SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
Commission file number: 000-25867
THE NAUTILUS GROUP, 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.) |
1400 NE 136th Avenue
Vancouver, Washington 98684
(Address of principal executive offices, including zip code)
(360) 694-7722
(Issuer’s telephone number, including area code)
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 issuer 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Number of shares of issuer’s common stock outstanding as of October 31, 2004: 32,873,366
SEPTEMBER 30, 2004
INDEX TO FORM 10-Q
| Page | ||||
| PART I – FINANCIAL INFORMATION |
||||
| Item 1. |
3 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||
| Item 3. |
31 | |||
| Item 4. |
32 | |||
| PART II – OTHER INFORMATION |
||||
| Item 1. |
33 | |||
| Item 6. |
33 | |||
| 34 | ||||
PART I – FINANCIAL INFORMATION
THE NAUTILUS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
| September 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS |
||||||||
| CURRENT ASSETS: |
||||||||
| Cash and cash equivalents |
$ | 99,933 | $ | 72,634 | ||||
| Trade receivables (less allowance for doubtful accounts of $2,254 and $2,538 in 2004 and 2003, respectively) |
59,958 | 75,492 | ||||||
| Inventories |
42,707 | 53,129 | ||||||
| Prepaid expenses and other current assets |
9,659 | 6,049 | ||||||
| Short-term notes receivable |
2,224 | 2,362 | ||||||
| Current deferred tax asset |
4,412 | 4,646 | ||||||
| Total current assets |
218,893 | 214,312 | ||||||
| PROPERTY, PLANT AND EQUIPMENT, net |
44,474 | 50,602 | ||||||
| GOODWILL |
29,755 | 29,755 | ||||||
| OTHER ASSETS, net |
16,797 | 17,266 | ||||||
| TOTAL ASSETS |
$ | 309,919 | $ | 311,935 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| CURRENT LIABILITIES: |
||||||||
| Trade payables |
$ | 32,839 | $ | 34,879 | ||||
| Accrued liabilities |
22,250 | 28,648 | ||||||
| Income taxes payable |
6,998 | 8,488 | ||||||
| Royalty payable to stockholders |
161 | 2,133 | ||||||
| Customer deposits |
2,657 | 1,453 | ||||||
| Total current liabilities |
64,905 | 75,601 | ||||||
| NONCURRENT DEFERRED TAX LIABILITY |
10,722 | 10,206 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 10) |
||||||||
| STOCKHOLDERS’ EQUITY: |
||||||||
| Common stock – authorized, 75,000,000 shares of no par value; issued and outstanding, 32,779,366 and 32,605,448 shares at September 30, 2004 and December 31, 2003, respectively |
4,970 | 2,828 | ||||||
| Unearned stock compensation |
(1,289 | ) | (1,544 | ) | ||||
| Retained earnings |
227,605 | 221,580 | ||||||
| Accumulated other comprehensive income |
3,006 | 3,264 | ||||||
| Total stockholders’ equity |
234,292 | 226,128 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 309,919 | $ | 311,935 | ||||
See notes to consolidated financial statements.
- 3 -
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| NET SALES |
$ | 123,182 | $ | 115,958 | $ | 354,257 | $ | 346,009 | ||||||
| COST OF SALES |
64,577 | 58,671 | 189,475 | 163,791 | ||||||||||
| Gross profit |
58,605 | 57,287 | 164,782 | 182,218 | ||||||||||
| OPERATING EXPENSES: |
||||||||||||||
| Selling and marketing |
38,039 | 34,492 | 110,392 | 109,688 | ||||||||||
| General and administrative |
6,540 | 9,339 | 21,095 | 24,999 | ||||||||||
| Research and development |
1,697 | 1,739 | 4,784 | 4,245 | ||||||||||
| Related-party royalties |
— | 1,597 | 1,843 | 4,838 | ||||||||||
| Third-party royalties |
1,051 | 333 | 2,850 | 969 | ||||||||||
| Total operating expenses |
47,327 | 47,500 | 140,964 | 144,739 | ||||||||||
| OPERATING INCOME |
11,278 | 9,787 | 23,818 | 37,479 | ||||||||||
| OTHER INCOME (EXPENSE): |
||||||||||||||
| Interest income |
371 | 134 | 913 | 593 | ||||||||||
| Other, net |
(1 | ) | 459 | (2 | ) | 1,037 | ||||||||
| Total other income, net |
370 | 593 | 911 | 1,630 | ||||||||||
| INCOME BEFORE INCOME TAXES |
11,648 | 10,380 | 24,729 | 39,109 | ||||||||||
| INCOME TAX EXPENSE |
4,193 | 3,737 | 8,902 | 14,079 | ||||||||||
| NET INCOME |
$ | 7,455 | $ | 6,643 | $ | 15,827 | $ | 25,030 | ||||||
| BASIC EARNINGS PER SHARE |
$ | 0.23 | $ | 0.20 | $ | 0.48 | $ | 0.77 | ||||||
| DILUTED EARNINGS PER SHARE |
$ | 0.22 | $ | 0.20 | $ | 0.47 | $ | 0.76 | ||||||
| Weighted average shares outstanding: |
||||||||||||||
| Basic shares outstanding |
32,662,043 | 32,600,101 | 32,675,273 | 32,571,840 | ||||||||||
| Diluted shares outstanding |
33,620,578 | 32,980,358 | 33,398,357 | 32,982,358 | ||||||||||
See notes to consolidated financial statements.
