NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL INFORMATION
Basis of Consolidation and Presentation
The accompanying condensed consolidated financial statements present the financial position, results of operations and cash flows of Nautilus, Inc. and its subsidiaries, all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.
The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2017
(the “
2017
Form 10-K”).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Further information regarding significant estimates can be found in our
2017
Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of
March 31, 2018
and
December 31, 2017
, and our results of operations, comprehensive income and cash flows for the
three
months ended
March 31, 2018
and
2017
. 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 2018-05
In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-05, "Income Taxes (Topic 740)." ASU 2018-05 provides amendments to SEC paragraphs pursuant to Staff Accounting Bulletin ("SAB") No. 118 related to the accounting for the income tax effects of the Tax Cuts and Jobs Act ("TCJA") enacted as of December 22, 2017. ASU 2018-05 clarifies the income tax effects of the TCJA when accounting under Topic 740 is (1) complete, (2) incomplete, but for which a reasonable estimate can be determined, or (3) incomplete, but for which a reasonable estimate cannot be determined. The adoption of ASU 2018-05 as of the March 13, 2018 issuance date had no material impact on our financial position, results of operations or cash flows. With the adoption of ASU 2018-05 under the provisions of SAB 118, we made an effort to reasonably estimate the impact of the TCJA, however, we have not completed our accounting under Topic 740 as of
March 31, 2018
.
ASU 2017-09
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope in Modification Accounting." ASU 2017-09 provides clarity and reduces diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. An entity should account for the effects of a modification unless all of certain criteria are met. Those criteria relate to fair value, vesting conditions and classification of the modified award. If all three conditions are the same for the modified award as for the original award, then the entity should not account for the effects of the modification. ASU 2017-09 is effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Our adoption of ASU 2017-09 as of January 1, 2018 had no material impact on our financial position, results of operations or cash flows.
ASU 2016-16
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory." Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset is sold to an outside party. The amendments in ASU 2016-16 eliminate the exception for an intra-entity transfer of an asset other than inventory, and allows recognition of the income tax consequences when the transfer occurs. ASU 2016-16 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. Our adoption of ASU 2016-16 as of January 1, 2018 had no material effect on our financial position, results of operations or cash flows.
ASU 2016-15
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." The amendments in ASU 2016-15 are intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows, with the intent of reducing diversity in practice for the eight types of cash flows identified. ASU 2016-15 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. Our adoption of ASU 2016-15 as of January 1, 2018 had no material effect on our financial position, results of operations or cash flows.
ASU 2014-09
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 replaces most existing revenue recognition guidance, and requires companies to recognize revenue based upon the transfer of promised goods and/or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and/or services. In addition, the standard requires disclosures related to the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We applied the five-step method outlined in the ASU to all revenue streams and elected the full retrospective method for our adoption of the standard as of January 1, 2018. The additional disclosures required by the ASU are included in Note 2,
Revenues
.
Recently Issued Pronouncements Not Yet Adopted
ASU 2018-02
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA, thereby eliminating the stranded tax effects and improving the usefulness of reported information to financial statement users. ASU 2018-02 is effective for all entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for public business entities for which financial statements have not yet been issued. While we do not expect the adoption of ASU 2018-02 to have a material effect on our business, we are evaluating the potential impact that ASU 2018-02 may have on our financial position, results of operations and cash flows.
ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 provides better alignment of an entity's risk management activities and financial reporting of hedges through changes to both the designation and measurement guidance for qualifying hedging relationships. In addition, the amendments in ASU 2017-12 also simplify the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity's intended hedging strategies. ASU 2017-12 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted in any interim period after issuance of the new standard, with effect of adoption reflected as of the beginning of the fiscal year of adoption. For cash flow and net investment hedges existing as of the adoption date, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income and opening retaining earnings. Amended presentation and disclosure guidance is required only prospectively, and certain transition elections are available upon adoption. While we do not expect the adoption of ASU 2017-12 to have a material effect on our business, we are evaluating the potential impact that ASU 2017-12 may have on our financial position, results of operations and cash flows.
