NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Nautilus, Inc. and subsidiaries (collectively, "Nautilus" or the "Company") was founded in 1986 and incorporated in the State of Washington in 1993. Our headquarters are located in Vancouver, Washington.
We are committed to providing innovative, quality solutions to help people achieve their fitness goals through a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories for consumer use, primarily in the U.S. and Canada, but also in international markets outside North America. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus
®
, Bowflex
®
, Octane Fitness
®
, Schwinn
®
and Universal
®
.
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 through television advertising, catalogs and the Internet. Our
Retail
business offers our products through a network of independent retail companies with stores and websites located in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and relate to Nautilus, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany transactions and balances have been eliminated in consolidation.
Discontinued Operations
Results from discontinued operations relate to the disposal of our former Commercial business, which began in 2009 and was completed in April 2011. We reached substantial completion of asset liquidation at December 31, 2012. However, we continue to have legal and accounting expenses as we work with authorities on final deregistration of each entity and product liability and other legal expenses associated with product previously sold into the Commercial channel.
Results of operations related to the Commercial business have been presented in the consolidated financial statements as discontinued operations for all periods presented.
Use of Estimates
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, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in the financial statements. Our most significant estimates relate to the following:
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•
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Revenue recognition, net of returns and allowances;
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•
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Sales discounts and allowances;
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•
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Allowance for uncollectible trade receivables;
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•
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Valuation of excess and obsolete inventory;
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•
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Goodwill and other long-term assets valuation;
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•
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Product warranty obligations;
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•
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Litigation and loss contingencies;
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•
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Deferred tax assets and the related valuation allowance;
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•
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Unrecognized tax benefits; and
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•
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Valuation of assets and liabilities related to acquisition.
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Actual results could differ from our estimates.
Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents held in bank accounts in excess of federally-insured limits and trade receivables. Trade receivables are generally unsecured and therefore collection is affected by the economic conditions in each of our principal markets.
We rely on third-party contract manufacturers in Asia for substantially all of our products and for certain product engineering support. Business operations could be disrupted by natural disasters, difficulties in transporting products from non-U.S. suppliers,
as well as political, social or economic instability in the countries where contract manufacturers or their vendors or customers conduct business. While any such contract manufacturing arrangement could be replaced over time, the temporary loss of the services of any primary contract manufacturer could delay product shipments and cause a significant disruption in our operations.
We derive a significant portion of our net sales from a small number of our Retail customers. A loss of business from one or more of these large customers, if not replaced with new business, would negatively affect our operating results and cash flows. In each of
2016
,
2015
and
2014
,
one
customer accounted for more than
10%
, but less than
15%
, of our net sales.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less at purchase are considered to be cash equivalents. As of
December 31, 2016
, cash equivalents consisted of money market funds and commercial paper and totaled
$13.6 million
. Our cash equivalents as of
December 31, 2015
consisted of money market funds and corporate bonds and totaled
$0.7 million
.
Available-For-Sale Securities
We classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Marketable securities with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Unrealized holding gains and losses, which are immaterial, are excluded from earnings and are reported net of tax in other comprehensive income until realized. Dividend and interest income is recognized when earned. Realized gains and losses, which were not material in
2016
or
2015
, are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
We periodically evaluate whether declines in fair values of our investments below their cost are "other-than-temporary." This evaluation consists of qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recovery occurs.
For additional information, refer to Note 4,
Fair Value Measurements
.
Derivative Securities
We record our derivative securities at fair value, and our portfolio currently consists of an interest rate swap contract. The fair value of our interest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreement. The amounts related to our cash flow hedge are recorded as deferred gains or losses in our consolidated balance sheets with the offset recorded in accumulated other comprehensive income, net of tax. We do not enter into derivative instruments for any purpose other than to manage our interest rate exposure. That is, we do not engage in interest rate speculation using derivative instruments.
Trade Receivables
Accounts receivable primarily consists of trade receivables due from our Retail segment customers. We determine an allowance for doubtful accounts based on historical customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance.
Inventories
Inventories are stated at the lower of cost or market, with cost determined based on the first-in, first-out method. We establish inventory allowances for excess, slow-moving and obsolete inventory based on inventory levels, expected product life and forecasted sales. Inventories are written down to market value based on historical demand, competitive factors, changes in technology and product lifecycles.
Inventories acquired from Octane as of
December 31, 2015
have been recorded at final fair values as of
December 31, 2016
. For additional information, see Note 2,
Business Acquisition
.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation. Improvements or betterments which add new functionality or significantly extend the life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired, or otherwise disposed of, and the related accumulated depreciation, are removed from the accounts at the time of disposal. Gains and losses resulting from asset sales and dispositions are recognized in the period in which assets are disposed. Depreciation is recognized, using the straight-line method, over the lesser of the estimated useful lives of the assets or, in the case of leasehold improvements, the lease term, including renewal periods if we expect to exercise our renewal
options. Depreciation on computer equipment, machinery and equipment and furniture and fixtures is determined based on estimated useful lives, which generally range from
three
-to-
seven
years.
Property, plant and equipment acquired from Octane as of
December 31, 2015
have been recorded at final fair values as of
December 31, 2016
. For additional information, see Note 2,
Business Acquisition
.
Goodwill
Goodwill consists of the excess of acquisition costs over the fair values of net assets acquired in business combinations. We review goodwill for impairment in the fourth quarter of each year and when events or changes in circumstances indicate that the carrying amount may be impaired. For this purpose, goodwill is evaluated at the reporting unit level. Our goodwill asset related to our Canadian subsidiary is attributable to our Direct reporting unit, and our goodwill related to the Octane acquisition is attributable to our Retail reporting unit. We performed assessments of goodwill in the fourth quarters of
2016
,
2015
and
2014
. For further information regarding goodwill, see Note 9,
Goodwill
.
Other Intangible Assets
Definite-lived intangible assets, primarily acquired trade names, customer relationships, patents and patent rights, are stated at cost, net of accumulated amortization. We recognize amortization expense for our definite-lived intangible assets on a straight-line basis over the estimated useful lives.
Indefinite-lived intangible assets consist of acquired trademarks, specifically trade names. Indefinite-lived intangible assets are stated at cost and are not amortized; instead, they are tested for impairment at least annually. We review our indefinite-lived trademarks for impairment in the fourth quarter of each year and when events or changes in circumstances indicate that the assets may be impaired. The fair value of trademarks is estimated using the relief from royalty method to estimate the value of the cost savings and a discounted cash flows method to estimate the value of future income. The sum of these two values for each trademark is the fair value of the trademark. If the carrying amount of trademarks exceeds the estimated fair value, we calculate impairment as the excess of carrying amount over the estimate of fair value. We tested our indefinite-lived trademarks for impairment in the fourth quarters of
2016
,
2015
and
2014
and determined that no impairment was indicated. For further information regarding other intangible assets, see Note 10,
Other Intangible Assets
.
Other intangible assets acquired from Octane as of
December 31, 2015
have been recorded at final fair values as of
December 31, 2016
. For additional information, see Note 2,
Business Acquisition
.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and definite-lived intangible assets, are evaluated for impairment when events or circumstances indicate the carrying value may be impaired. When such an event or condition occurs, we estimate the future undiscounted cash flows to be derived from the use and eventual disposition of the asset to determine whether a potential impairment exists. If the carrying value exceeds estimated future undiscounted cash flows, we record impairment expense to reduce the carrying value of the asset to its estimated fair value. No impairment charges were recorded in
2016
,
2015
or
2014
.
Revenue Recognition
Direct and Retail product sales and shipping revenues are recorded when products are shipped and title passes to customers. In most instances, Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss to the customer upon our delivery to the carrier. For Direct sales, revenue is generally recognized when products are shipped. Revenue is recognized net of applicable sales incentives, such as promotional discounts, rebates and return allowances. We estimate the revenue impact of incentive programs based on the planned duration of the program and historical experience.
