Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). All references to the first quarter of 2021 and 2020 mean the three-month periods ended June 30, 2021 and 2020, respectively. Unless the context otherwise requires, “Nautilus,” “we,” “us” and “our” refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “plan,” “expect,” “aim,” “believe,” “project,” “intend,” “estimate,” “will,” “should,” “could,” and other terms of similar meaning typically identify forward-looking statements. We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Forward-looking statements include any statements related to our future business, financial performance or operating results; anticipated fluctuations in net sales due to seasonality; plans and expectations regarding gross and operating margins; plans and expectations regarding research and development expenses and capital expenditures and anticipated results from such expenditures and other investments in our capabilities and resources; anticipated losses from discontinued operations; plans for new product introductions, strategic partnerships and anticipated demand for our new and existing products; and statements regarding our inventory and working capital requirements and the sufficiency of our financial resources. These forward-looking statements, and others we make from time-to-time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including our ability to timely acquire inventory that meets our quality control standards from sole source foreign manufacturers at acceptable costs, changes in consumer fitness trends, changes in the media consumption habits of our target consumers or the effectiveness, availability and price of media time consistent with our cost and audience profile parameters, greater than anticipated costs or delays associated with launch of new products, weaker than expected demand for new or existing products, a decline in consumer spending due to unfavorable economic conditions, softness in the retail marketplace or the availability from retailers of heavily discounted competitive products, an adverse change in the availability of credit for our customers who finance their purchases, our ability to pass along vendor raw material price increases and other cost pressures, including increased shipping costs and unfavorable foreign currency exchange rates, tariffs, risks associated with current and potential delays, work stoppages, or supply chain disruptions caused by the coronavirus pandemic, our ability to hire and retain key management personnel, our ability to effectively develop, market and sell future products, the availability and timing of capital for financing our strategic initiatives, including being able to raise capital on favorable terms or at all; changes in the financial markets, including changes in credit markets and interest rates that affect our ability to access those markets on favorable terms, the impact of any future impairments, our ability to protect our intellectual property, the introduction of competing products, and our ability to get foreign-sourced product through customs in a timely manner. Additional assumptions, risks and uncertainties are described in Part I, Item 1A, “Risk Factors,” in our 2020 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations.
Overview
We empower healthier living through individualized connected fitness experiences. We are committed to build a healthier world, one person at a time. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products, related accessories and digital platform for consumer use, primarily in the U.S., Canada, Europe and Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Bowflex®, Schwinn®, JRNY® and Nautilus®.
We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products directly to consumers primarily through websites. Our Retail business offers our products through a network of independent retail companies to reach consumers in the home use markets in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
As previously disclosed, we changed our fiscal year from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31 in order to include the primary fitness season for exercise equipment, October to March, in the same fiscal year. In addition, the new fiscal year-end is better aligned with the fiscal year-end of our retail partners.
For the three-months ended June 30, 2021, our results were primarily impacted by strong demand driven by our North Star strategy and the at home fitness surge. The five strategic pillars of North Star are (1) Adopt a consumer first mindset; (2) Scale a differentiated digital offering; (3) Focus investments on core businesses; (4) Evolve supply chain to be strategic advantage; and (5) Build organizational capabilities to win by unleashing the power of our team. We will leverage our many strengths to transform into a company that empowers healthier living through individualized connected fitness experiences. Our transformation will properly leverage our leading brands, products, innovation, distribution and digital assets to build a healthier world, one person at a time.
•Net sales for the three-months ended June 30, 2021 were $184.6 million, reflecting a 61.7% increase as compared to net sales of $114.2 million for the three-months ended June 30, 2020. Sales were up 74.4%, excluding sales related to the Octane brand, which was sold in October 2020.Sales growth was driven primarily by continued demand for connected fitness bikes and treadmills, like the Bowflex® VeloCore® bike and Bowflex® T22 Treadmill, and robust sales of SelectTech® weights.
•Net sales of our Direct segment increased by $13.0 million, or 25.7%, for the three-months ended June 30, 2021, compared to the three-months ended June 30, 2020.
