UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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[x] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015March 31, 2016
or
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[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-31321
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NAUTILUS, INC. |
(Exact name of Registrant as specified in its charter) |
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Washington | | 94-3002667 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
17750 S.E. 6th Way
Vancouver, Washington 98683
(Address of principal executive offices, including zip code)
(360) 859-2900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ] Smaller reporting company [ ]
(do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
The number of shares outstanding of the registrant's common stock as of October 31, 2015April 30, 2016 was 30,982,50331,032,496 shares.
NAUTILUS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015MARCH 31, 2016
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Item 1. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 6. | | | |
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
NAUTILUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
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| | | | | | | |
| As of |
| September 30, 2015 | | December 31, 2014 |
Assets | | | |
Cash and cash equivalents | $ | 29,021 |
| | $ | 45,206 |
|
Available-for-sale securities | 45,647 |
| | 26,984 |
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Trade receivables, net of allowances of $25 and $108 | 19,091 |
| | 26,260 |
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Inventories | 35,575 |
| | 24,896 |
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Prepaids and other current assets | 5,973 |
| | 6,987 |
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Income taxes receivable | 132 |
| | 50 |
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Deferred income tax assets, current portion | 8,851 |
| | 12,368 |
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Total current assets | 144,290 |
| | 142,751 |
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Property, plant and equipment, net | 11,689 |
| | 9,634 |
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Goodwill | 2,185 |
| | 2,520 |
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Other intangible assets, net | 10,466 |
| | 10,575 |
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Long-term deferred income tax assets | 3,541 |
| | 9,546 |
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Other assets | 471 |
| | 628 |
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Total assets | $ | 172,642 |
| | $ | 175,654 |
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Liabilities and Shareholders' Equity | | | |
Trade payables | $ | 38,895 |
| | $ | 47,574 |
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Accrued liabilities | 8,704 |
| | 9,851 |
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Warranty obligations | 2,658 |
| | 2,246 |
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Total current liabilities | 50,257 |
| | 59,671 |
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Income taxes payable | 3,758 |
| | 3,725 |
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Other long-term liabilities | 1,720 |
| | 1,186 |
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Total liabilities | 55,735 |
| | 64,582 |
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Commitments and contingencies (Note 13) |
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Shareholders' equity: | | | |
Common stock - no par value, 75,000 shares authorized, 30,982 and 31,333 shares issued and outstanding | 191 |
| | 8,033 |
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Retained earnings | 117,804 |
| | 103,347 |
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Accumulated other comprehensive loss | (1,088 | ) | | (308 | ) |
Total shareholders' equity | 116,907 |
| | 111,072 |
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Total liabilities and shareholders' equity | $ | 172,642 |
| | $ | 175,654 |
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| As of |
| March 31, 2016 | | December 31, 2015 |
Assets | | | |
Cash and cash equivalents | $ | 44,027 |
| | $ | 30,778 |
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Available-for-sale securities | 28,788 |
| | 29,998 |
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Trade receivables, net of allowances of $1,015 and $918 | 24,386 |
| | 45,155 |
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Inventories | 36,817 |
| | 42,729 |
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Prepaids and other current assets | 7,917 |
| | 6,888 |
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Income taxes receivable | 3,845 |
| | 439 |
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Deferred income tax assets | — |
| | 8,904 |
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Total current assets | 145,780 |
| | 164,891 |
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Property, plant and equipment, net | 16,796 |
| | 16,764 |
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Goodwill | 60,323 |
| | 60,470 |
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Other intangible assets, net | 72,394 |
| | 73,354 |
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Long-term deferred income tax assets | 99 |
| | — |
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Other assets | 386 |
| | 433 |
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Total assets | $ | 295,778 |
| | $ | 315,912 |
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Liabilities and Shareholders' Equity | | | |
Trade payables | $ | 38,456 |
| | $ | 61,745 |
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Accrued liabilities | 10,582 |
| | 13,027 |
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Warranty obligations | 4,397 |
| | 4,753 |
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Note payable, current portion, net of unamortized debt issuance costs of $7 and $7 | 15,993 |
| | 15,993 |
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Total current liabilities | 69,428 |
| | 95,518 |
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Warranty obligations, non-current | 4,315 |
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| 3,792 |
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Income taxes payable, non-current | 5,053 |
| | 4,116 |
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Deferred income tax liabilities, non-current | 13,251 |
| | 18,380 |
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Other long-term liabilities | 3,569 |
| | 3,144 |
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Note payable, non-current, net of unamortized debt issuance costs of $26 and $29 | 59,974 |
| | 63,971 |
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Total liabilities | 155,590 |
| | 188,921 |
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Commitments and contingencies (Note 15) |
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Shareholders' equity: | | | |
Common stock - no par value, 75,000 shares authorized, 31,032 and 31,005 shares issued and outstanding | 2,661 |
| | 796 |
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Retained earnings | 138,966 |
| | 127,522 |
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Accumulated other comprehensive loss | (1,439 | ) | | (1,327 | ) |
Total shareholders' equity | 140,188 |
| | 126,991 |
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Total liabilities and shareholders' equity | $ | 295,778 |
| | $ | 315,912 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| 2015 |
| 2014 | | 2015 | | 2014 | | 2016 | | 2015 |
Net sales | $ | 70,690 |
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| $ | 59,067 |
| | $ | 226,624 |
| | $ | 179,517 |
| | $ | 120,928 |
| | $ | 96,239 |
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Cost of sales | 34,481 |
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| 30,272 |
| | 105,870 |
| | 87,461 |
| | 54,584 |
| | 42,350 |
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Gross profit | 36,209 |
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| 28,795 |
| | 120,754 |
| | 92,056 |
| | 66,344 |
| | 53,889 |
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Operating expenses: | |
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Selling and marketing | 21,742 |
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| 17,086 |
| | 70,193 |
| | 54,549 |
| | 35,179 |
| | 28,399 |
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General and administrative | 5,505 |
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| 5,745 |
| | 15,376 |
| | 16,507 |
| | 8,231 |
| | 5,578 |
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Research and development | 2,573 |
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| 1,683 |
| | 7,259 |
| | 5,338 |
| | 3,634 |
| | 2,307 |
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Total operating expenses | 29,820 |
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| 24,514 |
| | 92,828 |
| | 76,394 |
| | 47,044 |
| | 36,284 |
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Operating income | 6,389 |
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| 4,281 |
| | 27,926 |
| | 15,662 |
| | 19,300 |
| | 17,605 |
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Other income (expense): | | | | | | | | | | | |
Interest income | 61 |
| | 18 |
| | 164 |
| | 42 |
| | 54 |
| | 44 |
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Interest expense | (6 | ) | | (9 | ) | | (17 | ) | | (21 | ) | | (466 | ) | | (5 | ) |
Other, net | (15 | ) | | 43 |
| | (412 | ) | | (74 | ) | | (124 | ) | | (116 | ) |
Total other income (expense), net | 40 |
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| 52 |
| | (265 | ) | | (53 | ) | |
Total other expense, net | | | (536 | ) | | (77 | ) |
Income from continuing operations before income taxes | 6,429 |
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| 4,333 |
| | 27,661 |
| | 15,609 |
| | 18,764 |
| | 17,528 |
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Income tax provision | 2,556 |
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| 1,669 |
| | 10,710 |
| | 5,699 |
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Income tax expense | | | 7,178 |
| | 6,669 |
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Income from continuing operations | 3,873 |
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| 2,664 |
| | 16,951 |
| | 9,910 |
| | 11,586 |
| | 10,859 |
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Discontinued operations: | | | | | | | | | | | |
Loss from discontinued operations before income taxes | (159 | ) |
| (241 | ) | | (472 | ) | | (1,075 | ) | | (124 | ) | | (153 | ) |
Income tax provision (benefit) from discontinued operations | (14 | ) |
| (64 | ) | | (405 | ) | | 417 |
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Income tax expense (benefit) from discontinued operations | | | 18 |
| | (26 | ) |
Loss from discontinued operations | (145 | ) |
| (177 | ) | | (67 | ) | | (1,492 | ) | | (142 | ) | | (127 | ) |
Net income | $ | 3,728 |
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| $ | 2,487 |
| | $ | 16,884 |
| | $ | 8,418 |
| | $ | 11,444 |
| | $ | 10,732 |
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Basic income per share from continuing operations | $ | 0.12 |
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| $ | 0.09 |
| | $ | 0.54 |
| | $ | 0.32 |
| | $ | 0.37 |
| | $ | 0.35 |
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Basic loss per share from discontinued operations | — |
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| (0.01 | ) | | — |
| | (0.05 | ) | | — |
| | — |
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Basic net income per share(1) | $ | 0.12 |
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| $ | 0.08 |
| | $ | 0.54 |
| | $ | 0.27 |
| | $ | 0.37 |
| | $ | 0.34 |
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Diluted income per share from continuing operations | $ | 0.12 |
| | $ | 0.08 |
| | $ | 0.53 |
| | $ | 0.31 |
| | $ | 0.37 |
| | $ | 0.34 |
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Diluted loss per share from discontinued operations | — |
| | (0.01 | ) | | — |
| | (0.05 | ) | | — |
| | — |
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Diluted net income per share(1) | $ | 0.12 |
| | $ | 0.08 |
| | $ | 0.53 |
| | $ | 0.27 |
| | $ | 0.37 |
| | $ | 0.34 |
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Shares used in per share calculations: | | | | | | | | | | | |
Basic | 31,272 |
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| 31,287 |
| | 31,386 |
| | 31,231 |
| | 31,016 |
| | 31,396 |
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Diluted | 31,527 |
| | 31,655 |
| | 31,702 |
| | 31,641 |
| | 31,295 |
| | 31,767 |
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(1)May not add due to rounding. | | | | | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net income | $ | 3,728 |
| | $ | 2,487 |
| | $ | 16,884 |
| | $ | 8,418 |
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Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on available-for-sale securities, net of income tax expense of $9, $0, $14 and $0 | 10 |
| | 4 |
| | 23 |
| | (6 | ) |
Foreign currency translation, net of income tax expense of $5, $5, $9 and $6 | (451 | ) | | (253 | ) | | (803 | ) | | (241 | ) |
Other comprehensive loss | (441 | ) | | (249 | ) | | (780 | ) | | (247 | ) |
Comprehensive income | $ | 3,287 |
| | $ | 2,238 |
| | $ | 16,104 |
| | $ | 8,171 |
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| | Three Months Ended March 31, |
| | 2016 | | 2015 |
Net income | | $ | 11,444 |
| | $ | 10,732 |
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Other comprehensive income (loss): | | | | |
Unrealized gain (loss) on available-for-sale securities, net of income tax expense of $12 and $0 | | 18 |
| | (1 | ) |
Loss on derivative securities, effective portion, net of income tax benefit of $413 and $0 | | (682 | ) | | — |
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Foreign currency translation, net of income tax (benefit) expense of $(7) and $5 | | 552 |
| | (484 | ) |
Other comprehensive loss | | (112 | ) | | (485 | ) |
Comprehensive income | | $ | 11,332 |
| | $ | 10,247 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
| | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2015 | | 2014 | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
