Nautilus 2012 Annual Report Download - page 28

Table of Contents
primarily arising from changes in foreign currency exchange rates between the U.S. and China, and $1.3 million was attributable to higher
supply chain costs, including outbound freight.
Gross margin of our Retail business was 23.4% in 2011, a decrease of 420 basis points compared to 2010, of which approximately 280 basis
points was due to increased costs of certain products, largely arising from changes in foreign currency exchange rates, and approximately 140
basis points was due to higher supply chain costs, including freight.
Operating Expenses
Operating expenses were $74.9 million in 2011, a decrease of $11.5 million, or 13.3%, compared to operating expenses of $86.3 million in 2010.
This reduction was achieved primarily through more effective media advertising, which enabled more efficient spending. In addition, general
and administrative expenses decreased by $2.2 million in 2011, compared to 2010.
Selling and Marketing
Selling and marketing expenses were $54.5 million in 2011, a decrease of $9.5 million, or 14.9%, compared to 2010. Advertising expense of our
Direct business, a component of selling and marketing expenses, in 2011 was $28.6 million, a decrease of $12.0 million, or 29.6%, compared to
2010. The comparative decrease in Direct advertising expenses was primarily attributable to management's decision in early 2011 to shift
advertising away from the mature home-gym category and to increase the media investment in our TreadClimber product line. Beginning in
early 2011, we shifted the marketing of home gyms from television advertising to more cost efficient online media. Lower comparable Direct
advertising expenses were offset in part by higher consumer credit financing costs, as a result of sequentially improving consumer credit
approval rates, and the availability of additional secondary consumer financing providers in 2011, as compared to 2010.
General and Administrative
General and administrative expenses were $17.1 million in 2011, a decrease of $2.2 million, or 11.5%, compared to 2010, primarily due to lower
depreciation expense.
Research and Development
Research and development expenses were $3.2 million in 2011, an increase of $0.3 million, or 10.9%, compared to 2010, as we increased our
investment in new product development resources and capabilities.
Other Income and Expense
Interest Expense
We incurred interest expense of $0.5 million in 2011 in connection with our long-term note payable, compared to $0.1 million in 2010. We have
not borrowed under our current financing agreement with Bank of the West, other than to fund our outstanding letters of credit.
Other Expense
Other expense was less than $0.1 million in 2011, compared to $0.5 million in 2010, primarily due to changes in foreign currency exchange
gains and losses.
Income Tax Expense
Income tax expense was $0.7 million in 2011, compared to income tax expense of $0.6 million in 2010, and primarily relates to taxable income
generated in Canada.
We increased our valuation allowances in 2010 to reduce U.S. deferred income tax assets generated during the respective years to the amounts
expected, more likely than not, to be realized. As a result, generally we did not recognize U.S. income tax benefits associated with our operating
loss in 2010.
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