QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
or
☐
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
NAUTILUS, INC.
(Exact name of Registrant as specified in its charter)
Washington
94-3002667
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
17750 S.E. 6th Way
Vancouver, Washington98683
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
NLS
New York Stock Exchange
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
Accelerated Filer
[x]
Non-accelerated filer
[ ]
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 August 6, 2021 was 30,930,700shares.
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
2,054
2,646
Provision for allowance for doubtful accounts
(156)
596
Inventory lower of cost or net realizable value
(134)
773
Stock-based compensation expense
1,225
865
Loss on asset dispositions
—
184
Loss on disposal group, goodwill and other intangible impairment charge
—
29,013
Deferred income taxes, net of valuation allowances
(908)
(7,523)
Other
1,125
(961)
Changes in operating assets and liabilities:
Trade receivables
(9,638)
(7,995)
Inventories
(43,259)
1,506
Prepaids and other assets
3,706
(611)
Income taxes receivable
(9,512)
4,823
Trade payables
15,200
19,742
Accrued liabilities and other liabilities, including warranty obligations
(1,743)
2,264
Net cash (used in) provided by operating activities
(28,156)
40,212
Cash flows from investing activities:
Proceeds from sales and maturities of available-for-sale securities
17,185
—
Purchases of property, plant and equipment
(1,850)
(2,965)
Net cash provided by (used in) investing activities
15,335
(2,965)
Cash flows from financing activities:
Proceeds from long-term debt
1,185
575
Payments on long-term debt
(1,337)
(13,167)
Proceeds from employee stock purchases
269
—
Proceeds from exercise of stock options
63
83
Tax payments related to stock award issuances
(1,322)
—
Net cash used in financing activities
(1,142)
(12,509)
Effect of exchange rate changes on cash and cash equivalents
740
644
(Decrease) increase in cash, cash equivalents and restricted cash
(13,223)
25,382
Less: Net change in cash balances classified as assets held-for-sale
—
(3,986)
Net change in cash, cash equivalents and restricted cash
(13,223)
21,396
Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash at beginning of period
39,780
26,456
Cash, cash equivalents and restricted cash at end of period
$
26,557
$
47,852
Supplemental disclosure of cash flow information:
Cash paid for interest
$
60
$
212
Cash paid for income taxes, net
18,562
447
Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred but not yet paid
$
786
$
652
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same amounts shown above:
Three-Months Ended June 30,
2021
2020
Cash and cash equivalents
$
25,218
$
45,656
Restricted cash
1,339
2,196
Total cash, cash equivalents and restricted cash
$
26,557
$
47,852
See accompanying Notes to Condensed Consolidated Financial Statements.
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.
On December 30, 2020, our Board of Directors approved a change in our fiscal year end from December 31st to March 31st. This document reflects our first quarter ending June 30, 2021 covering our fiscal year from April 1, 2021 through March 31, 2022.
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, 2020 (the “2020 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. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results could differ from those estimates. These uncertainties will be heightened by the COVID-19 pandemic, as we may be unable to accurately predict the impact of COVID-19 going forward and as a result our estimates may change in the near term. Further information regarding significant estimates can be found in our 2020 Form 10-K. We have reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. On the consolidated balance sheets, we have reclassified from accrued liabilities to income taxes payable, current portion.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of June 30, 2021 and March 31, 2021, and our results of operations, comprehensive income and shareholders' equity for the three-month periods ended June 30, 2021 and 2020 and our cash flows for the three-month periods ended June 30, 2021 and 2020. 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.
Recent Accounting Pronouncements
Recently Adopted Pronouncements
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in ASU 2019-12 introduce the following new guidance: (1) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax; and (2) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The amendments in ASU 2019-12 make changes to the following current guidance: (1) making an intraperiod allocation if there is a loss in continuing operations and a gain outside of continuing operations; (2) determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; (3) accounting for tax law changes and year-to-date losses in interim periods; and (4) determining how to apply the income tax guidance to franchise taxes that are partially based on income. ASU 2019-12 is effective for public business entities' fiscal years,
including interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. Our adoption of ASU 2019-12 as of January 1, 2021 had no material impact on our financial position, results of operations or cash flows.
Recently Issued Pronouncements Not Yet Adopted
ASU 2020-04 and ASU 2021-01
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use London Inter-bank Offered Rate (“LIBOR”) as a reference rate, which is effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations and cash flows.
ASU 2020-01
In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In May 2019, the FASB issued ASU 2019-05, which provides entities to have certain instruments with an option to irrevocably elect the fair value option. In November 2019, the FASB issued ASU 2019-11, which provides clarification and addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASC 2020-03, which provides an update to clarify or address specific issues. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
(2) REVENUES
Our revenues from contracts with customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):
Three-Months Ended June 30,
2021
2020
Product sales
$
179,811
$
110,595
Extended warranties and services
1,756
1,465
Other(1)
3,026
2,128
Net sales
$
184,593
$
114,188
(1) Other revenue is primarily freight and delivery, royalty income and subscription revenue.
Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
Three-Months Ended June 30,
2021
2020
United States
$
147,149
$
97,363
Canada
19,362
6,248
Europe, the Middle East and Africa
14,442
8,493
All other
3,640
2,084
Net sales
$
184,593
$
114,188
As of June 30, 2021, estimated revenue expected to be recognized in the future totaled $145.0 million, primarily related to customer order backlog, which includes firm orders for future shipment and unfulfilled orders to our Retail customers, as well as unfulfilled consumer orders within the Direct channel. We have further refined our Retail backlog to include unfilled future orders. Direct orders of $3.1 million and Retail orders of $141.9 million, comprised our backlog as of June 30, 2021, compared to Direct orders of $20.6 million and Retail orders of $130.0 million as of June 30, 2020. The estimated future revenues are net of contractual rebates and consideration payable for applicable Retail customers, and net of current promotional programs and sales discounts for our Direct customers.
The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue for which advance consideration is received prior to the transfer of control. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in nature and were recorded on the condensed consolidated balance sheets as accrued liabilities. Significant changes in contract liabilities balances, including revenue recognized in the reporting period that was included in opening contract liabilities, are shown below (in thousands):
Three-Months Ended June 30,
2021
2020
Balance, beginning of period
$
5,551
$
2,050
Cash additions
1,089
2,371
Revenue recognition
(4,883)
(918)
Balance, end of period
$
1,757
$
3,503
(3) 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 were as follows (in thousands):
June 30, 2021
Level 1
Level 2
Level 3
Total
Assets:
Cash Equivalents
Money market funds
$
6,184
$
—
$
—
$
6,184
Total cash equivalents
6,184
—
—
6,184
Available-for-Sale Securities
Commercial paper
—
7,998
—
7,998
Corporate bonds
—
8,153
—
8,153
U.S. government bonds
—
40,113
—
40,113
Total available-for-sale securities
—
56,264
—
56,264
Total assets measured at fair value
$
6,184
$
56,264
$
—
$
62,448
Liabilities:
Derivatives
Foreign currency forward contracts
$
—
$
510
$
—
$
510
Total liabilities measured at fair value
$
—
$
510
$
—
$
510
March 31, 2021
Level 1
Level 2
Level 3
Total
Assets:
Cash Equivalents
Money market funds
$
9,679
$
—
$
—
$
9,679
Total cash equivalents
9,679
—
—
9,679
Available-for-Sale Securities
Commercial paper
—
9,994
—
9,994
Corporate bonds
—
8,227
—
8,227
U.S. government bonds
—
55,227
—
55,227
Total available-for-sale securities
—
73,448
—
73,448
Total assets measured at fair value
$
9,679
$
73,448
$
—
$
83,127
Liabilities:
Derivatives
Foreign currency forward contracts
$
—
$
672
$
—
$
672
Total liabilities measured at fair value
$
—
$
672
$
—
$
672
For 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 three-month period ended June 30, 2021, nor for the period ended March 31, 2021.
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 for identical assets, 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 values of our foreign currency forward contracts are 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 did not have any changes to our valuation techniques during the three-month period ended June 30, 2021, nor for the year ended March 31, 2021.
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.
As of June 30, 2021 and March 31, 2021, there were no assets or liabilities that were recorded at fair value on a nonrecurring basis.
The carrying values of cash and cash equivalents, restricted cash, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fair value due to their short maturities. The carrying value of our debt approximates its fair value and falls under Level 2 of the fair value hierarchy, as the interest rate is variable and based on current market rates.
(4) DERIVATIVES
From time to time, we enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. We do not enter into derivative instruments for any purpose other than to manage foreign currency exposure. That is, we do not engage in currency exchange rate speculation using derivative instruments.
We may hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. As of June 30, 2021, total outstanding contract notional amounts were $66.0 million and had maturities of 79 days or less.
The fair value of our derivative instruments was included in our condensed consolidated balance sheets as follows (in thousands):
Balance Sheet Classification
As of
June 30, 2021
March 31, 2021
Derivative instruments not designated as cash flow hedges:
Accrued liabilities
$
510
$
672
The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
Statement of Operations Classification
Three-Months Ended June 30,
2021
2020
Derivative instruments not designated as cash flow hedges:
Inventories are stated at the lower of cost and net realizable value, with cost determined based on the first-in, first-out method. Our inventories consisted of the following (in thousands):
As of
June 30, 2021
March 31, 2021
Finished goods
$
106,413
$
63,918
Parts and components
4,719
4,167
Total inventories
$
111,132
$
68,085
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Estimated Useful Life (in years)
As of
June 30, 2021
March 31, 2021
Automobiles
5
$
23
$
23
Leasehold improvements
4
to
20
3,060
3,059
Computer software and equipment
2
to
7
38,244
36,956
Machinery and equipment
3
to
5
15,790
15,699
Furniture and fixtures
5
to
20
2,587
2,586
Work in progress(1)
N/A
2,196
1,314
Total cost
61,900
59,637
Accumulated depreciation
(37,182)
(35,141)
Total property, plant and equipment, net
$
24,718
$
24,496
(1) Work in progress includes information technology assets and production tooling.
