BOWFLEX INC. You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.
OVERVIEW
We are committed to providing innovative, quality solutions to help people achieve a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products, related accessories and digital platform for consumer use, primarily in theU.S. ,Canada ,Europe andAsia . Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus®, Bowflex®, Octane Fitness® and Schwinn®. We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products directly to consumers through television advertising, our websites, social media channels, and catalogs. Our Retail business offers our products through a network of independent retail companies and specialty retailers with stores and websites located in theU.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property. Our results for 2019 were primarily impacted by lower sales, however, we believe the appropriate improvements are being implemented into our overall business to address this trend. The primary actions taken include extensive, in-depth consumer insights research, which has identified an effective new positioning for the Bowflex® brand, and which is now underway through a new advertising campaign and updates to our websites, television commercials, social media, and other digital platforms. Additionally, we expect to launch targeted new products across all our channels over the next twelve months. In parallel, we plan to continue our digital transformation with the inclusion of updated digital experience platforms on key new products, moving toward our goal of having the majority of our products equipped with subscription-based digital experience offerings. Net sales for 2019 were$309.3 million , reflecting a 22.0% decrease as compared to net sales of$396.8 million for 2018. Net sales of our Direct segment decreased by$65.3 million , or 35.3%, in 2019, compared to 2018, primarily driven by lower Bowflex Max Trainer® product sales and the impact of the planned reduction in advertising spending. 16
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Net sales of our Retail segment decreased by
Royalty income for 2019 decreased by
Gross profit for 2019 was$110.6 million , or 35.8% of net sales, a decrease of$71.1 million , or 39.1%, as compared to gross profit of$181.7 million , or 45.8% of net sales, for 2018. The decrease in gross profit dollars was primarily due to lower sales coupled with lower gross margin percentages in both the Direct and Retail segments. Gross margin decreased 10.0% points in 2019, compared to 2018, due to unfavorable sales mix and overhead absorption. Operating expenses for 2019 were$211.1 million , an increase of$50.1 million , or 31.1%, as compared to operating expenses of$161.0 million for 2018. The increase in operating expenses was primarily related to a goodwill and intangible impairment charge of$72.0 million , partially offset by lower media spending and stock-based compensation expense. Operating loss for 2019 was$100.5 million , a decrease of$121.3 million , or 584.1%, as compared to operating income of$20.8 million for 2018. The decrease in operating income for 2019, compared to 2018, was primarily driven by a goodwill and intangible impairment charge and lower gross margins associated with our lower sales during the year, partially offset by reductions in media spending and other operating expenses. Loss from continuing operations was$92.3 million for 2019, or$3.11 per diluted share, compared to income from continuing operations of$15.1 million , or$0.50 per diluted share, for 2018. The effective tax rates for 2019 and 2018 were 9.4% and 28.1%, respectively. The 18.7% year-over-year percentage tax rate differential was due primarily to the goodwill impairment charge and valuation allowance recorded in 2019, for which no tax benefit was recognized and which reduced the effective tax rate for the year. Net loss for 2019 was$92.8 million , compared to net income of$14.7 million for 2018. Net loss per diluted share was$3.13 for 2019, compared to net income per diluted share of$0.48 for 2018.
Factors Affecting Our Performance
Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both theU.S. andCanada . Our profit margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, product warranty costs, the cost of fuel, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, the Internet and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses. As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you any future growth or profitability. For more information, see our discussion of Risk Factors located at Part I, Item 1A of this Form 10-K.
