Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NLS > SEC Filings for NLS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for NAUTILUS, INC.

Form 10-Q for NAUTILUS, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"). All references to the third quarter and first nine months of 2012 and 2011 mean the three- and nine-month periods ended September 30, 2012 and 2011, respectively. Unless the context otherwise requires, "Nautilus," "we," "us" and "our" refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.

Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the United States and Canada. Our profit margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, product warranty costs, the cost of fuel, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and air television advertisements of our products, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.

As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you any future growth or profitability. For more information, see our discussion of Risk Factors located at Part I, Item 1A of our 2011 Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identify forward-looking statements. The forward-looking statements in this Form 10-Q include, without limitation, our intention to expand the marketing of our products internationally; anticipated declines in sales of strength products, anticipated sales increases of cardio-oriented products and the expectation that increased sales of cardio products will offset anticipated declines in sales of strength products; the belief that year over year improvement in Direct sales is the result of broadening appeal of our cardio products, the effectiveness of our media advertising strategy and improved customer credit approval rates; the expectation that approval rates of consumer credit financing applications will continue at current rates; and the expectation that certain operating expenses will increase due to continued investment in new product development. Forward-looking statements also include any statements related to our expectations regarding future business and financial performance or conditions, anticipated sales growth across markets, distribution channels and product categories, expenses and gross margins, profits or losses, losses from discontinued operation, settlements of warranty obligations, new product introductions, and financing and working capital requirements and resources. These forward-looking statements, and others we make from time-to-time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including the risks described in Part I, Item 1A, "Risk Factors," in our 2011 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

Available Information

We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, available free of charge on our website, www.nautilusinc.com. In addition, our Code of Business Conduct and Ethics, corporate governance policies, and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on our website. The information presented on our website is not part of this report.


Table of Contents

OVERVIEW

Nautilus is committed to providing innovative, quality solutions to help people achieve a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-quality cardiovascular and strength fitness products and related accessories for consumer home use, primarily in the United States and Canada. Our products are sold under some of the most recognized brand names in the fitness industry, including Nautilus®, Bowflex®, Schwinn®, Schwinn Fitness™ and Universal®.

We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products to consumers through television advertising, the Internet and catalogs. Our Retail business offers our products through a network of third-party retailers with stores and websites located in the United States and internationally.

Net sales for the third quarter of 2012 were $38.1 million, an increase of $0.7 million, or 1.7%, as compared to net sales of $37.4 million for the third quarter of 2011. Net sales of our Direct segment for the third quarter of 2012 rose $2.5 million, or 10.9%, compared to the 2011 third quarter, largely due to continued strong demand for our cardio products and an increase in consumer credit approval rates. Net sales of our Retail segment for the third quarter of 2012 declined by $2.3 million, or 16.9%, compared to the 2011 third quarter. We believe some Retail customers accelerated a portion of their purchases into the second quarter of 2012, compared to their typical buying patterns, in anticipation of an impending price increase.

Income from continuing operations was $1.2 million for the third quarter of 2012, or $0.04 per diluted share, compared to income of $0.3 million, or $0.01 per diluted share, for the third quarter of 2011.
Net income for the third quarter of 2012 was $1.0 million, compared to net loss of $0.1 million for the third quarter of 2011. Net income per diluted share was $0.03 for the third quarter of 2012, compared to breakeven for the third quarter of 2011.
The improvement in our results of continuing operations for the third quarter of 2012 was driven primarily by higher sales volume and gross margin in our Direct segment.


Table of Contents

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012
AND 2011

The following table compares selected financial information in our condensed
consolidated statements of operations for the three months ended September 30,
2012 and 2011 (unaudited and in thousands):
                                           Three months ended September 30,                   Change
                                               2012                 2011                 $                %
Net sales                               $        38,052       $        37,402     $        650             1.7  %
Cost of sales                                    19,511                21,605           (2,094 )          (9.7 )%
Gross profit                                     18,541                15,797            2,744            17.4  %
Operating expenses:
Selling and marketing                            12,434                11,517              917             8.0  %
General and administrative                        4,371                 4,134              237             5.7  %
Research and development                          1,038                   859              179            20.8  %
Total operating expenses                         17,843                16,510            1,333             8.1  %
Operating income (loss)                             698                  (713 )          1,411           n.m.
Other income (expense):
Interest income                                       3                     5               (2 )
Interest expense                                     (9 )                (116 )            107
Other                                              (101 )                 (65 )            (36 )
Total other expense, net                           (107 )                (176 )             69
Income (loss) from continuing
operations before
  income taxes                                      591                  (889 )          1,480           n.m.
Income tax benefit                                 (625 )              (1,170 )            545
Income from continuing operations                 1,216                   281              935           332.7  %
Loss from discontinued operation, net
of income taxes                                    (265 )                (373 )            108
Net income (loss)                       $           951       $           (92 )   $      1,043           n.m.