Depreciation expense was as follows (in thousands):
Three-Months Ended June 30,
2021
2020
Depreciation expense
$
2,039
$
1,843
(7) OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following (in thousands):
Future amortization of definite-lived intangible assets is as follows (in thousands):
2022
$
46
2023
61
2024
61
2025
61
2026
47
Thereafter
22
$
298
(8) LEASES
We have several non-cancellable operating leases, primarily for office space, that expire at various dates over the next nine years. These leases generally contain renewal options to extend for one lease term of five years. For leases that we are reasonably certain we will exercise the lease renewal options, the options were considered in determining the lease term, and associated potential option payments are included in the lease payments. The payments used in the renewal term were estimated using the percentage rate increase of historical rent payments for each location where the renewal will be exercised.
Payments due under the lease contracts include annual fixed payments for office space. Variable payments including payments for our proportionate share of the building’s property taxes, insurance, and common area maintenance are treated as non-lease components and are recognized in the period for which the costs occur.
Operating lease expense was as follows (in thousands):
Three-Months Ended June 30,
2021
2020
Operating lease expense
$
1,466
$
1,145
Leases with an initial term of 12 months or less (“short-term lease”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term.
Other information related to leases was as follows (dollars in thousands):
As of
June 30, 2021
March 31, 2021
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flow from operating leases
$
1,352
$
1,076
Additional operating lease information:
Reductions to ROU assets resulting from reductions to operating lease obligations
$
359
$
268
Weighted average remaining operating lease term (years)
6.26
6.97
Weighted average discount rate on operating leases
5.00%
4.95%
We determined the discount rate for leases using a portfolio approach to determine an incremental borrowing rate to calculate the right-of-use assets and lease liabilities.
Maturities of operating lease liabilities under non-cancellable leases were as follows (in thousands):
As of
June 30, 2021
2022
$
4,502
2023
5,606
2024
5,168
2025
5,330
2026
4,267
Thereafter
7,969
Total undiscounted lease payments
32,842
Less imputed interest
(4,915)
Total lease liabilities
$
27,927
(9) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
As of
June 30, 2021
March 31, 2021
Payroll and related liabilities
$
5,485
$
6,616
Reserves (1)
3,405
2,624
Deferred revenue
1,757
5,551
Other
3,868
4,836
Total accrued liabilities
$
14,515
$
19,627
(1) Reserves is primarily sales return, inventory, sales tax and product liability reserves.
(10) PRODUCT WARRANTIES
Our products carry 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):
Three-Months Ended June 30,
2021
2020
Balance, beginning of period
$
8,651
$
3,154
Accruals
3,226
276
Payments
(2,093)
(879)
Balance, end of period
$
9,784
$
2,551
(11) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables set forth the changes in accumulated other comprehensive loss, net of tax (in thousands):
Current period other comprehensive loss before reclassifications
—
—
217
217
Net other comprehensive loss during period
—
—
217
217
Balance, June 30, 2021
$
(8)
$
—
$
70
$
62
Unrealized (Loss) Gain on Available-for-Sale Securities
Gain (Loss) on Derivative Securities
Foreign Currency Translation Adjustments
Accumulated Other Comprehensive Loss
Balance, March 31, 2020
$
—
$
—
$
(1,312)
$
(1,312)
Current period other comprehensive loss before reclassifications
—
—
353
353
Net other comprehensive loss during period
—
—
353
353
Balance, June 30, 2020
$
—
$
—
$
(959)
$
(959)
(12) INCOME (LOSS) 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. Basic income per share amounts were computed using the weighted average number of common shares outstanding. Diluted income 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 June 30,
2021
2020
Shares used to calculate basic income per share
30,697
29,909
Dilutive effect of outstanding stock options, performance stock units and restricted stock units
1,811
—
Shares used to calculate diluted income per share
32,508
29,909
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. In the case of restricted stock units, this is because unrecognized compensation expense exceeds the current value of the awards (i.e., grant date market value was higher than current average market price). In the case of stock options, this is because the average market price did not exceed the exercise price.
These shares may be anti-dilutive potential common shares in the future (in thousands):
We have two operating segments, Direct and Retail. There were no changes in our operating segments during the three-months ended June 30, 2021.
We evaluate performance of the operating segments 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 and other intangible assets. Unallocated assets primarily include cash, cash equivalents and restricted cash, derivative securities, shared information technology infrastructure, distribution centers, corporate headquarters, prepaids and other current assets, deferred income tax assets and other assets. Capital expenditures directly attributable to the Direct and Retail segments were not significant in any period.
Following is summary information by reportable segment (in thousands):
Three-Months Ended June 30,
2021
2020
Net sales:
Direct
$
63,396
$
50,433
Retail
120,484
62,948
Royalty
713
807
Consolidated net sales
$
184,593
$
114,188
Contribution:
Direct
$
6,759
$
16,995
Retail
22,090
11,613
Royalty
713
807
Consolidated contribution
$
29,562
$
29,415
Reconciliation of consolidated contribution to income (loss) from continuing operations:
The following customers accounted for 10% or more of total net sales as follows:
Three-Months Ended June 30,
2021
2020
Amazon.com
17.9
%
18.0
%
Best Buy
17.1
%
*
*Less than 10% of total net sales.
