Nature’s Sunshine Products, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures compared with December 31, 2017. The company manufactures and directly sells nutritional and personal-care products through independent distributors and reports four segments.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $87.3 million | $83.1 million | +5.1%; +1.4% excluding currency effects |
| Gross profit / margin | $64.6 million / 74.0% | $61.4 million / 73.9% | Margin +0.1 percentage point |
| Operating income / margin | $0.9 million / 1.0% | $2.1 million / 2.5% | Down $1.2 million |
| Net income | $0.3 million | $1.9 million | Down 82.1% |
| Net income attributable to common shareholders / diluted EPS | $0.5 million / $0.03 | $2.2 million / $0.11 | Lower than prior year |
| Operating cash flow | $3.7 million | $0.8 million | Improved |
Gross margin improved slightly as a result of favorable market mix. Volume incentives rose to 35.9% of sales from 34.9%, primarily reflecting greater promotional activity and sales mix. SG&A increased 6.8% to $32.4 million, or 37.1% of sales versus 36.5%; management cited $1.2 million of additional Oracle-related depreciation. Other income, net, declined to $0.7 million from $1.3 million, primarily due to lower foreign-exchange gains.
Segments and material year-over-year changes
- NSP Americas: Sales fell 6.2% to $41.9 million (6.8% lower in local currency). Management attributed the decline largely to lasting customer-service and ordering disruptions from the Oracle ERP implementation, as well as customer attrition. Active distributors and customers and active managers in the segment also declined.
- NSP Russia, Central and Eastern Europe: Sales rose 13.1% to $9.6 million, supported by improved distributor engagement and relative ruble stabilization.
- Synergy WorldWide: Sales rose 16.5% to $31.8 million; growth was 8.1% excluding currency effects. South Korea and Japan grew, while Europe and North America declined.
- NSP China: Sales rose 52.3% to $4.1 million, with growth supported by the direct-selling license received in May 2017 and efforts to expand distributors and market share.
Currency movements added approximately $3.0 million to consolidated sales. Overall growth was partly offset by the decline in NSP Americas. Worldwide active independent distributors and customers decreased to approximately 224,100 from 234,300; active managers declined to 13,700 from 14,900.
Cash, debt and liquidity
- Cash and cash equivalents were $42.3 million, down from $42.9 million at year-end; $35.7 million was held in foreign markets and may face restrictions or costs upon repatriation.
- Working capital was $46.2 million, compared with $48.9 million at December 31, 2017.
- Long-term borrowings under the $25 million Bank of America revolving facility were $7.7 million, down from $13.2 million. The facility matures July 11, 2020; the company reported compliance with its covenants. Borrowings are secured by specified assets.
- Operating cash flow was $3.7 million; investing activities used $0.5 million, principally reflecting lower capital spending after the Oracle system launch; financing activities used $5.2 million, including $5.5 million of credit-facility principal payments.
- Cash declined by $0.6 million during the quarter to $42.3 million. The company said available cash and operating cash generation should fund normal operating needs, including capital expenditures.
Outlook, accounting, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management’s liquidity view is subject to risks including prolonged economic weakness, weaker product demand, and unfavorable tax or non-income-tax outcomes.
- Oracle-related customer-service and online-ordering disruptions continued to weigh on NSP Americas; management said the segment’s baseline had reset lower after customer attrition. Foreign exchange remains a significant exposure: 59.0% of sales and 56.7% of operating expenses were outside the United States.
- The company adopted revenue standard Topic 606 on January 1, 2018. Adoption reduced opening accumulated deficit by $0.9 million, net of tax; it reduced Q1 revenue by $0.5 million and operating income by $0.2 million.
- The effective tax rate was 79.5%, versus 44.0% in Q1 2017, chiefly because certain foreign losses, particularly in China, did not provide a tax benefit and other foreign tax items were unfavorable. Unrecognized tax benefits were $4.7 million, with an increase primarily related to transfer-pricing contingencies.
- Accrued non-income-tax contingencies were $0.2 million; possible future payments were estimated at $0 to $3.9 million. Accrued amounts for other litigation were $1.2 million, with possible future payments estimated at $0 to $2.0 million. Management cautioned that outcomes remain uncertain.
- The company suspended quarterly dividends in 2017; no dividend was declared for Q1 2018. No material changes to previously disclosed risk factors were reported. Risks include regulation of direct selling and supplements, distributor retention, China operations, currency movements, product liability, and legal and tax uncertainty.
Important facts for investors to verify
- Whether NSP Americas can recover sales and distributor activity following the ERP-related disruption and customer attrition.
- How much reported sales growth reflects underlying demand versus favorable currency movements, and whether growth in China and Synergy markets continues.
- Whether increased volume-incentive and SG&A ratios constrain operating margins as sales develop.
- Availability of foreign-held cash, continued covenant compliance, and the pace of debt repayment.
- Potential changes in tax exposures, including transfer pricing, and the outcomes of non-income-tax matters and litigation.