Natural Health Trends Corp. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company sells NHT Global personal care, wellness and quality-of-life products through direct selling and e-commerce. It reported one operating segment.
Financial performance
Amounts below are in millions of dollars, except per-share figures and margins.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $51.5 | $80.4 | $111.3 | $154.7 |
| Gross profit / margin | $41.7 / 81.0% | $65.3 / 81.3% | $90.3 / 81.1% | $125.4 / 81.0% |
| Operating income / margin | $12.9 / 25.0% | $14.9 / 18.6% | $25.9 / 23.2% | $28.9 / 18.7% |
| Net income / margin | $10.3 / 20.0% | $12.2 / 15.2% | $20.7 / 18.6% | $23.5 / 15.2% |
| Diluted earnings per share | $0.91 | $1.07 | $1.84 | $2.03 |
| Operating cash flow | — | $20.6 | $30.4 |
Liquidity and capital: At June 30, cash and cash equivalents were $136.3 million, including $73.2 million of available-for-sale investments classified as cash equivalents; restricted cash was $3.0 million. Working capital was $95.0 million and the current ratio was 2.74. Cash increased $10.3 million from year-end 2016. The filing lists no interest-bearing debt balance. The company paid $10.1 million in dividends during the first half. On July 31, it declared a further $0.11 quarterly and $0.25 special dividend per share, payable August 31.
Changes and operating trends
- Q2 sales fell 36% year over year; first-half sales fell 28%. Q2 net income decreased 16%, while first-half net income decreased 12%.
- Hong Kong generated 88.8% of Q2 sales and 90.0% of first-half sales. Hong Kong sales declined 38% in Q2 and 29% in the first half. The company attributed much of the decline to an Asian-market slowdown and fewer active members.
- Active members were 107,290 at June 30, down from 126,440 a year earlier and 113,710 three months earlier. Hong Kong active members declined by 21,800, or 19%, year over year.
- Commissions declined to 42.9% of Q2 sales from 47.1% a year earlier, and to 43.2% from 47.1% for the first half, primarily reflecting lower estimated costs for incentive programs. Lower SG&A also supported operating margins.
- Operating cash flow fell to $20.6 million from $30.4 million in the first half of 2016; management cited lower product orders, partly offset by reduced inventories and inventory-related deposits.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management said existing cash and operating cash flows should fund normal operations and commitments for the foreseeable future, and it did not expect to need capital-market funding.
- Management intends to focus resources on Greater China and Southeast Asia, while continuing investment in China, including capabilities and infrastructure related to a potential direct-selling license. The company said it cannot predict if or when it will obtain a license, or whether any resulting direct-selling operations would be profitable.
- Revenue is highly concentrated in Hong Kong, with substantially all Hong Kong sales shipped to members in China. The company identified China/Hong Kong regulatory, market, member-retention, foreign-exchange and direct-selling risks. It had no material changes to the risk factors in its 2016 Form 10-K.
- A securities class action alleges misleading statements about the legality of the company’s China operations. In July 2017, the parties reached an agreement in principle to settle; the proposed settlement remained subject to written terms and court approval and, if approved, would be fully funded by insurers. Related shareholder derivative cases were stayed. The company said it would defend the claims if settlement is not finalized and approved.
- Cash and cash equivalents included $130.4 million held overseas, including $6.1 million in Chinese banks subject to foreign-currency controls. The company does not use foreign-exchange contracts to hedge short-term currency fluctuations.
Important facts for investors to verify
- Whether the proposed securities-litigation settlement is finalized and approved by the court, and whether insurance fully covers it.
- Whether the decline in Hong Kong sales and active members stabilizes, given the business’s pronounced China-related concentration.
- Progress and costs associated with the China direct-selling license effort, and any regulatory developments affecting the current business model.
- The accessibility and currency exposure of overseas cash, and the sustainability of dividends, which remain at the board’s discretion.