Nature’s Sunshine Products, Inc. — FY2018 Form 10-K
Business and period: The company manufactures and sells more than 700 nutritional and personal-care products, primarily through independent distributors. It reports four segments: NSP Americas, NSP Russia/Central and Eastern Europe, Synergy WorldWide, and NSP China. This annual report covers the year ended December 31, 2018; fourth-quarter figures are unaudited.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $364.8 million | $342.0 million |
| Gross profit / margin | $269.1 million / 73.8% | $251.0 million / 73.4% |
| Operating income / margin | $5.4 million / 1.5% | $1.4 million / 0.4% |
| Net income (loss) from continuing operations | $(1.2) million | $(13.8) million |
| Net income (loss) attributable to common shareholders | $(0.9) million; $(0.04) per share | $(12.9) million; $(0.69) per share |
| Cash from operating activities | $21.8 million | $10.5 million |
| Cash and cash equivalents at year-end | $50.6 million | $42.9 million |
| Working capital | $40.1 million | $48.9 million |
Cost of sales was 26.2% of sales, down from 26.6%; volume incentives were 34.4%, down from 35.1%; SG&A was 37.9% in both years. The company reported no year-end balance on its $25 million revolving facility, which matures in July 2020, and said it was compliant with covenants. Cash held by foreign subsidiaries was $40.6 million and may be subject to withholding taxes or other repatriation restrictions. Capital expenditures were $4.8 million.
Fourth quarter
Q4 sales were $97.4 million, compared with $88.3 million in Q4 2017. Operating loss narrowed to $1.2 million from $2.8 million; net loss attributable to common shareholders was $2.9 million versus $17.4 million. Q4 2018 SG&A rose to $41.1 million from $34.5 million. The filing attributes much of the prior-year Q4 loss to unusually high tax expense.
Changes and management commentary
- Full-year sales increased 6.7% in reported dollars and 5.5% excluding currency effects. Growth in NSP China (+45.5%), NSP Russia/Central and Eastern Europe (+19.9%), and Synergy WorldWide (+13.9%) more than offset the 6.0% decline in NSP Americas.
- South Korea was a major growth contributor within Synergy; Synergy Europe declined 13.6%. Management cited distributor engagement, promotions, market saturation, and recruiting trends among the market-specific drivers.
- Active distributors and customers declined to approximately 224,900 from 230,900; active Managers declined to 12,600 from 13,000. Management said U.S. sales declines may continue into 2019.
- Operating cash flow improved, partly due to timing of working-capital payments and receipts. Cash from investing activities was $0.2 million, including $5.0 million of proceeds from real-estate sales; financing activities used $12.2 million, principally reflecting revolving-credit repayments.
Outlook, unusual items, and risks
- No quantified sales or earnings guidance is provided. Management believes cash, operating cash generation, and available borrowing capacity should fund normal operating needs, but cautions that economic weakness, lower product demand, tax settlements, or non-income-tax contingencies could affect liquidity.
- FY2018 included $2.4 million of CEO transition costs and $1.5 million of restructuring expenses. Gains of approximately $4.0 million from two property sales partly offset SG&A increases. The CEO’s retirement was announced; Terrence Moorehead became CEO.
- The effective tax rate was 137.6% on $3.2 million of pretax income, reflecting foreign-operation tax effects, including GILTI and withholding taxes. The 2017 tax provision included substantial Tax Cuts and Jobs Act-related effects. Tax rates may fluctuate materially.
- Key risks include direct-selling and product regulation, distributor recruitment and retention, dependence on key distributor networks, foreign-exchange exposure, China regulatory scrutiny, product liability, cybersecurity and privacy, transfer pricing and tax matters, and legal contingencies. The filing notes intensified Chinese enforcement monitoring announced in January 2019.
- The company reported $1.7 million accrued for certain other litigation and estimated possible future payments of up to $0.4 million for other matters; non-income-tax contingency payments were estimated at $0–$3.4 million. Outcomes remain uncertain.
- Adoption of the new lease standard in 2019 was preliminarily expected to increase assets and liabilities by $22–$27 million, without significant effects on earnings or cash flows. The financial-statement auditor issued an unqualified opinion, and management and the auditor concluded internal controls were effective at year-end.
Important facts for investors to verify
- Whether distributor activity and sales trends in NSP Americas stabilize, and whether growth in China, Russia/CEE, and South Korea is sustainable.
- The drivers and recurrence of elevated tax expense, valuation allowances, foreign tax credits, and unrecognized tax benefits.
- How much of foreign-held cash can be repatriated without material tax or other restrictions, and continued compliance with credit-facility covenants.
- The financial and operating effects of China’s heightened regulatory enforcement and the company’s China joint venture and direct-selling model.
- The resolution and potential cash impact of litigation, non-income-tax contingencies, product-liability claims, and the disclosed restructuring and lease obligations.