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, 2016
(the “
2016
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
2016
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
September 30, 2017
and
December 31, 2016
, and our results of operations and comprehensive income for the
three and nine
months ended
September 30, 2017
and
2016
, and cash flows for the
nine months ended
September 30, 2017
and
2016
. 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.
New Accounting Pronouncements
ASU 2017-12
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 any potential impact that adoption of ASU 2017-12 may have on our financial position, results of operations or cash flows.
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. Early adoption is permitted, including adoption in any interim
period, for public business entities for reporting periods for which financial statements have not yet been issued. We do not expect the adoption of ASU 2017-09 to have a material effect on our financial position, results of operations or cash flows.
ASU 2017-04
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment". ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a 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 (8) 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. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented, but may apply it prospectively if retrospective application would be impracticable. We do not expect the adoption of ASU 2016-15 to have a material effect on our financial position, results of operations or 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." The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2019, using a modified-retrospective approach, with certain exceptions. Early adoption is permitted. While we do not expect the adoption of ASU 2016-13 to have a material effect on our business, we are evaluating any potential impact that adoption of ASU 2016-13 may have on our financial position, results of operations or cash flows.
ASU 2016-09
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted subject to certain requirements, and the method of application (i.e., retrospective, modified retrospective or prospective) depends on the transaction area that is being amended. Related to forfeitures, we changed our accounting treatment of forfeiture expense reversals from "at vest date" to "at forfeiture date." We applied the guidance on a modified retrospective basis, which resulted in a cumulative effective adjustment (in thousands) of $28 reduction to beginning retained earnings. In addition, related to excess tax benefits, we recognized all current period expense through the statement of operations and presented excess tax benefits as an operating cash flow, applied prospectively, with no adjustment to prior periods. The adoption of ASU 2016-09 in January 2017 did not have a material impact on our financial position, results of operations or 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 would require 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 right of use assets and lease liabilities.
ASU 2015-11
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption is permitted. Our adoption of ASU 2015-11 in January 2017 did not have a 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." 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 new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017, applied retrospectively to each prior period presented or retrospectively with a cumulative effect adjustment recognized as of the adoption date. We do not plan to early adopt this new standard, and accordingly, will adopt the new standard on January 1, 2018. We are planning to adopt using the full retrospective method.
We have identified and made substantial progress in analyzing our principal revenue streams by channel, including potential impacts on the timing of recognition of variable consideration and contract costs, primarily sales commissions, and on presentation of our installation and services revenue. In addition, we are nearing completion of our review of significant contracts and evaluation of the potential changes to our business processes, controls, systems and disclosures resulting from adoption of the new standard. We expect to finish these assessments during the
fourth
quarter of 2017. Based on our analyses to date, we have identified potential accounting and financial reporting impacts to our business processes, controls, systems and disclosures as a result of the new standard, and we are planning for those changes. Further, while we do not expect the adoption of ASU 2014-09, as amended, to have a material effect on our financial position, results of operations or cash flows, we do anticipate significant additional disclosure requirements upon adoption of the new standard.
(2) DISCONTINUED OPERATIONS
There was
no
revenue related to discontinued operations for the
three and nine
months ended
September 30, 2017
. However, we continue to have product liability expenses associated with product previously sold into the Commercial channel.
