Nautilus
Annual Report 2014

Plain-text annual report

NAUTILUS, INC. FORM 10-K (Annual Report) Filed 02/26/15 for the Period Ending 12/31/14 Address Telephone 17750 SE 6TH WAY VANCOUVER, WA 98683 360-859-2900 CIK 0001078207 Symbol NLS SIC Code 3949 - Sporting and Athletic Goods, Not Elsewhere Classified Industry Recreational Products Sector Consumer Cyclical Fiscal Year 12/31 http://www.edgar-online.com © Copyright 2015, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.  UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) For the fiscal year ended December 31, 2014 OR FOR THE TRANSITION PERIOD FROM TO Commission file number: 001-31321 17750 S.E. 6th Way Vancouver, Washington 98683 (Address of principal executive offices, including zip code) (360) 859-2900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [x] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ] Smaller reporting company [ ] (do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x] The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last sales price ($ 11.09 ) as reported on the New York Stock Exchange as of the last business day of the registrant's most recently completed second fiscal quarter ( June 30, 2014 ) was $346,878,044 . The number of shares outstanding of the registrant's common stock as of February 25, 2015 was 31,365,817 shares. Documents Incorporated by Reference FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 NAUTILUS, INC. (Exact name of Registrant as specified in its charter) Washington 94-3002667 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Title of each class Name of each exchange on which registered Common Stock, no par value New York Stock Exchange The registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for its 2015 Annual Meeting of Shareholders.  NAUTILUS, INC. 2014 FORM 10-K ANNUAL REPORT PART I Item 1. Business 1 Item 1A. Risk Factors 6 Item 1B. Unresolved Staff Comments 11 Item 2. Properties 11 Item 3. Legal Proceedings 12 Item 4. Mine Safety Disclosures 12 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13 Item 6. Selected Financial Data 15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 27 Item 8. Financial Statements and Supplementary Data 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 56 Item 9A. Controls and Procedures 56 Item 9B. Other Information 58 PART III Item 10. Directors, Executive Officers and Corporate Governance 58 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 58 Item 13. Certain Relationships and Related Transactions, and Director Independence 58 Item 14. Principal Accounting Fees and Services 59 PART IV Item 15. Exhibits and Financial Statement Schedules 59 Signatures 62  PART I Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identify forward-looking statements. The forward-looking statements in this report include, without limitation: our prospects, resources or capabilities; current or future financial trends; future operating results; future plans for introduction of new products; anticipated demand for our new and existing products; maintenance of appropriate inventory levels; growth in revenues and profits; leverage of operating expenses; future revenues from our licensing initiative; results of increased media investment in the Direct segment; continued improvement in operating margins; expectations for increased Research and Development expenses; the amount expected to be spent on software and equipment in 2015; fluctuations in Net Sales due to seasonality; and our ability to continue to fund our operating and capital needs for the following twelve-month period. Forward-looking statements also include any statements related to our expectations regarding future business and financial performance or conditions, anticipated sales growth across markets, distribution channels and product categories, expenses and gross margins, profits or losses, losses from discontinued operations, settlements of warranty obligations, the anticipated outcome of litigation to which we are a party, new product introductions, financing and working capital requirements and resources. These forward-looking statements, and others we make from time-to-time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including the risks described in Part I, Item 1A of this report. We do not undertake any duty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations. Item 1. Business OVERVIEW Founded in 1986, Nautilus is a consumer fitness products company headquartered in Vancouver, Washington and incorporated in the State of Washington in January 1993. 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 United States 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 ® , 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 United States and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property. Beginning in 2009, we began the divestiture of our Commercial business, which focused on the sale of commercial fitness equipment into gyms, health clubs, and fitness centers. That process was largely completed in 2011, and we reached substantial completion of asset liquidation at December 31, 2012. Results of operations from the Commercial business are presented as Discontinued Operations for all periods. There was no revenue related to the Commercial business for the years ended December 31, 2014 , 2013 or 2012 . BUSINESS STRATEGY We are focused on developing and marketing consumer fitness equipment and related products to help people enjoy healthier lives. Our products are targeted to meet the needs of a broad range of consumers, including fitness enthusiasts and individuals who are seeking the benefits of regular exercise. We have diversified our business by expanding our portfolio of high-quality fitness equipment into multiple product lines utilizing our well-recognized brand names. We are focused exclusively on consumer markets and distribution channels and view the continual innovation of our product offerings as a key aspect of our business strategy. We regularly refresh our existing product lines with new technologies and finishes, and focus significant effort and resources on the development or acquisition of innovative new fitness products for introduction to the marketplace at periodic intervals. Our strategies incorporate the individual characteristics of our Direct and Retail businesses. Our Direct business focuses on: (i) the development of, or acquisition of rights to, unique products; (ii) the application of creative, cost-effective ways to communicate the benefits of their use; and (iii) making various payment options available to our customers. We are particularly attentive to 1  Direct business metrics that provide feedback regarding the effectiveness of our media marketing programs and attractiveness of third-party consumer financing programs. In our Retail business, we strive to develop long-term relationships with key retailers of sports or fitness equipment. The primary objectives of our Retail business are (i) to offer a selection of products at key price-points; and (ii) to utilize the strength of our brands and long-standing customer relationships to secure more floor space with our Retail customers for our products. Our long-term strategy involves: PRODUCTS We market quality cardiovascular, strength and nutrition fitness products that cover a broad range of price points and features. Our products are designed for home use by individuals with varying exercise needs. From the person who works out occasionally to the serious athlete, we have products that will help them achieve their fitness objectives. While we offer our full product assortment to our Direct customers through our Internet websites and our catalogs, we generally differentiate the product models offered in our Direct and Retail sales channels. Currently, our Bowflex TreadClimber ® and Max Trainer ® product lines are offered for sale primarily through our Direct sales channel. Approximately 79% of our revenue in 2014 was derived from sales of consumer cardio products. While we continue to be a leader in the consumer strength product category, we believe the much larger market for cardio products offers us greater opportunity for growth. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION We conduct our business in two segments, Direct and Retail. For further information regarding our segments and geographic information, see Note 16, Segment and Geographic Information , to our consolidated financial statements in Part II, Item 8 of this report. SALES AND MARKETING Direct In our Direct business, we market and sell our products, principally Bowflex ® cardio and strength products, directly to consumers. While we are, and plan to continue to be, a large direct marketer of strength products in the United States, our advertising emphasis has shifted toward cardio products, especially the Bowflex TreadClimber ® and Bowflex Max Trainer ® , as cardio products represent the largest component of the fitness equipment market and a growing part of our business. Sales of cardio products represented 91% of our Direct channel revenues in 2014 , compared to 84% in 2013 and 81% in 2012 . Our marketing efforts are based on an integrated combination of media and direct consumer contact. In addition to television advertising, which ranges in length from 30 seconds to as long as three minutes, we utilize Internet advertising, product websites, inquiry-response mailings, catalogs and inbound/outbound call centers. Marketing and media effectiveness is measured continuously based on sales inquiries generated, cost-per-lead, conversion rates, return on investment and other performance 2 • creatively marketing our equipment, both directly to consumers and through our Retail customers, while leveraging our well-known brand names; • enhancing our product lines by designing fitness equipment that meets or exceeds the high expectations of our customers; • utilizing our strengths in product engineering to reduce product costs; • continuing our investment in research and development activities aimed at acquiring or creating new technologies; • increasing our international Retail sales and distribution; and • maximizing available royalty revenues from the licensing of our brands and intellectual property. • Nautilus ® is our corporate umbrella brand and is also used to differentiate certain specialized cardio, treadmills, ellipticals and bike products. • Our Bowflex ® brand represents a highly-regarded line of fitness equipment comprised of both cardio and strength products, including the TreadClimber ® and Max Trainer ® specialized cardio machines, PowerRod ® and Revolution ® home gyms and SelectTech ® dumbbells, and nutrition supplements including Bowflex Body TM . • Our Schwinn ® brand is known for its popular line of exercise bikes, including the Airdyne ® , treadmills, and ellipticals. • Our Universal ® brand, one of the oldest and most recognized names in the fitness industry, currently offers a line of kettlebell weights and weight benches.  metrics and we strive to optimize the efficiency of our marketing and media expenditures based on this data. Almost all of our Direct customer orders are received either on our Internet websites or through company-owned and third-party call centers. In order to facilitate consumer purchases, we partner with several third party credit providers. Credit approval rates are an important variable in the number of Direct products we sell in a given period. Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers increased to 41% in 2014 from 36% in 2013 and 32% in 2012 . Retail In our Retail business, we market and sell a comprehensive line of consumer fitness equipment under the Nautilus ® , Schwinn ® , Universal ® and Bowflex ® brands. Our products are marketed through a network of retail companies, consisting of sporting goods stores, Internet retailers, large-format and warehouse stores, and, to a lesser extent, smaller specialty retailers and independent bike dealers. We offer programs that provide price discounts to our Retail customers for ordering container-sized shipments or placing orders early enough in the season to allow for more efficient manufacturing by our Asian suppliers. These programs are designed to reduce our shipping and handling costs, with much of the savings being passed on to our customers. In addition, we often offer other types of sales incentives to our Retail customers, including volume discounts and various forms of rebates or allowances, which generally are intended to increase product exposure and availability for consumers, reduce transportation costs, and encourage marketing and promotion of our brands or specific products. PRODUCT DESIGN AND INNOVATION Innovation is a vital part of our business, and we continue to expand and diversify our product offerings by leveraging our research and development capabilities. We constantly search for new technologies and innovations that will help us grow our business, either through higher sales or increased production efficiencies. To accomplish this objective, we seek out ideas and concepts both within our company and from outside inventors. We rely on financial and engineering models to assist us in assessing the potential operational and economic impacts of adopting new technologies and innovations. If we determine that a third-party technology or innovation concept meets certain technical and financial criteria, we may enter into a licensing arrangement to utilize the technology or, in certain circumstances, purchase the technology for our own use. Our product design and engineering teams also invest considerable effort to improve product design and quality. As a consumer-driven company, we invest from time-to-time in qualitative and quantitative consumer research to help us assess new product concepts, optimal features and anticipated consumer adoption. Our research and development expenses were $7.2 million , $5.6 million and $4.2 million in 2014 , 2013 and 2012 , respectively, as we increased our investment in new product development resources and capabilities. We expect our research and development expenses to increase in 2015 as we continue to increase our investment in new product development. SEASONALITY We expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by the third quarter, and are generally weakest in the second quarter. We believe that, during the spring and summer months, consumers tend to be involved in outdoor activities, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization. MERCHANDISE SOURCING All of our products are produced by third-party manufacturers, and, in 2014 , all of our manufacturing partners were located in Asia. Although multiple factories bid on and are able to produce most of our products, we typically select one factory to produce any given product. Lead times for inventory purchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of which transit time represents three-to-four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts of future demand for our products. We attempt to compensate for our long replenishment lead times by maintaining adequate levels of inventory at our warehousing facilities. We monitor our suppliers' ability to meet our product needs and we participate in quality assurance activities to reinforce adherence to our quality standards. Our third-party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of individual purchase orders. Our manufacturing relationships are non-exclusive, and we are permitted to procure our products from other sources at our discretion. None of our manufacturing contracts include production 3  volume or purchase commitments on the part of either party. Our third-party manufacturers are responsible for the sourcing of raw materials and producing parts and finished products to our specifications. LOGISTICS Our warehousing and distribution facilities are located in Portland, Oregon, Obetz, Ohio, and Winnipeg, Manitoba. In our Direct business, we strive to maintain inventory levels that will allow us to ship our products shortly after receiving a customer's order. We use common carriers for substantially all of our merchandise shipments to Direct customers. In our Retail business, we manage our inventory levels to accommodate anticipated seasonal changes in demand. Generally, we maintain higher inventory levels at the end of the third and fourth quarters to satisfy relatively higher consumer demand in the fourth and first quarters of each year. Many of our Retail customers place orders well in advance of peak periods of consumer demand to ensure an adequate supply for the anticipated selling season. In 2014 approximately 54% of our Retail customers orders were shipped by our contract manufacturers in Asia directly to our Retail customer locations, typically in container loads. The use of such direct shipments allows us to maintain lower levels of inventory in our warehouses, resulting in lower storage, handling, freight, insurance and other costs. We use various commercial truck lines for our merchandise shipments to Retail customers. COMPETITION The markets for all of our products are highly competitive. We believe the principal competitive factors affecting our business are quality, brand recognition, innovation and pricing. We believe we are well positioned to compete in markets in which we can take advantage of our strong brand names, and that our focus on innovative product design, quality, and performance distinguishes our products from the competition. Our products compete directly with those offered by a large number of companies that market consumer fitness equipment and fitness programs. As the use of Internet websites for product sales by traditional retailers has increased, our competitors have become increasingly similar across our Direct and Retail sales channels. Our principal competitors include: Fitness Quest , ICON Health & Fitness, Johnson Health Tech, Beach Body and American Telecast. We also compete with marketers of computer-based physical activity products, such as the Nintendo Wii ® and Microsoft Xbox ® Kinect ® , and weight management companies, such as Weight Watchers, each of which offers alternative solutions for a fit and healthy lifestyle. EMPLOYEES As of February 25, 2015, we had approximately 340 employees, substantially all of whom were full-time. None of our employees are subject to collective bargaining agreements. We have not experienced a material interruption of our operations due to labor disputes. INTELLECTUAL PROPERTY Trademarks, patents and other forms of intellectual property are vital to the success of our business and are an essential factor in maintaining our competitive position in the health and fitness industry. Trademarks We own many trademarks including Nautilus ® , Bowflex ® , PowerRod ® , Bowflex Revolution ® , TreadClimber ® , Bowflex Max Trainer ® , SelectTech ® , Trimline ® , Airdyne ® , Bowflex Boost ® , Bowflex Body TM and Universal ® . Nautilus is the exclusive licensee under the Schwinn ® mark for indoor fitness products. We believe that having distinctive trademarks that are readily identifiable by consumers is an important factor in creating a market for our products, maintaining a strong company identity and developing brand loyalty among our customers. In addition, we have granted licenses to certain third-parties to use the Nautilus, Schwinn and TreadClimber trademarks on commercial fitness products, for which we receive royalty income and expanded consumer awareness of our brands. Each federally registered trademark is renewable indefinitely if the trademark is still in use at the time of renewal. 