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 replaces the existing guidance in Accounting Standards Codification ("ASC") 840, Leases. The new standard requires companies and other organizations to include lease obligations on their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization
of the ROU asset, and for operating leases the lessee would recognize a straight-line total lease expense. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for public companies' annual periods, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently assessing the impact that ASU 2016-02 will have on our consolidated financial statements, and expect that the primary impact upon adoption will be the recognition, on a discounted basis, of our minimum commitments under non-cancellable operating leases on our consolidated balance sheets, resulting in the recording of ROU assets and lease liabilities, as well as additional disclosures. Based on initial high-level assessments of our main facilities leases related to our domestic operations, we expect ASU 2016-02 to have a material impact on our financial position, results of operations and cash flows. We also anticipate significant additional disclosure requirements associated with the new standard.
(2) REVENUES
Adoption of Topic 606
On
January 1, 2018
, we adopted ASU 2014-09 and all subsequent ASUs that modified ASC 606. We elected to apply the standard and all related ASUs retrospectively to each prior reporting period presented. The implementation of the new standard had no material impact on the measurement or recognition of revenue, resulting in no adjustments to prior periods. Additional disclosures, however, have been added in accordance with the ASU.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our product sales and shipping revenues are reported net of promotional discounts, returns allowances, contractual rebates, and consideration payable to our customers. We estimate the revenue impact of retail sales incentive programs based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact of such incentives is recorded at the later of the time the customer is notified of the sales incentive or the time of the sale. We estimate our liability for product returns based on historical experience, and record the expected customer refund liability as a reduction of revenue, and the expected inventory right of recovery, net of estimated scrap, as a reduction of cost of sales. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.
We provide standard assurance-type warranties on our products which cover defective materials or nonconforming products, and is included with each product at no additional charge. In addition, we offer service-type/extended warranties for an additional fee to our Direct channel customers and Retail specialty and commercial customers. These warranty contracts provide coverage on labor and parts beyond the standard assurance warranty period.
For our product sales, services, and freight and delivery fees, we are the principal in the contract and recognize revenue at a point in time. For our Direct channel extended warranty contracts, we are the agent and recognize revenue on a net basis because our performance obligation is to facilitate the arrangement between our customers and the third-party performance obligor.
For customer contracts that include multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling price based on prices charged to customers or using expected cost plus margin.
Our revenues from contracts with customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Product sales
|
|
$
|
109,750
|
|
|
$
|
107,842
|
|
Extended warranties and services
|
|
3,482
|
|
|
3,801
|
|
Other
(1)
|
|
1,581
|
|
|
1,609
|
|
Net sales
|
|
$
|
114,813
|
|
|
$
|
113,252
|
|
(1)
Other revenue is primarily freight and delivery and royalty income.
Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
United States
|
|
$
|
103,590
|
|
|
$
|
101,038
|
|
Canada
|
|
5,783
|
|
|
7,120
|
|
All other
|
|
5,440
|
|
|
5,094
|
|
Net sales
|
|
$
|
114,813
|
|
|
$
|
113,252
|
|
As of
March 31, 2018
, estimated revenue expected to be recognized in the future totaled
$7.3 million
, primarily related to customer order backlog which includes firm orders for future shipment to our Retail customers, as well as unfulfilled consumer orders within the Direct channel. Retail orders of
$6.3 million
comprise the larger portion of our order backlog, while Direct orders of
$0.9 million
are a smaller portion of our backlog due to shorter fulfillment timeframes. 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, all of which are short-term in nature. The revenue recognized from contract liabilities and the remaining balances are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
March 31, 2017
|
Balance, beginning of period
|
$
|
1,084
|
|
|
$
|
1,096
|
|
Cash additions
|
689
|
|
|
746
|
|
Revenue recognition
|
(1,080
|
)
|
|
(776
|
)
|
Balance, end of period
|
$
|
693
|
|
|
$
|
1,066
|
|
Exemptions and Elections
We apply the practical expedient as per ASC 606-10-50-14 and do not disclose information related to remaining performance obligations due to their original expected durations are one year or less.
We expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded in selling and marketing expense.
We generally account for our shipping and handling activities as a fulfillment activity, consistent with the timing of revenue recognition; that is, when our customer takes control of the transferred goods. In the event that a customer were to take control of a product prior to shipment, we make an accounting policy election to treat such shipping and handling activities as a fulfillment cost.
(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 measured at fair value on a recurring basis as of
March 31, 2018
and
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
5,555
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,555
|
|
Total cash equivalents
|
|
5,555
|
|
|
—
|
|
|
—
|
|
|
5,555
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
Certificates of deposit
(1)
|
|
—
|
|
|
24,282
|
|
|
—
|
|
|
24,282
|
|
Corporate bonds
|
|
—
|
|
|
34,626
|
|
|
—
|
|
|
34,626
|
|
U.S. government bonds
|
|
—
|
|
|
9,997
|
|
|
—
|
|
|
9,997
|
|
Total available-for-sale securities
|
|
—
|
|
|
68,905
|
|
|
—
|
|
|
68,905
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
—
|
|
|
544
|
|
|
—
|
|
|
544
|
|
Foreign currency forward contracts
|
|
—
|
|
|
195
|
|
|
—
|
|
|
195
|
|
Total derivatives
|
|
—
|
|
|
739
|
|
|
—
|
|
|
739
|
|
Total assets measured at fair value
|
|
$
|
5,555
|
|
|
$
|
69,644
|
|
|
$
|
—
|
|
|
$
|
75,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
10,946
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,946
|
|
Commercial paper
|
|
—
|
|
|
1,996
|
|
|
—
|
|
|
1,996
|
|
Total cash equivalents
|
|
10,946
|
|
|
1,996
|
|
|
—
|
|
|
12,942
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
Certificates of deposit
(1)
|
|
—
|
|
|
19,875
|
|
|
—
|
|
|
19,875
|
|
Corporate bonds
|
|
—
|
|
|
29,239
|
|
|
—
|
|
|
29,239
|
|
U.S. government bonds
|
|
—
|
|
|
8,189
|
|
|
—
|
|
|
8,189
|
|
Total available-for-sale securities
|
|
—
|
|
|
57,303
|
|
|
—
|
|
|
57,303
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
—
|
|
|
372
|
|
|
—
|
|
|
372
|
|
Foreign currency forward contracts
|
|
—
|
|
|
390
|
|
|
—
|
|
|
390
|
|
Total derivatives
|
|
—
|
|
|
762
|
|
|
—
|
|
|
762
|
|
Total assets measured at fair value
|
|
$
|
10,946
|
|
|
$
|
60,061
|
|
|
$
|
—
|
|
|
$
|
71,007
|
|
(1)
All certificates of deposit are within current FDIC insurance limits.
We did not have any liabilities measured at fair value on a recurring basis as of
March 31, 2018
and
December 31, 2017
.
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
months ended
March 31, 2018
, nor for the year ended
December 31, 2017
.
We did not have any changes to our valuation techniques during the
three
months ended
March 31, 2018
, nor for the year ended
December 31, 2017
.
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 interest rate swap contract and 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 recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property, plant and equipment, goodwill, other intangible assets and certain other long-lived assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy. We did not perform any valuations on assets or liabilities that are valued at fair value on a nonrecurring basis during the
first three months
of
2018
. During the fourth quarter of
2017
, we performed our annual goodwill and indefinite-lived trade names impairment analyses effective as of October 1,
2017
. During the
three
months ended
March 31, 2018
, we did not record any other-than-temporary impairments on our financial assets required to be measured at fair value on a nonrecurring basis. For the year ended
December 31, 2017
, we recorded an impairment to our indefinite-lived Octane Fitness trade name in the amount of
$8.8 million
.
The carrying values of cash and cash equivalents, 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 term loan 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 interest rate swaps to fix a portion of our interest expense, and 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 interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivative instruments.