BUSINESS ACQUISITION
OnDecember 6, 2018 , we acquired certain assets ofPaofit Holdings Pte Limited , its subsidiaries and related companies (collectively, "Paofit") for an aggregate purchase price of$2.8 million . The acquisition was funded with cash on hand. Based primarily in 17
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Singapore , the Paofit business is focused on developing and distributing software applications known as RunSocial® and RideSocial™. The acquisition of Paofit's assets broadened our digital platform applications and deepened our talent pool. DISCONTINUED OPERATIONS Results from discontinued operations relate to the disposal of our former Nautilus® Commercial business, which was completed inApril 2011 . We reached substantial completion of asset liquidation atDecember 31, 2012 . Although there was no revenue related to the Commercial business in 2019 and 2018, we continue to incur product liability expenses associated with product previously sold into the Commercial channel, and accrued interest associated with an uncertain tax position on discontinued international operations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and (b) the impact of the estimate on financial condition or operating performance is material. Our critical accounting estimates are discussed below.Goodwill and Other Long-Term Assets Valuation We evaluate our indefinite-lived intangible assets and goodwill for potential impairment annually or when events or circumstances indicate their carrying value may be impaired. 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 be impaired. In 2019, we recognized a non-cash goodwill and intangible asset impairment charge of$72.0 million primarily related to the goodwill and indefinite-lived Octane Fitness brand name. No goodwill or other long-term asset impairment charges were recognized in 2018. Our impairment evaluations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate future cash flows and asset fair values. Our judgments regarding potential impairment are based on a number of factors including: the timing and amount of anticipated cash flows; market conditions; relative levels of risk; the cost of capital; terminal values; royalty rates; and the allocation of revenues, expenses and assets and liabilities to 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. Income Tax Significant judgments are required in determining tax provisions in relation to valuation allowance and tax positions. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. If our financial results or other relevant factors change, thereby impacting the likelihood of realizing the tax benefit of an uncertain tax position or deferred tax assets, significant judgment would be applied in determining the effect of the change. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained based on the technical merits of the position upon examination, including resolutions of any related appeals or litigation. Furthermore, valuation allowance would be provided against deferred tax assets if we determine it is no longer more likely than not that such assets would be fully realized based on the objectively verifiable evidence available. 18
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RESULTS OF OPERATIONS
The discussion that follows regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 should be read in conjunction with our consolidated financial statements and the related notes in this report. All comparisons to prior year results are in reference to continuing operations only in each period, unless otherwise indicated. A discussion regarding our financial condition and results of operations for fiscal 2018 compared to fiscal 2017 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 , filed with theSEC onFebruary 27, 2019 , which is available free of charge on theSEC's website at www.sec.gov and our Investors website at http://www.nautilusinc.com/investors/sec-filings/.
Results of operations information was as follows (in thousands):
Year Ended December 31,
2019 2018 Change % Change
Net sales $ 309,285 $ 396,753 $ (87,468 ) (22.0 )%
Cost of sales 198,702 215,013 (16,311 ) (7.6 )%
Gross profit 110,583 181,740 (71,157 ) (39.2 )%
Operating expenses:
Selling and marketing 94,595 115,920 (21,325 ) (18.4 )%
General and administrative 30,242 28,226 2,016 7.1 %
Research and development 14,282 16,825 (2,543 ) (15.1 )%
Goodwill and intangible impairment
charge 72,008 - 72,008 - %
Total operating expenses 211,127 160,971 50,156 31.2 %
Operating (loss) income (100,544 ) 20,769 (121,313 ) (584.1 )%
Other income (expense):
Interest income 162 1,044 (882 )
Interest expense (980 ) (1,051 ) 71
Other, net (470 ) 239 (709 )
Total other (expense) income, net (1,288 ) 232 (1,520 )
(Loss) income from continuing operations
before income taxes (101,832 ) 21,001 (122,833 )
Income tax (benefit) expense (9,537 ) 5,891 (15,428 )
(Loss) income from continuing operations (92,295 ) 15,110 (107,405 )
Loss from discontinued operations, net
of income taxes (505 ) (452 ) (53 )
Net (loss) income $ (92,800 ) $ 14,658 $ (107,458 )
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Results of operations information by segment was as follows (in thousands):
Year Ended December 31,
2019 2018 Change % Change
Net sales:
Direct $ 119,651 $ 184,925 $ (65,274 ) (35.3 )%
Retail 186,584 208,092 (21,508 ) (10.3 )%
Royalty 3,050 3,736 (686 ) (18.4 )%
$ 309,285 $ 396,753 $ (87,468 ) (22.0 )%
Cost of sales:
Direct $ 60,101 $ 73,446 $ (13,345 ) (18.2 )%
Retail 138,601 141,564 (2,963 ) (2.1 )%
Royalty - 3 (3 ) (100.0 )%
$ 198,702 $ 215,013 $ (16,311 ) (7.6 )%
Gross profit:
Direct $ 59,550 $ 111,479 $ (51,929 ) (46.6 )%
Retail 47,983 66,528 (18,545 ) (27.9 )%
Royalty 3,050 3,733 (683 ) (18.3 )%
$ 110,583 $ 181,740 $ (71,157 ) (39.2 )%
Gross margin:
Direct 49.8 % 60.3 % (1,050 ) basis points
Retail 25.7 % 32.0 % (630 ) basis points
The following tables compare the net sales of our major product lines within each business segment (in thousands):
Year Ended December 31,
2019 2018 Change % Change
Direct net sales:
Cardio products(1) $ 97,824 $ 160,132 $ (62,308 ) (38.9 )%
Strength products(2) 21,827 24,793 (2,966 ) (12.0 )%
119,651 184,925 (65,274 ) (35.3 )%
Retail net sales:
Cardio products(1) 141,331 165,911 (24,580 ) (14.8 )%
Strength products(2) 45,253 42,181 3,072 7.3 %
186,584 208,092 (21,508 ) (10.3 )%
Royalty income 3,050 3,736 (686 ) (18.4 )%
$ 309,285 $ 396,753 $ (87,468 ) (22.0 )%
(1) Cardio products include: Max Trainer®, TreadClimber®, Zero Runner®, Lateral X®, treadmills, exercise
bikes, ellipticals and subscription services.
