Market Overview

Nautilus, Inc. Reports Results for the Second Quarter 2018

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Second Quarter Retail Revenue Increased 5.7% to $39.2 Million

Company Raises Full Year 2018 Revenue Guidance Range and
Reiterates Operating Income Guidance

Nautilus, Inc. (NYSE:NLS) today reported its unaudited operating
results for the second quarter and six months ended June 30, 2018. The
Company raised its full year 2018 revenue guidance range and reiterated
full year operating income guidance.

Net sales for the second quarter of 2018 totaled $75.5 million, down
2.0% compared to $77.0 million in the same quarter of 2017. The decrease
in net sales was driven by lower Direct segment sales, down 11.0%,
reflecting expected declines in Bowflex TreadClimber® sales,
and weaker than projected Bowflex Max Trainer® sales. Strong
performance in the Retail segment, up 5.7% from the prior year quarter,
was driven by double-digit growth in the mass retail channel, partially
offset by lower sales in the specialty commercial channel. Royalty
revenue in the second quarter of 2018 was $1.5 million, compared to $0.8
million for the same quarter of last year, reflecting payments related
to a new royalty agreement, with future sales-based royalties that are
not expected to be material. For the first six months of 2018, net sales
were $190.3 million, flat to prior year. Gross margins for the second
quarter of 2018 totaled 44.6% versus 49.8% for the same period last
year, reflecting higher product costs across all channels, coupled with
a shift in segment revenue mix from Direct to Retail.

Operating income for the second quarter of 2018 was $1.2 million,
compared to $3.8 million in the same period last year, as lower net
sales and gross margins resulted in a decline in gross profit dollars,
partially offset by improved management of operating expenses. Operating
expenses for the second quarter were 43.0% of revenue versus 44.8% in
the same period last year. For the first six months of 2018, operating
income was $11.9 million, compared to $16.5 million in the same period
last year.

Income from continuing operations for the second quarter of 2018 was
$1.0 million, or $0.03 per diluted share, compared to $2.6 million, or
$0.08 per diluted share, for the same period last year. Income from
continuing operations for the first six months of 2018 was $9.1 million,
or $0.30 per diluted share, compared to income from continuing
operations of $10.8 million, or $0.35 per diluted share for the same
period last year. EBITDA from continuing operations for the second
quarter of 2018 totaled $3.3 million compared to $6.2 million in the
prior year period.

At June 30, 2018, cash and marketable securities increased to $85.9
million and debt decreased to $40.0 million, compared to $85.2 million
and $48.0 million, respectively, at December 31, 2017.

Bruce M. Cazenave, Chief Executive Officer, stated, "Our overall
performance was in-line with our expectations for the second quarter,
historically the seasonally slowest quarter of the year. We continued to
see solid momentum in our Retail segment during the second quarter,
which achieved 5.7% year-over-year growth, driven by double-digit
expansion in our mass retail channel. Our Direct segment remained
challenged in the second quarter by the continued phase-down of the
mature TreadClimber® and softer than expected results from
Max Trainer®. We expect strong growth in the Direct segment
in the back-half of 2018 based on new product launches and the
introduction of our new digital platform, which will be incorporated
onto an upgraded and refreshed Max Trainer product line."

Mr. Cazenave continued, "Our year is unfolding as expected and key
initiatives such as new product launches and fall season order plans for
retail customers are tracking well. These positive factors give us the
confidence to increase our full year revenue guidance range by $3
million. We are now expecting full year revenues in 2018 to be in the
range of $431 million to $440 million and are reiterating operating
income to be in the range of $42 million to $45 million. The Company has
also taken pricing actions and cost improvement measures to help
mitigate the impact of inflationary product cost pressures and
unfavorable foreign exchange trends that negatively impacted gross
margins in the first half of 2018. New product introductions slated for
the third quarter include two models of the Bowflex LateralX®
trainer in the Direct segment and the Octane MTX Max Trainer®,
the commercial version of our popular Max Trainer line designed for the
specialty and commercial channels of distribution. In addition, we plan
to launch upgraded versions of the Max Trainer that will support our
exciting new digital subscription platform in our Direct segment during
the fourth quarter. Our Retail segment is expected to continue to
perform well in the back-half of this year and achieve growth in each
quarter of 2018 versus the comparable quarters in 2017. Retail growth in
the back-half of this year is anticipated to come from expanded product
offerings across our Octane, Nautilus, and Bowflex brands, which will be
sold in commercial, traditional retail, and e-commerce channels this
fall. We are also pleased with the progress to date on several of the
key strategic initiatives we outlined earlier in the year. Specifically,
we have ramped up investments in the international channel, and key
logistics and systems integration initiatives have been completed. While
there is much we still need to do to accomplish the acceleration in
future top line and bottom line growth, we believe we are on track to
deliver on our stated objectives for 2018."