As of
March 31, 2018
, we had a
$44.0 million
interest rate swap outstanding with JPMorgan Chase Bank, N.A. This interest rate swap matures on
December 31, 2020
and has a fixed rate of
1.42%
per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark. At
March 31, 2018
, the one-month LIBOR rate was
1.65%
.
We typically designate all interest rate swaps as cash flow hedges and, accordingly, record the change in fair value for the effective portion of these interest rate swaps in accumulated other comprehensive income rather than current period earnings until the underlying hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings. For the
three
months ended
March 31, 2018
, there was no ineffectiveness. As of
March 31, 2018
, we expect to reclassify a gain of
$0.3 million
from accumulated other comprehensive income to earnings within the next twelve months.
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
March 31, 2018
, total outstanding contract notional amounts were
$24.1 million
. At
March 31, 2018
, these outstanding balance sheet hedging derivatives had maturities of 90 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
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
Interest rate swap contract
|
|
Prepaids and other current assets
|
|
$
|
256
|
|
|
$
|
134
|
|
|
|
Other assets
|
|
288
|
|
|
238
|
|
|
|
|
|
$
|
544
|
|
|
$
|
372
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaids and other current assets
|
|
$
|
195
|
|
|
$
|
390
|
|
The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Classification
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
2017
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
Income recognized in other comprehensive income before reclassifications
|
|
---
|
|
$
|
160
|
|
|
$
|
51
|
|
Income (loss) reclassified from accumulated other comprehensive income to earnings for the effective portion
|
|
Interest expense
|
|
21
|
|
|
(102
|
)
|
Income tax benefit (expense)
|
|
Income tax expense
|
|
(5
|
)
|
|
34
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
Income recognized in earnings
|
|
Other, net
|
|
$
|
1,029
|
|
|
$
|
—
|
|
Income tax expense
|
|
Income tax expense
|
|
(244
|
)
|
|
—
|
|
For additional information related to our derivatives, see Notes 3 and 10.
(5) INVENTORIES
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
|
|
March 31, 2018
|
|
December 31, 2017
|
Finished goods
|
$
|
33,309
|
|
|
$
|
48,771
|
|
Parts and components
|
4,390
|
|
|
4,583
|
|
Total inventories
|
$
|
37,699
|
|
|
$
|
53,354
|
|
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Automobiles
|
5
|
to
|
6
|
|
$
|
23
|
|
|
$
|
23
|
|
Leasehold improvements
|
4
|
to
|
20
|
|
3,673
|
|
|
3,542
|
|
Computer software and equipment
|
3
|
to
|
7
|
|
16,969
|
|
|
17,024
|
|
Machinery and equipment
|
3
|
to
|
5
|
|
15,531
|
|
|
15,178
|
|
Furniture and fixtures
|
5
|
to
|
20
|
|
2,376
|
|
|
2,295
|
|
Work in progress
(1)
|
N/A
|
|
2,646
|
|
|
1,052
|
|
Total cost
|
|
|
|
|
41,218
|
|
|
39,114
|
|
Accumulated depreciation
|
|
|
|
|
(24,627
|
)
|
|
(23,287
|
)
|
Total property, plant and equipment, net
|
|
|
|
|
$
|
16,591
|
|
|
$
|
15,827
|
|
(1)
Work in progress includes information technology assets, and production tooling and equipment.