Many Direct business customers finance their purchases through a third-party credit provider, for which we pay a commission or financing fee to the credit provider. Revenue for such transactions is recognized based on the sales price charged to the customer and the related commission or financing fee is included in selling and marketing expense.
Sales Discounts and Returns Allowance
Product sales and shipping revenues are reported net of promotional discounts and return allowances. 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 obligation as a reduction of revenue. 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. Activity in our sales discounts and returns allowance was as follows (in thousands):
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2016
|
|
2015
|
|
2014
|
Balance, January 1
|
$
|
5,677
|
|
|
$
|
4,296
|
|
|
$
|
4,106
|
|
Charges to reserve
|
12,935
|
|
|
16,700
|
|
|
15,285
|
|
Reductions for sales discounts and returns
|
(12,711
|
)
|
|
(15,569
|
)
|
|
(15,095
|
)
|
Business acquisition (Note 2)
|
—
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|
|
250
|
|
|
—
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|
Balance, December 31
|
$
|
5,901
|
|
|
$
|
5,677
|
|
|
$
|
4,296
|
|
Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and excluded from net sales.
Shipping and Handling Fees
Shipping and handling fees billed to customers are recorded net of discounts and included in both net sales and cost of sales.
Cost of Sales
Cost of sales primarily consists of: inventory costs; royalties paid to third parties; employment and occupancy costs of warehouse and distribution facilities, including depreciation of improvements and equipment; transportation expenses; product warranty expenses; distribution information systems expenses; and allocated expenses for shared administrative functions.
Product Warranty Obligations
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.
Litigation and Loss Contingencies
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. We record expenses for litigation and loss contingencies as a component of general and administrative expense when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When a loss contingency is not both probable and estimable, we do not establish an accrued liability. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then we disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an estimate cannot be made.
Advertising and Promotion
We expense our advertising and promotion costs as incurred. Production costs of television advertising commercials are recorded in prepaids and other current assets until the initial broadcast, at which time such costs are expensed. Advertising and promotion costs are included in selling and marketing expenses and totaled
$60.7 million
,
$54.8 million
and
$42.6 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Prepaid advertising and promotion costs were
$3.5 million
and
$1.5 million
as of
December 31, 2016
and
2015
, respectively.
Research and Development
Internal research and development costs, which primarily consist of salaries and wages, employee benefits, expenditures for materials, and fees to use licensed technologies, are expensed as incurred. Third party research and development costs for products under development or being researched, if any, are expensed as the contracted work is performed.
Income Taxes
We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are expected to be included, as income or expense, in the applicable tax return. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the enactment. Valuation allowances are provided against deferred income tax assets if we determine it is more likely than not that such assets will not be realized.
Unrecognized Tax Benefits
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained based on the technical merits of the position upon examination, including resolutions of any related appeals or litigation. We recognize tax-related interest and penalties as a component of income tax expense.
Foreign Currency Translation
We translate the accounts of our non-U.S. subsidiaries into U.S. dollars as follows: revenues, expenses, gains and losses are translated at weighted-average exchange rates during the year; and assets and liabilities are translated at the exchange rate on the balance sheet date. Translation gains and losses are reported in our consolidated balance sheets as a component of accumulated other comprehensive income.
Gains and losses arising from foreign currency transactions, including transactions between us and our non-U.S. subsidiaries, are recorded as a component of other income (expense) in our consolidated statements of operations.
Fair Value of Financial Instruments
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.
For additional information on financial instruments recorded at fair value on a recurring basis as of
December 31, 2016
and
2015
, refer to Note 4,
Fair Value Measurements
.
Stock-Based Compensation
We recognize stock-based compensation expense on a straight-line basis over the applicable vesting period, based on the grant-date fair value of the award. To the extent a stock-based award is subject to performance conditions, the amount of expense recorded in a given period, if any, reflects our assessment of the probability of achieving the performance targets.
Fair value of stock options is estimated using the Black-Scholes-Merton option valuation model; fair value of performance share unit ("PSU") awards, restricted stock unit ("RSU") awards and restricted stock awards ("RSA") is based on the closing market price on the day preceding the grant.
We estimate future forfeitures, at the time of grant and in subsequent periods, based on historical turnover rates, previous forfeiture experience and changes in the business or key personnel that would suggest future forfeitures may differ from historical data. We recognize compensation expense for only those stock options and other stock-based awards that are expected to vest. We reevaluate estimated forfeitures monthly and, if applicable, recognize a cumulative effect adjustment in the period of the change if the revised estimate of the impact of forfeitures differs significantly from the previous estimate.
Income Per Share Amounts
Basic income per share amounts were computed using the weighted average number of common shares outstanding. Diluted income per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method.
New Accounting Pronouncements
ASU 2017-04
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 2016-12
In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients." ASU 2016-12 clarifies aspects of Topic 606 related to assessing collectibility, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition, while retaining the related core principles for those areas. The effective date and transition requirements for ASU 2016-12 are the same as the effective date and transition requirements for Topic 606 (ASU 2014-09). While we do not expect the adoption of ASU 2016-12 to have a material effect on our business, we are evaluating any potential impact that adoption of ASU 2016-12 may have on our financial position, results of operations or cash flows.
ASU 2016-10
In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing." ASU 2016-10 clarifies aspects of Topic 606 related to identifying performance obligations and the licensing implementation guidance, while retaining the related core principles for those areas. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements for Topic 606 (ASU 2014-09). While we do not expect the adoption of ASU 2016-10 to have a material effect on our business, we are evaluating any potential impact that adoption of ASU 2016-10 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. We do not expect the adoption of ASU 2016-09 to have a material effect 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 evaluating any potential impact that adoption of ASU 2016-02 may have on our financial position, results of operations and cash flows.
ASU 2015-17
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes, and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments apply to all entities that present a classified statement of financial position, and aligns the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards ("IFRS") IAS 1. ASU 2015-17 is effective for public companies' financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Our early adoption of ASU 2015-17 in January 2016 did not have a material effect on our financial position, results of operations or cash flows. We are applying ASU 2015-17 on a prospective basis to all deferred tax liabilities and assets, and prior periods have not been retrospectively adjusted.
ASU 2015-16
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 simplifies the presentation of provisional amounts reported for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The amendments in ASU 2015-16 require an entity to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, and to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for public companies' financial statements issued for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015 on a prospective basis. Our adoption of ASU 2015-16 as of January 2016 did not have a material effect on our financial position, results of operations or cash flows.
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. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.
ASU 2015-05
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).” ASU 2015-05 provides guidance regarding the accounting for a customer's fees paid in a cloud computing arrangement, specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies' annual periods, including interim periods, beginning after December 15, 2015. Early adoption is permitted. Our adoption of ASU 2015-05 in January 2016 did not have a material effect on our financial position, results of operations or cash flows.
ASU 2014-12
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)." ASU No. 2014-12 addresses accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 indicates that, in such situations, the performance target should be treated as a performance condition and, accordingly, the performance target should not be reflected in estimating the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will be
achieved. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Our adoption of ASU 2014-12 in January 2016 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 expect to adopt the new standard on January 1, 2018, and have not yet selected a transition method. We are currently evaluating the overall impact this guidance will have on our consolidated financial statements. Based on our preliminary assessment, we do not expect the adoption of ASU 2014-09 to materially change the timing of revenue recognition and classification of transactions within our consolidated financial statements. We are, however, continuing our assessment, which may identify potential impacts.
(2) BUSINESS ACQUISITION
On
December 31, 2015
, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane Fitness, LLC ("Octane") for an aggregate base purchase price of
$115.0 million
, plus net adjustments for working capital and cash acquired on the closing date. We funded the acquisition through an
$80.0 million
term loan and cash on hand. Based in Brooklyn Park, Minnesota, Octane is a leader in zero-impact training with a line of fitness equipment focused on Retail specialty and commercial channels. The acquisition of Octane strengthened and diversified our brand portfolio, broadened our distribution and deepened our talent pool. Octane's business is highly complementary to our existing business from both product and channel perspectives and is expected to create numerous revenue synergies for us.