•Net sales of our Retail segment increased by $57.5 million, or 91.4%, for the three-months ended June 30, 2021, compared to the three-months ended June 30, 2020. Excluding Octane, net sales grew 120.7%.
•Royalty income for the three-months ended June 30, 2021 decreased by $0.1 million compared to the three-months ended June 30, 2020.
•Gross profit for the three-months ended June 30, 2021 was $55.5 million, reflecting a 17.1% increase as compared to gross profit of $47.4 million for the three-months ended June 30, 2020.Gross margin rate for the three-months ended June 30, 2021 was 30.1% compared to 41.5% for the three-months ended June 30, 2020. This margin pressure is the result of current macro events affecting not just the Company but many others as well. The 11.4 ppt decrease in gross margins was primarily due to: higher landed product costs driven by inflationary price increases in commodities and components, foreign exchange, and elevated transportation costs, partially offset by sales price increases (-6 ppts), channel mix as Direct segment sales were 34% versus 44% last year (-3 ppts), outbound freight (-1 ppt), and a strategic decision to end production of select SKUs (-1 ppt).
•Operating expenses for the three-months ended June 30, 2021 were $37.6 million, a decrease of $16.9 million, or 30.9%, as compared to operating expenses of $54.5 million for the three-months ended June 30, 2020, primarily due to the $29.0 million loss on disposal group for the same period last year partially offset by increased selling and marketing expenses, as the Direct business returned to more normalized levels of advertising and the company invested in incremental brand marketing. Total advertising expenses were $11.6 million this year versus $2.8 million last year. General and administrative expenses and product development expenses also increased versus last year primarily driven by investments in JRNY®.
•Operating income for the three-months ended June 30, 2021 was $17.9 million or 9.7% operating margin, a $25.0 million improvement compared to an operating loss of $7.1 million for the three-months ended June 30, 2020. JRNY® investments were $4.6 million this year versus $1 million last year and brand marketing was $3.4 million this year versus $0 last year. Excluding these investments, our Q1 2022 operating margins have been improved by 4 percentage points.
•Income from continuing operations was $14.0 million for the three-months ended June 30, 2021, or $0.43 per diluted share, compared to a loss from continuing operations of $5.0 million, or $0.17 per diluted share, for the three-months ended June 30, 2020.
•Net income was $13.9 million for the three-months ended June 30, 2021, compared to net loss of $5.1 million for the three-months ended June 30, 2020.
•The effective tax rates for the three-months ended June 30, 2021 and for the three-months ended June 30, 2020 were 19.7% and 32.0%, respectively.
JRNY® update
Nautilus Inc. continues to enhance the JRNY® platform, creating differentiated connected fitness experiences for their members. In the past quarter, the Company enhanced its content library, adding 200+ trainer-led videos and commissioning additional Explore the World content. They introduced the JRNY® app for use with its popular IC4 and C6 bikes further expanding its diverse lineup of connected products.
Today, Nautilus also announced a strategic partnership with digital fitness provider, FitOn. Under the agreement, JRNY® members will have access to hundreds of off-product workouts through the JRNY® digital fitness platform and app to keep members engaged and reaching their fitness goals.
Forward Looking Guidance
Second Quarter Fiscal 2022
•The Company’s revenue for the next few quarters will be compared to record results due to the pandemic’s effect on net sales last year. To gauge continued progress against the expanded addressable market, the Company will be measuring business versus last year and versus the same period two years ago for the next few quarters.
•Demand curves for the Direct segment in Q1 and in the first month of Q2 have started to revert to more typical seasonality patterns. Now that Direct’s backlog has returned to more normal levels, the Company expects Direct sales in Q2 to be lower than Q1.
•The Company expects total company net sales for the 2nd quarter of fiscal 2022 to be between $145 million and $155 million, a 2-year revenue CAGR of 53% to 59%.
•Similar to many other companies, the Company expects external gross margin challenges to continue in Q2 and anticipates increased price pressure due to the ongoing chip shortage.