n.m. = not meaningful


Table of Contents

The following table compares the net sales, cost of sales and gross profits of our business segments for the three months ended September 30, 2012 and 2011 (unaudited and in thousands):

                  Three months ended September 30,                Change
                      2012                 2011              $              %
Net sales:
Direct         $        25,103       $        22,645     $  2,458          10.9  %
Retail                  11,388                13,710       (2,322 )       (16.9 )%
Royalty income           1,561                 1,047          514          49.1  %
               $        38,052       $        37,402     $    650           1.7  %
Cost of sales:
Direct         $        10,558       $        10,861     $   (303 )        (2.8 )%
Retail                   8,953                10,744       (1,791 )       (16.7 )%
Royalty income               -                     -            -
               $        19,511       $        21,605     $ (2,094 )        (9.7 )%
Gross profit:
Direct         $        14,545       $        11,784     $  2,761          23.4  %
Retail                   2,435                 2,966         (531 )       (17.9 )%
Royalty income           1,561                 1,047          514          49.1  %
               $        18,541       $        15,797     $  2,744          17.4  %
Gross margin:
Direct                    57.9 %                52.0 %        590   basis points

Retail 21.4 % 21.6 % (20 ) basis points

The following table compares the net sales of our major product lines within each business segment for the three months ended September 30, 2012 and 2011 (unaudited and in thousands):

                                      Three months ended September 30,               Change
                                           2012               2011              $              %
Direct net sales:
Cardio products(1)                   $       20,036      $     16,754      $    3,282         19.6  %
Strength products(2)                          5,067             5,891            (824 )      (14.0 )%
                                             25,103            22,645           2,458         10.9  %
Retail net sales:
Cardio products(1)                            5,819             9,041          (3,222 )      (35.6 )%
Strength products(2)                          5,569             4,669             900         19.3  %
                                             11,388            13,710          (2,322 )      (16.9 )%
Royalty income                                1,561             1,047             514         49.1  %
                                     $       38,052      $     37,402      $      650          1.7  %

(1) Cardio products include: TreadClimbers, treadmills, exercise bikes, ellipticals and CoreBody Reformer.
(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.

Direct

Net sales for our Direct business totaled $25.1 million for the third quarter of 2012, an increase of $2.5 million, or 10.9%, compared to $22.6 million for the third quarter of 2011. The comparative increase in Direct sales reflected a $3.3 million, or 19.6%, increase in sales of cardio products, driven by continued strong demand for our cardio products. We believe the year over year improvement in Direct sales underscores broadening appeal of our cardio products, the effectiveness of our media advertising strategy and improved consumer credit approval rates. The increase in Direct sales of cardio products was partially offset by a $0.8 million, or 14.0%, decline in Direct sales of strength products, including a significant decline in sales of rod-based home gyms. The decline in sales of rod-based home gyms was attributable in part to the cessation in early 2011 of U.S. television advertising for these products, as television ad spending on this mature product category was generating


Table of Contents

unsatisfactory returns. We currently market our rod-based home gyms through more cost efficient online media. We expect that increased sales of cardio products will continue to more than offset anticipated declines in sales of strength products through our Direct channel during the remainder of 2012.

Combined consumer credit approvals by our primary and secondary third-party U.S. financing providers increased to 31% in the third quarter of 2012 from 27% in the third quarter of 2011, primarily due to increased participation by our financing providers. Management expects combined consumer credit approval rates during the remainder of 2012 to remain at approximately the same level as the third quarter of 2012.

Cost of sales for our Direct business decreased slightly to $10.6 million for the third quarter of 2012, compared to $10.9 million for the third quarter of 2011, as lower product unit costs paid to our suppliers more than offset the effect of higher Direct sales volume in the third quarter of 2012.