For the year ended
December 31, 2016
, Octane contributed net sales and net income of
$61.9 million
and
$2.3 million
, respectively. Operating results for
2016
included amortization of acquired assets of
$3.1 million
, and purchase accounting related inventory step-up charges of
$1.5 million
. Working capital and other measurement period adjustments for the year ended
December 31, 2016
totaled
$0.7 million
and are detailed in the valuation table below.
Total acquisition costs incurred in
2016
were
$0.3 million
, and cumulative-to-date costs total
$0.9 million
. These charges were expensed as incurred in general and administrative costs.
Purchase Price Allocation
Acquired assets and liabilities were recorded at estimated fair value as of the acquisition date, and subsequently adjusted and finalized during
2016
. The excess of the purchase price over the fair value of identifiable net assets resulted in the recognition of goodwill of
$59.7 million
, all of which was assigned to the Retail segment. The goodwill is not deductible for income tax purposes.
The following table summarizes the fair values of the net assets acquired and liabilities assumed, and measurement period adjustments since
December 31, 2015
, the acquisition date (in thousands):
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Preliminary valuation at December 31, 2015
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Measurement period adjustments
|
Final valuation at December 31, 2016
|
Cash
|
$
|
7,759
|
|
$
|
—
|
|
$
|
7,759
|
|
Accounts receivable
|
12,507
|
|
(31
|
)
|
12,476
|
|
Inventories
|
12,168
|
|
966
|
|
13,134
|
|
Prepaid expenses
|
1,028
|
|
(143
|
)
|
885
|
|
Deferred tax assets
|
1,287
|
|
16
|
|
1,303
|
|
Property, plant and equipment
|
3,240
|
|
132
|
|
3,372
|
|
Intangible assets
|
63,100
|
|
—
|
|
63,100
|
|
Total assets acquired
|
$
|
101,089
|
|
$
|
940
|
|
$
|
102,029
|
|
|
|
|
|
Accounts payable
|
6,215
|
|
282
|
|
6,497
|
|
Accrued liabilities
|
1,614
|
|
1,354
|
|
2,968
|
|
Warranty obligations
|
5,550
|
|
—
|
|
5,550
|
|
Deferred tax liabilities, non-current
|
20,914
|
|
119
|
|
21,033
|
|
Other non-current liabilities
|
519
|
|
(129
|
)
|
390
|
|
Total liabilities assumed
|
$
|
34,812
|
|
$
|
1,626
|
|
$
|
36,438
|
|
|
|
|
|
Net identifiable assets acquired
|
$
|
66,277
|
|
$
|
(686
|
)
|
$
|
65,591
|
|
Goodwill
|
58,357
|
|
1,348
|
|
59,705
|
|
Net assets acquired
|
$
|
124,634
|
|
$
|
662
|
|
$
|
125,296
|
|
The allocation of the purchase price is complete as of
December 31, 2016
.
The following table sets forth the components of identifiable intangible assets and their fair values, net of any measurement period changes since December 31, 2015, the acquisition date (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
Estimated useful life (years)
|
|
Weighted-average amortization period (years)
|
Trade name - Octane Fitness
|
$
|
23,000
|
|
|
Indefinite
|
|
N/A
|
|
|
|
|
|
|
Trade name - others
|
2,600
|
|
|
10 - 15
|
|
12.5
|
Patents
|
12,800
|
|
|
11 - 24
|
|
18
|
Customer relationships
|
24,700
|
|
|
10 - 15
|
|
13
|
Definite-lived intangible assets
|
40,100
|
|
|
|
|
|
Total intangible assets
|
$
|
63,100
|
|
|
|
|
|
Summary of Unaudited Pro Forma Information
The following table reflects the unaudited pro forma consolidated results of operations for the periods presented, as though the acquisition of Octane had occurred on January 1, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net sales
|
$
|
406,039
|
|
|
$
|
400,078
|
|
|
$
|
338,990
|
|
Net income
|
35,683
|
|
|
29,352
|
|
|
20,233
|
|
Net income per share:
|
|
|
|
|
|
|
Basic
|
$
|
1.15
|
|
|
$
|
0.94
|
|
|
$
|
0.65
|
|
|
Diluted
|
1.14
|
|
|
0.93
|
|
|
0.64
|
|
The unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results. The pro forma results do not include, for example, the effects of anticipated synergies from combining the two companies.
(3) DISCONTINUED OPERATIONS
Following is a summary of certain financial information regarding our discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Loss from discontinued operations before income taxes
|
$
|
(1,077
|
)
|
|
$
|
(601
|
)
|
|
$
|
(1,134
|
)
|
Income tax expense (benefit)
|
(154
|
)
|
|
(400
|
)
|
|
454
|
|
Total loss from discontinued operations
|
$
|
(923
|
)
|
|
$
|
(201
|
)
|
|
$
|
(1,588
|
)
|
The following table summarizes liabilities for exit costs related to discontinued operations, included in accrued liabilities and other long-term liabilities in our consolidated balance sheets (in thousands):
|
|
|
|
|
|
Facilities
Leases
|
Balance as of January 1, 2014
|
$
|
831
|
|
Payments
|
(258
|
)
|
Balance as of December 31, 2014
|
573
|
|
Payments
|
(273
|
)
|
Balance as of December 31, 2015
|
300
|
|
Payments
|
(300
|
)
|
Balance as of December 31, 2016
|
$
|
—
|
|
(4) FAIR VALUE MEASUREMENTS
Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories:
|
|
•
|
Level 1 - observable inputs such as quoted prices (unadjusted) in active liquid markets for identical securities as of the reporting date;
|
|
|
•
|
Level 2 - other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; or observable market prices in markets with insufficient volume and/or infrequent transactions; and
|
|
|
•
|
Level 3 - significant inputs that are generally unobservable inputs for which there is little or no market data available, including our own assumptions in determining fair value.
|
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Corporate bonds
|
|
—
|
|
|
733
|
|
|
—
|
|
|
733
|
|
Total Cash Equivalents
|
|
1
|
|
|
733
|
|
|
—
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
Certificates of deposit
(1)
|
|
—
|
|
|
25,234
|
|
|
—
|
|
|
25,234
|
|
Corporate bonds
|
|
—
|
|
|
4,764
|
|
|
—
|
|
|
4,764
|
|
Total Available-for-Sale Securities
|
|
—
|
|
|
29,998
|
|
|
—
|
|
|
29,998
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
1
|
|
|
$
|
30,731
|
|
|
$
|
—
|
|
|
$
|
30,732
|
|
(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
December 31, 2015
.
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 years ended
December 31, 2016
and
2015
. Additionally, we did not have any changes to our valuation techniques during the years ended
December 31, 2016
and
2015
.
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 value of our interest rate swap contract is 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. Other than our annual goodwill and indefinite-lived trade names impairment valuations effective as of October 1,
2016
and
2015
, we did not perform any valuations on assets or liabilities that are valued at fair value on a nonrecurring basis. During the years ended
December 31, 2016
and
2015
, 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 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.
(5) DERIVATIVES
From time to time, we enter into interest rate swaps to fix a portion of our interest expense. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.
As of
December 31, 2016
, we had a
$64.0 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
December 31, 2016
, the one-month LIBOR rate was
0.61%
.
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 either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. For the year ended
December 31, 2016
, there was no ineffectiveness. As of
December 31, 2016
, we expected to reclassify a loss of
$0.04 million
from accumulated other comprehensive loss to earnings within the next twelve months.
