UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant To Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: July 31, 2008
(Date of earliest event reported)
NAUTILUS, INC.
(Exact name of registrant as specified in its charter)
| Washington | 001-31321 | 94-3002667 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) | (I.R.S. Employer Identification No.) |
16400 SE Nautilus Drive
Vancouver, Washington 98683
(Address of principal executive offices and zip code)
(360) 859-2900
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12(b) under the Exchange Act (17 CFR 240.14a-12(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
NAUTILUS, INC.
FORM 8-K
Item 2.02 Results of Operations and Financial Condition
On July 31, 2008, Nautilus, Inc. issued a press release announcing second quarter 2008 preliminary earnings results. A copy of the press release is attached as Exhibit 99.1 hereto.
As previously announced, the Company will host an investor conference call at 5:00 PM EDT on July 31, 2008 to discuss second quarter 2008 results of operations and the Company’s restructuring efforts. The materials to be presented on the conference call are available at the Company’s website, www.nautilusinc.com, and are attached as Exhibit 99.2 to hereto.
The information in this Item 2.02 and in the exhibits attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise expressly stated in such filing.
Item 7.01 Regulation FD Disclosure
The information in Item 2.02 of this current report on Form 8-K is incorporated by reference in this Item 7.01.
Item 9.01 Financial Statements and Exhibits
| (d) Exhibits | ||
| Exhibit No. |
Description | |
| 99.1 | Nautilus, Inc. Press Release dated July 31, 2008. | |
| 99.2 | Slide presentation delivered by Edward J. Bramson on July 31, 2008. | |
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| NAUTILUS, INC. | ||||
| (Registrant) | ||||
| July 31, 2008 | By: | /s/ William D. Meadowcroft | ||
| (Date) | William D. Meadowcroft, | |||
| Chief Financial Officer | ||||
Exhibit 99.1
Nautilus, Inc. Announces Results for Second Quarter 2008
Significant Restructuring Activity Commenced in the Quarter
VANCOUVER, WA—July 31, 2008 — Fitness company Nautilus, Inc. (NYSE:NLS - News) 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 - News) 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)
| June 30, 2008 |
December 31, 2007 | |||||
| ASSETS | ||||||
| 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 Ended June 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 | ) | |||||
(continued)
NAUTILUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Six Months Ended June 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)
| Six Months Ended | |||||||||||||
| 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 | |||||||||||||
| 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 | |||||||||||||
| 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 | % | ||||
 Operating Review July 31, 2008 Exhibit 99.2 |
 2 Safe Harbor Statement This presentation contains forward-looking statements, which may contain words such as “intends,” “believes,” “anticipates,” and “expects.” These forward-looking statements involve risks and uncertainties that may cause
our actual results to be materially different from those expressed or implied
by these statements. A more detailed description of certain factors
that could affect actual results include, but are not limited to, those
discussed in the Nautilus, Inc. annual report on Form 10-K for the
fiscal year ended December 31, 2007. This presentation utilizes management
allocations to present channel segment results. These allocations are based
on management estimates and are subject to revision. We do not undertake any
duty to update forward-looking statements after the date they are made
or to conform them to actual results or to changes in circumstances or
expectations. Bowflex, Nautilus, Nautilus One, Schwinn Fitness, StairMaster and Universal are registered trademarks of Nautilus, Inc. |
