NAUTILUS Inc.By: Roman Fan, Jeffery Li, Yifan Liu, Siyu XuPresented April 23, 2015

Agenda

• Screening Process• Company Review • Relevant Stock Market Prospects• Macroeconomic Review• Financial Analysis• Financial Projection• Application of Valuation Methodologies• Recommendation

Screening Process

Mkt Cap<$1.5B Non-Financial Sector

EBIT/Tangible Assets > 15%

Piotroski Score>=6Altman Z Score>6

Among 7 companies, choose NLS (Strong growth

in Revenue and Profit)

Introduction - Nautilus Inc.

• Consumer fitness equipment company• Designing, Developing, Sourcing and Marketing high-quality

cardio and strength fitness products• Brand Portfolio: Nautilus ® , Bowflex ® , Schwinn ® and

Universal ®

• Located in Vancouver, WA• Founded in 1986, Public since 1999• Ticker Symbol: NLS (NYSE)• Last Closing Price:17.34 (4/22/2015)• Market Cap: 545M• P/E: 27; Fwd P/E: 20.64; EPS: 0.59; Source: Yahoo Finance; Nautilus 2014 - 10K

Nautilus Inc. – Business Segment

• North America Focus • Three Business Segments

• Strength, Cardio, Royalty

• Multi Sales Channel • Direct Channel

• Direct to consumer • Media Penetration Depended• Gross Margin: 63.7%• Financing vs. Non-financing

• Retail Channel • Leverage brand recognition from direct

sales channel• Independent Retailer

• Sport Authority, Dick’s Sporting Good, Walmart, and Academy

• Gross Margin: 25.4%Source: Nautilus 2014 - 10K

Direct64%

Retail34%

Royalty2%

Cardio79%

Strength19%

Royalty2%

U.S.84%

Canada13%

Others3%

Nautilus Inc. – Designing & Developing

Source: Nautilus Presentation at 2015 ROTH Conference

In- depth Consumer Research

Ground Up Design

Rigorous Equipment

Testing

Fitness Result

Validation

Continual Consumer Feedback

Nautilus Inc. – Sourcing

• Completely outsourcing the manufacturing• Local inspection office

• 2-3 months of production and transporting time• Raw material cost is off-loaded to manufacturers• No purchase commitment• Extended payable outstanding time with manufacturers

• Three warehouses for Direct Sales: Oregon, Ohio and Manitoba

• 54% retail orders shipped directly from manufacturersSource: Nautilus 2014 - 10K, page 3

Nautilus Inc. – Marketing

• Marketing is crucial in generating leads for direct sales• Mix media portfolio: Social(FB, Twitter),

Digital(Google, Yahoo), TV(ESPN, ABC, etc.), Printed media(Weight Watchers, etc.).

• Consistently monitor the efficiency with inquiries generated, cost-per-lead, conversion rates, return on investment

Source: Nautilus 2014 - 10K, page 4

Nautilus Inc. – Management

Source: Bloomberg

Nautilus Inc. – Management

Source: Bloomberg

Relevant Stock Market Prospects

Source: Yahoo Finance, NLS, as of 4/23/2015 Pre Market

SWOT

Source: Nautilus Presentation at 2015 ROTH Conference

• Leading provider of consumer fitness equipment

• Strong portfolio of brands, including #1 in the fitness industry (Bowflex ®)

• Multichannel growth strategy• Low leverage

• Presence in only cardio and strength segment

• Highly dependent on a few retailers

• Require continuity in technology development and patent holding

• Maintain a sustainable media planning

• Credit approval rate reliance

• Premium sporting equipment • International market

penetration

• Third-party credit approval rate rised

Macroeconomics

Source: Ken Research Private Limited

Increasing Health

Consciousness

Increasing Purchasing

Power

Spur Demand for Sporting Goods and Equipment

Potential Growth in International Market

Source: Nautilus Presentation at 2015 ROTH Conference

North America

• Mature market

• 3.5% annual growth

• Market 3.6B

EMEA

• Mature Market

• 3% annual growth

• Market 3B

Asia Pacific

• Emerging market

• >15% annual growth

• Market 1.18B

Latin America

• Emerging market

• 10% annual growth

• Market 0.4B

Nautilus Inc. – Industry Analysis

Source: US Census Bureau data on Statista

U.S. online shop and mail-order sales of sporting goods from 2003 to 2013

Rising trend on online shopping of sporting goods

Nautilus Inc. – Industry Analysis

Source: National Sporting Goods Association data on Statista

Distribution of sporting goods purchases by category in the U.S. in 2012

Equipment: highest spending among sporting goods

Nautilus Inc. – Industry Analysis

Source: National Sporting Goods Association data on Statista

Sports equipment by average price in the U.S. in 2013 (in U.S. dollars)

