Nautilus, Inc. Announces Results for Second Quarter 2008

Fitness company Nautilus, Inc. (NYSE:NLS) today announced results for the second quarter ended June 30, 2008. Loss from continuing operations for the quarter ended June 30, 2008 was $9.6 million or $0.30 per diluted share after recording restructuring related and other charges of $6.6 million, or $0.14 per diluted share after-tax. The charges principally related to severance, inventory reserves and anticipated settlements related to licensing agreements. In the second quarter of 2007, the Company reported income from continuing operations of $0.7 million or $0.02 per diluted share including a benefit of $18.3 million or $0.34 per diluted share after-tax from a litigation settlement. Results from continuing operations exclude the Company's former apparel business, which is considered a discontinued operation and was sold on April 18, 2008 for $69.4 million. Net loss (including discontinued operations) for the second quarter 2008 was $8.9 million, or $0.28 per diluted share, compared to net income of $1.1 million, or $0.04 per diluted share for the second quarter of 2007. An important part of our restructuring activities has been the establishment of separate teams with authority and responsibility for the profitability of each of our global business units. We will now be reporting the Commercial, Direct and Retail businesses on a global basis. As a result of changing the reportable business segments in the second quarter of 2008, accounting rules require the Company to perform an interim goodwill impairment test. The Company is in the process of determining whether a goodwill impairment charge is required as of June 30, 2008. An impairment charge, if any, would be a non-cash charge. The Company expects to complete this goodwill impairment assessment prior to the filing of its Form 10-Q for the second quarter. Net sales from continuing operations for the three months ended June 30, 2008, were $95.6 million compared to $102.5 million for the corresponding period last year, a decrease of 7%. Net sales increases in the Company’s Retail business were offset by declines in the Direct business, principally due to a weak consumer and tight credit environment, as well as declines in Commercial sales principally due to suspending sales of the Commercial TreadClimber. We have commenced work on a new Commercial TreadClimber which we expect to introduce at a future date. As of June 30, 2008, the Company had a net cash position of $4 million and unutilized borrowing availability of approximately $35 million versus net debt of $71 million at December 31, 2007. During the second quarter of 2008, the Company repurchased $2.2 million of common stock. As of July 29, 2008, the Company had repurchased 981,398 shares of common stock at an average price of $5.16 per share or a total of $5.1 million, leaving $4.9 million remaining on the $10 million share repurchase program authorized by our Board of Directors in May 2008. "In addition to managing our expenses tightly, we are continuing our thorough review of each business unit with a particular focus on profitable growth,” stated Edward Bramson, Chairman and Chief Executive Officer of Nautilus, Inc. "The four areas of strategic focus are new product development, resolving channel conflict, expanding our share of the cardio market, and capitalizing on our strong portfolio of brands. In order to improve our profitability in the current economic environment, we have initiated a restructuring program which is expected to reduce fixed costs significantly.” A copy of the presentation detailing the restructuring is available on our website at www.nautilusinc.com/earnings. Conference Call and Presentation The conference call is scheduled for 5:00 p.m. EDT (2:00 p.m. PDT), July 31, 2008. It will be broadcast live over the Internet hosted at www.nautilusinc.com/events and will be archived online within one hour after completion of the call. The accompanying presentation will be hosted at www.nautilusinc.com/earnings. In addition, listeners may call (866) 394-6821 in North America and (706) 645-0458 from outside North America. Participants from the Company will be Edward Bramson, Chairman and Chief Executive Officer, and Bill Meadowcroft, Chief Financial Officer. A telephonic playback will be available from 4:00 p.m. PDT, July 31, through 4:00 p.m. PDT, August 14, 2008. North American callers may dial (800) 633-8284 and international callers may dial (402) 977-9140 to hear the playback. The passcode is 21388886. About Nautilus, Inc. Headquartered in Vancouver, Wash., Nautilus, Inc. (NYSE:NLS) is a global fitness products company providing innovative, quality solutions to help people achieve a healthy lifestyle. With