Nature’s Sunshine Products, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company manufactures and sells nutritional and personal-care products through independent distributors in domestic and international markets. Financial amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $83.9 | $93.5 |
| Gross profit / gross margin | $62.0 / 73.9% | $70.9 / 75.8% |
| Operating income / operating margin | $5.3 / 6.4% | $6.8 / 7.3% |
| Continuing-operations income | $4.2 | $10.2 |
| Net income attributable to common shareholders | $5.7 | $9.7 |
| Diluted EPS | $0.30 | $0.58 |
| Cash from operating activities | $(0.9) | $0.5 |
| Capital expenditures | $6.0 | $4.6 |
Gross margin declined as a share of sales, while selling, general and administrative expense fell to $26.3 million from $29.2 million but increased to 31.4% of sales from 31.2%. Volume incentives were $30.3 million, or 36.2% of sales, versus $34.9 million, or 37.3%.
At March 31, cash and equivalents were $50.1 million, including $44.7 million held in foreign markets and potentially subject to repatriation restrictions or taxes. Working capital was $61.9 million. Current liabilities were $55.3 million; the filing reports no clear current ratio. The company had $2.7 million of unrestricted short-term investments available, in addition to cash. Revolver borrowings were $0.35 million against a $25 million facility maturing September 2016; the company reported covenant compliance.
Changes versus the prior-year quarter
- Sales declined 10.3% in U.S. dollars and 6.6% in local currencies. Currency translation reduced sales by approximately $3.4 million.
- NSP Russia, Central and Eastern Europe sales fell 50.5%, to $7.4 million, amid political unrest, sanctions and currency devaluation. NSP Americas sales were essentially flat at $46.5 million; Synergy WorldWide sales declined 4.2% in dollars but rose 3.6% in local currencies.
- Operating income declined 22.1%. Continuing-operations income fell 58.9%, in part because Q1 2014 included a $6.7 million discrete foreign-tax-credit benefit; the 2015 effective tax rate was 16.1%, compared with a 55.6% tax benefit rate in 2014.
- Cash declined $8.6 million during the quarter, to $50.1 million. Operating cash use and capital spending were accompanied by $1.9 million of dividends and $2.9 million of share repurchases.
- Active distributors and customers worldwide declined to approximately 277,000 from 328,300; active managers declined to 14,700 from 16,700.
Outlook, commentary and risks
- Management expects Russia, Ukraine and the broader region to remain significantly affected by political instability, sanctions and currency devaluation, with no near-term reversal expected. The company is supporting distributors through promotions and training.
- In April 2015, after quarter-end, the company announced a restructuring to streamline operations, discontinue Vietnam operations and eliminate approximately 100–130 positions through severance and attrition. It expects about $3.9 million of one-time costs, mostly in Q2 2015, and annualized savings of approximately $10–$15 million. Vietnam represented about 0.3% of Q1 2015 sales.
- Management stated that cash, operating cash generation and available resources should fund normal operations, dividends, repurchases and capital expenditures. This depends on demand, operating performance and the outcomes of tax and other contingencies. No formal revenue or earnings guidance is provided in the filing.
- Venezuela operations ceased in November 2014 and are reported as discontinued. Q1 2015 discontinued-operations income of $1.3 million reflected proceeds from selling Venezuelan fixed assets; this materially contributed to reported net income.
- Risks include foreign-exchange exposure, particularly in Eastern Europe; distributor retention and productivity; product and direct-selling regulation; product liability and litigation; and tax assessments. Accrued unrecognized tax benefits were $6.8 million. Certain foreign tax and civil matters have a possible, unprovided loss range of $0 to approximately $0.5 million; other litigation outcomes cannot be reliably estimated.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the expected $10–$15 million annualized savings materialize, and the final costs and timing of the restructuring.
- How sales, distributor activity and purchasing power evolve in Russia, Ukraine and other foreign markets, including the effects of exchange rates and sanctions.
- Whether operating cash flow recovers relative to capital spending, dividends and the share-repurchase program.
- The treatment and eventual resolution of tax positions, non-income-tax contingencies and legal proceedings.
- Whether China market launches progress through the required product-registration and permit approvals; the filing says China and New Markets sales to date were export business, not China operations.