Nautilus Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One)[x]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO Commission file number: 001-31321 NAUTILUS, INC.(Exact name of Registrant as specified in its charter) Washington 94-3002667(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)17750 S.E. 6th WayVancouver, 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:Title of each class Name of each exchange on which registeredCommon Stock, no par value New York Stock ExchangeSecurities 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 12months (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 andposted 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 andpost 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'sknowledge, 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. [ ]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 the definitions of “largeaccelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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) Emerging growth company [ ]If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act.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 ($18.90) as reported on the New YorkStock Exchange as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2017) was $567,409,298.The number of shares outstanding of the registrant's common stock as of February 28, 2018 was 30,327,978 shares.Documents Incorporated by ReferenceThe registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for its 2018 Annual Meeting of Shareholders. NAUTILUS, INC.2017 FORM 10-K ANNUAL REPORT PART I Item 1.Business 1Item 1A.Risk Factors 6Item 1B.Unresolved Staff Comments 12Item 2.Properties 12Item 3.Legal Proceedings 12Item 4.Mine Safety Disclosures 13 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13Item 6. Selected Financial Data 15Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 16Item 7A.Quantitative and Qualitative Disclosures About Market Risk 28Item 8.Financial Statements and Supplementary Data 29Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 64Item 9A.Controls and Procedures 64Item 9B.Other Information 65 PART III Item 10.Directors, Executive Officers and Corporate Governance 65Item 11.Executive Compensation 65Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 65Item 13.Certain Relationships and Related Transactions, and Director Independence 66Item 14.Principal Accounting Fees and Services 66 PART IV Item 15.Exhibits and Financial Statement Schedules 66Item 16.Form 10-K Summary 69Signatures 69 Table of ContentsPART IForward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Wordssuch as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identifyforward-looking statements. The forward-looking statements in this report include, without limitation: our prospects, resources or capabilities; current orfuture financial trends; anticipated future operating results; future plans for introduction of new products; anticipated demand for our new and existingproducts; maintenance of appropriate inventory levels; growth in revenues and profits; leverage of operating expenses; future revenues from licenses of ourintellectual property; results of increased media investment in the Direct segment; continued improvement in operating margins; expectations for increasedresearch and development expenses; anticipated capital expenditures; fluctuations in net sales due to seasonality; and our ability to continue to fund ouroperating and capital needs for the following twelve-month period. Forward-looking statements also include any statements related to our expectationsregarding 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 litigationto which we are a party, new product introductions, financing and working capital requirements and resources. These forward-looking statements, and otherswe 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 projectedin forward-looking statements, including the risks described in Part I, Item 1A of this report and in other reports we file with the Securities and ExchangeCommission. 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 changesin circumstances or expectations.Item 1. BusinessOVERVIEWFounded in 1986, Nautilus, Inc. and subsidiaries (collectively, "Nautilus" or the "Company") is a consumer fitness products company headquartered inVancouver, Washington and incorporated in the State of Washington in January 1993. We are committed to providing innovative, quality solutions to helppeople achieve their fitness goals through a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketinghigh-quality cardio and strength fitness products and related accessories for consumer and commercial use, primarily in the U.S. and Canada, but also ininternational markets outside North America. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus®,Bowflex®, Octane Fitness®, Schwinn® and Universal®.We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Directbusiness offers products directly to consumers through television advertising, the Internet and catalogs. Our Retail business offers our products through anetwork of independent companies to reach consumers in both the home use, as well as commercial use, markets in the U.S. and internationally. We alsoderive a portion of our revenue from the licensing of our brands and intellectual property.BUSINESS STRATEGYWe are focused on developing and marketing consumer fitness equipment and related products to help people enjoy healthier lives. Our products are targetedto meet the needs of a broad range of consumers, including fitness enthusiasts and individuals who are seeking the benefits of regular exercise. We havediversified our business by expanding our portfolio of high quality fitness equipment into multiple product lines utilizing our well-recognized brand names.We are focused on consumer markets and specialty and commercial distribution channels, and view the continual innovation of our product offerings as akey aspect of our business strategy. We regularly refresh our existing product lines with new technologies and finishes, and focus significant effort andresources 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, oracquisition of rights to, unique, branded 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 Direct business metrics that provide feedback regarding theeffectiveness of our media marketing programs and attractiveness of third-party consumer financing programs.1Table of ContentsIn our Retail business, we strive to develop long-term relationships with key retailers of sports or fitness equipment. The primary objectives of our Retailbusiness are (i) to offer a selection of innovative, unique products at key price-points to capture market share; and (ii) to utilize the strength of our brands andlong-standing customer relationships to secure more floor space with our Retail customers for our products, as well as support efforts to gain share in multi-user environments.Our long-term strategy involves:•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.PRODUCTSWe market quality cardiovascular and strength fitness products that cover a broad range of price points and features. Our products are designed for home useand multi-user environments by individuals with varying exercise needs. From the person who works out occasionally to the serious athlete, we haveproducts that will help them achieve their fitness objectives.•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 MaxTrainer®, TreadClimber® , and HVT® specialized cardio machines, PowerRod® and Revolution® home gyms and SelectTech® dumbbells.•Our Octane Fitness® brand is known for its innovation around low-impact cardio products, including the perfection of the traditional ellipticalmachine, along with the creation of new categories of exercise, including the xRide® recumbent elliptical, the LateralX® elliptical, and the ZeroRunner®.•Our Schwinn® brand is known for its popular line of exercise bikes, including the Airdyne®, as well as Schwinn-branded 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 weightbenches. We generally differentiate the product models offered in our Direct and Retail sales channels. Currently, our Max Trainer®, TreadClimber®, and HVT®product lines are offered for sale primarily through our Direct sales channel.Approximately 84% of our revenue in 2017 was derived from sales of consumer cardio products. While we continue to be a leader in the consumer strengthproduct category, we believe the much larger market for cardio products offers us greater opportunity for growth. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATIONWe conduct our business in two segments, Direct and Retail. For further information regarding our segments and geographic information, see Note 20,Segment and Enterprise-Wide Information, to our consolidated financial statements in Part II, Item 8 of this report.SALES AND MARKETINGDirectIn our Direct business, we market and sell our products, principally Bowflex® cardio and strength products, directly to consumers. While we are, and plan tocontinue to be, a large direct marketer of strength products in the U.S., our advertising emphasis has shifted toward cardio products, especially the MaxTrainer® and HVT®, as cardio products represent the largest component of the fitness equipment market and a majority of our business. Sales of cardioproducts represented 90% of our Direct channel revenues in 2017, compared to 93% in each of the two years 2016 and 2015, respectively.Our marketing efforts are based on an integrated combination of media and direct consumer contact. In addition to television advertising, which ranges inlength from 30 seconds to as long as three minutes, we utilize Internet advertising, product websites, inquiry-response mailings, catalogs andinbound/outbound call centers. Marketing and media effectiveness is measured continuously based on sales inquiries generated, cost-per-lead, conversionrates, return on investment and other performance2Table of Contentsmetrics and we strive to optimize the efficiency of our marketing and media expenditures based on this data. Almost all of our Direct customer orders arereceived either on our Internet websites or through company-owned and third-party call centers.In order to facilitate consumer sales, we partner with several third-party credit providers. Credit approval rates are an important variable in the number ofDirect products we sell in a given period. Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers increasedto 54% in 2017 from 51% in 2016 and 48% in 2015. The year-over-year boost in approval rates for 2017 compared to 2016, and 2016 compared to 2015, wasdue to expansion of credit approval standards, primarily by our Tier 1 third-party credit provider. We believe our marketing and media strategy, which hasattracted customers with higher credit scores, has also contributed to the increase in approval rates. RetailIn our Retail business, we market and sell a comprehensive line of consumer fitness equipment under the Nautilus®, Octane Fitness®, Schwinn®, Universal®and Bowflex® brands. Our products are marketed through a network of retail companies, consisting of sporting goods stores, Internet retailers, large-formatand warehouse stores, smaller specialty retailers, independent bike dealers, and to specialty commercial customers purchasing our products for multi-userenvironments.We offer programs that provide price discounts to our Retail customers for ordering container-sized shipments or placing orders early enough in the season toallow for more efficient manufacturing by our Asian suppliers. These programs are designed to reduce our shipping and handling costs, with much of thesavings being passed on to our customers. In addition, we often offer other types of sales incentives to our Retail customers, including volume discounts andvarious 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 INNOVATIONInnovation is a vital part of our business, and we continue to expand and diversify our product offerings by leveraging our research and developmentcapabilities. We constantly search for new technologies and innovations that will help us grow our business, either through higher sales or increasedproduction 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 andinnovations. If we determine that a third-party technology or innovation concept meets certain technical and financial criteria, we may enter into a licensingarrangement to utilize the technology or, in certain circumstances, purchase the technology for our own use. Our product design and engineering teams alsoinvest considerable effort to improve product design and quality. As a consumer-driven company, we invest from time-to-time in qualitative and quantitativeconsumer research to help us assess new product concepts, optimal features and anticipated consumer adoption.Our research and development expenses were $15.4 million, $13.9 million and $9.9 million in 2017, 2016 and 2015, respectively, as we increased ourinvestment in new product development resources and capabilities. We expect our research and development expenses to increase in 2018 as we continue tosupplement our investment in new product development, technology initiatives, and engineering capabilities.SEASONALITYWe expect our revenue from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by the thirdquarter, and are generally weakest in the second quarter. We believe that consumers tend to be involved in outdoor activities during the spring and summermonths, 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 SOURCINGAll of our products are produced by third-party manufacturers, and, in 2017, our manufacturing partners were primarily located in Asia. Although multiplefactories bid on and are able to produce most of our products, we typically select one factory to be the primary supplier of any given product. Lead times forinventory purchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of whichtransit time represents three-to-four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts offuture demand for our products. We attempt to compensate for our long replenishment lead times by maintaining adequate levels of inventory at ourwarehousing facilities.3Table of ContentsWe monitor our suppliers' ability to meet our product needs and we participate in quality assurance activities to reinforce adherence to our qualitystandards. Our third-party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis ofindividual purchase orders. Our manufacturing relationships are non-exclusive, and we are permitted to procure our products from other sources at ourdiscretion. None of our manufacturing contracts include production volume or purchase commitments on the part of either party. Our third-partymanufacturers are responsible for the sourcing of raw materials and producing parts and finished products to our specifications.LOGISTICSOur warehousing and distribution facilities are located in Oregon and Ohio. In addition to Company-operated distribution centers, we utilize third-partywarehouses and logistics providers to fulfill orders.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 commoncarriers 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 inventorylevels 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 Retailcustomers place orders well in advance of peak periods of consumer demand to ensure an adequate supply for the anticipated selling season.In 2017, approximately 58% of our Retail customers' orders were shipped by our contract manufacturers in Asia directly to our Retail customers 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, with much of the savings being passed on to our customers. We use various commercial truck lines for ourmerchandise shipments to Retail customers.COMPETITIONThe 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 ourfocus 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 ofInternet websites for product sales by traditional retailers has increased, our competitors have become increasingly similar across our Direct and Retail saleschannels.Our principal competitors include: ICON Health & Fitness, Johnson Health Tech, Peloton, Beach Body, American Telecast, Life Fitness, and Precor. We alsocompete with marketers of mobile device applications focused on fitness training and coaching on both iOS® and Android™ platforms, such as Workout:Gym exercise planner and NIKE® Training Club. Additional marketers of competitive products include the following: activity trackers and content-drivenphysical activity products, such as Garmin vivofit® and Fitbit®; computer-based recreation products, such as the Microsoft Xbox®; weight managementcompanies, such as Weight Watchers; group fitness, such as cross-fit classes; and gym memberships, each of which offers alternative solutions for a fit andhealthy lifestyle.EMPLOYEESAs of February 28, 2018, we had approximately 491 employees, substantially all of whom were full-time. None of our employees are subject to collectivebargaining agreements. We have not experienced a material interruption of our operations due to labor disputes.INTELLECTUAL PROPERTYTrademarks, patents and other forms of intellectual property are vital to the success of our business and are an essential factor in maintaining our competitiveposition in the health and fitness industry.4Table of ContentsTrademarksWe own many trademarks, including Nautilus®, Bowflex®, Max Trainer®, TreadClimber®, HVT®, Power Rod®, Bowflex Revolution®, SelectTech®, OctaneFitness®, LateralX®, xRide®, Zero Runner®, Airdyne®, and Universal®. Nautilus is the exclusive licensee under the Schwinn® mark for indoor fitnessproducts. 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 a third party to use theNautilus, Schwinn and TreadClimber trademarks on commercial fitness products, for which we receive royalty income and expanded consumer awareness ofour brands.Each federally registered trademark is renewable indefinitely if the trademark is still in use at the time of renewal.Patents and DesignsBuilding our intellectual property portfolio is an important factor in maintaining our competitive position in the health and fitness equipment industry. Wehave 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,exercise bikes, and elliptical machines. Patent and design protection for these technologies, which are utilized in products sold in both the Direct and Retailsegments, extends as far as 2034.We maintain a portfolio of patents related to our TreadClimber® specialized cardio machines, which are sold primarily in our Direct segment. The portfolioincludes approximately 23 issued U.S. patents. U.S. patents covering elements of our TreadClimber® products have expiration dates ranging from 2021 to2027. Expiration or invalidity of patents within our TreadClimber® portfolio could trigger the introduction of similar products by our competitors. Althoughwe view each of the patents within our portfolio as valuable, we do not view any single patent as critical to our success or ability to differentiate ourTreadClimber® products from similar products that may be introduced by competitors in the future. We regularly monitor commercial activity in our industryto guard against potential infringement. We protect our proprietary rights and take prompt, reasonable actions to prevent counterfeit products and otherinfringement on our intellectual property.We maintain a portfolio of patents and patent applications related to our MaxTrainer® specialized cardio machines, which are sold primarily in our Directsegment. The portfolio includes issued patents with expiration dates ranging from 2024 to 2034, and additional pending patent applications.Nautilus is also the licensee of patents related to the Bowflex Revolution® home gyms. These patents have expiration dates ranging from 2018 to 2025.Through its Octane Fitness subsidiary, Nautilus owns and licenses certain patents related to Octane's LateralX®, xRide® and Zero Runner® products. Thesepatents have expiration dates ranging from 2018 to 2034.BACKLOGWe define our customer order backlog to include firm orders for future shipment to our Retail customers, as well as unfulfilled consumer orders within theDirect segment.Backlog as of a given date fluctuates based on specific timing of product shipment within the typical shipment timeframes for each of our segments. Retailorders 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, 2017 and 2016 was approximately $6.0 million and $4.9 million, respectively.SIGNIFICANT CUSTOMERSIn 2017, 2016 and 2015, Amazon.com accounted for 11.9%, 11.3% and 11.1%, respectively, of our net sales.5Table of ContentsENVIRONMENTAL AND OTHER REGULATORY MATTERSOur operations are subject to various laws and regulations both domestically and abroad. In the U.S., federal, state and local regulations impose standards onour workplace and our relationship with the environment. For example, the U.S. Environmental Protection Agency, Occupational Safety and HealthAdministration and other federal agencies have the authority to promulgate regulations that may impact our operations. In particular, we are subject tolegislation placing restrictions on our generation, emission, treatment, storage and disposal of materials, substances and wastes. Such legislation includes: theToxic Substances Control Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Safe Drinking Water Act; and theComprehensive Environmental Response and the Compensation and Liability Act (also known as Superfund). We are also subject to the requirements of theConsumer 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. Althoughcompliance with federal, state, local and international environmental legislation has not had a material adverse effect on our financial condition or results ofoperations or cash flows in the past, there can be no assurance that material costs or liabilities will not be incurred in connection with such environmentalmatters in the future.AVAILABLE INFORMATIONOur common stock is listed on the New York Stock Exchange and trades under the symbol “NLS.” Our principal executive offices are located at 17750 SE6th Way, Vancouver, Washington 98683, and our telephone number is (360) 859-2900. The Internet address of our corporate website ishttp://www.nautilusinc.com. We maintain an investor relations page on our corporate website accessible at http://www.nautilusinc.com/investors.