Income from continuing operations | $ | 16,951 |
| | $ | 9,910 |
| $ | 11,586 |
| | $ | 10,859 |
|
Loss from discontinued operations | (67 | ) | | (1,492 | ) | (142 | ) | | (127 | ) |
Net income | 16,884 |
| | 8,418 |
| 11,444 |
| | 10,732 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | |
Depreciation and amortization | 2,511 |
| | 2,887 |
| 1,935 |
| | 910 |
|
Provision for (benefit from) allowance for doubtful accounts | (118 | ) | | 38 |
| 97 |
| | (108 | ) |
Inventory lower-of-cost-or-market adjustments | 136 |
| | 305 |
| — |
| | 18 |
|
Stock-based compensation expense | 1,073 |
| | 887 |
| 701 |
| | 301 |
|
Loss on asset dispositions | 289 |
| | 13 |
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(Gain) loss on asset dispositions | | 10 |
| | (2 | ) |
Deferred income taxes, net of valuation allowance | 9,503 |
| | 4,142 |
| 5,342 |
| | 6,102 |
|
Excess tax deficiency related to stock-based awards | 1 |
| | 288 |
| |
Excess tax (benefit) deficiency related to stock-based awards | | (1,514 | ) | | 2 |
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Changes in operating assets and liabilities: | | | | | | |
Trade receivables | 7,514 |
| | 6,855 |
| 20,540 |
| | 9,719 |
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Inventories | (10,748 | ) | | (5,844 | ) | 7,366 |
| | 4,930 |
|
Prepaids and other current assets | 1,205 |
| | 763 |
| (1,028 | ) | | 1,763 |
|
Income taxes | (82 | ) | | 469 |
| |
Income taxes receivable | | (3,406 | ) | | 27 |
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Trade payables | (9,030 | ) | | (16,079 | ) | (20,949 | ) | | (20,612 | ) |
Accrued liabilities, including warranty obligations | (630 | ) | | 196 |
| (1,854 | ) | | (298 | ) |
Net cash provided by operating activities | 18,508 |
| | 3,338 |
| 18,684 |
| | 13,484 |
|
Cash flows from investing activities: | | | | | | |
Purchases of available-for-sale securities | (55,230 | ) | | (20,973 | ) | (9,112 | ) | | (30,440 | ) |
Proceeds from maturities of available-for-sale securities | 33,186 |
| | 2,980 |
| 10,323 |
| | 3,680 |
|
Proceeds from sales of available-for-sale securities | 3,381 |
| | — |
| — |
| | 2,354 |
|
Purchases of property, plant and equipment and intangible assets | (3,604 | ) | | (2,558 | ) | |
Acquisition of business, net of cash acquired | | (3,469 | ) | | — |
|
Purchases of property, plant and equipment | | (787 | ) | | (590 | ) |
Net cash used in investing activities | (22,267 | ) | | (20,551 | ) | (3,045 | ) | | (24,996 | ) |
Cash flows from financing activities: | | | | | | |
Payments on long-term debt | | (4,000 | ) | | — |
|
Payments for stock repurchases | | — |
| | (1,996 | ) |
Proceeds from exercise of stock options | 1,001 |
| | 270 |
| 35 |
| | 407 |
|
Payments for stock repurchases | (11,568 | ) | | — |
| |
Tax payments related to stock award issuances | (775 | ) | | — |
| (221 | ) | | (652 | ) |
Excess tax deficiency related to stock-based awards | (1 | ) | | (288 | ) | |
Excess tax benefit (deficiency) related to stock-based awards | | 1,514 |
| | (2 | ) |
Net cash used in financing activities | (11,343 | ) | | (18 | ) | (2,672 | ) | | (2,243 | ) |
Effect of exchange rate changes on cash and cash equivalents | (1,083 | ) | | (8 | ) | 282 |
| | (758 | ) |
Decrease in cash and cash equivalents | (16,185 | ) | | (17,239 | ) | |
Increase (decrease) in cash and cash equivalents | | 13,249 |
| | (14,513 | ) |
Cash and cash equivalents: | | | | | | |
Beginning of period | 45,206 |
| | 40,979 |
| 30,778 |
| | 45,206 |
|
End of period | $ | 29,021 |
| | $ | 23,740 |
| $ | 44,027 |
| | $ | 30,693 |
|
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest | $ | (17 | ) | | $ | (21 | ) | $ | (466 | ) | | $ | (6 | ) |
Cash paid for income taxes, net | (917 | ) | | (384 | ) | (4,705 | ) | | (332 | ) |
Supplemental disclosure of non-cash investing activities: | | | | | | |
Capital expenditures incurred but not yet paid | $ | 602 |
| | $ | 107 |
| $ | 281 |
| | $ | 64 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL INFORMATION
Basis of Consolidation and Presentation
The accompanying condensed consolidated financial statements present the financial position, results of operations and cash flows of Nautilus, Inc. and its subsidiaries, all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.
The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20142015 (the “2014“2015 Form 10-K”).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Further information regarding significant estimates can be found in our 20142015 Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 30, 2015March 31, 2016 and December 31, 2014,2015, and our results of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2015March 31, 2016 and 20142015. Interim results are not necessarily indicative of results for a full year. Our revenues typically vary seasonally and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.
Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.
New Accounting Pronouncements
ASU 2016-10
In April 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing." ASU 2016-10 clarifies aspects of Topic 606 related to identifying performance obligations and the licensing implementation guidance, while retaining the related core principles for those areas. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements in Topic 606 (ASU 2014-09). While we do not expect the adoption of ASU 2016-10 to have a material effect on our business, we are still evaluating any potential impact that adoption of ASU 2016-10 may have on our financial position, results of operations or cash flows.
ASU 2016-09
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted subject to certain requirements, and the method of application (i.e., retrospective, modified retrospective or prospective) depends on the transaction area that is being amended. We do not expect the adoption of ASU 2016-09 to have a material effect on our financial position, results of operations or cash flows.
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 replaces the existing guidance in Accounting Standards Codification ("ASC") 840, Leases. The new standards would require companies and other organizations to include lease obligations on their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization
of the ROU asset, and for operating leases the lessee would recognize a straight-line total lease expense. ASU 2016-02 is effective for public companies' annual periods, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating any potential impact that adoption of ASU 2016-02 may have on our financial position, results of operations or cash flows.
ASU 2015-17
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes, and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments apply to all entities that present a classified statement of financial position, and aligns the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards ("IFRS") IAS 1. ASU 2015-17 is effective for public companies' financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Our early adoption of ASU 2015-17 in January 2016 did not have a material effect on our financial position, results of operations or cash flows. We are applying ASU 2015-17 on a prospective basis to all deferred tax liabilities and assets, and prior periods have not been retrospectively adjusted.
ASU 2015-16
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 simplifies the presentation of provisional amounts reported for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The amendments in ASU 2015-16 require an entity to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, and to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for public companies' financial statements issued for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015 on a prospective basis. Our adoption of ASU 2015-16 as of January 2016 did not have a material effect on our financial position, results of operations or cash flows.
ASU 2015-11
In July 2015, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.
ASU 2015-05
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).” ASU 2015-05 provides guidance regarding the accounting for a customer's fees paid in a cloud computing arrangement, specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 iswas effective for public companies' annual periods, including interim periods, beginning after December 15, 2015. Early adoption is permitted. We do not expect theOur adoption of ASU 2015-05 toin January 2016 did not have a material effect on our financial position, results of operations or cash flows.
ASU 2015-03
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30).” ASU 2015-03 simplifies the presentation of debt issuance costs. ASU 2015-03 is effective, as amended, for public company financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption iswas permitted for financial statements that have not been previously issued. We do not expect theOur adoption of ASU 2015-03 toas of December 31, 2015 did not have any effect on our financial position, results of operations or cash flows.
ASU 2015-02
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810).” ASU 2015-02 amends guidance regarding the consolidation of certain legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not expect the adoption of ASU 2015-02 to have anya material effect on our financial position, results of operations or cash flows.
ASU 2014-12
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)." ASU No. 2014-12 addresses accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 indicates that, in such situations, the performance target should be treated as a performance condition and, accordingly, the performance target should not be reflected in estimating the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December
15, 2015. We do not expect theOur adoption of ASU 2014-12 toin January 2016 did not have a material effect on our financial position, results of operations or cash flows.
ASU 2014-09
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and the International Accounting Standards Board that:
• removes inconsistencies and weaknesses in revenue requirements;
• provides a more robust framework for addressing revenue issues;
• improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;
• provides more useful information to users of financial statements through improved disclosure requirements; and
• simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.
ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017. While we do not expect the adoption of ASU 2014-09 to have a material effect on our business, we are still evaluating any potential impact that adoption of ASU 2014-09 may have on our financial position, results of operations or cash flows.
In April 2014,(2) BUSINESS ACQUISITION
On December 31, 2015, we acquired all of the FASB issued ASU No. 2014-08, "Presentationoutstanding capital stock of Financial Statements (Topic 205)OF Holdings, Inc., sole parent of Octane Fitness, LLC ("Octane") for an aggregate base purchase price of $115.0 million, plus net adjustments for working capital and Property, Plant,cash acquired on the closing date. We funded the acquisition through an $80.0 million term loan and Equipment (Topic 360)cash on hand.
For the three months ended March 31, 2016, Octane contributed net sales of $12.5 million and Reporting Discontinued Operationsnet loss of $0.8 million. The current period loss included amortization of acquired assets of $0.8 million and Disclosurespurchase accounting related inventory step-up expense of Disposals$0.7 million. Working capital and other measurement period adjustments as of ComponentsMarch 31, 2016 totaled $0.7 million and are detailed in the preliminary valuation table shown below.
Total acquisition costs incurred for the three months ended March 31, 2016 were $0.2 million, and cumulative to date costs total $0.8 million. These charges were expensed as incurred in general and administrative costs.
Purchase Price Allocation
Acquired assets and liabilities were recorded at estimated fair value as of an Entity." ASU 2014-08 amends the definition for what typesacquisition date. The excess of asset disposals arethe purchase price over the estimated fair value of identifiable net assets resulted in the recognition of goodwill of $58.1 million, all of which was assigned to the Retail segment, and is attributed primarily to Octane's intellectual property base, benefits of access to different markets and customers, and employee workforce. The goodwill is not expected to be considered discontinued operations, and amendsdeductible for income tax purposes.
The following table summarizes the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 also enhances the convergencepreliminary fair values of the FASB’snet assets acquired and liabilities assumed and measurement period adjustments since December 31, 2015, the acquisition date (in thousands):
|
| | | | | | | | | | | |
| Preliminary valuation at December 31, 2015 | | Measurement period adjustments | | Adjusted preliminary valuation at March 31, 2016 |
Cash | $ | 7,759 |
| | $ | — |
| | $ | 7,759 |
|
Accounts receivable | 12,507 |
| | — |
| | 12,507 |
|
Inventories | 12,168 |
| | 1,515 |
| | 13,683 |
|
Prepaid expenses | 1,028 |
| | — |
| | 1,028 |
|
Deferred tax assets | 1,287 |
| | (571 | ) | | 716 |
|
Property, plant and equipment | 3,240 |
| | — |
| | 3,240 |
|
Intangible assets | 63,100 |
| | — |
| | 63,100 |
|
Total assets acquired | 101,089 |
| | 944 |
| | 102,033 |
|
| | | | | |
Accounts payable | 6,215 |
| | — |
| | 6,215 |
|
Accrued liabilities | 1,614 |
| | — |
| | 1,614 |
|
Warranty obligations | 5,550 |
| | — |
| | 5,550 |
|
Deferred tax liabilities, non-current | 20,914 |
| | — |
| | 20,914 |
|
Other non-current liabilities | 519 |
| | — |
| | 519 |
|
Total liabilities assumed | 34,812 |
| | — |
| | 34,812 |
|
| | | | | |
Net identifiable assets acquired | 66,277 |
| | 944 |
| | 67,221 |
|
Goodwill | 58,357 |
| | (282 | ) | | 58,075 |
|
Net assets acquired | $ | 124,634 |
| | $ | 662 |
| | $ | 125,296 |
|
The allocation of the purchase price is preliminary and is based upon valuation information available and estimates and assumptions made as of March 31, 2016. We are still in the process of verifying data and finalizing information including valuation and recording of the assets acquired and liabilities assumed, and the International Accounting Standard Board’s reporting requirements for discontinued operations. ASU 2014-08 is effective for annual periods beginning on or afterresulting amount of recognized goodwill.
