Nautilus 2008 Annual Report Download - page 36

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Table of Contents
of increased advertising and the introduction during 2007 of the Revo XP with an upright bench format. The direct Australia division added $1.3
million in sales during 2007. The direct Australia division was closed in early 2008, and the market will be supported through the traditional
distributor model business going forward.
In the retail business , net sales declined 45.0% to $114.7 million in 2007 as compared to $208.6 million in 2006. The decline in this business
was mainly due to a shift in strategy as we limited the number of power-rod home gyms being offered into this market to more clearly
differentiate and segment products by business segment. During 2007 the Company provided a greater level of support to its customers in the
form of discounts to allow customers to sell through their inventory.
In the commercial business , net sales increased 8.4% to $134.6 million in 2007 compared to $124.2 million in 2006. Features on Nautilus
branded indoor bikes were updated during 2007 which led to significant increases in sales volumes for those products. We also experienced
increased sales of the TreadClimber product and StairMaster stepping products. In addition, we expanded our commercial sales business in our
four western European subsidiaries, and increased sales through our international distributors following the introduction of the TreadClimber and
the establishment of a subsidiary in China during the third quarter of 2006. This was offset by decreased sales of Schwinn branded indoor bikes,
other Nautilus branded cardio equipment and a slight decline in sales of the strength product lines as a result of delays in production and delivery
of the Company’s newly launched Nautilus One and certain free weight product lines.
Royalty income increased to $3.1 million in 2007 compared to $1.5 million in 2006. The increase was a result of acquiring a large patent group
related to elliptical machines during 2006 on which the Company had previously paid royalties. The acquisition of the patent group allowed the
Company to begin collecting royalty income from other parties who use the licensed technology.
Gross Profit
As a result of our decline in sales, our total gross profit declined by 32.7% to $179.4 million in 2007 as compared to $266.4 million in 2006. As a
percentage of consolidated net sales from continuing operations our gross profit margin decreased to 35.8% as compared to 43.2% in 2006. The
decrease in gross profit margin was due primarily to charges incurred during 2007 of $16.9 million resulting from warranty and inventory
reserves related to the commercial TreadClimber and a commercial elliptical product. These changes impacted margin by 3.4 percentage points.
Gross profit margin also decreased as a result of the continued shift in our sales product mix both between and within product categories and
among our selling business segments and additional promotions in the direct and retail channels. Most notable was the reduction of sales in
power-rod home gyms sold in both the direct and retail channels that historically provided higher margins than most of our other finished goods.
Operating Expenses
Selling and Marketing
Selling and marketing expenses increased by $4.5 million or 2.6% to $179.8 million in 2007 as compared to $175.3 million in 2006. As a
percentage of consolidated net sales our selling and marketing expenses increased to 35.9% in 2007 compared to 28.4% in 2006. The increase in
selling and marketing expenses is related to incremental bad debt reserves of $4.8 million primarily resulting from the bankruptcy filing by a
former customer. In addition, selling and marketing expenses increased in support of growing revenue, and as a result of costs related to
expansion into new markets including China and Australia. These increases were offset by a sales volume decline in the direct business resulting
in lower marketing expenses and financing fees.
General and Administrative
General and administrative expenses increased by $2.5 million or 5.3% to $49.4 million in 2007 as compared to $46.9 million in 2006. General
and administrative expenses in 2007 included $2.7 million in expenses related to a shareholder action seeking representation on our Board of
Directors.
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