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 withthe 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 athttp://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 otherinformation as filed with the SEC, available free of charge on the investor relations page of our corporate website. In addition to our SEC filings, we alsowebcast our earnings calls and certain events we participate in with members of the investment community on our investor relations page. Further, we use ourinvestor relations page to make presentations and other materials regarding our business and financial performance available, along with our Code ofBusiness Conduct and Ethics, corporate governance policies, and the charters of our Audit Committee, Compensation Committee and Nominating andCorporate Governance Committee. The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any otherreport or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. Item 1A. Risk FactorsNautilus operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in this Annual Report on Form10-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 areexpected to continue to be, subject to periodic fluctuations arising from a number of factors, including:•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;6Table of Contents•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 theavailability 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. These trends and factors could adversely affect our business, operating results, financial position and cash flows in any particular period. The loss of one or more of our large Retail customers could negatively impact our revenue and operating results.We derive a significant portion of our revenue from a small number of Retail customers. A Retail customer or any of our retail partners may in the futureexperience difficulties in their businesses that could prompt store closures or reorganizations. A loss of business from one or more of these large customers, ifnot replaced with new business, could negatively affect our operating results and cash flows.A decline in sales of Max Trainer® products without a corresponding increase in sales of other products would negatively affect our future revenues andoperating results.Sales of cardio products, especially Max Trainer® products, represent a substantial portion of our Direct segment revenues. Our products are sold in highlycompetitive markets with limited barriers to entry. Introduction by competitors of comparable products at lower price-points, a maturing product lifecycle orother factors could result in a decline in our revenues derived from this product line. A significant decline in our revenue from this product line would have amaterial 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 inresponse 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 toany revenue shortfalls. If we are unable to reduce operating expenses or other costs quickly in response to any declines in revenue, it would negativelyimpact 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 resultscould 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 consumerpreferences. In addition, any new products that we market may not generate sufficient revenues to recoup their acquisition, development, production,marketing, selling and other costs.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 ourproducts, or could disrupt the business of independent manufacturers that produce our products, by making their purchases of raw materials more expensiveand 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 inwhich we, our customers or our suppliers conduct business. Past fluctuations in currency exchange rates versus the U.S. dollar have caused our costs forcertain products to increase, reducing our margins and cash flows. Similar fluctuations and cost increases may occur in the future. If we are unable to increaseour 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 bereduced 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 and Europe. Currency rate fluctuations could make our products more expensive for foreign consumers and reduce our revenue, whichwould negatively affect our operating results and cash flows.7Table of ContentsFuture impairments of intangible assets could negatively impact our operating results.As of December 31, 2017, we had goodwill of $62.0 million and other intangible assets of $57.7 million, net of an $8.8 million impairment charge related tothe Octane Fitness brand name. Any future impairment charges, if significant, could materially and adversely affect our operating results. An unexpecteddecline in revenue, changes in market conditions, changes in competitive products or technologies or a change in management's intentions regardingutilization of intangible assets could lead to future impairment charges.We are subject to warranty claims for our products, which could result in unexpected expense. Many of our products carry 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 futurewarranty claims. However, the actual costs of servicing future warranty claims may exceed the reserve and have a material adverse effect on our results ofoperations, financial condition and cash flows.Decline in consumer spending would likely 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 marketshave 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 disruptionswill not occur in the future. Deterioration in general economic conditions may depress consumer spending, especially spending for discretionary consumerproducts 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 operatingresults, 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 thirdquarter, 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 inseasonal and geographic demand for particular types of fitness equipment. In addition, our customers may cancel orders, change delivery schedules or changethe mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results ofoperations 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 SafetyCommission, and the Consumer Financial Protection Bureau, regulate our product and marketing efforts. Our revenue and profitability could be significantlyharmed if any of these authorities commence a regulatory enforcement action that interrupts our marketing efforts, results in a product recall or negativepublicity, or requires changes in product design or marketing materials.Substantially higher advertising rates or a significant decline in availability of media time may hinder our ability to effectively market our productsand may reduce profitability. We depend on television and other media advertising to market certain products sold directly to consumers. Consequently, a marked increase in the price wemust pay for our preferred media time, 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 and media coverage of current events may compete for consumerattention, 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 patternsof television viewing. Additionally, consumer attention is increasingly fragmented across a variety of games, apps, the Internet and other digital media, thebalance of which may shift at any time in response to media coverage of current events and the advancement of new technologies. We believe that consumerattention to media coverage of major events, such as the Olympics and the U.S. presidential election, have, in the past, impacted the effectiveness of ourmedia advertising. Future events that draw significant media coverage may similarly impact our ability to engage consumers with our media advertising. Ifwe are unable to successfully adapt our media strategies to new television viewing and media consumption habits,8Table of Contentsor if consumer attention is focused on other events, the effectiveness and efficiency of our media placements could be adversely affected, and our operatingresults may be negatively impacted.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 creditfinancing sources. Reductions in consumer lending and the availability of consumer credit could limit the number of customers with the financial means topurchase our products. Higher interest rates could increase monthly payments for consumer products financed through one of our financing partners orthrough other sources of consumer financing. In the past, we have partnered with financial service companies to assist our customers in obtaining financing topurchase our products. Our present agreements with our third-party consumer credit financing providers enable certain customers to obtain financing if theyqualify for the provider's private label revolving credit card. We cannot be assured that our third-party financing providers will continue to provideconsumers with access to credit or that credit limits under such arrangements will not be reduced. Such restrictions or reductions in the availability ofconsumer credit could have a material adverse impact on our results of operations, financial position and cash flows.We may encounter difficulties in integrating acquired businesses and anticipated benefits of acquisitions may not be realized.On December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane. The ultimate success of our acquisition ofOctane, and any future acquisitions we may complete, depends, in part, on our ability to realize the anticipated synergies, channel and product diversificationand growth opportunities from integrating newly-acquired businesses or assets into our existing businesses. However, the acquisition and successfulintegration of independent businesses or assets is a complex, costly and time-consuming process, and the benefits we realize may not meet targetedexpectations. The risk and difficulties associated with acquiring and integrating companies and other assets include, among others:•Consolidating research and development, logistics, product sourcing, human resources, information technology and other aspects of the combinedoperations, where appropriate;•Coordinating sales, distribution and marketing functions and strategies across new and existing channels of trade;•Establishing or expanding manufacturing, research and development, sales, distribution and marketing functions in order to accommodate newly-acquired businesses or product lines or rationalizing these functions to take advantage of synergies;•Minimizing the diversion of management’s attention from ongoing business concerns;•Potential loss of key employees of the acquired business;•Coordinating geographically separate operations; and•Regulatory and legal issues relating to the integration of legacy and newly-acquired businesses.The purchase consideration and other costs and expenses of acquisitions could negatively impact our net income and earnings per share and a failure torealize the anticipated benefits of acquisitions would have a material adverse effect on our business, results of operations or financial condition.If our contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose revenues, and ourreputation 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 andprovide spare parts in support of our warranty and customer service obligations. We generally commit the manufacturing of each product to a single contractmanufacturer. Our reliance on contract manufacturers exposes us to the following risks over which we may have limited control:•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 withoutrequesting 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. Substantially all of our contract manufacturers are located in Asia, primarily China and Taiwan, and may be subject to disruption by natural disasters, as wellas political, social or economic instability. The temporary or permanent loss of the services of any of9Table of Contentsour 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 purchaseorders. There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary, establish future arrangements withother third-party manufacturers on commercially reasonable terms. Further, while we maintain an active quality control, factory inspection and qualificationprogram, we cannot assure that their manufacturing and quality control processes will be maintained at a level sufficient to meet our inventory needs orprevent the inadvertent sale of substandard products. While we believe that products manufactured by our current third-party manufacturers could generallybe procured from alternative sources, temporary or permanent loss of services from a significant manufacturer could cause disruption in our supply chain andoperations.Changes in international trade policy could adversely affect our business and results of operations.All of our products are produced by third-party manufacturers, substantially all of which are located in Asia, primarily in China and Taiwan. Additionally, wemake significant sales to customers worldwide, in particular to customers in Canada. Most of our imported products are subject to duties or tariffs that affectthe cost and quantity of various types of goods imported into the U.S. or our other markets. The current U.S. presidential administration has indicated that itmay seek changes to or withdraw the United States from various international treaties and trade arrangements. Uncertainty regarding policies affecting globaltrade may make it difficult for our management to accurately forecast our business, and increases in the duties, tariffs and other charges imposed on ourproducts by the United States or other countries in which on our products are manufactured or sold, or other restraints on international trade, could negativelyaffect our business and the results of our operations.Our inventory purchases are subject to long lead times, which could negatively impact our revenue, cash flows and liquidity. All of our products are produced by third-party manufacturers, substantially all of which are located in Asia, primarily China and Taiwan. Lead times forinventory purchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of whichtransit time represents three to four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts offuture demand for our products. Due to the length of our lead times, our revenue and cash flows may be negatively impacted if we do not have sufficientinventory on hand to meet customer demand for such items. In addition, our liquidity and cash flows may be negatively affected, and inventory obsolescencemay 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 salesorders and unanticipated inventory accumulation. 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 andoperational ports worldwide. Labor disputes or other disruptions at ports create significant risks for our business, particularly if work slowdowns, lockouts,strikes or other disruptions occur during our peak importing seasons. Any of these factors could result in reduced sales, canceled sales orders andunanticipated 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 materialadverse 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 tointernational trade, including: changes in a specific country's or region's political or economic conditions; trade restrictions; import and export licensingrequirements; changes in regulatory requirements; additional efforts to comply with a variety of foreign laws and regulations; and longer payment cycles incertain 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 ofour 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 eachcountry. Changes in any of the above factors could have a material adverse effect on our operating results, financial position and cash flows. 10Table of ContentsWe may face competition from providers of comparable products in categories where our patent protection is limited or reduced due to patentexpiration. Increased competition in those product categories could negatively affect our future revenues and operating results.Sales of cardio products, especially Max Trainer® products, represent a substantial portion of our Direct segment revenues. Introduction by competitors ofcomparable products, a maturing product lifecycle or other factors could result in a decline in our revenues derived from this product line. A significantdecline in our revenue from this product line, without offsetting sales gains, would have a material adverse effect on our operating results, financial positionand 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 tosuccessfully assert our intellectual property rights could impact our competitiveness. We rely on trademark, trade secret, patent and copyright laws to protectour 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 intellectualproperty, the validity, enforceability and commercial value of our intellectual property rights may be reduced or eliminated. We cannot be sure that ourintellectual 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 ownintellectual property rights or, where appropriate, license intellectual property rights necessary to compete successfully within the marketplace for ourproducts. 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, patent 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 ordefendant in litigation involving trademark or patent infringement claims or claims for breach of a license agreement. The prosecution or defense ofintellectual property litigation is both costly and disruptive of the time and resources of our management, regardless of the claim's merit. We could also berequired to pay substantial damages or settlement costs to resolve intellectual property litigation or related matters.We may not be able to successfully acquire intellectual property rights, protect existing rights, or potentially prevent others from claiming that we haveviolated their proprietary rights. We could incur substantial costs in defending against such claims even if they are without basis, and we could becomesubject to judgments or settlements requiring us to pay substantial damages, royalties or other charges.We are subject to periodic litigation, product liability risk and other regulatory proceedings, which could result in unexpected expense of time andresources. 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 Commercialbusiness segment. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any suchproceedings. An unfavorable outcome could have a material adverse effect on our business, financial condition and results of operations. In addition, anysignificant litigation in the future, regardless of its merits, could divert management's attention from our operations and may result in substantial legal costs. Disruption to our information and communication systems could result in interruptions to our business and potential implementation of new systems forcritical 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 ofinformation and communication systems. The success of our Direct business is heavily dependent on our ability to respond to customer sales inquiries andprocess sales transactions using our call center communication systems, Internet websites and similar data monitoring and communication systems providedand supported by third-parties. If such systems were to fail, or experience significant or lengthy interruptions in availability or service, our revenues could bematerially 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 methodof communication between employees, suppliers and customers. In addition, we use information systems to maintain our accounting records, assist in tradereceivables collection and customer service efforts, and forecast operating results and cash flows. 11Table of ContentsSystem failures or service interruptions may occur as the result of a number of factors, including: computer viruses; hacking or other unlawful activities bythird 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 ofbusiness interruption, we have in place a disaster recovery program that targets our most critical operational systems. If our disaster recovery system isineffective, 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, ourability to conduct operations would be significantly affected. If we do not consider the potential impact of critical decisions related to systems or processdesign and implementation, this could lead to operational challenges and increased costs. Any of the aforementioned factors could have a material adverseeffect 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 personallyidentifiable information. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietaryinformation or sensitive or confidential data about us, or our customers, including the potential loss or disclosure of such information or data as a result offraud, 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 inlitigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequencesof 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 confidentialinformation or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop anddeploy 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 orother security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address theseproblems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede ourrevenue, manufacturing, distribution or other critical functions.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesFollowing is a summary of each of our properties as of December 31, 2017:Company Location Primary Function(s) Owned orLeasedNautilus Washington Corporate headquarters, customer call center, retail store and R&D facility LeasedOctane Minnesota Design, sales, service and R&D facility LeasedNautilus Ohio Warehouse and distribution facility LeasedNautilus Oregon Warehouse and distribution facility LeasedNautilus China Quality assurance office LeasedOctane Netherlands Sales and service office LeasedThe Nautilus properties are used by both our Direct and Retail segments, and the Octane properties are primarily used for our Retail segment. The propertiesgenerally are well-maintained, adequate and suitable for their intended purposes, and we believe our existing properties will meet our operational needs forthe foreseeable future. If we require additional warehouse or office space in the future, we believe we will be able to obtain such space on commerciallyreasonable terms.Item 3. Legal ProceedingsFrom time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedingsinvolve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur.12Table of ContentsAs of the date of filing of this Annual Report on Form 10-K, we were not involved in any material legal proceedings.Item 4. Mine Safety DisclosuresNot applicable.PART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket for our Common StockOur common stock is listed on the New York Stock Exchange (the “NYSE”) and trades under the symbol “NLS.” As of February 28, 2018, there were 45holders of record of our common stock and approximately 11,800 beneficial shareholders. The following table sets forth the high and low sales prices of ourcommon stock for each period presented: High Low2017 Quarter 1$19.55 $14.80Quarter 2$19.55 $16.80Quarter 3$19.05 $16.05Quarter 4$17.25 $12.402016 Quarter 1$21.04 $16.80Quarter 2$21.10 $16.80Quarter 3$24.99 $17.68Quarter 4$22.59 $15.65We did not pay any dividends on our common stock in 2017 or 2016. Payment of any future dividends, in accordance with our borrowing arrangements, is atthe discretion of our Board of Directors, which considers various factors such as our financial condition, operating results, current and anticipated cash needsand future expansion plans.Equity Compensation PlansSee Part III, Item 12 for equity compensation plan information.Issuer Purchases of Equity SecuritiesThe following table provides information about our repurchases of our equity securities during the fourth quarter ended December 31, 2017. See Note 17 ofNotes to Consolidated Financial Statements for information regarding our public share repurchase programs.Period(a)Total Number ofShares Purchased(b)AveragePrice Paidper Share(c)Total Number of SharesPurchasedas Part of PubliclyAnnounced Plans orPrograms (1),(2)(d)Approximate DollarValue of Shares that May YetBe Purchased Under the Plansor Programs(1),(2)October 1 - October 3145,983$13.2245,983$17,586,541November 1 - November 30437,06212.81437,06211,987,135December 1 - December 31———11,987,135Total483,045$12.85483,045$11,987,135 (1) On May 4, 2016, our Board of Directors authorized the repurchase up to $10.0 million of our outstanding common stock from time to time throughMay 4, 2018. As of November 2017, the stock repurchases under this program were completed in full and the program expired.