Nautilus 2005 Annual Report Download - page 35

Table of Contents
Royalties
Royalty expense decreased 25.3% to $6.0 million in 2004 as compared to $8.0 million in 2003. We have several agreements under which
we are obligated to pay royalty fees on certain products. The decrease in our royalty expense was primarily attributable to the April 2004
expiration of a royalty agreement related to the Bowflex patents. This decrease in Bowflex related royalties was partially offset by royalty
expense associated with our TreadClimber and elliptical product sales.
Effective Income Tax Rates
The effective income tax rate decreased from 36.0% in 2003 to 34.3% in 2004. The decrease in the 2004 effective income tax rate is
primarily due to tax reserve adjustments as a result of favorable resolutions of certain federal and state income tax issues, tax advantaged
investment income and research and development credits.
Net Income
For the reasons discussed above, net income declined to $30.0 million in 2004 from $34.4 million in 2003, a decrease of 12.8%. Net
income in the second half of the year actually increased by 35% compared to the prior year as we began experiencing the growth benefits of
our turnaround strategy.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the quarters in the periods ended December 31, 2005 and 2004. The
information for each of these quarters is unaudited and has been prepared on the same basis as the audited financial statements appearing
elsewhere in this Annual Report on Form 10-K. In the opinion of management, all necessary adjustments have been included to present fairly
the unaudited quarterly results when read together with our audited financial statements and the related notes. Certain amounts from previous
periods have been reclassified to conform to the 2005 full-year presentation with no effect on previously reported consolidated net income or
stockholders’
equity. These operating results are not necessarily indicative of the results of any future period. Due to diversification towards the
commercial and retail sales channels, we expect heightened seasonality in our fitness equipment business. We expect sales in the second
quarter to be weakest while the fourth quarter should be our strongest. We expect the third quarter will generally be stronger than the first
quarter. For the apparel business, the first quarter tends to be the strongest, followed by the third and second quarters, respectively. We expect
apparel sales to be weakest in the fourth quarter.
While the first three quarters of 2005 surpassed prior year revenue and profit, we fell short of our target in the fourth quarter. We
managed to grow net sales in 2005, but experienced an earnings decline of 23.3% to $0.68 per diluted share. Interest in our products and
innovation remained strong, but we did not execute operationally as well as we should have. We uncovered gaps in our go-to-market process
for new products, with many delays due to manufacturing and distribution issues, resulting in higher than anticipated costs.
34
QUARTER ENDED
In Thousands (except per share)
March 31 June 30
September 30
December 31
Total
Fiscal 2005:
Net sales
$
156,388
$
129,581
$
163,308
$
182,033
$
631,310
Gross profit
76,773
58,054
72,286
71,701
278,814
Operating income
14,138
3,802
12,461
3,403
33,804
Net income
9,429
3,330
8,271
1,970
23,000
Earnings per share:
Basic
0.28
0.10
0.25
0.06
0.69
Diluted
0.28
0.10
0.24
0.06
0.68
Fiscal 2004:
Net sales
$
130,896
$
100,179
$
123,182
$
169,580
$
523,837
Gross profit
56,856
49,321
58,605
80,012
244,794
Operating income
9,819
2,721
11,278
20,644
44,462
Net income
6,437
1,935
7,455
14,158
29,985
Earnings per share:
Basic
0.20
0.06
0.23
0.43
0.92
Diluted
0.19
0.06
0.22
0.42
0.90