The fair value of our derivative instruments was included in our consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
As of December 31,
|
|
|
|
2016
|
|
2015
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
Interest rate swap contract
|
|
Accrued liabilities
|
|
$
|
38
|
|
|
$
|
—
|
|
The effect of derivative instruments on our consolidated statements of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Classification
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
2015
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
Loss recognized in other comprehensive income before reclassifications
|
|
---
|
|
$
|
(450
|
)
|
|
$
|
—
|
|
Loss reclassified from accumulated other comprehensive income to earnings for the effective portion
|
|
Interest expense
|
|
$
|
(626
|
)
|
|
$
|
—
|
|
Related tax effect
|
|
Income tax benefit
|
|
$
|
200
|
|
|
$
|
—
|
|
See also Note 4.
(6) TRADE RECEIVABLES
Trade receivables, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Trade receivables
|
$
|
45,628
|
|
|
$
|
46,073
|
|
Allowance for doubtful accounts
|
(170
|
)
|
|
(918
|
)
|
|
$
|
45,458
|
|
|
$
|
45,155
|
|
Changes in our allowance for doubtful trade receivables were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance, January 1
|
$
|
918
|
|
|
$
|
108
|
|
|
$
|
53
|
|
Charges to bad debt expense
|
289
|
|
|
786
|
|
|
104
|
|
Recoveries (write-offs), net
|
(1,037
|
)
|
|
24
|
|
|
(49
|
)
|
Balance, December 31
|
$
|
170
|
|
|
$
|
918
|
|
|
$
|
108
|
|
(7) INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined based on the first-in, first-out method. Our inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Finished goods
|
$
|
43,130
|
|
|
$
|
39,115
|
|
Parts and components
|
3,900
|
|
|
3,614
|
|
|
$
|
47,030
|
|
|
$
|
42,729
|
|
(8) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Automobiles
|
5
|
to
|
6
|
|
$
|
139
|
|
|
$
|
139
|
|
Leasehold improvements
|
4
|
to
|
20
|
|
3,388
|
|
|
3,397
|
|
Computer software and equipment
|
3
|
to
|
7
|
|
25,899
|
|
|
23,991
|
|
Machinery and equipment
|
3
|
to
|
5
|
|
13,085
|
|
|
10,867
|
|
Furniture and fixtures
|
5
|
to
|
20
|
|
2,238
|
|
|
1,605
|
|
Work in progress
(1)
|
N/A
|
|
768
|
|
|
1,655
|
|
Total cost
|
|
|
|
|
45,517
|
|
|
41,654
|
|
Accumulated depreciation
|
|
|
|
|
(28,049
|
)
|
|
(24,890
|
)
|
|
|
|
|
|
$
|
17,468
|
|
|
$
|
16,764
|
|
(1)
Work in progress primarily includes production tooling and equipment.
Depreciation expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Depreciation expense
|
$
|
4,320
|
|
|
$
|
2,558
|
|
|
$
|
1,983
|
|
(9) GOODWILL
The rollforward of goodwill was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Retail
|
|
Total
|
Balance, January 1, 2014
|
$
|
2,740
|
|
|
$
|
—
|
|
|
$
|
2,740
|
|
Currency exchange rate adjustment
|
(220
|
)
|
|
—
|
|
|
(220
|
)
|
Balance, December 31, 2014
|
2,520
|
|
|
—
|
|
|
2,520
|
|
Currency exchange rate adjustment
|
(407
|
)
|
|
—
|
|
|
(407
|
)
|
Business acquisition (Note 2)
|
—
|
|
|
58,357
|
|
|
58,357
|
|
Balance, December 31, 2015
|
2,113
|
|
|
58,357
|
|
|
60,470
|
|
Currency exchange rate adjustment
|
67
|
|
|
3
|
|
|
70
|
|
Measurement period adjustments (Note 2)
|
—
|
|
|
1,348
|
|
|
1,348
|
|
Balance, December 31, 2016
|
$
|
2,180
|
|
|
$
|
59,708
|
|
|
$
|
61,888
|
|
(10) OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Indefinite-lived trademarks
|
N/A
|
|
$
|
32,052
|
|
|
$
|
32,052
|
|
Definite-lived trademarks
|
10
|
to
|
15
|
|
2,600
|
|
|
2,600
|
|
Patents
|
8
|
to
|
24
|
|
31,487
|
|
|
31,487
|
|
Customer relationships
|
10
|
to
|
15
|
|
24,700
|
|
|
24,700
|
|
|
|
|
|
|
90,839
|
|
|
90,839
|
|
Accumulated amortization - definite-lived intangible assets
|
|
|
|
|
(21,039
|
)
|
|
(17,485
|
)
|
|
|
|
|
|
$
|
69,800
|
|
|
$
|
73,354
|
|
Amortization expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Amortization expense
|
$
|
3,554
|
|
|
$
|
854
|
|
|
$
|
2,040
|
|
Future amortization of definite-lived intangible assets is as follows (in thousands):
|
|
|
|
|
2017
|
$
|
3,256
|
|
2018
|
3,164
|
|
2019
|
3,134
|
|
2020
|
3,108
|
|
2021
|
3,078
|
|
Thereafter
|
22,008
|
|
|
$
|
37,748
|
|
(11) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Payroll and related liabilities
|
$
|
4,579
|
|
|
$
|
6,556
|
|
Other
|
8,313
|
|
|
6,471
|
|
Total accrued liabilities
|
$
|
12,892
|
|
|
$
|
13,027
|
|
(12) PRODUCT WARRANTIES
Changes in our product warranty obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance, January 1
|
$
|
8,545
|
|
|
$
|
2,246
|
|
|
$
|
1,638
|
|
Accruals
|
2,480
|
|
|
2,302
|
|
|
2,264
|
|
Payments
|
(3,575
|
)
|
|
(1,553
|
)
|
|
(1,656
|
)
|
Business acquisition (Note 2)
|
—
|
|
|
5,550
|
|
|
—
|
|
Balance, December 31
|
$
|
7,450
|
|
|
$
|
8,545
|
|
|
$
|
2,246
|
|
(13) BORROWINGS
Term Loan and Line of Credit
On December 31, 2015 we entered into an amendment (the “Amendment”) to our existing Credit Agreement, dated December 5, 2014, with JPMorgan Chase Bank, N.A. (“Chase Bank”) that provided for an
$80 million
term loan to finance the acquisition described in Note 2,
Business Acquisition
, above (the “Term Loan”). The Term Loan and our existing
$20 million
revolving line of credit with Chase Bank are secured by substantially all of the assets of Nautilus. The Term Loan matures on December 31, 2020. The Amendment also extended the maturity date of our existing revolving line of credit to December 31, 2020.
The Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement also contains customary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligations and exercise its remedies under the continuing security agreement.
Borrowing availability under the Credit Agreement is subject to our compliance with certain financial and operating covenants at the time borrowings are requested. Letters of credit under the Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing.
The interest rate applicable to the Term Loan and to each advance under the revolving line of credit is based on either Chase Bank's floating prime rate or adjusted LIBOR, plus an applicable margin. As of
December 31, 2016
, our borrowing rate for the Term Loan and line of credit advances was
1.86%
.
As of
December 31, 2016
, we had outstanding borrowings of
$64.0 million
on our term loan and
$0.5 million
in letters of credit issued under the Credit Agreement with expiration dates through
April 2017
. As of
December 31, 2016
, we were in compliance with the financial covenants of the Credit Agreement and approximately
$19.5 million
was available for borrowing under the line of credit.