(2) On April 25, 2017, our Board of Directors authorized a $15.0 million repurchase of our outstanding common stock from time to time through April 25,2019.13Table of ContentsStock Performance GraphThe graph below compares the cumulative total stockholder return of our common stock with the cumulative total return of the NYSE Composite Index andthe S&P SmallCap 600 index for the period commencing December 31, 2012 and ending on December 31, 2017. The S&P SmallCap 600 was chosenbecause we do not believe we can reasonably identify an industry index or specific peer issuer that would offer a meaningful comparison. The S&P SmallCap600 represents a broad-based index of companies with similar market capitalization. The graph assumes $100 was invested, on December 31, 2012, in our common stock and each index presented. The comparisons in the table below are notintended to forecast or be indicative of future performance of our common stock.14Table of ContentsItem 6. Selected Financial DataThe following selected consolidated financial data should be read in connection with our audited consolidated financial statements and related notes theretoand with Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K. Theconsolidated statements of operations data for fiscal years 2017, 2016 and 2015, and the selected consolidated balance sheets data as of December 31, 2017and 2016 are derived from, and are qualified by reference to, the audited consolidated financial statements which are included in this Form 10-K. Theconsolidated statements of operations data for fiscal 2014 and 2013 and the consolidated balance sheets data as of December 31, 2015, 2014 and 2013 arederived 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) 2017 2016 2015 2014 2013Consolidated Statements of Operations Data Net sales $406,184 $406,039 $335,764 $274,447 $218,803Cost of sales 202,302 194,514 162,530 133,872 112,326Gross profit 203,882 211,525 173,234 140,575 106,477 Operating expenses: Selling and marketing 116,222 115,437 101,618 81,059 66,486 General and administrative 27,111 28,775 21,441 22,131 18,705 Research and development 15,446 13,919 9,904 7,231 5,562 Asset impairment charge(1) 8,800 — — — — Total operating expenses 167,579 158,131 132,963 110,421 90,753 Operating income 36,303 53,394 40,271 30,154 15,724 Other income (expense): Interest income 653 234 218 63 14 Interest expense (1,552) (1,928) (22) (25) (36) Other, net 301 (119) (445) 32 337 Total other income (expense) (598) (1,813) (249) 70 315 Income from continuing operations before income taxes 35,705 51,581 40,022 30,22416,039Income tax expense (benefit)(2),(3) 8,080 16,480 13,219 9,841 (32,085)Income from continuing operations 27,625 35,101 26,803 20,383 48,124Loss from discontinued operations (1,358) (923) (201) (1,588) (170)Net income $26,267 $34,178 $26,602 $18,795 $47,954 Basic income per share from continuing operations $0.90 $1.13 $0.86 $0.65 $1.55Basic loss per share from discontinued operations (0.04) (0.03) (0.01) (0.05) (0.01)Basic net income per share $0.86 $1.10 $0.85 $0.60 $1.54 Diluted income per share from continuing operations $0.89 $1.12 $0.85 $0.64 $1.53Diluted loss per share from discontinued operations (0.04) (0.03) (0.01) (0.05) (0.01)Diluted net income per share $0.85 $1.09 $0.84 $0.59 $1.52 Shares used in per share calculations: Basic 30,671 31,032 31,288 31,253 31,072 Diluted 31,010 31,301 31,589 31,688 31,457 As of December 31,Consolidated Balance Sheets Data 2017 2016 2015 2014 2013Cash and investments(4) $85,196 $79,617 $60,776 $72,190 $40,979Working capital(4) 91,118 84,951 69,373 83,080 45,662Total assets 324,776 333,066 315,912 175,654 143,567Long-term note payable, net of current portion(5) 31,986 47,979 63,971 — —Other long-term liabilities 16,227 25,825 29,432 4,911 4,077Total shareholders' equity 179,189 160,857 126,991 111,072 91,56515Table of Contents(1) Asset impairment charge in 2017 related to the Octane Fitness brand name. See Notes 1, 4, 10, and 22 of notes to consolidated financial statements foradditional information. (2) Income tax expense in 2017 includes a $5.6 million benefit related to the change in U.S. tax law that resulted in a lower effective tax rate compared toprior years. See Note 14 of notes to consolidated financial statements for additional information. (3) Income tax benefit in 2013 includes a $38.9 million credit related to the reversal of our deferred tax asset valuation allowance. (4) The decreases in cash and investments and working capital at December 31, 2015 compared to December 31, 2014 were primarily due to our purchaseof Octane on December 31, 2015. See Note 2 of notes to consolidated financial statements for additional information. (5) The increase in long-term notes payable at December 31, 2015 compared to December 31, 2014 was due to our purchase of Octane on December 31,2015. See Notes 2 and 13 of notes to consolidated financial statements for additional information.Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financialstatements and related notes that are included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements based upon currentexpectations 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, customerbuying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customerdemand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existingsales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economyand the availability of consumer credit in both the U.S. and Canada. Our profit margins may vary in response to the aforementioned factors and our ability tomanage product costs. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, productwarranty costs, the cost of fuel, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also beaffected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce anddistribute advertisements of our products on television, the Internet and other media, facility costs, operating costs of our information and communicationssystems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have beenaffected 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 unduereliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and othercompanies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assureyou 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 includedesigning, developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories for consumer use, primarily in theU.S., Canada, Europe and Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus®, Bowflex®, OctaneFitness®, Schwinn® and Universal®.We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Directbusiness offers products directly to consumers through television advertising, the Internet and catalogs. Our Retail business offers our products through anetwork of independent retail companies and specialty retailers with stores and websites located in the U.S. and internationally. We also derive a portion ofour revenue from the licensing of our brands and intellectual property. Net sales in 2017 were $406.2 million, an increase of $0.1 million, compared to net sales of $406.0 million in 2016. Net sales of our Direct segment decreased$5.6 million, or 2.5%, compared to 2016, primarily due to decreased consumer demand for our16Table of ContentsTreadClimber® cardio products, partially offset by the introduction of the Bowflex HVT®. Net sales of our Retail segment increased by $6.0 million, or 3.3%in 2017, compared to 2016, reflecting sales increases across a variety of product offerings in the mass retail channel, partially offset by continued weakness insales to specialty and commercial customers.Income from continuing operations was $27.6 million, or $0.89 per diluted share, in 2017, compared to $35.1 million, or $1.12 per diluted share, in 2016.Income from continuing operations in 2017 included a non-cash intangible asset impairment charge of $8.8 million, and a one-time tax benefit of $5.6million related to the change in United States tax law that resulted in the reassessment of certain deferred tax assets and liabilities.Net income was $26.3 million, or $0.85 per diluted share, in 2017, compared to $34.2 million, or $1.09 per diluted share, in 2016.BUSINESS ACQUISITIONOn December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane, for an aggregate base purchase price of$115.0 million, plus adjustments for working capital and cash on the closing date. We funded the acquisition through an $80.0 million term loan and cash onhand. Based in Brooklyn Park, Minnesota, Octane is a leader in zero-impact training with a line of fitness equipment focused on Retail specialty andcommercial channels. The acquisition of Octane strengthened and diversified our brand portfolio, broadened our distribution and deepened our talent pool.Octane's business is highly complementary to our existing business from both product and channel perspectives.DISCONTINUED OPERATIONSResults from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantialcompletion of asset liquidation at December 31, 2012. Although there was no revenue related to the Commercial business in 2017, 2016 or 2015, wecontinue to incur product liability expenses associated with product previously sold into the Commercial channel.During 2017, our litigation with Biosig Instruments, Inc. ("Biosig") was settled. The litigation began in 2004 and alleged patent infringement in connectionwith our incorporation of heart rate monitors into certain cardio products of our former Commercial business. We paid Biosig $1.2 million under thesettlement, and the matter was dismissed with prejudice. The settlement was expensed in discontinued operations.CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect thereported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financialstatements. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the nature of the estimate is material due to thelevels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and (b) the impact of theestimate on financial condition or operating performance is material. Our critical accounting estimates are discussed below.Sales Discounts and AllowancesProduct sales and shipping revenues are reported net of promotional discounts and allowances, including returns. We estimate the revenue impact of retailsales 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 liabilityfor product returns based on historical experience and record the expected obligation as a reduction of revenue. If actual return costs differ from previousestimates, 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 interimperiods and to apply judgment regarding a number of factors, including estimated future customer purchases and returns.Goodwill and Other Long-Term Assets ValuationWe evaluate our indefinite-lived intangible assets and goodwill for potential impairment annually or when events or circumstances indicate their carryingvalue may be impaired. Definite-lived intangible assets, including acquired trade names, customer relationships, patents and patent rights, and other long-lived assets, primarily property, plant and equipment, are evaluated for impairment when events or circumstances indicate the carrying value may beimpaired. In 2017, we recognized a non-cash17Table of Contentsintangible asset impairment charge of $8.8 million related to the indefinite-lived Octane Fitness brand name. No goodwill or other long-term assetimpairment charges were recognized in 2016 or 2015.Our impairment evaluations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate futurecash flows and asset fair values. Our judgments regarding potential impairment are based on a number of factors including: the timing and amount ofanticipated cash flows; market conditions; relative levels of risk; the cost of capital; terminal values; royalty rates; and the allocation of revenues, expensesand assets and liabilities to reporting units. 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 ObligationsOur products carry defined warranties for defects in materials or workmanship. Our product warranties generally obligate us to pay for the cost of replacementparts, 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 costsof fulfilling future warranty claims. The estimated warranty costs are recorded as a component of cost of sales, based on historical warranty claim experienceand 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. Warrantyexpenses are affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is delivered tothe customer, product failure rates and variances in expected repair costs.Unrecognized Tax BenefitsSignificant judgments are required in determining tax provisions and evaluating tax positions. Such judgments require us to interpret existing tax law andother published guidance as applied to our circumstances. If our financial results or other relevant facts change, thereby impacting the likelihood of realizingthe tax benefit of an uncertain tax position, significant judgment would be applied in determining the effect of the change. A tax benefit from an uncertaintax 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 uponexamination, including resolutions of any related appeals or litigation.18Table of ContentsRESULTS OF OPERATIONSThe discussion that follows should be read in conjunction with our consolidated financial statements and the related notes in this report. All comparisons toprior 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, 2017 2016 Change % ChangeNet sales$406,184 $406,039 $145 — %Cost of sales202,302 194,514 7,788 4.0 %Gross profit203,882 211,525 (7,643) (3.6)%Operating expenses: Selling and marketing116,222 115,437 785 0.7 %General and administrative27,111 28,775 (1,664) (5.8)%Research and development15,446 13,919 1,527 11.0 %Asset impairment charge8,800 — 8,800 — %Total operating expenses167,579 158,131 9,448 6.0 %Operating income36,303 53,394 (17,091) (32.0)%Other income (expense): Interest income653 234 419 Interest expense(1,552) (1,928) 376 Other, net301 (119) 420 Total other expense, net(598) (1,813) 1,215 Income before income taxes35,705 51,581 (15,876) Income tax expense8,080 16,480 (8,400) Income from continuing operations27,625 35,101 (7,476) Loss from discontinued operations, net of income taxes(1,358) (923) (435) Net income$26,267 $34,178 $(7,911) 19Table of Contents Year Ended December 31, 2016 2015 Change % ChangeNet sales$406,039 $335,764 $70,275 20.9%Cost of sales194,514 162,530 31,984 19.7%Gross profit211,525 173,234 38,291 22.1%Operating expenses: Selling and marketing115,437 101,618 13,819 13.6%General and administrative28,775 21,441 7,334 34.2%Research and development13,919 9,904 4,015 40.5%Total operating expenses158,131 132,963 25,168 18.9%Operating income53,394 40,271 13,123 32.6%Other income (expense): Interest income234 218 16 Interest expense(1,928) (22) (1,906) Other, net(119) (445) 326 Total other expense, net(1,813) (249) (1,564) Income before income taxes51,581 40,022 11,559 Income tax expense16,480 13,219 3,261 Income from continuing operations35,101 26,803 8,298 Loss from discontinued operations, net of income taxes(923) (201) (722) Net income$34,178 $26,602 $7,576 Results of operations information by segment was as follows (in thousands): Year Ended December 31, 2017 2016 Change % ChangeNet sales: Direct$219,440 $225,057 $(5,617) (2.5)%Retail183,875 177,920 5,955 3.3 %Royalty2,869 3,062 (193) (6.3)% $406,184 $406,039 $145 — % Cost of sales: Direct$78,716 $75,390 $3,326 4.4 %Retail123,569 119,080 4,489 3.8 %Royalty17 44 (27) (61.4)% $202,302 $194,514 $7,788 4.0 %Gross profit: Direct$140,724 $149,667 $(8,943) (6.0)%Retail60,306 58,840 1,466 2.5 %Royalty2,852 3,018 (166) (5.5)% $203,882 $211,525 $(7,643) (3.6)%Gross margin: Direct64.1% 66.5% (240) basis pointsRetail32.8% 33.1% (30) basis points20Table of Contents Year Ended December 31, 2016 2015 Change % ChangeNet sales: Direct$225,057 $225,595 $(538) (0.2)%Retail177,920 106,195 71,725 67.5 %Royalty3,062 3,974 (912) (22.9)% $406,039 $335,764 $70,275 20.9 % Cost of sales: Direct$75,390 $83,238 $(7,848) (9.4)%Retail119,080 79,292 39,788 50.2 %Royalty44 — 44 — % $194,514 $162,530 $31,984 19.7 %Gross profit: Direct$149,667 $142,357 $7,310 5.1 %Retail58,840 26,903 31,937 118.7 %Royalty3,018 3,974 (956) (24.1)% $211,525 $173,234 $38,291 22.1 %Gross margin: Direct66.5% 63.1% 340 basis pointsRetail33.1% 25.3% 780 basis pointsThe following tables compare the net sales of our major product lines within each business segment (in thousands): Year Ended December 31, 2017 2016 Change % ChangeDirect net sales: Cardio products(1)$197,683 $209,569 $(11,886) (5.7)%Strength products(2)21,757 15,488 6,269 40.5 % 219,440 225,057 (5,617) (2.5)%Retail net sales: Cardio products(1)143,020 135,562 7,458 5.5 %Strength products(2)40,855 42,358 (1,503) (3.5)% 183,875 177,920 5,955 3.3 % Royalty income2,869 3,062 (193) (6.3)% $406,184 $406,039 $145 — %21Table of Contents Year Ended December 31, 2016 2015 Change % ChangeDirect net sales: Cardio products(1)$209,569 $210,578 $(1,009) (0.5)%Strength products(2)15,488 15,017 471 3.1 % 225,057 225,595 (538) (0.2)%Retail net sales: Cardio products(1)135,562 63,762 71,800 112.6 %Strength products(2)42,358 42,433 (75) (0.2)% 177,920 106,195 71,725 67.5 % Royalty income3,062 3,974 (912) (22.9)% $406,039 $335,764 $70,275 20.9 % (1) Cardio products include: MaxTrainer®, TreadClimber®, HVT®, Zero Runner®, treadmills, exercise bikes and ellipticals.(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.Net Sales and Cost of SalesDirectThe 2.5% decrease in year-over-year Direct net sales for 2017 compared to 2016 was primarily due to decreased consumer demand for our TreadClimber®cardio products, partially offset by a 40.5% increase in strength products. The 0.2% decrease in year-over-year Direct net sales for 2016 compared to 2015was primarily due to decreased consumer demand for our TreadClimber® cardio products, partially offset by growth in the Max Trainer® cardio product lineand a 3.1% increase in strength products. The business also benefited from higher U.S. consumer credit approval rates in both years.Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers were 54.4% in 2017 compared to 50.6% in 2016 and48.1% in 2015.The increase in Direct cost of sales in 2017 compared to 2016 was due to increased product costs related to unfavorable currency trends and unfavorableproduct mix, partially offset by the decrease in net sales.The decrease in Direct cost of sales in 2016 compared to 2015 was related to improvements in product mix and supply chain efficiencies. In addition, unusualitems that occurred in 2015, including an arbitration settlement of $2.5 million and write-off of nutrition inventory of $1.4 million, contributed to thedecrease in the year-over-year cost of sales for 2016 compared to 2015.The 240 basis point decrease in the gross margin of our Direct business for 2017 compared to 2016 was due to higher discounting of select products,increased product costs related to unfavorable currency trends, and unfavorable product mix.The 340 basis point increase in the gross margin of our Direct business for 2016 compared to 2015 was primarily driven by the arbitration settlement andreserves for nutrition product inventory discussed above, as well as improvements in product mix and improved supply chain efficiencies.RetailThe 3.3% increase in Retail net sales in 2017 compared to 2016 was driven primarily by sales increases across a variety of product offerings in both thetraditional retail and e-commerce channels, partially offset by weakness in sales to specialty and commercial customers.The 67.5% increase in Retail net sales in 2016 compared to 2015 was driven primarily by increased sales of our cardio products due to the acquisition ofOctane Fitness, coupled with growth in organic product sales.The increases in Retail cost of sales in 2017 compared to 2016, and in 2016 compared to 2015, were due to the increases in Retail net sales mentioned above.22Table of ContentsThe 30 basis point decrease in Retail gross margin in 2017 compared to 2016 was due to higher promotional discounting, increases in product costs, andunfavorable mix, partially offset by higher acquired cost of goods sold in 2016.The 780 basis point increase in Retail gross margin in 2016 compared to 2015 was primarily due to the acquisition of Octane Fitness, which had a highergross margin, coupled with improvements in product mix and supply chain efficiencies.Selling and MarketingDollars in thousandsYear Ended December 31, Change 2017 2016 $ %Selling and marketing$116,222 $115,437 $785 0.7%As % of net sales28.6% 28.4% Dollars in thousandsYear Ended December 31, Change 2016 2015 $ %Selling and marketing$115,437 $101,618 $13,819 13.6%As % of net sales28.4% 30.3% The increase in selling and marketing in 2017 compared to 2016 was primarily due to a $5.5 million increase in media advertising, coupled with a $1.0million increase in creative production costs related to HVT, partially offset by reductions in variable sales expenses of $5.8 million, mainly reducedfinancing fees.The increase in selling and marketing in 2016 compared to 2015 was primarily due to incremental sales and marketing expenses of $10.3 million related tothe acquisition of Octane Fitness, coupled with a $4.9 million increase in media advertising, partially offset by decreased program costs of $0.8 million.The slight increase in sales and marketing as a percentage of net sales in 2017 compared to 2016 was primarily due to less efficient performance of media,resulting in increased media spend to achieve 2017 Direct sales levels.The decrease in sales and marketing as a percentage of net sales in 2016 compared to 2015 was primarily due to the acquisition of Octane and growth in theorganic Retail business, both of which have a lower selling and marketing expense percentage than the company-wide average.Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows:Dollars in thousandsYear Ended December 31, Change 2017 2016 $ %Media advertising$65,130 $59,638 $5,492 9.2%Dollars in thousandsYear Ended December 31, Change 2016 2015 $ %Media advertising$59,638 $54,756 $4,882 8.9%The return metrics we achieved on media performance declined in 2017 and 2016, requiring an increase in investment relative to the sales generated. Wecontinue to closely monitor our media investments in order to optimize the investment and sales.General and AdministrativeDollars in thousandsYear Ended December 31, Change 2017 2016 $ %General and administrative$27,111 $28,775 $(1,664) (5.8)%As % of net sales6.7% 7.1% 23Table of ContentsDollars in thousandsYear Ended December 31, Change 2016 2015 $ %General and administrative$28,775 $21,441 $7,334 34.2%As % of net sales7.1% 6.4% The decrease in general and administrative in 2017 compared to 2016 was primarily due to $1.5 million of savings related to lower integration andadministrative costs related to Octane, and a $1.3 million reduction in incentive and stock compensation expense, offset by increased litigation costs of $1.3million.The increase in general and administrative in 2016 compared to 2015 was attributable to the inclusion of the Octane business in the amount of $3.8 millionand amortization of Octane acquired assets of $3.1 million.The decrease in general and administrative as a percentage of net sales in 2017 compared to 2016 was primarily due to achieving cost synergies related to theOctane Fitness acquisition.The increase in general and administrative as a percentage of net sales in 2016 compared to 2015 was primarily due to the amortization of Octane acquiredassets.Research and DevelopmentDollars in thousandsYear Ended December 31, Change 2017 2016 $ %Research and development$15,446 $13,919 $1,527 11.0%As % of net sales3.8% 3.4% Dollars in thousandsYear Ended December 31, Change 2016 2015 $ %Research and development$13,919 $9,904 $4,015 40.5%As % of net sales3.4% 2.9% The increases in research and development in 2017 compared to 2016, and in 2016 compared to 2015, were primarily due to our investment in additionalengineering and product development headcount as we continue to supplement our new product development resources required to innovate and broadenour product portfolio, coupled with the addition, in 2016, of the research and development expenses related to Octane.Asset Impairment ChargeDuring the fourth quarter of 2017, we identified impairment indicators in our Octane Fitness brand name originally acquired through the Octane Fitnessacquisition on December 31, 2015. Ongoing weakness in the specialty retail channel, as a result of retailer consolidation, has had a negative impact onOctane branded sales and projected growth trends. We utilized the relief-from-royalty method to quantify the impairment, resulting in an $8.8 million non-cash impairment charge for 2017. The impairment charge is recorded in operating expenses on the consolidated statements of operations.Interest ExpenseInterest expense of $1.6 million and $1.9 million in 2017 and 2016, respectively, was primarily related to the term loan that was used to finance the Octaneacquisition.Interest expense in 2015 was less than $0.1 million and was related to financing costs associated with capital equipment lease payments.Other, NetOther, net primarily relates to the effect of exchange rate fluctuations between the U.S. and the currencies of our foreign subsidiaries, primarily Canada, Chinaand Europe. In addition, 2017 included a gain of $0.2 million for an insurance reimbursement related to inventory loss, and 2015 included losses on assetdispositions of $0.3 million.24Table of ContentsIncome Tax ExpenseDollars in thousandsYear Ended December 31, Change 2017 2016 $ %Income tax expense$8,080 $16,480 $(8,400) (51.0)%Effective tax rate22.6% 31.9% Dollars in thousandsYear Ended December 31, Change 2016 2015 $ %Income tax expense$16,480 $13,219 $3,261 24.7%Effective tax rate31.9% 33.0% Income tax expense in 2017 was primarily attributable to the income generated domestically and internationally, partially offset by a $5.6 million incometax benefit related to the change in U.S. tax law that resulted in the revaluation of certain deferred tax assets and liabilities. Income tax expense for 2016included a release of previously unrecognized tax benefits of $2.7 million associated with certain non-U.S. filing positions which resulted from completingthe deregistration of a certain foreign entity. Income tax expense for 2015 included a $2.4 million release of our domestic valuation allowance.The amount of valuation allowance offsetting our deferred tax assets was $0.9 million as of December 31, 2017. Of the total remaining valuation allowance,$0.7 million primarily relates to domestic state credit carryforwards as we currently do not anticipate generating income of appropriate character to utilizethose credits. In addition, $0.2 million of the remaining valuation allowance relates to foreign net operating loss carryforwards. There have been no materialchanges to our foreign operations since December 31, 2016 and, accordingly, we maintain our existing valuation allowance on foreign deferred income taxassets in such jurisdictions at December 31, 2017.Refer to Note 14, 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, 2017, we had $85.2 million of cash and investments, compared to $79.6 million as of December 31, 2016. Cash provided by operatingactivities was $35.0 million for 2017, compared to cash provided by operating activities of $45.9 million for 2016. We expect our cash, cash equivalents andavailable-for-sale securities at December 31, 2017, along with cash expected to be generated from operations, to be sufficient to fund our operating andcapital requirements for at least twelve months from December 31, 2017.The decrease in cash flows from operating activities for 2017, compared to 2016, was primarily due to decreased operating performance and the changes inour operating assets and liabilities as discussed below.Trade receivables decreased $2.8 million to $42.7 million as of December 31, 2017, compared to $45.5 million as of December 31, 2016, due to the decreaseof Retail sales in the fourth quarter of 2017 compared to the fourth quarter of 2016.Inventories increased $6.3 million to $53.4 million as of December 31, 2017, compared to $47.0 million as of December 31, 2016, due to the addition of newproducts.Prepaids and other current assets decreased $0.8 million to $7.2 million as of December 31, 2017, compared to $8.0 million as of December 31, 2016, due torelease of advertising and creative content costs.Trade payables increased $0.9 million to $66.9 million as of December 31, 2017, compared to $66.0 million as of December 31, 2016, primarily due toincreased spending on media in the fourth quarter of 2017.Accrued liabilities decreased $2.1 million to $10.8 million as of December 31, 2017 compared to $12.9 million as of December 31, 2016, due to reductions inaccrued royalties payable.Warranty obligations decreased $1.3 million to $6.1 million as of December 31, 2017 compared to $7.5 million as of December 31, 2016, primarily due toimprovement in the experience rates of our products, resulting from better product quality, full stock of parts availability and sales mix.25Table of ContentsNet deferred income tax liabilities decreased by $8.4 million to $8.6 million as of December 31, 2017, compared to $17.0 million as of December 31, 2016,primarily due to the revaluation of certain deferred tax assets and liabilities as a result of the recent change in the U.S. tax law.Cash used in investing activities of $29.3 million for 2017 was primarily related to the net purchases of $25.5 million of marketable securities. In addition,$3.8 million was used for capital expenditures during 2017, primarily for product tooling, implementation of new software, and information system hardwareupgrades. We anticipate spending $8.5 million to $10.5 million in 2018 for systems integration, product tooling, and facilities-related upgrades.Cash used in financing activities of $26.7 million for 2017 was primarily related to principal repayments on our term loan of $16.0 million and sharerepurchase program spending of $11.1 million.Financing ArrangementsOn December 31, 2015 we entered into an amendment (the “Amendment”) to our existing Credit Agreement, dated December 5, 2014, with JPMorgan ChaseBank, N.A. (“Chase Bank”) that provided for an $80.0 million term loan (the “Term Loan”) to finance the acquisition of Octane. The Term Loan and ourexisting $20.0 million revolving line of credit with Chase Bank are secured by substantially all of our assets. The Term Loan matures on December 31, 2020.Under the terms of the Amendment, the maturity date of our existing revolving line of credit was extended to December 31, 2020.The Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, andlimitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement alsocontains customary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligationsand exercise its remedies under the continuing security agreement.Borrowing availability under the Credit Agreement is subject to our compliance with certain financial and operating covenants at the time borrowings arerequested. Letters of credit under the Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing.The interest rate applicable to the Term Loan, as well as each advance under the revolving line of credit, is based on either Chase Bank's floating prime rate oradjusted LIBOR, plus an applicable margin. As of December 31, 2017 our borrowing rate for both the Term Loan and line of credit advances was 2.35%.As of December 31, 2017, we had outstanding borrowings of $48.0 million on our term loan and no letters of credit issued under the Credit Agreement. As ofDecember 31, 2017, we were in compliance with the financial covenants of the Credit Agreement, and $20.0 million was available for borrowing under theline of credit.Stock Repurchase ProgramOn November 3, 2014, our Board of Directors authorized a stock repurchase program that authorized us to repurchase up to $15.0 million of our outstandingcommon stock from time to time during the ensuing period of 24 months. As of November 2016, the stock repurchases under this program were completed infull and the program expired.On May 4, 2016, our Board of Directors authorized the repurchase of up to $10.0 million of our outstanding common stock from time to time through May 4,2018. During 2017, repurchases under this program totaled $8.1 million. As of November 2017, the stock repurchases under this program were completed infull and the program expired.On April 25, 2017, our Board of Directors authorized a $15.0 million share repurchase program. Under this program, shares of common stock may berepurchased from time to time through April 25, 2019. Repurchases may be made in open market transactions at prevailing market prices, in privatelynegotiated transactions, or by other means in accordance with federal securities laws. Share repurchases are funded with existing cash balances, and therepurchased shares are retired and returned to unissued authorized shares. As of December 31, 2017, repurchases under this program totaled $3.0 million.During 2017, we repurchased 788,416 shares at an average price of $14.02 per share for an aggregate purchase price of $11.1 million under both programs. Asof December 31, 2017, $12.0 million remained available for future repurchases.Commitments and ContingenciesFor a description of our commitments and contingencies, refer to Note 21, Commitments and Contingencies, to our consolidated financial statements in PartII, Item 8 of this report. 26Table of ContentsNon-Cancellable Contractual ObligationsOur operating cash flows include the effect of certain non-cancellable contractual obligations. A summary of such obligations as of December 31, 2017 is asfollows (in thousands): Payments due by period Total Less than 1year 1-3 years 3-5 years More than 5yearsLong-term debt obligations, including interest$49,791 $16,984 $32,807 $— $—Operating lease obligations26,111 5,016 10,018 6,724 4,353Purchase obligations(1)19,048 19,048 — — —Minimum royalty obligations1,038 1,038 — — —Capital lease obligations438 132 259 47 —Total$96,426 $42,218 $43,084 $6,771 $4,353(1) Our purchase obligations are comprised primarily of inventory purchase commitments to our third-party manufacturers. Because substantially all of ourinventory is sourced from Asia, we have long lead times and therefore need to secure factory capacity from our vendors in advance. Our third-partymanufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of individual purchase orders.Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2017, we are unable to makereasonably reliable estimates of the timing of any cash settlements with the respective taxing authorities. Therefore, approximately $3.2 million of liabilitiesrelated to unrecognized tax benefits, including interest and penalties on uncertain tax positions, have been excluded from the contractual table above. Forfurther information, refer to Note 14, Income Taxes, to our consolidated financial statements in Part II, Item 8 of this report.Off-Balance Sheet ArrangementsIn 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; agreementswith customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, underwhich we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we mayindemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreementswith 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 policiesthat mitigate potential losses arising from certain types of indemnifications. Because we are unable to estimate our potential obligation, and becausemanagement does not expect these obligations to have a material adverse effect on our consolidated financial position, results of operations or cash flows, noliabilities are recorded at December 31, 2017.INFLATIONWe do not believe that inflation had a material effect on our business, financial condition or results of operations in 2017, 2016 or 2015. Inflation pressuresdo exist in countries where our contract manufacturers are based; however, we have largely mitigated these increases through cost improvement measures.NEW ACCOUNTING PRONOUNCEMENTSSee Note 1, Significant Accounting Polices, to our consolidated financial statements in Part II, Item 8 of this report.27Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate and Foreign Exchange RiskOur exposure to market risk from changes in interest rates relates primarily to our cash equivalents, marketable securities, derivative assets, and variable-ratedebt obligations. As of December 31, 2017, we had cash equivalents of $12.9 million held in a combination of money market funds and commercial paper,and marketable securities of $57.3 million, held in a combination of certificates of deposit, corporate bonds, and U.S. government bonds. Our cashequivalents mature within three months or less from the date of purchase. Marketable securities with original maturities of greater than three months andremaining 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. Wehave 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 ofthe 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 ratesmay negatively affect the market price or liquidity of certain securities within the portfolio.Our negotiated credit facilities generally charge interest based on a benchmark rate such as LIBOR. Fluctuations in short-term interest rates may cause interestpayments on term loan principal and drawn amounts on the revolving line to increase or decrease. As of December 31, 2017, the outstanding balances on ourcredit facilities totaled $48.0 million.In January 2016, we entered into an $80.0 million receive-variable, pay-fixed interest rate swap agreement, amortizing monthly in line with the outstandingprincipal balance on our term loan. The swap is classified as a cash flow hedge and effectively fixes the interest rate on our variable-rate term loan. Theinterest rate swap matures on December 31, 2020 and has a fixed interest rate of 1.42% per annum. The variable rate on the interest rate swap is the one-monthLIBOR benchmark, which was 1.35% at December 31, 2017. As of December 31, 2017, the outstanding balance on our interest rate swap was $48.0 million.The fair value of our interest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreement. The amountsrelated to our cash flow hedge are recorded as deferred gains or losses in our consolidated balance sheets with the offset recorded in accumulated othercomprehensive income, net of tax. At December 31, 2017, the fair value of our interest rate swap agreement was an asset of $0.4 million. The estimatedamount expected to be reclassified into earnings within the next twelve months was $0.1 million at December 31, 2017.We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. Totalnotional amounts outstanding at December 31, 2017 were $22.1 million. A hypothetical 10% increase in interest rates, or a 10% movement in the currenciesunderlying our foreign currency derivative positions, would not have material impacts on our results of operations, financial position or cash flows.We do not enter into derivative instruments for any purpose other than to manage our interest rate or foreign currency exposure. That is, we do not engage ininterest rate or currency exchange rate speculation using derivative instruments.28Table of ContentsItem 8. Financial Statements and Supplementary DataREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and Board of DirectorsNautilus, Inc.Opinions on the Consolidated Financial Statements and Internal Control Over Financial ReportingWe have audited the accompanying consolidated balance sheet of Nautilus, Inc. and subsidiaries (the “Company”) as of December 31, 2017, the relatedconsolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the year ended December 31, 2017, and the relatednotes (collectively, the "consolidated financial statements"). We have also audited the Company's internal control over financial reporting as of December 31,2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally acceptedaccounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsof the Treadway Commission.Basis for OpinionThe Company’s management is responsible for these consolidated financial statements, 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 InternalControl Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on theCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securitieslaws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.29Table of ContentsBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ KPMG LLPWe have served as the Company's auditor since 2017.Portland, OregonMarch 6, 201830Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofNautilus, Inc.Vancouver, WashingtonWe have audited the accompanying consolidated balance sheet of Nautilus, Inc. and subsidiaries (the "Company") as of December 31, 2016, and the relatedconsolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the two years in the period endedDecember 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesefinancial 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 thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide 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 ofDecember 31, 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformitywith accounting principles generally accepted in the United States of America./s/ Deloitte & Touche LLPPortland, OregonFebruary 27, 201731Table of ContentsNAUTILUS, INC.CONSOLIDATED BALANCE SHEETS(In thousands) As of December 31, 2017 2016Assets Cash and cash equivalents$27,893 $47,874Available-for-sale securities57,303 31,743Trade receivables, net of allowances of $119 and $17042,685 45,458Inventories53,354 47,030Prepaids and other current assets7,240 8,020Income taxes receivable17 3,231 Total current assets188,492 183,356Property, plant and equipment, net15,827 17,468Goodwill62,030 61,888Other intangible assets, net57,743 69,800Deferred income tax assets, non-current— 11Other assets684 543Total assets$324,776 $333,066Liabilities and Shareholders' Equity Trade payables$66,899 $66,020Accrued liabilities10,764 12,892Warranty obligations, current portion3,718 3,500Note payable, current portion, net of unamortized debt issuance costs of $7 and $715,993 15,993 Total current liabilities97,374 98,405Warranty obligations, non-current2,3993,950Income taxes payable, non-current2,955 2,403Deferred income tax liabilities, non-current8,558 16,991Other long-term liabilities2,315 2,481Note payable, non-current, net of unamortized debt issuance costs of $14 and $2131,986 47,979Total liabilities145,587 172,209Commitments and contingencies (Note 21) Shareholders' equity: Common stock - no par value, 75,000 shares authorized, 30,305 and 30,825 shares issued and outstanding— 578Retained earnings179,448 161,496Accumulated other comprehensive loss(259) (1,217)Total shareholders' equity179,189 160,857Total liabilities and shareholders' equity$324,776 $333,066See accompanying notes to consolidated financial statements.32Table of ContentsNAUTILUS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts) Year Ended December 31, 2017 2016 2015Net sales$406,184 $406,039 $335,764Cost of sales202,302 194,514 162,530Gross profit203,882 211,525 173,234Operating expenses: Selling and marketing116,222 115,437 101,618General and administrative27,111 28,775 21,441Research and development15,446 13,919 9,904Asset impairment charge8,800 — —Total operating expenses167,579 158,131 132,963Operating income36,303 53,394 40,271Other income (expense): Interest income653 234 218Interest expense(1,552) (1,928) (22)Other, net301 (119) (445)Total other expense, net(598) (1,813) (249)Income from continuing operations before income taxes35,705 51,581 40,022Income tax expense8,080 16,480 13,219Income from continuing operations27,625 35,101 26,803Discontinued operations: Loss from discontinued operations before income taxes(1,713) (1,077) (601)Income tax benefit of discontinued operations(355) (154) (400)Loss from discontinued operations(1,358) (923) (201)Net income$26,267 $34,178 $26,602 Basic income per share from continuing operations$0.90 $1.13 $0.86Basic loss per share from discontinued operations(0.04) (0.03) (0.01)Basic net income per share$0.86 $1.10 $0.85 Diluted income per share from continuing operations$0.89 $1.12 $0.85Diluted loss per share from discontinued operations(0.04) (0.03) (0.01)Diluted net income per share$0.85 $1.09 $0.84Shares used in per share calculations: Basic30,671 31,032 31,288Diluted31,010 31,301 31,589See accompanying notes to consolidated financial statements.33Table of ContentsNAUTILUS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) Year Ended December 31, 2017 2016 2015Net income$26,267 $34,178 $26,602Other comprehensive income (loss): Unrealized gain (loss) on marketable securities, net of income tax expense (benefit) of $(27), $5,and $1(56) 8 2Gain (loss) on derivative securities, effective portion, net of income tax expense (benefit) of$171, $(14), and $0240 (24) —Foreign currency translation adjustment, net of income tax expense (benefit) of $1, $(5), and $17774 126 (1,021)Other comprehensive income (loss)958 110 (1,019)Comprehensive income$27,225 $34,288 $25,583See accompanying notes to consolidated financial statements.34Table of ContentsNAUTILUS, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(In thousands) Common Stock RetainedEarnings AccumulatedOtherComprehensiveIncome (Loss) TotalShareholders'Equity Shares Amount Balances at January 1, 201531,333 $8,033 $103,347 $(308) $111,072Net income— — 26,602 — 26,602Unrealized gain on marketable securities, net ofincome tax expense of $1— — — 2 2Foreign currency translation adjustment, net of income tax expense of $17— — — (1,021) (1,021)Stock-based compensation expense— 1,484 — — 1,484Common stock issued under equitycompensation plan, net of shares withheld for tax payments377 275 — — 275Common stock issued under employee stockpurchase plan7 116 — — 116Tax benefit related to stock-based awards— 28 — — 28Repurchased shares(712) (9,140) (2,427) — (11,567)Balances at December 31, 201531,005 796 127,522 (1,327) 126,991Net income— — 34,178 — 34,178Unrealized gain on marketable securities, net ofincome tax expense of $5— — — 8 8Loss on derivative securities, effective portion, netof income tax benefit of $(14)— — — (24) (24)Foreign currency translation adjustment, net ofincome tax benefit of $(5)— — — 126 126Stock-based compensation expense— 2,613 — — 2,613Common stock issued under equitycompensation plan, net of shares withheld for tax payments116 117 — — 117Common stock issued under employee stockpurchase plan24 381 — — 381Tax benefit related to stock-based awards— 1,857 — — 1,857Repurchased shares(320) (5,186) (204) — (5,390)Balances at December 31, 201630,825 578 161,496 (1,217) 160,857Net income— — 26,267 — 26,267Unrealized loss on marketable securities, net ofincome tax benefit of $(27)— — — (56) (56)Gain on derivative securities, effective portion, netof income tax expense of $171— — — 240 240Foreign currency translation adjustment, net of income tax expense of $1— — — 774 774Stock-based compensation expense— 1,884 (28) — 1,856Common stock issued under equity compensation plan, net of shares withheld for tax payments231 (181) — — (181)Common stock issued under employee stockpurchase plan37 487 — — 487Repurchased shares(788) (2,768) (8,287) — (11,055)Balances at December 31, 201730,305 $— $179,448 $(259) $179,189See accompanying notes to consolidated financial statements.35Table of ContentsNAUTILUS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2017 2016 2015Cash flows from operating activities: Income from continuing operations$27,625 $35,101 $26,803Loss from discontinued operations(1,358) (923) (201)Net income26,267 34,178 26,602Adjustments to reconcile net income to net cash provided by operating activities: Asset impairment charge8,800 — —Depreciation and amortization8,643 7,874 3,412Bad debt expense311 289 786Inventory lower-of-cost-or-market/NRV adjustments1,067 245 1,583Stock-based compensation expense1,856 2,613 1,484Loss on asset disposals56 147 313Deferred income taxes, net of valuation allowances(8,556) 9,510 11,669Excess tax benefit related to stock-based awards— (1,857) (28)Other(117) 5 —Changes in operating assets and liabilities: Trade receivables2,516 (694) (6,812)Inventories(7,526) (3,110) (7,147)Prepaids and other current assets1,080 (1,415) 1,365Income taxes receivable3,214 (2,792) (389)Trade payables449 6,464 4,506Accrued liabilities, including warranty obligations(3,044) (5,606) 3,776Net cash provided by operating activities35,016 45,851 41,120Cash flows from investing activities: Acquisition of business, net of cash acquired— (3,468) (114,062)Purchases of property, plant and equipment and intangible assets(3,792) (4,656) (5,734)Purchases of available-for-sale-securities(88,413) (34,739) (61,933)Proceeds from maturities of available-for-sale securities62,939 32,923 55,292Proceeds from sales of available-for-sale securities— 71 3,602Net cash used in investing activities(29,266) (9,869) (122,835)Cash flows from financing activities: Proceeds from long-term debt— — 80,000Payments on long-term debt(16,000) (16,000) —Proceeds from employee stock purchases487 381 116Proceeds from exercise of stock options560 356 1,050Tax payments related to stock award issuances(741) (239) (775)Excess tax benefit related to stock-based awards— 1,857 28Payments for stock repurchases(11,055) (5,390) (11,567)Net cash provided by (used in) financing activities(26,749) (19,035) 68,852Effect of exchange rate changes on cash and cash equivalents1,018 149 (1,565)Increase (decrease) in cash and cash equivalents(19,981) 17,096 (14,428)Cash and cash equivalents: Beginning of year47,874 30,778 45,206End of year$27,893 $47,874 $30,778Supplemental disclosure of cash flow information: Cash paid for income taxes, net$11,630 $11,511 $1,308Cash paid for interest1,545 1,920 22Supplemental disclosure of non-cash investing activities: Acquisition consideration owed but not yet paid$— $— $2,813Capital expenditures incurred but not yet paid404 210 1,000Supplemental disclosure of non-cash financing activities: Loan fees incurred but not yet paid$— $— $36See accompanying notes to consolidated financial statements.36Table of ContentsNAUTILUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) SIGNIFICANT ACCOUNTING POLICIESOrganization and BusinessNautilus, Inc. and subsidiaries (collectively, "Nautilus", the "Company", "we" or "us") was founded in 1986 and incorporated in the State of Washington in1993. 