The following table sets forth the components of identifiable intangible assets and their estimated fair values and useful lives as of December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. We do not expect31, 2015, the adoptionacquisition date (dollars in thousands):
|
| | | | | | | |
| Estimated fair value | | Estimated useful life (years) | | Weighted-average amortization period (years) |
Trade name - Octane Fitness | $ | 23,000 |
| | Indefinite | | N/A |
Trade name - others | 2,600 |
| | 10 - 15 | | 12.5 |
Patents | 12,800 |
| | 11 - 24 | | 18 |
Customer relationships | 24,700 |
| | 10 - 15 | | 13 |
| $ | 63,100 |
| | | | |
Summary of ASU 2014-08 to have a material effect on our financial position,Unaudited Pro Forma Information
The following table reflects the unaudited pro forma consolidated results of operations or cash flows.for the periods presented, as though the acquisition of Octane had occurred on January 1, 2014 (in thousands, except per share amounts):
|
| | | | | | | | | |
| | | |
| | | Three Months Ended March 31, |
| | | 2016 | | 2015 |
Net sales | | $ | 120,928 |
| | $ | 111,130 |
|
Net income | | 11,514 |
| | 10,821 |
|
Net income per share: | | | | |
| Basic | | $ | 0.37 |
| | $ | 0.34 |
|
| Diluted | | 0.37 |
| | 0.34 |
|
The unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results.
(2)(3) DISCONTINUED OPERATIONS
There was no revenue related to discontinued operations for the ninethree months ended September 30, 2015March 31, 2016 or the year ended December 31, 2014.2015. However, we continue to have legal and accounting expenses as we work with authorities on final deregistration of certain foreign entities and product liability expenses associated with product previously sold into the Commercial channel.
The following table summarizes liabilities for exit costs related to discontinued operations, included in accrued liabilities and other long-term liabilities in our Condensed Consolidated Balance Sheets (in thousands):
|
| | | |
| Facilities Leases |
Balance, December 31, 2014 | $ | 573 |
|
Payments | (203 | ) |
Balance, September 30, 2015 | $ | 370 |
|
|
| | | |
| Facilities Leases |
Balance, December 31, 2015 | $ | 300 |
|
Payments | (75 | ) |
Balance, March 31, 2016 | $ | 225 |
|
We expect the lease obligations to be paid out through 2016.
(3)(4) FAIR VALUE MEASUREMENTS
Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories:
Level 1 - observable inputs such as quoted prices (unadjusted) in active liquid markets for identical securities as of the reporting date;
Level 2 - other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; or observable market prices in markets with insufficient volume and/or infrequent transactions; and
Level 3 - significant inputs that are generally unobservable inputs for which there is little or no market data available, including our own assumptions in determining fair value.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2015March 31, 2016 and December 31, 20142015 were as follows (in thousands):
| | | | September 30, 2015 | | March 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash Equivalents | | | | | | | | | | | | | | | | |
Money market funds | | $ | 8,401 |
| | $ | — |
| | $ | — |
| | $ | 8,401 |
| | $ | 9,007 |
| | $ | — |
| | $ | — |
| | $ | 9,007 |
|
Commercial paper | | — |
| | 7,097 |
| | — |
| | 7,097 |
| | — |
| | 5,997 |
| | — |
| | 5,997 |
|
Corporate bonds | | — |
| | 308 |
| | — |
| | 308 |
| | — |
| | 4,095 |
| | — |
| | 4,095 |
|
Total cash equivalents | | 8,401 |
| | 7,405 |
| | — |
| | 15,806 |
| | 9,007 |
| | 10,092 |
| | — |
| | 19,099 |
|
| | | | | | | | | | | | | | | | |
Available-for-Sale Securities | | | | | | | | | | | | | | | | |
Certificates of deposit(1) | | — |
| | 24,531 |
| | — |
| | 24,531 |
| | — |
| | 27,064 |
| | — |
| | 27,064 |
|
Commercial paper | | — |
| | 2,798 |
| | — |
| | 2,798 |
| |
Corporate bonds | | — |
| | 18,318 |
| | — |
| | 18,318 |
| | — |
| | 1,724 |
| | — |
| | 1,724 |
|
Total available-for-sale securities | | — |
| | 45,647 |
| | — |
| | 45,647 |
| | — |
| | 28,788 |
| | — |
| | 28,788 |
|
| | | | | | | | | | | | | | | | |
Total assets measured at fair value | | $ | 8,401 |
| | $ | 53,052 |
| | $ | — |
| | $ | 61,453 |
| | $ | 9,007 |
| | $ | 38,880 |
| | $ | — |
| | $ | 47,887 |
|
| | | | | | | | | |
Derivatives | | | | | | | | | |
Interest rate swap contract | | | $ | — |
| | $ | (1,095 | ) | | $ | — |
| | $ | (1,095 | ) |
| | | | | | | | | |
Total liabilities measured at fair value | | | $ | — |
| | $ | (1,095 | ) | | $ | — |
| | $ | (1,095 | ) |
| | | | December 31, 2014 | | December 31, 2015 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash Equivalents | | | | | | | | | | | | | | | | |
Money market funds | | $ | 2,591 |
| | $ | — |
| | $ | — |
| | $ | 2,591 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Certificates of deposit(1) | | — |
| | 980 |
| | — |
| | 980 |
| |
Commercial paper | | — |
| | 12,497 |
| | — |
| | 12,497 |
| |
Variable rate demand notes | | — |
| | 8,000 |
| | — |
| | 8,000 |
| |
Corporate bonds | | | — |
| | 733 |
| | — |
| | 733 |
|
Total cash equivalents | | 2,591 |
| | 21,477 |
| | — |
| | 24,068 |
| | 1 |
| | 733 |
| | — |
| | 734 |
|
| | | | | | | | | | | | | | | | |
Available-for-Sale Securities | | | | | | | | | | | | | | | | |
Certificates of deposit(1) | | — |
| | 14,202 |
| | — |
| | 14,202 |
| | — |
| | 25,234 |
| | — |
| | 25,234 |
|
Corporate bonds | | — |
| | 12,782 |
| | — |
| | 12,782 |
| | — |
| | 4,764 |
| | — |
| | 4,764 |
|
Total available-for-sale securities | | — |
| | 26,984 |
| | — |
| | 26,984 |
| | — |
| | 29,998 |
| | — |
| | 29,998 |
|
| | | | | | | | | | | | | | | | |
Total assets measured at fair value | | $ | 2,591 |
| | $ | 48,461 |
| | $ | — |
| | $ | 51,052 |
| | $ | 1 |
| | $ | 30,731 |
| | $ | — |
| | $ | 30,732 |
|
(1) All certificates of deposit are within current FDIC insurance limits.
We did not have any liabilities measured at fair value on a recurring basis as of September 30, 2015 or December 31, 2014.2015.
WeFor our assets measured at fair value on a recurring basis, we recognize transfers between levels at the actual date of the event or change in circumstance that caused the transfer. There were no transfers between levels during the ninethree months ended September 30, 2015,March 31, 2016, nor for the year ended December 31, 2014.2015.
We did not have any changes to our valuation techniques during the ninethree months ended September 30, 2015,March 31, 2016, nor for the year ended December 31, 2014.2015.
We classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment
valuations are obtained from inputs, other than quoted market prices in active markets, that are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions. The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Unrealized holding gains and losses are excluded from earnings and are reported net of tax in comprehensive income until realized.
The fair value of our interest rate swap contract is calculated as the present value of estimated future cash flows using discount factors derived from relevant Level 2 market inputs, including forward curves and volatility levels.
We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property, plant and equipment, goodwill, other intangible assets and certain other long-lived assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy. We did not perform any valuations on assets or liabilities that are valued at fair value on a nonrecurring basis during the first ninethree months of 2015.2016. During the fourth quarter of 2014,2015, we performed our annual goodwill and indefinite-lived trade names impairment analyses effective as of October 1, 2014.2015. During the ninethree months ended September 30, 2015March 31, 2016 and the year ended December 31, 2014,2015, we did not record any other-than-temporary impairments on our financial assets required to be measured at fair value on a nonrecurring basis.
(5) DERIVATIVES
From time to time, we enter into interest rate swaps to fix a portion of our interest expense. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.
As of March 31, 2016, we had a $76.0 million interest rate swap outstanding with JPMorgan Chase Bank, N.A. This interest rate swap matures on December 31, 2020 and has a fixed rate of 1.42% per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark. At March 31, 2016, the one-month LIBOR rate was 0.44%.
We typically designate all interest rate swaps as cash flow hedges and, accordingly, record the change in fair value for the effective portion of these interest rate swaps in accumulated other comprehensive income rather than current period earnings until the underlying hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. For the three months ended March 31, 2016, there was no ineffectiveness. As of March 31, 2016, we expect to reclassify $0.2 million from accumulated other comprehensive loss to earnings within the next twelve months.
The fair value of our derivative instruments was included in our Condensed Consolidated Balance Sheets as follows (in thousands):
|
| | | | | | | | | | |
| | Balance Sheet Classification | | As of |
| | | March 31, 2016 | | December 31, 2015 |
Derivatives instruments designated as cash flow hedges: | | | | | | |
Interest rate swap contract | | Accrued liabilities | | $ | 230 |
| | $ | — |
|
| | Other long-term liabilities | | 865 |
| | — |
|
| | | | $ | 1,095 |
| | $ | — |
|
The effect of derivative instruments on our Condensed Consolidated Statements of Operations was as follows (in thousands):
|
| | | | | | | | | | |
| | Statement of Operations Classification | | Three Months Ended March 31, |
| | | 2016 | | 2015 |
Derivatives instruments designated as cash flow hedges: | | | | | | |
Loss recognized in other comprehensive income before reclassifications | | --- | | $ | (810 | ) | | $ | — |
|
Loss reclassified from accumulated other comprehensive income to earnings for the effective portion | | Interest expense | | $ | (128 | ) | | $ | — |
|
(4)
(6) INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined based on the first-in, first-out method. Our inventories consisted of the following (in thousands):
| | | As of | As of |
| September 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Finished goods | $ | 33,768 |
| | $ | 23,765 |
| $ | 33,265 |
| | $ | 39,115 |
|
Parts and components | 1,807 |
| | 1,131 |
| 3,552 |
| | 3,614 |
|
Total inventories | $ | 35,575 |
| | $ | 24,896 |
| $ | 36,817 |
| | $ | 42,729 |
|
(5)(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| | | Estimated Useful Life (in years) | | As of | Estimated Useful Life (in years) | | As of |
| | September 30, 2015 | | December 31, 2014 | | March 31, 2016 | | December 31, 2015 |
Automobiles | 5 | to | 6 | | $ | 139 |
| | $ | 23 |
| 5 | to | 6 | | $ | 139 |
| | $ | 139 |
|
Leasehold improvements | 5 | to | 20 | | 2,140 |
| | 2,144 |
| 5 | to | 20 | | 3,432 |
| | 3,397 |
|
Computer software and equipment | 3 | to | 7 | | 23,381 |
| | 25,397 |
| 3 | to | 7 | | 23,444 |
| | 23,991 |
|
Machinery and equipment | 3 | to | 5 | | 7,484 |
| | 6,709 |
| 3 | to | 5 | | 11,433 |
| | 10,867 |
|
Furniture and fixtures | 5 | | 1,196 |
| | 1,108 |
| 5 | | 1,601 |
| | 1,605 |
|
Work in progress(1) | N/A | | 1,585 |
| | 421 |
| N/A | | 2,060 |
| | 1,655 |
|
Total cost | | 35,925 |
| | 35,802 |
| | 42,109 |
| | 41,654 |
|
Accumulated depreciation | | (24,236 | ) | | (26,168 | ) | | (25,313 | ) | | (24,890 | ) |
Total property, plant and equipment, net | | $ | 11,689 |
| | $ | 9,634 |
| | $ | 16,796 |
| | $ | 16,764 |
|
(1) Work in progress includes production tooling and internal use software development.
