Nautilus 2011 Annual Report Download - page 12

Table of Contents
Our revenues could decline due to changes in credit markets and decisions made by credit providers.
Historically, a significant portion of our Direct sales have been financed for our customers under various programs offered by third- party
consumer credit financing sources. Reductions in consumer lending and 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 the past, we have partnered with financial service
companies to assist our customers in obtaining financing to purchase our products. Our present agreements with our third party consumer credit
financing providers enable certain customers to obtain financing if they qualify for the provider's private label revolving credit card. We cannot
be assured that our third party financing providers will continue to provide consumers with access to credit or that credit limits under such
arrangements will not be reduced. Such restrictions or reductions in the availability of consumer credit could have a material adverse impact on
our results of operations, financial position and cash flows.
If our contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose market
share and revenues, and our reputation may be harmed.
We have outsourced the production of all of our products to third-party manufacturers. We rely on our contract manufacturers to procure
components and provide spare parts in support of our warranty and customer service obligations. We generally commit the manufacturing of
each product to a single contract manufacturer.
Our reliance on contract manufacturers exposes us to the following risks over which we may have limited control:
Substantially all of our contract manufacturers are located in Asia, primarily China, and may be subject to disruption by natural disasters, as well
as political, social or economic instability. The temporary or permanent loss of the services of any of our primary contract manufacturers could
cause a significant disruption in our product supply chain and operations and delays in product shipments.
Our third-party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of
individual purchase orders. There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary,
establish future arrangements with other third-party manufacturers on commercially reasonable terms. Further, we cannot assure that their
manufacturing and quality control processes will be maintained at a level sufficient to meet our inventory needs or prevent the inadvertent sale of
substandard products. While we believe that products manufactured by our current third-party manufacturers could generally be procured from
alternative sources, temporary or permanent loss of services from a significant manufacturer could cause disruption in our supply chain and
operations.
Our inventory purchases are subject to long lead times, which could negatively impact our sales, cash flows and liquidity.
All of our products are produced by third-party manufacturers, substantially all of which are located in Asia, primarily China. Lead times for
inventory purchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three
months, of which transit time represents three-to-four weeks. The length of our lead times requires us to place advance manufacturing orders
based on management forecasts of future demand for our products. Due to the length of our lead times, our sales and cash flows may be
negatively impacted if we do not have sufficient inventory on hand to meet customer demand for such items. In addition, our liquidity and cash
flows may be negatively affected, and inventory obsolescence may increase, if the quantity of products we order exceeds customer demand for
such items.
A delay in getting non-U.S.-sourced products through customs in a timely manner could result in reduced sales, canceled sales orders
and unanticipated inventory accumulation.
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Unexpected increases in manufacturing and repair costs;
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Interruptions in shipments if our contract manufacturer is unable to complete production;
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Inability to completely control the quality of finished products;
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Inability to completely control delivery schedules;
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Changes in our contract manufacturer's business models or operations;
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Potential increases in our negotiated product costs as a result of fluctuations in currency exchange rates;
• Impact of the global market and economic conditions on the financial stability of our contract manufacturers and their ability
to operate without requesting earlier payment terms or letters of credit;
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Potential lack of adequate capacity to manufacture all or a part of the products we require; and
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Potential unauthorized reproduction or counterfeiting of our products.