House gym products pricing ranks higher among sports equipmentNLS’s products are at a relative higher price point compared to average

Nautilus Inc. – Industry Analysis

Source: National Sporting Goods Association data on Statista

Average retail price of elliptical/cross-trainers in the U.S. from 2007 to 2013

Average Product Price = $600Price is relatively Stable

Nautilus Inc. – Industry Analysis

Source: IBISWorld Gym & Exercise Equipment Manufacturing in the US

Two customer categories:

Consumer category comprises equipments which individuals may purchase for home use

Institutional category provides equipment generally found in fitness centers

Main trends: Wholesales bypass increases due to the development of E-commerce. Manufacturers can sell their products

directly on their website. Retail Decrease, Direct Sale Increase Schools are becoming a larger purchaser of gym and exercise equipment, as government encourages more

exercise for young population. Outsourcing the manufacture of industry goods has been a major trend.

Nautilus Inc. – Industry Analysis

Source: IBISWORLD - Gym & Exercise Equipment Manufacturing in the US

Cardiovascular equipment: Including treadmills, exercise bikes or stair steppersPopular in health clubs, demand increase

Weight machines: Most consumers cannot afford a full array of weight machines,Therefore, machine is popular in club and rehabilitation centers

Free weights:Including dumbbells, barbells and kettle bells.Small size, popular among consumer market

Other: Exercise balls, stepping platforms, boxing bags, etc

Nautilus Inc. – Porter’s Five Forces

Competitive rivalry within the industry (High) • Many players in this industry provides similar products• High demand on innovation and new products• Intense price competition

Bargaining Power of Buyers (High)• Customers can get access to different brands via various channels• Strong correlation to personal disposal income

Bargaining Power of Suppliers (Low)• International suppliers from low-cost countries: Asian countries• Supplier is easily replaced as the switching cost is low

Threat of New Entrants (Low)• Significant capital requirements needed to new company• Product knowledge and innovation with intellectual property rights• Brand reputation and customer loyalty

Threat of Substitutes (Moderate to High)• Many other sports to choose

Comparable Analysis

Company Name TEV/ Revenues

TEV/EBITDA TEV/EBIT P/E P/B

Nautilus Inc. (NYSE:NLS) 1.7x 14.0x 15.9x 27.3x 5.6x

Johnson Health Tech Co., Ltd. (TSEC:1736) 1.4x 13.9x 17.5x 9.1x 2.8x

Star Fitness S.A. (WSE:SFI) 1.8x 18.9x 25.0x 30.8x 5.3x

Brunswick Corporation (NYSE:BC) 1.3x 11.0x 13.4x 26.5x 6.1x

Amer Sports Corp. (HLSE:AMEAS) 1.3x 13.7x 17.3x 45.1x 7.5x

Company Name

Johnson Health Tech Co., Ltd. (TSEC:1736)

Star Fitness S.A. (WSE:SFI)

Brunswick Corporation (NYSE:BC)

Amer Sports Corp. (HLSE:AMEAS)

ICON Health & Fitness, Inc.

American Telecast Products, LLC

Life Fitness, Inc. ( Conso in BC)

Cyber International Corp

Fitness Quest Inc.