(14) BORROWINGS
Wells Fargo Bank Credit Agreement
On May 14, 2021, we amended the January 31, 2020 Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (“Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility in the aggregate principal amount of up to $55.0 million, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility in the aggregate principal amount of $15.0 million (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Wells Fargo Financing"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. Several key features have been beneficially amended including permanently removing the $7.5 million minimum liquidity covenant and minimum EBITDA covenant that was scheduled to commence February 1, 2022. The Credit Facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than the greater of $6.0 million and 12.5% of the Loan Cap, as defined in the Credit Agreement. Various borrowing base definitions and limits were also amended that will result in improved availability under the asset-based revolver. In addition to the above structural improvements, the interest rate on the term loan was reduced to LIBOR plus 4.50% versus 5.00%. The maturity date remains January 31, 2025 and the term loan continues to contain amortization as originally scheduled. The repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.
Interest on the ABL Revolving Facility will accrue at LIBOR plus a margin of 1.75% to 2.25% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at LIBOR plus 4.50%. As of June 30, 2021, our interest rate was 1.85% for the ABL Revolving Facility and 4.60% for the Term Loan Facility.
As of June 30, 2021,outstanding borrowings, net of debt issuance costs, totaled $13.4 million, with $11.9 million and $1.5 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of June 30, 2021, we were in compliance with the financial covenants of the Credit Agreement and $53.6 million was available for borrowing under the ABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025.
The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement are classified based on the provisions of ASC 470 because the lock-box remittances do not automatically reduce the debt outstanding.
(15) COMMITMENTS AND CONTINGENCIES
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of June 30, 2021, we had standby letters of credit of $0.9 million.
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of June 30, 2021, we had approximately $174.9 million compared to $216.3 million as of March 31, 2021 in non-cancelable market-based purchase obligations, primarily to secured additional factory capacity for inventory purchases in 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 June 30, 2021.
Legal Matters
From time to time, in the ordinary course of business, 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.
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, the 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. Further, while we face contingencies that are reasonably possible to occur, we are unable to estimate the possible loss or range of loss at this time. As such, zero liability is recorded as of June 30, 2021.
As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.
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, 2020 (the “2020 Form 10-K”). All references to the first quarter of 2021 and 2020 mean the three-month periods ended June 30, 2021 and 2020, 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.
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. We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Forward-looking statements include any statements related to our future business, financial performance or operating results; 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 and anticipated results from such expenditures and other investments in our capabilities and resources; anticipated losses from discontinued operations; plans for new product introductions, strategic partnerships 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, changes in consumer fitness trends, changes in the media consumption habits of our target consumers or the effectiveness, availability and price of media time consistent with our cost and audience profile parameters, greater than anticipated costs or delays associated with launch of new products, weaker than expected demand for new or existing products, a decline in consumer spending due to unfavorable economic conditions, softness in the retail marketplace or the availability from retailers of heavily discounted competitive products, 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 other cost pressures, including increased shipping costs and unfavorable foreign currency exchange rates, tariffs, risks associated with current and potential delays, work stoppages, or supply chain disruptions caused by the coronavirus pandemic, our ability to hire and retain key management personnel, our ability to effectively develop, market and sell future products, the availability and timing of capital for financing our strategic initiatives, including being able to raise capital on favorable terms or at all; changes in the financial markets, including changes in credit markets and interest rates that affect our ability to access those markets on favorable terms, the impact of any future impairments, 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 2020 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 empower healthier living through individualized connected fitness experiences. We are committed to build a healthier world, one person at a time. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products, related accessories and digital platform for consumer use, primarily in the U.S., Canada, Europe and Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Bowflex®, Schwinn®, JRNY® and Nautilus®.
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 primarily through websites. Our Retail business offers our products through a network of independent retail companies to reach consumers in the home use markets in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
As previously disclosed, we changed our fiscal year from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31 in order to include the primary fitness season for exercise equipment, October to March, in the same fiscal year. In addition, the new fiscal year-end is better aligned with the fiscal year-end of our retail partners.
For the three-months ended June 30, 2021, our results were primarily impacted by strong demand driven by our North Star strategy and the at home fitness surge. The five strategic pillars of North Star are (1) Adopt a consumer first mindset; (2) Scale a differentiated digital offering; (3) Focus investments on core businesses; (4) Evolve supply chain to be strategic advantage; and (5) Build organizational capabilities to win by unleashing the power of our team. We will leverage our many strengths to transform into a company that empowers healthier living through individualized connected fitness experiences. Our transformation will properly leverage our leading brands, products, innovation, distribution and digital assets to build a healthier world, one person at a time.
•Net sales for the three-months ended June 30, 2021 were $184.6 million, reflecting a 61.7% increase as compared to net sales of $114.2 million for the three-months ended June 30, 2020. Sales were up 74.4%, excluding sales related to the Octane brand, which was sold in October 2020.Sales growth was driven primarily by continued demand for connected fitness bikes and treadmills, like the Bowflex® VeloCore® bike and Bowflex® T22 Treadmill, and robust sales of SelectTech® weights.