(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 as of
September 30, 2017
and
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,848
|
|
Commercial paper
|
|
—
|
|
|
1,998
|
|
|
—
|
|
|
1,998
|
|
Total cash equivalents
|
|
6,848
|
|
|
1,998
|
|
|
—
|
|
|
8,846
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
Certificates of deposit
(1)
|
|
—
|
|
|
14,974
|
|
|
—
|
|
|
14,974
|
|
Commercial paper
|
|
—
|
|
|
1,998
|
|
|
—
|
|
|
1,998
|
|
Corporate bonds
|
|
—
|
|
|
25,313
|
|
|
—
|
|
|
25,313
|
|
U.S. government bonds
|
|
—
|
|
|
5,010
|
|
|
—
|
|
|
5,010
|
|
Total available-for-sale securities
|
|
—
|
|
|
47,295
|
|
|
—
|
|
|
47,295
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
—
|
|
|
170
|
|
|
—
|
|
|
170
|
|
Total assets measured at fair value
|
|
$
|
6,848
|
|
|
$
|
49,463
|
|
|
$
|
—
|
|
|
$
|
56,311
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
9,635
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,635
|
|
Commercial paper
|
|
—
|
|
|
3,999
|
|
|
—
|
|
|
3,999
|
|
Total cash equivalents
|
|
9,635
|
|
|
3,999
|
|
|
—
|
|
|
13,634
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
Certificates of deposit
(1)
|
|
—
|
|
|
22,820
|
|
|
—
|
|
|
22,820
|
|
Corporate bonds
|
|
—
|
|
|
6,922
|
|
|
—
|
|
|
6,922
|
|
U.S. government bonds
|
|
—
|
|
|
2,001
|
|
|
—
|
|
|
2,001
|
|
Total available-for-sale securities
|
|
—
|
|
|
31,743
|
|
|
—
|
|
|
31,743
|
|
Total assets measured at fair value
|
|
$
|
9,635
|
|
|
$
|
35,742
|
|
|
$
|
—
|
|
|
$
|
45,377
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
(1)
All certificates of deposit are within current FDIC insurance limits.
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
nine
months ended
September 30, 2017
, nor for the year ended
December 31, 2016
.
We did not have any changes to our valuation techniques during the
nine
months ended
September 30, 2017
, nor for the year ended
December 31, 2016
.
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 nine months
of
2017
. During the fourth quarter of
2016
, we performed our annual goodwill and indefinite-lived trade names impairment analyses effective as of October 1,
2016
. During the
nine
months ended
September 30, 2017
and the year ended
December 31, 2016
, we did not record any other-than-temporary impairments on our financial assets required to be measured at fair value on a nonrecurring basis.
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
September 30, 2017
, we had a
$52.0 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
September 30, 2017
, the one-month LIBOR rate was
1.24%
.
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 and nine
months ended
September 30, 2017
and
2016
, there was no ineffectiveness. As of
September 30, 2017
, we expect to reclassify a gain of less than
$0.1 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
September 30, 2017
, total outstanding contract notional amounts were
$18.3 million
. At
September 30, 2017
, 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
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
Interest rate swap contract
|
|
Prepaids and other current assets
|
|
$
|
170
|
|
|
$
|
—
|
|
|
|
Accrued liabilities
|
|
—
|
|
|
38
|
|
|
|
|
|
$
|
170
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued liabilities
|
|
$
|
65
|
|
|
$
|
—
|
|
The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Classification
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Income (loss) recognized in other comprehensive income before reclassifications
|
|
---
|
|
$
|
8
|
|
|
$
|
84
|
|
|
$
|
6
|
|
|
$
|
(896
|
)
|
Loss reclassified from accumulated other comprehensive income to earnings for the effective portion
|
|
Interest expense
|
|
