Nature’s Sunshine Products, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
The company manufactures and direct-sells nutritional and personal-care products through independent distributors. Its four segments are NSP Americas, NSP Russia/Central and Eastern Europe, Synergy WorldWide, and China and New Markets. It sells in numerous countries; the United States and South Korea accounted for 43.4% and 16.9% of 2016 net sales, respectively.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $341.2 | $324.7 |
| Gross profit / margin | $250.2 / 73.3% | $239.4 / 73.7% |
| Operating income / margin | $10.0 / 2.9% | $13.9 / 4.3% |
| Income from continuing operations | $0.7 | $11.5 |
| Net income attributable to common shareholders | $2.1; $0.11 per diluted share | $14.7; $0.77 per diluted share |
| Operating cash flow | $3.4 | $10.2 |
| Capital expenditures | $11.0 | $22.5 |
| Cash and cash equivalents at year-end | $32.3 | $41.4 |
| Working capital | $37.1 | $48.4 |
| Revolver outstanding | $9.9 | $2.7 |
The 2016 effective income tax rate was 92.7%, substantially reducing earnings; the filing attributes the rate primarily to increased valuation allowances and foreign-operation tax adjustments. Consolidated net income was $0.7 million, while the $1.5 million loss attributable to noncontrolling interests resulted in $2.1 million attributable to common shareholders.
At year-end, the company had no long-term debt and had $15.1 million available under its $25 million revolving facility, which matures September 1, 2017. It reported compliance with debt covenants. Of cash, $29.1 million was held in foreign markets and could be subject to repatriation restrictions or taxes. Management said available cash and operating cash flows should fund normal operating needs, including capital expenditures.
Material changes versus the prior year
- Sales rose 5.1% (5.8% excluding currency effects), primarily from Hong Kong pre-opening product sales and growth in Synergy Korea and Japan. The China and New Markets segment increased to $14.5 million from $4.1 million; $10.4 million of 2016 sales came from Hong Kong pre-opening activity.
- Results remained uneven by segment: Synergy WorldWide sales increased 9.4%, while NSP Americas declined 1.8% and NSP Russia/Central and Eastern Europe declined 5.2%. Active distributors and customers fell to 243,600 from 264,400.
- Gross margin declined 0.4 percentage points, including a $1.7 million write-down of China inventory. Volume incentives declined as a share of sales, to 35.1% from 36.3%; SG&A rose to $120.3 million from $107.7 million and to 35.3% of sales from 33.2%.
- Operating income fell to $10.0 million from $13.9 million. Operating cash flow decreased to $3.4 million, and cash declined by $9.1 million during the year.
- Quarterly dividends totaled $0.40 per share, unchanged from 2015. The company reported no common shares repurchased under its program in 2016.
Outlook, management commentary, risks and unusual items
- China: The company had not received its direct-selling license and could not determine whether or when it would. Management said delayed licensing reduced sales versus expectations. The company built China infrastructure and inventory; the license uncertainty contributed to the inventory write-down. Its planned direct-selling, e-commerce and retail strategy remains subject to registrations, permits and approvals.
- Regional outlook: Management expected Russia/Central and Eastern Europe sales to remain significantly affected by political unrest, sanctions and currency devaluation. No quantitative earnings or sales guidance is provided in the filing.
- Costs and systems: SG&A increases included China service fees and infrastructure, additional non-capitalizable Oracle ERP labor, and employee benefits; these were partly offset by the absence of 2015 restructuring charges. The company anticipated completing its ERP implementation in early 2017; approximately $46.8 million had been invested in information systems by year-end.
- Key risks: Direct-selling and product regulation, distributor conduct and retention, product claims, China licensing and joint-venture execution, foreign-exchange exposure, geopolitical and economic conditions, tax and transfer-pricing matters, product liability, raw-material supply, inventory obsolescence, cybersecurity and reliance on information systems. The company did not use derivatives to hedge foreign-exchange exposure.
- Contingencies: The company reported various legal proceedings and had accrued $0.7 million for certain litigation. It disclosed possible future payments of $0 to approximately $0.5 million for other litigation and $0 to approximately $4.6 million for non-income-tax matters; outcomes are uncertain. It also reported $6.8 million of liabilities for unrecognized tax benefits.
- Other items: 2016 included $0.2 million of restructuring costs related to exiting the Philippines and streamlining Singapore. Venezuela operations had previously been discontinued in 2014. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether and when China’s direct-selling license and related product approvals are obtained, and the sales, service-fee and inventory implications.
- Whether growth in Hong Kong, South Korea and Japan can offset declines in other markets and the continuing decrease in active distributors and customers.
- Whether margins, SG&A and operating cash flow improve after the 2016 cost increases and ERP implementation.
- The availability and renewal terms of the revolving credit facility, covenant compliance and the extent to which foreign-held cash can be repatriated.
- Developments in tax reserves, non-income-tax assessments and legal proceedings, including the range of possible exposure disclosed by the company.