Depreciation expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Depreciation expense
|
$
|
1,629
|
|
|
$
|
1,427
|
|
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The rollforward of goodwill was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Retail
|
|
Total
|
Balance, January 1, 2017
|
$
|
2,180
|
|
|
$
|
59,708
|
|
|
$
|
61,888
|
|
Currency exchange rate adjustment
|
155
|
|
|
(13
|
)
|
|
142
|
|
Balance, December 31, 2017
|
2,335
|
|
|
59,695
|
|
|
62,030
|
|
Currency exchange rate adjustment
|
(64
|
)
|
|
(3
|
)
|
|
(67
|
)
|
Balance, March 31, 2018
|
$
|
2,271
|
|
|
$
|
59,692
|
|
|
$
|
61,963
|
|
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Indefinite-lived trademarks
|
N/A
|
|
$
|
23,252
|
|
|
$
|
23,252
|
|
Definite-lived trademarks
|
10
|
to
|
15
|
|
2,600
|
|
|
2,600
|
|
Patents
|
8
|
to
|
24
|
|
15,187
|
|
|
15,187
|
|
Customer relationships
|
10
|
to
|
15
|
|
24,700
|
|
|
24,700
|
|
|
|
|
|
|
65,739
|
|
|
65,739
|
|
Accumulated amortization - definite-lived intangible assets
|
|
|
|
|
(8,806
|
)
|
|
(7,996
|
)
|
Other intangible assets, net
|
|
|
|
|
$
|
56,933
|
|
|
$
|
57,743
|
|
Amortization expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Amortization expense
|
$
|
810
|
|
|
$
|
817
|
|
Future amortization of definite-lived intangible assets is as follows (in thousands):
|
|
|
|
|
Remainder of 2018
|
$
|
2,353
|
|
2019
|
3,134
|
|
2020
|
3,108
|
|
2021
|
3,078
|
|
2022
|
3,078
|
|
Thereafter
|
18,930
|
|
|
$
|
33,681
|
|
(8) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31, 2018
|
|
December 31, 2017
|
Payroll and related liabilities
|
$
|
3,453
|
|
|
$
|
3,659
|
|
Other
|
8,673
|
|
|
7,105
|
|
Total accrued liabilities
|
$
|
12,126
|
|
|
$
|
10,764
|
|
(9) 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 March 31,
|
|
|
2018
|
|
2017
|
Balance, beginning of period
|
|
$
|
6,117
|
|
|
$
|
7,450
|
|
Accruals
|
|
1,234
|
|
|
803
|
|
Payments
|
|
(1,293
|
)
|
|
(1,261
|
)
|
Balance, end of period
|
|
$
|
6,058
|
|
|
$
|
6,992
|
|
(10) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables set forth the changes in accumulated other comprehensive income (loss), net of tax (in thousands) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Available-for-Sale Securities
|
|
Gain on Derivative Securities
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance, January 1, 2018
|
$
|
(64
|
)
|
|
$
|
216
|
|
|
$
|
(411
|
)
|
|
$
|
(259
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
(37
|
)
|
|
160
|
|
|
(117
|
)
|
|
6
|
|
Reclassification of amounts to earnings
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
(16
|
)
|
Net other comprehensive income (loss) during period
|
(37
|
)
|
|
144
|
|
|
(117
|
)
|
|
(10
|
)
|
Balance, March 31, 2018
|
$
|
(101
|
)
|
|
$
|
360
|
|
|
$
|
(528
|
)
|
|
$
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Available-for-Sale Securities
|
|
Gain (Loss) on Derivative Securities
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance, January 1, 2017
|
$
|
(8
|
)
|
|
$
|
(24
|
)
|
|
$
|
(1,185
|
)
|
|
$
|
(1,217
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
(19
|
)
|
|
51
|
|
|
71
|
|
|
103
|
|
Reclassification of amounts to earnings
|
—
|
|
|
68
|
|
|
—
|
|
|
68
|
|
Net other comprehensive income (loss) during period
|
(19
|
)
|
|
119
|
|
|
71
|
|
|
171
|
|
Balance, March 31, 2017
|
$
|
(27
|
)
|
|
$
|
95
|
|
|
$
|
(1,114
|
)
|
|
$
|
(1,046
|
)
|
(11) STOCK REPURCHASE PROGRAM
On
April 25, 2017
, our Board of Directors authorized a
$15.0 million
share repurchase program. Under this program, shares of our common stock may be repurchased from time to time through
April 25, 2019
. As of
March 31, 2018
, repurchases under this program totaled
$5.7 million
.
On
February 21, 2018
our Board of Directors authorized an additional
$15.0 million
share repurchase program. Under the new program, shares of our common stock may be repurchased from time to time through
February 21, 2020
. Repurchases may be made in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases will be funded from existing cash balances, and repurchased shares will be retired and returned to unissued authorized shares. To date, we have not repurchased any shares under this program.