•Net sales of our Direct segment increased by $13.0 million, or 25.7%, for the three-months ended June 30, 2021, compared to the three-months ended June 30, 2020.
•Net sales of our Retail segment increased by $57.5 million, or 91.4%, for the three-months ended June 30, 2021, compared to the three-months ended June 30, 2020. Excluding Octane, net sales grew 120.7%.
•Royalty income for the three-months ended June 30, 2021 decreased by $0.1 million compared to the three-months ended June 30, 2020.
•Gross profit for the three-months ended June 30, 2021 was $55.5 million, reflecting a 17.1% increase as compared to gross profit of $47.4 million for the three-months ended June 30, 2020.Gross margin rate for the three-months ended June 30, 2021 was 30.1% compared to 41.5% for the three-months ended June 30, 2020. This margin pressure is the result of current macro events affecting not just the Company but many others as well. The 11.4 ppt decrease in gross margins was primarily due to: higher landed product costs driven by inflationary price increases in commodities and components, foreign exchange, and elevated transportation costs, partially offset by sales price increases (-6 ppts), channel mix as Direct segment sales were 34% versus 44% last year (-3 ppts), outbound freight (-1 ppt), and a strategic decision to end production of select SKUs (-1 ppt).
•Operating expenses for the three-months ended June 30, 2021 were $37.6 million, a decrease of $16.9 million, or 30.9%, as compared to operating expenses of $54.5 million for the three-months ended June 30, 2020, primarily due to the $29.0 million loss on disposal group for the same period last year partially offset by increased selling and marketing expenses, as the Direct business returned to more normalized levels of advertising and the company invested in incremental brand marketing. Total advertising expenses were $11.6 million this year versus $2.8 million last year. General and administrative expenses and product development expenses also increased versus last year primarily driven by investments in JRNY®.
•Operating income for the three-months ended June 30, 2021 was $17.9 million or 9.7% operating margin, a $25.0 million improvement compared to an operating loss of $7.1 million for the three-months ended June 30, 2020. JRNY® investments were $4.6 million this year versus $1 million last year and brand marketing was $3.4 million this year versus $0 last year. Excluding these investments, our Q1 2022 operating margins have been improved by 4 percentage points.
•Income from continuing operations was $14.0 million for the three-months ended June 30, 2021, or $0.43 per diluted share, compared to a loss from continuing operations of $5.0 million, or $0.17 per diluted share, for the three-months ended June 30, 2020.
•Net income was $13.9 million for the three-months ended June 30, 2021, compared to net loss of $5.1 million for the three-months ended June 30, 2020.
•The effective tax rates for the three-months ended June 30, 2021 and for the three-months ended June 30, 2020 were 19.7% and 32.0%, respectively.
JRNY® update
Nautilus Inc. continues to enhance the JRNY® platform, creating differentiated connected fitness experiences for their members. In the past quarter, the Company enhanced its content library, adding 200+ trainer-led videos and commissioning additional Explore the World content. They introduced the JRNY® app for use with its popular IC4 and C6 bikes further expanding its diverse lineup of connected products.
Today, Nautilus also announced a strategic partnership with digital fitness provider, FitOn. Under the agreement, JRNY® members will have access to hundreds of off-product workouts through the JRNY® digital fitness platform and app to keep members engaged and reaching their fitness goals.
Forward Looking Guidance
Second Quarter Fiscal 2022
•The Company’s revenue for the next few quarters will be compared to record results due to the pandemic’s effect on net sales last year. To gauge continued progress against the expanded addressable market, the Company will be measuring business versus last year and versus the same period two years ago for the next few quarters.
•Demand curves for the Direct segment in Q1 and in the first month of Q2 have started to revert to more typical seasonality patterns. Now that Direct’s backlog has returned to more normal levels, the Company expects Direct sales in Q2 to be lower than Q1.
•The Company expects total company net sales for the 2nd quarter of fiscal 2022 to be between $145 million and $155 million, a 2-year revenue CAGR of 53% to 59%.
•Similar to many other companies, the Company expects external gross margin challenges to continue in Q2 and anticipates increased price pressure due to the ongoing chip shortage.
•The Company was pleased with the results of North Star investment in Q1 and plans to continue investing in Q2. Brand marketing expenditures will be between $5 million and $6 million versus $3 million last quarter and zero last year. JRNY® investment will be between $5.5 million and $6.5 million versus $5 million last quarter and $1 million last year. JRNY® investments will further enhance platform functionality via improved adaptive workouts, the addition of a member portal, and additional fresh content, like the ones provided by their new partner FitOn. The Company expects these investments to dilute operating margins by 7 to 8 percentage points.
•Given these investments and the external macro pressure on gross margin, the Company expects operating margins to be in the low single digits.
Back Half of Fiscal 2022
•The Company expects to continue investing in North Star on a “pay as we go” basis.
•The Company assumes that the external macro factors negatively affecting gross margins will continue in Q3 and Q4. Although it’s unclear when the pressure will ease, the Company expects that over time, prices will stabilize and eventually return closer to pre-pandemic levels.
