Nautilus Q3 Sales Down 2.3%; Net Up on Tax Break

Nautilus, Inc. saw net sales for the third quarter total $159.6 million, a 2.3% decrease from last year's $163.3 million. Net income for the quarter was $9.4 million, or 29 cents per diluted share, increasing 22.1% from $7.7 million, or 20 cents per diluted share. Included in the Q306 net income is a tax reserve reversal of $3.0 million or 9 cents per share and an expense of about 1.5 cents per share for stock option expensing. Excluding the tax reversal, net income for the quarter was $6.4 million or 20 cents per share.

“Driven by continued improvement in our operational and manufacturing efficiency, our gross margins have improved to 45 percent and are the highest they have been in six quarters,” said Gregg Hammann, Chairman and CEO of Nautilus, Inc. “Improving margins are also due to taking selective price increases and refining certain sales relationships to assure profitability. We also concluded manufacturing at our Tyler, Texas facility during the quarter, and eliminated about 100 product SKUs, both of which are expected to generate further margin improvement going forward.

“The combination of eliminating less profitable customers and SKUs and the prime fitness season moving later this year, caused net sales to be slightly below our plan. However, the changes we have made to our business will set us up for sustainable gross and operating margin improvement going forward, and we expect to achieve a net sales growth rate of around 10 percent annually.

“Regarding our balance sheet, we bought back about $17 million in stock during the quarter. Inventories are below $70 million, as we flow more goods directly to customers and bypass our distribution centers. As is expected at the end of the third quarter, our receivables are higher due to the beginning of the fitness season. We expect lower DSOs at year-end.”

For the fourth quarter of 2006, the company estimates that net sales will be in the $190-210 million range, with expected earnings of 39 cents to 45 cents per diluted share, including about 1.5 cents per share for stock option expensing as required by FAS 123R in 2006, and with an additional 3 cents per share in expected tax reserve reversal.

The company expects to conclude 2006 with annual net sales growth of about 10%, and annual earnings growth of 22%-32% when factoring out FAS 123R and the tax reversal, a strong reflection on the operating health of the business. Including the tax reversal and FAS 123R, 2006 earnings are expected to grow 41%-51%.

The company expects 2007 plans to be highlighted by continued focus to achieve leverage through operating excellence. The company said preliminary full year 2007 net sales growth is expected to be around 10%, and earnings growth is expected to be within its three-year target range of 20%-30% growth.

“The greater visibility through our new information system is helping us uncover and capitalize upon a broad range of revenue and operational improvements, and we're just getting started in capitalizing upon them,” Hammann said.

In addition, the company announced that its Board of Directors declared a regular quarterly dividend of 10 cents per common share, payable December 8, 2006, to stockholders of record as of November 20, 2006.

                       NAUTILUS, INC.
                  CONSOLIDATED STATEMENTS OF INCOME
         (Unaudited, in thousands, except per share amounts)

                                    Three Months       Nine Months
                                  Ended September    Ended September
                                         30,                30,
                                 ------------------ ------------------
                                   2006     2005      2006     2005
                                 ------------------ ------------------
NET SALES                        $159,583 $163,308  $482,185 $449,277
COST OF SALES                      87,493   91,022   270,192  242,164
                                 ------------------ ------------------

         Gross profit              72,090   72,286   211,993  207,113
                                 ------------------ ------------------


OPERATING EXPENSES:
    Selling and marketing          42,621   44,526   137,887  129,425
    General and administrative     14,507   11,146    40,399   34,567
    Research and development        2,521    2,856     8,321    8,768
    Royalties                       1,296    1,297     3,991    3,952
                                 ------------------ ------------------

         Total operating expenses  60,945   59,825   190,598  176,712
                                 ------------------ ------------------

OPERATING INCOME                   11,145   12,461    21,395   30,401
OTHER INCOME (EXPENSE):
    Interest income (expense),
     net                             (537)     145    (1,152)   1,460
    Other income (expense), net        (2)      31     1,220      542
                                 ------------------ ------------------

         Total other income
          (expense)                  (539)     176        68    2,002
                                 ------------------ ------------------


INCOME BEFORE INCOME TAXES         10,606   12,637    21,463   32,403
INCOME TAX EXPENSE                  1,230    4,366     5,215   11,373
                                 ------------------ ------------------

NET INCOME                         $9,376   $8,271   $16,248  $21,030
                                 ================== ==================


EARNINGS PER SHARE:
         BASIC                      $0.29    $0.25     $0.50    $0.63
         DILUTED                    $0.29    $0.24     $0.50    $0.62

WEIGHTED AVERAGE SHARES
 OUTSTANDING:
         BASIC                     32,138   33,549    32,577   33,367
         DILUTED                   32,240   34,365    32,732   34,090