Nature’s Sunshine Products, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited quarterly results; Q4 ended December 31, 2011. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
The company manufactures and direct-sells more than 700 nutritional and personal-care products through independent Distributors and Managers. Its reportable segments are NSP United States, NSP International and Synergy Worldwide. Sales are international and principally depend on the independent sales network.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $367.8 million | $349.9 million |
| Operating income | $20.2 million; 5.5% margin | $11.3 million; 3.2% margin |
| Operating income excluding $14.75 million NutriPlus termination charge | $34.9 million; 9.5% margin | — |
| Income from continuing operations | $17.6 million | $8.5 million |
| Net income (loss) | $17.6 million | $(1.2) million |
| Basic / diluted EPS | $1.13 / $1.12 | $(0.08) / $(0.08) |
| Operating cash flow | $3.9 million | $16.2 million |
| Cash and cash equivalents | $59.0 million | $47.6 million |
| Long-term debt, including current portion | $9.2 million | None reported |
- Gross margin was approximately 81.1%, versus 80.3% in 2010; cost of goods sold fell to 18.9% of sales from 19.7%.
- Volume incentives were 36.4% of sales, compared with 37.3%. Selling, general and administrative expense was 35.2% of sales, down from 39.8%.
- Investing activities used $1.7 million; financing activities provided $9.6 million, including $10.0 million of term-loan proceeds. Capital expenditures were approximately $2.4 million.
- Year-end working capital is reported as $57.3 million in selected financial data (current ratio 1.85); the MD&A separately states $56.9 million. The filing does not reconcile this difference.
- The company had a $15 million revolving facility with no amount drawn at year-end. The $10 million term loan is secured by the Spanish Fork manufacturing facility, bears variable interest and matures in 2014. The company reported compliance with debt covenants.
- Of $59.0 million cash, $43.8 million was held in foreign markets and could be subject to repatriation restrictions or taxes. Short-term available-for-sale investments were $5.7 million.
Changes versus the prior comparable period
- Sales increased 5.1%, driven primarily by Synergy Worldwide, whose sales rose 37.0% (31.5% in local currencies). NSP United States sales declined 2.3%; NSP International sales declined 3.0% (3.6% in local currencies).
- Synergy sales grew in the United States, Korea and Europe. NSP International’s Russian markets grew excluding Belarus, while Belarus, Japan, Mexico and the Dominican Republic were among the weaker markets.
- Operating income increased by $8.9 million despite the one-time $14.75 million NutriPlus charge. Net income improved from a $1.2 million loss, which included discontinued Brazil operations, to $17.6 million. Continuing-operations income increased from $8.5 million.
- Operating cash flow fell from $16.2 million to $3.9 million, primarily because of the $21.7 million NutriPlus settlement payment. Management says cash flow would have been $9.5 million higher year over year excluding that payment.
- Cash increased $11.4 million year over year, supported in part by new borrowing. Active Distributors and customers declined to approximately 668,400 from 685,100; active Managers declined to approximately 27,800 from 28,300.
Quarterly results, outlook and material items
- Q4 2011: Sales were $92.1 million, operating income $9.6 million and net income $7.6 million. Basic EPS was $0.49 and diluted EPS $0.48.
- NutriPlus settlement: The company paid $21.7 million to settle all past and future Russian-business royalty obligations. Of this, $6.95 million covered previously accrued royalties and $14.75 million was recorded as a contract-termination expense. Management estimated the settlement would reduce annual operating costs by $5.6–$6.0 million at current Russian sales levels; the benefit varies with sales.
- No formal earnings or sales guidance is provided. Management described continued cost-reduction efforts and anticipated Distributor growth if existing operations expand and new markets are entered.
- Material risks include Distributor recruitment and retention, competition, product and direct-selling regulation, foreign-exchange movements, economic and political conditions, and product liability. A hypothetical 10% strengthening of the U.S. dollar was estimated to reduce sales by $12.4 million and operating income excluding the NutriPlus charge by $1.5 million.
- Venezuela was treated as highly inflationary, with government controls affecting access to foreign currency and cash repatriation. Belarusian currency and debt conditions, and the effects of Japan’s 2011 disasters on sales and distribution, were also cited as concerns.
- The company had $10.4 million of liabilities for unrecognized tax benefits and open tax examinations; agreements concerning the 2003–2008 U.S. tax years were reached or approved in early 2012. Other foreign VAT and civil matters could result in payments estimated at $0–$0.7 million, although the company said a material loss was reasonably possible and not estimable. Non-income-tax contingencies were accrued at approximately $6.9 million.
- Financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2011.
Important facts for investors to verify
- Confirm the working-capital figure: $57.3 million in selected data versus $56.9 million in MD&A.
- Assess whether Synergy’s rapid growth can continue and whether it offsets declines in the legacy NSP businesses and Distributor counts.
- Track operating cash conversion, given the marked decline in 2011 cash from operations and the settlement-related payment.
- Evaluate the sustainability of reported profitability separately from the $14.75 million one-time charge and the expected Russian royalty savings.
- Monitor tax-audit outcomes, non-income-tax exposures, foreign-cash accessibility, currency risk and the company’s ability to comply with loan covenants.