Nautilus’ Q3 Sales Jump 22 Percent

Year to date net sales through the third quarter were $141.7 million, an increase of 10 percent over the same period last year.

Gross margins for the third quarter improved in both the Direct and Retail segments, by 310 and 400 basis points respectively, versus same period last year, however the consolidated gross margin declined 160 basis points to 47.1 percent due to a greater percentage of sales coming from the company's lower gross margin Retail segment. Operating Income for the third quarter of 2013 was $1.3 million, a 91 percent increase over the $0.7 million reported in the same quarter of 2012. The increase in operating income reflects higher sales and gross margins in both the Direct and Retail Segments combined with improved operating leverage of sales and marketing and general and administrative expenses. Year to date operating income through nine months totals $5.6 million, an increase of 92 percent over the same period last year.

Net income from continuing operations for the third quarter of 2013 was $1.5 million, compared to $1.2 million for the same period last year. Net income for last year’s third quarter included a tax benefit of $0.6 million. Income per diluted share from continuing operations for the third quarter of 2013 was $0.05, compared to income per diluted share of $0.04 in the third quarter of 2012 which included approximately $0.02 per diluted share of tax benefit. On a year to date basis through the first nine-months of 2013, net income from continuing operations was $39.7 million or $1.26 per diluted share, which included a $34.2 million net income tax benefit due primarily to the partial reversal, in the second quarter of 2013, of a valuation allowance recorded against the company's deferred tax assets. Excluding the net income tax benefit, the company's income from continuing operations was $5.5 million, or $0.17 per diluted share, compared to $3.4 million, or $0.11 per diluted share, for the same period last year.

For the third quarter of 2013, the company reported net income (including discontinued operations) of $1.4 million, or $0.04 per diluted share. In the third quarter of 2012, the company reported net income (including discontinued operations) of $1.0 million, or $0.03 per diluted share including the previously mentioned tax benefit of $0.02 per diluted share. Net income for the third quarter of 2013 included a loss from discontinued operations of $0.1 million. Net income for the third quarter of 2012 included a loss from discontinued operations of $0.3 million, or ($0.01) per diluted share.

Bruce M. Cazenave, Chief Executive Officer, stated, “During the third quarter, we achieved very strong growth in our Retail business and were also pleased with the continued growth of the Direct business. The operating performance improvement this quarter reflects our team’s hard work to deliver impactful new products, further improve gross margins in both our Direct and Retail businesses, and to realize operating leverage across our sales, marketing, and administrative areas. We also continued to make incremental strategic investments in our overall marketing initiatives, and in new creative and media exposure for our Direct business.”

Mr. Cazenave continued, “We are encouraged by the favorable reception that our new products have received as we enter our historically strongest quarter of the year. Our new line-up of Retail products has been well received, and our new Direct products, including the Bowflex Boost™ band and the soon to be launched MAX Trainer™, have been receiving positive reviews in a broad base of general interest, fitness and social media outlets. Although overall consumer confidence and spending levels continue to present headwinds, we believe we have positioned ourselves well for this year’s peak fitness season.”

Segment Results

Net sales for the Direct segment were $25.7 million in the third quarter of 2013, an increase of 3 percent over the comparable period last year. Direct segment sales benefited from increased sales of the company's new product, Bowflex® UpperCut™, as well as continued strong demand for cardio products, especially our Bowflex® TreadClimber® product line, partially offset by a decline in strength products. Net sales year to date through nine months for the Direct segment were $93.7 million, an increase of 12 percent over the comparable period last year. U.S. credit approval rates rose to 34.3 percent in the third quarter of 2013, up from 31.4 percent for the same period last year.

Operating income for the Direct segment was $1.3 million for the third quarter 2013, compared to $1.9 million for the third quarter 2012. Higher sales and higher gross margins for the Direct segment were offset by higher media and creative investment designed to help drive new product awareness and expand the sales leads for the fourth quarter of 2013. Gross margin for the Direct business was 61.0 percent for the third quarter of 2013, compared to 57.9 percent in the third quarter of last year. Direct business gross margin benefited from improved overall overhead operating efficiency and cost improvements.

Net sales for the Retail segment were $19.4 million in the third quarter 2013, an increase of 70 percent when compared to $11.4 million in the third quarter last year. The company's Retail segment sales in the third quarter of 2012 were adversely affected as a result of some Retail customers accelerating a portion of their purchases into the second quarter from the third and fourth quarters, compared to their typical buying patterns, in anticipation of the price increases implemented in the third quarter last year. Net sales year to date through nine months for the Retail segment were $44.7 million, an increase of 6 percent compared to the same period last year. The improvement in Retail net sales is due primarily to growth in strength products and strong retailer acceptance of the company’s new lineup of cardio products.

Operating income for the Retail segment was $2.9 million, compared to $0.8 million in the third quarter last year. Retail gross margin was 25.4 percent in the third quarter of 2013, compared to 21.4 percent in the same quarter of last year. Gross margin benefited from a combination of the mix of new products, the price increase put in place last year, and improved overall overhead operational efficiency.

Royalty revenue in the third quarter was $1.2 million, compared to $1.6 million for the same quarter of last year. Prior year third quarter royalty revenue benefited from a one-time payment for back royalties owed to Nautilus. Current year royalties, while now including Commercial TreadClimber® sales, improved but not sufficiently to exceed the benefit of that prior year one-time true up. Royalty revenue year to date through nine months was $3.4 million, compared to $3.3 million in the same period in 2012.

Balance Sheet

The company ended the third quarter of 2013 in a strong financial position. As of September 30, 2013, the company had cash and cash equivalents of $27.7 million and no debt, compared to cash and cash equivalents of $23.2 million and no debt at year end 2012. Working capital was $35.2 million as of September 30, 2013, compared to $25.4 million at year end 2012. Inventory as of September 30, 2013 was $17.5 million, compared to $18.8 million as of December 31, 2012 and $16.9 million at the end of the third quarter of 2012. The company tightly manages inventory levels and believes that inventory is at the proper levels, when combined with planned purchases, to support sales in the fourth quarter of 2013.