•The Company was pleased with the results of North Star investment in Q1 and plans to continue investing in Q2. Brand marketing expenditures will be between $5 million and $6 million versus $3 million last quarter and zero last year. JRNY® investment will be between $5.5 million and $6.5 million versus $5 million last quarter and $1 million last year. JRNY® investments will further enhance platform functionality via improved adaptive workouts, the addition of a member portal, and additional fresh content, like the ones provided by their new partner FitOn. The Company expects these investments to dilute operating margins by 7 to 8 percentage points.
•Given these investments and the external macro pressure on gross margin, the Company expects operating margins to be in the low single digits.
Back Half of Fiscal 2022
•The Company expects to continue investing in North Star on a “pay as we go” basis.
•The Company assumes that the external macro factors negatively affecting gross margins will continue in Q3 and Q4. Although it’s unclear when the pressure will ease, the Company expects that over time, prices will stabilize and eventually return closer to pre-pandemic levels.
•Until the macro environment improves, the Company expects operating margins to be in the low to mid-single digits for the back half of the year.
•The Company continues to expect full year capital expenditures to be between $12 million and $14 million with the majority earmarked for JRNY® investments.
•The Company reiterates their expectation of reaching 250,000 JRNY® members by the end of FY22
Longer term view, beyond Fiscal 2022
•The Company’s conviction in their North Star strategy has never been stronger. Growth in JRNY® members and their increased engagement confirm the Company’s expectations that their North Star investments will ultimately yield higher quality recurring revenue and long-term profitable growth.
•The Company believes the near-term external gross margin pressures are temporary and are not delaying the Company’s expectations of achieving sustainable operating margins upwards of 15% by FYE 2026, as they realize the long-term benefits of their transformational investments.
Factors Affecting Our Performance
Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the U.S. and Canada. The COVID-19 pandemic has created a heightened need for home-fitness products at an unplanned rate. We are unable to estimate the length of time that the short-term increases in demand for many of our home-fitness products will outpace supply and we are accelerating the manufacturing and delivery of key products. We cannot predict the longer-term impacts of COVID-19 and the impact on our results of operations is uncertain. Our gross margins are being impacted by fluctuations in the costs or availability of materials used to manufacture our products, tariffs, expedited shipping and transportation costs and product warranty costs. Gross margins may also be affected by fluctuations in cost associated with acquisition or license of products and technologies, product warranty costs, the cost of fuel, foreign currency exchange rates, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, websites and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.
As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2020 Form 10-K as supplemented by our quarterly reports on Form 10-Q.
Discontinued Operations
Results from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation as of December 31, 2012. Although there was no revenue related to the former Commercial business in either the 2021 or 2020 periods, we continue to incur product liability and other legal expenses associated with product previously sold into the Commercial channel.
RESULTS OF OPERATIONS
Results of operations information was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30,
|
|
Change
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Net sales
|
$
|
184,593
|
|
|
$
|
114,188
|
|
|
$
|
70,405
|
|
|
61.7
|
%
|
Cost of sales
|
129,088
|
|
|
66,792
|
|
|
62,296
|
|
|
93.3
|
%
|
Gross profit
|
55,505
|
|
|
47,396
|
|
|
8,109
|
|
|
17.1
