Nautilus pays "tough" CPSC fine of nearly a million; still expects good Q1

Despite the company maintaining that it saw the allegation of a reporting delay differently, Nautilus Inc. (NYSE: NLS) has agreed to pay the U.S. Consumer Product Safety Commission (CPSC) a $950,000 civil penalty settling allegations that the company failed to give the agency timely reports on serious injuries and safety defects with nearly 800,000 Bowflex fitness machines recalled in 2004.

The Bowflex units in question, approximately 800,000 Bowflex Power Pro models with a Lat Tower attachment and Ultimate machines with faulty backs and pin adjustments, were part of two separate recalls in 2004 (see SNEWS® stories, Jan. 30, 2004, “Nautilus recalls 420,000 Bowflex units after injury reports;” Nov. 17, 2004, “Nautilus activates second Bowflex recall this year with CPSC”). The cost of the recalls were handled from Nautilus’ warranty reserve fund at a cost of under $2 million, according to the company for a total cost somewhere in the $2 million-plus range when the fines are included.

“CPSC is taking a tough position on penalties and has assessed a number of larger penalties recently. No one likes to pay penalties, but we are happy to put the matter behind us,” Holly Valkama, senior vice president, manufacturing and operations at Nautilus, told SNEWS®. “As a result of the process, we are designing and manufacturing all of our products to meet a tough new Nautilus standard for quality. We also have improved our reporting processes in close coordination with the CPSC.”

Improving the reporting process for all companies was a main goal of the fines, according to a release from the CPSC.

“The recent penalties levied by CPSC send a strong message that failing to report potential hazards is illegal,” stated CPSC Chairman Hal Stratton. “Companies need to understand that the quicker they report product safety problems to CPSC, the quicker we can take action together and protect consumers from injuries.”

Horizon Fitness had also been hit Oct. 29, 2004, with a fine of $500,000 for what the CPSC saw as a delay in reporting (see SNEWS® story, Nov. 1, 2004, “Horizon hit with $500K CPSC fine for unreported potential treadmill hazards”).

Despite the hit from the CPSC fines, SNEWS® has learned that Nautilus followed up the announcement of the fine with a “pre-announcement” earnings announcement reportedly informing analysts that it expects to offset this fine with better-than-expected revenues in Q1 when it releases its full financial reports on April 27. Although called “not common” but not completely unusual, pre-announcements are sometimes done regularly and sometimes done just to fend off bad news that could have an impact on stocks, one analyst told SNEWS®.

One RBC Capital analyst commented in a general statement to investors that “the good news … far outweighs the bad,” and that it maintained its “outperform” rating. Stocks closed on April 12, the day of the releases about the fine and the earnings, at 25.31, up 1.30 from the day’s opening. It saw a bit of a decline through the week, closing at 24.55 on April 13 and 23.86 on April 14.

Regardless of the success expected by Nautilus for Q1 revenues and their help in offsetting the fine, Nautilus is moving forward with its plans for 2005 — after dealing with this matter in one way or another for nearly two years.

“We are glad,” Valkama said, “to put the matter behind us”