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NAUTILUS, INC.
FORM 10-K
(Annual Report)
Filed 02/27/14 for the Period Ending 12/31/13
Address 17750 SE 6TH WAY
VANCOUVER, WA 98683
Telephone 360-859-2900
CIK 0001078207
Symbol NLS
SIC Code
3949 - Sporting and Athletic Goods, Not Elsewhere Classified
Industry Recreational Products
Sector Consumer Cyclical
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2014, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    NAUTILUS, INC. FORM 10-K (Annual Report) Filed 02/27/14 for the Period Ending 12/31/13 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 17750 SE 6TH WAY VANCOUVER, WA 98683 360-859-2900 0001078207 NLS 3949 - Sporting and Athletic Goods, Not Elsewhere Classified Recreational ...

  • Page 2
    ... No.) 17750 S.E. 6th Way Vancouver, Washington 98683 (Address of principal executive offices, including zip code) (360) 859-2900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which...

  • Page 3

  • Page 4
    ... Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and...

  • Page 5
    ... Operations for all periods. There was no revenue related to the Commercial business for the years ended December 31, 2013 or 2012. BUSINESS STRATEGY We are focused on developing and marketing consumer fitness equipment and related products to help people enjoy healthier lives. Our products...

  • Page 6
    ... cardio, ellipticals and bike products. Our Bowflex ® brand represents a highly-regarded line of fitness equipment comprised of both cardio and strength products, including the TreadClimber ® and MAX Trainer TM specialized cardio machines, treadmills, PowerRod ® and Revolution ® home gyms...

  • Page 7
    ... is a vital part of our business, and we continue to expand and diversify our product offerings by leveraging our research and development capabilities. We constantly search for new technologies and innovations that will help us grow our business, either through higher sales or increased production...

  • Page 8
    ... distinguishes our products from the competition. Our products compete directly with those offered by a large number of companies that market consumer fitness equipment and fitness programs. As the use of Internet websites for product sales by traditional retailers has increased, our competitors...

  • Page 9
    ... executive offices are located at 17750 SE 6th Way, Vancouver, Washington 98683, and our telephone number is (360) 859-2900. The Internet address of our corporate website is http://www.nautilusinc.com. We file annual reports, quarterly reports, current reports, proxy statements and other information...

  • Page 10
    ... from a small number of Retail customers. A loss of business from one or more of these large customers, if not replaced with new business, could negatively affect our operating results and cash flow. A decline in sales of TreadClimber products without a corresponding increase in sales of other...

  • Page 11
    ... advertising. New television technologies and services, such as video-on-demand, digital video recorders and Internet streaming services are changing traditional patterns of television viewing. Additionally, consumer attention is increasingly fragmented across a variety of games, apps, the Internet...

  • Page 12
    ...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...

  • Page 13
    ...aspects of our TreadClimber ® products expired during 2013. Although we own a number of other patents covering aspects of our TreadClimber ® products, the introduction of comparable products designed to compete with our TreadClimber ® line of specialized cardio machines may increase in the future...

  • Page 14
    ... of our Direct business is heavily dependent on our ability to respond to customer sales inquiries and process sales transactions using our call center communication systems, Internet websites and similar data monitoring and communication systems provided and supported by third-parties. If such...

  • Page 15
    ... our new information systems or significant system failures could disrupt our operations and have a material adverse effect on our operating results, financial position and cash flows. System Security Risks, Data Protection Breaches and Cyber Attacks Could Disrupt Our Operations. We manage and store...

  • Page 16
    ... to address the legal standard applied by the Federal Circuit in determining whether the patents may be valid under applicable law. The U.S. Supreme Court is expected to hear arguments in April 2014. We do not believe that our use of heart rate monitors utilized or purchased from third parties, and...

  • Page 17
    ... of our equity securities during the fourth quarter ended December 31, 2013: (a) (b) Average Price Paid per Share (or Unit) $7.96 (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs - (d) Maximum Number (or Approximate Dollar Value) of Shares (or...

  • Page 18
    ... total return of the NYSE Composite Index and the S&P SmallCap 600 Index for the period commencing December 31, 2008 and ending on December 31, 2013. The S&P SmallCap 600 Index was chosen because we do not believe we can reasonably identify an industry index or specific peer issuer that would offer...