Principal maturities of our Term Loan over the next five years are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
16,000
|
|
2018
|
16,000
|
|
2019
|
16,000
|
|
2020
|
16,000
|
|
|
$
|
64,000
|
|
(14) INCOME TAXES
Income Tax Expense
Income from continuing operations before income taxes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
U.S.
|
$
|
50,651
|
|
|
$
|
39,242
|
|
|
$
|
29,115
|
|
Non-U.S.
|
930
|
|
|
780
|
|
|
1,109
|
|
|
$
|
51,581
|
|
|
$
|
40,022
|
|
|
$
|
30,224
|
|
Income tax expense (benefit) from continuing operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
6,765
|
|
|
$
|
858
|
|
|
$
|
1,086
|
|
U.S. state
|
318
|
|
|
171
|
|
|
100
|
|
Non-U.S.
|
118
|
|
|
355
|
|
|
222
|
|
Total current
|
7,201
|
|
|
1,384
|
|
|
1,408
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
8,130
|
|
|
11,324
|
|
|
8,913
|
|
U.S. state
|
1,037
|
|
|
573
|
|
|
(558
|
)
|
Non-U.S.
|
112
|
|
|
(62
|
)
|
|
78
|
|
Total deferred
|
9,279
|
|
|
11,835
|
|
|
8,433
|
|
|
$
|
16,480
|
|
|
$
|
13,219
|
|
|
$
|
9,841
|
|
Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
U.S. statutory income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State tax, net of U.S. federal tax benefit
|
2.4
|
|
|
2.6
|
|
|
2.5
|
|
Non-U.S. income taxes
|
0.3
|
|
|
(0.1
|
)
|
|
(0.3
|
)
|
Nondeductible operating expenses
|
0.3
|
|
|
0.8
|
|
|
0.2
|
|
Research and development credit
|
(1.0
|
)
|
|
(0.6
|
)
|
|
(2.4
|
)
|
Change in deferred tax measurement rate
|
(0.1
|
)
|
|
—
|
|
|
0.1
|
|
Change in uncertain tax positions
|
(5.1
|
)
|
|
1.1
|
|
|
1.5
|
|
Change in valuation allowance
|
0.2
|
|
|
(5.8
|
)
|
|
(4.1
|
)
|
Other
|
(0.1
|
)
|
|
—
|
|
|
0.1
|
|
Effective income tax rate
|
31.9
|
%
|
|
33.0
|
%
|
|
32.6
|
%
|
Deferred Income Taxes
Individually significant components of deferred income tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
Accrued liabilities
|
$
|
5,089
|
|
|
$
|
6,392
|
|
Allowance for doubtful accounts
|
40
|
|
|
467
|
|
Inventory valuation
|
199
|
|
|
818
|
|
Capitalized indirect inventory costs
|
497
|
|
|
671
|
|
Stock-based compensation expense
|
1,346
|
|
|
693
|
|
Deferred rent
|
865
|
|
|
869
|
|
Accrued royalty
|
429
|
|
|
—
|
|
Net operating loss carryforward
|
2,377
|
|
|
3,361
|
|
Basis difference on long-lived assets
|
1,052
|
|
|
1,810
|
|
Credit carryforward
|
615
|
|
|
3,736
|
|
Other
|
140
|
|
|
171
|
|
Gross deferred income tax assets
|
12,649
|
|
|
18,988
|
|
Valuation allowance
|
(886
|
)
|
|
(888
|
)
|
Deferred income tax assets, net of valuation allowance
|
11,763
|
|
|
18,100
|
|
Deferred income tax liabilities:
|
|
|
|
Prepaid advertising
|
(1,302
|
)
|
|
(523
|
)
|
Other prepaids
|
(744
|
)
|
|
(579
|
)
|
Basis difference on long-lived assets
|
(26,215
|
)
|
|
(26,285
|
)
|
Undistributed earnings of foreign subsidiaries
|
(457
|
)
|
|
(188
|
)
|
Other
|
(25
|
)
|
|
(1
|
)
|
Deferred income tax liabilities
|
(28,743
|
)
|
|
(27,576
|
)
|
Net deferred income tax liabilities
|
$
|
(16,980
|
)
|
|
$
|
(9,476
|
)
|
Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Deferred income tax assets
|
$
|
—
|
|
|
$
|
8,904
|
|
Long-term deferred income tax assets
|
11
|
|
|
—
|
|
Long-term deferred income tax liabilities
|
(16,991
|
)
|
|
(18,380
|
)
|
Net deferred income tax liabilities
|
$
|
(16,980
|
)
|
|
$
|
(9,476
|
)
|
The table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2015, that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. During 2016 however, equity was increased by
$1.9 million
as we determined that such deferred tax assets arose directly from tax deductions related to equity compensation can be realized. We use FASB ASC 740 ordering for purposes of determining when excess tax benefits have been realized.
We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We have recorded a valuation allowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized. Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified.
As of December 31, 2016, we had a valuation allowance against net deferred income tax assets of
$0.9 million
. Of the remaining valuation allowance,
$0.6 million
primarily relates to domestic state tax credit carryforwards as we currently do not anticipate generating the income of appropriate character to utilize those credits. The remainder of
$0.3 million
relates to foreign net operating loss carryforwards. Should it be determined in the future that it is more likely than not that our domestic deferred income tax assets will be realized, an additional valuation allowance would be released during the period in which such an assessment is made. There have been no material changes to our foreign operations since December 31, 2015 and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2016.
Income Tax Carryforwards
As of
December 31, 2016
, we had the following income tax carryforwards (in millions):
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Expires in
|
Net operating loss carryforwards
|
|
|
|
|
U.S. State
|
|
$
|
50.9
|
|
|
2017 - 2035
|
China
|
|
$
|
0.7
|
|
|
2020 - 2021
|
Italy
|
|
$
|
0.5
|
|
|
2017
|
Income tax credit carryforwards
|
|
|
|
|
U.S. State
|
|
$
|
0.6
|
|
|
2018 - 2031
|
The timing and manner in which we are permitted to utilize our net operating loss carryforwards may be limited by Internal Revenue Code Section 382,
Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change
.
Unrecognized Tax Benefits
Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance, January 1
|
$
|
2,519
|
|
|
$
|
2,768
|
|
|
$
|
1,964
|
|
Additions for tax positions taken in prior years
|
21
|
|
|
1
|
|
|
72
|
|
Reductions for tax positions taken in prior years
|
(523
|
)
|
|
(426
|
)
|
|
—
|
|
Additions for tax positions related to the current year
|
83
|
|
|
43
|
|
|
821
|
|
Lapses of statutes of limitations
|
(130
|
)
|
|
—
|
|
|
(89
|
)
|
Other
|
—
|
|
|
133
|
|
|
—
|
|
Balance, December 31
|
$
|
1,970
|
|
|
$
|
2,519
|
|
|
$
|
2,768
|
|
Of the
$2.0 million
of gross unrecognized tax benefits from uncertain tax positions outstanding as of
December 31, 2016
,
$1.7 million
would affect our effective tax rate if recognized.
We recorded tax-related interest and penalty expense (benefit) of
$(1.9) million
,
$0.5 million
and
$0.4 million
in
2016
,
2015
and
2014
, respectively. We had a cumulative liability for interest and penalties related to uncertain tax positions as of
December 31, 2016
and
2015
of
$0.7 million
and
$2.5 million
, respectively.
Our U.S. federal income tax returns for 2009 through 2016 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2006 through 2016 are open to review, depending on the respective statute of limitation in each state. In addition, we file income tax returns in several non-U.S. jurisdictions with varying statutes of limitation.
As of
December 31, 2016
, we believe it is reasonably likely that, within the next 12 months,
$0.8 million
of the previously unrecognized tax benefits related to certain non-U.S. filing positions will be recognized as we anticipate the deregistration of a certain entity.