(6)(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
All goodwill is assigned to our Direct reporting segment. The rollforward of goodwill was as follows (in thousands):
|
| | | |
Balance, December 31, 2013 | $ | 2,740 |
|
Currency exchange rate adjustment | (220 | ) |
Balance, December 31, 2014 | 2,520 |
|
Currency exchange rate adjustment | (335 | ) |
Balance, September 30, 2015 | $ | 2,185 |
|
|
| | | | | | | | | | | |
| Direct | | Retail | | Total |
Balance, January 1, 2015 | $ | 2,520 |
| | $ | — |
| | $ | 2,520 |
|
Currency exchange rate adjustment | (407 | ) | | — |
| | (407 | ) |
Business acquisition (Note 2) | — |
| | 58,357 |
| | 58,357 |
|
Balance, December 31, 2015 | 2,113 |
| | 58,357 |
| | 60,470 |
|
Currency exchange rate adjustment | 147 |
| | (12 | ) | | 135 |
|
Business acquisition (Note 2) - measurement period adjustments | — |
| | (282 | ) | | (282 | ) |
Balance, March 31, 2016 | $ | 2,260 |
| | $ | 58,063 |
| | $ | 60,323 |
|
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
| | | Estimated Useful Life (in years) | | As of | Estimated Useful Life (in years) | | As of |
| | September 30, 2015 | | December 31, 2014 | | March 31, 2016 | | December 31, 2015 |
Other intangible assets: | | | | | |
Indefinite-lived trademarks | N/A | | $ | 9,052 |
| | $ | 9,052 |
| N/A | | $ | 32,052 |
| | $ | 32,052 |
|
Definite-lived trademarks | | 10 | to | 15 | | 2,600 |
| | 2,600 |
|
Patents | 8 | to | 18 | | 18,702 |
| | 18,154 |
| 8 | to | 24 | | 31,487 |
| | 31,487 |
|
Customer relationships | | 10 | to | 15 | | 24,700 |
| | 24,700 |
|
| | 27,754 |
| | 27,206 |
| | 90,839 |
| | 90,839 |
|
Accumulated amortization - patents | | (17,288 | ) | | (16,631 | ) | |
Accumulated amortization - definite-lived intangible assets | | | (18,445 | ) | | (17,485 | ) |
Other intangible assets, net | | $ | 10,466 |
| | $ | 10,575 |
| | $ | 72,394 |
| | $ | 73,354 |
|
Amortization expense was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Patent amortization | $ | 188 |
| | $ | 510 |
| | $ | 657 |
| | $ | 1,530 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
Amortization expense | $ | 960 |
| | $ | 290 |
|
Future amortization of patentsdefinite-lived intangible assets is as follows (in thousands):
| | Remainder of 2015 | $ | 197 |
| |
2016 | 497 |
| |
Remainder of 2016 | | $ | 2,592 |
|
2017 | 198 |
| 3,255 |
|
2018 | 106 |
| 3,162 |
|
2019 | 76 |
| 3,132 |
|
2020 | | 3,106 |
|
Thereafter | 340 |
| 25,095 |
|
| $ | 1,414 |
| $ | 40,342 |
|
(7)(9) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
| | | As of | As of |
| September 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Payroll and related liabilities | $ | 4,394 |
| | $ | 5,058 |
| $ | 3,916 |
| | $ | 6,556 |
|
Other | 4,310 |
| | 4,793 |
| 6,666 |
| | 6,471 |
|
Total accrued liabilities | $ | 8,704 |
| | $ | 9,851 |
| $ | 10,582 |
| | $ | 13,027 |
|
(8)(10) PRODUCT WARRANTIES
Our products carry limited, defined warranties for defects in materials or workmanship which, according to their terms, generally obligate us to pay the costs of supplying and shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods range from thirty days to, in limited circumstances, the
lifetime of certain product components. We record a liability at the time of sale for the estimated costs of fulfilling future warranty claims. If necessary, we adjust the liability for specific warranty-related matters when they become known and are reasonably estimable. Estimated warranty expense is included in cost of sales, based on historical warranty claim experience and available product quality data. Warranty expense is affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to the customer, product failure rates, and higher or lower than expected repair costs. If warranty expense differs from previous estimates, or if circumstances change such that the assumptions inherent in previous estimates are no longer valid, the amount of product warranty obligations is adjusted accordingly.
Changes in our product warranty obligations were as follows (in thousands):
| | | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2015 | | 2014 | | 2016 | | 2015 |
Balance, beginning of period | | $ | 2,246 |
| | $ | 1,638 |
| | $ | 8,545 |
| | $ | 2,246 |
|
Accruals | | 1,845 |
| | 1,719 |
| | 1,530 |
| | 815 |
|
Payments | | (1,433 | ) | | (1,236 | ) | | (1,363 | ) | | (564 | ) |
Balance, end of period | | $ | 2,658 |
| | $ | 2,121 |
| | $ | 8,712 |
| | $ | 2,497 |
|
(11) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss), net of applicable taxes, reported on our Condensed Consolidated Balance Sheets consists of unrealized holding gains and losses on available-for-sale securities, effective portions of gains and losses of derivative securities designated as cash flow hedges, and foreign currency translation adjustments. The following tables set forth the changes in accumulated other comprehensive income (loss), net of tax (in thousands):
|
| | | | | | | | | | | |
| Unrealized Gain (Loss) on Available-for-Sale Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, June 30, 2015 | $ | (5 | ) | | $ | (642 | ) | | $ | (647 | ) |
Current period other comprehensive income (loss) | 10 |
| | (451 | ) | | (441 | ) |
Balance, September 30, 2015 | $ | 5 |
| | $ | (1,093 | ) | | $ | (1,088 | ) |
|
| | | | | | | | | | | |
| Unrealized Gain (Loss) on Available-for-Sale Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, December 31, 2014 | $ | (18 | ) | | $ | (290 | ) | | $ | (308 | ) |
Current period other comprehensive income (loss) | 23 |
| | (803 | ) | | (780 | ) |
Balance, September 30, 2015 | $ | 5 |
| | $ | (1,093 | ) | | $ | (1,088 | ) |
|
| | | | | | | | | | | | | | | |
| Unrealized Gain (Loss) on Available-for-Sale Securities | | Loss on Derivative Securities (Effective Portion) | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, December 31, 2015 | $ | (16 | ) | | $ | — |
| | $ | (1,311 | ) | | $ | (1,327 | ) |
Current period other comprehensive income (loss) before reclassifications | 18 |
| | (810 | ) | | 552 |
| | (240 | ) |
Reclassification of amounts to earnings | — |
| | 128 |
| | — |
| | 128 |
|
Net other comprehensive income (loss) during period | 18 |
| | (682 | ) | | 552 |
| | (112 | ) |
Balance, March 31, 2016 | $ | 2 |
| | $ | (682 | ) | | $ | (759 | ) | | $ | (1,439 | ) |
|
| | | | | | | | | | | |
| Unrealized Gain (Loss) on Available-for-Sale Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Income (Loss) |
Balance, June 30, 2014 | $ | (10 | ) | | $ | 256 |
| | $ | 246 |
|
Current period other comprehensive income (loss) | 4 |
| | (253 | ) | | (249 | ) |
Balance, September 30, 2014 | $ | (6 | ) | | $ | 3 |
| | $ | (3 | ) |
|
| | | | | | | | | | | |
| Unrealized Loss on Available-for-Sale Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Income (Loss) |
Balance, December 31, 2013 | $ | — |
| | $ | 244 |
| | $ | 244 |
|
Current period other comprehensive loss | (6 | ) | | (241 | ) | | (247 | ) |
Balance, September 30, 2014 | $ | (6 | ) | | $ | 3 |
| | $ | (3 | ) |
|
| | | | | | | | | | | |
| Unrealized Loss on Available-for-Sale Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, December 31, 2014 | $ | (18 | ) | | $ | (290 | ) | | $ | (308 | ) |
Current period other comprehensive loss | (1 | ) | | (484 | ) | | (485 | ) |
Balance, March 31, 2015 | $ | (19 | ) | | $ | (774 | ) | | $ | (793 | ) |
(12) STOCK REPURCHASE PROGRAM
On November 3, 2014, our Board of Directors approved a stock repurchase program that authorized us to repurchase up to $15.0 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016. Share repurchases are funded with existing cash balances, and the repurchased shares are retired and returned to unissued authorized shares. There were no repurchases during the three months ended March 31, 2016. Repurchases pursuant to the program were as follows:
|
| | | | | | | | |
Quarter Ended | | Number of Shares | | Repurchased Amount | | Average Price Per Share |
March 31, 2015 | | 133,877 | | $ | 1,995,982 |
| | $14.91 |
September 30, 2015 | | 577,831 | | 9,571,545 |
| | 16.56 |
Totals to Date | | 711,708 | | $ | 11,567,527 |
| | $16.25 |
As of March 31, 2016, $3.4 million remains available for future repurchases.
(10)(13) INCOME PER SHARE
Basic per share amounts were computed using the weighted average number of common shares outstanding. Diluted per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method. The weighted average numbers of shares outstanding used to compute income per share were as follows (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Shares used to calculate basic income per share | 31,272 |
| | 31,287 |
| | 31,386 |
| | 31,231 |
| 31,016 |
| | 31,396 |
|
Dilutive effect of outstanding stock options, performance stock units and restricted stock units | 255 |
| | 368 |
| | 316 |
| | 410 |
| 279 |
| | 371 |
|
Shares used to calculate diluted income per share | 31,527 |
| | 31,655 |
| | 31,702 |
| | 31,641 |
| 31,295 |
| | 31,767 |
|
The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income per share because, in the case of stock options, the average market price did not exceed the exercise price, and for the performance stock units, because these shares are subject to performance conditions that had not been met. These shares may be dilutive potential common shares in the future (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stock options | 7 |
| | 212 |
| | 10 |
| | 247 |
|
Performance stock units | — |
| | 198 |
| | — |
| | 20 |
|
(11) STOCK REPURCHASE PROGRAM |
| | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
Stock options | 11 |
| | 25 |
|
Performance stock units | — |
| | 163 |
|
On November 3, 2014, our Board of Directors approved a stock repurchase program that authorized us to repurchase up to $15.0 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016. Share repurchases will be funded with existing cash balances and repurchased shares will be retired and returned to unissued authorized shares. Repurchases pursuant to the program were as follows:
|
| | | | | | | | |
Quarter Ended | | Number of Shares | | Repurchased Amount | | Average Price Per Share |
March 31, 2015 | | 133,877 | | $ | 1,995,982 |
| | $14.91 |
September 30, 2015 | | 577,831 | | 9,571,545 |
| | 16.56 |
Totals to Date | | 711,708 | | $ | 11,567,527 |
| | $16.25 |
As of September 30, 2015, $3.4 million remains available for future repurchases.
(12)(14) SEGMENT AND ENTERPRISE-WIDE INFORMATION
We operate in three segments - Direct, Retail, and Commercial and Specialty. Based on the aggregation criteria of ASC 280-10, we determined that two of the operating segments (Retail and Commercial and Specialty) can be aggregated due to these segments having similar economic and other characteristics. As a result, we have two reportable segments - Direct and Retail. This financial reporting structure was effective as of December 31, 2015, the acquisition date of Octane.
We evaluate performance using several factors, of which the primary financial measures are net sales and reportable segment contribution. Contribution is the measure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets are those directly assigned to an operating segment's operations, primarily accounts receivable, inventories, goodwill and other intangible assets. Unallocated assets primarily include cash and cash equivalents, available-for-sale securities, shared information technology infrastructure, distribution centers, corporate headquarters, prepaids and other current assets, deferred income tax assets and other assets, shared information technology infrastructure, distribution centers and corporate headquarters.assets. Capital expenditures directly attributable to the Direct and Retail segments were not significant in either period presented.any period.