As of
March 31, 2018
, there was
$24.3 million
remaining available for repurchases under the share repurchase programs.
Cumulative repurchases pursuant to the programs are as follows:
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Number of Shares
|
|
Repurchased Amount
|
|
Average Price Per Share
|
December 31, 2017
|
|
235,628
|
|
$3,012,869
|
|
$12.79
|
March 31, 2018
|
|
211,296
|
|
2,717,871
|
|
12.86
|
Totals-to-Date
|
|
446,924
|
|
$5,730,740
|
|
$12.82
|
(12) INCOME PER SHARE
Basic per share amounts were computed using the weighted average number of common shares outstanding. Diluted per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method. The weighted average numbers of shares outstanding used to compute income per share were as follows (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Shares used to calculate basic income per share
|
30,314
|
|
|
30,713
|
|
Dilutive effect of outstanding stock options, performance stock units and restricted stock units
|
277
|
|
|
414
|
|
Shares used to calculate diluted income per share
|
30,591
|
|
|
31,127
|
|
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 stock options, this is because the average market price did not exceed the exercise price. 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). These shares may be dilutive potential common shares in the future (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Stock options
|
13
|
|
|
14
|
|
Restricted stock units
|
1
|
|
|
15
|
|
(13) SEGMENT AND ENTERPRISE-WIDE INFORMATION
We have
two
operating segments - Direct and Retail. There have been no changes in our operating segments during the
three
months ended
March 31, 2018
.
We evaluate performance using several factors, of which the primary financial measures are net sales and reportable segment contribution.
Contribution is the measure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets are those directly assigned to an operating segment's operations, primarily accounts receivable, inventories, goodwill and other intangible assets. Unallocated assets primarily include cash and cash equivalents, available-for-sale securities, 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 March 31,
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
Direct
|
$
|
71,201
|
|
|
$
|
74,703
|
|
Retail
|
42,993
|
|
|
37,805
|
|
Royalty
|
619
|
|
|
744
|
|
Consolidated net sales
|
$
|
114,813
|
|
|
$
|
113,252
|
|
Contribution:
|
|
|
|
Direct
|
$
|
11,291
|
|
|
$
|
15,333
|
|
Retail
|
3,921
|
|
|
2,212
|
|
Royalty
|
617
|
|
|
733
|
|
Consolidated contribution
|
$
|
15,829
|
|
|
$
|
18,278
|
|
|
|
|
|
Reconciliation of consolidated contribution to income from continuing operations:
|
|
|
|
Consolidated contribution
|
$
|
15,829
|
|
|
$
|
18,278
|
|
Amounts not directly related to segments:
|
|
|
|
Operating expenses
|
(5,132
|
)
|
|
(5,595
|
)
|
Other expense, net
|
(34
|
)
|
|
(360
|
)
|
Income tax expense
|
(2,523
|
)
|
|
(4,138
|
)
|
Income from continuing operations
|
$
|
8,140
|
|
|
$
|
8,185
|
|
There was no material change in the allocation of assets by segment during the first
three
months of
2018
and, accordingly, assets by segment are not presented.
For the
three
months ended
March 31, 2018
, Dick's Sporting Goods, Inc. accounted for
10.4%
of total net sales. For the
three
months ended
March 31, 2017
,
no
customer represented
10.0%
or more of total net sales.
(14) COMMITMENTS AND CONTINGENCIES
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of
March 31, 2018
, we had
no
standby letters of credit.
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of
March 31, 2018
, we had approximately
$26.3 million
in noncancelable market-based purchase obligations, primarily for inventory purchases expected to be received within the next
twelve
months. Purchase obligations can vary from quarter-to-quarter and versus the same period in prior years due to a number of factors, including the amount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnification obligations vary from contract to contract, and generally a maximum obligation is not stated within the agreements. We hold insurance policies that mitigate potential losses arising from certain types of indemnification obligations. Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no related liabilities were recorded as of
March 31, 2018
.
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, 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
March 31, 2018
.
As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.