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NAUTILUS, INC.
FORM 10-K
(Annual Report)
Filed 03/07/13 for the Period Ending 12/31/12
Address 17750 SE 6TH WAY
VANCOUVER, WA 98683
Telephone 360-859-2900
CIK 0001078207
Symbol NLS
SIC Code
3949 - Sporting and Athletic Goods, Not Elsewhere Classified
Industry Recreational Products
Sector Consumer Cyclical
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2013, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ... 10-K (Annual Report) Filed 03/07/13 for the Period Ending 12/31/12 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 17750 SE 6TH WAY VANCOUVER, WA 98683 360-859-2900 0001078207 NLS 3949 - Sporting and Athletic Goods, Not Elsewhere Classified Recreational Products Consumer Cyclical...

  • Page 2
    ... of principal executive offices, including zip code) (360) 859-2900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, no par value New York Stock Exchange...

  • Page 3
    ... The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last sales price ($2.67) as reported on the New York Stock Exchange as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2012...

  • Page 4
    Table of Contents The registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for its 2013 Annual Meeting of Shareholders.

  • Page 5
    Table of Contents NAUTILUS, INC. 2012 FORM 10-K ANNUAL REPORT PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Market for Registrant's Common Equity, Related Stockholder Matters and ...

  • Page 6
    ... include designing, developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories for consumer use, primarily in the United States and Canada. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus...

  • Page 7
    ... product lines by designing fitness equipment that meets or exceeds the high expectations of our customers; • utilizing our strengths in product engineering to reduce product costs; • continuing our investment in research and development activities aimed at acquiring or creating new technologies...

  • Page 8
    ... the technology for our own use. Our product design and engineering teams also invest considerable effort to improve product design and quality. As a consumer-driven company, we invest from time-to-time in qualitative and quantitative consumer research to help us assess new product concepts, optimal...

  • Page 9
    ... of Total Fitness ® -branded products; ICON Health & Fitness, marketer of ProForm ® - and NordicTrack ® -branded products; Johnson Health Tech, marketer of Horizon ® -branded products; Beach Body, marketer of the P90X ® fitness program; and American Telecast, marketer of Total Gym ® -branded...

  • Page 10
    ... position in the health and fitness equipment industry. We have followed a policy of filing applications for U.S. and non-U.S. patents on utility and design inventions that we deem valuable to our business. We maintain a portfolio of patents related to our Bowflex® TreadClimber® specialized cardio...

  • Page 11
    ...' businesses or specific products; • Changes in the market conditions for consumer fitness equipment; • Changes in macroeconomic factors; • Availability of consumer credit; • Timing and availability of products coming from our offshore contract manufacturing suppliers; • Seasonality of...

  • Page 12
    ..., the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of fitness equipment. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice...

  • Page 13
    ... the availability of consumer credit could limit the number of customers with the financial means to purchase our products. Higher interest rates could increase monthly payments for consumer products financed through one of our monthly payment plans or through other sources of consumer financing. In...

  • Page 14
    ...sourced products through port operations and customs in a timely manner could result in reduced sales, canceled sales orders and unanticipated inventory accumulation. Most of our imported products are subject to duties or tariffs that affect the cost and quantity of various types of goods imported...

  • Page 15
    ... of its merits, could divert management's attention from our operations and may result in substantial legal costs. We are subject to warranty claims for our products which could result in unexpected expense. Many of our products carry limited warranties for defects in quality and workmanship...

  • Page 16
    ...increased costs. Any of the aforementioned factors could have a material adverse affect on our operating results, financial position and cash flows. Our current primary enterprise resource planning system is highly customized to our business and we may experience difficulties as we transition to new...

  • Page 17
    ...compensation plans not approved by security holders Total 1,729,000 - 1,729,000 $ 6.92 - 6.92 3,844,000 - 3,844,000 For further information regarding our equity compensation plans, refer to Note 12, Stockholders' Equity, to our consolidated financial statements in Part II, Item 8 of this report...

  • Page 18
    ... Total Number of Value) of Shares (or Shares (or Units) Units) that May Yet Be Purchased as Part of Publicly Announced Purchased Under the Plans or Plans or Programs Programs Period October 1 to October 31, 2012 November 1 to November 30, 2012 December 1 to December 31, 2012 (1) Total Number...