Following is summary information by reportable segment (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 |
Net sales: | | | | | | | | | | | |
Direct | $ | 42,876 |
| | $ | 34,498 |
| | $ | 158,595 |
| | $ | 117,589 |
| | $ | 81,234 |
| | $ | 74,057 |
|
Retail | 25,730 |
| | 23,467 |
| | 64,424 |
| | 58,609 |
| | 38,805 |
| | 21,290 |
|
Unallocated royalty income | 2,084 |
| | 1,102 |
| | 3,605 |
| | 3,319 |
| |
Royalty | | | 889 |
| | 892 |
|
Consolidated net sales | $ | 70,690 |
| | $ | 59,067 |
| | $ | 226,624 |
| | $ | 179,517 |
| | $ | 120,928 |
| | $ | 96,239 |
|
Contribution: | | | | | | | | | | | |
Direct | $ | 5,394 |
| | $ | 4,133 |
| | $ | 30,071 |
| | $ | 18,375 |
| | $ | 21,144 |
| | $ | 19,571 |
|
Retail | 3,224 |
| | 3,703 |
| | 5,900 |
| | 7,537 |
| | 3,944 |
| | 1,500 |
|
Unallocated royalty income | 2,084 |
| | 1,102 |
| | 3,605 |
| | 3,319 |
| |
Royalty | | | 870 |
| | 892 |
|
Consolidated contribution | $ | 10,702 |
| | $ | 8,938 |
| | $ | 39,576 |
| | $ | 29,231 |
| | $ | 25,958 |
| | $ | 21,963 |
|
| | | | | | | | | | | |
Reconciliation of consolidated contribution to income from continuing operations: | | | | | | | | | | | |
Consolidated contribution | $ | 10,702 |
| | $ | 8,938 |
| | $ | 39,576 |
| | $ | 29,231 |
| | $ | 25,958 |
| | $ | 21,963 |
|
Amounts not directly related to segments: | | | | | | | | | | | |
Operating expenses | (4,313 | ) | | (4,657 | ) | | (11,650 | ) | | (13,569 | ) | | (6,658 | ) | | (4,358 | ) |
Other expense, net | 40 |
| | 52 |
| | (265 | ) | | (53 | ) | | (536 | ) | | (77 | ) |
Income tax expense | (2,556 | ) | | (1,669 | ) | | (10,710 | ) | | (5,699 | ) | | (7,178 | ) | | (6,669 | ) |
Income from continuing operations | $ | 3,873 |
| | $ | 2,664 |
| | $ | 16,951 |
| | $ | 9,910 |
| | $ | 11,586 |
| | $ | 10,859 |
|
There was no material change in the allocation of assets by segment during the first ninethree months of 20152016 and, accordingly, assets by segment are not presented.
For the three months ended September 30,March 31, 2016 and 2015, Amazon.com accounted for 13.6% of our total net sales, and no customer represented 10.0% or more of total net sales for the first nine months of 2015. For the three and nine months ended September 30, 2014, Amazon.com accounted for 10.3% and 10.1%, respectively, of our total net sales.
(13)(15) COMMITMENTS AND CONTINGENCIES
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of September 30, 2015March 31, 2016, we had approximately $0.6$0.5 million in standby letters of credit with certain vendors expiring April 2016.2017.
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of September 30, 2015March 31, 2016, we had approximately $41.0$36.9 million in noncancelable market-based purchase obligations, primarily for inventory purchases expected to be received within the next twelve months. Purchase obligations can vary from quarter-to-quarter and versus the same period in prior years due to a number of factors, including the amount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnification obligations vary from contract to contract, and generally a maximum obligation is not stated within the agreements. We hold insurance policies that mitigate potential losses arising from certain types of indemnification obligations. Management does not deem these obligations to be significant to our financial position, results of operations or cash flows and, therefore, no related liabilities were recorded as of September 30, 2015.March 31, 2016.
Legal Matters
In 2004, we were sued in the Southern District of New York by BioSig Instruments, Inc. for alleged patent infringement in connection with our incorporation of heart rate monitors into certain cardio products. No significant activity in the litigation occurred until 2008. In 2012, the United States District Court granted summary judgment to us on grounds that BioSig’s patents
were invalid as a matter of law. BioSig appealed the grant of summary judgment and, in April 2013, the United States Court of Appeals for the Federal Circuit reversed the District Court’s decision on summary judgment and remanded the case to the District Court for further proceedings. On January 10, 2014, the U. S. Supreme Court granted our petition for a writ of certiorari to address the legal standard applied by the Federal Circuit in determining whether the patents may be valid under applicable law. The case was argued before the Supreme Court on April 28, 2014. By decision dated June 2, 2014, the Supreme Court unanimously reversed the Federal Circuit, holding that its standard of when a patent may be “indefinite” was incorrect and remanding to the Federal Circuit for reconsideration under the correct standard. The remand hearing in the Federal Circuit was held on October 29, 2014. By decision dated April 27, 2015, the same panel of the Federal Circuit affirmed its earlier reversal of the District Court’s decision on summary judgment. On May 27, 2015, we filed a petition for a rehearing en banc in the Federal Circuit, which was denied on August 4, 2015. Accordingly, absent2015 and a grant of reviewPetition for Review by the U. S. Supreme Court thewhich was also denied. The case will be returned to the District Court for further proceedings. We do not believe that our use of heart rate monitors utilized or purchased from third parties, and otherwise, infringes the BioSig patents.
In August 2014, we initiated an arbitration proceeding under a 1999 license agreement pursuant to which we had licensed certain rights relating to our TreadClimber® products. We believe that our obligation to pay royalties under the license agreement ceased in the fourth quarter of 2013. The licensor disputes this and issued a notice under the contract claiming breach of the license agreement and asserting various remedies. We are seeking a declaratory ruling in the arbitration that we have performed all of our obligations under the license agreement, and that there is no continuing obligation for us to pay royalties. The licensor has asserted various counterclaims in the arbitration, including contract and intellectual property claims, and asserted various remedies, including termination of the license agreement. We replied to the counterclaim, denying the allegations and demanding remedies and asserting defenses. The arbitration is being administered by the American Arbitration Association and is in the discovery stage of the litigation process with an anticipated hearing date in February 2016.
In addition to the mattersmatter described above, from time to time, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur.
Litigation and jury verdicts are, to some degree, inherently unpredictable, and although we have determined that a loss is not probable in connection with any current legal proceeding, it is reasonably possible that a loss may be incurred in connection with proceedings to which we are a party. Assessment of whether incurrence of a loss is probable, or a reasonable possibility, in connection with a particular proceeding, and estimation of the loss, or a range of loss, involves complex judgments and numerous uncertainties. Management is unable to estimate a range of reasonably possible losses related to litigation in its early stages, especially whenwhich the damages sought are indeterminate, or the legal and factual basis for the relevant claims have not been developed with specificity. As such, zero liability is recorded as of September 30, 2015.March 31, 2016.
We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates accordingly. We evaluate, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would make a loss probable or reasonably possible, and whether the amount of a probable or reasonably possible loss is estimable. Among other factors, we evaluate the advice of internal and external counsel, the outcomes from similar litigation, current status of the lawsuits (including settlement initiatives), legislative developments and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties.
(16) SUBSEQUENT EVENTS
On May 4, 2016, our Board of Directors authorized a $10.0 million expansion of our share repurchase program. Under the expanded program, shares of our common stock may be repurchased from time to time over the next 24 months in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases will be funded from existing cash balances, and repurchased shares will be retired and returned to unissued authorized shares. To date, we have not repurchased any shares pursuant to the program. The repurchase program expires May 4, 2018.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20142015 (the “2014“2015 Form 10-K”). All references to the thirdfirst quarter and first ninethree months of 20152016 and 20142015 mean the three and nine-monththree-month periods ended September 30,March 31, 2016 and 2015, and 2014, respectively. Unless the context otherwise requires, “Nautilus,” “we,” “us” and “our” refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.
Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the United States and Canada. Our profit margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, costs associated with acquisition or license of products and technologies, product warranty costs, the cost of fuel, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, the Internet and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.
As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability. For more information, see our discussion of risk factors located at Part I, Item 1A of our 20142015 Form 10-K.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identify forward-looking statements. Forward-looking statements include any statements related to our future business and financial performance; anticipated fluctuations in net sales due to seasonality; plans and expectations regarding gross and operating margins; plans and expectations regarding research and development expenses and capital expenditures; anticipated losses from discontinued operations; the anticipated outcome of litigation to which we are a party,;party; results of media investment in the Direct segment; plans for new product introductions and anticipated demand for our new and existing products; and statements regarding our inventory and working capital requirements and the sufficiency of our financial resources. These forward-looking statements, and others we make from time-to-time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including our ability to timely acquire inventory that meets our quality control standards from sole source foreign manufacturers at acceptable costs, the effectiveness, availability and price of media time consistent with our cost and audience profile parameters, greater than anticipated costs associated with launch of new products, our ability to successfully integrate acquired businesses, a decline in consumer spending due to unfavorable economic conditions, softness in the retail marketplace, an adverse change in the availability of credit for our customers who finance their purchases, our ability to pass along vendor raw material price increases and increased shipping costs, our ability to effectively develop, market and sell future products, our ability to protect our intellectual property, the introduction of competing products, and our ability to get foreign-sourced product through customs in a timely manner. Additional assumptions, risks and uncertainties are described in Part I, Item 1A, "Risk Factors," in our 20142015 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations.
Overview
We are committed to providing innovative, quality solutions to help people achieve a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products and
related accessories for consumer use, primarily in the United States, Canada and Canada.Europe. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus®, Bowflex®, Octane Fitness®, Schwinn® and Universal®.
We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products directly to consumers through television advertising, catalogs and the Internet. Our Retail business offers our products through a network of independent retail companies and specialty retailers with stores and websites located in the United States and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
Net sales for the first ninethree months of 20152016 were $226.6$120.9 million, an increase of $47.1$24.7 million, or 26.2%25.7%, as compared to net sales of $179.5$96.2 million for the first ninethree months of 2014.2015. Net sales of our Direct segment increased $41.0$7.2 million, or 34.9%9.7%, in the first ninethree months of 2015,2016, compared to the first ninethree months of 2014,2015, primarily due to increased consumer demand for our cardio products, especially the Bowflex Max Trainer®. Net sales of our Retail segment increased by $5.8$17.5 million, or 9.9%82.3%, in the first ninethree months of 2015,2016, compared to the first ninethree months of 2014,2015, primarily due to favorable retailer sell-throughthe addition of our lineup ofOctane sales, coupled with strong organic Retail sales growth across both cardio products launched in late 2013 and fall of 2014, together with increased sales of SelectTech® dumbbells.strength product offerings.
Gross profit for the first ninethree months of 20152016 was $120.8$66.3 million, or 53.3%54.9% of net sales, an increase of $28.7$12.5 million, or 31.2%23.1%, as compared to gross profit of $92.1$53.9 million, or 51.3%56.0% of net sales, for the first ninethree months of 2014.2015. The increase in gross profit dollars was primarily due to the increase in net sales, while the increasedecrease in the gross profit margin percentage was primarily due to a shift in channel mix to the DirectRetail segment.
Operating expenses for the first ninethree months of 20152016 were $92.8$47.0 million, an increase of $16.4$10.8 million, or 21.5%29.7%, as compared to operating expenses of $76.4$36.3 million for the first ninethree months of 2014.2015. The growth in operating expenses was primarily related to increasesan increase in selling and marketing expenses, reflecting increased advertising and sales-related variable spending.spending, together with incremental operating expenses from the Octane acquisition.
Operating income for the first ninethree months of 20152016 was $27.9$19.3 million, an increase of $12.3$1.7 million, or 78.3%9.6%, as compared to operating income of $15.7$17.6 million for the first ninethree months of 2014.2015. The improvement in our operating results for the first ninethree months of 20152016 compared to the first ninethree months of 20142015 was driven primarily by higher net sales and improved gross profit margins coupled with leveraging operating expenses over higher net sales.profits.
Income from continuing operations was $17.0$11.6 million for the first ninethree months of 2015,2016, or $0.53$0.37 per diluted share, compared to income from continuing operations of $9.9$10.9 million, or $0.31$0.34 per diluted share, for the first ninethree months of 2014.2015. The effective tax rates for the first ninethree months of 2016 and 2015 were 38.3% and 2014 were 38.7% and 36.5%38.0%, respectively.
Net income for the first ninethree months of 20152016 was $16.9$11.4 million, compared to net income of $8.4$10.7 million for the first ninethree months of 2014.2015. Net income per diluted share was $0.53$0.37 for the first ninethree months of 2015,2016, compared to $0.27$0.34 for the first ninethree months of 2014.2015.