4  Patents and Designs Building our intellectual property portfolio is an important factor in maintaining our competitive position in the health and fitness equipment industry. We have followed a policy of filing applications for U.S. and non-U.S. patents on utility and design inventions that we deem valuable to our business. We own or license patents and design registrations covering a variety of technologies, some of which are utilized in our selectorized dumbbells, treadmills, and exercise bikes. Nautilus is also the licensee of patents that cover the Bowflex Revolution ® home gyms. Patent and design protection for these technologies, which are utilized in products sold in both the Direct and Retail segments, extends as far as 2028. Additionally, we maintain a portfolio of patents related to our TreadClimber ® specialized cardio machines, which are sold primarily in our Direct segment. The portfolio includes approximately 24 issued U.S. patents covering various product features and other technologies associated with our TreadClimber ® products. A patent covering certain aspects of our TreadClimber ® products expired in 2013. Additional individual patents covering elements of our TreadClimber ® products have expiration dates ranging from 2021 to 2031. Expiration or invalidity of patents within our TreadClimber ® portfolio could trigger the introduction of similar products by our competitors. Although we view each of the patents within our portfolio as very valuable, we do not view any single patent as critical to our success or ability to differentiate our TreadClimber ® products from similar products that may be introduced by competitors in the future. We regularly monitor commercial activity in our industry to guard against potential infringement. We protect our proprietary rights vigorously and take prompt, reasonable actions to prevent counterfeit or products and other infringement on our intellectual property. BACKLOG We define our customer order backlog to include firm orders for future shipment to our Retail customers, whether or not subject to cancellation, as well as unfulfilled consumer orders within the Direct segment. In our past reports we calculated our customer order backlog to include only sales of backordered products that were not expected to be available for shipment within typical delivery timeframes. Backlog as of a given date fluctuates based on specific timing of product shipment within the typical shipment timeframes for each of our segments. Retail orders comprise the larger portion of our order backlog, while Direct orders comprise a smaller portion of our backlog due to shorter fulfillment timeframes. Our customer order backlog as of December 31, 2014 and 2013 was approximately $21.1 million and $11.1 million , respectively. The increase in the overall backlog as of December 31, 2014 resulted from delays in receipt of merchandise due to the west coast port slow down. SIGNIFICANT CUSTOMERS In 2014 , 2013 and 2012 , Amazon.com accounted for 11.3% , 11.2% and 11.7% , respectively, of our Net Sales. ENVIRONMENTAL AND OTHER REGULATORY MATTERS Our operations are subject to various laws and regulations both domestically and abroad. In the United States, federal, state and local regulations impose standards on our workplace and our relationship with the environment. For example, the U.S. Environmental Protection Agency, Occupational Safety and Health Administration and other federal agencies have the authority to promulgate regulations that may impact our operations. In particular, we are subject to legislation placing restrictions on our generation, emission, treatment, storage and disposal of materials, substances and wastes. Such legislation includes: the Toxic Substances Control Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Safe Drinking Water Act; and the Comprehensive Environmental Response and the Compensation and Liability Act (also known as Superfund). We are also subject to the requirements of the Consumer Product Safety Commission and the Federal Trade Commission, in addition to regulations concerning employee health and safety matters. Our operations and certain disposed components of our former Commercial business expose us to claims related to environmental matters. Although compliance with federal, state, local and international environmental legislation has not had a material adverse effect on our financial condition or results of operations in the past, there can be no assurance that material costs or liabilities will not be incurred in connection with such environmental matters in the future. 5  AVAILABLE INFORMATION Our common stock is listed on the New York Stock Exchange and trades under the symbol “NLS.” Our principal executive offices are located at 17750 SE 6th Way, Vancouver, Washington 98683, and our telephone number is (360) 859-2900. The Internet address of our corporate website is http://www.nautilusinc.com. We file annual reports, quarterly reports, current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended. You can inspect and obtain a copy of our reports, proxy statements and other information filed with the SEC at the offices of the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549, on official business days during the hours of 10 a.m. to 3 p.m. EST. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet website at http://www.sec.gov where you can access copies of most of our SEC filings. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, and other information as filed with the SEC, available free of charge on our corporate website. In addition, our Code of Business Conduct and Ethics, corporate governance policies, and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on our corporate website. The information presented on our corporate website is not part of this report. Item 1A. Risk Factors Nautilus operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in this Annual Report on Form 10-K are not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. If any of the risks described in this Annual Report on Form 10-K actually occur, our business, operating results and financial position could be adversely affected. Our revenues and profitability can fluctuate from period to period and are often difficult to predict due to factors beyond our control. Our results of operations in any particular period may not be indicative of results to be expected in future periods, and have historically been, and are expected to continue to be, subject to periodic fluctuations arising from a number of factors, including: These trends and factors could adversely affect our business, operating results, financial position and cash flows in any particular period. Intense competition or loss of one or more of our large Retail customers could negatively impact our sales and operating results. Our products are sold in highly competitive markets with limited barriers to entry. As a result, introduction by competitors of lower-priced or more innovative products could result in a significant decline in our revenues and have a material adverse effect on our operating results, financial position and cash flows. 6 • Introduction and market acceptance of new products and sales trends affecting specific existing products; • Variations in product selling prices and costs and the mix of products sold; • Size and timing of Retail customer orders, which, in turn, often depend upon the success of our customers' businesses or specific products; • Changes in the market conditions for consumer fitness equipment; • Changes in macroeconomic factors; • Availability of consumer credit; • Timing and availability of products coming from our offshore contract manufacturing suppliers; • Seasonality of markets, which vary from quarter-to-quarter and are influenced by outside factors such as overall consumer confidence and the availability and cost of television advertising time; • Effectiveness of our media and advertising programs; • Customer consolidation in our Retail segment, or the bankruptcy of any of our larger Retail customers; • Restructuring charges; • Goodwill and other intangible asset impairment charges; and • Legal and contract settlement charges.  Additionally, we derive a significant portion of our revenue from a small number of Retail customers. A loss of business from one or more of these large customers, if not replaced with new business, could negatively affect our operating results and cash flow. A decline in sales of TreadClimber ® and/or Max Trainer ® products without a corresponding increase in sales of other products would negatively affect our future revenues and operating results. Sales of cardio products, especially Bowflex TreadClimber ® and Bowflex Max Trainer ® products, represent a substantial portion of our Direct segment revenues. Introduction by competitors of comparable products at lower price-points, a maturing product lifecycle or other factors could result in a decline in our revenues derived from these products. A significant decline in our sales of these products would have a material adverse effect on our operating results, financial position and cash flows. Portions of our operating expenses and costs of goods sold are relatively fixed, and we may have limited ability to reduce expenses sufficiently in response to any revenue shortfalls. Many of our operating expenses are relatively fixed. We may not be able to adjust our operating expenses or other costs sufficiently to adequately respond to any revenue shortfalls. If we are unable to reduce operating expenses or other costs quickly in response to any declines in revenue, it would negatively impact our operating results, financial condition and cash flows. If we are unable to anticipate consumer preferences or to effectively develop, market and sell future products, our future revenues and operating results could be adversely affected. Our future success depends on our ability to effectively develop, market and sell new products that respond to new and evolving consumer preferences. Accordingly, our revenues and operating results may be adversely affected if we are unable to develop or acquire rights to new products that satisfy consumer preferences. In addition, any new products that we market may not generate sufficient revenues to recoup their acquisition, development, production, marketing, selling and other costs. Decline in consumer spending likely would negatively affect our product revenues and earnings. Success of each of our products depends substantially on the amount of discretionary funds available to our customers. Global credit and financial markets have experienced extreme disruptions in the recent past, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that similar disruptions will not occur in the future. Deterioration in general economic conditions may depress consumer spending, especially spending for discretionary consumer products such as ours. Poor economic conditions could in turn lead to substantial decreases in our net sales or have a material adverse effect on our operating results, financial position and cash flows. Our business is affected by seasonality which results in fluctuations in our operating results. We experience fluctuations in aggregate sales volume during the year. Sales are typically strongest in the first and fourth quarters, followed by the third quarter, and are generally weakest in the second quarter. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of fitness equipment. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. Government regulatory actions could disrupt our marketing efforts and product sales. Various international and U.S. federal, state and local governmental authorities, including the Federal Trade Commission, the Consumer Product Safety Commission, the Securities and Exchange Commission and the Consumer Financial Protection Bureau, regulate our product and marketing efforts. Our sales and profitability could be significantly harmed if any of these authorities commence a regulatory enforcement action that interrupts our marketing efforts, results in a product recall or negative publicity, or requires changes in product design. 7  Substantially higher advertising rates or a significant decline in availability of media time may hinder our ability to effectively market our products and may reduce profitability. We depend on television advertising to market certain products sold directly to consumers. Consequently, a marked increase in the price we must pay for our preferred media time and/or a reduction in its availability may adversely impact our financial performance. We may be unable to adapt to significant changes in media consumption habits, which could diminish the effectiveness or efficiency of our advertising. New television technologies and services, such as video-on-demand, digital video recorders and Internet streaming services are changing traditional patterns of television viewing. Additionally, consumer attention is increasingly fragmented across a variety of games, apps, the Internet and other digital media. If we are unable to successfully adapt our media strategies to new television viewing and media consumption habits, the effectiveness and efficiency of our media placements could be adversely affected, and our operating results may be harmed. Our revenues could decline due to changes in credit markets and decisions made by credit providers. Historically, a significant portion of our Direct sales have been financed for our customers under various programs offered by third-party consumer credit financing sources. Reductions in consumer lending and the availability of consumer credit could limit the number of customers with the financial means to purchase our products. Higher interest rates could increase monthly payments for consumer products financed through one of our financing partners or through other sources of consumer financing. In the past, we have partnered with financial service companies to assist our customers in obtaining financing to purchase our products. Our present agreements with our third party consumer credit financing providers enable certain customers to obtain financing if they qualify for the provider's private label revolving credit card. We cannot be assured that our third party financing providers will continue to provide consumers with access to credit or that credit limits under such arrangements will not be reduced. Such restrictions or reductions in the availability of consumer credit could have a material adverse impact on our results of operations, financial position and cash flows. If our contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose revenues, and our reputation and market share may be harmed. We have outsourced the production of all of our products to third-party manufacturers. We rely on our contract manufacturers to procure components and provide spare parts in support of our warranty and customer service obligations. We generally commit the manufacturing of each product to a single contract manufacturer. Our reliance on contract manufacturers exposes us to the following risks over which we may have limited control: Substantially all of our contract manufacturers are located in Asia, primarily China, and may be subject to disruption by natural disasters, as well as political, social or economic instability. The temporary or permanent loss of the services of any of our primary contract manufacturers could cause a significant disruption in our product supply chain and operations and delays in product shipments. Our third-party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of individual purchase orders. There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary, establish future arrangements with other third-party manufacturers on commercially reasonable terms. Further, while we maintain an active quality control, factory inspection and qualification program, we cannot assure that their manufacturing and quality control processes will be maintained at a level sufficient to meet our inventory needs or prevent the inadvertent sale of substandard products. While we believe that products manufactured by our current third-party manufacturers 8 • Unexpected increases in manufacturing and repair costs; • Interruptions in shipments if our contract manufacturer is unable to complete production; • Inability to completely control the quality of finished products; • Inability to completely control delivery schedules; • Changes in our contract manufacturer's business models or operations; • Potential increases in our negotiated product costs as a result of fluctuations in currency exchange rates; • Impact of the global market and economic conditions on the financial stability of our contract manufacturers and their ability to operate without requesting earlier payment terms or letters of credit; • Potential lack of adequate capacity to manufacture all or a part of the products we require; and • Potential unauthorized reproduction or counterfeiting of our products.  could generally be procured from alternative sources, temporary or permanent loss of services from a significant manufacturer could cause disruption in our supply chain and operations. Our inventory purchases are subject to long lead times, which could negatively impact our sales, cash flows and liquidity. All of our products are produced by third-party manufacturers, substantially all of which are located in Asia, primarily China. Lead times for inventory purchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of which transit time represents three-to-four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts of future demand for our products. Due to the length of our lead times, our sales and cash flows may be negatively impacted if we do not have sufficient inventory on hand to meet customer demand for such items. In addition, our liquidity and cash flows may be negatively affected, and inventory obsolescence may increase, if the quantity of products we order exceeds customer demand for such items. A delay in getting non-U.S.