Nature’s Sunshine Products, Inc. — Q2 2013 Form 10-Q
Business and period. The company manufactures and direct-sells nutritional and personal-care products through independent distributors and managers. This unaudited report covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $93.7 | $93.0 | $190.2 | $185.9 |
| Gross profit / margin | $71.0 / 75.8% | $70.4 / 75.7% | $143.1 / 75.2% | $139.5 / 75.1% |
| Operating income / margin | $7.8 / 8.3% | $10.3 / 11.1% | $14.8 / 7.8% | $19.5 / 10.5% |
| Net income | $6.1 | $7.3 | $10.9 | $14.5 |
| Diluted EPS | $0.38 | $0.46 | $0.68 | $0.91 |
| Operating cash flow | — | $15.3 | $9.2 |
Quarterly sales rose 0.7% (1.4% excluding currency effects); first-half sales rose 2.3% (2.8% excluding currency effects). Net income fell 16.9% in Q2 and 24.8% year to date. Gross margin improved slightly, but operating margin contracted as volume incentives and SG&A grew faster than sales. Volume incentives were 36.9% of sales in Q2 and 36.5% for the first half, versus 36.1% in both 2012 periods; SG&A was 30.6% and 30.9%, respectively, versus 28.5%.
At June 30, cash and cash equivalents were $87.3, current assets $151.7, current liabilities $61.4, and working capital $90.3. Cash increased $8.1 from year-end 2012. Foreign subsidiaries held $55.3 of cash, potentially subject to repatriation restrictions or taxes. Debt totaled $4.2, all under a term loan; no borrowings were drawn on the $15.0 revolving facility. The company reported covenant compliance. First-half capital expenditures were $2.3 and dividends paid were $3.2.
Material changes and management commentary
- NSP Russia, Central and Eastern Europe grew 13.4% in Q2 and 8.1% year to date. Synergy WorldWide declined 3.7% in Q2 but rose 5.8% year to date; NSP Americas, Asia Pacific and Europe declined 0.2% and 0.9%, respectively.
- Management attributed higher SG&A to investments in sales, marketing, science and product development. First-half SG&A also included $1.4 of one-time severance and accelerated stock-option expense related to the former CEO’s resignation.
- Other income was $1.5 in Q2 and $1.8 for the first half, mainly from foreign-exchange gains on U.S.-dollar cash balances held in foreign markets. These gains partly offset lower operating income.
- First-half foreign-currency translation losses were $3.9, contributing to lower comprehensive income. The U.S. dollar’s impact reduced reported sales by $0.6 in Q2 and $0.9 year to date.
- Active distributors and customers worldwide declined to approximately 331,000 from 337,600 year over year, while active managers were about 17,100 in both periods. Management cited weakness in Japan, Canada and certain Synergy markets, offset by growth in Russia, Belarus, Ukraine, Venezuela and the U.S.
Outlook, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management said available cash, operating cash flow and credit availability should meet foreseeable working-capital needs, while identifying economic downturns, weaker product demand and unfavorable tax or non-income-tax outcomes as potential liquidity risks.
After quarter-end, on August 8, 2013, the board declared a special one-time dividend of $1.50 per share in addition to the regular $0.10 dividend, with total cash payments expected to be approximately $25.6. It also authorized a $10.0 share-repurchase program over two years. The company said these actions would be funded from cash, future operating cash flow and possible revolver borrowings. The same day, it amended its revolving facility, raising the limit to $25.0 and extending maturity to August 2015.
Key exposures include foreign exchange and currency controls, including in highly inflationary Venezuela and Belarus; product and direct-selling regulation; distributor recruiting and retention; and legal, tax, product-liability and non-income-tax contingencies. The company had $10.8 accrued for unrecognized tax positions, with the IRS auditing 2009–2011 federal returns. It reported no provision for legal-proceeding losses; estimated possible payments ranged from $0 to approximately $1.0. Accrued non-income-tax contingencies were $5.6. Management cautioned that final outcomes could differ materially from estimates.
Important facts for investors to verify
- Whether sales and distributor activity improve in weaker markets, particularly Japan, Canada and Synergy North America and Asia.
- Whether higher sales, marketing and product-development spending produces growth sufficient to restore operating margins.
- The sustainability of cash generation and the effect of the special dividend, repurchases and any revolver borrowing on liquidity.
- Developments in the IRS audit, transfer-pricing exposures and other uncertain tax positions, as well as non-income-tax and legal contingencies.
- Currency-control access and exchange-rate assumptions in Venezuela and other foreign markets, and the potential impact of further currency movements.