(26
|
)
|
|
(167
|
)
|
|
(189
|
)
|
|
(480
|
)
|
Income tax benefit
|
|
Income tax expense
|
|
11
|
|
|
3
|
|
|
65
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in earnings
|
|
Other, net
|
|
$
|
(53
|
)
|
|
$
|
—
|
|
|
$
|
(53
|
)
|
|
$
|
—
|
|
Income tax benefit
|
|
Income tax expense
|
|
18
|
|
|
—
|
|
|
18
|
|
|
—
|
|
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
|
|
September 30, 2017
|
|
December 31, 2016
|
Finished goods
|
$
|
53,271
|
|
|
$
|
43,130
|
|
Parts and components
|
4,375
|
|
|
3,900
|
|
Total inventories
|
$
|
57,646
|
|
|
$
|
47,030
|
|
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Automobiles
|
5
|
to
|
6
|
|
$
|
23
|
|
|
$
|
139
|
|
Leasehold improvements
|
4
|
to
|
20
|
|
3,426
|
|
|
3,388
|
|
Computer software and equipment
|
3
|
to
|
7
|
|
26,138
|
|
|
25,899
|
|
Machinery and equipment
|
3
|
to
|
5
|
|
14,732
|
|
|
13,085
|
|
Furniture and fixtures
|
5
|
to
|
20
|
|
2,230
|
|
|
2,238
|
|
Work in progress
(1)
|
N/A
|
|
1,647
|
|
|
768
|
|
Total cost
|
|
|
|
|
48,196
|
|
|
45,517
|
|
Accumulated depreciation
|
|
|
|
|
(32,030
|
)
|
|
(28,049
|
)
|
Total property, plant and equipment, net
|
|
|
|
|
$
|
16,166
|
|
|
$
|
17,468
|
|
(1)
Work in progress includes computer software and production tooling.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The rollforward of goodwill was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Retail
|
|
Total
|
Balance, January 1, 2016
|
$
|
2,113
|
|
|
$
|
58,357
|
|
|
$
|
60,470
|
|
Currency exchange rate adjustment
|
67
|
|
|
3
|
|
|
70
|
|
Business acquisition - measurement period adjustments
|
—
|
|
|
1,348
|
|
|
1,348
|
|
Balance, December 31, 2016
|
2,180
|
|
|
59,708
|
|
|
61,888
|
|
Currency exchange rate adjustment
|
168
|
|
|
(11
|
)
|
|
157
|
|
Balance, September 30, 2017
|
$
|
2,348
|
|
|
$
|
59,697
|
|
|
$
|
62,045
|
|
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Indefinite-lived trademarks
|
N/A
|
|
$
|
32,052
|
|
|
$
|
32,052
|
|
Definite-lived trademarks
|
10
|
to
|
15
|
|
2,600
|
|
|
2,600
|
|
Patents
|
8
|
to
|
24
|
|
15,187
|
|
|
31,487
|
|
Customer relationships
|
10
|
to
|
15
|
|
24,700
|
|
|
24,700
|
|
|
|
|
|
|
74,539
|
|
|
90,839
|
|
Accumulated amortization - definite-lived intangible assets
|
|
|
|
|
(7,185
|
)
|
|
(21,039
|
)
|
Other intangible assets, net
|
|
|
|
|
$
|
67,354
|
|
|
$
|
69,800
|
|
Amortization expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amortization expense
|
$
|
812
|
|
|
$
|
817
|
|
|
$
|
2,446
|
|
|
$
|
2,738
|
|
Future amortization of definite-lived intangible assets is as follows (in thousands):
|
|
|
|
|
Remainder of 2017
|
$
|
810
|
|
2018
|
3,164
|
|
2019
|
3,134
|
|
2020
|
3,108
|
|
2021
|
3,078
|
|
Thereafter
|
22,008
|
|
|
$
|
35,302
|
|
(8) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2017
|
|
December 31, 2016
|
Payroll and related liabilities
|
$
|
2,199
|
|
|
$
|
4,579
|
|
Other
|
5,857
|
|
|
8,313
|
|
Total accrued liabilities
|
$
|
8,056
|
|
|
$
|
12,892
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
Balance, beginning of period
|
|
$
|
7,450
|
|
|
$
|
8,545
|
|
Accruals
|
|
2,163
|
|
|
2,132
|
|
Payments
|
|
(3,312
|
)
|
|
(2,857
|
)
|
Balance, end of period
|
|
$
|
6,301
|
|
|
$
|
7,820
|
|
(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 Gain (Loss) on Available-for-Sale Securities
|
|
Gain on Derivative Securities (Effective Portion)
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance, July 1, 2017
|
$
|
(36
|
)
|
|
$
|
83
|
|
|
$
|
(784
|
)
|
|
$
|
(737
|
)
|
Current period other comprehensive income
before reclassifications
|
22
|
|
|
8
|
|
|
371
|
|
|
401
|
|
Reclassification of amounts to earnings
|
—
|
|
|
15
|
|
|
—
|
|
|
15
|
|
