Nature’s Sunshine Products, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited quarterly results, including the quarter ended December 31, 2012. Unless stated otherwise, amounts below are U.S. dollars.
Business context
Nature’s Sunshine manufactures and direct-sells nutritional, herbal and personal-care products through independent Managers and Distributors. It operates three segments: NSP Americas, Asia Pacific and Europe; NSP Russia, Central and Eastern Europe; and Synergy WorldWide. The company reported approximately 333,400 active Distributors and customers and 16,600 active Managers at year-end.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $367.5 million | $367.8 million |
| Gross profit / gross margin | $274.1 million / 74.6% | $278.4 million / 75.7% |
| Operating income / margin | $34.0 million / 9.3% | $20.2 million / 5.5% |
| Net income | $25.4 million | $17.6 million |
| Diluted EPS | $1.59 | $1.12 |
| Cash from operations | $26.7 million | $3.9 million |
- Full-year sales were essentially flat, down 0.1% reported; excluding currency effects, sales increased 1.0%. Foreign exchange reduced revenue by about $4.1 million.
- Segment sales: NSP Americas, Asia Pacific and Europe fell 3.7% to $208.9 million; NSP Russia, Central and Eastern Europe rose 1.5% to $57.9 million; Synergy WorldWide increased 7.2% to $100.7 million, or 10.6% in local currencies.
- Cost of sales rose to 25.4% of revenue from 24.3%, reflecting higher raw-material costs, product/material write-offs, mix and import fees. Volume incentives declined slightly to 36.2% of sales from 36.4%; SG&A declined to 29.1% from 29.8%.
- Fourth-quarter 2012 sales were $90.4 million versus $92.1 million in Q4 2011; operating income was $5.8 million versus $9.6 million, and net income was $4.5 million versus $7.6 million. Diluted EPS was $0.28 versus $0.48.
- Year-end cash and equivalents were $79.2 million, working capital $83.9 million and current ratio 2.37. Cash from operations increased substantially, principally because the $21.7 million NutriPlus settlement payment occurred in 2011, not 2012. Capital expenditures were $6.6 million.
- Debt totaled $5.6 million, including $3.35 million current and $2.27 million long-term. The company had a $15 million revolving facility available and undrawn; it reported compliance with debt covenants. Nearly $49.8 million of cash was held in foreign subsidiaries and could face repatriation restrictions or taxes.
Changes, outlook and notable items
- Profitability improved despite flat revenue, aided by lower operating costs and the absence of the $14.75 million NutriPlus contract-termination charge recorded in 2011. The 2011 settlement extinguished future Russian royalty obligations.
- The company retrospectively reclassified shipping and handling costs from SG&A to cost of sales, moving $21.6 million in FY2012 and $20.0 million in FY2011. This changed reported gross margin and expense presentation, but not operating income or net income.
- Management gave no specific revenue or earnings guidance. It described efforts to improve recruiting, training and sales in the U.S. and Mexico, develop a new Mexico business model, and adapt Peru’s sales approach to regulatory restrictions. Synergy Europe and Korea were growth contributors; Japan and Synergy North America weakened.
- Peru’s regulatory changes sharply restricted sales through the traditional direct-selling model; Peru revenue fell 63% in 2012. Norwegian authorities temporarily restricted Synergy shipments in late 2012; shipments resumed in January 2013. Japan had unusually high returns tied to a promotion, which management said were not quality-related and had returned to normal levels.
- On March 6, 2013, the company announced CEO Michael Dean’s resignation effective March 31 and appointed Executive Chairman Gregory Probert interim CEO effective April 1. This leadership change occurred after year-end.
- Key risks include regulation of dietary supplements and network marketing, Distributor recruitment and retention, foreign exchange and currency controls, raw-material supply and inventory obsolescence, intense competition, and product-liability exposure. Venezuela announced a bolivar devaluation in February 2013; the company disclosed currency restrictions and cash-repatriation uncertainty.
- Foreign VAT and civil matters had a possible payment range of $0 to approximately $1.1 million, with no loss provision recorded. Accrued non-income-tax contingencies were $6.2 million. Unrecognized tax-benefit liabilities were $10.6 million; tax audits and uncertain outcomes could affect results.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor reported effective internal control over financial reporting at December 31, 2012.
Important facts for investors to verify
- Whether sales and Distributor productivity stabilize in the weaker NSP Americas markets, particularly the U.S., Mexico and Peru, and whether Synergy growth persists.
- How gross margin trends after the shipping-cost reclassification, and whether raw-material, write-off and import-cost pressures continue.
- Cash accessibility: the location, repatriation constraints and potential tax treatment of foreign-held cash, including exposure in Venezuela.
- Potential outcomes and timing of tax audits, non-income-tax contingencies and foreign litigation, including whether recorded reserves prove sufficient.
- Execution following the CEO transition and the effectiveness of management’s recruiting, training and market-recovery initiatives.
- The effect of the accounting reclassification when comparing reported gross margins with earlier company disclosures or peer results.