For further information, see "Results of Operations Information"
attached hereto.

Segment Results

Net sales for the Direct segment were $34.8 million in the second
quarter of 2018, a decrease of 11.0% over the comparable period last
year due to a decline in Max Trainer® sales, coupled with the
expected decline in TreadClimber® sales, partially offset by
the growth of new products, including the Bowflex Results SeriesTM
treadmills and ellipticals. Operating income for the Direct segment was
$0.7 million for the second quarter of 2018, compared to $2.5 million in
the second quarter of last year. Operating income was negatively
impacted by the decline in sales and gross margins, partially offset by
reduced media spending and a decrease in consumer financing fees. Gross
margin for the Direct segment declined by 370 basis points resulting
from a shift in product mix and higher product costs, due to rising
material costs and unfavorable changes in foreign currency exchange
rates.

Net sales for the Retail segment were $39.2 million in the second
quarter of 2018, an increase of 5.7% when compared to $37.1 million in
the second quarter last year. The increase reflected robust growth
across a variety of product lines, primarily in the mass retail channel.
Operating income for the Retail segment was $3.6 million for the second
quarter of 2018 compared to $6.1 million in the second quarter of last
year. The decrease in Retail segment operating income was primarily due
to the lower gross margin rate. Retail segment gross margin was 29.1% in
the second quarter of 2018, compared to 34.5% in the same quarter of the
prior year, reflecting increased product costs due to unfavorable
changes in foreign currency exchange rates.

For further information, see "Segment Information" attached hereto.

Balance Sheet

As of June 30, 2018, the Company had cash and marketable securities of
$85.9 million and debt of $40.0 million, compared to cash and marketable
securities of $85.2 million and debt of $48.0 million at year end 2017.
During the second quarter, the Company purchased $0.4 million of stock
in the open market as part of its previously announced stock repurchase
program. As of June 30, 2018, $23.9 million remained available for
future repurchases under the share repurchase program. Working capital
of $90.1 million as of June 30, 2018 was $1.1 million lower than the
2017 year-end balance of $91.1 million. Inventory as of June 30, 2018
was $42.3 million, compared to $53.4 million as of December 31, 2017 and
$42.3 million at the end of the second quarter last year.

For further information, see "Balance Sheet Information" attached
hereto.

Conference Call

Nautilus will host a conference call to discuss the Company's operating
results for the second quarter ended June 30, 2018 at 4:30 p.m. ET (1:30
p.m. PT) on Monday, July 30, 2018. The call will be broadcast live over
the Internet hosted at http://www.nautilusinc.com/events
and will be archived online within one hour after completion of the
call. In addition, listeners may call (800) 239-9838 in North America
and international listeners may call (323) 794-2551. Participants from
the Company will include Bruce M. Cazenave, Chief Executive Officer, Sid
Nayar, Chief Financial Officer, and William B. McMahon, Chief Operating
Officer.

A telephonic playback will be available from 7:30 p.m. ET, July 30,
2018, through 11:59 p.m. ET, August 13, 2018. Participants can dial
(844) 512-2921 in North America and international participants can dial
(412) 317-6671 to hear the playback. The passcode for the playback is
3415824.

Non-GAAP Presentation

In addition to disclosing results determined in accordance with GAAP,
Nautilus has presented EBITDA from continuing operations, a non-GAAP
financial measure, for the three and six months ended June 30, 2018 and
2017.

The Company defines EBITDA from continuing operations as its income from
continuing operations, adjusted to exclude interest expense (income),
income tax expense of continuing operations, and depreciation and
amortization expense. The Company uses EBITDA from continuing operations
in evaluating its operating results and for financial and operational
decision-making purposes such as budgeting and establishing operational
goals. The Company believes that EBITDA from continuing operations helps
identify underlying trends in its business that could otherwise be
masked by the effect of the items that are excluded from EBITDA from
continuing operations and enhances the overall understanding of the
Company's past performance and future prospects. The Company presents
EBITDA from continuing operations as a complement to results provided in
accordance with GAAP, and these results should not be regarded as a
substitute for GAAP. The Company strongly encourages you to review all
of its financial statements and publicly-filed reports in their entirety
and to not rely on any single financial measure.