 3 Turnaround objectives • Strengthen balance sheet and liquidity – Reduce risk – Support growth strategy – Permit future distributions to shareholders • Improve profitability at current sales levels – Lower breakeven level – Reduce earnings volatility – Eliminate losses in commercial business – Maintain investment in advertising • Develop strategy for profitable growth – New product development – Resolve retail / direct channel conflict – Expand share in cardio market – Capitalize on retail brand portfolio • Increase financial transparency |
 4 Balance sheet and liquidity • Sale of apparel business in April – $58.4 million net cash received – Up to $4.3 million to be received from escrow in October 2009 • Terminated $69 million agreement to acquire Land America – $8 million payment in Q2 settles all claims – Good supplier relationship restored • Maintaining liquidity – Operating cost reductions – Inventory reductions – Further outsourcing reduces required capital expenditures • Current position – Net cash of $4 million at June 30 versus net debt of $71 million at December 31, 2007 – Unutilized borrowing availability of approximately $35 million at June 30 • Improved balance sheet position permits share repurchases – $10 million approved – $5.1 million repurchased through July 29 |
 5 Improve profitability at current sales level • Historical profitability declined despite sales increases (1) – Fixed costs growing faster than sales (1) Excludes apparel division and restructuring and other items; 2003 and 2004 results adjusted for FAS 123R ($ millions) 2003 2004 2005 2006 2007 Sales 498.8 523.8 607.2 617.3 501.4 Gross Profit 243.5 238.6 262.6 266.3 196.3 Gross Margin 48.8% 45.6% 43.2% 43.1% 39.2% Advertising 83.0 76.0 76.0 85.0 78.0 as % of sales 16.6% 14.5% 12.5% 13.8% 15.6% Other SG&A 111.8 120.8 156.7 146.6 154.9 as % of sales 22.4% 23.1% 25.8% 23.7% 30.9% Operating Profit 48.7 41.8 29.9 34.7 (36.6) Operating Margin 9.8% 8.0% 4.9% 5.6% -7.3% |
 6 Improve profitability at current sales level • Expense growth affected all channels negatively (1) Allocations based on management estimates and are subject to revision (2) Corporate as a percent of Total Sales Note: Excludes apparel division and restructuring and other items; 2003 adjusted for FAS 123R 2003 2007 ($ millions) Direct Retail Comm. Corporate Total Direct Retail Comm. Corporate Total Sales 246.9 165.4 86.5 - 498.8 249.1 114.7 134.5 3.1 501.4 Cost of Goods Sold (1) 79.8 116.7 58.8 - 255.3 98.5 96.1 109.8 0.7 305.1 Gross Profit 167.1 48.7 27.7 - 243.5 150.6 18.6 24.7 2.4 196.3 Gross Margin 67.7% 29.4% 32.0% 48.8% 60.5% 16.2% 18.4% 39.2% Advertising (1) 79.6 3.4 - - 83.0 75.9 2.1 - - 78.0 Other SG&A (1) 54.7 21.9 16.5 18.7 111.8 67.7 18.0 37.1 32.1 154.9 Operating Profit 32.8 23.4 11.2 (18.7) 48.7 7.0 (1.5) (12.4) (29.7) (36.6) Operating Margin (2) 13.3% 14.1% 12.9% -3.7% 9.8% 2.8% -1.3% -9.2% -5.9% -7.3% Net Income 31.3 (25.0) EBITDA 63.7 (22.9) - - |
 7 Planned cost reductions (1) Excludes apparel division and restructuring and other items (2) Incremental savings (3) Assumes constant sales volume and mix Cost Reductions 2007 2007 Percent ($ millions) Actual (1) Annualized (2) 2008 Total Reduction Cost of Goods Sold (3) 305.1 (2.4) (16.3) (18.7) -6.1% Advertising 78.0 - (2.0) (2.0) -2.6% Selling & Marketing 97.4 (2.5) (21.3) (23.8) -24.4% General & Administrative 47.3 (2.2) (9.4) (11.6) -24.6% Research & Development 10.2 (1.0) (1.1) (2.1) -20.3% Subtotal Other SG&A 154.9 (5.7) (31.8) (37.5) -24.2% Total Costs 538.0 (8.1) (50.1) (58.2) -10.8% |
 8 Planned cost reductions • Pro forma 2007 reduction by channel • On a pro forma 2007 basis, each channel would have been profitable ($ millions) Direct Retail Commercial Corporate Total Cost of Goods Sold (1) 4.4 5.1 9.2 - 18.7 Advertising 2.0 - - - 2.0 Other SG&A 12.1 3.5 9.2 12.7 37.5 Total 18.5 8.6 18.4 12.7 58.2 (1) Assumes constant sales volume and mix |