(15) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss), net of applicable taxes, reported on our consolidated balance sheets consists of unrealized holding gains and losses on available-for-sale securities, effective portions of gains and losses of derivative securities designated as cash flow hedges, and foreign currency translation adjustments. The following table sets 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
|
|
Loss on Derivative Securities (Effective Portion)
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance, January 1, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
244
|
|
|
$
|
244
|
|
Current period other comprehensive loss
|
|
(18
|
)
|
|
—
|
|
|
(534
|
)
|
|
(552
|
)
|
Balance, December 31, 2014
|
|
(18
|
)
|
|
—
|
|
|
(290
|
)
|
|
(308
|
)
|
Current period other comprehensive income (loss)
|
|
2
|
|
|
—
|
|
|
(1,021
|
)
|
|
(1,019
|
)
|
Balance, December 31, 2015
|
|
(16
|
)
|
|
—
|
|
|
(1,311
|
)
|
|
(1,327
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
|
8
|
|
|
(450
|
)
|
|
126
|
|
|
(316
|
)
|
Reclassification of amounts to earnings
|
|
—
|
|
|
426
|
|
|
—
|
|
|
426
|
|
Net other comprehensive income (loss) during period
|
|
8
|
|
|
(24
|
)
|
|
126
|
|
|
110
|
|
Balance, December 31, 2016
|
|
$
|
(8
|
)
|
|
$
|
(24
|
)
|
|
$
|
(1,185
|
)
|
|
$
|
(1,217
|
)
|
(16) STOCK-BASED COMPENSATION
2015 Long-Term Incentive Plan
On April 28, 2015, Nautilus shareholders approved our 2015 Long-Term Incentive Plan (the “2015 Plan”), which replaced our 2005 Long-Term Incentive Plan that expired in 2015. The 2015 Plan is administered by the Compensation Committee of the Board of Directors and authorizes us to grant various types of stock-based awards including: stock options, stock appreciation rights, RSAs, RSUs and PSUs. Stock options granted under the 2015 Plan shall not have an exercise price less than the fair market value of our common stock on the date of the grant. The exercise price of a stock option or stock appreciation right may not be reduced without shareholder approval. Stock options generally vest over periods of
three
or
four
years of continuous service, commencing on the date of grant. Stock options granted under the 2015 Plan have a
seven
-year contractual term.
Upon adoption, there were approximately
4.8 million
shares available for issuance under the 2015 Plan. The number of shares available for issuance upon adoption of the 2015 Plan included new shares approved plus any shares of common stock which were previously reserved for issuance under our preceding plan, and were not subject to grant as of April 28, 2015 or as to which the stock-based compensation award is forfeited on or after April 28, 2015. The number of shares available for issuance is reduced by (i)
two
shares for each share delivered in settlement of any stock appreciation rights, for each share of RSA, RSU or PSU award, and (ii)
one
share for each share delivered in settlement of a stock option award. In no event shall more than
1.0 million
aggregate shares of common stock subject to stock options, stock appreciation rights, RSA, RSU or PSU awards be granted to any one participant in any one year under the 2015 Plan. At
December 31, 2016
, we had
4.4 million
shares available for future grant under our 2015 Plan, and a total of
5.2 million
shares of our common stock are reserved for future issuance pursuant to the 2015 Plan and our previous plan combined.
Stock Option Activity
Stock option activity was as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted-
Average
Exercise
Price
|
Outstanding at December 31, 2015
|
520
|
|
|
$
|
5.01
|
|
Forfeited, canceled or expired
|
(8
|
)
|
|
9.42
|
|
Exercised
|
(79
|
)
|
|
4.49
|
|
Outstanding at December 31, 2016
|
433
|
|
|
$
|
5.03
|
|
Certain information regarding options outstanding at
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Options Vested and Expected to Vest
|
Number (in thousands)
|
433
|
|
|
373
|
|
|
433
|
|
Weighted-average exercise price
|
$
|
5.03
|
|
|
$
|
4.27
|
|
|
$
|
5.03
|
|
Aggregate intrinsic value (in thousands)
|
$
|
5,838
|
|
|
$
|
5,311
|
|
|
$
|
5,838
|
|
Weighted average remaining contractual term (in years)
|
2.8
|
|
|
2.6
|
|
|
2.8
|
|
RSA Activity
Compensation expense for RSAs is recognized over the estimated vesting period. Following is a summary of RSA activity (shares in thousands):
|
|
|
|
|
|
|
|
|
RSAs Outstanding
|
|
Weighted-
Average
Grant Date Fair Value per Share
|
Outstanding at December 31, 2015
|
30
|
|
|
$
|
15.54
|
|
Granted
|
14
|
|
|
17.91
|
|
Outstanding at December 31, 2016
|
44
|
|
|
$
|
16.31
|
|
RSU Activity
Compensation expense for RSUs is recognized over the estimated vesting period. Following is a summary of RSU activity (shares in thousands):
|
|
|
|
|
|
|
|
|
RSUs Outstanding
|
|
Weighted-
Average
Grant Date Fair Value per Share
|
Outstanding at December 31, 2015
|
110
|
|
|
$
|
13.73
|
|
Granted
|
62
|
|
|
18.68
|
|
Forfeited, canceled or expired
|
(2
|
)
|
|
18.07
|
|
Vested
|
(61
|
)
|
|
17.68
|
|
Outstanding at December 31, 2016
|
109
|
|
|
$
|
18.17
|
|
PSU Activity
Compensation expense for PSUs is recognized over the estimated requisite service period based on the number of PSUs ultimately expected to vest.
In May 2013, we granted PSU awards to certain of our executive officers covering a total of
24,500
shares of our common stock. The PSUs vest based on achievement of certain operating income and return on asset goals established for a
three
-year performance period. The number of shares vesting under the PSU awards following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from
60%
of the PSU awards if minimum thresholds are achieved to a maximum of
150%
. These awards vested in full at the
150%
maximum achievement, net of forfeitures, for a total of
30,300
shares.
In February 2014, we granted PSU awards to certain of our executive officers covering a total of
82,494
shares of our common stock. The PSUs vest based on achievement of goals established for operating income and revenue growth for a three-year performance period. The number of shares vesting under the PSU awards following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from
60%
of the PSU awards if minimum thresholds are achieved to a maximum of
150%
. These awards are expected to vest in full at the
150%
maximum achievement, with the exception of any forfeitures.
In April and September 2015, we granted PSU awards to certain of our executive officers and management team covering a total of
56,820
shares of our common stock. The PSUs vest based on achievement of goals established for certain operating income and return on asset criteria for a three-year performance period. The number of shares vesting under the PSU awards following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from
60%
of the PSU awards if minimum thresholds are achieved to a maximum of
150%
.
In December 2015, we granted PSU awards to a certain executive officer and management team personnel covering a total of
117,230
shares of our common stock. The PSUs vest based on achievement of certain operating income and operating margin goals for a three-year performance period. The number of shares vesting under the PSU awards following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. As of
December 31, 2016
,
72,234
PSU shares remained, net of actual forfeitures to date.
In February 2016, we granted PSU awards to certain of our executive officers and management team covering a total of
54,818
shares of our common stock. The PSUs vest based on achievement of goals established for growth in operating income as a percentage of net revenue and return on invested capital over a three-year performance period. The number of shares that ultimately vest following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from
60%
of the PSU awards if minimum thresholds are achieved to a maximum of
150%
.
