Nautilus 2009 Annual Report Download - page 43

Table of Contents
Finite-lived intangible assets, primarily acquired patents and patent rights, are stated at cost, net of accumulated amortization. The Company
recognizes amortization expense for its finite-lived intangible assets on a straight-line basis over the estimated useful lives, which generally
range from one to 16 years.
Impairment of long
-lived assets – Long-lived assets, including property, plant and equipment, and finite-lived intangible assets, including
patents and patent rights, are evaluated for impairment when events or circumstances indicate the carrying value may be impaired. When such an
event or condition occurs, Nautilus estimates the future undiscounted cash flows to be derived from the use and eventual disposition of the asset
to determine whether a potential impairment exists. If the carrying value exceeds estimated future undiscounted cash flows, the Company
records impairment expense to reduce the carrying value of the asset to its estimated fair value.
In connection with changes in long-term product development plans resulting from strategic decisions made by management in the fourth
quarter, Nautilus recognized an impairment charge of $3.6 million in 2009 related to certain patent rights which the Company previously
expected to be utilized in its retail products.
Revenue recognition
– Product sales and shipping revenues, net of promotional discounts, rebates and return allowances, are recorded when
products are shipped and title passes to customers. Retail sales to customers are made pursuant to a sales contract that provides for transfer of
both title and risk of loss upon our delivery to the carrier.
Taxes collected from customers and remitted to governmental authorities are recorded on a net basis, and excluded from revenue. Shipping and
handling fees billed to customers are recorded gross and included in both revenue and cost of sales. Many direct business customers finance their
purchases through a third-party credit provider, for which Nautilus pays a commission or financing fee to the credit provider. Revenue for these
transactions is recognized based on the sales prices charged to the customer and the commission or financing fee is included in selling and
marketing expense.
Revenue is recognized net of applicable sales incentives, such as promotional discounts, rebates and return allowances. Nautilus estimates the
revenue impact of incentive programs, based on the planned duration of the program and historical experience. If the amount of sales incentives
is reasonably estimable, the impact of such incentives is recorded at the later of the time the customer is notified of the sales incentive or the time
of the sale.
Nautilus estimates liability for product returns based on historical experience and records the expected obligation as a reduction in revenue. If
actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period such costs
occur.
Cost of sales – Cost of sales is primarily comprised of: inventory purchase costs; royalties; salaries, wages and other employee-related costs;
occupancy charges, including depreciation of warehouse and distribution facility improvements and equipment; transportation expenses; costs of
product warranties and related services; distribution information systems costs; and allocated expenses for shared administrative functions.
Product warranty obligations
– The Company’s products carry limited defined warranties for defects in materials or workmanship, which
require Nautilus to pay for replacement parts, costs for shipping the parts to customers and, in certain instances, service labor costs. Nautilus
records a liability, at the time of sale, for the estimated costs of responding to future warranty claims. Estimated warranty costs are recorded as a
component of cost of sales, based on historical warranty claim experience and available product quality data. If necessary, Nautilus 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 warranty costs differ from previous estimates, or if circumstances change
such that the assumptions inherent in our previous estimates are no longer valid, the amount of warranty reserve is adjusted accordingly.
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