Discontinued Operations
Results from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation at December 31, 2012. Although there was no revenue related to the Commercial business in either the 20152016 or 20142015 periods, we continue to have legal and accounting expenses as we work with authorities on final deregistration of each entity, and product liability and other legal expenses associated with product previously sold into the Commercial channel.
RESULTS OF OPERATIONS
Results of operations information was as follows (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Net sales | $ | 70,690 |
| | $ | 59,067 |
| | $ | 11,623 |
| | 19.7 | % |
Cost of sales | 34,481 |
| | 30,272 |
| | 4,209 |
| | 13.9 | % |
Gross profit | 36,209 |
| | 28,795 |
| | 7,414 |
| | 25.7 | % |
Operating expenses: | | | | | | | |
Selling and marketing | 21,742 |
| | 17,086 |
| | 4,656 |
| | 27.3 | % |
General and administrative | 5,505 |
| | 5,745 |
| | (240 | ) | | (4.2 | )% |
Research and development | 2,573 |
| | 1,683 |
| | 890 |
| | 52.9 | % |
Total operating expenses | 29,820 |
| | 24,514 |
| | 5,306 |
| | 21.6 | % |
Operating income | 6,389 |
| | 4,281 |
| | 2,108 |
| | 49.2 | % |
Other income (expense): | | | | | | | |
Interest income | 61 |
| | 18 |
| | 43 |
| | |
Interest expense | (6 | ) | | (9 | ) | | 3 |
| | |
Other, net | (15 | ) | | 43 |
| | (58 | ) | | |
Total other income (expense), net | 40 |
| | 52 |
| | (12 | ) | | |
Income from continuing operations before income taxes | 6,429 |
| | 4,333 |
| | 2,096 |
| | |
Income tax expense | 2,556 |
| | 1,669 |
| | 887 |
| | |
Income from continuing operations | 3,873 |
| | 2,664 |
| | 1,209 |
| | |
Loss from discontinued operations, net of income taxes | (145 | ) | | (177 | ) | | 32 |
| | |
Net income | $ | 3,728 |
| | $ | 2,487 |
| | $ | 1,241 |
| | |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
Net sales | $ | 226,624 |
| | $ | 179,517 |
| | $ | 47,107 |
| | 26.2 | % | $ | 120,928 |
| | $ | 96,239 |
| | $ | 24,689 |
| | 25.7 | % |
Cost of sales | 105,870 |
| | 87,461 |
| | 18,409 |
| | 21.0 | % | 54,584 |
| | 42,350 |
| | 12,234 |
| | 28.9 | % |
Gross profit | 120,754 |
| | 92,056 |
| | 28,698 |
| | 31.2 | % | 66,344 |
| | 53,889 |
| | 12,455 |
| | 23.1 | % |
Operating expenses: | | | | | | | | | | | | | | |
Selling and marketing | 70,193 |
| | 54,549 |
| | 15,644 |
| | 28.7 | % | 35,179 |
| | 28,399 |
| | 6,780 |
| | 23.9 | % |
General and administrative | 15,376 |
| | 16,507 |
| | (1,131 | ) | | (6.9 | )% | 8,231 |
| | 5,578 |
| | 2,653 |
| | 47.6 | % |
Research and development | 7,259 |
| | 5,338 |
| | 1,921 |
| | 36.0 | % | 3,634 |
| | 2,307 |
| | 1,327 |
| | 57.5 | % |
Total operating expenses | 92,828 |
| | 76,394 |
| | 16,434 |
| | 21.5 | % | 47,044 |
| | 36,284 |
| | 10,760 |
| | 29.7 | % |
Operating income | 27,926 |
| | 15,662 |
| | 12,264 |
| | 78.3 | % | 19,300 |
| | 17,605 |
| | 1,695 |
| | 9.6 | % |
Other income (expense): | | | | | | | | | | | | | | |
Interest income | 164 |
| | 42 |
| | 122 |
| | | 54 |
| | 44 |
| | 10 |
| | |
Interest expense | (17 | ) | | (21 | ) | | 4 |
| | | (466 | ) | | (5 | ) | | (461 | ) | | |
Other, net | (412 | ) | | (74 | ) | | (338 | ) | | | (124 | ) | | (116 | ) | | (8 | ) | | |
Total other income (expense), net | (265 | ) | | (53 | ) | | (212 | ) | | | |
Total other expense, net | | (536 | ) | | (77 | ) | | (459 | ) | | |
Income from continuing operations before income taxes | 27,661 |
| | 15,609 |
| | 12,052 |
| | | 18,764 |
| | 17,528 |
| | 1,236 |
| | |
Income tax expense | 10,710 |
| | 5,699 |
| | 5,011 |
| | | 7,178 |
| | 6,669 |
| | 509 |
| | |
Income from continuing operations | 16,951 |
| | 9,910 |
| | 7,041 |
| | | 11,586 |
| | 10,859 |
| | 727 |
| | |
Loss from discontinued operations, net of income taxes | (67 | ) | | (1,492 | ) | | 1,425 |
| | | (142 | ) | | (127 | ) | | (15 | ) | | |
Net income | $ | 16,884 |
| | $ | 8,418 |
| | $ | 8,466 |
| | | $ | 11,444 |
| | $ | 10,732 |
| | $ | 712 |
| | |
Results of operations information by segment was as follows (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Net sales: | | | | | | | |
Direct | $ | 42,876 |
| | $ | 34,498 |
| | $ | 8,378 |
| | 24.3 | % |
Retail | 25,730 |
| | 23,467 |
| | 2,263 |
| | 9.6 | % |
Royalty income | 2,084 |
| | 1,102 |
| | 982 |
| | 89.1 | % |
| $ | 70,690 |
| | $ | 59,067 |
| | $ | 11,623 |
| | 19.7 | % |
Cost of sales: | | | | | | | |
Direct | $ | 15,326 |
| | $ | 13,030 |
| | $ | 2,296 |
| | 17.6 | % |
Retail | 19,155 |
| | 17,242 |
| | 1,913 |
| | 11.1 | % |
Royalty income | — |
| | — |
| | — |
| | — | % |
| $ | 34,481 |
| | $ | 30,272 |
| | $ | 4,209 |
| | 13.9 | % |
Gross profit: | | | | | | | |
Direct | $ | 27,550 |
| | $ | 21,468 |
| | $ | 6,082 |
| | 28.3 | % |
Retail | 6,575 |
| | 6,225 |
| | 350 |
| | 5.6 | % |
Royalty income | 2,084 |
| | 1,102 |
| | 982 |
| | 89.1 | % |
| $ | 36,209 |
| | $ | 28,795 |
| | $ | 7,414 |
| | 25.7 | % |
Gross margin: | | | | | | | |
Direct | 64.3 | % | | 62.2 | % | | 210 |
| basis points |
Retail | 25.6 | % | | 26.5 | % | | (90 | ) | basis points |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
Net sales: | | | | | | | | | | | | | | |
Direct | $ | 158,595 |
| | $ | 117,589 |
| | $ | 41,006 |
| | 34.9 | % | $ | 81,234 |
| | $ | 74,057 |
| | $ | 7,177 |
| | 9.7 | % |
Retail | 64,424 |
| | 58,609 |
| | 5,815 |
| | 9.9 | % | 38,805 |
| | 21,290 |
| | 17,515 |
| | 82.3 | % |
Royalty income | 3,605 |
| | 3,319 |
| | 286 |
| | 8.6 | % | |
Royalty | | 889 |
| | 892 |
| | (3 | ) | | (0.3 | )% |
| $ | 226,624 |
| | $ | 179,517 |
| | $ | 47,107 |
| | 26.2 | % | $ | 120,928 |
| | $ | 96,239 |
| | $ | 24,689 |
| | 25.7 | % |
Cost of sales: | | | | | | | | | | | | | | |
Direct | $ | 56,803 |
| | $ | 43,837 |
| | $ | 12,966 |
| | 29.6 | % | $ | 27,372 |
| | $ | 25,747 |
| | $ | 1,625 |
| | 6.3 | % |
Retail | 49,067 |
| | 43,624 |
| | 5,443 |
| | 12.5 | % | 27,193 |
| | 16,603 |
| | 10,590 |
| | 63.8 | % |
Royalty income | — |
| | — |
| | — |
| | — | % | |
Royalty | | 19 |
| | — |
| | 19 |
| | — | % |
| $ | 105,870 |
| | $ | 87,461 |
| | $ | 18,409 |
| | 21.0 | % | $ | 54,584 |
| | $ | 42,350 |
| | $ | 12,234 |
| | 28.9 | % |
Gross profit: | | | | | | | | | | | | | | |
Direct | $ | 101,792 |
| | $ | 73,752 |
| | $ | 28,040 |
| | 38.0 | % | $ | 53,862 |
| | $ | 48,310 |
| | $ | 5,552 |
| | 11.5 | % |
Retail | 15,357 |
| | 14,985 |
| | 372 |
| | 2.5 | % | 11,612 |
| | 4,687 |
| | 6,925 |
| | 147.7 | % |
Royalty income | 3,605 |
| | 3,319 |
| | 286 |
| | 8.6 | % | |
Royalty | | 870 |
| | 892 |
| | (22 | ) | | (2.5 | )% |
| $ | 120,754 |
| | $ | 92,056 |
| | $ | 28,698 |
| | 31.2 | % | $ | 66,344 |
| | $ | 53,889 |
| | $ | 12,455 |
| | 23.1 | % |
Gross margin: | | | | | | | | | | | | | | |
Direct | 64.2 | % | | 62.7 | % | | 150 |
| basis points | 66.3 | % | | 65.2 | % | | 110 |
| basis points |
Retail | 23.8 | % | | 25.6 | % | | (180 | ) | basis points | 29.9 | % | | 22.0 | % | | 790 |
| basis points |
The following table compares the net sales of our major product lines within each business segment (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Direct net sales: | | | | | | | |
Cardio products(1) | $ | 39,696 |
| | $ | 31,708 |
| | $ | 7,988 |
| | 25.2 | % |
Strength products(2) | 3,180 |
| | 2,790 |
| | 390 |
| | 14.0 | % |
| 42,876 |
| | 34,498 |
| | 8,378 |
| | 24.3 | % |
Retail net sales: | | | | | | | |
Cardio products(1) | 14,670 |
| | 14,445 |
| | 225 |
| | 1.6 | % |
Strength products(2) | 11,060 |
| | 9,022 |
| | 2,038 |
| | 22.6 | % |
| 25,730 |
| | 23,467 |
| | 2,263 |
| | 9.6 | % |
| | | | | | | |
Royalty income | 2,084 |
| | 1,102 |
| | 982 |
| | 89.1 | % |
| $ | 70,690 |
| | $ | 59,067 |
| | $ | 11,623 |
| | 19.7 | % |
| | | | | | | |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
Direct net sales: | | | | | | | | | | | | | | |
Cardio products(1) | $ | 147,579 |
| | $ | 106,955 |
| | $ | 40,624 |
| | 38.0 | % | $ | 77,092 |
| | $ | 70,034 |
| | $ | 7,058 |
| | 10.1 | % |
Strength products(2) | 11,016 |
| | 10,634 |
| | 382 |
| | 3.6 | % | 4,142 |
| | 4,023 |
| | 119 |
| | 3.0 | % |
| 158,595 |
| | 117,589 |
| | 41,006 |
| | 34.9 | % | 81,234 |
| | 74,057 |
| | 7,177 |
| | 9.7 | % |
Retail net sales: | | | | | | | | | | | | | | |
Cardio products(1) | 37,908 |
| | 35,350 |
| | 2,558 |
| | 7.2 | % | 29,953 |
| | 13,886 |
| | 16,067 |
| | 115.7 | % |
Strength products(2) | 26,516 |
| | 23,259 |
| | 3,257 |
| | 14.0 | % | 8,852 |
| | 7,404 |
| | 1,448 |
| | 19.6 | % |
| 64,424 |
| | 58,609 |
| | 5,815 |
| | 9.9 | % | 38,805 |
| | 21,290 |
| | 17,515 |
| | 82.3 | % |
| | | | | | | | | | | | | | |
Royalty income | 3,605 |
| | 3,319 |
| | 286 |
| | 8.6 | % | |
Royalty | | 889 |
| | 892 |
| | (3 | ) | | (0.3 | )% |
| $ | 226,624 |
| | $ | 179,517 |
| | $ | 47,107 |
| | 26.2 | % | $ | 120,928 |
| | $ | 96,239 |
| | $ | 24,689 |
| | 25.7 | % |
| | | | | | | | | | | | | | |
(1) Cardio products include: TreadClimber®, Max Trainer®, treadmills, exercise bikes, ellipticals, Bowflex Boost®, Bowflex BodyTM and DVDs. | |
(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights, UpperCut™ and accessories. | |
(1) Cardio products include: TreadClimber®, Max Trainer®, Zero Runner®, treadmills, exercise bikes and ellipticals. | | (1) Cardio products include: TreadClimber®, Max Trainer®, Zero Runner®, treadmills, exercise bikes and ellipticals. |
(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories. | | (2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories. |
Direct
Direct net sales increased by 24.3% and 34.9%, respectively,9.7% for the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014.2015. The increasesincrease in net sales werewas primarily related to our cardio products, especially the Bowflex Max Trainer®, which started shipping in early 2014.. In addition, strength sales increased 14.0% and 3.6%3.0% for the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014,2015, due to stronger sales in both the SelectTech® dumbbell and home gym categories.gyms.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the thirdfirst quarter of 20152016 increased to 47.8%49.9%, compared to 40.3%44.5% in the same period of 2014.2015. We attribute the increase to sales of the Bowflex Max Trainer®, which has attracted consumers with better credit scores, and our media strategy focused on driving quality consumer leads.
