Nautilus 2014 Annual Report Download - page 7

metrics and we strive to optimize the efficiency of our marketing and media expenditures 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 variable in
the number of Direct products we sell in a given period. Combined consumer credit approvals by our primary and secondary U.S. third-
party
financing providers increased to 41% in 2014 from 36% in 2013 and 32% in 2012 .
Retail
In our Retail business, we market and sell a comprehensive line of consumer fitness equipment under the Nautilus
®
, Schwinn
®
, Universal
®
and
Bowflex
®
brands. Our products are marketed through a network of retail companies, consisting of sporting goods stores, Internet retailers, large-
format and warehouse stores, and, to a lesser extent, smaller specialty retailers and independent bike dealers.
We offer programs that provide price discounts to our Retail customers for ordering container-
sized shipments or placing orders early enough in
the season to allow for more efficient manufacturing by our Asian suppliers. These programs are designed to reduce our shipping and handling
costs, with much of the savings being passed on to our customers. In addition, we often offer other types of sales incentives to our Retail
customers, including volume discounts and various forms of rebates or allowances, which generally are intended to increase product exposure
and availability for consumers, reduce transportation costs, and encourage marketing and promotion of our brands or specific products.
PRODUCT DESIGN AND INNOVATION
Innovation 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 efficiencies. To accomplish this objective, we seek out ideas and concepts both within our company and from
outside inventors.
We rely on financial and engineering models to assist us in assessing the potential operational and economic impacts of adopting new
technologies and innovations. If we determine that a third-
party technology or innovation concept meets certain technical and financial criteria,
we may enter into a licensing arrangement to utilize the technology or, in certain circumstances, purchase the technology for our own use. Our
product design and engineering teams also invest considerable effort to improve product design and quality. As a consumer-
driven company, we
invest from time-to-
time in qualitative and quantitative consumer research to help us assess new product concepts, optimal features and
anticipated consumer adoption.
Our research and development expenses were $7.2 million , $5.6 million and $4.2 million in 2014 , 2013 and 2012
, respectively, as we
increased our investment in new product development resources and capabilities. We expect our research and development expenses to increase
in 2015 as we continue to increase our investment in new product development.
SEASONALITY
We expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by
the third quarter, and are generally weakest in the second quarter. We believe that, during the spring and summer months, consumers tend to be
involved in outdoor activities, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a
significant effect on our inventory levels, working capital needs and resource utilization.
MERCHANDISE SOURCING
All of our products are produced by third-party manufacturers, and, in 2014
, all of our manufacturing partners were located in Asia. Although
multiple factories bid on and are able to produce most of our products, we typically select one factory to produce any given product. 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. We attempt to compensate for our long replenishment lead times by
maintaining adequate levels of inventory at our warehousing facilities.
We monitor our suppliers' ability to meet our product needs and we participate in quality assurance activities to reinforce adherence to our
quality standards. Our third-
party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on
the basis of individual purchase orders. Our manufacturing relationships are non-
exclusive, and we are permitted to procure our products from
other sources at our discretion. None of our manufacturing contracts include production
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