 9 Improve profitability at current sales level • Initial phase of cost reductions benefit H1 2008 (1) Allocations based on management estimates and are subject to revision (2) Corporate as a percent of Total Sales Note: Excludes apparel division and restructuring and other items H1 2007 H1 2008 ($ millions) Direct Retail Comm. Corporate Total Direct Retail Comm. Corporate Total Sales 128.3 46.9 62.9 1.3 239.4 110.9 51.8 60.4 2.0 225.1 Cost of Goods Sold (1) 48.3 39.6 50.5 0.3 138.7 43.9 40.8 48.9 (0.2) 133.4 Gross Profit 80.0 7.3 12.4 1.0 100.7 67.0 11.0 11.5 2.2 91.7 Gross Margin 62.4% 15.6% 19.7% 42.1% 60.4% 21.2% 19.0% 40.7% Advertising (1) 38.6 0.9 - - 39.5 35.1 0.6 - - 35.7 Other SG&A (1) 35.2 8.6 17.4 16.8 78.0 26.3 6.9 15.5 12.5 61.2 Operating Profit 6.2 (2.2) (5.0) (15.8) (16.8) 5.6 3.5 (4.0) (10.3) (5.2) Operating Margin (2) 4.8% -4.7% -7.9% -6.6% -7.0% 5.0% 6.8% -6.6% -4.6% -2.3% Net Income (11.2) (4.2) EBITDA (9.8) 1.7 - - |
 10 Planned cost reductions • Cost of goods sold – Facilities consolidation – Consolidation of distribution centers – Component costs • SG&A – Reduce management duplication – Efficiencies in marketing, finance, IT and International – Purchased services • Additional opportunities – Product redesign to improve manufacturability and reduce warranty expense – Improved component purchasing – Continuing SG&A cost control – Improved advertising effectiveness • Continuing profitability issues – Effect of economy on revenues – Purchased product cost increases – Freight (principally outbound) |
 11 Implementation of cost reductions • Expected timing of cost reductions and restructuring expenses (1) Assumes constant sales volume and mix Note: Includes results of 2007 reductions Cumulative Quarterly Run Rate 2008 2009 Annualized ($ millions) Q1 Q2 Q3 Q4 Q1 Run Rate Savings Cost of Goods Sold (1) (0.9) (1.0) (1.2) (1.6) (4.7) (18.7) SG&A (5.7) (6.7) (7.3) (8.4) (9.9) (39.5) Total (6.6) (7.7) (8.5) (10.0) (14.6) (58.2) 2008 2009 ($ millions) Q1 Q2 Q3 Q4 Q1 Total Restructuring & Other Items Asset Write-Downs - 1.4 0.7 3.5 - 5.6 Severance 1.8 1.5 0.4 0.6 0.4 4.7 Land America Settlement 8.0 - - - - 8.0 Other - 3.7 - 0.4 0.2 4.3 Total 9.8 6.6 1.1 4.5 0.6 22.6 |
 12 Implementation of cost reductions • Estimated composition of restructuring costs 2008 2009 ($ millions) Q1 Q2 Q3 Q4 Q1 Total Cash 9.8 2.4 0.4 1.6 0.6 14.8 Non-Cash - 4.2 0.7 2.9 - 7.8 Total 9.8 6.6 1.1 4.5 0.6 22.6 |
 13 Strategic focus • Restore sales growth at acceptable margins • Increase overall share in cardio market – 2007 U.S. fitness market (1) Cardio 72% Strength 28% – Nautilus percentage of cardio Retail 60% Direct 25% Commercial 63% • Increase penetration of mid-priced commercial strength market – Nautilus One leads at high end – Mid-market is 66% larger • Address Retail vs. Direct channel conflicts in consumer fitness products – Lowered margins – Reduced advertising efficiency (1) Source: Sporting Goods Manufacturers Association (SGMA) |
 14 Strategic focus • Capitalize on brand portfolio in Retail channel – Bowflex – Nautilus – Schwinn Fitness – StairMaster – Universal • Redesign Direct products to maintain gross profit margin at optimal price points
1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 2,100 2003 2004 2005 2006 2007 170 190 210 230 250 270 290 Average Selling Price Total Direct Channel Sales Optimal ASP Zone |
 15 Strategic focus • Most growth initiatives involve investment in new product development – Innovation – Design for manufacturability – Reposition price points – Consumer product differentiation • Expect to announce results of strategic review in Q1 2009 |
 16 Summary • Balance sheet and liquidity now satisfactory • Current cost reduction program completed by Q1 2009 – Near-term improvement in earnings – Offsets weak economic environment – Continued focus on cost control • Investment in key growth drivers of new product development and advertising continue at current levels • Opportunity to use enhanced cash flow for growth or shareholder distributions • Strategic Review in Q1 2009 – New and repositioned direct products – New cost-reduced commercial products – Retail brand optimization – Expansion in cardio market – Focus on profitable growth |
 |