-sourced products through port operations and customs in a timely manner could result in reduced sales, canceled sales orders and unanticipated inventory accumulation. Most of our imported products are subject to duties or tariffs that affect the cost and quantity of various types of goods imported into the U.S. or our other markets. The countries in which our products are produced or sold may adjust or impose new quotas, duties, tariffs or other restrictions. Further, our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the free flow of goods through open and operational ports worldwide. Labor disputes at various ports create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions during our peak importing seasons. Any of these factors could result in reduced sales, canceled sales orders and unanticipated inventory accumulation and have a material adverse effect on our operating results, financial position and cash flows. Unpredictable events and circumstances relating to our international operations, including our use of non-U.S. manufacturers, could have a material adverse effect on our business. Substantially all of our products are manufactured outside of the U.S. and a portion of our revenue is derived from sales outside the U.S., primarily in Canada, but also in markets outside North America. Accordingly, our future results could be materially adversely affected by a variety of factors pertaining to international trade, including: changes in a specific country's or region's political or economic conditions; trade restrictions; import and export licensing requirements; changes in regulatory requirements; additional efforts to comply with a variety of foreign laws and regulations; and longer payment cycles in certain countries, thus requiring us to finance customer purchases over a longer period than those made in the U.S. In addition, we rely on the performance of our employees located in foreign countries. Our ability to control the actions of these employees may be limited by the laws and regulations in effect in each country. Changes in any of the above factors could have a material adverse effect on our operating results, financial position and cash flows. Currency exchange rate fluctuations could result in higher costs, reduced margins or decreased international sales. Substantially all of our products are manufactured outside of the U.S. and, therefore, currency exchange rate fluctuations could result in higher costs for our products, or could disrupt the business of independent manufacturers that produce our products, by making their purchases of raw materials more expensive and more difficult to finance. Our future financial results could be significantly affected by the value of the U.S. dollar in relation to the foreign currencies in which we, our customers or our suppliers conduct business. Past fluctuations in the Chinese Renminbi exchange rate have caused our costs for certain products to increase, reducing our margins and cash flows. Similar fluctuations and cost increases may occur in the future. If we are unable to increase our selling prices to offset such cost increases, or if such increases have a negative impact on sales of our products, our revenues and margins would be reduced and our operating results and cash flows would be negatively impacted. In addition, a portion of our revenue is derived from sales outside the U.S., primarily in Canada. Currency rate fluctuations could make our products more expensive for foreign consumers and reduce our sales, which would negatively affect our operating results and cash flows. We may face competition from providers of comparable products in categories where our patent protection is limited or reduced due to patent expiration. Increased competition in those product categories could negatively affect our future revenues and operating results. A patent covering aspects of our TreadClimber ® products expired during 2013. Although we own a number of other patents covering aspects of our TreadClimber ® products, the introduction of comparable products designed to compete with our TreadClimber ® line of specialized cardio machines may increase in the future as a result of these patent expirations. Sales of cardio products, including Bowflex TreadClimber ® products, represent a substantial portion of our Direct segment revenues. Introduction by competitors of comparable products, a maturing product lifecycle or other factors could result in a decline in our revenues derived 9  from these products. A significant decline in our sales of these products, without offsetting sales gains, would have a material adverse effect on our operating results, financial position and cash flows. Failure or inability to protect our intellectual property could significantly harm our competitive position. Protecting our intellectual property is an essential factor in maintaining our competitive position in the health and fitness industry. Failure to maximize or to successfully assert our intellectual property rights could impact our competitiveness. We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. Many factors bear upon the exclusive ownership and right to exploit intellectual properties, including, without limitation, prior rights of third parties and nonuse and/or nonenforcement by us and/or related entities. While we make efforts to develop and protect our intellectual property, the validity, enforceability and commercial value of our intellectual property rights may be reduced or eliminated. We cannot be sure that our intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own or, where appropriate, license intellectual property rights necessary to compete successfully within the marketplace for our products. We cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future. If we do not, or are unable to, adequately protect our intellectual property, then we may face difficulty in differentiating our products from those of our competitors and our business, operating results and financial condition may be adversely affected. Trademark infringement or other intellectual property claims relating to our products could increase our costs. Our industry is susceptible to litigation regarding trademark and patent infringement and other intellectual property rights. We could become a plaintiff or defendant in litigation involving trademark or patent infringement claims or claims of breach of license. The prosecution or defense of intellectual property litigation is both costly and disruptive of the time and resources of our management, regardless of the claim's merit. We could also be required to pay substantial damages or settlement costs to resolve intellectual property litigation or related matters. We also may not be able to successfully acquire intellectual property rights, protect existing rights, or potentially prevent others from claiming that we have violated their proprietary rights. We could incur substantial costs in defending against such claims even if they are without basis, and we could become subject to judgments or settlements requiring us to pay substantial damages, royalties or other charges. Future impairments of intangible assets could negatively impact our operating results. We had goodwill of $2.5 million and other intangible assets of $10.6 million as of December 31, 2014 . Any future impairment charges, if significant, could materially and adversely affect our operating results. An unexpected decline in revenue, changes in market conditions, changes in competitive products or technologies or a change in management's intentions regarding utilization of intangible assets could lead to future impairment charges. We are subject to periodic litigation, product liability risk and other regulatory proceedings which could result in unexpected expense of time and resources. From time to time, we may be a defendant in lawsuits and regulatory actions relating to our business or the former operations of our discontinued Commercial business segment. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management's attention from our operations and may result in substantial legal costs. We are subject to warranty claims for our products which could result in unexpected expense. Many of our products carry limited warranties for defects in quality and workmanship. We may experience significant expense as the result of product quality issues, product recalls or product liability claims which may have a material adverse effect on our business. We maintain a warranty reserve for estimated future warranty claims. However, the actual costs of servicing future warranty claims may exceed the reserve and have a material adverse effect on our results of operations, financial condition and cash flows. Disruption to our information and communication systems could result in interruptions to our business and potential implementation of new systems for critical business functions may heighten the risk of disruption. Our business is reliant on information and communication technology, and a substantial portion of our revenues are generated with the support of information and communication systems. The success of our Direct business is heavily dependent on our ability 10  to respond to customer sales inquiries and process sales transactions using our call center communication systems, Internet websites and similar data monitoring and communication systems provided and supported by third-parties. If such systems were to fail, or experience significant or lengthy interruptions in availability or service, our revenues could be materially affected. We also rely on information systems in all stages of our product cycle, from design to distribution, and we use such systems as a method of communication between employees, suppliers and customers. In addition, we use information systems to maintain our accounting records, assist in trade receivables collection and customer service efforts, and forecast operating results and cash flows. System failures or service interruptions may occur as the result of a number of factors, including: computer viruses; hacking or other unlawful activities by third parties; disasters; equipment, hardware or software failures; ineffective design or implementation of new systems or systems upgrades; cable outages, extended power failures, or our inability or failure to properly protect, repair or maintain our communication and information systems. To mitigate the risk of business interruption, we have in place a disaster recovery program that targets our most critical operational systems. If our disaster recovery system is ineffective, in whole or in part, or efforts conducted by us or third-parties to prevent or respond to system interruptions in a timely manner are ineffective, our ability to conduct operations would be significantly affected. If we do not consider the potential impact of critical decisions related to systems or process design and implementation, this could lead to operational challenges and increased costs. Any of the aforementioned factors could have a material adverse affect on our operating results, financial position and cash flows. System Security Risks, Data Protection Breaches and Cyber Attacks Could Disrupt Our Operations. We manage and store various proprietary information and sensitive or confidential data relating to our business, including sensitive and personally identifiable information. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack or otherwise exploit any security vulnerabilities of our systems. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions. Item 1B. Unresolved Staff Comments None. Item 2. Properties Following is a summary of each of our properties as of December 31, 2014 : Our properties are used by both our Direct and Retail segments. The properties generally are well-maintained, adequate and suitable for their intended purposes, and we believe our existing properties will meet our operational needs for the foreseeable future. If we require additional warehouse or office space in the future, we believe we will be able to obtain such space on commercially reasonable terms. 11 Location Primary Function(s) Owned or Leased Washington Corporate headquarters, customer call center and R&D facility Leased Oregon Warehouse and distribution Leased Ohio Warehouse and distribution Leased Canada Warehouse and distribution Leased China Quality assurance office Leased  Item 3. Legal Proceedings 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 United States 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 United States 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, and no decision has yet been issued. We do not believe that our use of heart rate monitors utilized or purchased from third parties, and otherwise, infringe the BioSig patents. In August 2014, we initiated an arbitration proceeding under a 1999 license agreement pursuant to which we had licensed certain rights relating to our TreadClimber ® products. We believe that our obligation to pay royalties under the license agreement ceased in the fourth quarter of 2013. The licensor disputes this and issued a notice under the contract claiming breach of the license agreement and asserting various remedies. We are seeking a declaratory ruling in the arbitration that we have performed all our obligations under the license agreement, and that there is no continuing obligation to pay royalties. The licensor has asserted various counterclaims in the arbitration, including contract and intellectual property claims, and asserted various remedies, including termination of the license agreement. The Company has replied to the counterclaim, denying the allegations and demanded remedies and asserting defenses. The arbitration is being administered by the American Arbitration Association (AAA) and is in its preliminary stages. An arbitrator has been selected, however, a stay of the arbitration proceedings has been issued. In addition to the matters described above, from time to time we are subject to litigation, claims and assessments that arise in the ordinary course of business, including disputes that may arise from intellectual property related matters. Management believes that any liability resulting from such additional matters will not have a material adverse effect on our financial position, results of operations or cash flows. Item 4. Mine Safety Disclosures Not applicable. 12  PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for our Common Stock Our common stock is listed on the New York Stock Exchange (the “NYSE”) and trades under the symbol “NLS.” As of February 25, 2015 , there were 49 holders of record of our common stock and approximately 7,000 beneficial shareholders. The following table sets forth the high and low sales prices of our common stock for each period presented: We did not pay any dividends on our common stock in 2014 or 2013 , and we currently have no plans to pay dividends on our common stock in future periods. Payment of any future dividends, in accordance with our borrowing arrangements, is at the discretion of our Board of Directors, which considers various factors such as our financial condition, operating results, current and anticipated cash needs and future expansion plans. Equity Compensation Plans See Part III, Item 12 for Equity Compensation Plan information. Issuer Purchases of Equity Securities The following table provides information about our repurchases of our equity securities during the fourth quarter ended December 31, 2014 : 13 High Low 2014: Quarter 1 $ 9.66 $ 7.71 Quarter 2 $ 11.99 $ 7.94 Quarter 3 $ 13.31 $ 9.75 Quarter 4 $ 15.48 $ 10.72 2013: Quarter 1 $ 7.66 $ 3.48 Quarter 2 $ 8.75 $ 6.34 Quarter 3 $ 9.87 $ 6.15 Quarter 4 $ 8.49 $ 6.76 Period (a) Total Number of Shares (or Units) Purchased (1) (b) Average Price Paid per Share (or Unit) (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) October 1 to October 31, 2014 2,307 $ 13.38 — $— November 1 to November 30, 2014 4,467 $ 12.83 — $15,000,000 December 1 to December 31, 2014 4,467 $ 15.18 — $15,000,000 Total 11,241 $ 13.88 — $15,000,000 (1) Consists of shares withheld from the vesting portion of a restricted stock unit award granted to Bruce M. Cazenave, our Chief Executive Officer. We will withhold from each monthly vesting portion of the award the number of shares sufficient to satisfy Mr. Cazenave's tax withholding obligation incident to such vesting, unless Mr. Cazenave should first elect to satisfy the tax obligation by cash payment to us. (2) On November 3, 2014, our Board of Directors approved a stock repurchase program that authorizes us to repurchase up to $15 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016. To date, no shares have been repurchased pursuant to the program.  Stock Performance Graph The graph below compares the cumulative total stockholder return of our common stock with the cumulative total return of the NYSE Composite Index and the S&P SmallCap 600 Growth index for the period commencing December 31, 2009 and ending on December 31, 2014. The S&P SmallCap 600 Growth was chosen because we do not believe we can reasonably identify an industry index or specific peer issuer that would offer a meaningful comparison. The S&P SmallCap 600 Growth represents a broad-based index of companies with similar market capitalization. The graph assumes $100 was invested, on December 31, 2009, in our common stock and each index presented. The comparisons in the table below are not intended to forecast or be indicative of future performance of our common stock. 14  Item 6. Selected Financial Data The following selected consolidated financial data should be read in connection with our audited consolidated financial statements and related notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K. The consolidated statements of operations data for fiscal years 2014, 2013 and 2012, and the selected consolidated balance sheets data as of December 31, 2014 and 2013 are derived from, and are qualified by reference to, the audited consolidated financial statements which are included in this Form 10-K. The consolidated statements of operations data for fiscal 2011 and 2010 and the consolidated balance sheets data as of December 31, 2012, 2011 and 2010 are derived from audited consolidated financial statements which are not included in this Form 10-K. For the Year Ended December 31, (In thousands, except per share amounts) 2014 2013 2012 2011 2010 Consolidated Statements of Operations Data Net sales $ 274,447 $ 218,803 $ 193,926 $ 180,412 $ 168,450 Cost of sales 133,872 112,326 102,889 101,953 91,704 Gross profit 140,575 106,477 91,037 78,459 76,746 Operating expenses: Selling and marketing 81,059 66,486 58,617 54,494 64,039 General and administrative 22,131 18,705 17,669 17,143 19,371 Research and development 7,231 5,562 4,163 3,223 2,905 Total operating expenses 110,421 90,753 80,449 74,860 86,315 Operating income (loss) 30,154 15,724 10,588 3,599 (9,569 ) Other income (expense): Interest income 63 14 18 65 15 Interest expense (25 ) (36 ) 56 (466 ) (140 ) Other 32 337 (246 ) (11 ) 464 Total other income (expense) 70 315 (172 ) (412 ) 339 Income (loss) from continuing operations before income taxes 30,224 16,039 10,416 3,187 (9,230 ) Income tax provision (benefit) (1) 9,841 (32,085 ) (226 ) 686 588 Income (loss) from continuing operations 20,383 48,124 10,642 2,501 (9,818 ) Income (loss) from discontinued operations (1,588 ) (170 ) 6,241 (1,081 ) (13,023 ) Net income (loss) $ 18,795 $ 47,954 $ 16,883 $ 1,420 $ (22,841 ) Basic income (loss) per share from continuing operations $ 0.65 $ 1.55 $ 0.34 $ 0.08 $ (0.32 ) Basic income (loss) per share from discontinued operations (0.05 ) (0.01 ) 0.21 (0.03 ) (0.42 ) Basic net income (loss) per share $ 0.60 $ 1.54 $ 0.55 $ 0.05 $ (0.74 ) Diluted income (loss) per share from continuing operations $ 0.64 $ 1.53 $ 0.34 $ 0.08 $ (0.32 ) Diluted income (loss) per share from discontinued operations (0.05 ) (0.01 ) 0.21 (0.03 ) (0.42 ) Diluted net income (loss) per share $ 0.59 $ 1.52 $ 0.55 $ 0.05 $ (0.74 ) Shares used in per share calculations: Basic 31,253 31,072 30,851 30,746 30,744 Diluted 31,688 31,457 30,974 30,776 30,744 As of December 31, Consolidated Balance Sheets Data 2014 2013 2012 2011 2010 Cash and investments $ 72,190 $ 40,979 $ 23,207 $ 17,427 $ 14,296 Working capital 83,080 45,662 25,410 19,439 15,316 Total assets 175,654 143,567 94,311 82,813 78,367 Long-term notes payable — — — 5,598 5,141  (1) Income tax benefit in 2013 includes a $38.9 million credit related to the reversal of our deferred tax asset valuation allowance. 