Nature’s Sunshine Products, Inc. — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014; unaudited. The company manufactures and direct-sells nutritional and personal care products through independent Managers and Distributors in international markets.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $95.8 million | $96.5 million; down 0.8% reported, up 0.3% excluding currency effects |
| Gross profit / margin | $72.6 million / 75.9% | $72.0 million / 74.7% |
| Operating income / margin | $7.2 million / 7.5% | $6.9 million / 7.2% |
| Income before taxes | $6.1 million | $7.3 million |
| Net income / diluted EPS | $9.7 million / $0.58 | $4.9 million / $0.30 |
| Operating cash flow | $0.5 million | $7.8 million |
| Capital expenditures | $4.6 million | $1.2 million |
Amounts above are in U.S. dollars; financial statement amounts are reported in thousands. Net income rose despite lower pretax income, primarily because a discrete $6.7 million tax benefit arose from foreign tax credits associated with $21.5 million of intercompany dividends. The reported effective tax rate was a benefit of 59.6%, versus tax expense at 33.1% of pretax income in Q1 2013. Management said related tax effects may recur, but an impact as large as this quarter’s is unlikely.
At March 31, cash and cash equivalents were $71.5 million, current investments were $2.0 million, and working capital was $81.8 million. Cash declined $5.8 million during the quarter. Cash held by foreign subsidiaries totaled $38.7 million and may be subject to repatriation restrictions or taxes. Total debt was $11.4 million: $10.0 million drawn on a $25.0 million revolving facility due September 2015 and a $1.4 million current term-loan balance due in 2014. The company was in compliance with debt covenants.
Material changes and operating drivers
- Synergy WorldWide sales increased 10.4% (11.1% in local currency) to $30.0 million, led by strong South Korea growth. NSP Americas, Asia Pacific and Europe sales fell 4.6% to $50.7 million; NSP Russia, Central and Eastern Europe fell 6.8% to $15.0 million.
- South Korea sales increased 84.1% to $12.4 million. U.S. sales decreased 3.7% to $37.6 million. Companywide foreign-exchange movements reduced reported sales by approximately $1.0 million.
- Cost of sales fell to 24.1% of revenue from 25.3%, reflecting product mix, lower raw-material costs and lower in-market distribution costs. Volume incentives increased to 37.3% of revenue from 36.3%, partly reflecting Synergy’s higher-commission markets. SG&A declined 1.2% to $29.8 million.
- Active Managers declined to approximately 17,200 from 18,200 year over year; active Distributors and customers declined to approximately 329,800 from 341,200. Management attributed the decline principally to lower recruiting and retention in NSP Americas, Asia Pacific and Europe.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects cash from operations and available cash to fund normal operations, dividends, repurchases, capital expenditures and some business-development activity, but warns that weaker demand, prolonged economic weakness, tax settlements or contingencies could impair liquidity.
- Management cautioned that political uncertainty in Ukraine and Russia may weigh on near-term growth; further escalation or currency weakness could adversely affect sales and distributor purchasing power. The company also faces foreign-exchange exposure and reports that a 10% strengthening of the U.S. dollar would reduce quarterly operating income by an estimated $0.4 million, all else equal.
- Venezuela’s currency controls and exchange-rate changes remain uncertain. The company remeasured Venezuelan assets and liabilities at the SICAD 1 rate of 11.3 bolivars per U.S. dollar, recording an $0.8 million foreign-exchange loss. Venezuela represented 2.4% of Q1 sales. Belarus and Venezuela were treated as highly inflationary economies.
- The company declared a $0.10-per-share dividend, totaling approximately $1.6 million, payable April 7, 2014. Its $10 million repurchase authorization had $7.5 million remaining; no shares were repurchased in the quarter. Capital spending includes an Oracle ERP implementation expected to be completed by mid-2016.
- The General Dealer dispute over withheld discounts was resolved; the dealer repaid withheld amounts by May 1, 2014, and the parties agreed to a new three-year reseller agreement effective April 1, 2014. Other disclosed matters include an IRS audit of 2009–2011 returns, $12.3 million of unrecognized tax-benefit liabilities, $5.1 million accrued for non-income-tax contingencies, and other litigation for which possible future payments were estimated at $0–$0.8 million. Management could not predict the ultimate outcomes of legal proceedings.
- Disclosure controls were deemed effective, and the filing reported no material change in internal control over financial reporting or material change in risk factors from the 2013 Form 10-K.
Important facts for investors to verify
- Whether the unusual tax benefit and foreign-cash repatriation have lasting effects on the company’s tax rate, cash availability and reported earnings.
- Whether distributor recruitment and retention improve, particularly in the NSP Americas markets, and whether Synergy’s South Korea growth is sustainable.
- How Ukraine/Russia developments, Venezuela’s currency controls and foreign-exchange movements affect sales, collections and cash repatriation.
- Whether operating cash flow recovers from $0.5 million and how capital spending, the ERP program, dividends and potential repurchases affect liquidity.
- The outcomes of the IRS audit, transfer-pricing and other tax matters, non-income-tax contingencies, and remaining legal proceedings.