(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.
Net Sales and Cost of Sales
Direct
The 35.3% decrease in year-over-year Direct net sales for 2019 compared to 2018
was primarily due to decreased consumer demand for our cardio products sales,
which was largely related to Bowflex Max Trainer® products and a reduction in
advertising spending. Improvements are being implemented that we believe should
be effective in addressing this trend. The primary actions taken include
extensive, in-depth consumer insights research, which has identified an
effective new positing for the Bowflex brand, and which is now underway through
a new advertising campaign and updates to our website, television, social media
and other
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digital platforms. Also, based on customer insights we will continue our investments in personalized connected-fitness and will be made available on more Bowflex, Nautilus and Schwinn equipment over time.
The rates of combined consumer credit approvals by our primary and secondaryU.S. third-party financing providers were 54.1% in 2019 compared to 55.3% in 2018. The decrease in approvals reflects lower credit quality applications.
The decrease in Direct cost of sales in 2019 compared to 2018 was due to the decrease in net sales.
The 10.5% decrease in the gross margin of our Direct business for 2019 compared to 2018 was primarily due to shift in product mix and unfavorable overhead absorption related to lower net sales.
Retail
Retail net sales decreased by 10.3% in 2019 compared to 2018. The decrease was primarily due to the decline in Bowflex Max Trainer® product sales and decreases in commercial products.
The decrease in Retail cost of sales in 2019 compared to 2018 was due to the decreases in Retail net sales mentioned above.
The decrease in Retail gross margin in 2019 compared to 2018 was due to unfavorable sales mix and overhead absorption.
Selling and Marketing
Selling and marketing expenses include payroll, employee benefits, and other
headcount-related expenses associated with sales and marketing personnel, and
the costs of media advertising, promotions, trade shows, seminars, and other
programs.
Dollars in thousands Year Ended December 31, Change
2019 2018 $ %
Selling and marketing $ 94,595 $ 115,920 $ (21,325 ) (18.4)%
As % of net sales 30.6% 29.2%
The decrease in selling and marketing expenses in 2019 compared to 2018 was
primarily due to lower media spending of $20.1 million partially offset by a
major new multi-media advertising and communication campaign behind the Bowflex
brand and new products.
The slight increase in sales and marketing as a percentage of net sales in 2019 compared to 2018 was primarily due to less efficient performance of media.
Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows:
Dollars in thousands Year Ended December 31, Change
2019 2018 $ %
Media advertising $ 44,916 $ 65,017 $ (20,101 ) (30.9)%
The return metrics we achieved on media performance declined in 2019, and as a result we decreased media spend to focus on improved profitability.
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General and Administrative
General and administrative expenses include payroll, employee benefits,
stock-based compensation expense, and other headcount-related expenses
associated with finance, legal, facilities, certain human resources and other
administrative personnel, and other administrative fees.
Dollars in thousands Year Ended December 31, Change
2019 2018 $ %
General and administrative $ 30,242 $ 28,226 $ 2,016 7.1%
As % of net sales 9.8% 7.1%
The increase in general and administrative in 2019 compared to 2018 was primarily due to increased legal expenses.
The increase in general and administrative as a percentage of net sales in 2019
compared to 2018 was primarily due to the increase in legal expenses and the
lower total net sales.
