Nature’s Sunshine Products, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone Q4 filing; selected quarterly results are also summarized below. Amounts are in U.S. dollars.
Business context
The company manufactures and directly sells more than 700 nutritional and personal-care products through independent Managers and Distributors, across three segments: NSP Americas, Asia Pacific and Europe; NSP Russia, Central and Eastern Europe; and Synergy WorldWide. Approximately 80% of products sold are manufactured at its Spanish Fork, Utah facility. Revenue depends substantially on the size and productivity of its independent sales force.
Financial performance
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Net sales | $378.1 million | $367.5 million | Up 2.9%; up 3.7% in local currencies, with a $3.0 million unfavorable currency impact |
| Gross profit / margin | $283.3 million / 74.9% | $274.1 million / 74.6% | Margin improved 0.3 percentage points |
| Volume incentives | $138.5 million / 36.6% of sales | $133.3 million / 36.2% | Higher share, partly reflecting growth in markets with higher commissions |
| SG&A | $120.7 million / 31.9% of sales | $106.9 million / 29.1% | Increased $13.9 million |
| Operating income / margin | $24.1 million / 6.4% | $34.0 million / 9.3% | Down 29.3% |
| Net income / diluted EPS | $17.6 million / $1.07 | $25.4 million / $1.59 | Net income down 30.6% |
| Operating cash flow | $29.4 million | $26.7 million | Up $2.7 million |
| Capital expenditures | $8.6 million | $6.6 million | Increased investment, including IT systems |
Quarterly Q4 sales were $95.5 million versus $90.4 million in Q4 2012. Q4 net income declined to $1.8 million from $4.5 million; operating income was $2.6 million versus $5.8 million. Q4 2013 SG&A was $33.7 million, the highest quarterly amount reported for the year.
By segment, FY2013 sales were $207.1 million for NSP Americas, Asia Pacific and Europe (down 0.9%), $62.7 million for NSP Russia, Central and Eastern Europe (up 8.5%), and $108.3 million for Synergy WorldWide (up 7.6%). Growth in Russia/Central and Eastern Europe and Synergy was partly offset by declines in North America and Japan. Active Distributors and customers totaled approximately 334,200, compared with 333,400 a year earlier; active Managers totaled 16,900 versus 16,600.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $77.2 million, working capital was $80.0 million, and available-for-sale short-term investments were $2.0 million. Cash held by foreign subsidiaries was $63.0 million and may be subject to withholding taxes or repatriation restrictions. Financing cash outflow was $21.3 million, including $30.4 million of dividends and $2.5 million of share repurchases, partly offset by borrowing and option exercises.
The balance sheet reports $2.3 million of current debt and $10.0 million of long-term debt, or $12.3 million in total. The company had a $25 million revolving credit facility, bearing interest at LIBOR plus 1.25%; it reported compliance with debt covenants. The filing’s liquidity discussion says the revolver balance was $15 million, while the debt note and balance sheet report $10 million for the revolver. Investors should verify the actual year-end draw and total debt.
The company paid recurring quarterly dividends of $0.10 per share and a special $1.50 per-share dividend in 2013; total cash dividends were $30.4 million. A $10 million repurchase authorization had $7.5 million remaining at year-end. Future dividends remain at the Board’s discretion.
Material changes, outlook and risks
- SG&A rose primarily due to investment in sales, marketing, science and product-development personnel and programs, as well as higher Distributor events and incentives. FY2013 also included one-time costs: $1.4 million related to the former CEO’s departure, $1.3 million for a South Korea customs audit assessment and $1.1 million of restructuring costs.
- Management reported no numerical earnings or revenue guidance. It described investments intended to stimulate sales and profitability, including a global Oracle ERP implementation expected to be completed by mid-2016; remaining committed project spending was approximately $6.5 million.
- The U.S. business remained below prior-year sales levels. NSP and Synergy Japan were combined and began operating as Synergy Japan in January 2014. Peru’s regulatory changes had restricted traditional direct selling of many key products, prompting a wholesale channel.
- Currency and country risks are material: about 59.7% of sales were generated outside the U.S.; Venezuela and Belarus were treated as highly inflationary economies. The company reported $3.9 million of cash in Venezuelan bolivars and said it had been unsuccessful in obtaining U.S. dollars at the official exchange rate after the 2013 devaluation.
- A dispute with the sole general dealer serving Belarus, Georgia, Kazakhstan, Moldova, Mongolia, Russia and Ukraine involved approximately $2.0 million in withheld remittances at year-end. The dealer could seek about $22.0 million for earlier periods; the company disputes the claims and planned binding arbitration. Loss or disruption of the dealer could interrupt sales in those territories.
- Other foreign VAT and civil matters could result in payments estimated by the company at $0–$0.9 million, with no provision recorded for those matters. Accrued non-income-tax contingencies were $6.3 million. The balance-sheet liability for unrecognized tax benefits was $12.4 million; tax audits and uncertain outcomes could affect results.
- Additional risks include product and advertising regulation, Distributor conduct and retention, competition, product liability, inventory obsolescence, supplier/manufacturing disruption, IT implementation, and foreign-currency or cash-repatriation constraints. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the stated $15 million revolver balance in the liquidity discussion with the $10 million revolver balance in the debt note and balance sheet.
- Track whether operating margins recover as sales, marketing, science and product-development spending continues, and distinguish recurring costs from the identified one-time items.
- Monitor the general-dealer arbitration, the potential historical $22 million claim, renewal or replacement of the distribution arrangement, and any resulting impact on the regional business.
- Assess access to and repatriation of foreign cash, particularly in Venezuela, and the effect of currency movements on reported sales and earnings.
- Review developments in tax and VAT proceedings, including the $12.4 million unrecognized-tax-benefit liability and the $6.3 million accrued non-income-tax contingencies.
- Evaluate Distributor activity and regional trends, including continued U.S. and Japan weakness, the Japan integration, and the sustainability of growth in Russia/Central and Eastern Europe and Synergy markets.