize estimated losses as they become probable and can be
reasonably estimated.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is maintained at a level based on our historical experience adjusted for any known uncollectible amounts.
We periodically review the creditworthiness of our customers to help gauge collectibility. Our allowance is sensitive to changes in our
customers’ ability to pay due to unforeseen changes in the economy, the bankruptcy of a major customer, our efforts to actively pursue
collections, and increases in chargebacks. Any major change in the aforementioned factors may result in increasing the allowance for doubtful
accounts, which could have a significant impact on our financial position, results of operations and cash flows.
Inventory Valuation
Our inventory is valued at the lower of cost or market. Inventory adjustments are applied for any known obsolete or defective products. We
periodically review inventory levels of our product lines in conjunction with market trends to assess salability of our products. Our assessment of
necessary adjustments to market value of inventory is sensitive to changes in fitness technology and competitor product offerings driven by
customer demand. Any major change in the aforementioned factors may result in reductions to market value of inventory below cost, which
could have a significant impact on our financial position, results of operations and cash flows.
Product Warranty
We provide a limited warranty for the replacement of defective products. Our standard warranties require us to repair or replace defective
products at no cost to the consumer. We estimate the costs that may be incurred under our basic limited warranty and record a liability in the
amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of units sold, along
with the historical and anticipated cost to repair, replace or refund the original sale. We periodically assess the adequacy of our recorded
warranty liabilities and adjust the amounts as necessary. A significant change is our estimates may have a significant impact on our financial
position, results of operations and cash flows.
In early 2008, the Company suspended sales of the commercial TreadClimber products as a result of product durability issues until those issues
can be corrected. The severity of the quality issues and costs related to either replacing or maintaining this product increased significantly during
the fourth quarter of 2007 leading management to take specific action with this product. Management is currently evaluating alternatives for
addressing this warranty issue and has recorded its best estimate of the cost to remediate the issues identified which is included in accrued
liabilities and other long-term liabilities.
Stock Compensation
We account for employee share-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123
(revised 2004), Share-Based Payment . The fair value of each equity award as well as determination of probability when performance targets for
awards subject to performance conditions are expected to be met require extensive use of judgment. Application of alternative assumptions could
produce significantly different amounts of compensation cost recognized in the consolidated statements of income.
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