Research and Development
Research and development expenses include payroll, employee benefits, other
headcount-related expenses and information technology associated with product
development.
Dollars in thousands Year Ended December 31, Change
2019 2018 $ %
Research and development $ 14,282 $ 16,825 $ (2,543 ) (15.1)%
As % of net sales 4.6% 4.2%
The decrease in research and development expenses in 2019 compared to 2018, was primarily due to higher investments in digital platforms that were capitalized.
Goodwill and Intangible Impairment Charge In accordance ASC 350 - Intangibles -Goodwill and Other, we perform a goodwill and indefinite-lived asset impairment evaluation during the fourth quarter of each year. However, as a result of the decline in our market value relative to the market and our industry, identified as a triggering event, we performed an interim evaluation and a market capitalization reconciliation during the second quarter of 2019, which resulted in a non-cash goodwill and indefinite-lived intangible assets impairment charge of$72.0 million . ASC 350 requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, growth rates and terminal value. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also use market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. In accordance ASC 360 - Property, Plant, and Equipment and other long-lived assets, we performed a test for recoverability of our assets as the goodwill and indefinite-lived intangible asset impairment created a triggering event. The long-lived assets were recoverable and no impairment was required.
For additional information related to our goodwill and intangible impairment charge, see Notes 5, 11 and 12.
Interest Expense Interest expense of$1.0 million and$1.1 million in 2019 and 2018, respectively, was primarily related to the outstanding balance on our line of credit and term loan.
Other, Net
Other, net primarily relates to the effect of currency exchange rate
fluctuations with the
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Income Tax Expense Income tax provision includesU.S. and international income taxes, and interest and penalties on uncertain tax positions. Dollars in thousands Year Ended December 31, Change 2019 2018 $
%
Income tax (benefit) expense
9.4% 28.1%
Income tax benefit of $9.5 million was primarily related to our losses generated
in the U.S. in 2019. The reduced effective tax rate for 2019 compared to 2018
was due to the valuation allowance recorded as well as the goodwill impairment
charge for which no tax benefit was recognized in 2019. Income tax expense in
2018 was primarily related to our income generated domestically and
internationally.
Refer to Note 17, Income Taxes, to our consolidated financial statements included in Part II, Item 8 of this report for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. As ofDecember 31, 2019 , we had$11.1 million of cash and cash equivalents, compared to cash and investments of$63.5 million as ofDecember 31, 2018 . Cash used in operating activities was$22.6 million for 2019, compared to cash provided by operating activities of$21.3 million for 2018. The decrease in cash flows from operating activities for 2019, compared to 2018, was primarily due to decreased operating performance and the changes in our operating assets and liabilities as discussed below. Trade receivables increased by$8.8 million to$54.6 million as ofDecember 31, 2019 , compared to$45.8 million as ofDecember 31, 2018 , due to the increase in Retail sales in the fourth quarter of 2019 compared to the same period of 2018. Inventories decreased by$13.7 million to$54.8 million as ofDecember 31, 2019 , compared to$68.5 million as ofDecember 31, 2018 , primarily due to the efforts to align inventory levels more closely with sales trends. Prepaids and other current assets increased by$0.3 million to$8.3 million as ofDecember 31, 2019 , compared to$8.0 million as ofDecember 31, 2018 , due to added marketing costs for future campaigns, partially offset by royalty payments received in 2019. Trade payables decreased by$13.0 million to$74.3 million as ofDecember 31, 2019 , compared to$87.3 million as ofDecember 31, 2018 , primarily due to the decrease in inventory in the fourth quarter of 2019 compared to the fourth quarter of 2018.
Accrued liabilities decreased by
Operating lease liabilities, net of operating lease assets, increased by$1.9 million as ofDecember 31, 2019 due to the adoption of the new lease accounting standard.
Warranty obligations increased by
Net deferred income tax liabilities decreased by$10.6 million to$1.2 million as ofDecember 31, 2019 , compared to$11.8 million as ofDecember 31, 2018 , primarily due to the net operating loss deferred tax asset generated inU.S. reducing the overall net tax liability balance.
Cash provided by investing activities of
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assets, our digital platform JRNYTM, and production tooling and equipment. We anticipate spending$8.0 million to$10.0 million in 2020 for digital platform enhancements and production tooling.