Public

Private

Comparable Analysis

Weights  

Johnson Health Tech Co., Ltd. (TSEC:1736) 40%Star Fitness S.A. (WSE:SFI) 10%Brunswick Corporation (NYSE:BC) 30%Amer Sports Corp. (HLSE:AMEAS) 20%

Weight Average Multiples  TEV/ Revenues 1.4xTEV/EBITDA 13.5xTEV/EBIT 17.0xP/E 23.7xP/B 5.0x

Weight Average Multiples

  Multiples NLS Data

TEV/ Revenues 1.4x Revenue $274.40 TEV/EBITDA 13.5x EBITDA $34.20 TEV/EBIT 17.0x EBIT $30.20 P/E 23.7x EPS $0.64 P/B 5.0x TABG BV $98.60

Valuation    TEV/ Revenues $12.11 20%TEV/EBITDA $14.65 30%TEV/EBIT $16.28 30%P/E $15.16 10%P/B $15.59 10%Price $14.77

Financial Analysis

2010A 2011A 2012A 2013A 2014A (10.0%)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Margin

Gross Margin % Operating margin

2010A 2011A 2012A 2013A 2014A

(100.0%)

(80.0%)

(60.0%)

(40.0%)

(20.0%)

0.0%

20.0%

40.0%

60.0%

Profitability

Return on Assets % Return on Equity %

2010A 2011A 2012A 2013A 2014A0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

(30.0)

(25.0)

(20.0)

(15.0)

(10.0)

(5.0)

0

Liquidity

Avg. Cash Conversion Cycle Current Ratio Quick Ratio

2010A 2011A 2012A 2013A 2014A 0.0%

10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Solvency

Altman Z score Total Debt/Asset Total Liabilities/Total Assets

Financial Analysis

2010A 2011A 2012A 2013A 2014A

-150.0%-100.0%

-50.0%0.0%

50.0%100.0%150.0%200.0%250.0%

-50.0%-40.0%-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%

Greenblatt

EBIT/(NWC+Fixed assets) EBIT/(mkt value of equity+debt)

DuPont Analysis

  2010A 2011A 2012A 2013A 2014A

Tax Burden=net income/EBT 247.8% 44.6% 162.1% 299.0% 62.2%

Interest Burden=EBT/EBIT 95.8% 88.6% 94.9% 102.0% 100.2%

Operating Profit Margin = EBIT/ Sales -5.7% 2.0% 5.7% 7.2% 11.0%

Asset Turnover = Total Sales/ Total Asset 2.15 2.18 2.06 1.52 1.56

Leverage = Total Asset/ Total Equity 2.54 2.59 2.18 1.57 1.58

ROE -74.0% 4.4% 39.0% 52.4% 16.9%

Asset Turnover Without Cash* 2.63 2.76 2.73 2.13 2.65

Assumption Page

• Built 6 scenarios (Base, Bull, Bear * Successful in international market, or not)

• Revenue projected based on Cardio and Strength segments for each of the Direct and Retail sales

• Also decreased SG&A, COGS as company experienced increasing margin

• R&D increased but decreased as % of sales • Decreasing in the Change Net Working Capital, as

AP+, AR=, INV=

Assumption Page

Sales growth rate 2010A 2010A 2010A 2010A 2010A 2015E 2016E 2017E 2018E 2019E

Revenue 7.1% 7.5% 12.8% 25.4% 21.9% 19.7% 17.4% 13.8% 12.0%

Direct 10.8% 16.7% 9.3% 28.5% 25.8% 22.6% 18.6% 14.1% 11.4%

Cardio products(1) 39.6% 32.5% 14.1% 39.5% 30.0% 25.0% 20.0% 15.0% 12.0%

Strength products(2) - 26.5% - 21.8% - 10.2% - 29.7% - 18.0% - 18.0% - 18.0% - 18.0% - 18.0%

Retail 1.2% - 6.9% 20.2% 21.4% 15.5% 14.5% 15.4% 13.3% 13.6%

Cardio products(1) 0.2% - 17.2% 1.3% 53.3% 20.0% 10.0% 15.0% 15.0% 10.0%

Strength products(2) 2.9% 11.3% 44.8% - 7.8% - 5.0% 5.0% - 5.0% - 7.0% 2.0%

Royalty 19.2% 6.2% 6.1% 4.6% 5.5% 5.2% 5.0% 5.2% 5.3%Cost of sales % of RevCOGS 54.4% 56.5% 53.1% 51.3% 48.8% 47.2% 45.8% 45.1% 44.6% 44.2%

Direct 44.1% 46.1% 42.7% 40.3% 36.7% 35.0% 34.0% 33.0% 32.5% 32.0%

Retail 72.4% 76.6% 77.5% 74.7% 74.6% 74.7% 74.0% 74.3% 74.0% 73.0%Royalty 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other accountsSelling and marketing of sales yoy growth - 14.9% 7.6% 13.4% 21.9% 20.0% 18.0% 15.0% 14.0% 12.0%

