Nautilus 2012 Annual Report Download - page 24

Table of Contents
Gross margin of our Retail business was 22.5% in 2012 , a decrease of 90 basis points compared to 2011 , as the Retail price increase we
implemented in the third quarter of 2012 was more than offset by less absorption of fixed supply chain costs due to lower sales volume,
compared to 2011.
Operating Expenses
Operating expenses were $80.4 million in 2012 , an increase of $5.6 million , or 7.5% , compared to operating expenses of $74.9 million in
2011 . As a percent of revenue, operating expenses remained unchanged at 41.5% of net sales. The increase in operating expenses was largely
due to an increase of $4.1 million in selling and marketing expense and a $0.9 million
increase in research and development expense. In addition,
general and administrative expenses increased by $0.5 million in 2012 , compared to 2011 .
Selling and Marketing
Selling and marketing expenses were $58.6 million in 2012 , an increase of $4.1 million , or 7.6% , compared to 2011 , mainly due to higher
advertising expense of our Direct business. Advertising expense of our Direct business, a component of selling and marketing expenses, was
$30.9 million in 2012 , an increase of $2.3 million, or 8.0%, compared to 2011 , reflecting management's effort to increase Direct revenues in
2012 by increasing advertising levels of existing products and promoting new products.
General and Administrative
General and administrative expenses were $17.7 million in 2012 , an increase of $0.5 million , or 3.1% , compared to 2011 , primarily due to
increases in information technology and legal expenses totaling $1.0 million, partially offset by reductions of $0.3 million in depreciation and
amortization expenses and $0.2 million in personnel costs.
Research and Development
Research and development expenses were $4.2 million in 2012 , an increase of $0.9 million , or 29.2% , compared to 2011 , as we increased our
investment in new product development resources and capabilities.
Other Income and Expense
Interest Expense
Negative interest expense of
$0.1 million in 2012
arose from the prepayment in March 2012 of our Increasing Rate Senior Discount Notes. Early
repayment of the notes resulted in a lower average effective interest rate over the term of the notes than would have applied if the notes had been
held to maturity. In periods preceding the repayment date, we used the average effective interest rate as if the notes were held to maturity in
determining the amount of interest expense incurred. Interest expense was $0.5 million in 2011 . We have not borrowed under our current
financing agreement with Bank of the West, other than to fund our outstanding letters of credit. For more information, see " LIQUIDITY AND
CAPITAL RESOURCES - Financing Arrangements ."
Other Expense
Other expense was $0.2 million in 2012 , compared to less than $0.1 million in 2011 , primarily due to changes in foreign currency exchange
gains and losses.
Income Tax Expense
Income tax benefit was $0.2 million in 2012 , compared to income tax expense of $0.7 million in 2011 . Income tax benefit in 2012 primarily
relates to the expiration of statutes of limitation applicable to our liabilities for uncertain tax positions in certain jurisdictions. Income tax
expense in 2011 was attributable to the taxable income generated in Canada and the result of the Company's uncertain tax positions.
Generally we did not recognize U.S. income tax expense associated with our income from continuing operations for 2012 and 2011 due to the
valuation allowance against the net deferred tax asset.
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