Cash used in financing activities of
Financing Arrangements OnDecember 31, 2015 we entered into an amendment (the "Amendment") to our existing Credit Agreement, datedDecember 5, 2014 , with Chase (as amended, the "2014 Chase Credit Agreement") that provided for an$80.0 million term loan (the "Term Loan") to finance the acquisition ofOctane Fitness , which matures onDecember 31, 2020 . The Term Loan and our existing$20.0 million revolving line of credit with Chase are secured by substantially all of our assets. The 2014 Chase Credit Agreement was amended again onDecember 21, 2018 , which, among other changes, extended the term of the$20.0 million revolving line of credit toDecember 31, 2021 . The Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement also contains customary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligations and exercise its remedies under the continuing security agreement. Borrowing availability under the 2014 Chase Credit Agreement was subject to our compliance with certain financial and operating covenants at the time borrowings are requested. Letters of credit under the 2014 Chase Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing. During the three months endedMarch 31, 2019 , we paid down our existing term loan of$32.0 million and refinanced the remaining portion with borrowings under our new line of credit. We have a 2019 Chase Credit Agreement with Chase that provides for a$40.0 million revolving line of credit. The term of the 2019 Chase Credit Agreement expires onMarch 29, 2022 and is secured by substantially all of our assets. As ofDecember 31, 2019 , our line of credit had$14.1 million of outstanding borrowings and$24.0 million remained available for borrowing. The interest rate applicable to each advance under the revolving line of credit is based on either Chase's floating prime rate or adjusted London Interbank Offer Rate ("LIBOR"), plus an applicable margin. As ofDecember 31, 2019 , our borrowing rate for line of credit advances was 3.69%. The 2019 Chase Credit Agreement contains customary covenants for financings of this type, including, among other terms and conditions, revolving availability subject to a calculated borrowing base, minimum cash reserves and minimum fixed charge cover ratio covenants, as well as limitations and conditions on our ability to (i) create, incur, assume or be liable for indebtedness; (ii) dispose of assets outside the ordinary course of business; (iii) acquire, merge or consolidate with or into another person or entity; (iv) create, incur or allow any lien on any of our property; (v) make investments; or (vi) pay dividends or make distributions, in each case subject to certain exceptions. In addition, the 2019 Chase Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on indebtedness held by third parties (subject to certain limitations and cure periods), as well as a subjective acceleration clause. Based on our forecast, we concluded a breach of the minimum fixed charge coverage ratio covenant on the 2019 Chase Credit Agreement at theDecember 31, 2019 measurement date. We classified the 2019 Chase Credit Agreement as a non-current liability as of theDecember 31, 2019 financial statements as the covenant being breached at the balance sheet date was cured with alternative sources of funding obtained to terminate the 2019 Chase Credit Agreement as of the issuance of these financial statements. See Note 26, Subsequent Events to our consolidated financial statements in Part II, Item 8 of this report. Stock Repurchase Program OnApril 25, 2017 , our Board of Directors authorized a$15.0 million share repurchase program. Under this program, shares of common stock may be repurchased from time to time throughApril 25, 2019 . During 2018, repurchases under this program totaled$12.0 million . As ofNovember 2018 , the stock repurchases under this program were completed in full and the program expired.
On
During 2018, we repurchased 990,229 shares at an average price of$13.12 per share for an aggregate purchase price of$13.0 million . As ofDecember 31, 2019 ,$14.0 million remained available for future repurchases under the existing program. 24
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Repurchases may be made in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases are funded with existing cash balances, and the repurchased shares are retired and returned to unissued authorized shares.
Commitments and Contingencies For a description of our commitments and contingencies, refer to Note 24, Commitments and Contingencies, to our consolidated financial statements in Part II, Item 8 of this report. Off-Balance Sheet Arrangements In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions. The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications. Because we are unable to estimate our potential obligation, and because management does not expect these obligations to have a material adverse effect on our consolidated financial position, results of operations or cash flows, no liabilities are recorded atDecember 31, 2019 .
INFLATION
We do not believe that inflation had a material effect on our business, financial condition or results of operations in 2019 or 2018. Inflation pressures do exist in countries where our contract manufacturers are based; however, we have largely mitigated these increases through cost improvement measures.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, Significant Accounting Policies, to our consolidated financial statements in Part II, Item 8 of this report.
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