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling and marketing
|
21,300
|
|
|
12,446
|
|
|
8,854
|
|
|
71.1
|
%
|
General and administrative
|
11,523
|
|
|
9,315
|
|
|
2,208
|
|
|
23.7
|
%
|
Research and development
|
4,815
|
|
|
3,728
|
|
|
1,087
|
|
|
29.2
|
%
|
Loss on disposal group
|
—
|
|
|
29,013
|
|
|
(29,013)
|
|
|
(100.0)
|
%
|
Total operating expenses
|
37,638
|
|
|
54,502
|
|
|
(16,864)
|
|
|
(30.9)
|
%
|
Operating income (loss)
|
17,867
|
|
|
(7,106)
|
|
|
24,973
|
|
|
(351.4)
|
%
|
Other expense:
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|
|
|
|
|
|
Interest income
|
21
|
|
|
1
|
|
|
20
|
|
|
2,000.0
|
%
|
Interest expense
|
(314)
|
|
|
(338)
|
|
|
24
|
|
|
(7.1)
|
%
|
Other, net
|
(120)
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|
|
115
|
|
|
(235)
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|
|
*
|
Total other expense, net
|
(413)
|
|
|
(222)
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|
|
(191)
|
|
|
86.0
|
%
|
Income (loss) from continuing operations before income taxes
|
17,454
|
|
|
(7,328)
|
|
|
24,782
|
|
|
|
Income tax expense (benefit)
|
3,438
|
|
|
(2,342)
|
|
|
5,780
|
|
|
|
Income (loss) from continuing operations
|
14,016
|
|
|
(4,986)
|
|
|
19,002
|
|
|
|
Loss from discontinued operations, net of income taxes
|
(132)
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|
|
(124)
|
|
|
(8)
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|
|
|
Net income (loss)
|
$
|
13,884
|
|
|
$
|
(5,110)
|
|
|
$
|
18,994
|
|
|
|
*Not meaningful
Results of operations information by segment and major product lines was as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30,
|
|
Change
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Net sales:
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|
|
|
|
|
|
Direct net sales:
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|
|
|
|
|
|
|
Cardio products(1)
|
$
|
31,430
|
|
|
$
|
45,585
|
|
|
$
|
(14,155)
|
|
|
(31.1)
|
%
|
Strength products(2)
|
31,966
|
|
|
4,848
|
|
|
27,118
|
|
|
559.4
|
%
|
Direct
|
63,396
|
|
|
50,433
|
|
|
12,963
|
|
|
25.7
|
%
|
|
|
|
|
|
|
|
|
Retail net sales:
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|
|
|
|
|
|
|
Cardio products(1)
|
89,924
|
|
|
49,011
|
|
|
40,913
|
|
|
83.5
|
%
|
Strength products(2)
|
30,560
|
|
|
13,937
|
|
|
16,623
|
|
|
119.3
|
%
|
Retail
|
120,484
|
|
|
62,948
|
|
|
57,536
|
|
|
91.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
|
713
|
|
|
807
|
|
|
(94)
|
|
|
(11.6)
|
%
|
|
$
|
184,593
|
|
|
$
|
114,188
|
|
|
$
|
70,405
|
|
|
61.7
|
%
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
Direct
|
$
|
38,882
|
|
|
$
|
22,910
|
|
|
$
|
15,972
|
|
|
69.7
|
%
|
Retail
|
90,206
|
|
|
43,882
|
|
|
46,324
|
|
|
105.6
|
%
|
|
|
|
|
|
|
|
|
|
$
|
129,088
|
|
|
$
|
66,792
|
|
|
$
|
62,296
|
|
|
93.3
|
%
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
Direct
|
$
|
24,514
|
|
|
$
|
27,523
|
|
|
$
|
(3,009)
|
|
|
(10.9)
|
%
|
Retail
|
30,278
|
|
|
19,066
|
|
|
11,212
|
|
|
58.8
|
%
|
Royalty
|
713
|
|
|
807
|
|
|
(94)
|
|
|
(11.6)
|
%
|
|
$
|
55,505
|
|
|
$
|
47,396
|
|
|
$
|
8,109
|
|
|
17.1
|
%
|
Gross margin:
|
|
|
|
|
|
|
|
Direct
|
38.7
|
%
|
|
54.6
|
%
|
|
(1,590)
|
|
basis points
|
Retail
|
25.1
|
%
|
|
30.3
|
%
|
|
(520)
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|
basis points
|
|
|
|
|
|
|
|
|
Contribution:
|
|
|
|
|
|
|
|
Direct
|
$
|
6,759
|
|
|
$
|
16,995
|
|
|
(10,236)
|
|
|
(60.2)
|
%
|
Retail
|
22,090
|
|
|
11,613
|
|
|
10,477
|
|
|
90.2
|
%
|
|
|
|
|
|
|
|
|
Contribution rate:
|
|
|
|
|
|
|
|
Direct
|
10.7
|
%
|
|
33.7
|
%
|
|
(2,300)
|
|
basis points
|
Retail
|
18.3
|
%
|
|
18.4
|
%
|
|
(10)
|
|
basis points
|
(1) Cardio products include: connected-fitness bikes, the Bowflex® C6, Bowflex® VeloCore®, Schwinn® IC4, Max Trainer®, connected-fitness treadmills, other exercise bikes, ellipticals and subscription services.
|
(2) Strength products include: Bowflex® Home Gyms, Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories.
|
Direct
Net sales for the three-months ended June 30, 2021 were $63.4 million, up 25.7%, from $50.4 million in the same period last year.