Following is a summary of PSU activity (shares in thousands):
|
|
|
|
|
|
|
|
|
PSUs Outstanding
|
|
Weighted-
Average
Grant Date Fair Value per Share
|
Outstanding at December 31, 2015
|
277
|
|
|
$
|
13.67
|
|
Granted and additional goal shares awarded
|
84
|
|
|
16.81
|
|
Forfeited, canceled or expired
|
(65
|
)
|
|
16.93
|
|
Vested
|
(32
|
)
|
|
7.13
|
|
Outstanding at December 31, 2016
|
264
|
|
|
$
|
14.66
|
|
Stock-Based Compensation
We receive income tax deductions as a result of the exercise of certain stock options and vesting of RSAs, RSUs and PSUs. Stock-based compensation expense, primarily included in general and administrative expense, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
$
|
389
|
|
|
$
|
327
|
|
|
$
|
592
|
|
RSAs
|
168
|
|
|
—
|
|
|
—
|
|
RSUs
|
734
|
|
|
544
|
|
|
121
|
|
PSUs
|
1,211
|
|
|
575
|
|
|
353
|
|
ESPP
|
111
|
|
|
38
|
|
|
—
|
|
|
$
|
2,613
|
|
|
$
|
1,484
|
|
|
$
|
1,066
|
|
Certain other information regarding our stock-based compensation was as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Weighted average grant-date per share fair value of stock options granted
|
$
|
—
|
|
|
$
|
8.94
|
|
|
$
|
5.36
|
|
Total intrinsic value of stock options exercised
|
1,221
|
|
|
4,142
|
|
|
736
|
|
Fair value of RSUs vested
|
311
|
|
|
673
|
|
|
872
|
|
Fair value of PSUs vested
|
574
|
|
|
1,454
|
|
|
—
|
|
As of
December 31, 2016
, unrecognized compensation expense for outstanding, but unvested stock-based awards was
$2.7 million
, which is expected to be recognized over a weighted average period of
0.3
to
1.4
years.
Employee Stock Purchase Plan
On April 28, 2015, our shareholders approved our Employee Stock Purchase Plan (the “ESPP”). The ESPP is administered by the Compensation Committee of the Board of Directors and provides a means by which eligible employees may be given an opportunity to purchase shares of our common stock at a discount using payroll deductions. The ESPP authorizes the issuance of up to
0.5 million
shares of our common stock, subject to adjustment as provided in the ESPP for stock splits, stock dividends, recapitalizations and other similar events.
Pursuant to the ESPP, and subject to certain limitations specified therein, eligible employees may elect to purchase shares of our common stock in one or more of a series of offerings conducted pursuant to the procedures set forth in the ESPP at a purchase price equal to
90%
of the lower of the fair market value of the common stock on the first trading day of the offering period or on the last day of the offering period. Offering periods commence on May 15 and November 15 of each year and are six-months in
duration, with the exception of the first offering period in 2015, which was a four-month offering. Purchases under the ESPP may be made exclusively through payroll deductions.
Persons eligible to participate in the ESPP generally include employees who have been employed for at least 12 months prior to the applicable offering date and who, immediately upon purchasing shares under the ESPP, would own directly or indirectly, an aggregate of less than
5%
of the total combined voting power or value of all outstanding shares of our common stock.
ESPP activity was as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Available for Issuance
|
|
Weighted-
Average
Purchase Price
|
|
Weighted-Average Discount per Share
|
Balance at December 31, 2015
|
493
|
|
|
|
|
|
Employee shares purchased
|
(24
|
)
|
|
$
|
15.84
|
|
|
$
|
1.75
|
|
Balance at December 31, 2016
|
469
|
|
|
|
|
|
Assumptions used in calculating the fair value of stock option grants and employee stock purchases were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
ESPP
|
|
ESPP
|
|
Options
|
|
Options
|
Dividend yield
|
—%
|
|
—%
|
|
—%
|
|
—%
|
Risk-free interest rate
|
0.4%
|
|
0.1%
|
|
1.6%
|
|
1.7%
|
Expected life (years)
|
N/A
|
|
N/A
|
|
4.28
|
|
4.75
|
Expected volatility
|
56%
|
|
43%
|
|
71%
|
|
80%
|
Dividend yield
is based on our current expectation that no dividend payments will be made in future periods.
Risk-free interest rate
is the U.S. Treasury zero-coupon rate, as of the grant date, for issues having a term approximately equal to the expected life of the stock option. For the ESPP, it is the U.S. Treasury six-month constant maturities rate, as of the offering date.
Expected life
is the period of time over which stock options are expected to remain outstanding. We calculate expected term based on the average of the sum of the vesting periods and the full contractual term.
Expected volatility
is the percentage amount by which the price of our common stock is expected to fluctuate annually during the estimated expected life for stock options. Expected price volatility is calculated using historical daily closing prices over a period matching the weighted-average expected life for stock options, as management believes such changes are the best indicator of future volatility. For the ESPP, expected volatility is the percentage amount by which the price of our common stock is expected to fluctuate semi-annually during the offering period.
(17) STOCK REPURCHASE PROGRAM
On
November 3, 2014
, our Board of Directors approved a stock repurchase program that authorized us to repurchase up to
$15.0 million
of our outstanding common stock from time to time during the ensuing period of
24
months. On
May 4, 2016
, our Board of Directors approved an expansion of our share repurchase program that authorized us to repurchase up to an additional
$10.0 million
of our outstanding common stock from time to time during the period of
24
months following such approval. Repurchases may be made in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases are funded with existing cash balances, and the repurchased shares are retired and returned to unissued authorized shares.
The repurchase program expired on
November 3, 2016
as to the original
$15.0 million
authorization. The repurchase program expires on
May 4, 2018
as to the
$8.0 million
available as of
December 31, 2016
for repurchases under the
$10.0 million
expansion.
Cumulative repurchases to date pursuant to the program are as follows:
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Number of Shares
|
|
Repurchased Amount
|
|
Average Price per Share
|
March 31, 2015
|
|
133,877
|
|
$1,995,982
|
|
$14.91
|
September 30, 2015
|
|
577,831
|
|
9,571,545
|
|
16.56
|
December 31, 2016
|
|
319,805
|
|
5,390,355
|
|
16.86
|
Totals to Date
|
|
1,031,513
|
|
$16,957,882
|
|
$16.44
|
(18) INCOME PER SHARE
The weighted average numbers of shares outstanding used to compute income per share amounts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Shares used for basic per share calculations
|
31,032
|
|
|
31,288
|
|
|
31,253
|
|
Dilutive effect of outstanding options, RSUs, and PSUs
|
269
|
|
|
301
|
|
|
435
|
|
Shares used for diluted per share calculations
|
31,301
|
|
|
31,589
|
|
|
31,688
|
|
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, primarily because the average market price did not exceed the exercise price. These shares may be dilutive potential common shares in the future (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
8
|
|
|
12
|
|
|
225
|
|
(19) 401(k) SAVINGS PLAN
We sponsor a 401(k) savings plan that allows eligible employees to contribute a certain percentage of their salary. Employees are automatically enrolled within the first month of employment and have the ability to opt out. As a safe harbor plan sponsor, we are subject to non-discretionary matching contributions. Currently, we match
100%
of the employee's first
1%
of eligible pay contributed plus
50%
of eligible pay contributed on the next
5%
, for a maximum employer matching of
3.5%
. Employees vest in the employer matching portions at
25%
after the first year of employment, and
100%
after
two
years of employment. Our matching contributions for the savings plan were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
401(k) matching contributions
|
$
|
1,014
|
|
|
$
|
746
|
|
|
$
|
631
|
|
(20) SEGMENT AND ENTERPRISE-WIDE INFORMATION
In accordance with FASB ASC 280,
Segment Reporting
, Nautilus determined that it has
two
operating segments as of
December 31, 2016
- Direct and Retail.
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.
The accounting policies of the reportable segments are the same as the policies described in Note 1,
Significant Accounting Policies
.
