NLS
#Thank you, <UNK>.
Good afternoon, everyone, and thank you for joining our call today.
I'd like to start by providing a general overview of our first quarter, and then we'll turn it over to Sid <UNK> to review our financials in more detail.
Bill <UNK> will then provide updates on the business segments as well as on product activity and expected introductions for the remainder of this year.
Finally, I'd like to provide some closing remarks, including an update on our outlook for 2018, and then we'll open up the call for questions.
First quarter 2018 revenue and operating income exceeded our guidance.
The performance increases were driven primarily by strong growth in the mass retail channel of distribution within the Retail segment.
Other channels of our business performed as expected, with modest growth in the specialty commercial channel and a decline in the Direct segment due to the phase-down of the mature TreadClimber line.
Increased operating expense leverage was achieved in the quarter versus prior year, despite stepped-up investments in product development and the multifaceted operating improvement plan we outlined in the previous earnings call.
I will provide an update on the progress of this plan in my summary comments.
Because of our operating model and performance during the quarter, we also continued to strengthen our balance sheet.
We ended the quarter with approximately $93 million in cash and marketable securities, and further reduced debt to $44 million.
In addition, we repurchased $2.7 million of stock in the open market as part of our previously announced stock repurchase program.
As we look forward into 2018, new products planned to be launched this year are tracking as scheduled, as Bill will describe shortly.
They are being very positively received in both formal market launches at industry shows as well as with end users in field tests.
Now I'd like to turn it over ---+ turn the call over to Sid.
Sid.
Thanks, <UNK>.
Good afternoon, everyone.
I'd like to review the details of our financial results for the first quarter of 2018.
Net sales for the first quarter totaled $114.8 million, an increase of 1.4% as compared to the same period in the prior year, reflecting strong growth in the retail channels, partially offset by lower sales in the direct channel.
First quarter gross margins decreased by 250 basis points in the Direct segment to 63%, and were down 80 basis points in the Retail segment to 31.2%, when compared to the same quarter last year.
Direct margins were primarily impacted by a shift in product mix to lower-margin products, while Retail margins were impacted by higher product costs, reflecting unfavorable changes in foreign exchange currency exchange rates.
On an overall basis, total company gross margins for the first quarter 2018 decreased by 320 basis points to 51.3% versus the same period prior year, reflecting the lower gross margin rate in Direct and a shift in channel mix to an increased percentage of Retail segment revenues.
Total operating expenses for the first quarter of 2018, as a percentage of net sales, decreased to 42% from 43.3% in the same period last year, primarily reflecting decreased sales and marketing expense, partially offset by higher R&D expense.
Sales and marketing expense for the first quarter of 2018 was $36.8 million or 32% of net sales as compared to $37.7 million or 33.3% of net sales in the same period last year.
The decreased dollar spending reflected a non-recurrence of a $1.2 million reserve recorded in the same period of the prior year, along with lower financing fees of $1.6 million.
These decreases were partially offset by a $1.3 million increase in media costs, reflecting lower ROIs on our advertising spend.
The decrease in sales and marketing expense as a percentage of sales reflects the same factors.
General and administrative expenses were $6.9 million or 6% of net sales for the first quarter of 2018, which compares to $7.5 million or 6.6% of net sales in the same period last year.
The decreased dollar spending in G&A primarily reflects lower litigation costs.
Research and development costs in the first quarter of 2018 were $4.5 million or 3.9% of net sales compared to $3.9 million or 3.5% of net sales in the same period last year.
The dollar increase reflects increased investment in the engineering and digital platform resources required to continue to innovate and broaden our product portfolio.
Operating income for the first quarter of 2018 decreased to $10.7 million as compared to operating income of $12.7 million in the same quarter of last year.
The decrease reflects the decline in gross margin rates, partially offset by the decrease in operating expenses.
Operating margin for the first quarter of 2018 decreased to 9.3% compared to 11.2% for the same period last year.
Income from continuing operations for the first quarter of 2018 was $8.1 million or $0.27 per diluted share as compared to $8.2 million or $0.26 per diluted share for the same period last year.
EBITDA from continuing operations in the first quarter of 2018 decreased to $13.1 million versus $14.9 million for the same quarter of the prior year.
The effective tax rate for the first quarter of 2018 was 23.7% compared to 33.6% in the same period last year.
The reduced tax rate reflects the impact on the quarter of the recently enacted Tax Cuts and Jobs Act.
We anticipate the full year effective rate to be in the 24% to 25% range.
Total net income, including discontinued operations, for the first quarter of 2018 was $8.1 million or $0.26 per diluted share, which includes a $0.1 million loss, net of taxes, from discontinued operations.
This compares to the first quarter last year where we reported total net income, including discontinued operations, of $7.1 million or $0.23 per diluted share, which included a net loss from discontinued operations of $1.1 million.
Discontinued operations in the prior year included a $1.2 million charge related to the final settlement of a long-standing lawsuit with Biosig Instruments.
Turning now to our segment results.
Net sales in the Direct business totaled $71.2 million in the first quarter of 2018, a 4.7% decrease over the same quarter last year.
Direct segment sales were impacted by the continued decline in TreadClimber sales and marginally lower Max Trainer sales.
However, sales increases in the Bowflex Results Series and HVT product lines helped to partially offset those declines.