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 principalbusiness activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories forconsumer use, primarily in the U.S., Canada, and Europe. Our products are sold under some of the most-recognized brand names in the fitness industry:Nautilus®, Bowflex®, Octane Fitness®, Schwinn® and Universal®.We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Directbusiness offers products directly to consumers through television advertising, catalogs and the Internet. Our Retail business offers our products through anetwork of independent retail companies and specialty retailers with stores and websites located in the U.S. and internationally. We also derive a portion ofour revenue from the licensing of our brands and intellectual property.Basis of PresentationThe accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”) and relate to Nautilus, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany transactions andbalances have been eliminated in consolidation.Discontinued OperationsResults from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantialcompletion of asset liquidation at December 31, 2012. Although there was no revenue related to our former Commercial business during 2015 through 2017,we continue to have 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 allperiods presented.Critical Accounting EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in the financial statements. Our critical accountingestimates relate to the following:•Sales discounts and allowances;•Goodwill and other long-term assets valuation;•Product warranty obligations; and•Unrecognized tax benefits.Actual results could differ from our estimates.ConcentrationsFinancial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents held in bank accounts inexcess of federally-insured limits and trade receivables. Trade receivables are generally unsecured and therefore collection is affected by the economicconditions 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 operationscould be disrupted by natural disasters, difficulties in transporting products from non-U.S. suppliers, as well as political, social or economic instability in thecountries where contract manufacturers or their vendors or customers conduct business. While any such contract manufacturing arrangement could bereplaced over time, the temporary loss of the services of any primary contract manufacturer could delay product shipments and cause a significant disruptionin our operations.37Table of ContentsWe 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, ifnot replaced with new business, would negatively affect our operating results and cash flows. In each of 2017, 2016 and 2015, one customer accounted formore than 10%, but less than 15%, of our net sales.Cash and Cash EquivalentsAll highly liquid investments with original maturities of three months or less at purchase are considered to be cash equivalents. As of December 31, 2017, and2016, cash equivalents consisted of money market funds and commercial paper, and totaled $12.9 million and $13.6 million, respectively.Available-For-Sale SecuritiesWe classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Marketable securities with original maturities of greaterthan three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year maybe classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available forcurrent operations. Unrealized holding gains and losses, which are immaterial, are excluded from earnings and are reported net of tax in other comprehensiveincome until realized. Dividend and interest income is recognized when earned. Realized gains and losses, which were not material in 2017 or 2016, areincluded 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 ofqualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until aforecasted recovery occurs.For additional information, refer to Note 4, Fair Value Measurements.Derivative SecuritiesWe record our derivative securities at fair value, and our portfolio currently consists of an interest rate swap contract and foreign currency forward contracts.The fair value of our interest rate swap agreement, which is classified as a cash flow hedge, represents the estimated receipts or payments that would be madeto terminate the agreement. The amounts related to the cash flow hedge are recorded as deferred gains or losses in our consolidated balance sheets with theoffset recorded in accumulated other comprehensive loss, net of tax.We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. Ahypothetical 10% increase in interest rates, or a 10% movement in the currencies underlying our foreign currency derivative positions, would not havematerial impacts on our results of operations, financial position or cash flows. Gains and losses on foreign currency forward contracts are recognized in theOther, net line of our consolidated statements of operations.We do not enter into derivative instruments for any purpose other than to manage our interest rate or foreign currency exposure. That is, we do not engage ininterest rate or currency exchange rate speculation using derivative instruments.Trade ReceivablesAccounts receivable primarily consists of trade receivables due from our Retail segment customers. We determine an allowance for doubtful accounts basedon historical customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off againstthe allowance. InventoriesInventories are stated at the lower of cost and net realizable value ("NRV"), with cost determined based on the first-in, first-out method. We establishinventory allowances for excess, slow-moving and obsolete inventory based on inventory levels, expected product life and forecasted sales. Inventories arewritten down to NRV based on historical demand, competitive factors, changes in technology and product lifecycles.Property, Plant and EquipmentProperty, plant and equipment is stated at cost, net of accumulated depreciation. Improvements or betterments which add new functionality or significantlyextend the life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired, or otherwise disposedof, and the related accumulated depreciation, are removed from the accounts at the time of disposal. Gains and losses resulting from asset sales anddispositions are recognized in the period in which assets are disposed. Depreciation is recognized, using the straight-line method, over the lesser of theestimated useful lives of the assets or, in the case of leasehold improvements, the lease term, including renewal periods if we expect to exercise our renewal38Table of Contentsoptions. Depreciation on automobiles, computer software and equipment, machinery and equipment, and furniture and fixtures is determined based onestimated useful lives, which generally range from three-to-seven years.GoodwillGoodwill consists of the excess of acquisition costs over the fair values of net assets acquired in business combinations. It is not amortized, but rather is testedat the reporting unit level at least annually for impairment or more frequently if triggering events or changes in circumstances indicate impairment. Initially,qualitative factors are considered to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Someof these qualitative factors may include macroeconomic conditions, industry and market considerations, a change in financial performance, entity-specificevents, a sustained decrease in share price, and consideration of the difference between the fair value and carrying amount of a reporting unit as determined inthe most recent quantitative assessment. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit'sfair value is less than its carrying amount, a quantitative impairment analysis is performed. A quantitative impairment analysis involves estimating the fairvalue of a reporting unit using widely-accepted valuation methodologies including the income and market approaches, which requires the use of estimatesand assumptions. These estimates and assumptions include revenue growth rates, discounts rates, and determination of appropriate market comparables. If thefair value of the reporting unit is less than its carrying amount, an impairment loss is recognized in an amount equal to that excess, not to exceed the carryingamount of the goodwill. We performed assessments of goodwill in the fourth quarters of 2017, 2016 and 2015, and determined no impairments were indicated in those years. Weevaluate goodwill at the reporting unit level. Our goodwill asset related to our Canadian subsidiary is attributable to our Direct reporting unit, and ourgoodwill related to the Octane acquisition is attributable to our Retail reporting unit. For further information regarding goodwill, see Note 9, Goodwill.Other Intangible AssetsIndefinite-lived intangible assets consist of acquired trademarks, specifically trade names. Indefinite-lived intangible assets are stated at cost and are notamortized; instead, they are tested for impairment at least annually. We review our indefinite-lived trademarks for impairment in the fourth quarter of eachyear and when events or changes in circumstances indicate that the assets may be impaired. The fair value of trademarks is estimated using the relief-from-royalty method to estimate the value of the cost savings and a discounted cash flows method to estimate the value of future income. The sum of these twovalues for each trademark is the fair value of the trademark. If the carrying amount of trademarks exceeds the estimated fair value, we calculate impairment asthe excess of carrying amount over the estimate of fair value.We tested our indefinite-lived trademarks for impairment in the fourth quarters of 2017, 2016 and 2015. During the fourth quarter of 2017, we identifiedimpairment indicators in our Octane Fitness brand name originally acquired through the Octane Fitness acquisition on December 31, 2015. Ongoingweakness in the specialty retail channel, as a result of retailer consolidation, has had a negative impact on Octane branded sales and projected growth trends.We utilized the relief-from-royalty method to quantify the impairment, resulting in an $8.8 million non-cash impairment charge for 2017. The impairmentcharge is recorded in operating expenses on the consolidated statements of operations. We determined no impairment was indicated in 2016 and 2015 for ourindefinite-lived intangible assets.Definite-lived intangible assets, primarily acquired trade names, customer relationships, patents and patent rights, are stated at cost, net of accumulatedamortization, and are evaluated for impairment as discussed below under Impairment of Long-Lived Assets. We recognize amortization expense for ourdefinite-lived intangible assets on a straight-line basis over the estimated useful lives. For further information regarding other intangible assets, see Note 10,Other Intangible Assets.Impairment of Long-Lived AssetsLong-lived assets, including property, plant and equipment and definite-lived intangible assets, are evaluated for impairment when events or circumstancesindicate the carrying value may be impaired. When such an event or condition occurs, we estimate the future undiscounted cash flows to be derived from theuse and eventual disposition of the asset to determine whether a potential impairment exists. If the carrying value exceeds estimated future undiscounted cashflows, we record impairment expense to reduce the carrying value of the asset to its estimated fair value. No impairment charges were recorded in 2017, 2016and 2015.Share RepurchasesShares of our common stock may be repurchased from time to time as authorized by our Board of Directors. Repurchases may be made in open markettransactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases arefunded from existing cash balances, and repurchased shares are retired and returned to unissued authorized shares. These repurchases are accounted for asreductions to our common stock to the extent available with remaining amounts allocated against retained earnings.39Table of ContentsRevenue RecognitionDirect and Retail product sales and shipping revenues are recorded when products are shipped and title passes to customers. In most instances, Retail sales tocustomers 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. ForDirect sales, revenue is generally recognized when products are shipped. Revenue is recognized net of applicable sales incentives, such as promotionaldiscounts, rebates and return allowances. We estimate the revenue impact of incentive programs based on the planned duration of the program and historicalexperience.Many Direct business customers finance their purchases through a third-party credit provider, for which we pay a commission or financing fee to the creditprovider. Revenue for such transactions is recognized based on the sales price charged to the customer and the related commission or financing fee isincluded in selling and marketing expense.Sales Discounts and Returns AllowanceProduct sales and shipping revenues are reported net of promotional discounts and return allowances. We estimate the revenue impact of retail sales incentiveprograms based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact ofsuch 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 productreturns based on historical experience and record the expected obligation as a reduction of revenue. If actual return costs differ from previous estimates, theamount of the liability and corresponding revenue are adjusted in the period in which such costs occur. Activity in our sales discounts and returns allowancewas as follows (in thousands): 2017 2016 2015Balance, January 1$5,901 $5,677 $4,296Charges to reserve18,377 12,935 16,700Reductions for sales discounts and returns(17,358) (12,711) (15,569)Business acquisition (Note 2)— — 250Balance, December 31$6,920 $5,901 $5,677Taxes Collected from Customers and Remitted to Governmental AuthoritiesTaxes collected from customers and remitted to governmental authorities are recorded on a net basis and excluded from net sales.Shipping and Handling FeesShipping and handling fees billed to customers are recorded net of discounts and included in both net sales and cost of sales.Cost of SalesCost 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; andallocated expenses for shared administrative functions.Product Warranty ObligationsOur products carry defined warranties for defects in materials or workmanship which, according to their terms, generally obligate us to pay the costs ofsupplying and shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding productwarranty periods range from thirty days to, in limited circumstances, the lifetime of certain product components. We record a liability at the time of sale forthe estimated costs of fulfilling future warranty claims. If necessary, we adjust the liability for specific warranty-related matters when they become known andare reasonably estimable. Estimated warranty expense is included in cost of sales, based on historical warranty claim experience and available productquality data. Warranty expense is affected by the performance of new products, significant manufacturing or design defects not discovered until after theproduct 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 isadjusted accordingly.Litigation and Loss ContingenciesFrom time to time, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to theeventual outcomes and losses which may be realized when one or more future events occur or fail to occur. We record expenses for litigation and losscontingencies 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 bereasonably estimated. When a loss contingency is not both probable and estimable, we do not establish an accrued liability. However, if the loss (or anadditional loss in excess of the accrual)40Table of Contentsis 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 thatan estimate cannot be made.Advertising and PromotionWe expense our advertising and promotion costs as incurred. Production costs of television advertising commercials are recorded in prepaids and othercurrent assets until the initial broadcast, at which time such costs are expensed. Advertising and promotion costs are included in selling and marketingexpenses and totaled $66.4 million, $60.7 million and $54.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. Prepaidadvertising and promotion costs were $1.5 million and $3.5 million as of December 31, 2017 and 2016, respectively.Research and DevelopmentInternal research and development costs, which primarily consist of salaries and wages, employee benefits, expenditures for materials, and fees to use licensedtechnologies, are expensed as incurred. Third-party research and development costs for products under development or being researched, if any, are expensedas the contracted work is performed. In addition, we capitalize costs to develop software for internal use in accordance with accounting guidance.Income TaxesWe account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future taxconsequences 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 beincluded, 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 theperiod of the enactment. Valuation allowances are provided against deferred income tax assets if we determine it is more likely than not that such assets willnot be realized.Unrecognized Tax BenefitsWe 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 ofthe position upon examination, including resolutions of any related appeals or litigation. We recognize tax-related interest and penalties as a component ofincome tax expense.Foreign Currency TranslationWe translate the accounts of our non-U.S. subsidiaries into U.S. dollars as follows: revenues, expenses, gains and losses are translated at weighted-averageexchange rates during the year; and assets and liabilities are translated at the exchange rate on the balance sheet date. Translation gains and losses arereported in our consolidated balance sheets as a component of accumulated other comprehensive income.Gains and losses arising from foreign currency transactions, including transactions between us and our non-U.S. subsidiaries, are recorded as a component ofother income (expense) in our consolidated statements of operations.Fair Value of Financial InstrumentsThe carrying values of cash and cash equivalents, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fairvalue due to their short maturities.For additional information on financial instruments recorded at fair value on a recurring basis as of December 31, 2017 and 2016, refer to Note 4, Fair ValueMeasurements.Stock-Based CompensationWe 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 ofthe probability of achieving the performance targets.Fair value of stock options is estimated using the Black-Scholes-Merton option valuation model; fair value of performance share unit ("PSU") awards,restricted stock unit ("RSU") awards and restricted stock awards ("RSA") is based on the closing market price on the day preceding the grant.Prior to our adoption of Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") 2016-09 in January 2017, we estimatedfuture forfeitures, at the time of grant and in subsequent periods, based on historical turnover rates, previous forfeiture experience and changes in the businessor key personnel that would suggest future forfeitures may differ from historical data. We recognized compensation expense for only those stock options andother stock-based awards that were expected to vest. We reevaluated estimated forfeitures monthly and, if applicable, recognized a cumulative effectadjustment in the period41Table of Contentsof the change if the revised estimate of the impact of forfeitures differed significantly from the previous estimate. With our adoption of ASU 2016-09, wechanged our accounting treatment of forfeiture expense reversals from "at vest date" to "at forfeiture date." As a result, we no longer estimate future forfeituresprior to their actual occurrence.Shares to be issued upon the exercise of stock options or the vesting of stock awards will come from newly issued shares.Income Per Share AmountsBasic income per share amounts were computed using the weighted average number of common shares outstanding. Diluted income per share amounts werecalculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, asdetermined by the treasury stock method.New Accounting PronouncementsNewly-Adopted PronouncementsASU 2017-04In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, orinterim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for theamount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount ofgoodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity stillhas the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 iseffective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis.Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. Our early adoption of ASU 2017-04 for ourannual goodwill impairment testing as of October 1, 2017 did not have a material effect on our financial position, results of operations or cash flows.ASU 2016-09In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based PaymentAccounting." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies' annualperiods, including interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted subject to certain requirements,and the method of application (i.e., retrospective, modified retrospective or prospective) depends on the transaction area that is being amended. Related toforfeitures, we changed our accounting treatment of forfeiture expense reversals from "at vest date" to "at forfeiture date." We applied the guidance on amodified retrospective basis, which resulted in a $28,308 cumulative effective adjustment and reduction to beginning retained earnings as of January 1,2017. In addition, related to excess tax benefits, we recognized all current period expense through the statement of operations and presented excess taxbenefits as an operating cash flow, applied prospectively, with no adjustment to prior periods. The adoption of ASU 2016-09 in January 2017 did not have amaterial impact on our financial position, results of operations or cash flows.ASU 2015-11In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for thevaluation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and netrealizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning afterDecember 15, 2016 on a prospective basis. Early adoption is permitted. Our adoption of ASU 2015-11 in January 2017 did not have a material effect on ourfinancial position, results of operations or cash flows.Issued Not Yet Adopted PronouncementsASU 2017-12In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities." ASU2017-12 provides better alignment of an entity's risk management activities and financial reporting of hedges through changes to both the designation andmeasurement guidance for qualifying hedging relationships. In addition, the amendments in ASU 2017-12 also simplify the recognition and presentation ofthe effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity's intendedhedging strategies. ASU 2017-12 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after42Table of ContentsDecember 15, 2018. Early application is permitted in any interim period after issuance of the new standard, with effect of adoption reflected as of thebeginning of the fiscal year of adoption. For cash flow and net investment hedges existing as of the adoption date, an entity should apply a cumulative-effectadjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income and opening retaining earnings.Amended presentation and disclosure guidance is required only prospectively, and certain transition elections are available upon adoption. While we do notexpect the adoption of ASU 2017-12 to have a material effect on our business, we are evaluating any potential impact that adoption of ASU 2017-12 mayhave on our financial position, results of operations or cash flows.ASU 2017-09In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope in Modification Accounting." ASU 2017-09provides clarity and reduces diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions ofa share-based payment award. An entity should account for the effects of a modification unless all of certain criteria are met. Those criteria relate to fair value,vesting conditions and classification of the modified award. If all three conditions are the same for the modified award as for the original award, then theentity should not account for the effects of the modification. ASU 2017-09 is effective for all entities for annual periods, including interim periods withinthose annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entitiesfor reporting periods for which financial statements have not yet been issued. We do not expect the adoption of ASU 2017-09 to have a material effect on ourfinancial position, results of operations or cash flows.ASU 2016-15In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." Theamendments in ASU 2016-15 are intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cashflows, with the intent of reducing diversity in practice for the eight (8) types of cash flows identified. ASU 2016-15 is effective for public companies' fiscalyears, including interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. Entities must apply the guidanceretrospectively to all periods presented, but may apply it prospectively if retrospective application would be impracticable. We do not expect the adoption ofASU 2016-15 to have a material effect on our financial position, results of operations or cash flows.ASU 2016-13In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments."The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit lossesand requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for publiccompanies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2019, using a modified-retrospective approach,with certain exceptions. Early adoption is permitted. While we do not expect the adoption of ASU 2016-13 to have a material effect on our business, we areevaluating any potential impact that adoption of ASU 2016-13 may have on our financial position, results of operations or cash flows.ASU 2016-02In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 replaces the existing guidance in Accounting Standards Codification("ASC") 840, Leases. The new standard would require companies and other organizations to include lease obligations on their balance sheets, including adual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operatingleases will result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognizeinterest expense and amortization of the ROU asset, and for operating leases the lessee would recognize a straight-line total lease expense. Lessees and lessorsare required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 iseffective for public companies' annual periods, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently assessingthe impact that ASU 2016-02 will have on our consolidated financial statements, and expect that the primary impact upon adoption will be the recognition,on a discounted basis, of our minimum commitments under non-cancellable operating leases on our consolidated balance sheets resulting in the recording ofright of use assets and lease liabilities.ASU 2014-09In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 replaces most existing revenue recognitionguidance, and requires companies to recognize revenue based upon the transfer of promised goods and/or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods and/or services. In addition, the new guidance requires enhanceddisclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement andrecognition. ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017, applied retrospectively to each43Table of Contentsprior period presented or retrospectively with a cumulative effect adjustment recognized as of the adoption date. We are adopting the new standard onJanuary 1, 2018 using the full retrospective method.We have identified and analyzed our principal revenue streams by channel, including potential impacts on the timing of recognition of variableconsideration and consideration payable to a customer, primarily related to our sales discounts and allowances programs, and contract costs, mainly salescommissions, as well as presentation of our extended warranty and installation services revenue. We are also substantially complete with our review ofsignificant contracts and our evaluation of the potential changes to our business processes, controls, systems and disclosures resulting from adoption of thenew standard. We expect to finalize documentation of these assessments during the first quarter of 2018. Based on our analyses, we have determined there areno material changes to prior periods' reported amounts. Further, we have identified potential accounting and financial reporting impacts to our businessprocesses, controls, systems and disclosures as a result of the new standard, and we are preparing for those changes. In addition, while we do not expect theadoption of ASU 2014-09, as amended, to have a material effect on our financial position, results of operations or cash flows, we do anticipate significantadditional disclosure requirements upon adoption of the new standard.(2) BUSINESS ACQUISITIONOn December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane Fitness, LLC ("Octane") for an aggregatebase purchase price of $115.0 million, plus net adjustments for working capital and cash acquired on the closing date. We funded the acquisition through an$80.0 million term loan and cash on hand. Based in Brooklyn Park, Minnesota, Octane is a leader in zero-impact training with a line of fitness equipmentfocused on Retail specialty and commercial channels. The acquisition of Octane strengthened and diversified our brand portfolio, broadened our distributionand deepened our talent pool. Octane's business is highly complementary to our existing business from both product and channel perspectives.Purchase Price AllocationAcquired assets and liabilities were recorded at estimated fair value as of the acquisition date, and subsequently adjusted and finalized during 2016. Theexcess of the purchase price over the fair value of identifiable net assets resulted in the recognition of goodwill of $59.7 million, all of which was assigned tothe Retail segment. The goodwill is not deductible for income tax purposes.The following table summarizes the fair values of the net assets acquired and liabilities assumed as of the acquisition date, including all measurement periodadjustments (in thousands): Final valuation atDecember 31, 2016Cash$7,759Accounts receivable12,476Inventories13,134Prepaid expenses885Deferred tax assets1,303Property, plant and equipment3,372Intangible assets63,100 Total assets acquired102,029 Accounts payable6,497Accrued liabilities2,968Warranty obligations5,550Deferred tax liabilities, non-current21,033Other non-current liabilities390 Total liabilities assumed36,438 Net identifiable assets acquired65,591Goodwill59,705Net assets acquired$125,29644Table of ContentsSummary of Unaudited Pro Forma InformationThe following table reflects the unaudited pro forma consolidated results of operations for the periods presented, as though the acquisition of Octane hadoccurred on January 1, 2014 (in thousands, except per share amounts): (unaudited) Year Ended December 31, 2016 2015Net sales$406,039 $400,078Net income35,683 29,352Net income per share: Basic$1.15 $0.94 Diluted1.14 0.93The unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would havebeen realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results. The pro forma results do not include,for example, the effects of anticipated synergies from combining the two companies.(3) DISCONTINUED OPERATIONSFollowing is a summary of certain financial information regarding our discontinued operations (in thousands): Year Ended December 31, 2017 2016 2015Loss from discontinued operations before income taxes$(1,713) $(1,077) $(601)Income tax benefit(355) (154) (400)Total loss from discontinued operations$(1,358) $(923) $(201) During 2017, our litigation with Biosig Instruments, Inc. ("Biosig") was settled. The litigation began in 2004 and alleged patent infringement in connectionwith our incorporation of heart rate monitors into certain cardio products of our former Commercial business. We paid Biosig $1.2 million under thesettlement, and the matter was dismissed with prejudice. The settlement was expensed in discontinued operations in 2017.(4) FAIR VALUE MEASUREMENTSFactors used in determining the fair value of financial assets and liabilities are summarized into three broad categories:•Level 1 - observable inputs such as quoted prices (unadjusted) in active liquid markets for identical securities as of the reporting date;•Level 2 - other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speedsand 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 ownassumptions in determining fair value. 45Table of ContentsAssets and liabilities measured at fair value on a recurring basis were as follows (in thousands): December 31, 2017 Level 1 Level 2 Level 3 TotalAssets: Cash Equivalents Money market funds $10,946 $— $— $10,946 Commercial paper — 1,996 — 1,996 Total cash equivalents 10,946 1,996 — 12,942 Available-for-Sale Securities Certificates of deposit(1) — 19,875 — 19,875 Corporate bonds — 29,239 — 29,239 U.S. government bonds — 8,189 — 8,189 Total available-for-sale securities — 57,303 — 57,303 Derivatives Interest rate swap contract — 372 — 372 Foreign currency forward contracts — 390 — 390 Total derivatives — 762 — 762 Total assets measured at fair value $10,946 $60,061 $— $71,007 December 31, 2016 Level 1 Level 2 Level 3 TotalAssets: Cash Equivalents Money market funds $9,635 $— $— $9,635 Commercial paper — 3,999 — 3,999 Total cash equivalents 9,635 3,999 — 13,634 Available-for-Sale Securities Certificates of deposit(1) — 22,820 — 22,820 Corporate bonds — 6,922 — 6,922 U.S. government bonds — 2,001 — 2,001 Total available-for-sale securities — 31,743 — 31,743 Total assets measured at fair value $9,635 $35,742 $— $45,377 Liabilities: Derivatives Interest rate swap contract $— $(38) $— $(38) Total liabilities measured at fair value $— $(38) $— $(38)(1) All certificates of deposit are within current FDIC insurance limits.For our assets measured at fair value on a recurring basis, we recognize transfers between levels at the actual date of the event or change in circumstance thatcaused the transfer. There were no transfers between levels during the years ended December 31, 2017 and 2016. Additionally, we did not have any changesto our valuation techniques during the years ended December 31, 2017 and 2016.46Table of ContentsWe classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from inputs, other than quotedmarket prices in active markets for identical assets, that are directly or indirectly observable in the marketplace and quoted prices in markets with limitedvolume or infrequent transactions. The factors or methodology used for valuing securities are not necessarily an indication of the risk associated withinvesting in those securities. Unrealized holding gains and losses are excluded from earnings and are reported net of tax in comprehensive income untilrealized.The fair values of our interest rate swap contract and our foreign currency forward contracts are calculated as the present value of estimated future cash flowsusing discount factors derived from relevant Level 2 market inputs, including forward curves and volatility levels. We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property, plant and equipment, goodwill, other intangibleassets and certain other long-lived assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputsand therefore fall under Level 3 of the fair value hierarchy. Other than our annual goodwill and indefinite-lived trade names impairment assessments andvaluations effective as of October 1, 2017 and 2016, we did not perform any assessments or valuations on assets or liabilities that are valued at fair value on anonrecurring basis. During the year ended December 31, 2017, we recorded an impairment to our indefinite-lived Octane Fitness trade name in the amount of$8.8 million. For the year ended December 31, 2016, we did not record any other-than-temporary impairments on our financial assets required to be measuredat fair value on a nonrecurring basis.The carrying values of cash and cash equivalents, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fairvalue due to their short maturities. The carrying value of our term loan approximates its fair value and falls under Level 2 of the fair value hierarchy, as theinterest rate is variable and based on current market rates.(5) DERIVATIVESFrom time to time, we enter into interest rate swaps to fix a portion of our interest expense, and foreign exchange forward contracts to offset the earningsimpacts of exchange rate fluctuations on certain monetary assets and liabilities. We do not enter into derivative instruments for any purpose other than tomanage interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivativeinstruments.As of December 31, 2017, we had a $48.0 million interest rate swap outstanding with JPMorgan Chase Bank, N.A. This interest rate swap matures onDecember 31, 2020 and has a fixed rate of 1.42% per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark. At December 31,2017, the one-month LIBOR rate was 1.35%.We typically designate all interest rate swaps as cash flow hedges and, accordingly, record the change in fair value for the effective portion of these interestrate swaps in accumulated other comprehensive income rather than current period earnings until the underlying hedged transaction affects earnings. Gainsand losses on the derivative representing hedge ineffectiveness are recognized in current earnings. For the years ended December 31, 2017 and 2016, therewas no ineffectiveness. As of December 31, 2017, we expect to reclassify a gain of $0.1 million from accumulated other comprehensive loss to earningswithin the next twelve months.We may hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cashflows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominatedin foreign currencies and are carried at fair value with changes in the fair value recorded as other income. These derivative instruments do not subject us tomaterial balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assetsand liabilities being hedged. As of December 31, 2017, total outstanding contract notional amounts were $22.1 million. At December 31, 2017, theseoutstanding balance sheet hedging derivatives had maturities of 90 days or less.47Table of ContentsThe fair value of our derivative instruments was included in our consolidated balance sheets as follows (in thousands): Balance Sheet Classification As of December 31, 2017 2016Derivative instruments designated as cash flow hedges: Interest rate swap contract Prepaids and other current assets $134 $— Other assets 238 — Accrued liabilities — (38) $372 $(38)Derivative instruments not designated as cash flow hedges: Foreign currency forward contracts Prepaids and other current assets $390 $— $390 $—The effect of derivative instruments on our consolidated statements of operations was as follows (in thousands): Statement of OperationsClassification Year Ended December 31, 2017 2016 2015Derivative instruments designated as cash flow hedges: Gain (loss) recognized in other comprehensive income beforereclassifications --- $80 $(450) $—Loss reclassified from accumulated other comprehensive income toearnings for the effective portion Interest expense (207) (626) —Income tax benefit Income tax expense 47 200 — Derivative instruments not designated as cash flow hedges: Loss recognized in earnings Other, net $(382) $— $— Income tax benefit Income tax expense 86 — —For additional information related to our derivatives, see Notes 4 and 15.(6) TRADE RECEIVABLESTrade receivables, net, consisted of the following (in thousands): As of December 31, 2017 2016Trade receivables$42,804 $45,628Allowance for doubtful accounts(119) (170) $42,685 $45,458Changes in our allowance for doubtful trade receivables were as follows (in thousands): 2017 2016 2015Balance, January 1$170 $918 $108Charges to bad debt expense311 289 786Recoveries (write-offs), net(362) (1,037) 24Balance, December 31$119 $170 $91848Table of Contents(7) INVENTORIESOur inventories consisted of the following (in thousands): As of December 31, 2017 2016Finished goods$48,771 $43,130Parts and components4,583 3,900 $53,354 $47,030(8) PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment consisted of the following (in thousands): EstimatedUseful Life(in years) As of December 31, 2017 2016Automobiles5to6 $23 $139Leasehold improvements4to20 3,542 3,388Computer software and equipment3to7 17,024 25,899Machinery and equipment3to5 15,178 13,085Furniture and fixtures5to20 2,295 2,238Work in progress (1)N/A 1,052 768Total cost 39,114 45,517Accumulated depreciation (23,287) (28,049) $15,827 $17,468(1) Work in progress primarily includes production tooling and equipment and information technology assets.Depreciation expense was as follows (in thousands): Year Ended December 31, 2017 2016 2015Depreciation expense$5,387 $4,320 $2,558(9) GOODWILLThe rollforward of goodwill was as follows (in thousands): Direct Retail TotalBalance, January 1, 2015$2,520 $— $2,520Currency exchange rate adjustment(407) — (407)Business acquisition (Note 2)— 58,357 58,357Balance, December 31, 20152,113 58,357 60,470Currency exchange rate adjustment67 3 70Measurement period adjustments (Note 2)— 1,348 1,348Balance, December 31, 20162,180 59,708 61,888Currency exchange rate adjustment155 (13) 142Balance, December 31, 2017$2,335 $59,695 $62,030We performed our annual goodwill impairment evaluations during the fourth quarters of 2017, 2016, and 2015. Our 2017 and 2015 evaluations wereperformed using a qualitative assessment of each reporting unit and determined that it was not more-likely-than-not that the fair value of any reporting unitwas less than its carrying amount. Our 2016 test was conducted using a quantitative valuation due to our acquisition of Octane on December 31, 2015. Wedetermined no impairments of goodwill were indicated in 2017, 2016 and 2015.49Table of Contents(10) OTHER INTANGIBLE ASSETSOther intangible assets consisted of the following (in thousands): EstimatedUseful Life(in years) As of December 31, 2017 2016Indefinite-lived trademarks(1)N/A $23,252 $32,052Definite-lived trademarks10to15 2,600 2,600Patents8to24 15,187 31,487Customer relationships10to15 24,700 24,700 65,739 90,839Accumulated amortization - definite-lived intangible assets (7,996) (21,039) $57,743 $69,800(1) During the fourth quarter of 2017, we identified impairment indicators in our Octane Fitness brand name originally acquired through the Octane Fitness acquisition onDecember 31, 2015. Ongoing weakness in the specialty retail channel, as a result of retailer consolidation, has had a negative impact on Octane branded sales and projected growthtrends. We utilized the relief-from-royalty method to quantify the impairment, resulting in an $8.8 million non-cash impairment charge for 2017.Amortization expense was as follows (in thousands): Year Ended December 31, 2017 2016 2015Amortization expense$3,256 $3,554 $854Future amortization of definite-lived intangible assets is as follows (in thousands):2018$3,16420193,13420203,10820213,07820223,078Thereafter18,929 $34,491(11) ACCRUED LIABILITIESAccrued liabilities consisted of the following (in thousands): As of December 31, 2017 2016Payroll and related liabilities$3,659 $4,579Other7,105 8,313Total accrued liabilities$10,764 $12,89250Table of Contents(12) PRODUCT WARRANTIESChanges in our product warranty obligations were as follows (in thousands): 2017 2016 2015Balance, January 1$7,450 $8,545 $2,246Accruals3,008 2,480 2,302Payments(4,341) (3,575) (1,553)Business acquisition (Note 2)— — 5,550Balance, December 31$6,117 $7,450 $8,545 (13) BORROWINGSTerm Loan and Line of CreditOn December 31, 2015 we entered into an amendment (the “Amendment”) to our existing Credit Agreement, dated December 5, 2014, with JPMorgan ChaseBank, N.A. (“Chase Bank”) that provided for an $80 million term loan to finance the acquisition described in Note 2, Business Acquisition, above (the “TermLoan”). The Term Loan and our existing $20 million revolving line of credit with Chase Bank are secured by substantially all of the assets of Nautilus. TheTerm Loan matures on December 31, 2020. The Amendment also extended the maturity date of our existing revolving line of credit to December 31, 2020.The Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, andlimitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement alsocontains customary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligationsand exercise its remedies under the continuing security agreement.Borrowing availability under the Credit Agreement is subject to our compliance with certain financial and operating covenants at the time borrowings arerequested. Letters of credit under the Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing.The interest rate applicable to the Term Loan and to each advance under the revolving line of credit is based on either Chase Bank's floating prime rate oradjusted LIBOR, plus an applicable margin. As of December 31, 2017, our borrowing rate for the Term Loan and line of credit advances was 2.35%.As of December 31, 2017, we had outstanding borrowings of $48.0 million on our term loan and no letters of credit issued under the Credit Agreement. As ofDecember 31, 2017, we were in compliance with the financial covenants of the Credit Agreement, and $20.0 million was available for borrowing under theline of credit.Principal maturities of our Term Loan over the next five years are as follows (in thousands):2018$16,000201916,000202016,000 $48,000(14) INCOME TAXESIncome Tax ExpenseIncome from continuing operations before income taxes was as follows (in thousands): Year Ended December 31, 2017 2016 2015U.S.