Net other comprehensive income during period
|
22
|
|
|
23
|
|
|
371
|
|
|
416
|
|
Balance, September 30, 2017
|
$
|
(14
|
)
|
|
$
|
106
|
|
|
$
|
(413
|
)
|
|
$
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Available-for-Sale Securities
|
|
Gain (Loss) on Derivative Securities (Effective Portion)
|
|
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
|
(6
|
)
|
|
6
|
|
|
772
|
|
|
772
|
|
Reclassification of amounts to earnings
|
—
|
|
|
124
|
|
|
—
|
|
|
124
|
|
Net other comprehensive income (loss) during period
|
(6
|
)
|
|
130
|
|
|
772
|
|
|
896
|
|
Balance, September 30, 2017
|
$
|
(14
|
)
|
|
$
|
106
|
|
|
$
|
(413
|
)
|
|
$
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain on Available-for-Sale Securities
|
|
Gain (Loss) on Derivative Securities (Effective Portion)
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance, July 1, 2016
|
$
|
10
|
|
|
$
|
(787
|
)
|
|
$
|
(869
|
)
|
|
$
|
(1,646
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
—
|
|
|
84
|
|
|
(45
|
)
|
|
39
|
|
Reclassification of amounts to earnings
|
—
|
|
|
164
|
|
|
—
|
|
|
164
|
|
Net other comprehensive income (loss) during period
|
—
|
|
|
248
|
|
|
(45
|
)
|
|
203
|
|
Balance, September 30, 2016
|
$
|
10
|
|
|
$
|
(539
|
)
|
|
$
|
(914
|
)
|
|
$
|
(1,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on Available-for-Sale Securities
|
|
Loss on Derivative Securities (Effective Portion)
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other Comprehensive Loss
|
Balance, January 1, 2016
|
$
|
(16
|
)
|
|
$
|
—
|
|
|
$
|
(1,311
|
)
|
|
$
|
(1,327
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
26
|
|
|
(896
|
)
|
|
397
|
|
|
(473
|
)
|
Reclassification of amounts to earnings
|
—
|
|
|
357
|
|
|
—
|
|
|
357
|
|
Net other comprehensive income (loss) during period
|
26
|
|
|
(539
|
)
|
|
397
|
|
|
(116
|
)
|
Balance, September 30, 2016
|
$
|
10
|
|
|
$
|
(539
|
)
|
|
$
|
(914
|
)
|
|
$
|
(1,443
|
)
|
(11) STOCK REPURCHASE PROGRAM
On
May 4, 2016
, our Board of Directors authorized the repurchase of up to
$10.0 million
of our outstanding common stock from time to time through
May 4, 2018
.
On
April 25, 2017
, our Board of Directors authorized an additional
$15.0 million
share repurchase program, bringing the total authorization under existing programs to
$25.0 million
. Under the new program, shares of our common stock may be repurchased from time to time through
April 25, 2019
. 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.
As of
September 30, 2017
, there was
$18.2 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, 2016
|
|
120,996
|
|
$1,957,882
|
|
$16.18
|
March 31, 2017
|
|
218,515
|
|
3,426,959
|
|
15.68
|
September 30, 2017
|
|
86,856
|
|
1,420,934
|
|
16.36
|
Totals-to-Date
|
|
426,367
|
|
$6,805,775
|
|
$15.96
|
(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 September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Shares used to calculate basic income per share
|
30,749
|
|
|
31,118
|
|
|
30,739
|
|
|
31,069
|
|
Dilutive effect of outstanding stock options, performance stock units and restricted stock units
|
326
|
|
|
267
|
|
|
359
|
|
|
271
|
|
Shares used to calculate diluted income per share
|
31,075
|
|
|
31,385
|
|
|
31,098
|
|
|
31,340
|
|
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. These shares may be dilutive potential common shares in the future (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
7
|
|
|
4
|
|
|
8
|
|
|
11
|
|
(13) SEGMENT AND ENTERPRISE-WIDE INFORMATION
In accordance with FASB ASC 280,
Segment Reporting
, we determined that we have
two
operating segments - Direct and Retail. There have been no changes in our operating segments during the
nine
months ended
September 30, 2017
.
