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NAUTILUS, INC.
FORM 10-K
(Annual Report)
Filed 02/26/15 for the Period Ending 12/31/14
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 2015, 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 02/26/15 for the Period Ending 12/31/14 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
    The registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for its 2015 Annual Meeting of Shareholders.

  • Page 4
    NAUTILUS, INC. 2014 FORM 10-K ANNUAL REPORT PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of...

  • Page 5
    ..., which focused on the sale of commercial fitness equipment into gyms, health clubs, and fitness centers. That process was largely completed in 2011, and we reached substantial completion of asset liquidation at December 31, 2012. Results of operations from the Commercial business are presented as...

  • Page 6
    ... and weight benches. • • While we offer our full product assortment to our Direct customers through our Internet websites and our catalogs, we generally differentiate the product models offered in our Direct and Retail sales channels. Currently, our Bowflex TreadClimber ® and Max Trainer...

  • Page 7
    ... based on this data. Almost all of our Direct customer orders are received either on our Internet websites or through company-owned and third-party call centers. In order to facilitate consumer purchases, we partner with several third party credit providers. Credit approval rates are an important...

  • Page 8
    ... include: Fitness Quest , ICON Health & Fitness, Johnson Health Tech, Beach Body and American Telecast. We also compete with marketers of computer-based physical activity products, such as the Nintendo Wii ® and Microsoft Xbox ® Kinect ® , and weight management companies, such as Weight Watchers...

  • Page 9
    ... due to the west coast port slow down. SIGNIFICANT CUSTOMERS In 2014 , 2013 and 2012 , Amazon.com accounted for 11.3% , 11.2% and 11.7% , respectively, of our Net Sales. ENVIRONMENTAL AND OTHER REGULATORY MATTERS Our operations are subject to various laws and regulations both domestically and...

  • Page 10
    ... conditions for consumer fitness equipment; • Changes in macroeconomic factors; • Availability of consumer credit; • Timing and availability of products coming from our offshore contract manufacturing suppliers; • Seasonality of markets, which vary from quarter-to-quarter and are influenced...

  • Page 11
    ... from these products. A significant decline in our sales of these products would have a material adverse effect on our operating results, financial position and cash flows. Portions of our operating expenses and costs of goods sold are relatively fixed, and we may have limited ability to reduce...

  • Page 12
    ... advertising to market certain products sold directly to consumers. Consequently, a marked increase in the price we must pay for our preferred media time and/or a reduction in its availability may adversely impact our financial performance. We may be unable to adapt to significant changes in media...

  • 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
    ... involving trademark or patent infringement claims or claims of breach of license. The prosecution or defense of intellectual property litigation is both costly and disruptive of the time and resources of our management, regardless of the claim's merit. We could also be required to pay substantial...

  • Page 15
    ... operating results, financial position and cash flows. System Security Risks, Data Protection Breaches and Cyber Attacks Could Disrupt Our Operations. We manage and store various proprietary information and sensitive or confidential data relating to our business, including sensitive and personally...

  • Page 16
    .... The remand hearing in the Federal Circuit was held on October 29, 2014, and no decision has yet been issued. We do not believe that our use of heart rate monitors utilized or purchased from third parties, and otherwise, infringe the BioSig patents. In August 2014, we initiated an arbitration...

  • Page 17
    ... our repurchases of our equity securities during the fourth quarter ended December 31, 2014 : (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) - - - - (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased...

  • Page 18
    ...for the period commencing December 31, 2009 and ending on December 31, 2014. The S&P SmallCap 600 Growth was chosen because we do not believe ...meaningful comparison. The S&P SmallCap 600 Growth represents a broad-based index of companies with similar market capitalization. The graph assumes $100 was...

  • Page 19
    ... Operations Data Net sales Cost of sales Gross profit $ 274,447 133,872 140,575 $ 218,803 112,326 106,477 $ 193,926 102,889 91,037 $ 180,412 101,953 78,459 $ 168,450 91,704 76,746 2014 2013 2012 2011 2010 Operating expenses: Selling and marketing General and administrative Research and development...

  • Page 20
    Other long-term liabilities Total shareholders' equity (1) 4,911 111,072 4,077 91,565 6,508 43,326 6,614 31,953 6,148 30,799 Income tax benefit in 2013 includes a $38.9 million credit related to the reversal of our deferred tax asset valuation allowance. 15

  • 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 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, in certain instances, service labor costs. At the time of sale, we...

  • Page 23
    ... 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 Contingencies From time to time, we may be involved in claims, lawsuits and other proceedings. Such matters involve uncertainty...

  • Page 24
    .... Results of operations information was as follows (in thousands): Year Ended December 31, 2014 2013 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, 2014 2013 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 175,593 93,...

  • Page 27
    ...$ Cardio products include: TreadClimber ® , Max Trainer ® , treadmills, exercise bikes, ellipticals, Bowflex Boost ® , Bowflex Body TM and DVDs. Strength products include: home gyms, selectorized dumbbells, kettlebell weights, UpperCut™ and accessories. Net Sales and Cost of Sales Direct The...

