Nautilus 2006 Annual Report Download - page 25

Table of Contents
shift in our sales product mix both between and within product categories and among our selling channels. This was partially offset by a
reduction in our warranty costs due to an overall improvement in quality of our products and through a recovery of a portion of such costs from
our suppliers. In addition, as a result of improving our operating efficiencies and sustained engineering efforts we have continued to focus on
reducing the cost of our sourced products from our Asian manufacturers.
Fitness Equipment Business – Gross profit for our fitness equipment business improved slightly to $254.8 million as compared to $254.0
million last year. As a percentage of net sales, the gross profit margin improved slightly to 46.0% in 2006 compared to 45.8% last year. Factors
affecting gross profit included a reduction of our warranty costs due to an overall improvement in quality, and through the recovery of a portion
of warranty costs from our Asian manufacturers. In addition, we realized reductions of the actual cost of our sourced products through various
sustained engineering efforts and continued vendor contract negotiations as we seek strong partnerships with fewer vendors. These cost savings
were offset by an increase in freight costs and changes in both the sales channel and product sales mix within the product categories.
International Equipment Business – Gross profit for our international equipment business was $16.5 million in 2006 compared to $13.8
million in 2005, an increase of $2.7 million or 19.6%. As a percentage of net sales, the gross profit margin remained unchanged at 25.9% in
2006 compared to that in 2005. The increased gross profit was attributed to efficiency gains in service and logistics performance along with an
overall increase in sales volume. The increase was offset by downward pressure on selling prices exerted by strong competition, increased
freight costs, and unfavorable sales mix resulting in increased sales volumes from the lower margin retail sales channel.
Fitness Apparel Business – Gross profit for the Fitness Apparel Business improved by 147.7% to $27.3 million as compared to $11.0
million last year. However, as noted above, Pearl Izumi was acquired in July 2005 and the comparable gross profit for the six months ended
December 31, 2006 was $12.8 million as compared to $11.0 million during the same period of 2005, an increase of $1.9 million or 16.3%. As a
percentage of net sales, the gross profit margin for this time period decreased to 43.4% in 2006 compared to 45.9% last year. The decrease in
the profit margin is mainly due to the sales mix of products offered and a larger portion of sales coming from the international direct and
distributor markets which have historically lower profit margins.
Consolidated Operating Expenses
Selling and Marketing – Selling and marketing (“S&M”) expenses increased by 3.9% to $186.6 as compared to $179.7 million last year.
As a percentage of consolidated net sales our S&M expenses decreased to 27.4% in 2006 compared to 28.5% last year. The increase in total
S&M expenses is primarily due to inclusion of operating results related to the acquisition of Pearl Izumi last year resulting in additional
expense of $4.5 million, an increase in consumer financing fees due to stronger financing utilization by our direct channel consumers, an
increase in direct marketing costs and additional share-based compensation expense of approximately $0.4 million as a result of adoption of
SFAS 123(R), with the remainder resulting from an increase in commission costs of approximately $1.8 million due to overall increased sales
volume.
General and Administrative – General and administrative (“G&A”) expenses increased by 10.8% to $54.1 million as compared to $48.8
million last year. As a percentage of consolidated net sales our G&A expenses were 8.0% in 2006 compared to 7.7% last year. The increase is
mainly due to inclusion of G&A expenses of our acquired businesses in 2005 of approximately $4.3 million, a full year of depreciation and rent
expense of approximately $2.2 million for our new corporate headquarters which we occupied late in the third quarter of 2005, and $1.8 million
of share-based compensation expense resulting from the adoption of SFAS 123(R), offset by a decrease of $1.8 million in legal costs.
Research and Development – Research and development (“R&D”) expenses remained unchanged at $11.2 million.
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