Nature’s Sunshine Products, Inc. — Q2 2011 Form 10-Q
Business context and period. The company manufactures and markets nutritional and related products through independent distributors and managers. It reports Nature’s Sunshine U.S., Nature’s Sunshine International, and Synergy Worldwide segments. This unaudited report covers the quarter and six months ended June 30, 2011; financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $91.8 | $87.1 | $184.7 | $173.9 |
| Operating income | $8.1 | $3.3 | $15.7 | $3.8 |
| Operating margin | 8.8% | 3.8% | 8.5% | 2.2% |
| Net income | $5.6 | $1.1 | $12.2 | $5.2 |
| Diluted EPS | $0.36 | $0.07 | $0.78 | $0.33 |
| Operating cash flow | Not separately stated for the quarter | $15.8 | $5.4 |
- For the six months, cost of goods sold was 19.3% of sales versus 20.0% a year earlier; volume incentives were 36.7% versus 37.4%; and SG&A was 35.5% versus 40.4%.
- Cash and cash equivalents were $63.0 at June 30, 2011, and unrestricted short-term investments were $7.0. Working capital was $56.3, up from $41.4 at December 31, 2010. About $40.3 of cash was held in foreign markets and may face repatriation restrictions or taxes.
- Current liabilities were $71.0; the filing lists no borrowings on the balance sheet. The company was negotiating a revolving facility of up to $15.0 and a $10.0, three-year term facility secured by its Spanish Fork manufacturing facility.
- Six-month investing cash flow was negative $1.2, including $0.7 of capital expenditures; financing cash flow was positive $0.3. Cash rose $15.4 to $63.0.
Changes versus the prior comparable period
- Q2 sales increased 5.4%; six-month sales increased 6.2%. Synergy Worldwide drove growth: segment sales rose 37.7% in Q2 and 42.4% for six months. Growth was strongest in the U.S., Europe, and Korea, with favorable currency effects also contributing.
- Nature’s Sunshine U.S. sales declined 0.9% in Q2 and 1.8% for six months. International sales declined 3.7% in Q2 and 1.3% for six months; lower sales in the Dominican Republic, Japan, and Mexico were partly offset by Russian-market growth and currency effects.
- Operating income improved substantially as sales grew and operating expenses fell. Management cited lower SG&A, cost reductions, lower product write-offs and raw-material costs, and lower volume-incentive rates. Q2 SG&A decreased $1.3; six-month SG&A decreased $4.7.
- Six-month other income/expense moved from $2.0 of income to $0.2 of expense, largely because 2010 included a non-recurring $3.7 Venezuelan currency remeasurement gain. Six-month 2011 net income also benefited from an approximately $1.0 tax benefit tied to expiration of certain foreign tax statutes of limitation.
- Brazil operations, discontinued in 2010 following declining sales and regulatory restrictions, contributed no sales or loss in the 2011 periods; 2010 included losses of $0.4 for Q2 and $1.0 for six months.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management said cost-reduction efforts continue and described the new U.S. “Brilliant Body, Brilliant Business” initiative as an early-stage program intended to build distributor recruitment and retention over several years.
- Management identified distributor and manager recruitment and retention, product and direct-selling regulation, consumer demand, foreign exchange, currency controls, raw-material availability, litigation, and tax matters as risks. Japan’s earthquake, tsunami, and nuclear disaster disrupted sales and distribution; Belarus’s debt and foreign-currency constraints may affect sales. Mexico’s VAT interpretation and compliance were cited as contributors to lower sales.
- On July 8, 2011, after quarter-end, the company settled its NutriPlus arbitration for $21.7. The settlement extinguished accrued unpaid royalty and future royalty obligations in perpetuity. The company had accrued $6.95 at June 30 toward unpaid royalties and said this accrual would be applied to the settlement. The filing does not clearly state the settlement’s ultimate accounting charge or cash-payment timing.
- The IRS was auditing 2006–2009 returns; proposed adjustments for 2003–2005 transfer pricing and related deductions remained in administrative appeal. Management could not determine the outcome or potential impact. Other foreign VAT and civil matters could result in payments ranging from $0 to approximately $1.7; no provision was recorded because the loss could not be estimated. Accrued non-income tax contingencies were $9.3.
- Venezuela remained highly inflationary, with currency controls and uncertain access to foreign currency. It accounted for about 1.4% of sales in both 2011 reporting periods. Management cautioned that adverse tax, demand, economic, currency, or contingency outcomes could harm liquidity. Disclosure controls were deemed effective; no material change in internal control was reported.
Important facts for investors to verify
- How the $21.7 NutriPlus settlement is recognized, when it is paid, and the effect beyond the $6.95 accrued liability.
- Progress and terms of the proposed credit facilities, given foreign-held cash and potential repatriation restrictions.
- Resolution and potential cash or earnings effects of the IRS audit, transfer-pricing appeal, and non-income tax contingencies.
- Whether Synergy growth can continue and whether declines in Nature’s Sunshine U.S. and International markets, including distributor counts, stabilize.
- Exposure to currency movements and country-specific disruptions, particularly Venezuela, Japan, Belarus, and Mexico.