a brand portfolio including Nautilus®, Bowflex®, Schwinn®Fitness, StairMaster® and Universal®, Nautilus manufactures and markets innovative fitness products through direct, commercial, retail, and international channels. Formed in 1986, the company had 2007 sales of $502 million. It has 1,100 employees and operations in Washington, Oregon, Colorado, Oklahoma, Virginia, Canada, Switzerland, Germany, United Kingdom, Italy, China and other locations around the world. Website: www.nautilusinc.com Safe Harbor Statement: This press release includes forward-looking statements, including statements concerning estimated future profitability and operational improvement. Factors that could cause Nautilus, Inc. actual results to differ materially from these forward-looking statements include availability of media time and fluctuating advertising rates, its ability to successfully transfer products to alternative manufacturing facilities, manufacturing quality issues resulting in increased warranty costs, a decline in consumer spending due to unfavorable economic conditions, its ability to effectively develop, market, and sell future products, its ability to get foreign-sourced product through customs in a timely manner, its ability to effectively identify, negotiate and integrate any future strategic acquisitions, its ability to protect its intellectual property, introduction of lower-priced competing products, unpredictable events and circumstances relating to international operations including its use of foreign manufacturers, government regulatory action, and general economic conditions. Please refer to our reports and filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q, for a further discussion of these risks and uncertainties. We also caution you not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events.   NAUTILUS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)   ASSETS   June 30, 2008   December 31, 2007 CURRENT ASSETS: Cash and cash equivalents $ 4,433 $ 7,911 Trade receivables (net of allowance for doubtful accounts of $4,763 and $4,490 at June 30, 2008 and December 31, 2007, respectively) 54,617 88,311 Inventories, net 62,277 58,910 Prepaid expenses and other current assets 6,774 13,759 Income taxes receivable 15,522 11,382 Assets of discontinued operations — 73,771 Assets held for sale 1,677 1,677 Short-term note receivable — 2,384 Deferred tax assets   10,633   18,615   Total current assets 155,933 276,720 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $63,368 and $59,673 on June 30, 2008 and December 31, 2007, respectively 39,138 42,291 GOODWILL 32,656 32,743 OTHER INTANGIBLES AND OTHER ASSETS, net   43,284   39,086   TOTAL ASSETS $ 271,011 $ 390,840   LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Trade payables $ 35,232 $ 43,993 Accrued liabilities 38,095 37,318 Short-term borrowings 397 79,000 Income taxes payable 311 283 Customer deposits 2,402 2,925 Liabilities of discontinued operations   —   15,867   Total current liabilities 76,437 179,386 NON-CURRENT LIABILITIES 4,857 6,919 NON-CURRENT DEFERRED TAX LIABILITIES 3,578 5,123 LONG-TERM TAXES PAYABLE 3,621 2,958 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY: Common stock – no par value, 75,000 shares authorized, 31,232 and 31,557 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively 4,158 4,346 Retained earnings 169,784 185,021 Accumulated other comprehensive income   8,576   7,087   Total stockholders’ equity   182,518   196,454   TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 271,011 $ 390,840   NAUTILUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share amounts)       Three Months Ended June 30, Six Months Ended June 30,   2008     2007   2008     2007   NET SALES $ 95,564 $ 102,534 $ 225,165 $ 239,507 COST OF SALES   61,630   64,305   135,306   138,763   Gross profit   33,934   38,229   89,859   100,744   OPERATING EXPENSES: Selling and marketing 31,484 40,854 73,714 88,416 General and administrative 14,896 11,476 34,706 22,886 Research and development 1,961 2,638 4,166 5,426 Litigation settlement   —   (18,300)   —   (18,300)   Total operating expenses   48,341   36,668   112,586   98,428   OPERATING INCOME (LOSS) (14,407) 1,561 (22,727) 2,316 OTHER INCOME (EXPENSE): Interest income 11 83 90 153 Interest expense (93) (871) (1,330) (1,751) Other income, net   132   429   175   524   Total other income (expense)   50   (359)   (1,065)   (1,074)   INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (14,357) 1,202 (23,792) 1,242 INCOME TAX EXPENSE (BENEFIT)   (4,722)   531   (7,276)   597   INCOME (LOSS) FROM CONTINUING OPERATIONS (9,635) 671 (16,516) 645 DISCONTINUED OPERATIONS: Income from discontinued operations 640 700 3,016 4,680 Income tax expense (benefit) from