Nautilus 2010 Annual Report Download - page 18

Table of Contents
Product sales and shipping revenues are reported net of promotional discounts and return allowances. We estimate the revenue impact of retail
sales incentive programs based on the planned duration of the program and historical experience. If the amount of our retail sales incentives can
be reasonably estimated, we record the impact of such incentives at the later of the time we notify our customer of the sales incentive, or the time
of the sale. If actual amounts differ from our estimates, revenue is adjusted.
Our calculation of amounts owed for sales discounts and allowances contains uncertainties because it requires management to make assumptions
in interim periods and to apply judgment regarding a number of factors, including estimated future customer inventory purchases and returns.
Goodwill and Intangible Asset Valuation
We evaluate our indefinite-lived intangible assets and goodwill for potential impairment annually or when events or circumstances indicate their
carrying value may be impaired. Finite-lived intangible assets, including patents and patent rights, are evaluated for impairment when events or
circumstances indicate the carrying value may be impaired. In 2009 we recognized $5.9 million in impairment charges related to intangible
assets used in our continuing operations. Impairment charges of $1.7 million related to intangible assets of discontinued operations were
recognized in 2009 . No intangible asset impairment charges were recognized in 2010.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment in order to
estimate future cash flows and asset fair values. Our judgments regarding potential impairment are based on a number of factors including: the
timing and amount of anticipated cash flows; market conditions; relative levels of risk; the cost of capital; terminal values; royalty rates; and the
allocation of revenues, expenses and assets and liabilities to business segments. Each of these factors can significantly affect the value of our
goodwill or indefinite-lived intangible assets and, thereby, could have a material adverse affect on our financial position and results of
operations.
Product Warranty Obligations
Our products carry limited defined warranties for defects in materials or workmanship. Our product warranties generally obligate us to pay for
the cost of replacement parts, cost of shipping the parts to our customers and, in certain instances, service labor costs. At the time of sale, we
record a liability for the estimated costs of fulfilling future warranty claims. The 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, we adjust our liability for specific warranty
matters when they become known and are reasonably estimable. Our estimates of warranty expenses are based on significant judgment, and the
frequency and cost of warranty claims are subject to variation. 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 variances in
expected repair costs.
Uncertainties exist with respect to outstanding warranty obligations of our commercial business, now a discontinued operation, as units sold to
customers approach end-of-
life and settlements are reached with certain customers in connection with our exit from the commercial business. As
of December 31, 2010, our warranty liability included $2.9 million for future warranty costs of our former commercial business, which
represents management's estimate of the probable amount. However, in light of the aforementioned uncertainties, management believes it is
reasonably possible that actual warranty costs of our former commercial business could exceed this amount by as much as $0.2 million, which if
realized would decrease operating results of discontinued operations in future periods.
Litigation and Loss Contingencies
From time to time, we may be involved in claims, lawsuits and other proceedings. Such matters involve uncertainty as to the eventual outcomes
and any losses or gains we may ultimately realize when one or more future events occur or fail to occur. We record 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. We estimate the
probability of such losses based on the advice of internal and external counsel, outcomes from similar litigation, 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.
Deferred Tax Assets
- Valuation Allowance
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