  • Page 28
    ...-based home gyms through more cost efficient online media and through the Retail channel. Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers were 41.4% in 2014 compared to 36.1% in 2013 and 31.6% in 2012 . The increase in Cost of Sales in our Direct...

  • Page 29
    ...,819 $6,824 Change $ 19.1% Year Ended December 31, 2013 2012 % Media advertising $35,819 $30,903 $4,916 15.9% We made strategic increased investments in media and creative advertising in 2014 to further support Bowflex TreadClimber ® and the launch of Bowflex Max Trainer ® . General and...

  • Page 30
    ... 2014 and 2013 was less than $0.1 million each year, and was for financing costs associated with capital equipment lease payments. Negative interest expense of $0.1 million in 2012 arose from the early repayment in March 2012 of our Increasing-Rate Senior Discount Notes. Early repayment of the notes...

  • Page 31
    ... hardware information system upgrades. We anticipate spending $4.5 million to $5.5 million in 2015 for software, equipment and product tooling. Financing Arrangements On December 5, 2014, we entered into a Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. ("Chase Bank") that...

  • Page 32
    ... of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization. INFLATION We do not believe that inflation had a material effect on our business, financial condition or results of operations in 2014 , 2013 or 2012...

  • Page 33
    ..., commercial paper and variable rate demand notes, and marketable securities of $27.0 million , held in a combination of certificates of deposit and corporate bonds. Our cash equivalents mature within three months or less from the date of purchase. Marketable securities with original maturities...

  • Page 34
    ...in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014 , based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring...

  • Page 35
    ... 31, 2014 2013 Assets Cash and cash equivalents Available-for-sale securities Trade receivables, net of allowances of $108 and $53 Inventories Prepaids and other current assets Income taxes receivable Deferred income tax assets Total current assets Property, plant and equipment, net Goodwill...

  • Page 36
    ..., except per share amounts) Year Ended December 31, 2014 2013 2012 Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating expenses Operating income Other income (expense): Interest income Interest expense...

  • Page 37
    NAUTILUS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2014 2013 2012 Net income $ Other comprehensive loss: Unrealized loss on ...47,954 - (381) 47,573 $ 16,883 - (83) 16,800 $ $ See accompanying Notes to Consolidated Financial Statements. 31

  • Page 38
    ... compensation plan Balances at December 31, 2012 Net income Foreign currency translation adjustment, net of income tax provision 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 Net...

  • Page 39
    ... financing activities: Repayment of long-term borrowings Proceeds from exercise of stock options Excess tax deficiency related to stock-based awards Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Increase in cash and cash equivalents...

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

  • Page 41
    ... Concentrations Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents held in bank accounts in excess of federally-insured limits and trade receivables. Trade receivables are generally unsecured and therefore collection is...

  • Page 42
    ... portion of our Net Sales from a small number of our Retail customers. A loss of business from one or more of these large customers, if not replaced with new business, would negatively affect our operating results and cash flows. In 2014 , 2013 and 2012 , one customer accounted for more than 10...

  • Page 43
    ... and shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods range from thirty days to, in limited circumstances, the lifetime of certain product components. We record a liability at the time of sale...

  • Page 44
    ..., and fees to use licensed technologies, are expensed as incurred. Third party research and development costs for products under development or being researched, if any, are expensed as the contracted work is performed. Income Taxes We account for income taxes based on the asset and liability method...

  • Page 45
    ... effect on our financial position, results of operations or cash flows. ASU 2014-12 In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)". ASU No. 2014-12 addresses accounting for share-based payments when the terms of an award provide that a performance...

  • Page 46
    ... of ASU 2014-09 may have on our financial position, results of operations or cash flows. ASU 2014-08 In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) and Reporting Discontinued Operations and Disclosures...

  • Page 47
    ... (unadjusted) in active liquid markets for identical securities as of the reporting date; Level 2 - other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; or observable market prices in markets...

  • Page 48
    ... use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy. Other than our annual Goodwill and indefinite-lived trade names impairment valuations effective as of October 1, 2014 and 2013, we did not perform any valuations on assets or liabilities that are...

  • Page 49
    ... 688 4,281 49,040 (40,541) 8,499 Work in progress includes production tooling construction in progress and, in 2013, internal use software development. Depreciation expense was as follows (in thousands): Year Ended December 31, 2014 2013 2012 Depreciation expense (7) GOODWILL $ 1,983 $ 1,254...

  • Page 50
    ... years) December 31, 2014 2013 Indefinite life trademarks Patents Accumulated amortization - patents N/A 8 to 16 ...PRODUCT WARRANTIES Changes in our product warranty obligations were as follows (in thousands): Year Ended December 31, 2014 2013 2012 Balance, January 1 Accruals Adjustments Payments...

  • Page 51
    ... 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 52
    ... Ended December 31, 2014 2013 2012 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...

  • Page 53
    ...): December 31, 2014 2013 Deferred income tax assets: Accrued liabilities Allowance for doubtful accounts Inventory valuation Capitalized indirect inventory costs Stock-based compensation expense Net operating loss carryforward Basis difference on long-lived assets Credit carryforward Other Gross...