Strength product sales grew 559.4% to a historical record, led by the popular SelectTech® weights and Bowflex® Home Gyms. Cardio sales declined 31.1%, primarily due to end-of-life products that are no longer available for sale this year and a decline in sales of the Schwinn® IC4 Bowflex® C6 bikes that was partially offset by VeloCore® sales.
Gross margin rate for the three-months ended June 30, 2021 was 38.7%, down 15.9%, from 54.6% in the same period last year. The 15.9 ppt decrease in gross margin was primarily driven by: higher landed product costs (-6
ppts), higher outbound freight costs (-6 ppts), deleveraging of fixed costs as direct sales grew slower than retail’s (-2 ppts), a strategic decision to end production of select SKUs (-1 ppt), and increased investments in JRNY® (-1 ppt). Gross profit was $24.5 million, down 10.9% versus last year. Gross profit for the three-months ended June 30, 2021 was $24.5 million, down 10.9% compared to gross profit of $27.5 million same period last year.
Segment contribution income for the three-months ended June 30, 2021 was $6.8 million or 10.7%, down 60.2%, compared to segment contribution income of $17.0 million or 33.7% for the same period last year. The $10.2 million decline was primarily driven by lower gross profit and the return to normalized levels of media spend. Advertising expenses were $8.0 million for the three-months ended June 30, 2021 compared to $2.4 million last year.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the three-months ended June 30, 2021 were 53.0%, compared to 48.4% in the same period of 2020. The increase in approval rates reflects higher credit quality applications.
Retail
Retail segment sales of $120.5 million for the three-months ended June 30, 2021, the best quarterly sales in segment history.
Net sales for the three-months ended June 30, 2021 were up 91.4%, from $62.9 million for the same period last year, or 120.7% excluding sales related to the Octane brand. Retail segment sales outside the United States and Canada grew 70%, or 102% excluding Octane.
Strength product sales grew by 119.3%, led by our popular SelectTech® weights and benches and Bowflex® Home Gyms. Cardio sales increased by 83.5%, to a historical record, driven by connected-fitness bikes and treadmills.
Gross margin rate for the three-months ended June 30, 2021 was 25.1%, down from 30.3% in the same period last year. The 5.2 ppt decrease in gross margin was primarily driven by: higher landed product costs (-6 ppts), a strategic decision to end production of select SKUs (-1 ppt), offset by leverage on fixed costs as retail segment sales grew faster than direct segment sales (+2 ppts).Gross profit for the three-months ended June 30, 2021 was $30.3 million, an increase of 58.8% compared to gross profit of $19.1 million same period last year.
Segment contribution income for the three-months ended June 30, 2021 was $22.1 million or 18.3%, compared to $11.6 million or 18.4% for the same period last year, primarily driven by higher gross profit and expense leverage.
Selling and Marketing
Selling and marketing expenses include payroll, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of media advertising, promotions, trade shows, seminars, and other programs.
Selling and marketing information was as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30,
|
|
Change
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Selling and marketing
|
$21,300
|
|
$12,446
|
|
$8,854
|
|
71.1%
|
As % of net sales
|
11.5%
|
|
10.9%
|
|
|
|
|
The increase in selling and marketing expense in the three-month period ended June 30, 2021 as compared to the same period of 2020 was primarily related to a $5.6 million increase in Direct media advertising and a $3.1 million increase for brand marketing.
Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows (dollars in thousands):
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|
Three-Months Ended June 30,
|
|
Change
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Media advertising
|
$8,016
|
|
$2,385
|
|
$5,631
|
|
236.1%
|
As % of net sales
|
4.3%
|
|
2.1%
|
|
|
|
|
The increase in media advertising for the three-month period ended June 30, 2021 compared to the same period of 2020 was primarily due the return to normalized levels of media spend.
General and Administrative
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with the executive team, finance, legal, IT, facilities, certain human resources and other administrative personnel, and other administrative fees.
General and administrative expenses was as follows (dollars in thousands):
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|
Three-Months Ended June 30,
|
|
Change
|
|
2021
|
|
2020
|
|
$
|
|
%
|
General and administrative
|
$11,523
|
|
$9,315
|
|
$2,208
|
|
23.7%
|
As % of net sales
|
6.2%
|
|
8.2%
|
|
|
|
|
General and administrative expenses were higher for the three-months ended June 30, 2021 compared to the same period of 2020 primarily driven by increases in IT, and for short-term incentive and personnel costs.
Research and Development
Research and development expenses include payroll, employee benefits, other headcount-related expenses and information technology associated with product development.
Research and development expenses were as follows (dollars in thousands):
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|
|
|
Three-Months Ended June 30,
|
|
Change
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Research and development
|
$4,815
|
|
$3,728
|
|
$1,087
|
|
29.2%
|
As % of net sales
|
2.6%
|
|
3.3%
|
|
|
|
|
The increase in research and development expenses for the three-month period ended June 30, 2021 compared to the same period of 2020 was primarily driven by an increase in investment for our digital platform JRNY®, which more than offset savings associated with the divestiture of Octane.
Loss on Disposal Group
In the quarter ended June 30, 2020, we recorded a $29.0 million non-cash charge related to the fair value of the held-for-sale of assets of our Octane Fitness brand name which was sold in October 2020.
Interest Expense
Interest expense was nearly flat at $0.3 million for the three-month period ended June 30, 2021 and June 30, 2020.
Other, Net
Other, net primarily relates to the effect of exchange rate fluctuations between the U.S. and our foreign subsidiaries and foreign exchange derivative contracts.
Income Tax Expense (Benefit)
Income tax provision includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.
Income tax expense (benefit) was as follows (dollars in thousands):
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|
|
|
Three-Months Ended June 30,
|
|
Change
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Income tax expense (benefit)
|
$3,438
|
|
$(2,342)
|
|
$5,780
|
|
(246.8)%
|
Effective tax rate
|
19.7%
|
|
32.0%
|
|
|
|
|
|
|
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|
The income tax expense from continuing operations for the three-months period ended June 30, 2021 was a result of the profit generated in the U.S. The reduced effective tax rate for the same period was primarily due to the excess tax benefit related to stock-based compensation recognized as a current period benefit through the Condensed Consolidated Statements of Operations.
The income tax benefit and effective tax rate from continuing operations for the same period of the prior year were primarily due to the loss recorded as a result of the held-for-sale valuation of our Octane Fitness disposal group in the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our shareholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.
As of June 30, 2021, we had $82.8 million of cash, cash equivalents, restricted cash and available-for-sale securities, and $53.6 million was available for borrowing under the ABL Revolving Facility, compared to $113.2 million of cash, cash equivalents, restricted cash and available-for-sale securities, and $54.4 million was available for borrowing under the ABL Revolving Facility as of March 31, 2021. We expect our cash, cash equivalents, restricted cash and investments and amounts available under our Wells Fargo Financing as of June 30, 2021, along with cash expected to be generated from operations, to be sufficient to fund our operating and capital requirements for at least twelve months from June 30, 2021.
Cash used in operating activities was $28.2 million for the three-month period ended June 30, 2021, compared to cash provided in operating activities of $40.2 million for the three-month period ended June 30, 2020. The decrease in cash flows from operating activities for the three-month period ended June 30, 2021 as compared to the same period of 2020 was primarily due to changes in our operating assets and liabilities discussed below, partially offset by the increase in net income.
