Nature’s Sunshine Products, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited. The company manufactures and directly sells nutritional and personal-care products through independent distributors, across four segments: NSP Americas, NSP Russia/Central and Eastern Europe, Synergy WorldWide, and China and New Markets. Unless otherwise noted, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $79.6 million | $93.4 million | $244.7 million | $279.7 million |
| Gross profit / margin | $58.9 million / 74.1% | $70.7 million / 75.7% | $181.1 million / 74.0% | $211.6 million / 75.6% |
| Operating income / margin | $3.1 million / 3.9% | $5.5 million / 5.9% | $11.7 million / 4.8% | $18.2 million / 6.5% |
| Income from continuing operations | $1.6 million | $5.1 million | $8.2 million | $18.9 million |
| Net income attributable to common shareholders | $2.8 million | $1.0 million | $11.0 million | $13.9 million |
| Diluted EPS attributable to common shareholders | $0.15 | $0.06 | $0.57 | $0.82 |
| Operating cash flow | Not separately provided | Not separately provided | $8.2 million | $13.5 million |
- Q3 net income included $0.8 million from discontinued operations, compared with a $4.1 million loss in Q3 2014. Nine-month discontinued-operations income was $2.1 million, versus a $5.0 million loss in 2014; therefore, total net income trends differ from continuing-operations performance.
- At September 30, cash and cash equivalents were $43.9 million, current assets $104.8 million, current liabilities $51.7 million, and working capital $53.0 million. Cash was down from $58.7 million at year-end 2014; $40.5 million was held in foreign markets and may face repatriation taxes or restrictions. Short-term available-for-sale investments were $1.8 million.
- Total liabilities were $62.1 million and shareholders’ equity $134.5 million. Revolver borrowings were $1.2 million against a $25.0 million facility maturing September 2017; the company reported compliance with covenants. No other long-term debt balance is reported in the supplied filing text.
- Nine-month investing cash outflow was $15.3 million, including $17.5 million of capital expenditures. Financing used $6.7 million, including $5.6 million of dividends and $6.1 million of share repurchases. Cash declined $14.8 million over the period.
Changes versus the prior comparable period
- Sales fell 14.8% in Q3 and 12.5% year to date. Excluding foreign exchange effects, sales declined 8.8% and 7.8%, respectively. Currency movements reduced reported sales by about $5.6 million in Q3 and $13.3 million year to date.
- NSP Russia, Central and Eastern Europe sales dropped 46.2% in Q3 and 48.1% year to date, reflecting political and economic disruption, ruble and hryvnia weakness, and distributor attrition. Synergy sales fell 20.0% and 12.6%; NSP Americas fell 2.8% and 1.7%. China and New Markets declined 14.1% and 30.3%.
- Gross margin contracted by 1.6 percentage points in Q3 and year to date, mainly from foreign exchange impacts and inventory-reserve changes. Lower volume incentives as a share of sales partly offset this pressure, while SG&A as a share of sales rose to 34.1% in Q3 and 33.0% year to date.
- Operating income declined 43.4% in Q3 and 36.0% year to date. Q3 continuing-operations income fell 68.5%; nine-month continuing-operations income fell 56.5%. The Q3 effective tax rate rose to 44.4% from 7.4%; year-to-date it was 26.0%, versus a tax benefit in the prior-year period.
- Active distributors and customers fell to approximately 256,800 from 298,000, and active managers to 13,000 from 15,500. The largest reductions were in Russia/Central and Eastern Europe.
Outlook, management commentary, risks, and unusual items
- Management expects Russia/Central and Eastern Europe sales to remain under pressure and does not expect a near-term reversal. It cited political unrest, sanctions, and currency devaluation as continuing headwinds that may also weaken operating cash flow.
- Management said cash from operations and available cash should support normal operating needs, dividends, repurchases, capital spending, and potential business development. This outlook is subject to weaker demand, economic downturns, and adverse tax or contingency settlements. The filing gives no numerical earnings or revenue guidance.
- An April 2015 restructuring eliminated about 100 positions worldwide and ended Vietnam operations. Restructuring charges were about $0.3 million in Q3 and $2.4 million for nine months, primarily severance; $0.7 million of nine-month charges remained unpaid. Vietnam represented a small portion of sales.
- China direct-selling and e-commerce plans remain dependent on registrations and permits; retail entry was indefinitely deferred following a regulatory change. China and New Markets sales to date were wholesale sales outside China.
- Tax and legal exposures include $7.0 million accrued for unrecognized income-tax positions, up from $6.6 million at year-end, primarily due to transfer-pricing contingencies. Accrued non-income-tax contingencies were $0.3 million; possible future payments were estimated at $0–$2.6 million. Other foreign litigation could involve $0–$0.7 million; management said losses were not considered probable or could not yet be estimated. Outcomes are uncertain.
- The New York Attorney General issued a September 2015 cease-and-desist letter concerning Devil’s Claw supplements and requested information; the company said it believes it sells the products lawfully. Broader dietary-supplement regulation, product claims, direct-selling rules, litigation, distributor relations, and product-liability exposure are identified risks.
- Other notable risks include foreign-exchange volatility (the company does not hedge with derivatives), distributor and customer declines, regulatory requirements in international markets, and uncertainty around China operations. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification priorities
- Assess whether the sharp Russia/Central and Eastern Europe decline and distributor losses stabilize, and whether management’s expected continued weakness affects cash generation.
- Separate continuing-operations results from discontinued-operations gains when evaluating reported net income and EPS; review the Venezuela asset-sale proceeds and Brazil liability release included in discontinued results.
- Track constant-currency sales, gross-margin pressure, distributor counts, and the effects of foreign-exchange movements on both sales and product affordability.
- Review the timing and returns of the $17.5 million in year-to-date capital spending, including the Oracle ERP implementation expected to be completed by early 2017, alongside lower cash and ongoing dividends and repurchases.
- Monitor transfer-pricing and other tax exposures, non-income-tax contingencies, the Devil’s Claw inquiry, and other litigation for changes in estimated liabilities or regulatory requirements.
- Confirm progress and regulatory approvals for China plans, and whether the restructuring produces expected cost savings beyond its reported charges.