- 4 -
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | 15,827 | $ | 25,030 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
9,245 | 8,961 | ||||||
| Amortization of unearned compensation |
255 | 71 | ||||||
| (Gain)/loss on sale of property, plant and equipment |
(1,774 | ) | 131 | |||||
| Tax benefit of exercise of nonqualified options |
315 | 540 | ||||||
| Deferred income taxes |
748 | 169 | ||||||
| Changes in assets and liabilities: |
||||||||
| Trade receivables |
15,426 | (6,502 | ) | |||||
| Inventories |
10,382 | 12,855 | ||||||
| Prepaid expenses and other current assets |
(1,291 | ) | (433 | ) | ||||
| Trade payables |
(2,047 | ) | (18,782 | ) | ||||
| Income taxes payable |
(1,487 | ) | 1,640 | |||||
| Accrued liabilities and royalty payable to stockholders |
(8,316 | ) | 6,166 | |||||
| Customer deposits |
1,213 | 716 | ||||||
| Net cash provided by operating activities |
38,496 | 30,562 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Additions to property, plant and equipment |
(4,049 | ) | (5,602 | ) | ||||
| Proceeds from sale of property, plant and equipment |
649 | 16 | ||||||
| Net decrease (increase) in other assets |
180 | (573 | ) | |||||
| Proceeds from maturities of short-term investments |
— | 17,578 | ||||||
| Net decrease in notes receivable |
138 | 436 | ||||||
| Net cash provided by (used in) investing activities |
(3,082 | ) | 11,855 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Cash dividends paid on common stock |
(9,802 | ) | (9,769 | ) | ||||
| Stock repurchases |
— | (1,422 | ) | |||||
| Proceeds from exercise of stock options |
1,827 | 942 | ||||||
| Net cash used in financing activities |
(7,975 | ) | (10,249 | ) | ||||
| Effect of foreign currency exchange rate changes |
(140 | ) | (62 | ) | ||||
(Continued)
- 5 -
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||
| 2004 |
2003 | |||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS |
$ | 27,299 | $ | 32,106 | ||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
72,634 | 31,719 | ||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 99,933 | $ | 63,825 | ||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||
| Cash paid for income taxes |
$ | 9,252 | $ | 11,760 | ||
| Amount receivable issued as part of the sale of land |
$ | 2,331 | — | |||
(Concluded)
See notes to consolidated financial statements.
- 6 -
THE NAUTILUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
| 1. | BASIS OF PRESENTATION |
The accompanying unaudited consolidated financial statements of The Nautilus Group, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) and pursuant to Securities and Exchange Commission rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
The financial information included herein reflects all adjustments (consisting of only normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the results of operations and financial position for the interim periods presented. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year.
Consolidation – The consolidated financial statements include The Nautilus Group, Inc. and its wholly-owned subsidiaries (collectively the “Company”). All intercompany transactions and balances have been eliminated.
Use of Accounting Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates included in the preparation of the financial statements are related to revenue recognition, stock-based compensation, warranty reserves, legal reserves, sales return reserves, allowance for doubtful accounts, inventory valuation, intangible asset valuation, and the income tax provision.
Stock-Based Compensation – The Company continues to measure compensation expense for its stock-based employee compensation plans using the method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. The Company provides pro forma disclosures of net income and earnings per share as if the method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, had been applied in measuring compensation expense.
- 7 -
With one exception, the Company has not recognized compensation expense relating to employee stock options because it has granted options with an exercise price equal to the fair value of the stock on the effective date of grant. In July 2003, certain stock options were granted at an exercise price below current market price on the day of the grant, and thus the Company recognized compensation expense of $85 and $255 for the three and nine months ended September 30, 2004 and $71 for the three and nine months ended September 30, 2003. The unearned portion of this stock option grant resides in Stockholders’ Equity in the Consolidated Balance Sheets and will be recognized evenly over the five-year vesting period as compensation expense. The estimated compensation expense for years 2004-2007 is $340 per year and for 2008 is $184. If the Company had elected to recognize compensation expense for all options granted using a fair value approach, and therefore determined the compensation based on the fair value as determined by the Black-Scholes option pricing model, the pro forma net income and earnings per share would have been as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2004 |
2003 |
2004 |
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