Nautilus 2007 Annual Report Download - page 24

Table of Contents
advertising space. The decrease in sales of rod based home gyms was slightly offset by an increase in sales volume for our Bowflex Revolution
and the Bowflex TreadClimbers. Sales of these products increased as a result of increased advertising and the introduction during 2007 of the
Revo XP with an upright bench format.
In the retail channel , net sales declined 49.3% to $99.5 million as compared to $196.1 million last year. The decline in this channel was mainly
due to a shift in strategy as we are limiting the number of power-rod home gyms being offered into this channel to more clearly differentiate and
segment products by channel. The retail channel experienced a general softness in consumer spending during 2007 which has caused the
Company to provide a greater level of support to its customers in the form of discounts to allow our customers to sell through their existing
inventory.
In the commercial channel , net sales remained substantially unchanged at $73.6 million in 2007 compared to $73.0 million last year. Product
features of Nautilus branded bikes were refreshed 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. 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. Sales of the Company’s
commercial TreadClimber products were suspended in early 2008 as a result of durability issues. Sales will be suspended until the product can
be re-engineered and the durability and warranty issues can be corrected. We anticipate this will lead to a reduction in commercial channel
revenue during 2008 compared with 2007.
Royalty income represents the revenue the Company receives for licensing certain owned patents, trademarks and brands to other companies.
Royalty income increased to $3.1 million in 2007 compared to $1.2 million last year. 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.
International Equipment Business – The International Equipment Business markets and sells fitness products sold under the Nautilus,
Bowflex, Schwinn Fitness, and StairMaster, brand names through the commercial, retail and direct channels of distribution located outside of the
Americas. Net sales for the International Equipment Business improved 21.3% to $77.5 million as compared to $63.9 million last year. The
increase in net sales was due to expansion of our commercial sales channel in our four western European subsidiaries, as well as increased sales
through our distributors following the introduction of the TreadClimber in international sales markets. In addition, we established a subsidiary in
China during the third quarter of 2006 and added a direct division in Australia during 2007. 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. Sales of the Company’s commercial TreadClimber products were suspended in early 2008 as a result of
durability issues. Sales will be suspended until the product can be re-engineered and the durability issues can be corrected. We anticipate this to
cause a reduction in International Equipment Business revenue during 2008 compared with 2007.
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 last year. As
a percentage of consolidated net sales from continuing operations our gross profit margin decreased to 35.8% as compared to 43.2% last year.
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 commercial cardiovascular products. This change 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 channels.
During 2007, the Company reclassified royalty expense into cost of goods sold for all reporting periods. Royalties were previously reported as a
separate line item included in operating expenses.
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