Trade receivables increased by $9.5 million to $98.2 million as of June 30, 2021, compared to $88.7 million as of March 31, 2021, primarily due to timing of customer payments on increased sales. Trade receivables as of June 30, 2021 compared to June 30, 2020 increased by $64.4 million due to the timing of customer payments on increased sales.
Inventory was $111.1 million, compared to $68.1 million as of March 31, 2021. The increase in inventory is driven by the strategic decision to increase on-hand inventory levels ahead of the fitness season given continued disruption in global logistics. More than 60% of inventory as of June 30, 2021 was in-transit. Inventories as of June 30, 2021 compared to June 30, 2020, increased by $89.8 million, primarily due to the surge in demand for home-fitness products.
Prepaid and other current assets decreased by $10.2 million to $15.7 million, compared to $25.8 million as of March 31, 2021, primarily related to other short-term deposits for inventory.
Trade payables increased by $15.7 million to $114.6 million as of June 30, 2021, compared to $98.9 million as of March 31, 2021, primarily due to timing of payments for inventory.
Accrued liabilities decreased by $5.1 million to $14.5 million as of June 30, 2021, compared to $19.6 million as of March 31, 2021, primarily due to deferred revenue liabilities.
Cash provided by investing activities of $15.3 million for the three-month period ended June 30, 2021 was primarily due to proceeds from sales and maturities of available-for-sale securities. We anticipate spending between $12.0 million and $14.0 million in 2022 for digital platform enhancements, systems integration, and production tooling.
Cash used in financing activities of $1.1 million for the three-month period ended June 30, 2021 was primarily related to tax payments related to stock award issuances.
Financing Arrangements
On May 14, 2021, we amended the January 31, 2020 Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (“Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility in the aggregate principal amount of up to $55.0 million, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility in the aggregate principal amount of $15.0 million (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Wells Fargo Financing"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. Several key features have been beneficially amended including permanently removing the $7.5 million minimum liquidity covenant and minimum EBITDA covenant that was scheduled to commence February 1, 2022. The Credit Facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than the greater of $6.0 million and 12.5% of the Loan Cap, as defined in the Credit Agreement. Various borrowing base definitions and limits were also amended that will result in improved availability under the asset-based revolver. In addition to the above structural improvements, the interest rate on the term loan was reduced to LIBOR plus 4.50% versus 5.00%. The maturity date remains January 31, 2025 and the term loan continues to contain amortization as originally scheduled. The repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.
Interest on the ABL Revolving Facility will accrue at LIBOR plus a margin of 1.75% to 2.25% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at LIBOR plus 4.50%. As of June 30, 2021, our interest rate was 1.85% for the ABL Revolving Facility and 4.60% for the Term Loan Facility.
As of June 30, 2021, outstanding borrowings, net of debt issuance costs, totaled $13.4 million, with $11.9 million and $1.5 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of June 30, 2021, we were in compliance with the financial covenants of the Credit Agreement and $53.6 million was available for borrowing under the ABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025.
The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement are classified based on the provisions of ASC 470 because the lock-box remittances do not automatically reduce the debt outstanding.
Off-Balance Sheet Arrangements
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of June 30, 2021, we had approximately $174.9 million, compared to $216.3 million as of March 31, 2021 in non-cancelable market-based purchase obligations, primarily to secure additional factory capacity for inventory purchases in the next twelve months. Purchase obligations can vary from quarter-to-quarter and versus the same period in prior years due to a number of factors, including the amount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications.
Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no liabilities were recorded at June 30, 2021.
SEASONALITY
Prior to the COVID-19 pandemic, our revenue from fitness equipment products varied seasonally. Sales were typically strongest in the fourth calendar quarter and lowest in the second calendar quarter as we believe that consumers tend to be involved in outdoor activities during the spring and summer months, including outdoor exercise, which impacts sales of indoor fitness equipment this seasonality had a significant effect on our inventory levels, working capital needs and resource utilization. Since 2020, due to stay-at-home orders related to the COVID-19 pandemic, we did not experience the typical seasonality.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not changed from those discussed in our 2020 Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 for a discussion of new accounting pronouncements.