  • Page 19
    ... 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: Nautilus...

  • Page 20
    ...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...

  • Page 21
    ... because management is required to make assumptions and to apply judgment to estimate the future realization of net deferred tax assets. If our financial results or other relevant facts change, thereby impacting the likelihood of realizing the tax benefit of an uncertain tax position, significant...

  • Page 22
    ... for the years ended December 31, 2012 and 2011 (in thousands): Year Ended December 31, 2012 2011 Change % Change Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating expenses Operating income Other...

  • Page 23
    ...$ $ $ Cardio products include treadclimbers, treadmills, exercise bikes, ellipticals and CoreBody Reformer. Strength products include home gyms, selectorized dumbbells, kettlebell weights and weight benches. Direct Net sales of our Direct business were $125.0 million in 2012 , an increase of $17...

  • Page 24
    ... expenses and $0.2 million in personnel costs. Research and Development Research and development expenses were $4.2 million in 2012 , an increase of $0.9 million , or 29.2% , compared to 2011 , as we increased our investment in new product development resources and capabilities. Other Income and...

  • Page 25
    ... from discontinued operation, net of income taxes, was $6.2 million in 2012 , compared to a loss of $1.1 million in 2011 . In the fourth quarter of 2012, we substantially completed the liquidation of our investment in foreign subsidiaries formerly associated with the Commercial business. As a result...

  • Page 26
    ... 31, 2011 and 2010 (in thousands): Year Ended December 31, 2011 2010 Change % Change Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating expenses Operating income (loss) Other income (expense): Interest...

  • Page 27
    ...$ $ Cardio products include treadclimbers, treadmills, exercise bikes and ellipticals and CoreBody Reformer. Strength products include home gyms, selectorized dumbbells, kettlebell weights and weight benches. Direct Net sales of our Direct business were $107.1 million in 2011, an increase of $10...

  • Page 28
    ... increase the media investment in our TreadClimber product line. Beginning in early 2011, we shifted the marketing of home gyms from television advertising to more cost efficient online media. Lower comparable Direct advertising expenses were offset in part by higher consumer credit financing costs...

  • Page 29
    ... in 2012 of $4.9 million consisted of $5.0 million used to repay our Increasing Rate Senior Discount Notes, partially offset by $0.1 million provided by the exercise of stock options. Cash used in financing activities in 2011 was less than $0.1 million for payment of bank financing costs. Financing...

  • Page 30
    ... is available through March 31, 2015 for working capital, standby letters of credit and general corporate purposes. Borrowing availability under the Loan Agreement is subject to our compliance with certain financial and operating covenants at the time borrowings are requested. Standby letters of...

  • Page 31
    ... outdoor activities, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization. NEW ACCOUNTING PRONOUNCEMENTS In the first quarter of 2012, we adopted Accounting...

  • Page 32
    Table of Contents Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2012 and 2011 Consolidated Statements of Operations for the years ended December 31,...

  • Page 33
    Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Nautilus, Inc. Vancouver, Washington We have audited the accompanying consolidated balance sheets of Nautilus, Inc. and subsidiaries (the "Company") as of December 31, 2012 and ...

  • Page 34
    ...Trade receivables, net of allowances of $93 in 2012 and $300 in 2011 Inventories Prepaids and other current assets Income taxes receivable Short-term notes receivable Deferred income tax assets Total current assets Property, plant and equipment, net Goodwill Other intangible assets, net Other assets...

  • Page 35
    Table of Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 2012 2011 2010 Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating ...

  • Page 36
    ... of Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Year Ended December 31, 2012 2011 2010 Net income (loss) Other comprehensive income (loss), net of tax: Foreign currency translation, net of income tax (benefit) expense of ($9), $8 and ($15) Total...

  • Page 37
    ...Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Accumulated Other Comprehensive Income Common Stock Shares Amount Retained Earnings Total...Common stock issued under equity compensation plan Balances at December 31, 2012 30,744 - - - 30...financial statements. 32

  • Page 38
    ... payables Accrued liabilities, including warranty obligations Net cash provided by (used in) operating activities Cash flows from investing activities: Proceeds from sale of discontinued operation Proceeds from other asset sales Purchases of software and equipment Net decrease in restricted cash...

