Nautilus 2006 Annual Report Download - page 26

Table of Contents
Royalties – Royalty expense increased 4.5% to $5.6 million as compared to $5.4 million last year. We have several agreements under
which we are obligated to pay royalty fees on certain product sales. The increase in our royalty expense is primarily a result of an increase in
sales volumes related to our Bowflex Revolution and TreadClimber, partially offset by the purchase of the Rodgers patent portfolio whereby
certain product sales no longer have associated royalties applicable to those patents.
Consolidated Other Income (Expense), net
Net interest expense increased to $2.0 million in 2006 compared to net interest income of $1.2 million in 2005. The increase in expense is
due to the increase in the average balance of our short-term borrowings that were outstanding during 2006 as compared to the Company being
in a cash investment position during most of last year.
Net other income increased to $1.6 million in 2006 from $0.3 million in 2005 primarily due to foreign currency gains realized by the
Company in 2006.
Consolidated Income Tax Expense
The provision for income tax expense decreased by 5.9% to $11.6 million as compared to $12.3 million last year. Our effective tax rate in
2006 was 28.5% compared to 34.8% in 2005. The decrease in the effective tax rate is primarily due to a $3.8 million reduction of our tax
contingency reserves resulting from our determination that certain statutory periods for the assessment of additional state income tax are now
closed.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004
Consolidated Net Sales
Consolidated net sales were $631.3 million for 2005 compared to $523.8 million for 2004, an increase of $107.5 million or 20.5%. The
acquisitions of Pearl Izumi and Belko Canada, our Canadian distributor, in 2005 represented $45.6 million of this increase in net sales.
Fitness Equipment Business – Net sales from the fitness equipment business were $554.2 million for 2005 compared to $479.9 million in
2004. Specific channel net sales information is detailed below:
International Equipment Business – Net sales from the international equipment business were $53.1 million in 2005 compared to $43.9
million in 2004, an increase of $9.2 million or 20.9%. The increase in net sales was attributed to continued formation of new commercial and
retail relationships in Australia, Germany, New Zealand, and the United Kingdom.
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• In our direct channel
, net sales improved by 10.3% to $293.9 million in 2005 compared to $266.5 million in 2004. The increase in
direct channel sales was due to increased sales volumes of Bowflex home gyms, TreadClimber products and SelectTech dumbbells.
In addition, net sales increased approximately $12.4 million as the result of a price increase in certain TreadClimber and Bowflex
home gym products that took place during 2005.
• In our commercial channel , net sales improved 8.2% to $72.9 million in 2005 compared to $67.4 million in 2004. The increase is
primarily attributed to the introduction of the commercial grade TreadClimber during the second quarter of 2005, in addition to
continued sales of the Nautilus Commercial Series treadmills that started shipping during the first quarter of 2005.
• In our retail channel , net sales improved by 33.3% to $187.4 million in 2005 compared to $140.6 million in 2004. The increase in
net sales is due primarily to increased unit sales from new products introduced into the specialty channel during 2005, specifically
the Bowflex SelectTech, TreadClimber and home-gym products along with new products being introduced into the retail channel,
specifically SelectTech, TreadClimber and new Bowflex home-
gym products. The increase was also due to gaining additional retail
customers as well as expanding the number of products offered at existing customer locations.