Nautilus Q4 Net Income Plunges on Operational Issues

Nautilus, Inc. reported that net sales increased 6.9% to $181.3 million for the fourth quarter ended December 31, compared to $169.6 million for the corresponding period last year. Net income for the quarter plunged to $2.8 million, or 8 cents per diluted share, down from $14.2 million, or 42 cents per diluted share, for the fourth quarter of 2004.

For the fiscal year ended December 31, 2005, the company generated $630.6 million in net sales and diluted earnings of 70 cents per share, dwon 21.3% from the prior year.

“I am very disappointed in our fourth quarter performance,” said Gregg Hammann, chairman and CEO. “This team has performed well the previous nine quarters delivering upon our guidance each quarter. However, during the fourth quarter our manufacturing and go-to-market processes were not able to manage the introduction of six new products during the busy holiday season. This operational issue accounted for the majority of our revenue shortfall.

“Our team has identified the causes of these operational issues, and we are focused on correcting these processes during the first half of 2006. Four of the six innovative products are now in full market launch, and we are completing refinements on the additional two products. We are making a number of improvements in our manufacturing and go-to-market process, including the requirement of on-site sub-supplier inspections for each new product going forward. We are also working closely with key suppliers to move more of our work upstream to free capacity in our distribution centers and manufacturing plants. Examples of this work include moving master-packing to our suppliers, working cross dock activities, and initiating direct-to-customer shipments from suppliers versus through our distribution network.

“Our 2006 growth and performance will be driven by leveraging our industry-leading pipeline of innovative products, expanding assortments with existing partners, and achieving growth in every business channel again in 2006. Our manufacturing and operations teams are being supported by a global sourcing team to assure we are achieving operating improvement, and by a companywide initiative focused on quality, customer service, and cost takeout.”

For the first quarter of 2006, the Company estimates that net sales will be in the $180 million to $185 million range, with expected earnings of 14 cents to 18 cents per diluted share, including an estimated two cents per share charge for stock option expensing as required by FAS 123 in 2006.

The Company reported that it repurchased approximately 638,000 shares of stock during the fourth quarter 2005. For the full year, the Company purchased 831,000 shares at an average price of $18.82 for an investment of $15.6 million. It has a three-year authorization of $100 million that began in 2005.

In addition, the Company announced that its Board of Directors declared a regular quarterly dividend of 10 cents per common share, payable March 10, 2006, to stockholders of record as of February 20, 2006.

                           NAUTILUS, INC.
                CONSOLIDATED STATEMENTS OF OPERATIONS
           (In Thousands, Except Share and Per Share Data)
                             (Unaudited)


                         Three Months Ended      Twelve Months Ended
                            December 31,            December 31,
                       ----------------------- -----------------------
                           2005        2004        2005        2004
                       ----------- ----------- ----------- -----------

NET SALES                $181,317    $169,580    $630,594    $523,837

COST OF SALES             109,228      89,599     351,392     279,043
                       ----------- ----------- ----------- -----------

      Gross profit         72,089      79,981     279,202     244,794

OPERATING EXPENSES:
  Selling and marketing    49,640      46,185     179,065     156,577
  General and
   administrative          14,009       9,938      48,576      31,033
  Research and
   development              2,392       1,970      11,160       6,754
  Royalties                 1,416       1,275       5,368       5,968
                       ----------- ----------- ----------- -----------

      Total operating
       expenses            67,457      59,368     244,169     200,332
                       ----------- ----------- ----------- -----------

OPERATING INCOME            4,632      20,613      35,033      44,462

OTHER INCOME (EXPENSE):
  Interest income
   (expense)                 (272)        444       1,188       1,257
  Other income
   (expense)                 (240)       (139)        302        (172)
                       ----------- ----------- ----------- -----------

      Total other
       income (expense)      (512)        305       1,490       1,085
                       ----------- ----------- ----------- -----------

INCOME BEFORE INCOME
 TAXES                      4,120      20,918      36,523      45,547

INCOME TAX EXPENSE          1,352       6,760      12,725      15,662
                       ----------- ----------- ----------- -----------

NET INCOME                 $2,768     $14,158     $23,798     $29,885
                       =========== =========== =========== ===========

BASIC EARNINGS PER
 SHARE                      $0.08       $0.43       $0.71       $0.91

DILUTED EARNINGS PER
 SHARE                      $0.08       $0.42       $0.70       $0.89