Nautilus reported that net sales for the third quarter decreased 16% to $134.0 million from $159.6 million for the corresponding period last year, down 16%. Net loss for the third quarter, including charges of 13 cents related to bad debt reserves for a customer's pending bankruptcy and costs associated with the departure of the company's former CEO, was $13.3 million, or 42 cents per diluted share, compared to income of $9.4 million, or 29 cents per diluted share, for the third quarter of 2006. The year-ago third quarter included a tax reserve reversal of $3.0 million, or 9 cents per share. Excluding the tax reversal, net income for the quarter was $6.4 million, or 20 cents per diluted share.
The decline in performance was primarily attributable to a reduction in sales of rod-based home gyms in retail and an overall shift in sales mix for customers, channels and products.
“We are very disappointed by Nautilus' third quarter financial results,” said Robert S. Falcone, Nautilus chairman, president and CEO. “Our shareholders can be certain that we are implementing the changes necessary to address these shortfalls in order to drive sustainable growth and value.”
Outlook
For the fourth quarter, the company expects net sales of approximately $160 million and earnings from operations to be about break-even. Nautilus is undergoing a comprehensive review of the business and expects some restructuring charges in the fourth quarter, which are not included in this estimate. These will include severance costs and may include inventory adjustments for discontinued products and other restructuring charges.
Addressing Shortfalls, Improving Financial Position
Since taking over as Nautilus' CEO on August 13, 2007, Mr. Falcone has undertaken a thorough review of the company's business and operating strategy and implemented several initiatives aimed at improving the company's financial condition, and will continue to build on the company's turnaround strategy.
These steps include:
— The company's anticipated agreement to amend and secure its $125
million line of credit with a $50 million accordion and replace it with a
new $150 million asset-based loan with a $50 million accordion.
— The re-negotiation of the financial terms associated with Nautilus'
planned acquisition of Land America, its largest contract manufacturer,
based in Xiamen, China. New terms include a price concession of
approximately $7 million and a payment schedule that has been extended to
October 2008. The transaction, which will provide the Company with a
vertical manufacturing presence, is expected to help improve long-term
gross and operating margins.
— A reduction of workforce by approximately 140 employees, or 9 percent
of the company's employee base, generating approximately $10 million in
fixed-cost savings.
— The exploration of divestitures for non-core assets, including the
company's technical apparel business, Pearl iZUMi.
— The suspension of the company's 10-cent-per-share quarterly cash
dividend, which will provide an additional $13 million available for
operations.
— The development of a global growth strategy for the company's
commercial, direct and retail business lines.
“These steps are both necessary to unlocking the true value of Nautilus for our shareholders and reflective of the conservative and strategic manner in which we will manage our business moving forward,” said Mr. Falcone.
The company remains optimistic about its prospects for future growth within the $10 billion global fitness industry. “Not only does Nautilus operate the most widely recognized brand names, it offers a growing global consumer base the most innovative products,” said Mr. Falcone. “Our shareholders can be confident that we will combine the right infrastructure with best-in-class execution to leverage the many opportunities before us.”
NAUTILUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Preliminary – Unaudited, in thousands, except per share amounts)Three Months Nine Months
Ended September 30, Ended September 30,
———————- ———————-
2007 2006 2007 2006
———- ———– ———- ———–
NET SALES $ 133,957 $ 159,583 $ 409,869 $ 482,185
COST OF SALES 81,064 87,493 238,211 270,192
———- ———– ———- ———–Gross profit 52,893 72,090 171,658 211,993
———- ———– ———- ———–OPERATING EXPENSES:
Selling and marketing 53,071 42,621 147,963 137,887
General and administrative 16,103 14,507 42,787 40,399
Research and development 3,142 2,521 9,080 8,321
Royalties 1,903 1,296 4,610 3,991
Litigation settlement — — (18,300) —
———- ———– ———- ———–Total operating expenses 74,219 60,945 186,140 190,598
———- ———– ———- ———–OPERATING INCOME (LOSS) (21,326) 11,145 (14,482) 21,395
OTHER INCOME (EXPENSE):
Interest income 222 309 265 532
Interest expense (1,852) (846) (3,603) (1,684)
Other income, net 910 (2) 1,697 1,220
———- ———– ———- ———–Total other income
(expense) (720) (539) (1,641) 68
———- ———– ———- ———–INCOME (LOSS) BEFORE INCOME
TAXES (22,046) 10,606 (16,123) 21,463
INCOME TAX EXPENSE
(BENEFIT) (8,737) 1,230 (6,387) 5,215
———- ———– ———- ———–NET INCOME (LOSS) $ (13,309) $ 9,376 $ (9,736) $ 16,248
========== =========== ========== ===========EARNINGS (LOSS) PER SHARE:
BASIC $ (0.42) $ 0.29 $ (0.31) $ 0.50
DILUTED $ (0.42) $ 0.29 $ (0.31) $ 0.50
WEIGHTED AVERAGE SHARES
OUTSTANDING:BASIC 31,545 32,138 31,533 32,577
DILUTED 31,553 32,240 31,681 32,732