  • Page 39

  • Page 40
    ...Contents NAUTILUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES Organization and Business - Nautilus is a leading designer, developer and marketer of consumer fitness products sold under well-known brand names such as Nautilus , Bowflex , Schwinn and Universal...

  • Page 41
    ... from revenue. Shipping and handling fees billed to customers are recorded gross and included in both revenue and cost of sales. Many direct business customers finance their purchases through a third-party credit provider, for which Nautilus pays a commission or financing fee to the credit provider...

  • Page 42
    ...of Contents replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods range from sixty days to, in limited circumstances, the lifetime of certain product components. The Company records a liability at the time of...

  • Page 43
    ... transactions - In September 2010 , the Company entered into an agreement to borrow $5.0 million from certain entities under common control of Sherborne Investors GP, LLC and its affiliates (collectively "Sherborne"). At the time, Sherborne was the Company's largest shareholder and was controlled by...

  • Page 44
    ... in light of continuing operating losses in its Commercial business and in order to focus exclusively on managing its Direct and Retail consumer businesses, the Company committed to a plan for the complete divestiture of its Commercial business, which qualified for held-for-sale accounting treatment...

  • Page 45
    ... of uncollectible trade receivables of the Company's former Commercial business. (4) INVENTORIES Inventories, net, as of December 31, 2012 and 2011 consisted of the following (in thousands): December 31, 2012 2011 Finished goods Parts and components Total inventories $ $ 17,148 1,639 18,787...

  • Page 46
    ... Total cost Accumulated depreciation Total property, plant and equipment, net 1 5 to 20 3 to 5 3 to 5 5 N/A $ $ 2,863 36,107 5,359 870 2,080 47,279 (41,141) 6,138 $ $ 2,557 36,872 4,759 666 1,937 46,791 (42,386) 4,405 Work in progress includes internal use software development and production...

  • Page 47
    ... 31, 2012 2011 Exit costs of discontinued operation Payroll and benefits Royalties Legal and professional fees Other Total accrued liabilities (9) PRODUCT WARRANTIES $ $ 340 3,327 1,063 834 2,607 8,171 $ $ 796 2,389 821 825 2,387 7,218 Changes in the Company's product warranty liability in...

  • Page 48
    ...to the Purchase Agreement, the Company issued to the Sherborne Purchasers $6,096,996 in aggregate principal amount at maturity of Increasing Rate Senior Discount Notes due December 31, 2012 (the "Notes"). The Notes had an original principal amount totaling $5,000,000 and an original maturity date of...

  • Page 49
    ... Allowance for doubtful accounts Inventory valuation Capitalized indirect inventory costs Stock-based compensation expense Net operating loss carryforward Basis difference on assets held-for-sale Capital loss carryforward Basis difference on long-lived assets Other Total deferred income tax...

  • Page 50
    ... The timing and manner in which the Company is permitted to utilize its net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change . As of December 31, 2012 , the Company...

  • Page 51
    ... Company's U.S. federal income tax returns for 2009 through 2012 are open to review by the U.S. Internal Revenue Service. The Company's state income tax returns for 2006 through 2012 are open to review, depending on the respective statute of limitation in each state. In addition, the Company files...

  • Page 52
    ...31, 2012 , 2011 and 2010 was as follows (in thousands, except exercise price and contractual life): WeightedAverage Remaining Contractual Life (in years) Total Shares WeightedAverage Exercise Price Aggregate Intrinsic Value ($000s) Options outstanding, January 1, 2010 Granted Forfeited, canceled...

  • Page 53
    ... service period based on the number of performance stock units ultimately expected to vest. In February and August 2012, the Company granted performance stock unit awards to certain of the Company's executive officers. The performance stock unit awards vest based on achievement of certain operating...

  • Page 54
    ... or loss used by the Company's chief operating decision maker and is defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that...

  • Page 55
    ... AND CONTINGENCIES Operating Leases The Company leases property and equipment under non-cancelable operating leases which, in the aggregate, extend through 2019. Many of these leases contain renewal options and provide for rent escalations and payment of real estate taxes, maintenance, insurance and...