  • Page 19
    ... of Operations Data Net sales Cost of sales Gross profit $ 218,803 112,326 106,477 $ 193,926 102,889 91,037 $ 180,412 101,953 78,459 $ 168,450 91,704 76,746 $ 189,260 92,745 96,515 2013 2012 2011 2010 2009 Operating expenses: Selling and marketing General and administrative Research and development...

  • Page 20
    Total assets Long-term notes payable Other long-term liabilities Total shareholders' equity 143,567 - 4,077 91,565 94,311 - 6,508 43,326 82,813 5,598 6,614 31,953 78,367 5,141 6,148 30,799 115,172 - 6,489 52,483 (1) Income tax benefit in 2013 includes a $38.9 million credit related to the ...

  • Page 21
    ... influenced by media costs to produce and distribute advertisements of our products on television, the Internet and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In...

  • Page 22
    ...our financial position and results of operations. Product Warranty Obligations Our products carry limited defined warranties for defects in materials or workmanship. Our product warranties generally obligate us to pay for the cost of replacement parts, cost of shipping the parts to our customers and...

  • Page 23
    ... claims are subject to variation. Warranty expenses are affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to the customer, product failure rates and variances in expected repair costs. Litigation and Loss...

  • Page 24
    .... Results of operations information was as follows (in thousands): Year Ended December 31, 2013 2012 Change % Change Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating expenses Operating income Other...

  • Page 25
    19

  • Page 26
    Results of operations information by segment was as follows (in thousands): Year Ended December 31, 2013 2012 Change % Change Net sales: Direct Retail Royalty income $ $ Cost of sales: Direct Retail Royalty income Gross profit: Direct Retail Royalty income Gross margin: Direct Retail 136,663 76,...

  • Page 27
    ...: TreadClimber ® , treadmills, exercise bikes, ellipticals, CoreBody Reformer ® , Bowflex Boost TM and DVDs. Strength products include: home gyms, selectorized dumbbells, kettlebell weights, UpperCut™ and accessories. Year Ended December 31, 2012 2011 Change % Change Direct net sales: Cardio...

  • Page 28
    ... fixed supply chain costs due to the higher sales volume. We are no longer required to pay royalties on certain expired patents covering aspects of our Treadclimber ® products. The impact of this on our Direct segment gross margins is uncertain. Retail The 20.2% increase in Retail Net Sales in 2013...

  • Page 29
    ... strategic increased investments in media and creative advertising in 2013 to further support the launch of UpperCutâ„¢ and to build sales leads for all Direct products in the second half of 2013. General and Administrative Dollars in thousands Year Ended December 31, 2013 2012 $ Change % General...

  • Page 30
    ... in Canada and the result of changes in our uncertain tax positions. Generally, we did not recognize U.S. income tax expense associated with our income from continuing operations for 2013, 2012 or 2011 due to the valuation allowance against the net deferred tax asset. In the second quarter of 2013...

  • Page 31
    ... information system upgrades and new product tooling equipment. We anticipate spending $2.5 million in all of 2014 for software and equipment. Financing Arrangements We have a Credit Agreement (the "Loan Agreement") with Bank of the West that provides for a $15,750,000 maximum revolving secured...

  • Page 32
    ...our Consolidated Financial Statements in Part II, Item 8 of this report. Off-Balance Sheet Arrangements In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under...

  • Page 33
    ...Given that cash equivalents mature within three months or less from the date of purchase, a decline in interest rates over time would reduce our interest income, but would not have a material impact on our results of operations, financial position or cash flows. In addition, due to the nature of our...

  • Page 34
    ... respects, the financial position of Nautilus, Inc. and subsidiaries as of December 31, 2013 and 2012 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 , in conformity with accounting principles generally accepted in the...

  • Page 35
    ... 31, 2013 2012 Assets Cash and cash equivalents Trade receivables, net Inventories, net Prepaids and other current assets Income taxes receivable Short-term notes receivable Deferred income tax assets Total current assets Property, plant and equipment, net Goodwill Other intangible assets, net Long...

  • Page 36
    NAUTILUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 2013 2012 2011 Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating expenses Operating...

  • Page 37
    NAUTILUS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2013 2012 2011 Net income Other comprehensive income: Foreign currency translation, net of income tax (benefit) expense of $20, $(9) and $8 Comprehensive income $ 47,954 $ 16,883 $ 1,420 $...

