Nautilus 2008 Annual Report Download - page 52

Table of Contents
(l) Cost of Sales – The Company’s cost of sales is primarily comprised of costs associated with the following: raw materials and other
component parts; salaries, wages and other employee-related expenditures; occupancy charges, including depreciation on manufacturing and
warehousing facilities and equipment; manufacturing and distribution-
related lease costs; transportation expenses; product warranties and related
services; the costs of manufacturing and distribution information systems; and allocated costs for shared administrative functions.
(m) Product Warranties – The Company’s products carry limited defined warranties for defects in materials or workmanship. Our warranties
generally obligate us to pay for the costs to manufacture or purchase warranty parts, ship the parts to our customers, and, in certain instances,
service costs to replace the warranty part. We record a liability, at the time of sale, for the estimated costs of responding to future warranty
claims. The liability is recorded as a component of cost of sales and is estimated based on historical warranty claim experience and available
product quality data. If necessary, the Company adjusts its liability for specific warranty matters when they become known and are reasonably
estimable. Warranty expenses are 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 estimated costs differ from
actual warranty costs incurred, or if circumstances change such that the assumptions inherent in our previous estimates are no longer valid, we
adjust our warranty reserve accordingly.
In the fourth quarter of 2007, the Company accrued warranty expenses totaling $12.7 million, to establish a reserve for future warranty claims as
a result of product quality issues concerning its commercial TreadClimber. During 2008, the Company incurred $6.5 million in warranty-related
costs pertaining to these quality issues. These costs were applied against the reserve established in 2007. At December 31, 2008, the Company’s
warranty reserves include $6.9 million in anticipation of further warranty claims related to the commercial TreadClimber.
The following reflects the activity related to our warranty reserves for the three year period ended December 31, 2008:
Warranty reserves at December 31, 2008 and 2007 include $2.5 million and $6.9 million, respectively, in estimated long-term accrued warranty
obligations.
(n) 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. The Company 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. We regularly monitor our estimated exposure to these
contingencies and, as additional information becomes known, may change our estimates accordingly. A significant change in our estimates, or an
outcome that differs from the assumptions incorporated in our estimates, may have a material impact on our results of operations, financial
position and cash flows.
48
(In thousands)
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Deductions*
Balance at
End of
Year
Warranty reserves:
2008
$
25,185
$
9,122
$
(16,470
)
$
17,837
2007
9,699
27,304
(11,818
)
25,185
2006
10,210
11,067
(11,578
)
9,699
*
Deductions represent warranty claims paid out in the form of service costs and/or product replacements.