$34,259 $50,651 $39,242Non-U.S.1,446 930 780 $35,705 $51,581 $40,02251Table of ContentsIncome tax expense (benefit) from continuing operations was as follows (in thousands): Year Ended December 31, 2017 2016 2015Current: U.S. federal$14,409 $6,765 $858U.S. state1,887 318 171Non-U.S.330 118 355Total current16,626 7,201 1,384Deferred: U.S. federal(9,418) 8,130 11,324U.S. state819 1,037 573Non-U.S.53 112 (62)Total deferred(8,546) 9,279 11,835 $8,080 $16,480 $13,219Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations: Year Ended December 31, 2017 2016 2015U.S. statutory income tax rate35.0 % 35.0 % 35.0 %State tax, net of U.S. federal tax benefit5.0 2.4 2.6Non-U.S. income taxes(0.1) 0.3 (0.1)Nondeductible operating expenses0.8 0.3 0.8Research and development credit(1.5) (1.0) (0.6)Change in deferred tax measurement rate (1)(15.3) (0.1) —Change in uncertain tax positions0.8 (5.1) 1.1Excess tax benefits from stock plans(2.1) — —Change in valuation allowance0.1 0.2 (5.8)Other(0.1) (0.1) —Effective income tax rate22.6 % 31.9 % 33.0 %(1) Effective income tax rate for 2017 includes impacts related to the Tax Cuts and Jobs Act (the “TCJ Act”).52Table of ContentsDeferred Income TaxesIndividually significant components of deferred income tax assets and liabilities were as follows (in thousands): As of December 31, 2017 2016Deferred income tax assets: Accrued liabilities$3,000 $5,089Allowance for doubtful accounts12 40Inventory valuation254 199Capitalized indirect inventory costs383 497Stock-based compensation expense897 1,346Deferred rent588 865Accrued royalty— 429Net operating loss carryforward1,715 2,377Basis difference on long-lived assets548 1,052Credit carryforward634 615Other179 140Gross deferred income tax assets8,210 12,649Valuation allowance(914) (886)Deferred income tax assets, net of valuation allowance7,296 11,763Deferred income tax liabilities: Prepaid advertising(370) (1,302)Other prepaids(610) (744)Basis difference of long-lived assets(14,856) (26,215)Undistributed earnings of foreign subsidiaries— (457)Other(18) (25)Deferred income tax liabilities(15,854) (28,743)Net deferred income tax liabilities$(8,558) $(16,980)Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands): As of December 31, 2017 2016Deferred income tax assets, non-current— 11Deferred income tax liabilities, non-current(8,558) (16,991)Net deferred income tax liabilities$(8,558) $(16,980)On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986 thatimpact corporate taxation requirements, such as the reduction of the federal tax rate for corporations from 35% to 21%, changes or limitations to certain taxdeductions, implementing the territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.We made an effort to reasonably estimate the impact of the TCJ Act, however, due to the complexities and the timing of the enactment, our accounting underASC 740 for certain income tax effects of the TCJ Act is provisional as of December 31, 2017. We reported, as provisional amounts, the specific effect ofthose items for which the accounting is not complete but for which we determined a reasonable estimate. These provisional amounts are subject to adjustmentduring a “measurement period” until the accounting under ASC 740 is complete.Further, on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when aregistrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income taxeffects of the TCJ Act. In accordance with SAB 118, we have calculated and recorded a $5.6 million income tax benefit in the fourth quarter of 2017 relatedto the remeasurement of certain deferred tax assets53Table of Contentsand liabilities. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities. Any subsequent adjustment to theseamounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We haverecorded 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 needfor, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on ajurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. Aspart of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must becommensurate with the extent to which the strength of the evidence can be objectively verified.As of December 31, 2017, we had a valuation allowance against net deferred income tax assets of $0.9 million. Of the remaining valuation allowance, $0.7million primarily relates to domestic state tax credit carryforwards as we currently do not anticipate generating income of appropriate character to utilizethose credits. The remainder of $0.2 million relates to foreign net operating loss carryforwards. Should it be determined in the future that it is more likely thannot that our domestic deferred income tax assets will be realized, an additional valuation allowance would be released during the period in which such anassessment is made. There have been no material changes to our foreign operations since December 31, 2016, and, accordingly, we maintain our existingvaluation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2017.Income Tax CarryforwardsAs of December 31, 2017, we had the following income tax carryforwards (in millions): Amount Expires inNet operating loss carryforwards U.S. state $32.0 2018 - 2035China $0.8 2020 - 2022Income tax credit carryforwards U.S. state $0.9 2018 - 2031The 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 BenefitsFollowing is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands): Year Ended December 31, 2017 2016 2015Balance, January 1$1,970 $2,519 $2,768Additions for tax positions taken in prior years38 21 1Reductions for tax positions taken in prior years(5) (523) (426)Additions for tax positions related to the current year211 83 43Lapses of statutes of limitations(11) (130) —Other(9) — 133Balance, December 31$2,194 $1,970 $2,519Of the $2.2 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2017, $2.0 million would affect oureffective tax rate if recognized.We recorded tax-related interest and penalty expense (benefit) of $0.3 million, $(1.9) million and $0.5 million in 2017, 2016 and 2015, respectively. We hada cumulative liability for interest and penalties related to uncertain tax positions as of December 31, 2017 and 2016 of $1.0 million and $0.7 million,respectively.54Table of ContentsOur U.S. federal income tax returns for 2009 through 2017 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2007through 2017 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, 2017, we believe it is reasonably likely that, within the next 12 months, $0.8 million of the previously unrecognized tax benefits relatedto certain non-U.S. filing positions may be recognized.(15) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)Accumulated other comprehensive income (loss), net of applicable taxes, reported on our consolidated balance sheets consists of unrealized holding gainsand losses on available-for-sale securities, effective portions of gains and losses of derivative securities designated as cash flow hedges, and foreign currencytranslation adjustments. The following table sets forth the changes in accumulated other comprehensive income (loss), net of tax (in thousands) for theperiods presented: Unrealized Gain (Loss)on Available-for-SaleSecurities Gain (loss) onDerivativeSecurities Foreign CurrencyTranslationAdjustments Accumulated OtherComprehensive Income(Loss)Balance, January 1, 2015 $(18) $— $(290) $(308)Current period other comprehensive income (loss) 2 — (1,021) (1,019)Balance, December 31, 2015 (16) — (1,311) (1,327)Current period other comprehensive income (loss) beforereclassifications 8 (450) 126 (316)Reclassification of amounts to earnings — 426 — 426Net other comprehensive income (loss) during period 8 (24) 126 110Balance, December 31, 2016 (8) (24) (1,185) (1,217)Current period other comprehensive income (loss) beforereclassifications (56) 80 774 798Reclassification of amounts to earnings — 160 — 160Net other comprehensive income (loss) during period (56) 240 774 958Balance, December 31, 2017 $(64) $216 $(411) $(259)(16) STOCK-BASED COMPENSATION2015 Long-Term Incentive PlanOn April 28, 2015, Nautilus shareholders approved our 2015 Long-Term Incentive Plan (the “2015 Plan”), which replaced our 2005 Long-Term IncentivePlan that expired in 2015. The 2015 Plan is administered by the Compensation Committee of the Board of Directors and authorizes us to grant various typesof stock-based awards including: stock options, stock appreciation rights, RSAs, RSUs, and PSUs. Stock options granted under the 2015 Plan shall not havean 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 rightmay not be reduced without shareholder approval. Stock options generally vest over periods of three or four years of continuous service, commencing on thedate of grant. Stock options granted under the 2015 Plan have a seven-year contractual term.Upon adoption, there were approximately 4.8 million shares available for issuance under the 2015 Plan. The number of shares available for issuance uponadoption of the 2015 Plan included new shares approved, plus any shares of common stock which were previously reserved for issuance under our precedingplan and were not subject to grant as of April 28, 2015, or as to which the stock-based compensation award is forfeited on or after April 28, 2015. The numberof shares available for issuance is reduced by (i) two shares for each share delivered in settlement of any stock appreciation rights, RSA, RSU or PSU awards,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 stocksubject to stock options, stock appreciation rights, RSA, RSU or PSU awards be granted to any one participant in any one year under the 2015 Plan. AtDecember 31, 2017, we had 4.2 million shares available for future grant under our 2015 Plan, and a total of 4.9 million shares of our common stock arereserved for future issuance pursuant to awards currently outstanding under the 2015 Plan and our previous plan combined.55Table of ContentsStock Option ActivityStock option activity was as follows (shares in thousands): OptionsOutstanding Weighted-AverageExercisePriceOutstanding at December 31, 2016433 $5.03Forfeited, canceled or expired(1) 15.58Exercised(135) 4.15Outstanding at December 31, 2017297 $5.37Certain information regarding options outstanding at December 31, 2017 was as follows: OptionsOutstanding OptionsExercisable Options Vestedand Expected toVestNumber (in thousands)297 291 297Weighted-average exercise price$5.37 $5.19 $5.37Aggregate intrinsic value (in thousands)$2,405 $2,401 $2,405Weighted average remaining contractual term (in years)2.1 2.0 2.1RSA ActivityCompensation expense for RSAs is recognized over the estimated vesting period. Following is a summary of RSA activity (shares in thousands): RSAs Outstanding Weighted-AverageGrant Date Fair Valueper ShareOutstanding at December 31, 201644 $16.31Granted17 17.60Vested(14) 17.91Outstanding at December 31, 201747 $16.28RSU ActivityCompensation expense for RSUs is recognized over the estimated vesting period. Following is a summary of RSU activity (shares in thousands): RSUs Outstanding Weighted-AverageGrant Date Fair Valueper ShareOutstanding at December 31, 2016109 $18.17Granted108 16.94Forfeited, canceled or expired(24) 17.78Vested(2) 19.07Outstanding at December 31, 2017191 $17.64PSU ActivityCompensation expense for PSUs is recognized over the estimated requisite service period based on the number of PSUs ultimately expected to vest.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 vested in 2017based on achievement of goals established for operating income and revenue growth for the three-year performance period ended 2016. These awards vestedin full in 2017 at the 150% maximum achievement for a total of 123,739 shares.56Table of ContentsIn April and September 2015, we granted PSU awards to certain of our executive officers and management team covering a total of 56,820 shares of ourcommon stock. The PSUs vest based on achievement of goals established for certain operating income and return on asset criteria for a three-year performanceperiod. The number of shares vesting under the PSU awards following conclusion of the performance period will be determined based on the level at whichthe 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 of150%. These awards are expected to vest at approximately 115% achievement, net of any forfeitures. As of December 31, 2017, approximately 44,900 PSUshares remained, net of actual forfeitures to date.In December 2015, we granted PSU awards to a certain executive officer and management team personnel covering a total of 117,230 shares of our commonstock. The PSUs vest based on achievement of certain operating income and operating margin goals for a three-year performance period. The number ofshares vesting under the PSU awards following conclusion of the performance period will be determined based on the level at which the financial goals areachieved. As of December 31, 2017, approximately 13,600 PSU shares remained, net of actual forfeitures to date. These awards were authorized forreplacement by our Board of Directors during 2017 and will be processed in 2018.In February 2016, we granted PSU awards to certain of our executive officers and management team covering a total of 54,818 shares of our common stock.The PSUs vest based on achievement of goals established for growth in operating income as a percentage of net revenue and return on invested capital over athree-year performance period. The number of shares that ultimately vest following conclusion of the performance period will be determined based on thelevel 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 amaximum of 150%. As of December 31, 2017, approximately 48,600 PSU shares remained, net of actual forfeitures to date.In February 2017, we granted PSU awards to certain of our executive officers and management team covering a total of 72,017 shares of our common stock.The PSUs vest based on achievement of goals established for growth in operating income as a percentage of net revenue and return on invested capital over athree-year performance period. The number of shares that ultimately vest following conclusion of the performance period will be determined based on thelevel 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 amaximum of 150%. As of December 31, 2017, approximately 65,100 PSU shares remained, net of actual forfeitures to date.Following is a summary of PSU activity (shares in thousands): PSUs Outstanding Weighted-AverageGrant Date Fair Value perShareOutstanding at December 31, 2016264 $14.66Granted and additional goal shares awarded113 13.84Forfeited, canceled or expired(81) 16.99Vested(124) 8.23Outstanding at December 31, 2017172 $17.65Stock-Based CompensationStock-based compensation expense, primarily included in general and administrative expense, was as follows (in thousands): Year Ended December 31, 2017 2016 2015Stock options$84 $389 $327RSAs287 168 —RSUs954 734 544PSUs408 1,211 575ESPP123 111 38 $1,856 $2,613 $1,48457Table of ContentsCertain other information regarding our stock-based compensation was as follows (in thousands, except per share amounts): Year Ended December 31, 2017 2016 2015Weighted average grant-date per share fair value of stock options granted$— $— $8.94Total intrinsic value of stock options exercised1,522 1,221 4,142Fair value of RSUs vested28 311 673Fair value of PSUs vested2,036 574 1,454As of December 31, 2017, unrecognized compensation expense for outstanding, but unvested stock-based awards was $2.6 million, which is expected to berecognized over a weighted average period of 0.4 to 1.3 years.Employee Stock Purchase PlanOn April 28, 2015, our shareholders approved our Employee Stock Purchase Plan (the “ESPP”). The ESPP is administered by the Compensation Committee ofthe Board of Directors and provides eligible employees with an opportunity to purchase shares of our common stock at a discount using payroll deductions.The ESPP authorizes the issuance of up to 0.5 million shares of our common stock, subject to adjustment as provided in the ESPP for stock splits, stockdividends, recapitalizations and other similar events.Pursuant to the ESPP, and subject to certain limitations specified therein, eligible employees may elect to purchase shares of our common stock in one ormore of a series of offerings conducted pursuant to the procedures set forth in the ESPP at a purchase price equal to 90% of the lower of the fair market valueof the common stock on the first trading day of the offering period or on the last day of the offering period. Offering periods commence on May 15 andNovember 15 of each year and are six-months in duration, with the exception of the first offering period in 2015, which was a four-month offering. Purchasesunder the ESPP may be made exclusively through payroll deductions.Persons eligible to participate in the ESPP generally include employees who have been employed for at least 12 months prior to the applicable offering dateand who, immediately upon purchasing shares under the ESPP, would own directly or indirectly, an aggregate of less than 5% of the total combined votingpower or value of all outstanding shares of our common stock.ESPP activity was as follows (shares in thousands): Shares Available forIssuance Weighted-AveragePurchase Price Weighted-AverageDiscount per ShareBalance at December 31, 2016469 Employee shares purchased(37) $13.20 $2.19Balance at December 31, 2017432 Assumptions used in calculating the fair value of stock option grants and employee stock purchases were as follows: Year Ended December 31, 2017 2016 2015 ESPP ESPP ESPPOptionsDividend yield—% —% —%—%Risk-free interest rate0.8% 0.4% 0.1%1.6%Expected life (years)N/A N/A N/A4.28Expected volatility44% 56% 43%71%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 stockoption. For the ESPP, it is the U.S. Treasury six-month constant maturities rate, as of the offering date.58Table of ContentsExpected 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 sumof 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 forstock options. Expected price volatility is calculated using historical daily closing prices over a period matching the weighted-average expected life forstock options, as management believes such changes are the best indicator of future volatility. For the ESPP, expected volatility is the percentage amount bywhich the price of our common stock is expected to fluctuate semi-annually during the offering period.(17) STOCK REPURCHASE PROGRAMOn November 3, 2014, our Board of Directors authorized a stock repurchase program that authorized us to repurchase up to $15.0 million of our outstandingcommon stock from time to time during the ensuing period of 24 months. As of November 2016, the stock repurchases under this program were completed infull and the program expired.On May 4, 2016, our Board of Directors authorized the repurchase of up to $10.0 million of our outstanding common stock from time to time through May 4,2018. During 2017, repurchases under this program totaled $8.1 million. As of November 2017, the stock repurchases under this program were completed infull and the program expired.On April 25, 2017, our Board of Directors authorized a $15.0 million share repurchase program. Under this program, shares of common stock may berepurchased from time to time through April 25, 2019. Repurchases may be made in open market transactions at prevailing market prices, in privatelynegotiated transactions, or by other means in accordance with federal securities laws. Share repurchases are funded with existing cash balances, and therepurchased shares are retired and returned to unissued authorized shares. As of December 31, 2017, repurchases under this program totaled $3.0 million.As of December 31, 2017, there was $12.0 million remaining available for share repurchases pursuant to the 2017 program. Repurchases for 2015 through2017 for all programs were as follows:Year Ended Number of Shares Repurchased Amount Average Price per ShareDecember 31, 2015 711,708 $11,567,527 $16.25December 31, 2016 319,805 5,390,355 16.86December 31, 2017 788,416 11,054,983 14.02Totals to Date 1,819,929 $28,012,865 $15.39(18) INCOME PER SHAREThe weighted average numbers of shares outstanding used to compute income per share amounts were as follows (in thousands): Year Ended December 31, 2017 2016 2015Shares used for basic per share calculations30,671 31,032 31,288Dilutive effect of outstanding options, RSUs, and PSUs339 269 301Shares used for diluted per share calculations31,010 31,301 31,589The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income pershare, primarily because the average market price did not exceed the exercise price. These shares may be dilutive potential common shares in the future (inthousands): As of December 31, 2017 2016 2015Stock options8 8 1259Table of Contents(19) 401(k) SAVINGS PLANWe sponsor a 401(k) savings plan that allows eligible employees to contribute a certain percentage of their salary. Employees are automatically enrolledwithin the first month of employment and have the ability to opt out. As a safe harbor plan sponsor, we are subject to non-discretionary matchingcontributions. Currently, we match 100% of the employee's first 1% of eligible pay contributed plus 50% of eligible pay contributed on the next 5%, for amaximum employer matching of 3.5%. Employees vest in the employer matching portions at 25% after the first year of employment, and 100% after twoyears of employment. Our matching contributions for the savings plan were as follows (in thousands): Year ended December 31, 2017 2016 2015401(k) matching contributions$1,056 $1,014 $746(20) SEGMENT AND ENTERPRISE-WIDE INFORMATIONIn accordance with FASB ASC 280, Segment Reporting, we determined that we have two operating segments - Direct and Retail. There have been no changesin our operating segments during the year ended December 31, 2017.We evaluate performance using several factors, of which the primary financial measures are net sales and reportable segment contribution. Contribution is themeasure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling andmarketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segmentassets are those directly assigned to an operating segment's operations, primarily accounts receivable, inventories, goodwill and other intangible assets.Unallocated assets primarily include cash and cash equivalents, available-for-sale securities, derivative securities, shared information technologyinfrastructure, distribution centers, corporate headquarters, prepaids and other current assets, deferred income tax assets and other assets. Capital expendituresdirectly attributable to the Direct and Retail segments were not significant in any period.60Table of ContentsFollowing is summary information by reportable segment (in thousands): Year Ended December 31, 2017 2016 2015Net Sales: Direct$219,440 $225,057 $225,595Retail183,875 177,920 106,195Unallocated royalty2,869 3,062 3,974Consolidated net sales$406,184 $406,039 $335,764Contribution: Direct$34,900 $43,215 $39,940Retail27,495 29,451 12,850Unallocated royalty2,852 3,018 3,974Consolidated contribution$65,247 $75,684 $56,764 Reconciliation of consolidated contribution to income from continuing operations: Consolidated contribution$65,247 $75,684 $56,764Amounts not directly related to segments: Operating expenses(28,944) (22,290) (16,493)Other expense, net(598) (1,813) (249)Income tax expense8,080 16,480 13,219Income from continuing operations$27,625 $35,101 $26,803 Depreciation and amortization expense: Direct$1,666 $1,944 $868Retail4,606 4,775 757Unallocated corporate2,371 1,155 1,787Total depreciation and amortization expense$8,643 $7,874 $3,412 As of December 31, Assets:2017 2016 Direct$40,532 $37,388 Retail192,064 206,580 Unallocated corporate92,180 89,098 Total assets$324,776 $333,066 Net sales by geographic area were as follows: Year Ended December 31, 2017 2016 2015U.S.