Gross margin for our Direct business was 57.9% of net sales for the third quarter of 2012, an increase of 590 basis points compared to the third quarter of 2011. The increase in Direct gross margin was primarily attributable to a shift in sales toward higher margin cardio products in the third quarter of 2012, compared to the same period last year.

Retail

Net sales for our Retail business totaled $11.4 million for the third quarter of 2012, a decrease of $2.3 million, or 16.9%, compared to $13.7 million for the third quarter of 2011. As previously disclosed, in the first half of 2012 we took certain steps to stabilize declining gross margins in our Retail business. These steps included a price increase for the second half of 2012, which we believe resulted in some Retail customers accelerating a portion of their purchases into the second quarter of 2012, compared to their typical buying patterns.

Cost of sales for our Retail business decreased by $1.8 million, or 16.7%, to $9.0 million for the third quarter of 2012, compared to $10.7 million for the third quarter of 2011. The decrease in cost of sales was primarily attributable to lower Retail sales volume in the third quarter of 2012.

Gross margin for our Retail business was 21.4% of net sales for the third quarter of 2012, a decrease of 20 basis points compared to the third quarter of 2011, as the Retail price increase we implemented in the third quarter of 2012 was more than offset by less absorption of fixed costs due to lower sales volume, as compared to the third quarter of 2011.

Operating Expenses

Operating expenses increased by 8.1% to $17.8 million for the third quarter of 2012, compared to $16.5 million for the third quarter of 2011. The $1.3 million increase in operating expenses consisted of a $0.9 million increase in selling and marketing expense, a $0.2 million increase in research and development expense as we increased our investment in new product development resources and capabilities, and a $0.2 million increase in general and administrative expense.

Selling and Marketing

Selling and marketing expense was $12.4 million for the third quarter of 2012, an increase of $0.9 million, or 8.0%, compared to the third quarter of 2011. As a percent of sales, selling and marketing expense increased to 32.7% for the third quarter of 2012, compared to 30.8% for the third quarter of 2011. Media advertising expense of our Direct business is the largest component of selling and marketing expense. Media advertising expense was $6.6 million for the third quarter of 2012, an increase of $0.6 million, or 10.8%, compared to the third quarter of 2011.

General and Administrative

General and administrative expense was $4.4 million for the third quarter of 2012, an increase of $0.2 million, or 5.7%, compared to the third quarter of 2011, primarily due to spending for information systems improvements.


Table of Contents

Research and Development

Research and development expense was $1.0 million for the third quarter of 2012, an increase of $0.2 million, or 20.8%, compared to the third quarter of 2011. We expect research and development expense to increase for the full year 2012, compared to 2011, as we continue to invest in new product development.

Income Tax Benefit

Income tax benefit was $0.6 million and $1.2 million for the third quarters of 2012 and 2011, respectively. Income tax benefit for the third quarter of 2012 was primarily related to the expiration of statutes of limitation applicable to our liabilities for uncertain tax positions in certain jurisdictions. Income tax benefit for the third quarter of 2011 was attributable to our pre-tax loss for the period.

Discontinued Operation

We completed the disposal of our former Commercial business, reported as a discontinued operation, in April 2011. Loss from discontinued operation was $0.3 million for the third quarter of 2012, compared to loss of $0.4 million for the third quarter of 2011. In the third quarter of 2011, we settled certain outstanding contingencies related to completed asset disposal transactions and, accordingly, we decreased the amount of disposal loss we had previously estimated by $0.3 million, which reduced the amount of our loss from discontinued operation. Disposal loss adjustments in the third quarter of 2012 were not significant.