  • Page 38
    ... Balances at December 31, 2012 Net income Foreign currency translation adjustment, net of income tax expense of $20 Stock-based compensation expense Common stock issued under equity compensation plan Tax deficiency related to stock-based awards Balances at December 31, 2013 30,744 - - - 3 30,747...

  • Page 39
    ... from sale of discontinued operations Proceeds from other asset sales Purchases of software and equipment Net decrease in restricted cash Net cash used in investing activities Cash flows from financing activities: Repayment of long-term borrowings Financing costs Proceeds from exercise of stock...

  • Page 40
    See accompanying Notes to Consolidated Financial Statements. 33

  • Page 41
    ... business segments. Our Direct business offers products directly to consumers through television advertising, catalogs and the Internet. Our Retail business offers our products through a network of independent retail companies with stores and websites located in the United States and internationally...

  • Page 42
    .... During the fourth quarter of 2013, we changed the date of our annual goodwill impairment test to October 1 to better align with our annual and long-term planning and budgeting process. Accordingly, we believe this change in accounting principle is preferable. The change did not delay, accelerate...

  • Page 43
    ... expenses for shared administrative functions. Product Warranty Obligations Our products carry limited, defined warranties for defects in materials or workmanship which, according to their terms, generally obligate us to pay the costs of supplying and shipping replacement parts to customers and, in...

  • Page 44
    ... promotion costs were $2.2 million and $1.3 million as of December 31, 2013 and 2012 , respectively. Research and Development Internal research and development costs, which primarily consist of salaries and wages, employee benefits, expenditures for materials, and fees to use licensed technologies...

  • Page 45
    ...of continuing operating losses in our Commercial business and in order to focus exclusively on managing our Direct and Retail businesses, we committed to a plan for the complete divestiture of our Commercial business, which qualified for held-for-sale accounting treatment. The Commercial business is...

  • Page 46
    ... liabilities for exit costs related to discontinued operations, included in Accrued Liabilities and Other Long-Term Liabilities in our Condensed Consolidated Balance Sheets (in thousands): Facilities Leases Severance and Benefits Balance as of January 1, 2011 Adjustments Payments Balance as of...

  • Page 47
    ... includes internal use software development and production tooling construction in progress. Depreciation expense was as follows (in thousands): Year Ended December 31, 2013 2012 2011 Depreciation expense $ (6) GOODWILL 1,254 $ 1,199 $ 1,644 All goodwill is assigned to our Direct reporting...

  • Page 48
    ... secured credit line. The line of credit is available through March 31, 2015 for w orking capital, standby letters of credit and general corporate purposes. Borrowing availability under the Loan Agreement is subject to our compliance with certain financial and operating covenants at the time...

  • Page 49
    ... Agreement, we issued to the Sherborne Purchasers $6.1 million in aggregate principal amount at maturity of Increasing Rate Senior Discount Notes (the "Notes"). The Notes had an original principal amount totaling $5.0 million and an original maturity date of December 31, 2012. On March 12, 2012...

  • Page 50
    ..., 2013 2012 2011 U.S. statutory income tax rate State tax, net of U.S. federal tax benefit Non-U.S. income taxes Nondeductible operating expenses Research and development credit Change in deferred tax measurement rate Change in uncertain tax positions Expiration of capital loss carryforward Change...

  • Page 51
    ..., 2013 2012 Deferred Income Tax Assets: $ Accrued liabilities Allowance for doubtful accounts Inventory valuation Capitalized indirect inventory costs Stock-based compensation expense Net operating loss carryforward Capital loss carryforward Basis difference on long-lived assets Credit carryforward...

  • Page 52
    ... of operations for recent years. We generally consider cumulative pre-tax losses in the three-year period ending with the current quarter to be significant negative evidence regarding our future profitability. A pattern of objectively-measured recent financial reporting losses is heavily weighted as...

  • Page 53
    ...2014 - 2016 2014 - 2017 2018 - 2033 2019 - 2022 The timing and manner in which we are permitted to utilize our net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change...

  • Page 54
    ... 2010, we granted PSU awards covering a total of 146,000 shares of our common stock to key members of our executive team. The PSUs were subject to both time-based vesting (one-third annually over three years ) and achievement of a stock price target of two times the grant date price. If, over the...