For a quantitative reconciliation of our non-GAAP financial measures to
the most comparable GAAP measures, see "Reconciliation of Non-GAAP
Financial Measures" included with this release.

About Nautilus, Inc.

Headquartered in Vancouver, Washington, Nautilus, Inc. (NYSE:NLS) is a
global fitness solutions company that believes everyone deserves a fit
and healthy life. With a brand portfolio including Bowflex®,
Nautilus®, Octane Fitness®, Schwinn®
and Universal®, Nautilus, Inc. develops innovative products
to support healthy living through direct and retail channels, as well as
in commercial channels with Octane Fitness® products.
Nautilus, Inc. uses the investor relations page of its website (www.nautilusinc.com/investors)
to make information available to its investors and the market.

This press release includes forward-looking statements (statements which
are not historical facts) within the meaning of the Private Securities
Litigation Reform Act of 1995, including: projected or forecasted
financial and operating results; future plans for introduction of new
products, anticipated demand for the Company's new and existing
products, and projected impact of the new product launches on the
Company's operating results; statements regarding the Company's
prospects, resources or capabilities; current or future financial and
economic trends; planned investments and strategic initiatives and the
anticipated or targeted results of such initiatives. Factors that could
cause Nautilus, Inc.'s actual results to differ materially from these
forward-looking statements include: our ability to timely acquire
inventory that meets our quality control standards from sole source
foreign manufacturers at acceptable costs; an inability to pass along or
otherwise mitigate the impact of raw material price increases and other
cost pressures, including unfavorable currency exchange rates;
experiencing delays and/or greater than anticipated costs in connection
with launch of new products, entry into new markets, or strategic
initiatives; our ability to hire and retain key management personnel;
changes in consumer fitness trends; changes in the media consumption
habits of our target consumers or the effectiveness of our media
advertising; a decline in consumer spending due to unfavorable economic
conditions; and softness in the retail marketplace. Additional
assumptions, risks and uncertainties are described in detail in our
registration statements, reports and other filings with the Securities
and Exchange Commission, including the "Risk Factors" set forth in our
Annual Report on Form 10-K, as supplemented by our quarterly reports on
Form 10-Q. Such filings are available on our website or at www.sec.gov.
You are cautioned that such statements are not guarantees of future
performance and that our actual results may differ materially from those
set forth in the forward-looking statements. We undertake no obligation
to publicly update or revise forward-looking statements to reflect
subsequent developments, events or circumstances.

RESULTS OF OPERATIONS INFORMATION

The following summary contains information from our condensed
consolidated statements of operations for the three and six months ended
June 30, 2018 and 2017 (unaudited and in thousands, except per share
amounts):

       

Three Months Ended
June 30,

Six Months Ended
June 30,

2018     2017 2018     2017
 
Net sales $ 75,498 $ 77,029 $ 190,311 $ 190,281
Cost of sales 41,850   38,651   97,792   90,158  
Gross profit 33,648 38,378 92,519 100,123
 
Operating expenses:
Selling and marketing 22,084 23,628 58,847 61,293
General and administrative 6,327 7,315 13,237 14,801
Research and development 4,035   3,586   8,536   7,497  
Total operating expenses 32,446 34,529 80,620 83,591
 
Operating income 1,202 3,849 11,899 16,532
Other income (expense), net 57   (127 ) 23   (487 )
Income from continuing operations before income taxes 1,259 3,722 11,922 16,045
Income tax expense 252   1,156   2,775   5,294  
Income from continuing operations 1,007 2,566 9,147 10,751
Loss from discontinued operations(1) (79 ) (77 ) (160 ) (1,169 )
Net income $ 928   $ 2,489   $ 8,987   $ 9,582  
 
Basic income per share from continuing operations $ 0.03 $ 0.08 $ 0.30 $ 0.35
Basic loss per share from discontinued operations     (0.01 ) (0.04 )
Basic net income per share(2) $ 0.03   $ 0.08   $ 0.30   $ 0.31  
 
Diluted income per share from continuing operations $ 0.03 $ 0.08 $ 0.30 $ 0.35
Diluted loss per share from discontinued operations     (0.01 ) (0.04 )
Diluted net income per share $ 0.03   $ 0.08   $ 0.29   $ 0.31  
 