General and administration of sales 11.5% 9.5% 9.1% 8.5% 8.1% 7.5% 7.3% 7.0% 6.8% 6.8%

R&D of revenue 1.7% 1.8% 2.1% 2.5% 2.6% 2.5% 2.6% 2.6% 2.7% 2.8%

tax rate of pre- tax rate - 6.4% 21.5% - 1.9% - 200.1% 32.6% 35.0% 35.0% 35.0% 35.0% 35.0%Account Receivables as % of Rev 11.7% 13.2% 11.2% 11.6% 9.6% 9.6% 9.5% 9.3% 9.2% 9.0%Inventory as % of COGS 11.28% 11.38% 18.26% 14.09% 18.60% 17.0% 16.0% 15.0% 16.0% 16.0%Accounts payable of COGS 26.75% 28.02% 31.83% 33.11% 35.54% 35.5% 35.5% 35.5% 35.5% 35.5%Depreciation 4.5 1.8 1.2 1.3 2.0 2.00 2.20 2.20 2.20 2.20Amort. of other Intangibles 2.1 2.1 2.1 2.1 2.0 2.10 2.10 2.10 2.10 2.10Capital Expenditure - 0.2 - 2.5 - 2.4 - 3.6 - 3.2 - 3.30 - 3.60 - 3.70 - 3.50 - 3.20

Discount RateCAPITAL STRUCTURE

EQUITY (MKT) 357.91 100.0%DEBT (BV) 0 0.0%TOTAL 357.91 100.0%

COST OF EQUITYCAPM  Risk free rate 2.5%beta 1.33Market premium 7.0%CAPM   11.79%     Realized equity return 5 Yr   39%   Cost of equity  CAPM 11.8%Real equity return 39%Graham g% 9.25Adj cost of equity = WACC   12.5%     WACC 12.5%

Risk Premium 1%Discount Rate 14%

Terminal Growth rate 3%

Case Analysis   Case Driver-> 2Base <--Drop Down Here  With International Expansion <--Drop Down Here  

DCF

Sensitivity Analysis Discount Rate

17.26 11.5% 12.5% 13.5% 14.5% 14.4%

Terminal Growth Rate

2.0% 19.89 17.83 16.13 14.70 14.77

2.5% 20.75 18.50 16.67 15.14 15.22

3.0% 21.71 19.25 17.26 15.62 15.70

3.5% 22.79 20.08 17.91 16.14 16.23

4.0% 24.01 21.00 18.63 16.72 16.80

DCF

  2014A 2015E 2016E 2017E 2018E 2019ETerminal Value

EBIT 30.1 46.0 62.6 81.1 94.8 108.3 Tax rate 35% 35% 35% 35% 35% 35% EBT 19.59 29.92 40.67 52.69 61.63 70.37 Add: Depreciation and Amortization 4.1 4.1 4.3 4.3 4.3 4.3 Less: Capitalization -3.2 -3.3 -3.6 -3.7 -3.5 -3.2 Less: Increase in NWC  Account receivables 26.3 32.1 38.0 43.7 49.2 53.9 Inventory 24.9 26.8 29.3 31.8 38.1 42.3 Account payables 47.6 56.1 65.1 75.2 84.7 93.9 NWC 3.6 2.9 2.2 0.2 2.6 2.2 Increase in NWC -0.7 -0.7 -2.0 2.4 -0.4 FCF   31.43 42.03 55.28 60.06 71.83 73.98Discounted factor 27.70 32.62 37.81 36.19 38.14 374.09PV 546.54  # of outstanding share 31.664  Price/share 17.26           

Recommendation

• Current Price: $17.34

• DCF: • $17.26 Base with International Expansion• $16.10 Base with limited International Expansion

• Comparable: $14.77 BUY!200 Share of NLS @ $16.50

GTC

• Small Cap with growth potential

• Strong brands

• Innovation focused, premium products

• Strong financial condition and historical performance

• No Debt, Light Assets, Large Cash on the book

• Experienced management

• Possible future acquisition to gain larger market share

• Low correlation with our other current portfolio companies