Nautilus 2008 Annual Report Download - page 26

Table of Contents
OVERVIEW
Substantially all of our revenues are generated from product sales. Our net sales for the year ended December 31, 2008, totaled $411.2 million, a
decline of 18.0% compared to the $501.5 million reported for the year ended December 31, 2007. The decline in net sales is primarily due to a
weak consumer environment and tight credit market.
Gross profit margins increased, to 36.6% in 2008, compared to 35.8% in 2007. We have implemented a number of cost savings initiatives during
2008 and implemented sales price increases in all segments. The impact of these efforts were substantially offset by an 18.0% decline in total
sales and a change in sales mix resulting in a 25.4% decline in direct segment revenue. Gross profit for 2008 was reduced by charges of $6.8
million for discontinued inventory, $1.4 million for severance and $2.7 million for costs incurred with closing the Tulsa manufacturing facility.
Gross profit for 2007 was reduced by the impact of $16.9 million in discontinued inventory and warranty costs related to specialized cardio
product sold in the commercial segment that was not meeting durability requirements and led to curtailment of shipments in most countries. The
direct segment is generally our highest margin business.
Our operating expenses have declined due to our aforementioned restructuring efforts and profitability initiatives implemented in late 2007 and
early 2008. Such initiatives included reorganizing and reducing our workforce, combining our U.S. and Canadian call center, closing the direct
business in Australia, and the termination of a number of marketing arrangements. Operating expenses for 2008 totaled $234.1 million,
compared to $248.0 million reported in 2007. Operating expenses for 2008 included; $29.8 million in goodwill impairment charges and $1.1
million in other intangibles impairment charges; $14.0 million in restructuring charges; $2.8 million in write-downs associated with assets
owned by a subsidiary in China; $2.5 million in bad debt expense; $1.1 million write down of previously deferred financing costs as a result of
amending our loan agreement; $2.0 million in legal and contract settlement costs; $0.6 million in reimbursement obligations for costs incurred
by Sherborne Investors in a shareholder action to obtain representation on our Board of Directors. Operating expenses for 2007 included an
$18.3 million benefit associated with a favorable legal settlement with ICON Health and Fitness; $26.8 million in restructuring charges; a $4.8
million bad debt expense due to the bankruptcy of a customer; and $2.7 million in costs incurred by the Company in countering the action of
Sherborne Investors. The reduction in operating expenses, compared to the prior year, is a result of management’s efforts to better align
operating expenses with current and anticipated revenue levels through significant reductions in media expenses, personnel costs and other
discretionary expenses. We will continue to focus on reducing our operating expenses in the coming months as we move forward with our
turnaround strategy.
In addition, we anticipate recognizing additional restructuring expenses of approximately $12.5 million through the second quarter of 2009
related primarily to severance costs, real estate lease terminations and write-off of leasehold improvements.
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that
affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the
consolidated financial statements. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate
requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably
could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the
presentation of our financial condition, changes in financial condition or results of operations. Our critical accounting policies and estimates are
discussed below.
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