15 Other long-term liabilities 4,911 4,077 6,508 6,614 6,148 Total shareholders' equity 111,072 91,565 43,326 31,953 30,799  Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the United States and Canada. Our profit margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, product warranty costs, the cost of fuel, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, the Internet and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses. As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you any future growth or profitability. For more information, see our discussion of Risk Factors located at Part I, Item 1A of this Form 10-K. OVERVIEW We are committed to providing innovative, quality solutions to help people achieve 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 United States and Canada. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus ® , Bowflex ® , 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 United States and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property. Our Net Sales in 2014 were $274.4 million , an increase of $55.6 million , or 25.4% , compared to Net Sales of $218.8 million in 2013 . Net Sales of our Direct segment increased $38.9 million , or 28.5% , compared to 2013 , primarily due to increased consumer demand for our cardio products, especially the Bowflex Max Trainer ® . Net Sales of our Retail segment increased by $16.4 million , or 21.4% in 2014 , compared to 2013 , primarily due to growth in recently launched cardio products. Income from Continuing Operations was $20.4 million , or $0.64 per diluted share, in 2014 , compared to $48.1 million , or $1.53 per diluted share, in 2013 . Income from Continuing Operations in 2014 and 2013 included a $1.2 million and a $38.9 million credit related to the reversal of our deferred tax asset valuation allowance, respectively. Without consideration of the reversal of our deferred tax asset valuation allowance, the improvement in our results from continuing operations in 2014, compared to 2013, was driven primarily by higher sales and increased operating income in both our Direct and Retail segments. Net Income was $18.8 million , or $0.59 per diluted share, in 2014 , compared to $48.0 million , or $1.52 per diluted share, in 2013 . Net Income in 2014 and 2013 included a $1.2 million and a $38.9 million credit related to the reversal of our deferred tax asset valuation allowance, respectively. 16  DISCONTINUED OPERATIONS Results from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation at December 31, 2012. Income from Discontinued Operations of $6.2 million in 2012 primarily represents a currency translation adjustment gain related to the liquidation of European subsidiaries. Although there was no revenue related to the Commercial business in 2014, 2013 or 2012, 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our critical accounting policies and estimates are discussed below. We have not made any material changes in the methodologies we use in our critical accounting estimates during the past three fiscal years. If our assumptions or estimates change in future periods, the impact on our financial position and operating results could be material. 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 product is 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. Sales Discounts and Allowances 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. Our calculations of amounts owed for sales discounts and allowances contain uncertainties because they require management to make assumptions in interim periods and to apply judgment regarding a number of factors, including estimated future customer inventory purchases and returns. Goodwill and Other Long-Term Assets Valuation We evaluate our indefinite-lived intangible assets and goodwill for potential impairment annually or when events or circumstances indicate their carrying value may be impaired. Finite-lived intangible assets, including patents and patent rights, and property, plant and equipment are evaluated for impairment when events or circumstances indicate the carrying value may be impaired. No goodwill or other long-term asset impairment charges were recognized in 2014 , 2013 or 2012 . Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate future cash flows and asset fair values. Our judgments regarding potential impairment are based on a number of factors including: the timing and amount of anticipated cash flows; market conditions; relative levels of risk; the cost of capital; terminal values; royalty rates; and the allocation of revenues, expenses and assets and liabilities to business segments. Each of these factors can significantly affect the value of our Goodwill or other long-term assets and, thereby, could have a material adverse effect on our financial position and results of operations. Product Warranty Obligations Our products carry limited defined warranties for defects in materials or workmanship. Our product warranties generally obligate us to pay for the cost of replacement parts, cost of shipping the parts to our customers and, in certain instances, service labor costs. At the time of sale, we record a liability for the estimated costs of fulfilling future warranty claims. The estimated warranty 17  costs are recorded as a component of cost of sales, based on historical warranty claim experience and available product quality data. If necessary, we adjust our liability for specific warranty matters when they become known and are reasonably estimable. Our estimates of warranty expenses are based on significant judgment, and the frequency and cost of warranty claims are subject to variation. Warranty expenses are 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 variances in expected repair costs. Litigation and Loss Contingencies From time to time, we may be involved in claims, lawsuits and other proceedings. Such matters involve uncertainty as to the eventual outcomes and any losses or gains we may ultimately realize when one or more future events occur or fail to occur. We record expenses for litigation and loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We estimate the probability of such losses based on the advice of internal and external counsel, outcomes from similar litigation, 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. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, we may change our estimates accordingly. Deferred Tax Assets - Valuation Allowance 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. Deferred tax assets and liabilities are measured using the enacted tax rates that are 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 our deferred tax assets and liabilities is recognized in the period of the enactment. 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. Each quarter, we assess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxable income and re-evaluate whether any adjustments or release of all or any portion of valuation allowance is appropriate. As a result of this evaluation, for example, in the second quarter of 2013, we concluded that a majority of the existing valuation allowance on our domestic deferred income tax assets was no longer required. Further, in the fourth quarter of 2014, after re-evaluating the potential realization of the remainder of our deferred income tax assets, we concluded that, as of December 31, 2014, a portion of the existing valuation allowance against state net operating loss deferred tax assets was no longer necessary. Accordingly, an income tax benefit of $1.2 million was recorded in the fourth quarter of 2014 related to the reduction of our existing valuation allowance. As of December 31, 2014, we have a valuation allowance against net deferred income tax assets of $6.2 million . If our assumptions change and we determine we will be able to realize these deferred income tax assets, the tax benefits related to any reversal of the valuation allowance will be accounted for in the period in which we make such determination. Likewise, should we determine that we would not be able to realize our deferred income tax assets in the future, an adjustment to the valuation allowance to reserve for the deferred income tax assets would increase expense in the period such determination was made. Unrecognized Tax Benefits Significant judgments are required in determining tax provisions and evaluating tax positions. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. If our financial results or other relevant facts change, thereby impacting the likelihood of realizing the tax benefit of an uncertain tax position, significant judgment would be applied in determining the effect of the change. A tax benefit from an uncertain tax position may be recognized 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. 18  RESULTS OF OPERATIONS The discussion that follows should be read in conjunction with our consolidated financial statements and the related notes in this report. All comparisons to prior year results are in reference to continuing operations only in each period, unless otherwise indicated. Results of operations information was as follows (in thousands): Year Ended December 31, 2014 2013 Change % Change Net sales $ 274,447 $ 218,803 $ 55,644 25.4 % Cost of sales 133,872 112,326 21,546 19.2 % Gross profit 140,575 106,477 34,098 32.0 % Operating expenses: Selling and marketing 81,059 66,486 14,573 21.9 % General and administrative 22,131 18,705 3,426 18.3 % Research and development 7,231 5,562 1,669 30.0 % Total operating expenses 110,421 90,753 19,668 21.7 % Operating income 30,154 15,724 14,430 91.8 % Other income (expense): Interest income 63 14 49 Interest expense (25 ) (36 ) 11 Other 32 337 (305 ) Total other income (expense), net 70 315 (245 ) Income before income taxes 30,224 16,039 14,185 Income tax provision (benefit) 9,841 (32,085 ) 41,926 Income from continuing operations 20,383 48,124 (27,741 ) Loss from discontinued operations, net of income taxes (1,588 ) (170 ) (1,418 ) Net income $ 18,795 $ 47,954 $ (29,159 ) Year Ended December 31, 2013 2012 Change % Change Net sales $ 218,803 $ 193,926 $ 24,877 12.8 % Cost of sales 112,326 102,889 9,437 9.2 % Gross profit 106,477 91,037 15,440 17.0 % Operating expenses: Selling and marketing 66,486 58,617 7,869 13.4 % General and administrative 18,705 17,669 1,036 5.9 % Research and development 5,562 4,163 1,399 33.6 % Total operating expenses 90,753 80,449 10,304 12.8 % Operating income 15,724 10,588 5,136 48.5 % Other income (expense): Interest income 14 18 (4 ) Interest expense (36 ) 56 (92 ) Other 337 (246 ) 583 Total other income (expense), net 315 (172 ) 487 Income before income taxes 16,039 10,416 5,623 Income tax benefit (32,085 ) (226 ) (31,859 ) Income from continuing operations 48,124 10,642 37,482 Income (loss) from discontinued operations, net of income taxes (170 ) 6,241 (6,411 ) Net income $ 47,954 $ 16,883 $ 31,071 19  Results of operations information by segment was as follows (in thousands): 20 Year Ended December 31, 2014 2013 Change % Change Net sales: Direct $ 175,593 $ 136,663 $ 38,930 28.5 % Retail 93,223 76,775 16,448 21.4 % Royalty income 5,631 5,365 266 5.0 % $ 274,447 $ 218,803 $ 55,644 25.4 % Cost of sales: Direct $ 64,362 $ 55,008 $ 9,354 17.0 % Retail 69,510 57,318 12,192 21.3 % Royalty income — — — $ 133,872 $ 112,326 $ 21,546 19.2 % Gross profit: Direct $ 111,231 $ 81,655 $ 29,576 36.2 % Retail 23,713 19,457 4,256 21.9 % Royalty income 5,631 5,365 266 5.0 % $ 140,575 $ 106,477 $ 34,098 32.0 % Gross margin: Direct 63.3 % 59.7 % 360 basis points Retail 25.4 % 25.3 % 10 basis points Year Ended December 31, 2013 2012 Change % Change Net sales: Direct $ 136,663 $ 124,978 $ 11,685 9.3 % Retail 76,775 63,891 12,884 20.2 % Royalty income 5,365 5,057 308 6.1 % $ 218,803 $ 193,926 $ 24,877 12.8 % Cost of sales: Direct $ 55,008 $ 53,349 $ 1,659 3.1 % Retail 57,318 49,540 7,778 15.7 % Royalty income — — — $ 112,326 $ 102,889 $ 9,437 9.2 % Gross profit: Direct $ 81,655 $ 71,629 $ 10,026 14.0 % Retail 19,457 14,351 5,106 35.6 % Royalty income 5,365 5,057 308 6.1 % $ 106,477 $ 91,037 $ 15,440 17.0 % Gross margin: Direct 59.7 % 57.3 % 240 basis points Retail 25.3 % 22.5 % 280 basis points  The following tables compare the Net Sales of our major product lines within each business segment (in thousands): Net Sales and Cost of Sales Direct The 28.5% increase in Direct Net Sales in 2014 compared to 2013 was primarily related to a 39.5% increase in Direct sales of our cardio products that was due primarily to growth of the Bowflex Max Trainer ® , which started shipping in January 2014, partially offset by a decline in the Bowflex TreadClimber ® . The business also benefited from higher U.S. consumer credit approval rates. The 9.3% increase in Direct Net Sales in 2013 compared to 2012 was primarily related to a 14.1% increase in sales of our cardio products, reflecting strong consumer demand, especially for our Bowflex TreadClimber ® , which we believe was driven by increased advertising effectiveness, improved call center effectiveness and higher U.S. consumer credit approval rates. The increases in Direct Net Sales of cardio products in 2014 compared to 2013 , and in 2013 compared to 2012 , were partially offset by a 29.7% and a 10.2% decline, respectively, in Direct Net Sales of strength products, primarily rod-based home gyms. The declines in sales of rod-based home gyms were attributable, in part, to the reduction of advertising for these products over 21 Year Ended December 31, 2014 2013 Change % Change Direct net sales: Cardio products (1) $ 160,249 $ 114,846 $ 45,403 39.5 % Strength products (2) 15,344 21,817 (6,473 ) (29.7 )% 175,593 136,663 38,930 28.5 % Retail net sales: Cardio products (1) 56,262 36,692 19,570 53.3 % Strength products (2) 36,961 40,083 (3,122 ) (7.8 )% 93,223 76,775 16,448 21.4 % Royalty income 5,631 5,365 266 5.0 % $ 274,447 $ 218,803 $ 55,644 25.4 % (1) Cardio products include: TreadClimber ® , Max Trainer ® , treadmills, exercise bikes, ellipticals, Bowflex Boost ® , Bowflex Body TM and DVDs. (2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights, UpperCut™ and accessories. Year Ended December 31, 2013 2012 Change % Change Direct net sales: Cardio products (1) $ 114,846 $ 100,677 $ 14,169 14.1 % Strength products (2) 21,817 24,301 (2,484 ) (10.2 )% 136,663 124,978 11,685 9.3 % Retail net sales: Cardio products (1) 36,692 36,209 483 1.3 % Strength products (2) 40,083 27,682 12,401 44.8 % 76,775 63,891 12,884 20.2 % Royalty income 5,365 5,057 308 6.1 % $ 218,803 $ 193,926 $ 24,877 12.8 % (1) Cardio products include: TreadClimber ® , Max Trainer ® , treadmills, exercise bikes, ellipticals, Bowflex Boost ® , Bowflex Body TM and DVDs. (2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights, UpperCut™ and accessories.  time, as management determined that television advertising spending on this mature product category was generating suboptimal returns. We continue to market and sell rod-based home gyms through more cost efficient online media and through the Retail channel. Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers were 41.4% in 2014 compared to 36.1% in 2013 and 31.6% in 2012 . The increase in Cost of Sales in our Direct business in 2014 compared to 2013 , and in 2013 compared to 2012 , was almost entirely related to the growth in Direct Net Sales. The 360 basis point increase in the gross margin of our Direct business for 2014 compared to 2013 was primarily driven by improvements in product mix coupled with lower product costs related to expired royalty expenses. The 240 basis point increase in the gross margin of our Direct business for 2013 compared to 2012 was primarily due to greater absorption of fixed supply chain costs resulting from the higher sales volume. Retail The 21.4% increase in Retail Net Sales in 2014 compared to 2013 was driven primarily by increased sales of our cardio products. Net Sales of strength products in the Retail business decreased 7.8% in 2014 compared to 2013 , primarily driven by lower sales of home gyms. The 53.3% increase in Retail cardio sales for 2014 compared to 2013 was primarily due to the strong acceptance of our new line of cardio products introduced in the third quarter of 2013, along with additional cardio products launched in the third quarter of 2014. The 20.2% increase in Retail Net Sales in 2013 compared to 2012 was primarily driven by increased sales of our strength products, which increased 44.8% , primarily due to higher sales of selectorized dumbbells and home gyms. The 1.3% increase in sales of Retail cardio products, including indoor bikes and ellipticals, was primarily due to the introduction of our new line of cardio products in the third quarter of 2013. The increase in Retail Cost of Sales for both 2014 compared to 2013 , and 2013 compared to 2012 , was due to the increase in Retail Net Sales. The 10 basis point improvement in Retail gross margin in 2014 compared to 2013 was primarily due to greater absorption of fixed supply chain costs due to higher sales volume, partially offset by higher allowances related to discontinued inventory and a less favorable product mix. Gross margins in our Retail business increased by 280 basis points in 2013 compared to 2012 , as a result of the Retail price increase we implemented in the third quarter of 2012 and greater absorption of fixed supply chain costs due to higher sales volume. Selling and Marketing The increases in Selling and Marketing in 2014 compared to 2013 , and in 2013 compared to 2012 , were primarily due to increases in media advertising of $6.8 million and $4.9 million , respectively, as well as increased incremental variable sales expenses and program costs of $4.8 million and $2.6 million , respectively. In addition, production costs for creative media increased $1.6 million in 2014 compared to 2013 . Selling and Marketing as a percentage of Net Sales is affected by the mix of Direct sales compared to Retail sales. Selling and Marketing expenses are generally higher as a percentage of Net Sales in the Direct segment and lower as a percentage of Net Sales 22 Dollars in thousands Year Ended December 31, Change 2014 2013 $ % Selling and Marketing $81,059 $66,486 $14,573 21.9% As % of Net Sales 29.5% 30.4% Dollars in thousands Year Ended December 31, Change 2013 2012 $ % Selling and Marketing $66,486 $58,617 $7,869 13.4% As % of Net Sales 30.4% 30.2%  in the Retail segment. These costs as a percentage of Net Sales declined in 2014 compared to 2013 as a result of the year-over-year revenue growth in both segments. Media advertising expense of our Direct business is the largest component of Selling and Marketing and was as follows: We made strategic increased investments in media and creative advertising in 2014 to further support Bowflex TreadClimber ® and the launch of Bowflex Max Trainer ® . General and Administrative The increase in General and Administrative in 2014 compared to 2013 was due to increased employee-related costs of $0.9 million , higher spending on intellectual property registration and legal fees for patent enforcement of $0.8 million , product liability and other legal costs of $0.8 million , increased technology and facilities infrastructure costs of $0.6 million , and higher general insurance and business taxes expenses of $0.3 million . The increase in General and Administrative in 2013 compared to 2012 was primarily due to a $0.4 million increase in infrastructure costs and a $0.8 million increase in employee-related costs, partially offset by a $0.3 million one-time charge in 2012 for lease write-off costs. The decreases in General and Administrative as a percentage of Net Sales in 2014 compared to 2013 and in 2013 compared to 2012 were primarily due to higher Net Sales. Research and Development The increases in Research and Development in 2014 compared to 2013 and in 2013 compared to 2012 were primarily due to our continued investment in additional engineering and product development headcount. We expect Research and Development expense to increase in 2015 compared to 2014 , as we continue to invest in new product development resources. 23 Dollars in thousands Year Ended December 31, Change 2014 2013 $ % Media advertising $42,643 $35,819 $6,824 19.1% Dollars in thousands Year Ended December 31, Change 2013 2012 $ % Media advertising $35,819 $30,903 $4,916 15.9% Dollars in thousands Year Ended December 31, Change 2014 2013 $ % General and Administrative $22,131 $18,705 $3,426 18.3% As % of Net Sales 8.1% 8.5% Dollars in thousands Year Ended December 31, Change 2013 2012 $ % General and Administrative $18,705 $17,669 $1,036 5.9% As % of Net Sales 8.5% 9.1% Dollars in thousands Year Ended December 31, Change 2014 2013 $ % Research and Development $7,231 $5,562 $1,669 30.0% As % of Net Sales 2.6% 2.5% Dollars in thousands Year Ended December 31, Change 2013 2012 $ % Research and Development $5,562 $4,163 $1,399 33.6% As % of Net Sales 2.5% 2.1%  Interest Expense Interest expense in both 2014 and 2013 was less than $0.1 million each year, and was for financing costs associated with capital equipment lease payments. Negative interest expense of $0.1 million in 2012 arose from the early repayment in March 2012 of our Increasing-Rate Senior Discount Notes. Early repayment of the notes resulted in a lower average effective interest rate over the term of the notes than would have applied if the notes had been held to maturity. In prior periods, we used the average effective interest rate as if the notes were held to maturity in determining the amount of interest expense incurred. Other Income (Expense) Other Income (Expense) primarily relates to the effect of exchange rate fluctuations between the U.S. and Canada. However, 2014 and 2013 also included gains of $0.1 million and $0.3 million , respectively, related to refunds of state sales taxes previously paid by us. Income Tax Expense (Benefit) n/m - Not meaningful. Our income tax expense in 2014 was primarily attributable to the income generated domestically and in Canada, partially offset by a $1.2 million release of our domestic valuation allowance. Income tax benefit for 2013 included a $38.9 million release of our domestic valuation allowance. Income tax benefit for 2012 was primarily related to the expiration of statutes of limitation applicable to our liabilities for uncertain tax positions in certain jurisdictions. Generally, we did not recognize U.S. income tax expense associated with our income from continuing operations for 2013 or 2012 due to the valuation allowance against the net deferred tax asset. Each quarter, we assess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxable income and re-evaluate whether any adjustments or release of all or any portion of valuation allowance is appropriate. As a result of this evaluation, in the second quarter of 2013, we concluded that a majority of the existing valuation allowance on our domestic deferred income tax assets was no longer required. Accordingly, an income tax benefit of $38.9 million related to the reduction of our existing valuation allowance was recorded during 2013. Further, in the fourth quarter of 2014, after re-evaluating the potential realization of the remainder of our deferred income tax assets, we concluded that, as of December 31, 2014, a portion of the existing valuation allowance against state net operating loss deferred tax assets was no longer necessary. Accordingly, an income tax benefit of $1.2 million was recorded in the fourth quarter of 2014 related to the reduction of our existing valuation allowance. The amount of valuation allowance offsetting our deferred tax assets was $6.2 million as of December 31, 2014 . Of the total remaining valuation allowance, $2.9 million primarily relates to domestic credit carryforwards as we currently do not anticipate to generate the income of appropriate character to utilize those credits. 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. In addition, $3.3 million of the remaining valuation allowance relates to foreign net operating loss carryforwards. There have been no material changes to our foreign operations since December 31, 2013 and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2014 . Refer to Note 12, Income Taxes , to our Consolidated Financial Statements included in Part II, Item 8 of this report for additional information. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2014 , we had $45.2 million of Cash and Cash Equivalents, compared to $41.0 million as of December 31, 2013 and $27.0 million of Available-For-Sale Securities at December 31, 2014 compared to none at December 31, 2013 . Cash 24 Dollars in thousands Year Ended December 31, Change 2014 2013 $ % Income Tax Expense (Benefit) $9,841 $(32,085) $41,926 n/m Dollars in thousands Year Ended December 31, Change 2013 2012 $ % Income Tax Benefit $(32,085) $(226) $(31,859) n/m  provided by operating activities was $34.4 million for 2014 , compared to cash provided by operating activities of $21.1 million for 2013 . We expect our Cash and Cash Equivalents and Available-For-Sale Securities at December 31, 2014 , along with cash expected to be generated from operations, to be sufficient to fund our operating and capital requirements for at least twelve months from December 31, 2014 . The increase in cash flows from operating activities for 2014 , compared to 2013, was primarily due to improved operating performance and the changes in our operating assets and liabilities as discussed below. Trade receivables increased $1.0 million to $26.3 million as of December 31, 2014 , compared to $25.3 million as of December 31, 2013 , due to higher revenue within our Retail business. Days sales outstanding ("DSO") at December 31, 2014 were 17.6 days compared to 19.9 days as of December 31, 2013 . The decrease in DSO at December 31, 2014 compared to December 31, 2013 was due to a greater mix of Direct revenue along with improved collections. Direct sales are generally collected by credit card or funded by third party financing partners, resulting in cash receipt within a few days after product shipment. Inventories increased $9.1 million to $24.9 million as of December 31, 2014 , compared to $15.8 million as of December 31, 2013 , due to higher revenue, additional products, and the opening of a new distribution center. A significant portion of this inventory was in-transit as of December 31, 2014, as the west coast port slowdown has delayed deliveries by 15-25 days. We believe our current inventory level is appropriate to meet customer requirements and to support additional growth of the business. Net deferred income tax assets decreased $8.3 million to $21.9 million as of December 31, 2014 , compared to $30.2 million as of December 31, 2013 , primarily due to the utilization of net operating loss deferred tax assets in 2014. Trade payables increased $10.4 million to $47.6 million as of December 31, 2014 , compared to $37.2 million as of December 31, 2013 , primarily due to increased inventory purchases and media expense to support the growth in sales. Accrued liabilities increased $0.8 million to $9.9 million as of December 31, 2014 compared to $9.1 million as of December 31, 2013 , primarily due to increases in accrued payroll, commissions and incentive compensation. Warranty obligations increased $0.6 million to $2.2 million as of December 31, 2014 compared to $1.6 million as of December 31, 2013 , primarily due to increased year-over-year sales in both our business segments. Cash used in investing activities of $30.2 million for 2014 was primarily related to the purchase of $37.4 million of marketable securities, offset by maturities of marketable securities of $10.5 million during the period. Additionally, $3.2 million was used for capital expenditures during 2014 , primarily for implementation of new software and hardware information system upgrades. We anticipate spending $4.5 million to $5.5 million in 2015 for software, equipment and product tooling. Financing Arrangements On December 5, 2014, we entered into a Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. ("Chase Bank") that provides for a $20.0 million maximum revolving secured credit line. The line of credit is available through December 5, 2017 for working capital, letters of credit and general corporate purposes. 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 each advance under the Credit Agreement is based on either Chase Bank's floating prime rate or adjusted LIBOR, plus an applicable margin. Our borrowing rate was 1.17% as of December 31, 2014 . The Credit Agreement contains customary covenants, including minimum fixed charge coverage ratio and asset coverage ratio, and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. Borrowings under the Credit Agreement are collateralized by substantially all of our assets pursuant to a continuing security agreement. 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. As of December 31, 2014 , we had no outstanding borrowings and $0.6 million in letters of credit issued under the Credit Agreement with expiration dates through April 2015 . As of December 31, 2014 , we were in compliance with the financial covenants of the Credit Agreement and approximately $19.4 million was available for borrowing. Commitments and Contingencies For a description of our commitments and contingencies, refer to Note 17 to our Consolidated Financial Statements in Part II, Item 8 of this report. 25  Non-Cancelable Contractual Obligations Our operating cash flows include the effect of certain non-cancelable, contractual obligations. A summary of such obligations as of December 31, 2014 , including those related to our discontinued Commercial operations, is as follows (in thousands): Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2014 , we are unable to make reasonably reliable estimates of the timing of any cash settlements with the respective taxing authorities. Therefore, approximately $4.7 million of liabilities related to unrecognized tax benefits, including interest and penalties on uncertain tax positions, have been excluded from the contractual table above. For further information, refer to Note 12, Income Taxes , to our Consolidated Financial Statements in Part II, Item 8 of this report. Off-Balance Sheet Arrangements In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions. The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications. Because we are unable to estimate our potential obligation, and because management does not expect these obligations to have a material adverse effect on our consolidated financial position, results of operations or cash flows, no liabilities are recorded at December 31, 2014 . SEASONALITY We expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by the third quarter, and are generally weakest in the second quarter. We believe that, during the spring and summer months, consumers tend to be involved in outdoor activities, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization. INFLATION We do not believe that inflation had a material effect on our business, financial condition or results of operations in 2014 , 2013 or 2012 . Inflation pressures do exist in countries where our contract manufacturers are based, however we have largely mitigated these increases through cost improvement measures. NEW ACCOUNTING PRONOUNCEMENTS See Note 1, Significant Accounting Polices , to our Consolidated Financial Statements in Part II, Item 8 of this report. 26 Payments due by period Total Less than 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations $ 25,917 $ 4,050 $ 7,240 $ 4,824 $ 9,803 Purchase obligations (1) 21,250 21,250 — — — Minimum royalty obligations 188 188 — — — Total $ 47,355 $ 25,488 $ 7,240 $ 4,824 $ 9,803 (1) Our purchase obligations are comprised primarily of inventory purchase commitments. Because substantially all of our inventory is sourced from Asia, we have long lead times and therefore need to secure factory capacity from our vendors in advance.  Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents and substantially all our marketable securities. As of December 31, 2014 , we had cash equivalents of $24.1 million held in a combination of money market funds, certificates of deposit, commercial paper and variable rate demand notes, and marketable securities of $27.0 million , held in a combination of certificates of deposit and corporate bonds. Our cash equivalents mature within three months or less from the date of purchase. 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. We have classified our marketable securities as available-for-sale and, therefore, we may choose to sell or hold them as changes in the market occur. Because of the short-term nature of the instruments in our portfolio, a decline in interest rates would reduce our interest income over time, and an increase in interest rates may negatively affect the market price or liquidity of certain securities within the portfolio, but a change in interest rates would not have a material impact on our results of operations, financial position or cash flows. 27  Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Nautilus, Inc. Vancouver, Washington We have audited the accompanying consolidated balance sheets of Nautilus, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013 , and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014 . These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nautilus, Inc. and subsidiaries as of December 31, 2014 and 2013 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 , in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014 , based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting. /s/ Deloitte & Touche LLP Portland, Oregon February 26, 2015 28  NAUTILUS, INC. CONSOLIDATED BALANCE SHEETS (In thousands) See accompanying Notes to Consolidated Financial Statements. 29 As of December 31, 2014 2013 Assets Cash and cash equivalents $ 45,206 $ 40,979 Available-for-sale securities 26,984 — Trade receivables, net of allowances of $108 and $53 26,260 25,336 Inventories 24,896 15,824 Prepaids and other current assets 6,987 6,927 Income taxes receivable 50 80 Deferred income tax assets 12,368 4,441 Total current assets 142,751 93,587 Property, plant and equipment, net 9,634 8,499 Goodwill 2,520 2,740 Other intangible assets, net 10,575 12,615 Long-term deferred income tax assets 9,546 25,725 Other assets 628 401 Total assets $ 175,654 $ 143,567 Liabilities and Shareholders' Equity Trade payables $ 47,574 $ 37,192 Accrued liabilities 9,851 9,123 Warranty obligations, current portion 2,246 1,610 Total current liabilities 59,671 47,925 Warranty obligations, non-current — 28 Income taxes payable, non-current 3,725 2,577 Other long-term liabilities 1,186 1,472 Total liabilities 64,582 52,002 Commitments and contingencies (Note 17) Shareholders' equity: Common stock - no par value, 75,000 shares authorized, 31,333 and 31,162 shares issued and outstanding 8,033 6,769 Retained earnings 103,347 84,552 Accumulated other comprehensive income (loss) (308 ) 244 Total shareholders' equity 111,072 91,565 Total liabilities and shareholders' equity $ 175,654 $ 143,567  NAUTILUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) See accompanying Notes to Consolidated Financial Statements. 30 Year Ended December 31, 2014 2013 2012 Net sales $ 274,447 $ 218,803 $ 193,926 Cost of sales 133,872 112,326 102,889 Gross profit 140,575 106,477 91,037 Operating expenses: Selling and marketing 81,059 66,486 58,617 General and administrative 22,131 18,705 17,669 Research and development 7,231 5,562 4,163 Total operating expenses 110,421 90,753 80,449 Operating income 30,154 15,724 10,588 Other income (expense): Interest income 63 14 18 Interest expense (25 ) (36 ) 56 Other 32 337 (246 ) Total other income (expense), net 70 315 (172 ) Income from continuing operations before income taxes 30,224 16,039 10,416 Income tax provision (benefit) 9,841 (32,085 ) (226 ) Income from continuing operations 20,383 48,124 10,642 Discontinued operations: Income (loss) from discontinued operations before income taxes (1,134 ) (559 ) 6,007 Income tax provision (benefit) of discontinued operations 454 (389 ) (234 ) Income (loss) from discontinued operations (1,588 ) (170 ) 6,241 Net income $ 18,795 $ 47,954 $ 16,883 Basic income per share from continuing operations $ 0.65 $ 1.55 $ 0.34 Basic income (loss) per share from discontinued operations (0.05 ) (0.01 ) 0.21 Basic net income per share $ 0.60 $ 1.54 $ 0.55 Diluted income per share from continuing operations $ 0.64 $ 1.53 $ 0.34 Diluted income (loss) per share from discontinued operations (0.05 ) (0.01 ) 0.21 Diluted net income per share $ 0.59 $ 1.52 $ 0.55 Shares used in per share calculations: Basic 31,253 31,072 30,851 Diluted 31,688 31,457 30,974  NAUTILUS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) See accompanying Notes to Consolidated Financial Statements. 