Nature’s Sunshine Products, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; dollar amounts below are in millions unless stated otherwise. The company manufactures and direct-sells nutrition and personal-care products through independent Managers and Distributors.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Revenue | $92.5 | $91.2 | $282.6 | $277.1 |
| Gross profit / margin | $68.8 / 74.4% | $68.1 / 74.6% | $211.9 / 75.0% | $207.6 / 74.9% |
| Operating income / margin | $6.7 / 7.3% | $8.7 / 9.5% | $21.5 / 7.6% | $28.2 / 10.2% |
| Net income | $4.9 | $6.4 | $15.8 | $20.9 |
| Diluted EPS | $0.29 | $0.40 | $0.97 | $1.31 |
| Operating cash flow | Not presented for the quarter | $22.0 | $17.3 |
Revenue increased 1.3% in Q3 and 2.0% year to date; excluding unfavorable currency effects, growth was 2.4% and 2.7%, respectively. Q3 operating income fell 22.9% and net income fell 23.9%; nine-month operating income fell 23.9% and net income fell 24.5%. Higher selling, general and administrative (SG&A) costs were the principal pressure: SG&A rose 7.4% in Q3 and 9.9% year to date, reaching 30.4% and 30.8% of revenue, respectively. Volume incentives also edged up as a share of sales.
For the first nine months, investing activities used $4.5 million and financing activities used $19.0 million. Cash declined $2.6 million from year-end 2012 to $76.6 million. At September 30, current assets were $145.4 million, current liabilities $65.1 million, and working capital $80.3 million, versus $83.9 million at year-end 2012. Cash included $58.3 million held in foreign markets, potentially subject to repatriation restrictions and taxes; short-term unrestricted investments were $2.1 million.
Debt was $13.1 million: $10.0 million outstanding on the revolving facility and $3.1 million on the term loan. The revolver limit was increased to $25 million and maturity extended to September 2015; the term loan matures in August 2014. Both carried a 1.50% stated rate at quarter-end. The company reported compliance with debt covenants.
Material changes and operating trends
- NSP Russia, Central and Eastern Europe revenue grew 10.5% in Q3 and 8.8% year to date, with growth reported for a fourth consecutive quarter.
- Synergy WorldWide revenue rose 4.0% in Q3 and 5.2% year to date. Europe and South Korea were strengths; North America declined.
- NSP Americas, Asia Pacific and Europe revenue declined 2.4% in Q3 and 1.3% year to date. Japan remained weak; U.S. sales also declined slightly.
- Management attributed higher SG&A to investment in sales, marketing, science and product-development personnel and programs. Year-to-date SG&A also included $1.4 million of one-time severance and accelerated stock-option expense related to the former CEO’s resignation.
- Foreign exchange reduced reported revenue by approximately $1.0 million in Q3 and $1.9 million year to date. The company reported a $2.8 million foreign-currency translation loss in other comprehensive income for the nine-month period.
Capital allocation, outlook and risks
The company paid a special $1.50-per-share dividend in August, in addition to its regular $0.10 quarterly dividend; total dividends paid during the first nine months were $28.8 million. The board also authorized a $10 million repurchase program, of which $1.9 million had been used by September 30. No specific revenue or earnings guidance was provided. Management said available cash, operating cash flows and the credit facility should meet foreseeable working-capital needs, while noting that an economic downturn, lower product demand, or unfavorable tax-contingency outcomes could impair liquidity.
- Currency and market access: Venezuela and Belarus were classified as highly inflationary. The company had not succeeded in obtaining U.S. dollars through Venezuela’s official SICAD currency system; timing of future approvals was uncertain. Foreign-currency movements and restrictions on repatriating funds remain risks.
- Taxes: The IRS was auditing U.S. federal returns for 2009–2011. Accrued unrecognized tax benefits were $11.5 million, up from $10.6 million at year-end, primarily reflecting transfer-pricing contingencies, penalties and interest.
- Contingencies: Accrued non-income-tax contingencies were $5.5 million. Other foreign VAT and civil matters had a possible payment range of $0 to approximately $0.9 million; no provision was recorded for those matters. Management cautioned that adverse litigation outcomes could be material.
- Other risks: Product and direct-selling regulation, distributor recruitment and retention, product-liability claims, changing demand, and competition. Management reported no material changes to the risk factors in its 2012 Form 10-K and stated disclosure controls were effective.
Investor verification priorities
- Assess whether sales growth in Russia/Central and Eastern Europe and Synergy can offset continued weakness in Japan, the U.S. and other NSP markets.
- Track SG&A and volume-incentive rates to determine whether spending on growth initiatives translates into stronger operating margins.
- Review cash accessibility by market, particularly Venezuela, alongside the special dividend, repurchases, and increased revolving borrowings.
- Monitor the IRS audit, transfer-pricing exposure, and non-income-tax and litigation contingencies for changes in estimates or cash requirements.
- Evaluate currency impacts: reported revenue growth lagged local-currency growth, and the company does not use derivatives to hedge foreign-exchange exposure.