Nautilus 2005 Annual Report Download - page 34

Table of Contents
Net Income
For the reasons discussed above, net income declined to $23.0 million in 2005 from $30.0 million in 2004, a decrease of 23.3%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
Net Sales
Net sales were $523.8 million for 2004 compared to $498.8 million for 2003, an increase of $25.0 million or 5.0%. The increase in net
sales was due to several factors, including product innovation in the Bowflex home-gym line, strong demand for the Bowflex TreadClimber
cardio products, and the introduction of Bowflex SelectTech dumbbells, coupled with more effective advertising placement and an increase in
consumer financing approval rates. Additionally, sales of Bowflex branded products within the retail sales channel represented approximately
$7.1 million of the overall increase in sales and our international operations that handle sales outside of the America’s performed strongly,
increasing net sales by $7.6 million to $43.9 million in 2004 from $36.3 million in 2003.
Gross Profit
Gross profit decreased by $7.0 million to $244.8 million in 2004 as compared to $251.8 million in 2003, or a 2.8% decline. The gross
profit margin decreased to 46.7% in 2004 from 50.5% in 2003. The decline was primarily due to increased promotions to drive sales growth, a
change in direct product sales mix from the higher margin Bowflex home gym products to the TreadClimber and SelectTech products, and to
increased shipping costs due to the combination of carrier rate increase and certain sales promotions. Additionally, the decline in gross profit
margin can be attributed to the expansion of sales into large volume, lower margin retail customers consistent with our diversification strategy.
Operating Expenses
Selling and Marketing
Selling and marketing expenses were $156.6 million for 2004 compared to $149.2 million for 2003, an increase of $7.3 million or 4.9%.
As a percentage of net sales, overall selling and marketing expenses remained consistent in 2004 as compared to 2003 at 29.9%. This was
mainly due to strong consumer demand for our Bowflex products and higher consumer financing approval rates, which allowed the Company
to reduce the direct segment advertising expense by 6.3% while achieving the same sales volume. These savings were offset by an increase in
consumer financing fees due to stronger financing utilization by our direct consumers of 63.8% in 2004 compared to 43.0% in 2003.
General and Administrative
General and administrative expenses were $31.0 million for 2004 compared to $37.1 million for 2003, a decrease of $6.1 million or
16.3%. As a percentage of net sales, general and administrative expenses decreased to 5.9% in 2004 as compared to 7.4% in 2003. This
decrease was due primarily to reductions in 2004 wage and consulting costs associated with the implementation of our information systems,
which was completed towards the end of 2003, as well as to a $1.8 million one-time gain on the sale of property incurred during the third
quarter of 2004 which offset general and administrative expenses. Legal related costs also decreased by $1.5 million from 2003 to 2004 due
mostly to developments in the ICON legal matters.
Research and Development
Research and development increased $1.1 million to $6.8 million in 2004 from $5.7 million in 2003. The increase in research and
development was due primarily to additional employees added to support the ongoing innovation initiative within our Company.
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