Nautilus (NYSE: NLS) announced plans to close its manufacturing facility in Tyler, Texas, by the end of the year and consolidate its U.S. manufacturing of cardiovascular equipment in its Tulsa, Okla., facility. The move will eliminate about 100 positions at the Texas facility, which Nautilus acquired in 2001, and add about 50 jobs in Oklahoma.
The transition will begin in June as the company shifts production of its treadmills and TreadClimber cardio products to Oklahoma. The 198,000-sqaure-foot Texas facility is valued at $4 million to $5 million, and will be put up for sale. Tyler employees will either be offered transfers to Tulsa or assisted with severance benefits and outplacement support.
"As we evaluated cardiovascular manufacturing requirements over the next five to seven years, we concluded that a single domestic cardio facility would be the best decision for our future growth," said Gregg Hammann, Nautilus' chairman and CEO, in a statement. "Compared to operating two facilities within 300 miles, one facility provides significant manufacturing efficiencies, primarily through overhead, labor savings, procurement leverage, engineering expertise, and quality control."
Nautilus said it expects modest efficiency contributions from the consolidation in late 2006, and operating improvement of $3 million to $4 million annually starting in 2007, which equates to a margin benefit of 30-50 basis points and an EPS benefit of $0.06-$0.08. Once the Texas facility is closed, Nautilus will have one domestic cardio facility in Tulsa and one domestic strength facility in Independence, Va.
RBC Capital Markets analyst Ed Aaron said in a client note about the factory switch: "We see this as just one of many opportunities that Nautilus has to improve the back end of its business. Given the excess capacity in its U.S. manufacturing business, this consolidation makes strategic sense, in our opinion. While there's always execution risk with projects like this, this project does not appear to be overly complex."
For now, RBC said it is maintaining its "Outperform" rating and $19 price target for Nautilus, adding that it will revisit its estimates after the company releases its first-quarter earnings.
On April 4, Nautilus closed on the New York Stock Exchange at $16, up $1.07 from the previous day's closing.