Nature’s Sunshine Products, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The company manufactures and direct-sells nutritional and personal-care products through independent distributors and managers. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless otherwise indicated.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $92.9 million | $92.8 million | Flat |
| Operating income | $9.2 million | $7.6 million | +20.4% |
| Operating margin | 9.9% | 8.2% | +1.7 percentage points |
| Income before taxes | $9.1 million | $7.9 million | +14.9% |
| Net income | $7.2 million | $6.6 million | +9.2% |
| Diluted EPS | $0.46 | $0.43 | Up $0.03 |
| Operating cash flow | $0.6 million | $7.3 million | Down $6.7 million |
- Cost of goods sold was 19.8% of sales (20.0% in Q1 2011); volume incentives were 36.1% (36.9%); SG&A was 34.2% (34.9%). The resulting operating margin improved to 9.9% from 8.2%.
- The effective tax rate was 20.3%, compared with 16.0%. Management attributed the 2012 rate, below the 35% U.S. statutory rate, primarily to foreign deductible items, expiration of certain foreign tax positions, and a valuation-allowance release related to foreign tax credits.
- Cash and cash equivalents were $61.3 million at March 31, versus $59.0 million at December 31, 2011. Working capital was $64.2 million. Cash flow from operations was limited by the timing of receipts and payments and $6.3 million of income-tax payments.
- Investing activities provided $2.4 million, including $3.5 million of proceeds from investment sales; capital expenditures were $0.9 million. Financing activities used $0.5 million, including $0.8 million of term-loan principal payments. Cash increased $2.4 million during the quarter.
- Total debt was $8.4 million: $3.3 million current and $5.1 million long term. The company had no borrowings against its $15 million revolving credit facility, available through August 2013. The term loan bears variable interest (1.625% at quarter-end), is secured by the Spanish Fork manufacturing facility, and matures in 2014. The company reported compliance with debt covenants.
Material changes and operating trends
- Synergy Worldwide sales rose 13.0% to $23.3 million (15.5% in local currencies), led by Europe and Korea. Its operating income declined to $1.7 million from $1.8 million.
- NSP International sales fell 5.1% to $34.7 million (4.2% in local currencies); operating income increased to $4.6 million from $2.1 million. NSP United States sales declined 2.3% to $34.8 million, and operating income decreased to $2.9 million from $3.8 million.
- Management cited weaker sales in Belarus, Mexico and Peru, among other markets. Peru sales fell 66.3%, principally because local regulation restricted sales of several key products through direct selling. Synergy Japan sales fell 40.6%; unusually high returns tied to a promotion contributed, and the company said returns were not product-quality related.
- Operating expenses fell $1.5 million overall. Management cited approximately $2.0 million of lower costs following the NutriPlus settlement—$1.6 million in Russian-business royalties and $0.4 million in professional fees—as well as lower volume-incentive and SG&A ratios. Share-based compensation expense increased to $0.6 million from $0.1 million.
- Active managers worldwide were approximately 29,800 versus 30,300 a year earlier; active distributors and customers were approximately 675,400 versus 696,400.
Outlook, risks and contingencies
- The filing gives no specific earnings or sales guidance. Management said it expects available cash, operating cash flows and the undrawn credit facility to meet working-capital needs for the foreseeable future, while warning that prolonged weakness, lower product demand, or unfavorable tax or non-income-tax outcomes could harm liquidity.
- Risks include distributor recruitment and retention, direct-selling and product regulation, foreign exchange and currency controls, economic and geopolitical conditions, raw-material availability and costs, product liability, inventory obsolescence, and tax and transfer-pricing disputes. The company reported no material changes to the risk factors in its 2011 Form 10-K.
- Approximately $49.8 million of cash was held by foreign subsidiaries and may face withholding taxes or other repatriation restrictions. A hypothetical 10% strengthening of the U.S. dollar was estimated to reduce quarterly operating income by $0.3 million.
- Accrued unrecognized tax positions were $9.2 million, down from $10.4 million at year-end. The IRS was auditing 2009–2010 U.S. returns; earlier disputes for 2003–2005 and 2006–2008 had been settled, with $0.5 million and $1.2 million, respectively, still accrued at quarter-end. Management cautioned that final tax outcomes could materially affect results.
- Accrued foreign non-income-tax contingencies were $7.1 million. Other legal proceedings include VAT assessments and civil litigation; management provided no loss accrual and estimated potential future payments could range from zero to approximately $1.0 million. Unfavorable outcomes could be material.
- Management said disclosure controls were effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Synergy’s growth can offset continued weakness in NSP U.S. and international markets, and whether distributor counts stabilize.
- Whether operating cash flow recovers after its sharp year-over-year decline and how much foreign-held cash can be practically repatriated.
- Whether the improvement in operating margin is sustainable, given one-time NutriPlus-related savings, higher share-based compensation, and market-specific returns and cost pressures.
- Developments in IRS examinations, unrecognized tax positions, foreign non-income-tax accruals, and other legal proceedings.
- Effects of currency movements and regulatory restrictions, especially in Belarus and Peru, and the company’s ability to rebuild sales in Mexico and Japan.