31 Year Ended December 31, 2014 2013 2012 Net income $ 18,795 $ 47,954 $ 16,883 Other comprehensive loss: Unrealized loss on marketable securities, net of income tax benefit of $(11), $0 and $0 (18 ) — — Foreign currency translation, net of income tax provision (benefit) of $15, $20 and $(9) (534 ) (381 ) (83 ) Comprehensive income $ 18,243 $ 47,573 $ 16,800  NAUTILUS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) See accompanying Notes to Consolidated Financial Statements. 32 Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Shares Amount Balances at January 1, 2012 30,747 $ 5,360 $ 19,715 $ 6,878 $ 31,953 Net income — — 16,883 — 16,883 Foreign currency translation adjustment, net of income tax benefit of $9 — — — (83 ) (83 ) Reclassification of foreign currency translation gains to income upon substantial liquidation of subsidiaries — — — (6,170 ) (6,170 ) Stock-based compensation expense — 630 — — 630 Common stock issued under equity compensation plan 177 113 — — 113 Balances at December 31, 2012 30,924 6,103 36,598 625 43,326 Net income — — 47,954 — 47,954 Foreign currency translation adjustment, net of income tax provision of $20 — — — (381 ) (381 ) Stock-based compensation expense — 454 — — 454 Common stock issued under equity compensation plan 238 357 — — 357 Tax deficiency related to stock-based awards — (145 ) — — (145 ) Balances at December 31, 2013 31,162 6,769 84,552 244 91,565 Net income — — 18,795 — 18,795 Unrealized loss on marketable securities, net of income tax benefit of $(11) — — — (18 ) (18 ) Foreign currency translation adjustment, net of income tax provision of $15 — — — (534 ) (534 ) Stock-based compensation expense — 1,066 — — 1,066 Common stock issued under equity compensation plan 171 378 — — 378 Tax deficiency related to stock-based awards (180 ) — — (180 ) Balances at December 31, 2014 31,333 $ 8,033 $ 103,347 $ (308 ) $ 111,072  NAUTILUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2014 2013 2012 Cash flows from operating activities: Income from continuing operations $ 20,383 $ 48,124 $ 10,642 Income (loss) from discontinued operations (1,588 ) (170 ) 6,241 Net income 18,795 47,954 16,883 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,024 3,344 3,269 Bad debt expense (reduction) 104 588 (13 ) Inventory lower-of-cost-or-market adjustments 457 557 402 Stock-based compensation expense 1,066 454 630 (Gain) loss on asset disposals 145 2 (30 ) Deferred income taxes, net of valuation allowances 8,007 (32,814 ) 145 Excess tax deficiency related to stock-based awards 180 145 — Reclassification of foreign currency translation gains to income upon substantial liquidation of subsidiaries — — (6,170 ) Changes in operating assets and liabilities: Trade receivables (1,331 ) (4,417 ) 1,928 Inventories (9,560 ) 2,388 (7,573 ) Prepaids and other current assets (314 ) (1,174 ) (1,314 ) Income taxes receivable 30 (91 ) 464 Trade payables 10,456 4,487 4,189 Accrued liabilities, including warranty obligations 2,313 (337 ) 3 Net cash provided by operating activities 34,372 21,086 12,813 Cash flows from investing activities: Proceeds from sale of discontinued operations — 116 410 Proceeds from other asset sales — 5 6 Purchases of property, plant and equipment (3,181 ) (3,590 ) (2,442 ) Purchases of available-for-sale-securities (37,434 ) — — Proceeds from maturities of available-for-sale securities 10,450 — — Net cash used in investing activities (30,165 ) (3,469 ) (2,026 ) Cash flows from financing activities: Repayment of long-term borrowings — — (5,000 ) Proceeds from exercise of stock options 378 357 113 Excess tax deficiency related to stock-based awards (180 ) (145 ) — Net cash provided by (used in) financing activities 198 212 (4,887 ) Effect of exchange rate changes on cash and cash equivalents (178 ) (57 ) (120 ) Increase in cash and cash equivalents 4,227 17,772 5,780 Cash and cash equivalents, beginning of year 40,979 23,207 17,427 Cash and cash equivalents, end of year $ 45,206 $ 40,979 $ 23,207 Supplemental disclosure of cash flow information: Cash paid for income taxes, net $ (923 ) $ (450 ) $ (277 ) Cash paid for interest $ (25 ) $ (36 ) $ (544 ) Supplemental disclosure of non-cash investing activities: Capital expenditures incurred but not yet paid $ 86 $ — $ — See accompanying Notes to Consolidated Financial Statements. 33  NAUTILUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES Organization and Business Nautilus 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 United States 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 ® , 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 United States 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: 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 34 • Revenue recognition; • Sales discounts and allowances; • Allowance for uncollectible trade receivables; • Valuation of excess and obsolete inventory; • Goodwill and other long-term assets valuation; • Product warranty obligations; • Litigation and loss contingencies; • Deferred tax assets and the related valuation allowance; and • Unrecognized tax benefits.  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 2014 , 2013 and 2012 , 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, 2014 , cash equivalents consisted of money market funds, certificates of deposit, commercial paper, and variable-rate demand notes and totaled $24.1 million . As of December 31, 2013 , we did not have any cash equivalents. 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 immaterial in 2014, 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 3, Fair Value Measurements . 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. 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. 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 is an asset of our Direct reporting unit. We performed an assessment of goodwill in the fourth quarters of 2014, 2013 and 2012 and concluded that circumstances did not more likely than not indicate an impairment had occurred. For further information regarding goodwill, see Note 7, Goodwill . Other Intangible Assets Finite-lived intangible assets, primarily acquired patents and patent rights, are stated at cost, net of accumulated amortization. We recognize amortization expense for our finite-lived intangible assets on a straight-line basis over the estimated useful lives. Indefinite-lived intangible assets consist of acquired trademarks. Indefinite-lived intangible assets are stated at cost and are not amortized; instead, they are tested for impairment at least annually. We review our acquired 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 35  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 acquired trademarks for impairment in the fourth quarters of 2014, 2013 and 2012 and determined that no impairment was indicated. For further information regarding other intangible assets, see Note 8, Other Intangible Assets . Impairment of Long-Lived Assets Long-lived assets, including property, plant and equipment and finite-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 2014, 2013 or 2012. 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): 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 revenue. Shipping and Handling Fees Shipping and handling fees billed to customers are recorded gross and included in both revenue 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 limited, 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 36 2014 2013 2012 Balance, January 1 $ 4,106 $ 4,990 $ 5,113 Charges to reserve 15,285 13,345 11,730 Reductions for sales discounts and returns (15,095 ) (14,229 ) (11,853 ) Balance, December 31 $ 4,296 $ 4,106 $ 4,990  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 as prepaid expenses until the initial broadcast, at which time such costs are expensed. Advertising and promotion costs are included in Selling and Marketing expenses and totaled $42.6 million , $35.8 million and $30.9 million for the years ended December 31, 2014 , 2013 and 2012 , respectively. Prepaid advertising and promotion costs were $1.4 million and $2.2 million as of December 31, 2014 and 2013 , 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. 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. In the fourth quarter of 2012, we substantially completed the liquidation of our investment in foreign subsidiaries formerly associated with the Commercial business. As a result, an accumulated translation adjustment of $6.2 million was removed from accumulated other comprehensive income and recognized as a gain of the discontinued operations. 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, 2014, refer to Note 3, Fair Value Measurements . We did not have any financial instruments that were recorded at fair value on a recurring basis at December 31, 2013. 37  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 awards and restricted stock unit awards is based on the closing market price on the day preceding the grant. 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 2015-01 In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20).” ASU 2015-01 simplifies income statement presentation by eliminating the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of ASU 2015-01 will not have any effect on our financial position, results of operations or cash flows. ASU 2014-17 In November 2014, the FASB issued ASU No. 2014-17, "Business Combinations (Topic 805)". ASU 2014-17 provides guidance on whether and at what threshold an acquired entity that is a business or nonprofit entity (either public or nonpublic), can apply pushdown accounting in its separate financial statements upon the occurrence of an event in which an acquirer obtains control of the acquired entity. ASU 2014-17 was effective on November 18, 2014. Since ASU 2014-17 relates to pushdown accounting in separate financial statements upon the occurrence of an event whereby an acquirer obtains control of an acquired entity, our adoption of ASU 2014-17 in November 2014 did not have any effect on our financial position, results of operations or cash flows. ASU 2014-16 In November 2014, the FASB issued ASU No. 2014-16, "Derivatives and Hedging (Topic 815)". ASU 2014-16 provides guidance to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. The objective of ASU 2014-16 is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for these financial instruments. ASU 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. We do not expect the adoption of ASU 2014-16 to have a material effect on our financial position, results of operations or cash flows. ASU 2014-15 In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)". ASU 2014-15 provides guidance related to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter. Early application is permitted. We do not expect the adoption of ASU 2014-15 to 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. We do not expect the adoption of ASU 2014-12 to have a material effect on our financial position, results of operations or cash flows. 38  ASU 2014-09 In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers". ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and the International Accounting Standards Board that: • removes inconsistencies and weaknesses in revenue requirements; • provides a more robust framework for addressing revenue issues; • improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; • provides more useful information to users of financial statements through improved disclosure requirements; and • simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2016. While we do not expect the adoption of ASU 2014-09 to have a material effect on our business, we are still evaluating any potential impact that adoption of ASU 2014-09 may have on our financial position, results of operations or cash flows. ASU 2014-08 In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". ASU 2014-08 amends the definition for what types of asset disposals are to be considered discontinued operations, and amends the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 also enhances the convergence of the FASB’s and the International Accounting Standard Board’s reporting requirements for discontinued operations. ASU 2014-08 is effective for annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. We do not expect the adoption of ASU 2014-08 to have a material effect on our financial position, results of operations or cash flows. ASU 2013-11 In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". ASU 2013-11 amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss ("NOL") carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. ASU 2013-11 was effective for annual and interim periods for fiscal years beginning after December 15, 2013. Since ASU 2013-11 relates only to the presentation of unrecognized tax benefits, our adoption of ASU 2013-11 in January 2014 did not have a material effect on our financial position, results of operations or cash flows. (2) DISCONTINUED OPERATIONS Following is a summary of certain financial information regarding our discontinued operations (in thousands): 39 Year Ended December 31, 2014 2013 2012 Revenue $ — $ — $ — Loss from discontinued operations (1,134 ) (559 ) (163 ) Reclassification of foreign currency translation gains to income upon substantial liquidation of subsidiaries — — 6,170 Income tax (provision) benefit (454 ) 389 234 Total income (loss) from discontinued operations $ (1,588 ) $ (170 ) $ 6,241  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): We expect the lease obligations to be paid out through 2016 . (3) FAIR VALUE MEASUREMENTS Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories: Assets measured at fair value on a recurring basis were as follows (in thousands): (1) All certificates of deposit are within current FDIC insurance limits. We did not have any assets or liabilities measured at fair value on a recurring basis as of December 31, 2013. 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 year ended December 31, 2014. 40 Facilities Leases Severance and Benefits Balance as of January 1, 2012 $ 1,929 $ 175 Adjustments (390 ) — Payments (421 ) (175 ) Balance as of December 31, 2012 1,118 — Payments (287 ) — Balance as of December 31, 2013 831 — Payments (258 ) — Balance as of December 31, 2014 $ 573 $ — • 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. December 31, 2014 Level 1 Level 2 Level 3 Total Cash Equivalents Money market funds $ 2,591 $ — $ — $ 2,591 Certificates of deposit (1) — 980 — 980 Commercial paper — 12,497 — 12,497 Variable rate demand notes — 8,000 — 8,000 Total Cash Equivalents 2,591 21,477 — 24,068 Available-for-Sale Securities Certificates of deposit (1) — 14,202 — 14,202 Corporate bonds — 12,782 — 12,782 Total Available-for-Sale Securities — 26,984 — 26,984 Total assets measured at fair value $ 2,591 $ 48,461 $ — $ 51,052  We did not have any changes to our valuation techniques during the year ended December 31, 2014. We classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Level 1 investments valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investments valuations are obtained from inputs, other than quoted market prices in active markets, 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 other comprehensive income until realized. During the year ended December 31, 2014, we did not record any other-than-temporary impairments on our financial assets required to be measured at fair value on a nonrecurring basis. 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, 2014 and 2013, we did not perform any valuations on assets or liabilities that are valued at fair value on a nonrecurring basis. (4) TRADE RECEIVABLES Trade receivables, net, consisted of the following (in thousands): Changes in our allowance for doubtful trade receivables were as follows (in thousands): (5) INVENTORIES Inventories consisted of the following (in thousands): 41 December 31, 2014 2013 Trade receivables $ 26,368 $ 25,389 Allowance for doubtful accounts (108 ) (53 ) $ 26,260 $ 25,336 2014 2013 2012 Balance, January 1 $ 53 $ 93 $ 300 Charges to (reversals of) bad debt expense 104 588 (13 ) Writeoffs, net of recoveries (49 ) (628 ) (194 ) Balance, December 31 $ 108 $ 53 $ 93 December 31, 2014 2013 Finished goods $ 23,765 $ 14,259 Parts and components 1,131 1,565 $ 24,896 $ 15,824  (6) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands): (1) Work in progress includes production tooling construction in progress and, in 2013, internal use software development. Depreciation expense was as follows (in thousands): (7) GOODWILL All goodwill is assigned to our Direct reporting unit. The rollforward of Goodwill was as follows (in thousands): 42 Estimated Useful Life (in years) December 31, 2014 2013 Automobiles 5 $ 23 $ — Leasehold improvements 5 to 20 2,144 2,869 Computer equipment 3 to 7 25,397 35,554 Machinery and equipment 3 to 5 6,709 5,648 Furniture and fixtures 5 1,108 688 Work in progress (1) N/A 421 4,281 Total cost 35,802 49,040 Accumulated depreciation (26,168 ) (40,541 ) $ 9,634 $ 8,499 Year Ended December 31, 2014 2013 2012 Depreciation expense $ 1,983 $ 1,254 $ 1,199 Balance, January 1, 2012 $ 2,873 Currency exchange rate adjustment 67 Balance, December 31, 2012 2,940 Currency exchange rate adjustment (200 ) Balance, December 31, 2013 2,740 Currency exchange rate adjustment (220 ) Balance, December 31, 2014 $ 2,520  (8) OTHER INTANGIBLE ASSETS Other intangible assets consisted of the following (in thousands): Amortization expense was as follows (in thousands): Future amortization of patents is as follows (in thousands): (9) ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands): (10) PRODUCT WARRANTIES Changes in our product warranty obligations were as follows (in thousands): 43 Estimated Useful Life (in years) December 31, 2014 2013 Indefinite life trademarks N/A $ 9,052 $ 9,052 Patents 8 to 16 18,154 18,154 27,206 27,206 Accumulated amortization - patents (16,631 ) (14,591 ) $ 10,575 $ 12,615 Year Ended December 31, 2014 2013 2012 Amortization expense $ 2,040 $ 2,050 $ 2,050 2015 $ 828 2016 430 2017 143 2018 65 2019 35 Thereafter 22 $ 1,523 December 31, 2014 2013 Payroll and related liabilities $ 5,058 $ 4,244 Other 4,793 4,879 $ 9,851 $ 9,123 Year Ended December 31, 2014 2013 2012 Balance, January 1 $ 1,638 $ 2,492 $ 2,017 Accruals 2,264 1,097 2,615 Adjustments — (186 ) (170 ) Payments (1,656 ) (1,765 ) (1,970 ) Balance, December 31 $ 2,246 $ 1,638 $ 2,492  (11) BORROWINGS Line of Credit On December 5, 2014, we entered into a Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. ("Chase Bank") that provides for a $20.0 million maximum revolving secured credit line. The line of credit is available through December 5, 2017 for working capital, letters of credit and general corporate purposes. 