$352,703 $353,893 $295,366Canada25,589 26,005 33,230All other27,892 26,141 7,168 $406,184 $406,039 $335,764There are no material long-lived assets held outside of the U.S.In 2017, 2016 and 2015, Amazon.com accounted for 11.9%, 11.3% and 11.1%, respectively, of our net sales.61Table of Contents(21) COMMITMENTS AND CONTINGENCIESOperating LeasesWe lease property and equipment under non-cancellable operating leases which, in the aggregate, extend through 2025. Many of these leases containrenewal options and provide for rent escalations and payment of real estate taxes, maintenance, insurance and certain other operating expenses of theproperties. Rent expense under all operating leases was as follows (in thousands): Year Ended December 31, 2017 2016 2015Rent expense$6,095 $6,561 $5,033As of December 31, 2017, future minimum lease payments under non-cancellable leases, reduced for sublease income, were as follows (in thousands):2018$5,01620195,03520204,98320214,02120222,703Thereafter4,353 $26,111Guarantees, Commitments and Off-Balance Sheet ArrangementsWe have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of December 31, 2017, we hadapproximately $19.0 million in non-cancelable market-based purchase obligations, primarily for inventory purchases expected to be received within the nexttwelve months. Purchase obligations can vary from quarter-to-quarter and versus the same period in prior years due to a number of factors, including theamount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses. As of December 31, 2017, we had nooutstanding letters of credit with any of our vendors.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 withcustomers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under whichwe may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we mayindemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreementswith 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 theagreements. We hold insurance policies that mitigate potential losses arising from certain types of indemnification obligations. Management does not deemthese obligations to be significant to our financial position, results of operations or cash flows and, therefore, no related liabilities were recorded as ofDecember 31, 2017.Legal MattersFrom time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedingsinvolve 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 withany current legal proceeding, it is reasonably possible that a loss may be incurred in connection with proceedings to which we are a party. Assessment ofwhether 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 inwhich the damages sought are indeterminate, or the legal and factual basis for the relevant claims have not been developed with specificity. As such, zeroliability is recorded as of December 31, 2017.62Table of ContentsWe 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 anydevelopments that would make a loss probable or reasonably possible, and whether the amount of a probable or reasonably possible loss is estimable. Amongother factors, we evaluate the advice of internal and external counsel, the outcomes from similar litigation, current status of the lawsuits (including settlementinitiatives), legislative developments and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precisionand reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties.As of the date of filing of this Annual Report on Form 10-K, we were not involved in any material legal proceedings.(22) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited)The following table summarizes our unaudited quarterly financial data for 2017 and 2016 (in thousands, except per share amounts): Quarter Ended March 31 June 30 September 30 December 31 Total2017 Net sales$113,252 $77,029 $88,132 $127,771 $406,184Gross profit61,745 38,378 41,315 62,444 203,882Operating income(1)12,683 3,849 13,365 6,406 36,303Income from continuing operations(2)8,185 2,566 8,342 8,532 27,625Loss from discontinued operations(3)(1,092) (77) (101) (88) (1,358)Net income7,093 2,489 8,241 8,444 26,267Net income per share: Basic$0.23 $0.08 $0.27 $0.28 $0.86Diluted0.23 0.08 0.27 0.27 0.85 2016 Net sales$120,928 $78,529 $80,818 $125,764 $406,039Gross profit66,344 41,862 39,217 64,102 211,525Operating income19,300 6,573 8,211 19,310 53,394Income from continuing operations(4)11,586 3,696 7,845 11,974 35,101Loss from discontinued operations(142) (166) (251) (364) (923)Net income11,444 3,530 7,594 11,610 34,178Net income per share: Basic$0.37 $0.11 $0.24 $0.38 $1.10Diluted0.37 0.11 0.24 0.37 1.09(1) Operating income for the quarter ended December 31, 2017 included an $8.8 million non-cash asset impairment charge related to the Octane Fitness brand name.(2) Income from continuing operations for the quarter ended December 31, 2017 included a non-recurring tax benefit of $5.6 million related to the change in U.S. tax law thatresulted in the reassessment of certain deferred tax assets and liabilities.(3) Loss from discontinued operations for the quarter ended March 31, 2017 included a $1.2 million expense related to a lawsuit settlement with Biosig Instruments, Inc.(4) Income from continuing operations for the quarter ended September 30, 2016 included a non-recurring tax benefit of $2.7 million related to the release of previouslyunrecognized tax benefits associated with certain non-U.S. filing positions, which resulted from completing the deregistration of a certain foreign entity.63Table of Contents(23) SUBSEQUENT EVENTOn February 21, 2018, our Board of Directors authorized an additional $15.0 million share repurchase program. Under the new program, shares of ourcommon stock may be repurchased from time to time through February 21, 2020. Repurchases may be made in open market transactions at prevailing prices,in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases will be funded from existing cashbalances, and repurchased shares will be retired and returned to unissued authorized shares. To date, we have not repurchased any shares under the new $15.0million program. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresDisclosure Controls and ProceduresAs of December 31, 2017, we conducted an evaluation under the supervision and with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controlsand 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 controlsand 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 submitsunder the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controlsand procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive andprincipal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2017 that our disclosure controls and procedures wereeffective.Management's Report On Internal Control Over Financial ReportingManagement 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 PrincipalExecutive Officer and Principal Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and proceduresthat:•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 amaterial effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.Management's AssessmentOur management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financialreporting based on the criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on our assessment, management concluded that our internal control over financial reporting was effective as of December 31,2017.Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting as ofDecember 31, 2017, which appears in Part II, Item 8 of this report.64Table of ContentsChanges In Internal Control Over Financial ReportingWe are implementing an enterprise resource planning ("ERP") system and complementary systems that support our Retail operations related to Octane.During the fourth quarter of 2017, the ERP requirements were refined in certain areas to support certain legacy business-to-business and business-to-consumerprocesses as part of the initial deployment. Development and deployment of features of the ERP and complementary systems continued and are in progress.We expect to deploy certain operations-related features ahead of final cut-over activities. This approach is expected to provide a smooth transition andreduce risk by deploying new features into the production environment over time as opposed to a single launch. Full implementation is planned to becompleted in the second quarter of 2018. As each phase of the implementation occurs, we are taking steps to monitor and maintain appropriate internalcontrol over financial reporting and will continue to evaluate these controls for effectiveness.There were no other changes in our internal control over financial reporting that occurred during the three-month period ended December 31, 2017 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe 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 2018 Annual Meeting of Shareholdersto be filed with the SEC by April 30, 2018 (the "2018 Proxy Statement"). If the 2018 Proxy Statement is not filed with the SEC by April 30, 2018, suchinformation will be included in an amendment to this Annual Report on Form 10-K filed by April 30, 2018.Item 11. Executive CompensationThe information required by this item will be set forth under the captions Executive Compensation and Director Compensation in our 2018 Proxy Statement.If the 2018 Proxy Statement is not filed with the SEC by April 30, 2018, such information will be included in an amendment to this Annual Report on Form10-K filed by April 30, 2018.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersEquity Compensation Plan InformationThe following table provides information about our equity compensation plan as of December 31, 2017 (shares in thousands):Plan CategoryNumber of securitiesto be issued upon exerciseof outstanding options,warrants and rights(1),(2),(3)(a) Weighted averageexercise price ofoutstanding options,warrants and rights(4)(b) Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a))(c)Equity compensation plans approved by security holders469 $5.37 4,206Equity compensation plans not approved by security holders— — —Total469 $5.37 4,206(1) Includes approximately 158 PSU awards granted to certain executive officers and management team. The awards vest based on service requirements alongwith achievement of certain financial goals established for a three-year performance period, and can range from 60% of the PSU awards if minimumthresholds are achieved to a maximum of 150%. Of the 158 PSU shares, 45 are calculated at 115% of the target award, 65 are calculated at 100% of target,and 48 are calculated at 0% of target.(2) Includes approximately 14 PSU awards granted to certain management personnel pursuant to the acquisition of Octane (see Note 2 of notes to consolidatedfinancial statements). The awards vest based on service requirements along with achievement of certain financial goals established for a three-yearperformance period. The 14 PSU shares were authorized for replacement by our Board of Directors during 2017 and will be processed in 2018.65Table of Contents(3) Excludes 238 RSA and RSU awards outstanding at December 31, 2017, of which 47 RSA shares are subject to vesting and release, and 191 RSU shares aresubject to forfeiture.(4) 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 16, Stock-Based Compensation, to our consolidated financial statements in PartII, Item 8 of this report.Beneficial OwnershipThe information required by this item is included under the caption Security Ownership of Certain Beneficial Owners and Management in our 2018 ProxyStatement. If the 2018 Proxy Statement is not filed with the SEC by April 30, 2018, such information will be included in an amendment to this Annual Reporton Form 10-K filed by April 30, 2018.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item is included under the caption Information Concerning the Board of Directors in our 2018 Proxy Statement. If the 2018Proxy Statement is not filed with the SEC by April 30, 2018, such information will be included in an amendment to this Annual Report on Form 10-K filedby April 30, 2018.Item 14. Principal Accounting Fees and ServicesThe information required by this item is included under the caption Ratification of Appointment of Independent Registered Public Accounting Firm for 2018in our 2018 Proxy Statement. If the 2018 Proxy Statement is not filed with the SEC by April 30, 2018, such information will be included in an amendment tothis Annual Report on Form 10-K filed by April 30, 2018.PART IVItem 15. Exhibits and Financial Statement SchedulesFinancial Statements and SchedulesThe consolidated financial statements, together with the reports thereon of KPMG LLP and Deloitte & Touche LLP, are included on the pages indicatedbelow: PageReports of Independent Registered Public Accounting Firms 29Consolidated Balance Sheets as of December 31, 2017 and 2016 32Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 33Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 34Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015 35Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 36Notes to Consolidated Financial Statements 37Financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notesthereto.ExhibitsThe following exhibits are filed herewith and this list is intended to constitute the exhibit index.66Table of ContentsExhibit No. Description 3.1 Amended and Restated Articles of Incorporation - Incorporated by reference to Exhibit A to Schedule 14A, as filed with the Commission onApril 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 Commissionon 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 theCommission 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 Form10-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 withthe 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 onForm 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 monthsended 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 byreference to Exhibit 2.1 of our Quarterly Report on Form 10-Q for the three months ended September 30, 2001, as filed with theCommission on November 14, 2001. 10.7 License Agreement dated as of December 29, 2009 between Nautilus, Inc. and Fit Dragon International, Inc. - Incorporated by reference toExhibit 10.24 of our Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission on March 8, 2010. 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 onMarch 8, 2010. 10.9* Severance and Employment Agreement, dated September 21, 2007, between the Company and Wayne M. Bolio - Incorporated by referenceto 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. 10.10* Severance and Employment Agreement, dated March 30, 2011, between the Company and William B. McMahon - Incorporated byreference to Exhibit 10.1 of our Current Report on Form 8-K as filed with the Commission on March 31, 2011. 10.11 Office Lease Agreement dated as of July 25, 2011, by and between Nautilus, Inc. and Columbia Tech Center, L.L.C. - Incorporated byreference to Exhibit 10.2 to our Current Report on Form 8-K as filed with the Commission on July 29, 2011.10.12* Executive Employment Agreement dated as of May 30, 2011, between Nautilus, Inc. and Bruce M. Cazenave - Incorporated by reference toExhibit 10.1 of our Form 10-Q for the three months ended June 30, 2011 as filed with the Commission on August 11, 2011. 10.13* 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. 10.14* Form of Non-Employee Director Nonstatutory Stock Option Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for thethree months ended March 31, 2012 as filed with the Commission on May 9, 2012. 10.15* Form of Non-Employee Director Restricted Stock Unit Award Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q forthe three months ended June 30, 2013 as filed with the Commission on August 8, 2013. 10.16* Executive Employment Agreement dated as of February 10, 2014, by and between Nautilus, Inc. and Sidharth Nayar - Incorporated byreference 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. 10.17* Offer Letter, dated July 26, 2013, between the Company and Jeffery Collins - Incorporated by reference to Exhibit 10.3 of our Form 10-Qfor the three months ended March 31, 2014 as filed with the Commission on May 8, 2014. 67Table of ContentsExhibit No. Description 10.18 First Lease Modification Agreement, dated as of June 19, 2014, to the Office Lease by and between Nautilus, Inc. and Columbia TechCeter, 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 asfiled with the Commission on August 7, 2014. 10.19 Credit Agreement dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit10.1 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.20 Continuing Security Agreement dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated byreference to Exhibit 10.2 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.21 Line of Credit Note dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit10.3 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.22* Nautilus, Inc. 2015 Long-Term Incentive Plan - Incorporated by reference to Exhibit 10.1 of our Form 8-K dated April 28, 2015 as filedwith the Commission on May 4, 2015. 10.23 Nautilus, Inc. Employee Stock Purchase Plan - Incorporated by reference to Exhibit 10.2 of our Form 8-K dated April 28, 2015 as filed withthe Commission on May 4, 2015. 10.24 Consent and Amendment to Loan Documents dated December 31, 2015 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. -Incorporated by reference to Exhibit 10.30 of our Form 10-K for the year ended December 31, 2015 as filed with the Commission onFebruary 25, 2016. 10.25 Term Note dated December 31, 2015 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit 10.31of our Form 10-K for the year ended December 31, 2015 as filed with the Commission on February 25, 2016. 10.26* Employment Agreement dated December 28, 2016, by and between Nautilus, Inc. and Brian Pope - Incorporated by reference to Exhibit10.34 of our Form 10-K for the year ended December 31, 2016 as filed with the Commission on February 27, 2017. 10.27* Employment Agreement dated January 1, 2017, by and between Nautilus, Inc. and Ryan Simat - Incorporated by reference to Exhibit10.35 of our Form 10-K for the year ended December 31, 2016 as filed with the Commission on February 27, 2017. 10.28* Offer Letter dated November 8, 2017, between the Company and Christopher K. Quatrochi. 21 Subsidiaries of the Company. 23.1 Consent of Independent Registered Public Accounting Firm. 23.2 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, asamended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embeddedwithin the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*Indicates management contract, compensatory agreement or arrangement, in which our directors or executive officers may participate.68Table of ContentsItem 16. Form 10-K SummaryNone.SIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized. NAUTILUS, INC. (Registrant) March 6, 2018 By:/s/ Bruce M. Cazenave Date Bruce M. Cazenave Chief Executive Officer(Principal Executive Officer) NAUTILUS, INC. (Registrant) March 6, 2018 By:/s/ Sidharth Nayar Date Sidharth Nayar Chief Financial Officer(Principal Financial and Accounting Officer)POWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Bruce M. Cazenave, Sidharth Nayar and Wayne M. Bolio, and each ofthem, 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 hisname, 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 allamendments to this report, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grantingunto 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 confirmingall 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 registrantand in the capacities indicated on March 6, 2018.(Remainder of page is blank.) 69Table of ContentsSignature 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 * ChairmanM. Carl Johnson, III * DirectorRonald P. Badie * DirectorRichard A. Horn * DirectorAnne G. Saunders * DirectorMarvin G. Siegert *By: /s/ Wayne M. Bolio March 6, 2018 Wayne M. Bolio Attorney-In-Fact 70 EXHIBIT 21SUBSIDIARIES OF NAUTILUS, INC. Nautilus, Inc., a Washington corporationNautilus Fitness Canada, Inc., a Canadian corporationNautilus (Shanghai) Fitness Co., Ltd., a Chinese corporationNautilus (Shanghai) Fitness Equipments Co., Ltd., a Chinese corporationOF Holdings, Inc., a Delaware corporationOctane Fitness, LLC, a Minnesota limited liability companyUS Octane Fitness Limited, a Hong Kong corporationOctane Fitness International, B.V., a Netherlands corporationOctane Fitness UK Ltd, a United Kingdom corporationEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of DirectorsNautilus, Inc.We consent to the incorporation by reference in the registration statement (Nos. 333-204455, 333-126054, 333-46936 and 333-79643) on Form S-8 ofNautilus, Inc. of our report dated March 6, 2018, with respect to the consolidated balance sheet of Nautilus, Inc. as of December 31, 2017, and the relatedconsolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the year ended December 31, 2017, and the relatednotes (collectively, the "consolidated financial statements"), and the effectiveness of internal control over financial reporting as of December 31, 2017, whichreport appears in the December 31, 2017 annual report on Form 10-K of Nautilus, Inc. /s/ KPMG LLP Portland, OregonMarch 6, 2018EXHIBIT 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statements No. 333-204455, 333-126054, 333-79643 and 333-46936 on Form S-8 of our reportdated February 27, 2017, relating to the consolidated financial statements of Nautilus, Inc. as of December 31, 2016 and for each of the two years in theperiod ended December 31, 2016, appearing in this Annual Report on Form 10-K of Nautilus, Inc. for the year ended December 31, 2017. /s/ Deloitte & Touche LLP Portland, OregonMarch 6, 2018EXHIBIT 31.1CERTIFICATIONI, Bruce M. Cazenave, certify that:1.I have reviewed this annual report on Form 10-K of Nautilus, Inc.;2.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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant'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 reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. March 6, 2018 By:/s/ Bruce M. CazenaveDate Bruce M. Cazenave Chief Executive Officer(Principal Executive Officer)EXHIBIT 31.2CERTIFICATIONI, Sidharth Nayar, certify that:1.I have reviewed this annual report on Form 10-K of Nautilus, Inc.;2.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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant'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 reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. March 6, 2018 By:/s/ Sidharth NayarDate Sidharth Nayar Chief Financial Officer(Principal Financial and Accounting Officer)EXHIBIT 32.1CertificationPursuant 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), theundersigned 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, 2017 (the “Form 10-K”) of the Company fully complies with therequirements 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 materialrespects, the financial condition and results of operations of the Company. March 6, 2018 By:/s/ Bruce M. CazenaveDate Bruce M. Cazenave Chief Executive Officer(Principal Executive Officer)March 6, 2018 By:/s/ Sidharth NayarDate Sidharth Nayar Chief Financial Officer(Principal Financial and Accounting Officer)

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