Nature’s Sunshine Products, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results; dollar figures below are in millions unless stated otherwise. The company manufactures and directly sells nutritional and personal care products through independent distributors.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $81.3 | $89.4 | $164.4 | $171.8 |
| Gross profit | $60.1 | $66.3 | $121.5 | $126.7 |
| Gross margin | 73.9% | 74.2% | 73.9% | 73.7% |
| Operating income | $0.02 | $4.2 | $2.1 | $6.4 |
| Net income (loss) | $(0.42) | $2.37 | $1.44 | $4.16 |
| Net income (loss) attributable to common shareholders | $(0.19) | $2.57 | $1.97 | $4.64 |
| Basic and diluted EPS attributable to common shareholders | $(0.01) | $0.14 | $0.10 | $0.25 basic; $0.24 diluted |
| Operating cash flow | Not separately stated | Not separately stated | $(0.68) | $6.46 |
Margins and expenses: Q2 operating margin fell to approximately 0.03% from 4.8%; H1 operating margin was 1.3% versus 3.7%. SG&A rose 1.9% in Q2 and 4.3% for H1, reaching 39.1% and 37.8% of sales, respectively. Volume incentives were 34.8% of sales in both 2017 periods; cost of sales was 26.1%.
Liquidity and debt: At June 30, cash was $31.8, working capital $33.1, total current assets $97.9 and current liabilities $64.8. Cash declined $0.46 from year-end. Cash was substantially held in foreign markets and may face repatriation taxes or restrictions. The company had $12.0 outstanding on a $25.0 revolving facility, versus $9.9 at December 31, 2016; it was in covenant compliance at quarter-end. Total liabilities were $74.9. H1 capital expenditures were $3.1; investing cash use was $0.84.
Changes versus prior period
- Q2 sales decreased 9.0% (8.9% in local currencies); H1 sales declined 4.3% (4.4% in local currencies). Q2 common-shareholder results shifted from $2.57 million income to a $0.19 million loss; H1 common-shareholder income declined 57%.
- Q2 sales fell in NSP Americas (11.9%), Synergy Worldwide (8.0%) and China and New Markets (8.6%); NSP Russia, Central and Eastern Europe increased 6.3%. For H1, China and New Markets grew 32.2% and the Russia/CEE segment grew 13.1%, while Americas and Synergy declined.
- Active distributors and customers were 214,500 versus 248,900 a year earlier. NSP Americas active distributors/customers declined to 105,500 from 129,700.
- H1 operating cash flow moved from $6.46 million provided to $0.68 million used, primarily reflecting working-capital timing and lower earnings. Inventory increased to $51.0 million from $47.6 million at year-end.
Outlook, commentary and significant matters
- Oracle ERP implementation: Launched in NSP Americas on April 2, 2017. Call-center delays and online ordering problems hurt sales, distributor/customer activity and profitability. Management expected adverse effects to continue through the remainder of 2017; the filing provides no quantified earnings or revenue guidance.
- China: The company received a direct-selling license during Q2, permitting expansion of direct-selling activities. Management reported continued investment in China; H1 China and New Markets sales growth partly reflected the absence of Q1 2016 sales.
- Credit facility: After quarter-end, on July 11, 2017, the company replaced its Wells Fargo facility with a $25 million Bank of America revolver maturing July 11, 2020. It carries LIBOR plus 1.25% interest, is secured by specified assets and includes financial and other restrictive covenants.
- Dividends: The company paid a $0.10-per-share dividend in April, then announced in May that quarterly dividends were suspended. The board will periodically reassess the policy.
- Taxes and contingencies: Q2 effective tax rate was 190.5%, reflecting foreign losses—primarily China—that currently provide no tax benefit, partly offset by foreign tax credits. Accrued unrecognized tax positions were $7.0 million. Non-income-tax contingencies could require payments from $0 to approximately $3.8 million; other identified litigation could involve $0 to approximately $0.5 million. Outcomes remain uncertain.
- Other risks: Management cited distributor retention and productivity, foreign exchange, China regulatory and execution requirements, political/economic conditions in Russia, Ukraine and South Korea, product and direct-selling regulation, and litigation. Ukraine was classified as highly inflationary in June 2017. The company reported no material change to previously disclosed risk factors and no material legal proceeding in Part II.
- Accounting outlook: Topic 606 revenue standard was expected to be adopted in 2018 using the modified retrospective method; management did not expect a material impact.
Most important facts for investors to verify
- Whether ERP service and ordering disruptions were resolved and whether sales, margins and distributor activity recovered after Q2.
- Subsequent sales, profitability and cash conversion, given lower operating income and negative H1 operating cash flow.
- Availability of foreign-held cash for U.S. needs, borrowing levels and compliance with the new secured credit facility’s covenants.
- Progress and economics of China’s direct-selling expansion, including ongoing investment and regulatory requirements.
- Developments in tax examinations and non-income-tax or litigation contingencies, as well as the board’s future dividend decisions.