  • Page 56
    ... 31, 2012 , the Company's warranty liability included $0.4 million for estimated future warranty costs of its discontinued Commercial operation. Legal Matters The Company is party to various legal proceedings arising from normal course business activities. In addition, the Company's tax filings are...

  • Page 57
    ... of Contents (16) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited) The following table summarizes the Company's unaudited quarterly financial data for 2012 and 2011 (in thousands, except per share amounts): Quarter Ended March 31 June 30 September 30 December 31 Total 2012...

  • Page 58
    Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Disclosure Controls and Procedures As of December 31, 2012 , we conducted an evaluation...

  • Page 59
    ... financial reporting. Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Nautilus, Inc. Vancouver, Washington We have audited the internal control over financial reporting of Nautilus, Inc. and subsidiaries (the "Company") as of December 31, 2012...

  • Page 60
    ...be included in an amendment to this Annual Report on Form 10-K filed by April 30, 2013. Item 14. Principal Accounting Fees and Services The information required by this item is included under the caption Appointment of Registered Independent Public Accounting Firm for 2012 in our Proxy Statement. If...

  • Page 61
    Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements See the Consolidated Financial Statements in Part II, Item 8. (a)(2) Financial Statement Schedule There are no financial statement schedules filed as part of this Annual Report on Form 10-K, ...

  • Page 62
    ... Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) * M. Carl Johnson, III Chairman * Ronald P. Badie Director * Richard A. Horn Director * Anne G. Saunders Director * Marvin G. Siegert Director *By: /s/ Wayne M. Bolio Wayne M. Bolio Attorney-In-Fact...

  • Page 63
    ...10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 15, 2004. Supply Agreement dated as of May 2, 2008 by and among Nautilus, Inc., Land America Health and Fitness Co., Ltd. and Treuriver Investments Co. Limited - Incorporated by...

  • Page 64
    ... Agreement dated as of May 5, 2008 by and among Nautilus, Inc. Land America Health and Fitness Co., Ltd., Treuriver Investments Co. Limited, Michael C. Bruno and Yang Lin Qing - Incorporated by reference to Exhibit 10.5 of the Company's Form 10-Q for the three months ended March 31, 2008 as filed...

  • Page 65
    ...as filed with the Commission on November 9, 2010. First Amendment dated November 6, 2010 to Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between the Company and GE Money Bank. Merchant Agreement dated December 15, 2010, between the Company and Hy Cite Corporation...

  • Page 66
    10.32 Office Lease Agreement dated as of July 25, 2011, by and between Nautilus, Inc. and Columbia Tech Center, L.L.C. Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K as filed with the Commission on July 29, 2011. Executive Employment Agreement dated as of May ...

  • Page 67
    ...Section 906 of the Sarbanes-Oxley Act of 2002. The following financial statements from Nautilus, Inc.'s annual report on Form 10-K for the fiscal year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of...

  • Page 68
    ... corporation Nautilus International Holdings, S.A., a Swiss corporation Nautilus International, S.A., a Swiss corporation Nautilus Switzerland, S.A., a Swiss corporation Nautilus International GmbH, a German corporation Nautilus Fitness UK Ltd., a United Kingdom corporation Nautilus Fitness Canada...

  • Page 69
    ... to the consolidated financial statements of Nautilus, Inc., and the effectiveness of Nautilus, Inc.'s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Nautilus, Inc. for the year ended December 31, 2012 . /s/ Deloitte & Touche LLP Portland, Oregon March...

  • Page 70
    ... weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other...

  • Page 71

  • Page 72
    ... weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other...

  • Page 73

  • Page 74
    ... of Title 18, United States Code), the undersigned officer of Nautilus, Inc., a Washington corporation (the "Company"), does hereby certify that: To my knowledge, the Annual Report on Form 10-K for the year ended December 31, 2012 (the "Form 10-K") of the Company fully complies with the requirements...

  • Page 75
    ... of Title 18, United States Code), the undersigned officer of Nautilus, Inc., a Washington corporation (the "Company"), does hereby certify that: To my knowledge, the Annual Report on Form 10-K for the year ended December 31, 2012 (the "Form 10-K") of the Company fully complies with the requirements...