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 September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales:
|
|
|
|
|
|
|
|
Direct
|
$
|
33,986
|
|
|
$
|
33,710
|
|
|
$
|
147,800
|
|
|
$
|
159,884
|
|
Retail
|
53,505
|
|
|
46,223
|
|
|
128,393
|
|
|
117,939
|
|
Royalty
|
641
|
|
|
885
|
|
|
2,220
|
|
|
2,452
|
|
Consolidated net sales
|
$
|
88,132
|
|
|
$
|
80,818
|
|
|
$
|
278,413
|
|
|
$
|
280,275
|
|
Contribution:
|
|
|
|
|
|
|
|
Direct
|
$
|
5,289
|
|
|
$
|
2,584
|
|
|
$
|
23,141
|
|
|
$
|
31,253
|
|
Retail
|
12,118
|
|
|
9,164
|
|
|
20,427
|
|
|
17,225
|
|
Royalty
|
638
|
|
|
871
|
|
|
2,206
|
|
|
2,419
|
|
Consolidated contribution
|
$
|
18,045
|
|
|
$
|
12,619
|
|
|
$
|
45,774
|
|
|
$
|
50,897
|
|
|
|
|
|
|
|
|
|
Reconciliation of consolidated contribution to income from continuing operations:
|
|
|
|
|
|
|
|
Consolidated contribution
|
$
|
18,045
|
|
|
$
|
12,619
|
|
|
$
|
45,774
|
|
|
$
|
50,897
|
|
Amounts not directly related to segments:
|
|
|
|
|
|
|
|
Operating expenses
|
(4,680
|
)
|
|
(4,408
|
)
|
|
(15,877
|
)
|
|
(16,813
|
)
|
Other expense, net
|
(161
|
)
|
|
(218
|
)
|
|
(648
|
)
|
|
(1,336
|
)
|
Income tax expense
|
(4,862
|
)
|
|
(148
|
)
|
|
(10,156
|
)
|
|
(9,621
|
)
|
Income from continuing operations
|
$
|
8,342
|
|
|
$
|
7,845
|
|
|
$
|
19,093
|
|
|
$
|
23,127
|
|
There was no material change in the allocation of assets by segment during the first
nine
months of
2017
and, accordingly, assets by segment are not presented.
Certain customers individually represented 10% or more of total net sales as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Customer:
|
|
|
|
|
|
|
|
Customer #1
|
18.5
|
%
|
|
17.2
|
%
|
|
13.5
|
%
|
|
12.1
|
%
|
Customer #2
|
13.7
|
%
|
|
*
|
|
|
*
|
|
|
*
|
|
*
Less than 10%
(14) COMMITMENTS AND CONTINGENCIES
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of
September 30, 2017
, 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
September 30, 2017
, we had approximately
$37.5 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
September 30, 2017
.
Legal Matters
From time to time, 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.
Litigation and jury verdicts are, to some degree, inherently unpredictable, and although we have determined that a loss is not probable in connection with any current legal proceeding, it is reasonably possible that a loss may be incurred in connection with proceedings to which we are a party. Assessment of whether incurrence of a loss is probable, or a reasonable possibility, in connection with a particular proceeding, and estimation of the loss, or a range of loss, involves complex judgments and numerous uncertainties. Management is unable to estimate a range of reasonably possible losses related to litigation in which the damages sought are indeterminate, or the legal and factual basis for the relevant claims have not been developed with specificity. As such, zero liability is recorded as of
September 30, 2017
.
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.
Indemnification Settlement
During the
three
months ended September 30, 2017, we received payment in settlement of an indemnification claim related to the December 31, 2015 purchase of Octane. The settlement totaled
$1.5 million
, and was related to excess royalty expense, obsolete inventory, duty on tooling equipment, and uncollectible accounts receivable. These amounts were credited to the condensed consolidated statement of operations for the
third
quarter of
2017
in the line items for selling and marketing and cost of sales in accordance with the accounting of the original costs.