Nature’s Sunshine Products, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. The company manufactures and directly sells nutritional and personal-care products through independent distributors and four segments: NSP Americas, NSP Russia/Central and Eastern Europe, Synergy WorldWide, and NSP China. Financial amounts below are in millions of U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $91.3 | $81.3 | $178.6 | $164.4 |
| Gross profit / margin | $67.0 / 73.4% | $60.1 / 73.9% | $131.6 / 73.7% | $121.5 / 73.9% |
| Operating income / margin | $2.2 / 2.4% | $0.02 / approximately 0% | $3.1 / 1.7% | $2.1 / 1.3% |
| Other income (loss), net | $(1.8) | $0.4 | $(1.1) | $1.7 |
| Net income (loss), consolidated | $(0.06) | $(0.42) | $0.27 | $1.44 |
| Net income (loss) attributable to common shareholders | $0.07 | $(0.19) | $0.57 | $1.97 |
| EPS attributable to common shareholders | Approximately $0.00 | $(0.01) | $0.03 | $0.10 |
| Operating cash flow | Not separately reported | Not separately reported | $9.4 | $(0.7) |
Q2 sales increased 12.2% year over year, or 9.6% excluding currency effects; first-half sales rose 8.6%, or 5.5% excluding currency effects. Q2 operating income improved substantially from near breakeven, but foreign-exchange losses and a high tax provision left consolidated net loss of $0.06 million. The common-shareholder result was positive because losses attributable to noncontrolling interests are excluded from that measure. The Q2 effective tax rate was 116.4%; the six-month rate was 86.5%, primarily reflecting foreign losses, especially in China, that did not produce tax benefits.
Liquidity, balance sheet and cash flow
- At June 30, cash and cash equivalents were $46.9 million, current assets $104.4 million, current liabilities $57.8 million, and working capital $46.6 million, compared with $48.9 million of working capital at December 31, 2017.
- Cash increased $4.0 million during the first half. Operating activities provided $9.4 million; investing activities used $0.1 million; financing activities used $5.5 million. Operating cash flow improved from a $0.7 million use in the first half of 2017, chiefly due to timing of working-capital payments and receipts.
- Of cash on hand, $15.7 million was held in the U.S. and $31.2 million in foreign markets, where repatriation may be subject to taxes or other restrictions.
- Long-term debt and revolving-facility borrowings totaled $7.2 million, down from $13.2 million at year-end 2017. The $25 million Bank of America facility matures July 2020 and bears interest at LIBOR plus 1.25%. Certain financial covenants were amended effective June 30; the company reported compliance at quarter-end.
- Total assets were $194.5 million and total liabilities $72.8 million at June 30. The company paid no dividends in the first half of 2018; it paid $1.9 million in the comparable 2017 period.
Material changes and management commentary
- Growth was strongest in NSP China, up 53.5% in Q2, and NSP Russia/Central and Eastern Europe, up 31.4%. Synergy WorldWide rose 20.9%, while NSP Americas declined 2.6%. South Korea and Japan supported Synergy growth; NSP China’s expansion followed receipt of a direct-selling license in May 2017.
- Foreign exchange added approximately $2.1 million to Q2 sales and $5.1 million to first-half sales. Q2 other expense was primarily foreign-exchange losses. Management notes that international currency movements can materially affect results.
- Cost of sales increased to 26.6% of sales in Q2 from 26.1%, with management citing market mix, inventory-obsolescence provisions and employee benefits. Volume incentives were 34.5% of Q2 sales versus 34.8%; SG&A was 36.5% versus 39.1%.
- SG&A included $1.5 million of CEO-transition costs following the announced pending retirement of the CEO. The company also recognized a $2.3 million gain on the sale of an office building in Mexico City, completed in June. A separate eight-acre Provo property remained held for sale and was under contract.
- Adoption of revenue-recognition Topic 606 produced a $0.9 million net reduction to opening accumulated deficit. It reduced first-half 2018 revenue by $0.5 million and operating income by $0.2 million; prior-year periods were not restated.
- Management stated that available cash and expected operating cash generation should fund normal operating needs, including capital expenditures. The filing provides no quantified sales or earnings guidance.
Risks, contingencies and other disclosures
- Key risks include direct-selling and nutritional-product regulation, distributor recruitment and retention, product registration and market access, China and South Korea regulatory complexity, foreign currency, cybersecurity, raw-material availability, product liability, and possible changes in trade policies or tariffs.
- The company reported legal proceedings but no new matters under Part II, Item 1. It had $0.2 million accrued for non-income-tax contingencies, with potential future payments estimated at $0 to $3.4 million. Other litigation accruals were $1.4 million; potential future payments were estimated at $0 to $1.9 million. Some other matters had reasonably possible but unestimable losses and no provision recorded.
- Accrued unrecognized tax positions were $4.8 million, up from $4.6 million at year-end, primarily due to transfer-pricing contingencies. Tax returns remain open to examination in U.S. and foreign jurisdictions.
- Management said disclosure controls were effective as of June 30, 2018, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales momentum in China, Russia/Central and Eastern Europe, and Synergy can persist, and whether NSP Americas can reverse its decline.
- Whether operating profitability can improve despite FX exposure, high tax rates, and increased costs; distinguish consolidated net income from income attributable to common shareholders.
- Availability of foreign-held cash, future revolver usage, and ongoing compliance with amended credit covenants.
- Potential outcomes and cash costs of tax positions, non-income-tax contingencies, and litigation, including amounts not accrued or not presently estimable.
- Effects of the CEO transition, implementation of the Oracle ERP system, and the Topic 606 accounting change on subsequent results and comparability.