Nature’s Sunshine Products, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Unaudited consolidated financial statements. Unless stated otherwise, amounts below are in U.S. dollars and millions; share and per-share data are as reported.
Business context
The company manufactures and direct-sells nutritional and personal-care products through independent Managers and Distributors. It reports three segments: NSP Americas, Asia Pacific and Europe; NSP Russia, Central and Eastern Europe; and Synergy WorldWide.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $96.479 | $92.868 | +3.9% (+4.2% in local currencies) |
| Gross profit / margin | $72.034 / 74.7% | $69.139 / 74.4% | Margin +0.3 percentage points |
| Operating income / margin | $6.942 / 7.2% | $9.174 / 9.9% | -24.3%; margin -2.7 points |
| Income before tax | $7.272 | $9.064 | -19.8% |
| Net income / margin | $4.864 / 5.0% | $7.228 / 7.8% | -32.7% |
| Diluted EPS | $0.30 | $0.46 | Down $0.16 |
| Operating cash flow | $7.823 | $0.588 | Up $7.235 |
Cost of sales improved to 25.3% of revenue from 25.6%, while volume incentives rose to 36.3% from 36.1%. SG&A increased 14.1% to $30.117 million, or 31.2% of sales versus 28.4%. The filing attributes about $1.5 million of increased costs to compensation and benefits supporting sales, marketing and product development, and about $1.4 million to one-time severance and accelerated stock-option expense associated with the former CEO’s resignation. The effective tax rate rose to 33.1% from 20.3%.
Segments and operating trends
- NSP Americas, Asia Pacific and Europe: Revenue fell 1.5% to $53.137 million (down 1.0% in local currencies). Weakness included Japan, where sales fell 46.1%, and Canada; Venezuela sales rose 36.3%.
- NSP Russia, Central and Eastern Europe: Revenue rose 3.5% to $16.140 million, with Russia cited as a source of growth.
- Synergy WorldWide: Revenue rose 16.5% to $27.202 million (16.7% in local currencies), with growth in Europe and Asia Pacific, partly offset by a 14.5% decline in North America.
Worldwide active Managers declined to approximately 18,200 from 19,000, and active Distributors and customers to approximately 341,200 from 349,100. The filing identifies recruiting and activity levels as key drivers of revenue.
Cash, debt and liquidity
Cash and cash equivalents were $83.036 million at March 31, 2013, up from $79.241 million at year-end; working capital was $87.0 million, compared with $83.9 million. Operating activities provided $7.823 million; investing activities used $1.240 million and financing activities used $1.784 million. Financing outflows included $1.583 million of dividends and $0.834 million of term-debt principal payments. Capital expenditures were $1.165 million.
Total term debt was $4.786 million, including $3.362 million current and $1.424 million long-term. The $15 million revolving facility was undrawn and available through August 2014. The term loan bears interest at LIBOR plus 1.25% (1.50% at quarter-end), is secured by the Spanish Fork manufacturing facility, and matures in August 2014. The company reported compliance with debt covenants. Of cash held by foreign subsidiaries, $53.3 million may be subject to withholding taxes or repatriation restrictions.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and the credit facility should meet working-capital needs for the foreseeable future. No numerical earnings or revenue guidance is provided.
- Management cited a prolonged downturn, lower product demand, and unfavorable outcomes on tax positions or non-income-tax contingencies as potential threats to long-term liquidity.
- Venezuela and Belarus were treated as highly inflationary economies. Venezuela devalued its currency to 6.3 bolivars per U.S. dollar; currency controls and uncertain access to foreign currency create additional risk. Venezuela represented 2.2% of Q1 2013 sales.
- The company had $10.609 million of liabilities for unrecognized tax benefits; the IRS was auditing U.S. federal returns for 2009–2011. Accrued non-income-tax contingencies were $6.301 million.
- Various legal proceedings remain unresolved. No loss provision was recorded; management said potential future payments could range from $0 to approximately $1 million, and an adverse ruling could materially affect results.
- Product formulation, labeling, advertising and direct-selling activities are regulated across numerous jurisdictions. Foreign exchange, distributor recruitment and retention, product liability, and changes in consumer demand are identified risks.
- Disclosure controls were assessed as effective at March 31, 2013; the filing reported no material changes to internal control over financial reporting during the quarter and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether Synergy’s growth and the recovery efforts in weaker NSP and Synergy markets sustain, alongside trends in active Managers and Distributors.
- Whether elevated SG&A, including CEO-transition costs and growth investments, moderates and operating margins recover.
- Developments in the IRS audit, transfer-pricing exposure, other tax contingencies and legal proceedings.
- Venezuela currency access, repatriation restrictions and foreign-exchange effects on sales, cash and earnings.
- Repayment or refinancing plans for the term loan maturing in August 2014 and continued compliance with debt covenants.