We may incur additional expenses in future periods in connection with the settlement of contingencies arising from and directly related to the former Commercial business prior to its disposal. We are currently in the process of liquidating the foreign subsidiaries formerly associated with the Commercial business. Upon the substantial completion of the liquidation, the amount of the accumulated translation adjustment component of equity associated with the entities will be removed as a separate component of equity and reported as a gain or loss of the discontinued operation.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND
2011

The following table compares selected financial information in our condensed
consolidated statements of operations for the nine months ended September 30,
2012 and 2011 (unaudited and in thousands):
                                            Nine months ended September 30,                  Change
                                               2012                 2011                 $               %
Net sales                               $       128,897       $       120,427     $      8,470           7.0  %
Cost of sales                                    69,283                68,000            1,283           1.9  %
Gross profit                                     59,614                52,427            7,187          13.7  %
Operating expenses:
Selling and marketing                            41,057                38,601            2,456           6.4  %
General and administrative                       12,672                13,103             (431 )        (3.3 )%
Research and development                          2,957                 2,336              621          26.6  %
Total operating expenses                         56,686                54,040            2,646           4.9  %
Operating income (loss)                           2,928                (1,613 )          4,541          n.m.
Other income (expense):
Interest income                                      16                    14                2
Interest expense                                     66                  (348 )            414
Other                                              (187 )                  17             (204 )
Total other expense, net                           (105 )                (317 )            212
Income (loss) from continuing
operations before
  income taxes                                    2,823                (1,930 )          4,753          n.m.
Income tax benefit                                 (554 )              (1,136 )            582
Income (loss) from continuing
operations                                        3,377                  (794 )          4,171          n.m.
Loss from discontinued operation, net
of
  income taxes                                      (68 )                (960 )            892
Net income (loss)                       $         3,309       $        (1,754 )   $      5,063          n.m.


n.m. = not meaningful


Table of Contents

The following table compares the net sales, cost of sales and gross profits of our business segments for the nine months ended September 30, 2012 and 2011 (unaudited and in thousands):

                   Nine months ended September 30,                Change
                      2012                 2011              $             %
Net sales:
Direct         $        83,544       $        75,354     $ 8,190         10.9  %
Retail                  42,057                42,090         (33 )       (0.1 )%
Royalty income           3,296                 2,983         313         10.5  %
               $       128,897       $       120,427     $ 8,470          7.0  %
Cost of sales:
Direct         $        36,312       $        35,317     $   995          2.8  %
Retail                  32,971                32,683         288          0.9  %
Royalty income               -                     -           -
               $        69,283       $        68,000     $ 1,283          1.9  %
Gross profit:
Direct         $        47,232       $        40,037     $ 7,195         18.0  %
Retail                   9,086                 9,407        (321 )       (3.4 )%
Royalty income           3,296                 2,983         313         10.5  %
               $        59,614       $        52,427     $ 7,187         13.7  %
Gross margin:
Direct                    56.5 %                53.1 %       340   basis points

Retail 21.6 % 22.3 % (70 ) basis points

The following table compares the net sales of our major product lines within each business segment for the nine months ended September 30, 2012 and 2011 (unaudited and in thousands):

                                      Nine months ended September 30,               Change
                                          2012              2011               $              %
Direct net sales:
Cardio products(1)                   $     65,978      $      52,017      $   13,961         26.8  %
Strength products(2)                       17,566             23,337          (5,771 )      (24.7 )%
                                           83,544             75,354           8,190         10.9  %
Retail net sales:
Cardio products(1)                         23,385             25,790          (2,405 )       (9.3 )%
Strength products(2)                       18,672             16,300           2,372         14.6  %
                                           42,057             42,090             (33 )       (0.1 )%
Royalty income                              3,296              2,983             313         10.5  %
                                     $    128,897      $     120,427      $    8,470          7.0  %

(1) Cardio products include: TreadClimbers, treadmills, exercise bikes, ellipticals and CoreBody Reformer.
(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.

Direct

Net sales for our Direct business totaled $83.5 million for the first nine months of 2012, an increase of $8.2 million, or 10.9%, compared to $75.4 million for the first nine months of 2011. The comparative increase in Direct sales reflected a $14.0 million, or 26.8%, increase in sales of cardio products. We believe the year over year improvement in Direct sales underscores broadening appeal of our cardio products, the effectiveness of our media advertising strategy and improved consumer credit approval rates. The increase in Direct sales of cardio products was partially offset by a $5.8 million, or 24.7%, decline in Direct sales of strength products, including a significant decline in sales of rod-based home gyms. The decline in sales of rod-based home gyms was attributable in part to the cessation in early 2011 of U.S. television advertising for these products, as television


Table of Contents

ad spending on this mature product category was generating unsatisfactory . . .

  Add NLS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NLS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.