The increasesincrease in cost of sales of our Direct business in the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014 were2015 was almost entirely related to the growth in Direct net sales as discussed above.
For the thirdfirst quarter of 2015,2016, Direct gross margin increased 210110 basis points as compared to the same period of 20142015 primarily due to product mix and leveraging of supply chain costs and lower reserve requirements, reflecting improved warranty and returns experience.The 150 basis point increase in gross margin for the nine-month period of 2015 compared to the same period of 2014 was primarily due to the non-recurrence of inventory write-downs for discontinued product required in the prior year combined with leveraging supply chain costs.
Retail
Retail net sales increased by 9.6% and 9.9%, respectively,82.3% for the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014.2015. The increases wereincrease was primarily driven by anthe acquisition of Octane, as well as organic growth across a variety of cardio and strength products.
The increase in cost of SelectTech® dumbbell sales coupled with increased sales of our Retail business in the lineupthree-month period ended March 31, 2016 compared to the same period of cardio products launched2015 was almost entirely related to the growth in late 2013 and fall of 2014.Retail net sales as discussed above.
For the thirdfirst quarter of 2015,2016, Retail gross margin decreased 90increased 790 basis points compared to the same period of 20142015 due to unfavorablethe inclusion of Octane, which has higher margins, along with improved product mix and customer mix, reflecting increased lower margin treadmill sales and lower sales to Canadian customers. The 180 basis point decrease in gross marginleveraging of supply chain costs in the nine-month periodorganic Retail business, partially offset by a 190 basis points decline related to a purchase price accounting-related inventory step up charge of 2015 compared to$0.7 million that affected cost of sales for the same periodfirst quarter of 2014 was primarily due to unfavorable product and customer mix, and higher distribution related costs. Retail gross margins have increased on a sequential basis during the 2015 quarters as we continue to execute our plans for mitigation of the recent comparative period declines in Retail gross margin.2016.
Selling and Marketing
| | Dollars in thousands | Three Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
Selling and Marketing | $21,742 | | $17,086 | | $4,656 | | 27.3% | |
Selling and marketing | | $35,179 | | $28,399 | | $6,780 | | 23.9% |
As % of net sales | 30.8% | | 28.9% | | 29.1% | | 29.5% | |
|
| | | | | | | |
Dollars in thousands | Nine Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Selling and Marketing | $70,193 | | $54,549 | | $15,644 | | 28.7% |
As % of net sales | 31.0% | | 30.4% | | | | |
The increasesincrease in selling and marketing expense in the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014 were2015 was primarily related to increasesan increase in media advertising of $3.0$3.3 million, and $9.8 million, respectively,the incremental selling and increases in incremental variable sales expense of $1.5 million and $5.2 million, respectively, mainly financing fees paid to our financing partners,marketing expenses related to the increases in net sales.inclusion of Octane.
The increasesdecrease as a percentage of net sales in the three and nine-month periodsthree-month period ended March 31, 2016 compared to the same periodsperiod of 2014 were2015 was primarily due to the increases in media advertising.acquisition of Octane which has a lower selling and marketing expense percentage than the existing business.
Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows:
|
| | | | | | | |
Dollars in thousands | Three Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Media advertising | $12,510 | | $9,534 | | $2,976 | | 31.2% |
| | Dollars in thousands | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
Media advertising | $38,211 | | $28,383 | | $9,828 | | 34.6% | $17,509 | | $14,242 | | $3,267 | | 22.9% |
The increasesincrease in media advertising in the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014 were2015 was primarily to drive incremental leads and sales in the Direct business.
General and Administrative
|
| | | | | | | |
Dollars in thousands | Three Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
General and Administrative | $5,505 | | $5,745 | | $(240) | | (4.2)% |
As % of net sales | 7.8% | | 9.7% | | | | |
| | Dollars in thousands | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
General and Administrative | $15,376 | | $16,507 | | $(1,131) | | (6.9)% | |
General and administrative | | $8,231 | | $5,578 | | $2,653 | | 47.6% |
As % of net sales | 6.8% | | 9.2% | | 6.8% | | 5.8% | |
The decreasesincrease in general and administrative in the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014 were2015 was primarily due to lowerhigher spending on patent legal expensescorporate administration, infrastructure and employee-related costs of $0.1$1.1 million, $0.8 million and $0.5 million, respectively. Additionally, we received state business tax refunds of $0.4 million, duringrespectively, primarily reflecting the first nine monthsinclusion of 2015 as a result of a recent audit.Octane.
The decreasesincrease as a percentage of net sales in the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014 were primarily2015 was due to the increases in net sales, coupled with lowerincreased spending and tax refunds as discussed above.
Research and Development
|
| | | | | | | |
Dollars in thousands | Three Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Research and Development | $2,573 | | $1,683 | | $890 | | 52.9% |
As % of net sales | 3.6% | | 2.8% | | | | |
| | Dollars in thousands | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
Research and Development | $7,259 | | $5,338 | | $1,921 | | 36.0% | |
Research and development | | $3,634 | | $2,307 | | $1,327 | | 57.5% |
As % of net sales | 3.2% | | 3.0% | | 3.0% | | 2.4% | |
The increasesincrease in research and development in the three and nine-month periodsthree-month period ended September 30, 2015March 31, 2016 compared to the same periodsperiod of 2014 were2015 was primarily due to our continued investment in additional engineering and product development headcount as we continue to supplement our new product development resources required to innovate and broaden our product portfolio.portfolio, coupled with the incremental impact of the R&D expenses related to Octane.
The increasesincrease as a percentage of net sales in the three and nine-month periodsthree-month period of 20152016 compared to the same periodsperiod of 2014 were2015 was primarily due to the increased investment discussed above.
Interest Expense
Interest expense increased $0.5 million for the three months ended March 31, 2016 compared to the same period of 2015 due to borrowings under our new term loan in connection with the Octane acquisition on December 31, 2015.
Other, netNet
Other, net relates to losses on asset dispositions, as well as the effect of exchange rate fluctuations between the U.S. and Canada.
Income Tax ProvisionExpense |
| | | | | | | |
Dollars in thousands | Three Months Ended September 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Income Tax Provision | $2,556 | | $1,669 | | $887 | | 53.1% |
Effective tax rate | 39.8% | | 38.5% | | | | |
| | Dollars in thousands | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | $ | | % | 2016 | | 2015 | | $ | | % |
Income Tax Provision | $10,710 | | $5,699 | | $5,011 | | 87.9% | |
Income tax expense | | $7,178 | | $6,669 | | $509 | | 7.6% |
Effective tax rate | 38.7% | | 36.5% | | 38.3% | | 38.0% | |
Income tax provisionexpense from continuing operations for the three and nine-monththree-month periods ended September 30,March 31, 2016 and 2015 waswere based on a 39.8%38.3% and 38.7%38.0% effective tax rate, respectively, both primarily related to our profitable U.S. and Canadian operations. The lower effective tax rate of 36.5% for the nine-month period ended September 30, 2014 was mainly driven by certain U.S. tax credit benefits recognized during the first half of 2014.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2015March 31, 2016, we had total cash and investments of $74.7$72.8 million compared to $72.2$60.8 million as of December 31, 2014.2015. Cash provided by operating activities was $18.5$18.7 million for the ninethree months ended September 30, 2015March 31, 2016, compared to $3.3$13.5 million for the ninethree months ended September 30, 2014.March 31, 2015. We expect our cash, cash equivalents and available-for-sale securities at September 30, 2015,March 31, 2016, along with cash expected to be generated from operations, to be sufficient to fund our operating and capital requirements for at least twelve months from September 30, 2015.March 31, 2016.
The increase in cash flows from operating activities for the ninethree months ended September 30, 2015March 31, 2016 as compared to the same period of 20142015 was primarily due to improved operating performance, as well as changes in our operating assets and liabilities as discussed below.
Trade receivables decreased $7.2$20.8 million to $19.124.4 million as of September 30, 2015,March 31, 2016, compared to $26.3$45.2 million as of December 31, 2014,2015, due to seasonally lower net sales in the Retail business. Days sales outstanding ("DSO") at September 30, 2015 were 21.4 daysTrade receivables as of March 31, 2016 compared to 17.6 days as of DecemberMarch 31, 2014 and 21.7 days as of September 30, 2014. The increase in DSO at September 30, 2015 compared to December 31, 2014 wasincreased $7.6 million due to a higher mixthe acquisition of Retail sales.Octane.
Inventories increased $10.7decreased $5.9 million to $35.6$36.8 million as of September 30, 2015,March 31, 2016, compared to $24.9$42.7 million as of December 31, 2014,2015, due to improvedseasonally lower stocking levels of high demand products.requirements. Inventories as of September 30, 2015March 31, 2016 compared to September 30, 2014March 31, 2015 increased by $14.2$16.9 million, primarily due to higher net sales, new product introductions, and the additionacquisition of a new distribution center that opened in September 2014.Octane.
Prepaid and other current assets decreasedincreased $1.0 million to $6.0$7.9 million as of September 30, 2015,March 31, 2016, compared to $7.0$6.9 million as of December 31, 2014,2015, due to reductionan increase in prepaid insurance of royalties receivable of $1.0$0.9 million.
DeferredNet deferred income tax assets decreased $9.5liability increased $3.7 million to $12.4$13.2 million as of September 30, 2015,March 31, 2016, compared to $21.9$9.5 million as of December 31, 2014,2015, primarily due to the utilization of net operating losstax credit carryforwards from prior periods.
Trade payables decreased $8.7$23.3 million to $38.938.5 million as of September 30, 2015,March 31, 2016, compared to $47.6$61.7 million as of December 31, 2014,2015, due to seasonality in the business. Trade payables as of March 31, 2016 compared to March 31, 2015 increased $11.6 million. The lower amount outstanding as of March 31, 2015 was primarily due to shorteraccelerated payment terms at the time with a certain inventory vendor. As of third quarter 2015, we had returned to standard payment terms with certain vendors, partially offset by increased inventory purchasesthat vendor which are reflected in preparation for our seasonally strongest quarters.the trade payables amounts as of March 31, 2016.
Accrued liabilities decreased $1.1$2.4 million to $8.7$10.6 million as of September 30, 2015,March 31, 2016, compared to $9.9$13.0 million as of December 31, 2014,2015, due to reductions ofa reduction in accrued incentive compensation in the first ninethree months of 2015,2016, reflecting payout of incentive compensation during the first quarter.
