Business Context and Reporting Period
Company: Nature's Sunshine Products, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company manufactures and markets herbal products, vitamin and mineral supplements, and personal care products through a direct sales force of independent Distributors and Managers. Operations are divided into three segments: Nature's Sunshine Products (United States), Nature's Sunshine Products (International), and Synergy Worldwide.
Key Financial Metrics
Amounts in thousands, except per share data.
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales Revenue | $84,149 | $167,325 |
| Operating Income (Loss) | $2,056 | $(788) |
| Net Income (Loss) | $1,534 | $72 |
| Diluted EPS | $0.10 | $0.00 |
| Cash and Cash Equivalents | $32,839 | $32,839 (Balance Sheet) |
| Working Capital | $30,374 | $30,374 (Balance Sheet) |
| Short-term Borrowings | $966 | $966 (Balance Sheet) |
Cash Flow (Six Months Ended June 30, 2009):
- Net cash used in operating activities: $(3,002)
- Net cash provided by investing activities: $863
- Net cash provided by financing activities: $190
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 12.3% for the quarter and 13.0% for the six-month period compared to 2008. This was primarily driven by a strengthening U.S. dollar against foreign currencies (notably the Russian ruble and Ukrainian hryvnia) and weakening demand due to economic conditions.
- Segment Performance:
- NSP International: Sales dropped 24.8% (QTD) and 23.6% (YTD) due to currency fluctuations and reduced distributor activity.
- NSP United States: Sales increased 0.8% (QTD) but decreased 2.7% (YTD).
- Synergy Worldwide: Sales decreased 12.2% (QTD) and 9.7% (YTD).
- Profitability: Operating income turned from a profit of $4.3 million in the prior year six-month period to a loss of $0.8 million in the current period. However, the Company reported a net income of $1.5 million for the quarter, compared to a net loss of $0.7 million in the prior year quarter, largely due to a significant reduction in the provision for income taxes.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased by 10.7% (QTD) and 8.2% (YTD) due to reduced spending in Russian, Ukrainian, and Eastern European markets.
Guidance, Outlook, Risks, and Unusual Items
- Dividend Suspension: The Company suspended payment of its quarterly cash dividend in the second quarter of 2009 to preserve approximately $3.1 million in annual cash flow following a period of exceptional legal and accounting expenses.
- Legal Proceedings:
- Class-Action Litigation: A successful mediation was reached regarding a shareholder class-action lawsuit. A Memorandum of Understanding (MOU) was executed, and the insurer agreed to fund the settlement. Final approval is pending court review.
- SEC Settlement: On July 31, 2009, the Company settled an SEC enforcement action regarding alleged Foreign Corrupt Practices Act (FCPA) violations by a Brazilian subsidiary in 2000-2001. The Company agreed to pay a $600,000 civil penalty.
- Prescott Matter: A settlement and voting agreement was reached with a shareholder group, resulting in the resignation of most current directors and the appointment of new directors to fill vacancies.
- Internal Controls: The Company disclosed that disclosure controls and procedures were not effective as of June 30, 2009, due to three material weaknesses (Accounting for Taxes, Financial Reporting Process, and Information Technology) that remain in the remediation process.
- Foreign Currency Risk: The Company is highly sensitive to exchange rate fluctuations. A 10% strengthening of the U.S. dollar could decrease operating income by approximately 1.4% (QTD) and increase the operating loss by 10.2% (YTD).
- Accounting Correction: The Company corrected prior period financial statements (2008) to reclassify volume rebates for Russia and Ukraine from an expense to a reduction of sales revenue. This had no impact on net income or cash flows.
Investor Verification Checklist
- Dividend Policy: Confirm the status of the suspended dividend and the timeline for potential resumption.
- Legal Settlements: Monitor the final court approval of the class-action settlement and the terms of the definitive Stipulation.
- Internal Controls: Review future filings for progress on remediating the three identified material weaknesses in internal controls over financial reporting.
- Currency Exposure: Assess the impact of continued U.S. dollar strength on international revenue, particularly in Russia and Ukraine.
- SEC Compliance: Verify the Company's ongoing compliance with SEC reporting requirements following the recent re-registration of its common stock.