Nautilus Q3 Profitability Improves

Nautilus, Inc. reported sales for the third quarter 2012 totaled $38.1 million, an increase of
1.7 percent compared to net sales of $37.4 million for the same quarter
in 2011.

Gross margin for the third quarter of 2012 improved 650 basis points to 48.7 percent, compared to 42.2 percent for the same quarter in 2011. The increase in gross margin was primarily due to sales of higher margin Direct products. Operating margin for the third quarter of 2012 improved 370 basis points to 1.8 percent versus a loss of 1.9 percent during the same period last year.

Income from continuing operations for the third quarter ended September 30, 2012 was $1.2 million, compared to $0.3 million for the same period last year. Income per diluted share from continuing operations for the third quarter of 2012 increased to $0.04, compared to $0.01 for the same quarter a year ago. The strong improvement in results from continuing operations primarily reflects improved gross margins and higher operating income from the Company's Direct business.

For the nine months ended September 30, 2012, income from continuing operations was $3.4 million, compared to loss from continuing operations of $0.8 million for the same period last year. Income per diluted share from continuing operations for the first nine months of 2012 was $0.11, compared to loss per diluted share of $(0.03) for the same period a year ago.

Bruce M. Cazenave, Chief Executive Officer, stated, “We are pleased with the performance of our business in the third quarter and first nine months of this year, as we generated sales growth and significant improvements in net income compared to the same periods last year . Our results reflect the continued strength of our Direct business, which highlights the successful execution of a number of our key initiatives, including generating strong top line growth while delivering higher gross margins. As we previously disclosed, our Retail business was impacted by a shift in some of our retail partners' buying patterns, which accelerated revenue into the second quarter from the third quarter. Importantly, our Retail margins stabilized despite being adversely affected by the revenue shift and resulting lower volume absorption of fixed costs in the third quarter versus the same period last year. Our Retail segment continued to contribute positively to our overall profitability in the third quarter.”

The Company reported net income (including discontinued operation) of $1.0 million for the third quarter of 2012, compared to net loss of $0.1 million for the third quarter of 2011. Net income per diluted share for the third quarter of 2012 was $0.03, compared to breakeven for the same period last year. Net income for the 2012 third quarter included loss from discontinued operation of $ 0.3 million, or $(0.01) per diluted share, compared to loss from discontinued operation of $0.4 million, or $(0.01) per diluted share, for the same period last year.

Mr. Cazenave continued, “The momentum in our Direct business is encouraging, and the positioning of both the Retail and Direct businesses for more profitable growth in the future is advancing as planned. New products remain a top focus area for the company and we have a number of exciting products hitting the marketplace during the fall / winter season, including a new and unique DVD based exercise program, new and refreshed items for our Retail segment, and the marketing re-launch of our CoreBody Reformer. Our new product plans and restructured operating platform are key elements of our strategy to successfully grow revenues, leverage our operating expenses, and continue to improve our operating margins while expanding our product portfolio.”

Segment Results

Net sales for the Direct segment were $25.1 million in the third quarter of 2012, an increase of 10.9 percent over the comparable period last year, reflecting strong demand for the Company's cardio products. The higher sales were also partly driven by increased advertising effectiveness and higher U.S. consumer credit approval rates, which rose to 31 percent in the third quarter of 2012, up from 27 percent for the same period last year.

Operating income for the Direct segment improved to $1.9 million for the third quarter 2012, compared to $0.2 million for the third quarter 2011. This improvement reflects stronger sales as well as a 590 basis point improvement in Direct gross margin. Gross margin for the Direct business was 57.9 percent for the third quarter of 2012, compared to 52.0 percent in the third quarter of last year, reflecting successful execution of the Company's key initiative to improve product margins.

Net sales for the Retail segment were $11.4 million in the third quarter 2012, compared to $13.7 million in the third quarter last year. As previously disclosed, in the first half of 2012, the Company took certain steps to stabilize declining gross margins in its Retail business. These steps included a price increase for the back half of 2012, which contributed to a 23 percent year-over-year increase in sales for the second quarter as some Retail customers accelerated a portion of their purchases into the second quarter compared to their typical buying patterns.

Operating income for the Retail segment was $0.8 million, compared to $1.3 million in the third quarter last year. Retail gross margin was 21.4 percent in the third quarter of 2012, compared to 21.6 percent in the same quarter of last year. Retail margins were adversely affected by less absorption of fixed costs due to the lower volumes in the quarter versus the same period last year.

Balance Sheet

As of September 30, 2012, the Company had cash and cash equivalents of $15.2 million and no debt, compared to cash and cash equivalents of $17.4 million and $5.6 million of debt at year end 2011. Working capital was $17.9 million as of September 30, 2012, compared to $19.4 million at year end 2011; the decline in working capital was mainly the result of paying off the $5.6 million of debt during March of this year. Inventory as of September 30, 2012 was $16.9 million, compared to $11.6 million as of December 31, 2011 and $13.5 million same period last year. The Company believes it has adequate inventory to support current demand levels.