Cash used in investing activities of $22.3$3.0 million for the first ninethree months of 20152016 was primarily related to $3.5 million of payments to Octane related to the December 31, 2015 stock purchase agreement, partially offset by net purchases of $18.7 millionmaturities of marketable securities and $3.6of $1.2 million. In addition, $0.8 million ofwas used for capital expenditures during the period primarily for new softwareproduction tooling and information technology equipment.computer hardware and software. We anticipate spending between $5.5$7.0 million and $6.5$8.0 million in 20152016 for software, equipment, leasehold improvements, intangible assets, and product tooling.
Cash used in financing activities of $11.3$2.7 million for the first ninethree months of 20152016 was primarily related to the share buyback program spendingrepayments on our term loan of $11.6$4.0 million, during the first nine months of 2015, partially offset by proceeds from stock option exercises.$1.5 million of recognized excess tax benefits related to stock-based compensation.
Financing Arrangements
On December 5, 2014, we entered intoWe have a Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. ("(“Chase Bank"Bank”) that provides for an $80.0 million term loan and a $20.0 million maximum revolving secured credit line. The line of credit. The term of the Credit Agreement expires on December 31, 2020 and is secured by substantially all of our assets.
The Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement also contains customary events of default. Upon an event of default, the lender may terminate its credit is available through December 5, 2017 for working capital, letters of creditline commitment, accelerate all outstanding obligations and general corporate purposes. exercise its remedies under the continuing security agreement.
Borrowing availability under the Credit Agreementrevolving line of credit is subject to our compliance with certain financial and operating covenants at the time borrowings are requested. Letters of credit under the Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing.
The interest rate applicable to the term loan, as well as each advance under the Credit Agreementrevolving line of credit, is based on either Chase Bank's floating prime rate or adjusted LIBOR, plus an applicable margin. OurAs of March 31, 2016 our borrowing rate for both the term loan and line of credit advances was 1.19% as of September 30, 2015. The Credit Agreement contains customary covenants, including minimum fixed charge coverage ratio and asset coverage ratio, and limitations on capital
expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. Borrowings under the Credit Agreement are collateralized by substantially all of our assets pursuant to a continuing security agreement. The Credit Agreement also contains customary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligations and exercise its remedies under the continuing security agreement.1.69%.
As of September 30, 2015,March 31, 2016, the balance on our term loan was $76.0 million, and we had no outstanding borrowings and $0.6under the line of credit. In addition, $0.5 million in letters of credit issuedthat expire April 2017 were outstanding under the Credit Agreement that expire April 2016.Agreement. As of September 30, 2015,March 31, 2016, we were in compliance with the financial covenants of the Credit Agreement and approximately $19.4$19.5 million was available for borrowing.borrowing under the line of credit.
As of March 31, 2016, we had a $76.0 million receive-variable, pay-fixed interest rate swap outstanding with Chase Bank. The interest rate swap amortizes monthly in line with the outstanding principal balance on our term loan and is classified as a cash flow hedge. The swap matures on December 31, 2020 and has a fixed rate of 1.42% per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark. At March 31, 2016, the one-month LIBOR rate was 0.44%.
Commitments and Contingencies
For a description of our commitments and contingencies, refer to Note 1315 to our Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications. Because we are unable to estimate our potential obligation, and because management does not expect these obligations to have a material adverse effect on our consolidated financial position, results of operations or cash flows, no liabilities are recorded at September 30, 2015.March 31, 2016.
Stock Repurchase Program
On November 3, 2014, our Board of Directors approved a stock repurchase program that authorized us to repurchase up to $15.0 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016. Share repurchases will beare funded with existing cash balances, and the repurchased shares will beare retired and returned to unissued authorized shares. For 2015 to date,As of March 31, 2016, we have repurchased 711,708 shares at an average price of $16.25 per share for a total of $11.6 million. As of September 30, 2015,million, and $3.4 million remains available for future repurchases.
SEASONALITY
We expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by the third quarter, and are generally weakest in the second quarter. We believe that, during the spring and summer months, consumers tend to be involved in outdoor activities, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not changed from those discussed in our 20142015 Form 10-K.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no materialInterest Rate Risk
Our exposure to market risk from changes in interest rates relates primarily to our reportedcash equivalents, marketable securities, variable-rate debt obligations, and derivative liabilities. As of March 31, 2016, we had cash equivalents of $19.1 million held in a combination of money market risksfunds, commercial paper and corporate bonds, and marketable securities of $28.8 million, held in a combination of certificates of deposit and corporate bonds. Our cash equivalents mature within three months or risk management policies sinceless from the filingdate of purchase. Marketable securities with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. We have classified our marketable securities as available-for-sale and, therefore, we may choose to sell or hold them as changes in the market occur. Because of the short-term nature of the instruments in our portfolio, a decline in interest rates would reduce our interest income over time, and an increase in interest rates may negatively affect the market price or liquidity of certain securities within the portfolio, but a change in interest rates would not have a material impact on our results of operations, financial position or cash flows.
Our negotiated credit facilities generally charge interest based on a benchmark rate such as LIBOR. Fluctuations in short-term interest rates may cause interest payments on term loan principal and drawn amounts on the revolving line to increase or decrease. As of March 31, 2016, the outstanding balances on our credit facilities totaled $76.0 million.
In January 2016, we entered into an $80 million receive-variable, pay-fixed interest rate swap agreement, amortizing monthly in line with the outstanding principal balance on our term loan. The swap is classified as a cash flow hedge and effectively fixes the interest rate on our variable-rate term loan. The interest rate swap matures on December 31, 2020 and has a fixed interest rate of 1.42% per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark, which was 0.44% at March 31, 2016.
The fair value of our 2014 Form 10-K, which was filedinterest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreement. The amounts related to our cash flow hedge are recorded as deferred gains or losses in our Consolidated Balance Sheets with the Securities and Exchange Commission on February 26, 2015.offset recorded in accumulated other comprehensive income, net of tax. At March 31, 2016, the fair value of our interest rate swap agreement was a liability of $1.1 million. The estimated amount expected to be reclassified into earnings within the next twelve months was $0.2 million at March 31, 2016.
We do not enter into derivative instruments for any purpose other than to manage our interest rate exposure. That is, we do not engage in interest rate speculation using derivative instruments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a- 15(e) and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, our management, including the Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
At this time, we continue to evaluate the business and internal controls and processes associated with Octane and are making various changes to its operating and organizational structure based on our business plan. We are in the process of implementing our internal control structure over this acquired business. The SEC’s rules require us to include acquired entities in our assessment of the effectiveness of internal control over financial reporting no later than the annual management report following the first anniversary of the acquisition. We plan to complete the evaluation and the integration of Octane within the required time frames and report management’s assessment of our internal control over financial reporting in our first annual report in which such assessment is required for this acquisition.
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2015March 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Patent Infringement Case
In 2004, we were sued in the Southern District of New York by BioSig Instruments, Inc. for alleged patent infringement in connection with our incorporation of heart rate monitors into certain cardio products. No significant activity in the litigation occurred until 2008. In 2012, the United States District Court granted summary judgment to us on grounds that BioSig’s patents
were invalid as a matter of law. BioSig appealed the grant of summary judgment and, in April 2013, the United States Court of Appeals for the Federal Circuit reversed the District Court’s decision on summary judgment and remanded the case to the District Court for further proceedings. On January 10, 2014, the U. S. Supreme Court granted our petition for a writ of certiorari to address the legal standard applied by the Federal Circuit in determining whether the patents may be valid under applicable law. The case was argued before the Supreme Court on April 28, 2014. By decision dated June 2, 2014, the Supreme Court unanimously reversed the Federal Circuit, holding that its standard of when a patent may be “indefinite” was incorrect and remanding to the Federal Circuit for reconsideration under the correct standard. The remand hearing in the Federal Circuit was held on October 29, 2014. By decision dated April 27, 2015, the same panel of the Federal Circuit affirmed its earlier reversal of the District Court’s decision on summary judgment. On May 27, 2015, we filed a petition for a rehearing en banc in the Federal Circuit, which was denied on August 4, 2015. Accordingly, absent2015 and a grant of reviewPetition for Review by the U. S. Supreme Court thewhich was also denied. The case will be returned to the District Court for further proceedings. We do not believe that our use of heart rate monitors utilized or purchased from third parties, and otherwise, infringes the BioSig patents.
In August 2014, we initiated an arbitration proceeding under a 1999 license agreement pursuant to which we had licensed certain rights relating to our TreadClimber® products. We believe that our obligation to pay royalties under the license agreement ceased in the fourth quarter of 2013. The licensor disputes this and issued a notice under the contract claiming breach of the license agreement and asserting various remedies. We are seeking a declaratory ruling in the arbitration that we have performed all of our obligations under the license agreement, and that there is no continuing obligation for us to pay royalties. The licensor has asserted various counterclaims in the arbitration, including contract and intellectual property claims, and asserted various remedies, including termination of the license agreement. We replied to the counterclaim, denying the allegations and demanding remedies and asserting defenses. The arbitration is being administered by the American Arbitration Association and is in the discovery stage of the litigation process with an anticipated hearing date in February 2016.
In addition to the mattersmatter described above, from time to time we are subject to litigation, claims and assessments that arise in the ordinary course of business, including disputes that may arise from intellectual property related matters. Management believes that any liability resulting from such additional matters will not have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
We operate in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in our 20142015 Form 10-K are not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. If any of the risks described in our 20142015 Form 10-K actually occur, our business, operating results and financial position could be adversely affected. There has not been a material change to the risk factors as set forth in our 20142015 Form 10-K.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of our equity securities during the thirdfirst quarter ended September 30, 2015:March 31, 2016:
| | Period | (a)
Total Number of Shares Purchased | (b)
Average Price Paid per Share | (c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | (a)
Total Number of Shares Purchased(2) | (b)
Average Price Paid per Share | (c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) |
July 1 - July 31 | — | $— | — | $13,004,018 | |
August 1 - August 31 | 387,360 | 16.98 | 387,360 | 6,426,756 | |
September 1 - September 30 | 190,471 | 15.72 | 190,471 | 3,432,473 | |
January 1 - January 31 | | — | $— | — | $3,432,473 |
February 1 - February 29 | | 12,228 | 18.06 | — | 3,432,473 |
March 1 - March 31 | | — | — | — | 3,432,473 |
Total | 577,831 | $16.56 | 577,831 | $3,432,473 | 12,228 | $18.06 | — | $3,432,473 |
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(1) On November 3, 2014, our Board of Directors approved a stock repurchase program that authorizes us to repurchase up to $15.0 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016. | (1) On November 3, 2014, our Board of Directors approved a stock repurchase program that authorizes us to repurchase up to $15.0 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016. | (1) On November 3, 2014, our Board of Directors approved a stock repurchase program that authorizes us to repurchase up to $15.0 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016. |
(2) Consists of shares withheld from the vesting portions of stock unit awards made to our executive officers to satisfy the executives' tax withholding obligations incident to such vesting. | | (2) Consists of shares withheld from the vesting portions of stock unit awards made to our executive officers to satisfy the executives' tax withholding obligations incident to such vesting. |
Item 6. Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
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Exhibit No. | | Description |
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31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
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31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
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32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 | | The following financial statements from Nautilus, Inc.'s quarterly report on Form 10-Q for the three and nine months ended September 30, 2015March 31, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Operations (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (unaudited), (iv) Condensed Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Condensed Consolidated Financial Statements (unaudited). |
SIGNATURES
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 thereunto duly authorized.
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| | | |
| | NAUTILUS, INC. |
| | (Registrant) |
November 5, 2015 | | | |
May 9, 2016 | | By: | /S/ Bruce M. Cazenave |
Date | | | Bruce M. Cazenave |
| | | Chief Executive Officer (Principal Executive Officer) |
|
| | | |
| | NAUTILUS, INC. |
| | (Registrant) |
November 5, 2015 | | | |
May 9, 2016 | | By: | /S/ Sidharth Nayar |
Date | | | Sidharth Nayar |
| | | Chief Financial Officer (Principal Financial and Accounting Officer) |