Nautilus Inc.’s sales from continuing operations were
down 34% in the third quarter to $41.4 million from $62.7 million a
year ago but the Vancouver, WA-based fitness firm was able to cut its
net loss in the period to $24.4 million, or 5 cents per share, from
$34.1 million, or 71 cents per share, in the same quarter last year.

Continuing
results include the company’s direct and retail businesses but exclude
the company's commercial business, for which the company is actively
seeking a buyer as announced on September 29, 2009. The commercial
business is considered a discontinued operation.

The company
offset expected lower sales in the retail and direct businesses with
greater operating efficiencies. This resulted in profitable operating
income for both the retail and direct businesses in the third quarter
ending September 30, 2009. Operating income for the retail business was
$2.2 million for the third quarter 2009, compared to $4.4 million in
the third quarter 2008. The direct business generated $1.7 million in
operating income for the third quarter 2009, compared to an operating
loss of $0.9 million in the third quarter 2008.

The company
reported a loss from continuing operations for the third quarter 2009
of $1.5 million, or 5 cents per diluted share. Included in loss from
continuing operations is a non-cash pre-tax asset impairment charge of
$2.1 million, related to the company’s intellectual property, and a
pre-tax benefit from warranty expense reduction of $1.4 million,
reflecting recent improvements in warranty claims experience. In the
third quarter of 2008, loss from continuing operations was $22.2
million, or 72 cents per diluted share.

The company reported a
loss from discontinued operations for the third quarter of 2009 of
$22.9 million, or 75 cents per diluted share. The commercial business
qualified for “held-for-sale” accounting treatment as a result of the
planned divestiture of that business and, as such, loss from
discontinued operations includes a non-cash after-tax impairment loss
of $17.9 million. Loss from discontinued operations in the third
quarter 2008 was $11.9 million, or 39 cents per diluted share.

Net
loss from continuing and discontinued operations in the third quarter
2009 was $24.4 million, or 80 cents per diluted share, compared with a
net loss of $34.1 million, or $1.11 per diluted share, in the third
quarter 2008.

Comparative net sales by business segment were as follows:

Three Months Ended

($ thousands)

 

Sept 30, 2009

 

Sept 30, 2008

 

 


$ Change



 

% Change

Direct


$

25,253


$

38,730



 

$

(13,477

)


-34.8

%

Retail



15,656



23,723




( 8,067

)


-34.0

%

Corporate


 

522


 

203



 

319

 


157.1

%

Net Sales


$

41,431


$

62,656



 

$

(21,225

)


-33.9

%


Net
sales declined in the direct business, primarily due to the restricted
availability of consumer credit, as well as the Company’s decision to
reduce advertising spend commensurate with sales trends. The Company’s
net sales in its retail business declined primarily due to reductions
in customer inventory levels and reluctance by retailers to replenish
inventory in this challenging economic environment, as well as reduced
product placement at certain customers, partially offset by new
business gains.

For continuing operations, consolidated gross
profit margin in the third quarter 2009 increased 250 basis points to
49.0% of net sales, compared to gross profit margin of 46.5% for the
same period last year. The improvement in gross margin is due primarily
to a $1.4 million benefit relating to the company’s warranty expense
following an analysis of recent warranty claim experience performed in
the third quarter 2009. While this is a one-time benefit, the company
anticipates warranty expense as a percent of revenue to be lower than
its historical rates as a result of more stringent warranty claim
management. Additionally, gross margin benefited from both a shift in
sales mix toward higher-margin TreadClimber products in the company’s
direct business and decreased shipping costs. Gross profit margin in
the direct business was 62.8% for the third quarter 2009, compared to
59.3% for the same period last year. Retail business gross profit
margin was 26.6% in the third quarter 2009, compared to 29.0% for the
same period last year.

Operating expenses for continuing
operations declined by approximately $11.7 million, or 33.6%, in the
third quarter 2009, compared to the third quarter 2008, primarily due
to a decrease in prevailing advertising rates, improvement in the
creative content of the advertisements and optimized advertising
placement, as well as the company’s continued commitment to align
operating costs with anticipated revenue. These cost reductions were
partially offset by a $2.1 million non-cash asset impairment charge in
the third quarter 2009.

The company generated net cash from
operating activities of $19.1 million for the first nine months of
2009, compared to $13.4 million for the same period last year. The
improvement is primarily the result of increased accounts receivable
collections and inventory reductions, in the commercial business which
is reported as discontinued operations.

For the third quarter
2009 total depreciation and amortization was $2.8 million, with
approximately $0.3 million related to commercial business discontinued
operations. Additionally, for the nine months ending September 30, 2009
total depreciation and amortization was $8.6 million, with
approximately $1.0 million related to commercial business discontinued
operations.

For the first nine months of fiscal 2009, Nautilus had sales of $135.6
million, with a loss of $59 million, or 71 cents per share, compared
with sales of $219.8 million, with a loss of $49.3 million, or $1.07
per share.

The
company had cash of $7.0 million and no borrowings as of September 30,
2009, compared to cash of $5.6 million and short-term borrowings of
$17.9 million, a net borrowing of $12.3 million, at December 31, 2008.

In
addition, on November 6, 2009 a new law was enacted permitting
companies to elect to carry back 2008 or 2009 net operating losses to
offset U.S. taxable income reported in the preceding five years. As a
result, the company plans to make this election and expects to receive
a U.S. income tax refund of approximately $11.9 million by March 31,
2010.

Edward Bramson, Chairman and Chief Executive Officer of
Nautilus, Inc., stated, “While our top line results continue to reflect
the challenging consumer spending environment, we are encouraged by the
progress we are making towards restoring our continuing operations to
profitability. For the second consecutive quarter, we achieved positive
operating income for both our retail and direct businesses, reflecting
our success in aligning our cost structure with revenue trends.”

Bramson
continued, “Over the past year, we have worked diligently to
restructure our business and position our company for long-term
profitable growth. As we announced in September, we made the decision
to divest our commercial business assets in order to enable our team to
invest all of our resources on our branded consumer businesses. While
Nautilus Commercial has many attractive assets, we believe we will
benefit from greater operating efficiencies by focusing exclusively on
our direct and retail channels. In the 4th quarter we plan to launch a
major new product, the Nautilus branded Mobia™ low impact cardio
machine. We are hopeful that this and other new product programs will
generate profitable sales growth in 2010.”

Nautilus's brands  include Nautilus(R), Bowflex(R), Schwinn(R)Fitness, StairMaster(R) and Universal(R).


NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)



 


 


 


 



Three Months Ended
September 30,

Nine Months Ended
September 30,


2009
2008
2009
2008

Net sales


$

41,431



$

62,656



$

135,588



$

219,809


Cost of sales


 

21,150

 


 

33,526

 


 

65,194

 


 

112,696

 









 

Gross profit


 

20,281

 


 

29,130

 


 

70,394

 


 

107,113

 









 

Operating expenses:









Selling and marketing



14,278




23,753




53,202




83,452


General and administrative



5,240




8,951




18,587




27,176


Research and development


About The Author

Thomas J. Ryan

Thomas J. Ryan Senior Business Editor | SGB Media tryan@sgbonline.com | 917.375.4699

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