•Until the macro environment improves, the Company expects operating margins to be in the low to mid-single digits for the back half of the year.
•The Company continues to expect full year capital expenditures to be between $12 million and $14 million with the majority earmarked for JRNY® investments.
•The Company reiterates their expectation of reaching 250,000 JRNY® members by the end of FY22
Longer term view, beyond Fiscal 2022
•The Company’s conviction in their North Star strategy has never been stronger. Growth in JRNY® members and their increased engagement confirm the Company’s expectations that their North Star investments will ultimately yield higher quality recurring revenue and long-term profitable growth.
•The Company believes the near-term external gross margin pressures are temporary and are not delaying the Company’s expectations of achieving sustainable operating margins upwards of 15% by FYE 2026, as they realize the long-term benefits of their transformational investments.
Factors Affecting Our Performance
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 U.S. and Canada. The COVID-19 pandemic has created a heightened need for home-fitness products at an unplanned rate. We are unable to estimate the length of time that the short-term increases in demand for many of our home-fitness products will outpace supply and we are accelerating the manufacturing and delivery of key products. We cannot predict the longer-term impacts of COVID-19 and the impact on our results of operations is uncertain. Our gross margins are being impacted by fluctuations in the costs or availability of materials used to manufacture our products, tariffs, expedited shipping and transportation costs and product warranty costs. Gross margins may also be affected by fluctuations in cost associated with acquisition or license of products and technologies, product warranty costs, the cost of fuel, foreign currency exchange rates, 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, websites 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 2020 Form 10-K as supplemented by our quarterly reports on Form 10-Q.
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 as of December 31, 2012. Although there was no revenue related to the former Commercial business in either the 2021 or 2020 periods, we continue to incur product liability and other legal expenses associated with product previously sold into the Commercial channel.
Results of operations information by segment and major product lines was as follows (dollars in thousands):
Three-Months Ended June 30,
Change
2021
2020
$
%
Net sales:
Direct net sales:
Cardio products(1)
$
31,430
$
45,585
$
(14,155)
(31.1)
%
Strength products(2)
31,966
4,848
27,118
559.4
%
Direct
63,396
50,433
12,963
25.7
%
Retail net sales:
Cardio products(1)
89,924
49,011
40,913
83.5
%
Strength products(2)
30,560
13,937
16,623
119.3
%
Retail
120,484
62,948
57,536
91.4
%
Royalty
713
807
(94)
(11.6)
%
$
184,593
$
114,188
$
70,405
61.7
%
Cost of sales:
Direct
$
38,882
$
22,910
$
15,972
69.7
%
Retail
90,206
43,882
46,324
105.6
%
$
129,088
$
66,792
$
62,296
93.3
%
Gross profit:
Direct
$
24,514
$
27,523
$
(3,009)
(10.9)
%
Retail
30,278
19,066
11,212
58.8
%
Royalty
713
807
(94)
(11.6)
%
$
55,505
$
47,396
$
8,109
17.1
%
Gross margin:
Direct
38.7
%
54.6
%
(1,590)
basis points
Retail
25.1
%
30.3
%
(520)
basis points
Contribution:
Direct
$
6,759
$
16,995
(10,236)
(60.2)
%
Retail
22,090
11,613
10,477
90.2
%
Contribution rate:
Direct
10.7
%
33.7
%
(2,300)
basis points
Retail
18.3
%
18.4
%
(10)
basis points
(1) Cardio products include: connected-fitness bikes, the Bowflex® C6, Bowflex® VeloCore®, Schwinn® IC4, Max Trainer®, connected-fitness treadmills, other exercise bikes, ellipticals and subscription services.
(2) Strength products include: Bowflex® Home Gyms, Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories.
Direct
Net sales for the three-months ended June 30, 2021 were $63.4 million, up 25.7%, from $50.4 million in the same period last year.
Strength product sales grew 559.4% to a historical record, led by the popular SelectTech® weights and Bowflex® Home Gyms. Cardio sales declined 31.1%, primarily due to end-of-life products that are no longer available for sale this year and a decline in sales of the Schwinn® IC4 Bowflex® C6 bikes that was partially offset by VeloCore® sales.
Gross margin rate for the three-months ended June 30, 2021 was 38.7%, down 15.9%, from 54.6% in the same period last year. The 15.9 ppt decrease in gross margin was primarily driven by: higher landed product costs (-6
ppts), higher outbound freight costs (-6 ppts), deleveraging of fixed costs as direct sales grew slower than retail’s (-2 ppts), a strategic decision to end production of select SKUs (-1 ppt), and increased investments in JRNY® (-1 ppt). Gross profit was $24.5 million, down 10.9% versus last year. Gross profit for the three-months ended June 30, 2021 was $24.5 million, down 10.9% compared to gross profit of $27.5 million same period last year.
Segment contribution income for the three-months ended June 30, 2021 was $6.8 million or 10.7%, down 60.2%, compared to segment contribution income of $17.0 million or 33.7% for the same period last year. The $10.2 million decline was primarily driven by lower gross profit and the return to normalized levels of media spend. Advertising expenses were $8.0 million for the three-months ended June 30, 2021 compared to $2.4 million last year.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the three-months ended June 30, 2021 were 53.0%, compared to 48.4% in the same period of 2020. The increase in approval rates reflects higher credit quality applications.