  • Page 55
    ... tax deductions as a result of the exercise of certain stock options and vesting of RSUs and PSUs. Stock-based compensation expense, primarily included in general and administrative expense, was as follows (in thousands): Year Ended December 31, 2013 2012 2011 Stock options Restricted stock units...

  • Page 56
    ... of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include Selling and Marketing expenses, General and Administrative expenses, and Research and Development expenses that are directly related to segment operations. Segment...

  • Page 57
    ...): Year Ended December 31, 2013 2012 2011 Net Sales: Direct Retail Unallocated royalty income Consolidated Net Sales Contribution: Direct Retail Unallocated royalty income Consolidated contribution Reconciliation of consolidated contribution to income from continuing operations: Consolidated...

  • Page 58
    ... years due to a number of factors, including the amount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses. In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These...

  • Page 59
    ... our unaudited quarterly financial data for 2013 and 2012 (in thousands, except per share amounts): Quarter Ended March 31 June 30 September 30 December 31 Total 2013 Net sales Gross profit Operating income (loss) Income from continuing operations Income (loss) from discontinued operations Net...

  • Page 60
    ...Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules...

  • Page 61
    ... Public Accounting Firm To the Board of Directors and Shareholders of Nautilus, Inc. Vancouver, Washington We have audited the internal control over financial reporting of Nautilus, Inc. and subsidiaries (the "Company") as of December 31, 2013 , based on criteria established in Internal Control...

  • Page 62
    ... financial statements in Part II, Item 8 of this report. Beneficial Ownership The information required by this item is included under the caption Security Ownership of Certain Beneficial Owners and Management in our Proxy Statement for our 2014 Annual Meeting of Shareholders to be filed with the SEC...

  • Page 63
    ... indicated below: Page 28 29 30 31 32 33 34 Report of Independent Public Accounting Firm Consolidated Balance Sheets as of December 31, 2013 and 2012 Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 Consolidated Statements of Comprehensive Income for the...

  • Page 64
    10.9* Form of Performance Unit Agreement - Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the three months ended June 30, 2006, as filed with the Commission on August 9, 2006. 56

  • Page 65
    ...2012. Security Agreement dated as of March 8, 2010 between Nautilus, Inc. and Bank of the West - Incorporated by reference to Exhibit 10.31 of our Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission on March 8, 2010. Private Label Consumer Credit Card Program Agreement...

  • Page 66
    Med, Inc. - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended June 30, 2010 as filed with the Commission on August 16, 2010. [Confidential treatment has been granted with respect to a portion of this Exhibit] 57

  • Page 67
    ...to Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between the Company and GE Money Bank - Incorporated by reference to Exhibit 10.27 of our Form 10-K for the fiscal year ended December 31, 2012 as filed with the Commission on March 7, 2013. Merchant Agreement dated...

  • Page 68
    101 * The following financial statements from Nautilus, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of ...

  • Page 69
    ... duly authorized. NAUTILUS, INC. Date: February 27, 2014 By: /s/ Bruce M. Cazenave Bruce M. Cazenave C hief Executive Officer (Principal Executive Officer, Acting Principal Financial Officer and Acting Principal Accounting Officer) POWER OF ATTORNEY Each person whose individual signature...

  • Page 70
    ..., 2014 Nautilus, Inc. 17750 S.E. 6th Way Vancouver, Washington 98683 Dear Sirs/Madams: We have audited the financial statements of Nautilus, Inc. and subsidiaries as of December 31, 2013 and 2012, and for each of the three years in the period ended December 31, 2013, included in your Annual Report...

  • Page 71
    ... OF NAUTILUS, INC. Nautilus, Inc., a Washington corporation Nautilus International Holdings, S.A., a Swiss corporation Nautilus International, S.A., a Swiss corporation Nautilus International GmbH, a German corporation Nautilus Fitness UK Ltd., a United Kingdom corporation Nautilus Fitness Canada...

  • Page 72
    ...on Form S-8 of our reports dated February 27, 2014 , relating to the consolidated financial statements of Nautilus, Inc., and the effectiveness of Nautilus, Inc.'s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Nautilus, Inc. for the year ended December 31...

  • Page 73
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 74
    ... complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. February 27, 2014 Date By: /s/ Bruce M. Cazenave...