  • Page 54
    ... tax credit carryforwards U.S. Federal U.S. State $ 37.2 85.3 15.0 1.2 3.6 0.4 2029 - 2031 2015 - 2031 2015 - 2020 2015 - 2017 2018 - 2034 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...

  • Page 55
    ... , respectively. Our U.S. federal income tax returns for 2009 through 2014 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2006 through 2014 are open to review, depending on the respective statute of limitation in each state. In addition, we file income tax...

  • Page 56
    ...determined based on the level at which the financial goals are achieved. The number of shares vesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150% . Following is a summary of PSU activity (shares in thousands): WeightedAverage Grant Date Fair Value per...

  • Page 57
    ... Certain other information regarding our stock-based compensation was as follows (in thousands, except per share amounts): Year Ended December 31, 2014 2013 2012 Weighted average grant-date per share fair value of stock options granted Total intrinsic value of stock options exercised Fair value of...

  • Page 58
    ..., 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 assets are those...

  • Page 59
    ...2,366 825 78 3,269 December 31, Assets: Direct Retail Unallocated corporate Total assets Net sales by geographic area were as follows: 2014 2013 $ 25,263 37,203 113,188 $ 175,654 $ 21,249 32,023 90,295 $ 143,567 Year Ended December 31, 2014 2013 2012 U.S. Canada All other $ 231,230 35,367...

  • Page 60
    ...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 may include: agreements with vendors and suppliers, under...

  • Page 61
    ...use of heart rate monitors utilized or purchased from third parties, and otherwise, infringe the BioSig patents. In August 2014, we initiated an arbitration proceeding under a 1999 license agreement pursuant to which we had licensed certain rights relating to our TreadClimber ® products. We believe...

  • Page 62
    (18) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited) The following table summarizes our unaudited quarterly financial data for 2014 and 2013 (in thousands, except per share amounts): Quarter Ended March 31 June 30 September 30 December 31 Total 2014 Net sales Gross profit ...

  • Page 63
    ...internal control over financial reporting. During the twelve months ended December 31, 2014 , we completed the implementation of a new enterprise resource planning ("ERP") system, which covers all of our significant processes including, but not limited to, revenue and invoicing, purchasing, accounts...

  • Page 64
    ... control over financial reporting of Nautilus, Inc. and subsidiaries (the "Company") as of December 31, 2014 , based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management...

  • Page 65
    ... item will be set forth under the captions Election of Directors , Section 16(a) Beneficial Ownership Reporting Compliance, Executive Officers, Information Concerning the Board of Directors and Code of Ethics in our Proxy Statement for our 2015 Annual Meeting of Shareholders to be filed with the SEC...

  • Page 66
    ... 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. Trademark License Agreement, dated September 20, 2001, by and between Pacific Direct, LLC and Nautilus, Inc. Incorporated by reference to Exhibit...

  • Page 67
    reference to Exhibit 10.24 of our Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission on March 8, 2010. 59

  • Page 68
    ... the Commission on March 8, 2010. Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between Nautilus, Inc. and GE Money Bank - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2010 as filed with the Commission on August 16...

  • Page 69
    ... Award Agreement dated as of February 28, 2014, by and between Nautilus, Inc. and Sidharth Nayar - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended March 31, 2014 as filed with the Commission on May 8, 2014. Offer Letter, dated July 26, 2013, between the Company...

  • Page 70
    ..., 2014, to the Office Lease by and between Nautilus, Inc. and Columbia Tech Ceter, L.L.C. dated July 25, 2011 - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2014 as filed with the Commission on August 7, 2014. Credit Agreement dated December 5, 2014...

  • Page 71
    ...Cazenave Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer) NAUTILUS, INC. Date: February 26, 2015 By: /s/ Sidharth Nayar Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY Each person whose individual signature appears below...

  • Page 72
    ... Chief Financial Officer (Principal Financial and Accounting Officer) * M. Carl Johnson, III Chairman * Ronald P. Badie Director * Richard A. Horn Director * Anne G. Saunders Director * Marvin G. Siegert Director *By: /s/ Wayne M. Bolio Wayne M. Bolio Attorney-In-Fact February 26, 2015...

  • Page 73
    ... NAUTILUS, INC. Nautilus, Inc., a Washington corporation Nautilus Fitness UK Ltd., a United Kingdom corporation Nautilus Fitness Canada, Inc., a Canadian corporation Nautilus (Shanghai) Fitness Co., Ltd., a Chinese corporation Nautilus (Shanghai) Fitness Equipments Co., Ltd., a Chinese corporation

  • Page 74
    ... S-8 of our reports dated February 26, 2015 , 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, 2014...

  • Page 75
    ... by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has...

  • Page 76
    ... by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has...

  • Page 77
    ..., United States Code), the undersigned officers of Nautilus, Inc., a Washington corporation (the "Company"), do hereby certify that: To our knowledge, the Annual Report on Form 10-K for the year ended December 31, 2014 (the "Form 10-K") of the Company fully complies with the requirements of Section...