Retail
Retail segment sales of $120.5 million for the three-months ended June 30, 2021, the best quarterly sales in segment history.
Net sales for the three-months ended June 30, 2021 were up 91.4%, from $62.9 million for the same period last year, or 120.7% excluding sales related to the Octane brand. Retail segment sales outside the United States and Canada grew 70%, or 102% excluding Octane.
Strength product sales grew by 119.3%, led by our popular SelectTech® weights and benches and Bowflex® Home Gyms. Cardio sales increased by 83.5%, to a historical record, driven by connected-fitness bikes and treadmills.
Gross margin rate for the three-months ended June 30, 2021 was 25.1%, down from 30.3% in the same period last year. The 5.2 ppt decrease in gross margin was primarily driven by: higher landed product costs (-6 ppts), a strategic decision to end production of select SKUs (-1 ppt), offset by leverage on fixed costs as retail segment sales grew faster than direct segment sales (+2 ppts).Gross profit for the three-months ended June 30, 2021 was $30.3 million, an increase of 58.8% compared to gross profit of $19.1 million same period last year.
Segment contribution income for the three-months ended June 30, 2021 was $22.1 million or 18.3%, compared to $11.6 million or 18.4% for the same period last year, primarily driven by higher gross profit and expense leverage.
Selling and Marketing
Selling and marketing expenses include payroll, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of media advertising, promotions, trade shows, seminars, and other programs.
Selling and marketing information was as follows (dollars in thousands):
Three-Months Ended June 30,
Change
2021
2020
$
%
Selling and marketing
$21,300
$12,446
$8,854
71.1%
As % of net sales
11.5%
10.9%
The increase in selling and marketing expense in the three-month period ended June 30, 2021 as compared to the same period of 2020 was primarily related to a $5.6 million increase in Direct media advertising and a $3.1 million increase for brand marketing.
Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows (dollars in thousands):
The increase in media advertising for the three-month period ended June 30, 2021 compared to the same period of 2020 was primarily due the return to normalized levels of media spend.
General and Administrative
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with the executive team, finance, legal, IT, facilities, certain human resources and other administrative personnel, and other administrative fees.
General and administrative expenses was as follows (dollars in thousands):
Three-Months Ended June 30,
Change
2021
2020
$
%
General and administrative
$11,523
$9,315
$2,208
23.7%
As % of net sales
6.2%
8.2%
General and administrative expenses were higher for the three-months ended June 30, 2021 compared to the same period of 2020 primarily driven by increases in IT, and for short-term incentive and personnel costs.
Research and Development
Research and development expenses include payroll, employee benefits, other headcount-related expenses and information technology associated with product development.
Research and development expenses were as follows (dollars in thousands):
Three-Months Ended June 30,
Change
2021
2020
$
%
Research and development
$4,815
$3,728
$1,087
29.2%
As % of net sales
2.6%
3.3%
The increase in research and development expenses for the three-month period ended June 30, 2021 compared to the same period of 2020 was primarily driven by an increase in investment for our digital platform JRNY®, which more than offset savings associated with the divestiture of Octane.
Loss on Disposal Group
In the quarter ended June 30, 2020, we recorded a $29.0 million non-cash charge related to the fair value of the held-for-sale of assets of our Octane Fitness brand name which was sold in October 2020.
Interest Expense
Interest expense was nearly flat at $0.3 million for the three-month period ended June 30, 2021 and June 30, 2020.
Other, Net
Other, net primarily relates to the effect of exchange rate fluctuations between the U.S. and our foreign subsidiaries and foreign exchange derivative contracts.
Income Tax Expense (Benefit)
Income tax provision includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.
Income tax expense (benefit) was as follows (dollars in thousands):
The income tax expense from continuing operations for the three-months period ended June 30, 2021 was a result of the profit generated in the U.S. The reduced effective tax rate for the same period was primarily due to the excess tax benefit related to stock-based compensation recognized as a current period benefit through the Condensed Consolidated Statements of Operations.
The income tax benefit and effective tax rate from continuing operations for the same period of the prior year were primarily due to the loss recorded as a result of the held-for-sale valuation of our Octane Fitness disposal group in the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our shareholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.
As of June 30, 2021, we had $82.8 million of cash, cash equivalents, restricted cash and available-for-sale securities, and $53.6 million was available for borrowing under the ABL Revolving Facility, compared to $113.2 million of cash, cash equivalents, restricted cash and available-for-sale securities, and $54.4 million was available for borrowing under the ABL Revolving Facility as of March 31, 2021. We expect our cash, cash equivalents, restricted cash and investments and amounts available under our Wells Fargo Financing as of June 30, 2021, 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 June 30, 2021.
Cash used in operating activities was $28.2 million for the three-month period ended June 30, 2021, compared to cash provided in operating activities of $40.2 million for the three-month period ended June 30, 2020. The decrease in cash flows from operating activities for the three-month period ended June 30, 2021 as compared to the same period of 2020 was primarily due to changes in our operating assets and liabilities discussed below, partially offset by the increase in net income.