discontinued operations   (118)   261   1,737   1,753   INCOME FROM DISCONTINUED OPERATIONS, net of tax   758   439   1,279   2,927   NET INCOME (LOSS) $ (8,877) $ 1,110 $ (15,237) $ 3,572   EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS: BASIC $ (0.30) $ 0.02 $ (0.52) $ 0.02 DILUTED $ (0.30) $ 0.02 $ (0.52) $ 0.02 EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS: BASIC $ 0.02 $ 0.02 $ 0.04 $ 0.09 DILUTED $ 0.02 $ 0.02 $ 0.04 $ 0.09 EARNINGS (LOSS) PER SHARE: BASIC $ (0.28) $ 0.04 $ (0.48) $ 0.11 DILUTED $ (0.28) $ 0.04 $ (0.48) $ 0.11 WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 31,582 31,545 31,569 31,527 DILUTED 31,582 31,685 31,569 31,707   NAUTILUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)   Six Months EndedJune 30,   2008     2007     CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (15,237) $ 3,572 Income from discontinued operations   1,279   2,927   Income (loss) from continuing operations (16,516) 645 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities Depreciation and amortization 7,662 6,872 Share-based compensation expense 2,006 1,391 Gain on sale of property, plant and equipment (173) (22) Excess tax benefit from exercise of employee stock options --- (77) Deferred income taxes 5,849 (1,274) Litigation settlement --- (18,300) Foreign currency transaction gain (315) (363) Changes in assets and liabilities: Trade receivables 35,751 60,903 Inventories (2,273) (15,316) Prepaid expenses and other current assets 2,062 4,547 Other assets (908) --- Income taxes receivable (4,140) --- Trade payables (8,967) (20,273) Income taxes payable 712 (2,640) Accrued liabilities (2,127) (5,223) Customer deposits   (561)   63   Net cash provided by operating activities of continuing operations 18,062 10,933 Net cash provided by (used in) operating activities of discontinued operations   (1,617)   722   Net cash provided by operating activities   16,445   11,655   CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (2,402) (4,585) Proceeds from sale of property, plant and equipment 141 32 Refund of acquisition escrow deposit 5,000 --- Net increase in other intangibles and other assets (285) (484) Proceeds from sale of Pearl Izumi 58,435 --- Net (increase) decrease in short-term note receivable   2,384   (133)   Net cash provided by (used in) investing activities from continuing operations 63,273 (5,170) Net cash used in investing activities from discontinued operations   (24)   (377)   Net cash provided by (used in) investing activities   63,249   (5,547)   NAUTILUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)   Six Months EndedJune 30,   2008     2007   CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid on common stock --- (6,311) Proceeds from exercise of stock options 563 756 Excess tax benefit from exercise of employee stock options --- 77 Net (reduction) increase in short-term borrowings (78,603) 600 Stock repurchases   (2,209)   ---   Net cash used in financing activities from continuing operations (80,249) (4,878) Net cash used in financing activities from discontinued operations   (174)   (142)   Net cash used in financing activities   (80,423)   (5,020)   Net effect of foreign currency exchange rate changes   (2,749)   500   Net (decrease) increase in cash and cash equivalents (3,478) 1,588 Cash and cash equivalents, beginning of period   7,911   4,262   Cash and cash equivalents, end of period $ 4,433 $ 5,850   Supplemental disclosures: Cash paid for interest $ 2,342 $ 1,666   Cash refunded (paid) for income taxes $ 8,812 $ (6,973)   SUPPLEMENTAL DISCLOSURE OF OTHER NONCASH INVESTING AND FINANCING ACTIVITIES: Accrued and noncurrent liabilities incurred for software purchase $ 1,021 --- Escrow deposit included in other assets for sale of Pearl Izumi $ 4,365 ---   NAUTILUS, INC. NET SALES BY BUSINESS UNIT (Unaudited, in thousands)           YTD Six Months Ended ($ in thousands) June 30, 2008 June 30, 2007 $ Change % Change   Direct $ 110,943 $ 128,333 $ (17,390 ) -13.6 % Retail 51,822 46,913 4,909 10.5 % Commercial 60,440 62,931 (2,491 ) -4.0 % Royalties   1,960   1,330   630   47.4 % Total Revenue $ 225,165 $ 239,507 $ (14,342 ) -6.0 %     Three Months Ended ($ in thousands) June 30, 2008 June 30, 2007 $ Change % Change   Direct $ 41,317 $ 54,191 $ (12,874 ) -23.8 % Retail 22,872 14,986 7,886 52.6 % Commercial 30,466 32,751 (2,285 ) -7.0 % Royalties   909   606   303   50.0 % Total Revenue $ 95,564 $ 102,534 $ (6,970 ) -6.8 %   Three Months Ended ($ in thousands) Mar 31, 2008 Mar 31, 2007 $ Change % Change   Direct $ 69,626 $ 74,142 $ (4,516 ) -6.1 % Retail 28,950 31,927 (2,977 ) -9.3 % Commercial 29,974 30,180 (206 ) -0.7 % Royalties   1,051   724   327   45.2 % Total Revenue $ 129,601 $ 136,973 $ (7,372 ) -5.4 %