Gross margin for the Direct business declined to 63% for the first quarter of 2018 compared to 65.5% in the same quarter of last year due to a shift in product mix to more lower-margin HVT and Bowflex Results Series product.
Operating income for the first quarter of 2018 in our Direct business was $11.3 million compared to $15.3 million in the same quarter prior year.
Operating income was negatively impacted by the lower net sales and gross margins in the first quarter of 2018.
Net sales in our Retail segment for the first quarter of 2018 were $43 million, an increase of 13.7% compared to $37.8 million in the first quarter of last year.
The increase in Retail net sales reflects strong growth across a variety of product lines as well as sales growth in specialty retail and commercial customers.
Gross margins for the Retail business decreased by 80 basis points to 31.2% in the first quarter of 2018 as compared to 32% for the prior period, primarily due to higher product costs related to unfavorable foreign exchange rates.
In the first quarter of 2018, operating income for the Retail business totaled $3.9 million as compared to $2.2 million in the same period of last year.
The increase is attributable to the higher revenue, coupled with a non-recurrence of a $1.2 million reserve recorded in the same period of the prior year.
Now turning to the consolidated balance sheet.
Cash and investments totaled $92.7 million as of March 31, 2018, with $44 million of debt.
This compares to $85.2 million in cash, and debt of $48 million at December 31, 2017.
During the first quarter, the company purchased $2.7 million of stock in the open market as part of its previously announced stock repurchase program.
Inventories were $37.7 million as of March 31, 2018, compared to $53.4 million at December 31, 2017, and $34.3 million at March 31, 2017.
The decrease in inventory versus year-end 2017 relates to the seasonality of the business.
Trade payables were $41.7 million as of March 31, 2018, compared to $66.9 million at the end of 2017, again, reflecting seasonality of purchases.
Capital expenditures totaled $1.3 million for the 3 months ended March 31, 2018, with spending primarily on systems integration, product, equipment and tooling.
We anticipate full year CapEx to be in the range of $8.5 million to $10.5 million, reflecting increased spend on systems integration, digital platform enhancements and warehouse consolidation initiatives.
At this time, I'd like to turn it over to Bill <UNK>, our Chief Operating Officer, who will provide additional insights into our business and key products.
Bill.
Thank you, Bill.
I'd like to make a few final comments before we open up the call for questions.
We are pleased with the first quarter results and remain confident in our ability to return to full year top line growth for both Retail and Direct segments this year.
While it is still early in the year, we believe we are well positioned to deliver results per our full year guidance given the trajectory of the baseline business in conjunction with the breadth of truly innovative new product introductions still coming that Bill referred to earlier.
Equally important is that the multifaceted operational improvement plan, which we discussed in the previous call, is tracking as scheduled, and we expect those initiatives to be mostly completed later this year.
As a reminder, the operational improvement plan includes systems integration, consolidation of warehouse facilities, supply base realignment, and restructuring of our international sales and support teams.
These initiatives are anticipated to strengthen our infrastructure and support our growth initiatives, including new product introductions and improved margins beginning in 2019.
As far as 2018 guidance, the full year outlook remains the same as communicated on our previous call in March.
On a full year basis for 2018, we continue to expect revenues between $428 million and $437 million, with operating income in the range of $42 million to $45 million.
This is inclusive of the estimated expenses and investments related to the business model improvements we mentioned.
Even though we exceeded the first quarter guidance and have started the year well, we feel it is not prudent at this time to change the full year guidance given ongoing product cost pressures and the phasing of investment expenditures to support the key initiatives that remain ahead of us for the balance of this year.
While full year expenses and capital expenditures related to the key initiatives are tracking as planned, we now do expect to see heavier concentration of these expenses in the second and third quarters of this year.
In closing, I'd like to thank all of our dedicated employees, who are instrumental in our successes and help the company become stronger every quarter as a result of their efforts and initiatives.
That concludes our prepared remarks.
Now I'd like to open up the call for questions.
Operator.
I'll let ---+ it's a couple of things, but I think the biggest part of it is that, remember that for the last 2 years, because of a lot of the M&A activity that was occurring in the specialty side of commercial specialty, those stores that were being acquired and consolidated, that seems to have stabilized.
We saw some stabilization in the first quarter, I could say, bottoming out.
But we do feel that, that is ---+ that part of the specialty and commercial channel could actually hold its own.
It's kind of what we've considered this year not necessarily growing, but at least holding its own versus prior year, on a full year basis.
And then, we have, of course, the MTX that Bill alluded to, coming in, in the back half.
And all indications are that ---+ the feedback has been very strong, as we said, both in the shows globally, not just in the U.S., but also from an end-user visits and where we're putting it in the gyms.
Thanks, Steve.
Yes ---+ no, in terms of the capital deployment plan, sort of the priorities remain unchanged.
I think we are ---+ I would say, we're still in the market for an appropriate acquisition, but I think as we've laid out on past calls, it would have to be the right filters and the right asset before we went ahead and did it.
But we are on ---+ certainly in the market, looking for appropriate assets that could accelerate our strategic initiatives that we've outlined here.
We'll continue to be in the market opportunistically on the stock buyback program, as we were in Q1.
Yes.
Thank you all for your interest today in Nautilus and joining our call.
We look forward to providing another update on the business on our second quarter earnings call in a few months.
Hope everyone has a great rest of the day.
Thank you.