Trade receivables increased by $9.5 million to $98.2 million as of June 30, 2021, compared to $88.7 million as of March 31, 2021, primarily due to timing of customer payments on increased sales. Trade receivables as of June 30, 2021 compared to June 30, 2020 increased by $64.4 million due to the timing of customer payments on increased sales.
Inventory was $111.1 million, compared to $68.1 million as of March 31, 2021. The increase in inventory is driven by the strategic decision to increase on-hand inventory levels ahead of the fitness season given continued disruption in global logistics. More than 60% of inventory as of June 30, 2021 was in-transit. Inventories as of June 30, 2021 compared to June 30, 2020, increased by $89.8 million, primarily due to the surge in demand for home-fitness products.
Prepaid and other current assets decreased by $10.2 million to $15.7 million, compared to $25.8 million as of March 31, 2021, primarily related to other short-term deposits for inventory.
Trade payables increased by $15.7 million to $114.6 million as of June 30, 2021, compared to $98.9 million as of March 31, 2021, primarily due to timing of payments for inventory.
Accrued liabilities decreased by $5.1 million to $14.5 million as of June 30, 2021, compared to $19.6 million as of March 31, 2021, primarily due to deferred revenue liabilities.
Cash provided by investing activities of $15.3 million for the three-month period ended June 30, 2021 was primarily due to proceeds from sales and maturities of available-for-sale securities. We anticipate spending between $12.0 million and $14.0 million in 2022 for digital platform enhancements, systems integration, and production tooling.
Cash used in financing activities of $1.1 million for the three-month period ended June 30, 2021 was primarily related to tax payments related to stock award issuances.
Financing Arrangements
On May 14, 2021, we amended the January 31, 2020 Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (“Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility in the aggregate principal amount of up to $55.0 million, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility in the aggregate principal amount of $15.0 million (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Wells Fargo Financing"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. Several key features have been beneficially amended including permanently removing the $7.5 million minimum liquidity covenant and minimum EBITDA covenant that was scheduled to commence February 1, 2022. The Credit Facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than the greater of $6.0 million and 12.5% of the Loan Cap, as defined in the Credit Agreement. Various borrowing base definitions and limits were also amended that will result in improved availability under the asset-based revolver. In addition to the above structural improvements, the interest rate on the term loan was reduced to LIBOR plus 4.50% versus 5.00%. The maturity date remains January 31, 2025 and the term loan continues to contain amortization as originally scheduled. The repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.
Interest on the ABL Revolving Facility will accrue at LIBOR plus a margin of 1.75% to 2.25% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at LIBOR plus 4.50%. As of June 30, 2021, our interest rate was 1.85% for the ABL Revolving Facility and 4.60% for the Term Loan Facility.
As of June 30, 2021, outstanding borrowings, net of debt issuance costs, totaled $13.4 million, with $11.9 million and $1.5 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of June 30, 2021, we were in compliance with the financial covenants of the Credit Agreement and $53.6 million was available for borrowing under the ABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025.
The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement are classified based on the provisions of ASC 470 because the lock-box remittances do not automatically reduce the debt outstanding.
Off-Balance Sheet Arrangements
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of June 30, 2021, we had approximately $174.9 million, compared to $216.3 million as of March 31, 2021 in non-cancelable market-based purchase obligations, primarily to secure additional factory capacity for inventory purchases in 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 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.
Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no liabilities were recorded at June 30, 2021.
SEASONALITY
Prior to the COVID-19 pandemic, our revenue from fitness equipment products varied seasonally. Sales were typically strongest in the fourth calendar quarter and lowest in the second calendar quarter as we believe that consumers tend to be involved in outdoor activities during the spring and summer months, including outdoor exercise, which impacts sales of indoor fitness equipment this seasonality had a significant effect on our inventory levels, working capital needs and resource utilization. Since 2020, due to stay-at-home orders related to the COVID-19 pandemic, we did not experience the typical seasonality.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not changed from those discussed in our 2020 Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 for a discussion of new accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Exchange Risk
Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents, derivative assets and variable-rate debt obligations. Our cash equivalents mature within three-months or less from the date 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.
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 June 30, 2021, the outstanding balances on our credit facilities totaled $13.7 million.
We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. Total notional amounts outstanding as of June 30, 2021 were $66.0 million.
A hypothetical 10% increase in interest rates, or a 10% movement in the currencies underlying our foreign currency derivative positions, would have material impacts on our results of operations, financial position or cash flows. We do not enter into derivative instruments for any purpose other than to manage our interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange 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, as amended (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 Principal Executive Officer and our Principal Financial and Accounting 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 Principal Executive Officer and Principal Financial and Accounting Officer, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, our disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable Securities and Exchange Commission rules and forms, and that it is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three-months ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, in the ordinary course of business, 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.
As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.
Item 1A. Risk Factors
We operate in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in our 2020 Form 10-K are not the only 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 2020 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 2020 Form 10-K.
Item 6. Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
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.
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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.