Shares used in per share calculations:
Basic 30,193 30,755 30,253 30,734
Diluted 30,476 31,095 30,533 31,110
 
Select Metrics:
Gross margin 44.6 % 49.8 % 48.6 % 52.6 %
Selling and marketing % of net sales 29.3 % 30.7 % 30.9 % 32.2 %
General and administrative % of net sales 8.4 % 9.5 % 7.0 % 7.8 %
Research and development % of net sales 5.3 % 4.7 % 4.5 % 3.9 %
Operating income % of net sales 1.6 % 5.0 % 6.3 % 8.7 %

 

(1) The six months ended June 30, 2017 include a $1.2 million
expense related to a lawsuit settlement with Biosig Instruments, Inc.

(2) May not add due to rounding.

SEGMENT INFORMATION

The following table presents certain comparative information by segment
for the three and six months ended June 30, 2018 and 2017 (unaudited and
in thousands):

       

Three Months Ended
June 30,

Change
2018     2017 $     %
Net sales:
Direct $ 34,824 $ 39,111 $ (4,287 ) (11.0 )%
Retail 39,185 37,083 2,102 5.7 %
Royalty 1,489   835   654   78.3 %
$ 75,498   $ 77,029   $ (1,531 ) (2.0 )%
 
Operating income (loss):
Direct $ 739 $ 2,519 $ (1,780 ) (70.7 )%
Retail 3,568 6,097 (2,529 ) (41.5 )%
Unallocated corporate (3,105 ) (4,767 ) 1,662   34.9 %
$ 1,202   $ 3,849   $ (2,647 ) (68.8 )%
       

Six Months Ended
June 30,

Change
2018     2017 $     %
Net sales:
Direct $ 106,025 $ 113,814 $ (7,789 ) (6.8 )%
Retail 82,178 74,888 7,290 9.7 %
Royalty 2,108   1,579   529   33.5 %
$ 190,311   $ 190,281   $ 30   %
 
Operating income (loss):
Direct $ 12,030 $ 17,852 $ (5,822 ) (32.6 )%
Retail 7,489 8,309 (820 ) (9.9 )%
Unallocated corporate (7,620 ) (9,629 ) 2,009   20.9 %
$ 11,899   $ 16,532   $ (4,633 ) (28.0 )%

BALANCE SHEET INFORMATION

The following summary contains information from our condensed
consolidated balance sheets as of June 30, 2018 and December 31, 2017
(unaudited and in thousands):

   
As of
June 30, 2018     December 31, 2017
Assets
 
Cash and cash equivalents $ 25,929 $ 27,893
Available-for-sale securities 59,987 57,303
Trade receivables, net of allowances of $54 and $119 25,275 42,685
Inventories 42,262 53,354
Prepaids and other current assets 12,342   7,257
Total current assets 165,795 188,492
 
Property, plant and equipment, net 17,792 15,827
Goodwill 61,928 62,030
Other intangible assets, net 56,149 57,743
Deferred income tax assets, non-current 78
Other assets 614   684
Total assets $ 302,356   $ 324,776
 
Liabilities and Shareholders' Equity
 
Trade payables $ 46,633 $ 66,899
Accrued liabilities 9,194 10,764
Warranty obligations, current portion 3,915 3,718
Note payable, current portion 15,993   15,993
Total current liabilities 75,735 97,374
 
Warranty obligations, non-current 1,787 2,399
Income taxes payable, non-current 3,186 2,955
Deferred income tax liabilities, non-current 9,978 8,558
Other non-current liabilities 2,091 2,315
Note payable, non-current 23,989 31,986
Shareholders' equity 185,590   179,189
Total liabilities and shareholders' equity $ 302,356   $ 324,776

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The following table presents a reconciliation of EBITDA from continuing
operations for the three and six months ended June 30, 2018 and 2017
(unaudited and in thousands):

       

Three Months Ended
June 30,

Six Months Ended
June 30,

2018     2017 2018     2017
 
Income from continuing operations $ 1,007 $ 2,566 $ 9,147 $ 10,751
Interest (income) expense, net (26 ) 237 (5 ) 550
Income tax expense of continuing operations 252 1,156 2,775 5,294
Depreciation and amortization 2,029   2,274   4,468   4,518
Earnings before interest, taxes, depreciation and amortization
(EBITDA) from continuing operations
$ 3,262   $ 6,233   $ 16,385   $ 21,113

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