Business Context and Reporting Period
Company: Nature's Sunshine Products, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
Business Overview: The Company manufactures and markets herbal products, vitamins, minerals, and personal care items through a direct sales force of independent Distributors and Managers. Operations are divided into three segments: Nature's Sunshine Products (United States and International) and Synergy Worldwide.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Net Sales Revenue | $86,096 | $260,029 |
| Operating Income | $3,876 | $7,719 |
| Net Income from Continuing Operations | $2,678 | $8,855 |
| Loss from Discontinued Operations | $(8,418) | $(9,388) |
| Net (Loss) Income | $(5,740) | $(533) |
| Cash and Cash Equivalents | $45,657 | $45,657 (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $10,220 |
| Working Capital | $42,660 | N/A |
Note: Working Capital calculated as Total Current Assets ($106,617) minus Total Current Liabilities ($63,957).
Material Changes vs. Prior Period
- Revenue: Consolidated net sales increased 0.7% for the quarter and 3.0% for the nine-month period compared to 2009. Growth was driven by the Synergy Worldwide segment (+22.1% Q/Q) and NSP International (+3.0% YTD), offset by declines in NSP United States (-6.3% Q/Q) and Venezuela due to currency devaluation.
- Profitability: Operating income decreased 40.8% for the quarter but increased 18.7% for the nine-month period. The quarterly decline was driven by higher SG&A expenses and lower operating income in the International segment.
- Discontinued Operations: The Company ceased operations in Brazil in Q3 2010 due to import regulations. This resulted in a one-time charge of $8.2 million (including a $7.4 million non-cash write-off of translation adjustments), turning a net income position into a net loss for the quarter.
- Cash Flow: Operating cash flow improved significantly to $10.2 million for the nine months ended Sep 30, 2010, compared to $0.97 million in the prior year period, driven by improved operating income and working capital management.
Outlook, Risks, and Management Commentary
- Venezuela Currency Risk: Venezuela was designated a highly inflationary economy in Jan 2010. The devaluation of the bolivar fuerte reduced reported sales by ~2% and operating income by ~$0.5 million for the quarter. The Company holds restricted cash in Venezuela ($249k) due to government seizure of bank deposits.
- Segment Performance: Synergy Worldwide showed strong growth in Europe, the U.S., and Korea. NSP International saw growth in Russia and Mexico but declines in Venezuela, Japan, and Indonesia.
- Tax Contingencies: The IRS is examining tax returns for 2003-2009. The Company has accrued liabilities for unrecognized tax positions but cannot predict the final outcome. Effective tax rates fluctuated significantly due to discrete items and foreign operations.
- Internal Controls: Management identified a material weakness in internal controls related to accounting for taxes. Remediation is ongoing, and disclosure controls were deemed ineffective as of September 30, 2010.
- Liquidity: The Company has no long-term credit facility but maintains $45.7 million in cash and equivalents. Management is exploring a long-term credit facility to mitigate unforeseeable risks.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the non-recurring nature of the $8.2 million Brazil exit charge and its effect on net income.
- Venezuela Exposure: Assess the risk of further currency devaluation and the recoverability of restricted cash ($249k) in Venezuela.
- Tax Liability Resolution: Monitor the outcome of IRS examinations for 2003-2009 and the potential for additional tax provisions.
- Internal Control Remediation: Track progress on fixing the material weakness regarding tax accounting to ensure future financial statement reliability.
- Segment Mix: Evaluate the sustainability of Synergy Worldwide's growth versus the decline in the core NSP United States segment.