Following is summary information by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net Sales:
|
|
|
|
|
|
Direct
|
$
|
225,057
|
|
|
$
|
225,595
|
|
|
$
|
175,593
|
|
Retail
|
177,920
|
|
|
106,195
|
|
|
93,223
|
|
Unallocated royalty
|
3,062
|
|
|
3,974
|
|
|
5,631
|
|
Consolidated net sales
|
$
|
406,039
|
|
|
$
|
335,764
|
|
|
$
|
274,447
|
|
Contribution:
|
|
|
|
|
|
Direct
|
$
|
43,215
|
|
|
$
|
39,940
|
|
|
$
|
29,345
|
|
Retail
|
29,451
|
|
|
12,850
|
|
|
13,279
|
|
Unallocated royalty
|
3,018
|
|
|
3,974
|
|
|
5,631
|
|
Consolidated contribution
|
$
|
75,684
|
|
|
$
|
56,764
|
|
|
$
|
48,255
|
|
|
|
|
|
|
|
Reconciliation of consolidated contribution to income from continuing operations:
|
|
|
|
|
|
Consolidated contribution
|
$
|
75,684
|
|
|
$
|
56,764
|
|
|
$
|
48,255
|
|
Amounts not directly related to segments:
|
|
|
|
|
|
Operating expenses
|
(22,290
|
)
|
|
(16,493
|
)
|
|
(18,101
|
)
|
Other income (expense), net
|
(1,813
|
)
|
|
(249
|
)
|
|
70
|
|
Income tax expense
|
16,480
|
|
|
13,219
|
|
|
9,841
|
|
Income from continuing operations
|
$
|
35,101
|
|
|
$
|
26,803
|
|
|
$
|
20,383
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
Direct
|
$
|
1,944
|
|
|
$
|
868
|
|
|
$
|
1,913
|
|
Retail
|
4,775
|
|
|
757
|
|
|
643
|
|
Unallocated corporate
|
1,155
|
|
|
1,787
|
|
|
1,468
|
|
Total depreciation and amortization expense
|
$
|
7,874
|
|
|
$
|
3,412
|
|
|
$
|
4,024
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Assets:
|
2016
|
|
2015
|
|
|
Direct
|
$
|
37,388
|
|
|
$
|
35,356
|
|
|
|
Retail
|
206,580
|
|
|
202,696
|
|
|
|
Unallocated corporate
|
89,098
|
|
|
77,860
|
|
|
|
Total assets
|
$
|
333,066
|
|
|
$
|
315,912
|
|
|
|
Net sales by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
U.S.
|
$
|
353,893
|
|
|
$
|
295,366
|
|
|
$
|
231,230
|
|
Canada
|
26,005
|
|
|
33,230
|
|
|
35,367
|
|
All other
|
26,141
|
|
|
7,168
|
|
|
7,850
|
|
|
$
|
406,039
|
|
|
$
|
335,764
|
|
|
$
|
274,447
|
|
There are no material long-lived assets held outside of the U.S.
In
2016
,
2015
and
2014
, Amazon.com accounted for
11.3%
,
11.1%
and
11.3%
, respectively, of our net sales.
(21) COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease property and equipment under non-cancellable operating leases which, in the aggregate, extend through 2025. Many of these leases contain renewal options and provide for rent escalations and payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Rent expense under all operating leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Rent expense
|
$
|
6,561
|
|
|
$
|
5,033
|
|
|
$
|
3,625
|
|
As of
December 31, 2016
, future minimum lease payments under non-cancellable leases, reduced for sublease income, were as follows (in thousands):
|
|
|
|
|
2017
|
$
|
4,608
|
|
2018
|
4,973
|
|
2019
|
4,995
|
|
2020
|
4,978
|
|
2021
|
4,015
|
|
Thereafter
|
7,051
|
|
|
$
|
30,620
|
|
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of
December 31, 2016
, we had approximately
$0.5 million
in letters of credit with certain vendors with expiration dates through
April 2017
.
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of
December 31, 2016
, we had approximately
$17.6 million
in non-cancelable 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
December 31, 2016
.
Legal Matters
In 2004, we were sued in the Southern District of New York by BioSig Instruments, Inc. for alleged patent infringement in connection with our incorporation of heart rate monitors into certain cardio products. No significant activity in the litigation occurred until 2008. In 2012, the U.S. District Court granted summary judgment to us on grounds that BioSig’s patents were invalid as a matter of law. BioSig appealed the grant of summary judgment and, in April 2013, the U.S. Court of Appeals for the Federal Circuit reversed the District Court’s decision on summary judgment and remanded the case to the District Court for further proceedings. On January 10, 2014, the U. S. Supreme Court granted our petition for a writ of certiorari to address the legal standard applied by the Federal Circuit in determining whether the patents may be valid under applicable law. The case was argued before the Supreme Court on April 28, 2014. By decision dated June 2, 2014, the Supreme Court unanimously reversed the Federal Circuit, holding that its standard of when a patent may be “indefinite” was incorrect and remanding to the Federal Circuit for reconsideration under the correct standard. The remand hearing in the Federal Circuit was held on October 29, 2014. By decision dated April 27, 2015, the same panel of the Federal Circuit affirmed its earlier reversal of the District Court’s decision on summary
judgment. On May 27, 2015, we filed a petition for a rehearing en banc in the Federal Circuit, which was denied on August 4, 2015 and a Petition for Review by the U. S. Supreme Court which was also denied. The case has been returned to the District Court, and the parties are currently engaged in discovery and other pre-trial motion practice. We do not believe that our use of heart rate monitors utilized or purchased from third parties, and otherwise, infringes the BioSig patents.
In addition to the matter described above, 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
December 31, 2016
.
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.
(22) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes our unaudited quarterly financial data for
2016
and
2015
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Total
|
2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
120,928
|
|
|
$
|
78,529
|
|
|
$
|
80,818
|
|
|
$
|
125,764
|
|
|
$
|
406,039
|
|
Gross profit
|
66,344
|
|
|
41,862
|
|
|
39,217
|
|
|
64,102
|
|
|
211,525
|
|
Operating income
|
19,300
|
|
|
6,573
|
|
|
8,211
|
|
|
19,310
|
|
|
53,394
|
|
Income from continuing operations
|
11,586
|
|
|
3,696
|
|
|
7,845
|
|
|
11,974
|
|
|
35,101
|
|
Loss from discontinued operations
|
(142
|
)
|
|
(166
|
)
|
|
(251
|
)
|
|
(364
|
)
|
|
(923
|
)
|
Net income
(1)
|
11,444
|
|
|
3,530
|
|
|
7,594
|
|
|
11,610
|
|
|
34,178
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.37
|
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
$
|
0.38
|
|
|
$
|
1.10
|
|
Diluted
|
0.37
|
|
|
0.11
|
|
|
0.24
|
|
|
0.37
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
96,239
|
|
|
$
|
59,695
|
|
|
$
|
70,690
|
|
|
$
|
109,140
|
|
|
$
|
335,764
|
|
Gross profit
|
53,889
|
|
|
30,656
|
|
|
36,209
|
|
|
52,480
|
|
|
173,234
|
|
Operating income
|
17,605
|
|
|
3,932
|
|
|
6,389
|
|
|
12,345
|
|
|
40,271
|
|
Income from continuing operations
|
10,859
|
|
|
2,219
|
|
|
3,873
|
|
|
9,852
|
|
|
26,803
|
|
Income (loss) from discontinued operations
|
(127
|
)
|
|
205
|
|
|
(145
|
)
|
|
(134
|
)
|
|
(201
|
)
|
Net income
(2),(3)
|
10,732
|
|
|
2,424
|
|
|
3,728
|
|
|
9,718
|
|
|
26,602
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.34
|
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
|
$
|
0.85
|
|
Diluted
|
0.34
|
|
|
0.08
|
|
|
0.12
|
|
|
0.31
|
|
|
0.84
|
|
(1)
Net income for the quarter ended
September 30, 2016
included a non-recurring tax benefit of
$2.7 million
related to the release of previously unrecognized tax benefits associated with certain non-U.S. filing positions, which resulted from completing the deregistration of a certain foreign entity.
(2)
Net income for the quarter ended
December 31, 2015
included a
$2.4 million
credit related to the reversal of a portion of our deferred tax asset valuation allowance.
(3)
Net income for the quarter ended
December 31, 2015
also include
d
$4.5 million
of unusual items including the following: settlement expense related to a licensing arbitration; write-off of nutrition inventory; unrecorded current period royalty revenue and reversal of prior period royalty revenue related to a dispute with the licensee; an accounts receivable reserve related to potentially uncollectible balances from a large sporting goods retailer; and transaction expenses related to the acquisition of Octane.