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 each advance under the Credit Agreement is based on either Chase Bank's floating prime rate or adjusted LIBOR, plus an applicable margin. Our borrowing rate was 1.17% as of December 31, 2014 . The Credit Agreement contains customary covenants, including minimum fixed charge coverage ratio and asset coverage ratio, and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. Borrowings under the Credit Agreement are collateralized by substantially all of our assets pursuant to a continuing security agreement. 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. As of December 31, 2014 , we had no outstanding borrowings and $0.6 million in letters of credit issued under the Credit Agreement with expiration dates through April 2015 . As of December 31, 2014 , we were in compliance with the financial covenants of the Credit Agreement and approximately $19.4 million was available for borrowing. Related Party Note Payable On September 3, 2010, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with certain entities (collectively, the “Sherborne Purchasers”) under common control of Sherborne Investors GP, LLC and its affiliates (collectively “Sherborne”). Sherborne was formerly our largest shareholder and is controlled by Edward J. Bramson, our former Chairman and Chief Executive Officer, and Craig L. McKibben, a former member of our Board of Directors. Pursuant to the Purchase Agreement, we issued to the Sherborne Purchasers $6.1 million in aggregate principal amount at maturity of Increasing Rate Senior Discount Notes (the “Notes”). The Notes had an original principal amount totaling $5.0 million and an original maturity date of December 31, 2012. On March 12, 2012, the maturity date of the Notes was automatically extended under certain terms of the Purchase Agreement to May 2, 2013. On July 19, 2011, beneficial interest in the Notes was assigned by the Sherborne Purchasers pro-rata to their respective investors in the manner permitted by the Purchase Agreement. Such assignment was made in connection with the resignation of Messrs. Bramson and McKibben from their respective positions with Nautilus on May 26, 2011, and the subsequent pro-rata distribution by certain Sherborne-affiliated entities to their respective investors of our common stock owned by such entities. We repaid all amounts outstanding under the Notes on March 30, 2012 and interest paid related to the Notes was $0.5 million during 2012 . If all of the Notes were paid on the original maturity date, the effective rate of interest over the term of the Purchase Agreement would have been approximately 8.7% per annum, which was the rate at which interest expense was accrued in periods preceding the repayment date. The actual effective rate of interest through the repayment date was approximately 6.4% per annum. (12) INCOME TAXES Income Tax Provision Income from continuing operations before income taxes was as follows (in thousands): 44 Year Ended December 31, 2014 2013 2012 United States $ 29,115 $ 15,386 $ 10,025 Non-U.S. 1,109 653 391 $ 30,224 $ 16,039 $ 10,416  Income tax expense (benefit) from continuing operations was as follows (in thousands): Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations: 45 Year Ended December 31, 2014 2013 2012 Current: U.S. federal $ 1,086 $ 541 $ (579 ) U.S. state 100 56 53 Non-U.S. 222 (12 ) 155 Total current 1,408 585 (371 ) Deferred: U.S. federal 8,913 (29,552 ) 177 U.S. state (558 ) (3,370 ) 17 Non-U.S. 78 252 (49 ) Total deferred 8,433 (32,670 ) 145 $ 9,841 $ (32,085 ) $ (226 ) Year Ended December 31, 2014 2013 2012 U.S. statutory income tax rate 35.0 % 35.0 % 35.0 % State tax, net of U.S. federal tax benefit 2.5 2.9 1.1 Non-U.S. income taxes (0.3 ) 1.2 — Nondeductible operating expenses 0.2 (0.4 ) 0.4 Research and development credit (2.4 ) (0.7 ) — Change in deferred tax measurement rate 0.1 0.2 0.1 Change in uncertain tax positions 1.5 2.2 (6.5 ) Expiration of capital loss carryforward — 26.9 — Change in valuation allowance (4.1 ) (267.6 ) (32.3 ) Other 0.1 0.2 — Effective income tax rate 32.6 % (200.1 )% (2.2 )%  Deferred Income Taxes Individually significant components of deferred income tax assets (liabilities) were as follows (in thousands): Our net deferred income tax asset (liability) was recorded on our Consolidated Balance Sheets as follows (in thousands): The table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2014 and 2013, that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Instead, equity will be increased by $0.8 million if and when such deferred tax assets are ultimately realized. We use tax law ordering when 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. During 2008, we determined that it was no longer more likely than not that the tax benefits from the existing U.S. deferred tax assets would be realized due to the substantial amount of the cumulative accounting losses realized in the recent years in the U.S. 46 December 31, 2014 2013 Deferred income tax assets: Accrued liabilities $ 3,510 $ 3,230 Allowance for doubtful accounts 33 20 Inventory valuation 377 312 Capitalized indirect inventory costs 295 159 Stock-based compensation expense 558 376 Net operating loss carryforward 19,742 35,635 Basis difference on long-lived assets 3,289 4,412 Credit carryforward 4,565 3,422 Other 339 332 Gross deferred income tax assets 32,708 47,898 Valuation allowance (6,156 ) (12,944 ) Deferred income tax assets, net of valuation allowance 26,552 34,954 Deferred income tax liabilities: Prepaid advertising (467 ) (793 ) Other prepaids (696 ) (592 ) Basis difference on long-lived assets (3,355 ) (2,938 ) Undistributed earnings of foreign subsidiaries (179 ) (177 ) Other (1 ) (288 ) Deferred income tax liabilities (4,698 ) (4,788 ) Net deferred income tax asset $ 21,854 $ 30,166 December 31, 2014 2013 Current deferred income tax assets $ 12,368 $ 4,441 Non-current deferred income tax assets 9,546 25,725 Other long-term liabilities (60 ) — Net deferred income tax asset $ 21,854 $ 30,166  and the large taxable losses incurred in the U.S. in 2007 and 2008. Accordingly, we established a full valuation allowance against our U.S. net deferred tax assets in 2008. Each quarter, we assess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxable income and re-evaluate whether any adjustments or release of all or any portion of valuation allowance is appropriate. As a result of this evaluation, in the second quarter of 2013, we concluded that a majority of the existing valuation allowance on our domestic deferred income tax assets was no longer required, accordingly, a tax benefit of $38.9 million was recorded during 2013 related to the reduction of our existing valuation allowance. Further in the fourth quarter of 2014, after re-evaluating the potential realization of the remainder of our deferred income tax assets, we concluded that, as of December 31, 2014, a portion of the existing valuation allowance against state net operating loss deferred tax assets was no longer necessary. Accordingly, an income tax benefit of $1.2 million was recorded in the fourth quarter of 2014 related to the reduction of our existing valuation allowance. As of December 31, 2014, we have a valuation allowance against net deferred income tax assets of $6.2 million . Of the remaining valuation allowance, $2.9 million primarily relates to domestic credit carryforwards as we currently do not anticipate to generate the income of appropriate character to utilize those credits. The remainder, $3.3 million relates to foreign net operating loss carryfowards. 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, 2013 and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2014. Income Tax Carryforwards As of December 31, 2014 , we had the following income tax carryforwards (in millions): 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): Of the $2.8 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2014 , $2.5 million would affect our effective tax rate if recognized. We recognize tax-related interest and penalties as a component of income tax provision. We recorded such tax-related interest and penalties of $0.4 million , $0.0 million and $0.1 million in 2014, 2013 and 2012, respectively. We had a cumulative liability for 47 Amount Expires in Net operating loss carryforwards U.S. Federal $ 37.2 2029 - 2031 U.S. State 85.3 2015 - 2031 Switzerland 15.0 2015 - 2020 Italy 1.2 2015 - 2017 Income tax credit carryforwards U.S. Federal 3.6 2018 - 2034 U.S. State 0.4 2019 - 2022 2014 2013 2012 Unrecognized tax benefits, January 1 $ 1,964 $ 2,530 $ 4,376 Additions for tax positions taken in prior years 72 166 — Reductions for tax positions taken in prior years — (472 ) (972 ) Additions for tax positions related to the current year 821 54 — Lapses of statutes of limitations (89 ) (314 ) (874 ) Unrecognized tax benefits, December 31 $ 2,768 $ 1,964 $ 2,530  interest and penalties related to uncertain tax positions as of December 31, 2014 and 2013 of $2.0 million and $1.6 million , respectively. Our U.S. federal income tax returns for 2009 through 2014 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2006 through 2014 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, 2014 , we believe it is reasonably likely that, within the next 12 months, $0.3 million of the previously unrecognized tax benefits related to certain non-U.S. filing positions will be recognized as we anticipate the deregistration of certain foreign subsidiaries. (13) STOCK-BASED INCENTIVE PLAN AND STOCK-BASED COMPENSATION 2005 Long-Term Incentive Plan Our 2005 Long-Term Incentive Plan (the “2005 Plan”), which is administered by the Compensation Committee of the Board of Directors, authorizes us to grant various types of stock-based awards including: stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs") and performance stock units ("PSUs"). Stock options granted under the 2005 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 2005 Plan have a seven -year contractual term. Upon adoption, there were approximately 4.0 million shares available for issuance under the 2005 Plan. The number of shares available for issuance is increased by any shares of common stock which were previously reserved for issuance under our preceding stock option plan, and were not subject to grant on June 6, 2005, or as to which the stock-based compensation award is forfeited on or after June 6, 2005. 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 restricted stock, and for each stock unit or performance unit 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, restricted stock or performance stock unit awards be granted to any one participant in any one year under the 2005 Plan. At December 31, 2014 , we had 3.7 million shares available for future grant under our 2005 Plan and we had 4.8 million shares of our common stock reserved for future issuance pursuant to the 2005 Plan and our previous plan. Stock Option Activity Stock option activity was as follows (shares in thousands): Certain information regarding options outstanding at December 31, 2014 was as follows: 48 Options Outstanding Weighted- Average Exercise Price Outstanding at December 31, 2013 993 $ 6.73 Granted 154 8.52 Forfeited, canceled or expired (252 ) 16.46 Exercised (97 ) 3.90 Outstanding at December 31, 2014 798 $ 4.41 Options Outstanding Options Exercisable Options Vested and Expected to Vest Number (in thousands) 798 500 797 Weighted-average exercise price $ 4.41 $ 3.25 $ 4.41 Aggregate intrinsic value (in millions) $ 8.6 $ 6.0 $ 8.6 Weighted average remaining contractual term (in years) 4.3 3.4 4.3  RSU Activity Following is a summary of RSU activity (shares in thousands): 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 April 2010, we granted PSU awards covering a total of 146,000 shares of our common stock to key members of our executive team. The PSUs were subject to both time-based vesting (one-third annually over three years ) and achievement of a stock price target of two times the grant date price. If, over the three-year period, the stock price did not close at or above two times the grant date price over any 20 of 30 consecutive days, the entire award would have been forfeited. These awards vested in full over the three-year vesting period. In February and August 2012, we granted PSU awards to certain executive officers covering a total of 82,000 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 PSUs 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 PSUs that vest can range from 60% of the PSUs 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 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% . 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% . Following is a summary of PSU activity (shares in thousands): 49 RSUs Outstanding Weighted- Average Grant Date Fair Value per Share Outstanding at December 31, 2013 139 $ 3.58 Granted 29 8.86 Forfeited, canceled or expired — — Vested (81 ) 10.78 Outstanding at December 31, 2014 87 $ 5.93 PSUs Outstanding Weighted- Average Grant Date Fair Value per Share Outstanding at December 31, 2013 84 $ 3.76 Granted 82 8.22 Forfeited, canceled or expired — — Vested — — Outstanding at December 31, 2014 166 $ 5.97  Stock-Based Compensation We receive income tax deductions as a result of the exercise of certain stock options and vesting of RSUs and PSUs. Stock-based compensation expense, primarily included in General and Administrative expense, was as follows (in thousands): Certain other information regarding our stock-based compensation was as follows (in thousands, except per share amounts): As of December 31, 2014 , unrecognized compensation expense for outstanding, but unvested stock-based awards was $0.7 million , which is expected to be recognized over a weighted average period of 1.5 years. Assumptions used in calculating the fair value of stock option grants were as follows: Expected 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. 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, as management believes such changes are the best indicator of future volatility. 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 each quarter 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. 50 Year Ended December 31, 2014 2013 2012 Stock options $ 592 $ 337 $ 355 Restricted stock units 121 54 188 Performance stock units 353 63 87 $ 1,066 $ 454 $ 630 Year Ended December 31, 2014 2013 2012 Weighted average grant-date per share fair value of stock options granted $ 5.36 $ 4.37 $ 1.89 Total intrinsic value of stock options exercised 736 451 33 Fair value of RSUs vested 872 545 405 Fair value of PSUs vested — 386 — Year Ended December 31, 2014 2013 2012 Dividend yield —% —% —% Risk-free interest rate 1.7 % 0.9 % 0.9 % Expected life (years) 4.75 4.75 4.75 Expected volatility 80 % 89 % 92 %  (14) STOCK REPURCHASE PROGRAM On November 3, 2014 , our Board of Directors approved a stock repurchase program that authorizes us to repurchase up to $15 million of our outstanding common stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016 . Share repurchases will be funded with existing cash balances and repurchased shares will be retired and returned to unissued authorized shares. To date, we have not repurchased any shares pursuant to the program. (15) INCOME PER SHARE The weighted average numbers of shares outstanding used to compute income per share amounts were as follows (in thousands): 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): (16) SEGMENT AND GEOGRAPHIC INFORMATION We have two reportable segments - Direct and Retail. 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, 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. 51 Year Ended December 31, 2014 2013 2012 Shares used for basic per share calculations 31,253 31,072 30,851 Dilutive effect of outstanding options, PSUs and RSUs 435 385 123 Shares used for diluted per share calculations 31,688 31,457 30,974 As of December 31, 2014 2013 2012 Stock options 225 304 1,072 PSUs — 12 26  Following is summary information by reportable segment (in thousands): Net sales by geographic area were as follows: There are no material long-lived assets held outside of the U.S. 52 Year Ended December 31, 2014 2013 2012 Net Sales: Direct $ 175,593 $ 136,663 $ 124,978 Retail 93,223 76,775 63,891 Unallocated royalty income 5,631 5,365 5,057 Consolidated Net Sales $ 274,447 $ 218,803 $ 193,926 Contribution: Direct $ 29,345 $ 14,126 $ 12,479 Retail 13,279 11,431 7,855 Unallocated royalty income 5,631 5,365 5,057 Consolidated contribution $ 48,255 $ 30,922 $ 25,391 Reconciliation of consolidated contribution to income from continuing operations: Consolidated contribution $ 48,255 $ 30,922 $ 25,391 Amounts not directly related to segments: Operating expenses (18,101 ) (15,198 ) (14,801 ) Other income (expense), net 70 315 (174 ) Income tax (provision) benefit (9,841 ) 32,085 226 Income from continuing operations $ 20,383 $ 48,124 $ 10,642 Depreciation and amortization expense: Direct $ 1,913 $ 1,956 $ 2,366 Retail 643 642 825 Unallocated corporate 1,468 746 78 Total depreciation and amortization expense $ 4,024 $ 3,344 $ 3,269 December 31, Assets: 2014 2013 Direct $ 25,263 $ 21,249 Retail 37,203 32,023 Unallocated corporate 113,188 90,295 Total assets $ 175,654 $ 143,567 Year Ended December 31, 2014 2013 2012 U.S. $ 231,230 $ 181,381 $ 167,504 Canada 35,367 34,166 24,977 All other 7,850 3,256 1,445 $ 274,447 $ 218,803 $ 193,926  (17) COMMITMENTS AND CONTINGENCIES Operating Leases We lease property and equipment under non-cancelable 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): As of December 31, 2014 , future minimum lease payments under non-cancelable leases, reduced for sublease income, were as follows (in thousands): Guarantees, Commitments and Off-Balance Sheet Arrangements As of December 31, 2014 , we had approximately $0.6 million in letters of credit with certain vendors with expiration dates through April 2015 . We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of December 31, 2014 , we had approximately $21.3 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, 2014 . 