Nautilus Down $8.9 M, Focusing on Retail


VANCOUVER, WA -- Despite a net loss of $8.9 million for the second quarter of 2008 compared to net income of $1.1 million for the second quarter of 2007, Nautilus executives were optimistic in a conference call last week that announced the company's second quarter results. The company's re-organization efforts and a refocus on retail are two of the main reasons for the optimism.

"I would say our balance sheet now is satisfactory," Ed Bramson, Nautilus Inc. chairman and CEO, said in the call. "You might even call it good. Cost reduction program has not yet got to the point where we won't have any losing quarters but we're still working on it."

In late July, Nautilus announced plans to close its Tulsa, OK, facilities by the end of 2008 and transfer the manufacturing of its products to its facility in Independence, VA. Although the closing will affect 140 people, the company said it does not have plans to eliminate any major product lines. The company also plans to consolidate its two distribution centers located in Independence, VA, and Portland, OR. In February, Nautilus announced that it would transition a call center in Winnipeg, Canada, to the company's headquarters in Vancouver, WA.

"In addition to managing our expenses tightly, we are continuing our thorough review of each business unit with a particular focus on profitable growth," Bramson said. "The four areas of strategic focus are new product development, resolving channel conflict, expanding our share of the cardio market and capitalizing on our strong portfolio of brands. In order to improve our profitability in the current economic environment, we have initiated a restructuring program which is expected to reduce fixed costs significantly."

The company will also spend more time honing its retail business, Bramson said, noting that unlike Nautilus, many other manufacturers have to pay a licensing fee on their retail equipment.

“There was a time when you might of thought of [retail] as the secondary channel for selling the direct based home gyms, but it is now actually a self-standing business,” he said in the call. “Most of its sales are actually in cardio, and it has it seems to us some fairly good opportunities to gain floor space and to gain customers in some of the larger retail stores.”

Nautilus’ main cardio focus in the retail world is the Treadclimber, Bramson said. The commercial Treadclimber was pulled earlier this year, and in fall 2005, the company withdrew the product to strengthen its hydraulic system, reintroducing it in summer 2006. The Treadclimber TC916 won a FIBO Innovation Award last year.

“We think there's a big opportunity to grow the Treadclimber direct business because it's relatively small right now, and it's a distinguishable product,” he said. “It hasn't been put into retail, and the commercial Treadclimber was not one of our better design efforts I would have to say. But our customers love it.”

The $8.9 million net loss does not include Pearl Izumi, the company's former apparel business, which is considered a discontinued operation and was sold on April 18 for $69.4 million. According to a statement from the company, loss from continuing operations for the second quarter was $9.6 million after recording restructuring related and other charges of $6.6 million. The charges were mainly due to severance, inventory reserves and anticipated settlements related to licensing agreements.

In the second quarter of 2007, the company reported income from continuing operations of about $700,000, including a benefit of $18.3 million after-tax from a litigation settlement. Results from continuing operations exclude Pearl Izumi.

Net sales from continuing operations for the three months ended June 30, 2008, were $95.6 million compared to $102.5 million for the corresponding period last year, resulting in a 7 percent decrease. Net sales increases in the company's retail business were offset by declines in the direct business, principally due to a weak consumer and tight credit environment, as well as declines in commercial sales principally due to suspending sales of the commercial TreadClimber.

“An important part of our restructuring activities has been the establishment of separate teams with authority and responsibility for the profitability of each of our global business units. We will now be reporting the commercial, direct and retail businesses on a global basis,” the company said in a statement.

As a result of changing the reportable business segments in the second quarter of 2008, accounting rules require the company to perform an interim goodwill impairment test. Nautilus is in the process of determining whether a goodwill impairment charge is required as of June 30, 2008. An impairment charge, if any, would be a non-cash charge. The company expects to complete this goodwill impairment assessment prior to the filing of its Form 10-Q for the second quarter.

As of June 30, 2008, the company had a net cash position of $4 million and unutilized borrowing availability of approximately $35 million versus net debt of $71 million on Dec. 31, 2007.

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