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 United States 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 United States 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, 53 Year Ended December 31, 2014 2013 2012 Rent expense $ 3,625 $ 3,473 $ 3,218 2015 $ 4,050 2016 3,990 2017 3,250 2018 2,249 2019 2,575 Thereafter 9,803 $ 25,917  and no decision has yet been issued. We do not believe that our use of heart rate monitors utilized or purchased from third parties, and otherwise, infringe the BioSig patents. In August 2014, we initiated an arbitration proceeding under a 1999 license agreement pursuant to which we had licensed certain rights relating to our TreadClimber ® products. We believe that our obligation to pay royalties under the license agreement ceased in the fourth quarter of 2013. The licensor disputes this and issued a notice under the contract claiming breach of the license agreement and asserting various remedies. We are seeking a declaratory ruling in the arbitration that we have performed all our obligations under the license agreement, and that there is no continuing obligation to pay royalties. The licensor has asserted various counterclaims in the arbitration, including contract and intellectual property claims, and asserted various remedies, including termination of the license agreement. The Company has replied to the counterclaim, denying the allegations and demanded remedies and asserting defenses. The arbitration is being administered by the American Arbitration Association (AAA) and is in its preliminary stages. An arbitrator has been selected, however, a stay of the arbitration proceedings has been issued. In addition to the matters 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 its early stages, especially when 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, 2014 . 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. 54  (18) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited) The following table summarizes our unaudited quarterly financial data for 2014 and 2013 (in thousands, except per share amounts): (1) Net income in the quarters ended December 31, 2014 and June 30, 2013 included a $1.2 million and a $35.8 million credit, respectively, related to the reversal of a portion of our deferred tax asset valuation allowance. (2) May not add due to rounding. 55 Quarter Ended March 31 June 30 September 30 December 31 Total 2014 Net sales $ 71,903 $ 48,546 $ 59,067 $ 94,931 $ 274,447 Gross profit 38,481 24,780 28,795 48,519 140,575 Operating income 9,001 2,379 4,281 14,493 30,154 Income from continuing operations 5,748 1,498 2,664 10,473 20,383 Loss from discontinued operations (374 ) (941 ) (177 ) (96 ) (1,588 ) Net income (1) 5,374 557 2,487 10,377 18,795 Net income per share: Basic $ 0.17 $ 0.02 $ 0.08 $ 0.33 $ 0.60 Diluted (2) 0.17 0.02 0.08 0.33 0.59 2013 Net sales $ 59,214 $ 36,242 $ 46,256 $ 77,091 $ 218,803 Gross profit 30,694 17,329 21,777 36,677 106,477 Operating income (loss) 5,994 (1,724 ) 1,336 10,118 15,724 Income from continuing operations 5,524 32,668 1,500 8,432 48,124 Income (loss) from discontinued operations (365 ) 195 (116 ) 116 (170 ) Net income (1) 5,159 32,863 1,384 8,548 47,954 Net income per share: Basic $ 0.17 $ 1.06 $ 0.04 $ 0.27 $ 1.54 Diluted (2) 0.17 1.05 0.04 0.27 1.52  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Disclosure Controls and Procedures As of December 31, 2014 , we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2014 that our disclosure controls and procedures were effective. Management's Report On Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of, our Principal Executive Officer and Principal Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management's Assessment Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2014 . Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2014 , which is included herein. Changes In Internal Control Over Financial Reporting Other than as discussed below, there were no changes in our internal control over financial reporting that occurred during the three- and twelve-months ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the twelve months ended December 31, 2014 , we completed the implementation of a new enterprise resource planning ("ERP") system, which covers all of our significant processes including, but not limited to, revenue and invoicing, purchasing, accounts payable, accounts receivable and general ledger reporting. We believe this new ERP system and related processes enhance our internal control over financial reporting. We may make modifications and upgrades to the ERP system in the future to further enhance our internal control over financial reporting. 56 • Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Nautilus, Inc. Vancouver, Washington We have audited the internal control over financial reporting of Nautilus, Inc. and subsidiaries (the “Company”) as of December 31, 2014 , based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management's Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014 , based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2014 of the Company and our report dated February 26, 2015 expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP Portland, Oregon February 26, 2015 57  Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item will be set forth under the captions Election of Directors , Section 16(a) Beneficial Ownership Reporting Compliance, Executive Officers, Information Concerning the Board of Directors and Code of Ethics in our Proxy Statement for our 2015 Annual Meeting of Shareholders to be filed with the SEC by April 30, 2015 (the "2015 Proxy Statement"). If the 2015 Proxy Statement is not filed with the SEC by April 30, 2015, such information will be included in an amendment to this Annual Report on Form 10-K filed by April 30, 2015. Item 11. Executive Compensation The information required by this item will be set forth under the captions Executive Compensation and Director Compensation in our 2015 Proxy Statement. If the 2015 Proxy Statement is not filed with the SEC by April 30, 2015, such information will be included in an amendment to this Annual Report on Form 10-K filed by April 30, 2015. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information The following table provides information about our equity compensation plan as of December 31, 2014 (shares in thousands): (1) Includes 166 PSU awards granted to certain executive officers. The awards vest based on service requirements along with achievement of certain financial goals established for a three-year performance period, and can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150%. The 166 PSU shares are calculated at 100% of the target award. (2) Weighted average exercise price shown in column (b) does not take into account the PSU awards included in column (a) of the table. For further information regarding our equity compensation plan, refer to Note 13, Stock-Based Incentive Plan and Stock-Based Compensation , to our consolidated financial statements in Part II, Item 8 of this report. Beneficial Ownership The information required by this item is included under the caption Security Ownership of Certain Beneficial Owners and Management in our 2015 Proxy Statement. If the 2015 Proxy Statement is not filed with the SEC by April 30, 2015, such information will be included in an amendment to this Annual Report on Form 10-K filed by April 30, 2015. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is included under the caption Information Concerning the Board of Directors in our 2015 Proxy Statement. If the 2015 Proxy Statement is not filed with the SEC by April 30, 2015, such information will be included in an amendment to this Annual Report on Form 10-K filed by April 30, 2015. 58 Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) (a) Weighted average exercise price of outstanding options, warrants and rights (2) (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 964 $ 4.41 3,705 Equity compensation plans not approved by security holders — — — Total 964 $ 4.41 3,705  Item 14. Principal Accounting Fees and Services The information required by this item is included under the caption Ratification of Appointment of Registered Independent Public Accounting Firm for 2015 in our 2015 Proxy Statement. If the 2015 Proxy Statement is not filed with the SEC by April 30, 2015, such information will be included in an amendment to this Annual Report on Form 10-K filed by April 30, 2015. PART IV Item 15. Exhibits and Financial Statement Schedules Financial Statements and Schedules The Consolidated Financial Statements, together with the report thereon of Deloitte & Touche LLP, are included on the pages indicated below: Financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Exhibits The following exhibits are filed herewith and this list is intended to constitute the exhibit index. Page Report of Independent Public Accounting Firm 28 Consolidated Balance Sheets as of December 31, 2014 and 2013 29 Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012 30 Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 31 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2014, 2013 and 2012 32 Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 33 Notes to Consolidated Financial Statements 34 Exhibit No. Description 3.1 Amended and Restated Articles of Incorporation - Incorporated by reference to Exhibit A to Schedule 14A, as filed with the Commission on April 22, 2008. 3.2 Amended and Restated Bylaws - Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, as filed with the Commission on April 5, 2005. 3.3 Amendment to Amended and Restated Bylaws of the Company - Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, as filed with the Commission on January 31, 2007. 10.1* Company 2005 Long-Term Incentive Plan - Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, as filed with the Commission on June 10, 2005. 10.2* First Amendment to Company 2005 Long-Term Incentive Plan - Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the three months ended September 30, 2006, as filed with the Commission on November 9, 2006. 10.3* Form of Nonstatutory Stock Option Agreement - Incorporated by reference to Exhibit 10 of our Current Report on Form 8-K, as filed with the Commission on July 29, 2005. 10.4* Form of Non-Employee Director Nonstatutory Stock Option Agreement - Incorporated by reference to Exhibit 10 of our Current Report on Form 8-K, as filed with the Commission on August 19, 2005. 10.5* Form of Performance Unit Agreement - Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the three months ended June 30, 2006, as filed with the Commission on August 9, 2006. 10.6 Trademark License Agreement, dated September 20, 2001, by and between Pacific Direct, LLC and Nautilus, Inc. - Incorporated by reference to Exhibit 2.1 of our Quarterly Report on Form 10-Q for the three months ended September 30, 2001, as filed with the Commission on November 14, 2001. 10.7 License Agreement dated as of December 29, 2009 between Nautilus, Inc. and Fit Dragon International, Inc. - Incorporated by  59 reference to Exhibit 10.24 of our Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission on March 8, 2010.  Exhibit No. Description 10.8 Technology Transfer and License Agreement dated as of December 29, 2009 between Nautilus, Inc. and Fit Dragon International, Inc. - Incorporated by reference to Exhibit 10.26 of our Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission on March 8, 2010. 10.9 Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between Nautilus, Inc. and GE Money Bank - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2010 as filed with the Commission on August 16, 2010. [Confidential treatment has been granted with respect to a portion of this Exhibit] 10.10 HELPcard Merchant Agreement, dated June 14, 2010, effective as of June 11, 2010, by and between Nautilus, Inc. and Dent-A-Med, Inc. - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended June 30, 2010 as filed with the Commission on August 16, 2010. [Confidential treatment has been granted with respect to a portion of this Exhibit] 10.11 First Amendment dated November 6, 2010 to Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between the Company and GE Money Bank - Incorporated by reference to Exhibit 10.27 of our Form 10-K for the fiscal year ended December 31, 2012 as filed with the Commission on March 7, 2013. 10.12 Merchant Agreement dated December 15, 2010, between the Company and Hy Cite Corporation - Incorporated by reference to Exhibit 10.28 of our Form 10-K for the fiscal year ended December 31, 2012 as filed with the Commission on March 7, 2013. [Confidential treatment has been granted with respect to a portion of this Exhibit] 10.13* Executive Employment Agreement, dated September 21, 2007, between the Company and Wayne M. Bolio - Incorporated by reference to Exhibit 10.33 of our Form 10-K for the fiscal year ended December 31, 2010 as filed with the Commission on March 8, 2011. 10.14* Severance and Employment Agreement, dated April 23, 2012, between the Company and Robert O. Murdock - Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K as filed with the Commission on March 20, 2013. 10.15* Severance and Employment Agreement, dated March 30, 2011, between the Company and William B. McMahon - Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K as filed with the Commission on March 31, 2011. 10.16 Office Lease Agreement dated as of July 25, 2011, by and between Nautilus, Inc. and Columbia Tech Center, L.L.C. - Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K as filed with the Commission on July 29, 2011. 10.17* Executive Employment Agreement dated as of May 30, 2011, between Nautilus, Inc. and Bruce M. Cazenave - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2011 as filed with the Commission on August 11, 2011. 10.18* Form of Restricted Stock Unit Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended June 30, 2011 as filed with the Commission on August 11, 2011. 10.19* Form of Restricted Stock Unit Agreement - Incorporated by reference to Exhibit 10.3 of our Form 10-Q for the three months ended June 30, 2011 as filed with the Commission on August 11, 2011. 10.20* Form of Non-Employee Director Nonstatutory Stock Option Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended March 31, 2012 as filed with the Commission on May 9, 2012. 10.21 Program Agreement between Nautilus, Inc. and Genesis Bankcard Services, Inc. - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2013 as filed with the Commission on August 8, 2013. [Confidential Treatment has been granted with respect to portions of this exhibit] 10.22* Form of Non-Employee Director Restricted Stock Unit Award Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended June 30, 2013 as filed with the Commission on August 8, 2013. 10.23* Executive Employment Agreement dated as of February 10, 2014, by and between Nautilus, Inc. and Sidharth Nayar - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended March 31, 2014 as filed with the Commission on May 8, 2014.  60 10.24* Stock Unit Award Agreement dated as of February 28, 2014, by and between Nautilus, Inc. and Sidharth Nayar - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended March 31, 2014 as filed with the Commission on May 8, 2014. 10.25* Offer Letter, dated July 26, 2013, between the Company and Jeffery Collins - Incorporated by reference to Exhibit 10.3 of our Form 10-Q for the three months ended March 31, 2014 as filed with the Commission on May 8, 2014.  61 Exhibit No. Description 10.26 First Lease Modification Agreement, dated as of June 19, 2014, to the Office Lease by and between Nautilus, Inc. and Columbia Tech Ceter, L.L.C. dated July 25, 2011 - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2014 as filed with the Commission on August 7, 2014. 10.27 Credit Agreement dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit 10.1 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.28 Continuing Security Agreement dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit 10.2 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.29 Line of Credit Note dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit 10.3 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 21 Subsidiaries of the Company. 23 Consent of Independent Registered Public Accounting Firm. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 The following financial statements from Nautilus, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. * Indicates management contract, compensatory agreement or arrangement, in which our directors or executive officers may participate.  SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints Bruce M. Cazenave and Wayne M. Bolio, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this report, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 26, 2015 . (Remainder of page is blank.) 62 NAUTILUS, INC. Date: February 26, 2015 By: /s/ Bruce M. Cazenave Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer) NAUTILUS, INC. Date: February 26, 2015 By: /s/ Sidharth Nayar Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer)  63 Signature Title /s/ Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer) Bruce M. Cazenave /s/ Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer) Sidharth Nayar * Chairman M. Carl Johnson, III * Director Ronald P. Badie * Director Richard A. Horn * Director Anne G. Saunders * Director Marvin G. Siegert *By: /s/ Wayne M. Bolio February 26, 2015 Wayne M. Bolio Attorney-In-Fact  EXHIBIT 21 SUBSIDIARIES OF NAUTILUS, INC. Nautilus, Inc., a Washington corporation Nautilus Fitness UK Ltd., a United Kingdom corporation Nautilus Fitness Canada, Inc., a Canadian corporation Nautilus (Shanghai) Fitness Co., Ltd., a Chinese corporation Nautilus (Shanghai) Fitness Equipments Co., Ltd., a Chinese corporation  EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements No. 333-126054, 333-79643 and 333-46936 on Form S-8 of our reports dated February 26, 2015 , relating to the consolidated financial statements of Nautilus, Inc., and the effectiveness of Nautilus, Inc.'s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Nautilus, Inc. for the year ended December 31, 2014 . /s/ Deloitte & Touche LLP Portland, Oregon February 26, 2015  EXHIBIT 31.1 CERTIFICATION I, Bruce M. Cazenave, certify that: 1. I have reviewed this annual report on Form 10-K of Nautilus, Inc.; 1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 3. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 4. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 26, 2015 By: /s/ Bruce M. Cazenave Date Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer)  EXHIBIT 31.2 CERTIFICATION I, Sidharth Nayar, certify that: 1. I have reviewed this annual report on Form 10-K of Nautilus, Inc.; 1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 3. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 4. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 26, 2015 By: /s/ Sidharth Nayar Date Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer)  EXHIBIT 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officers of Nautilus, Inc., a Washington corporation (the “Company”), do hereby certify that: To our knowledge, the Annual Report on Form 10-K for the year ended December 31, 2014 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. February 26, 2015 By: /s/ Bruce M. Cazenave Date Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer) February 26, 2015 By: /s/ Sidharth Nayar Date Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer) 

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